SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from
____________ to___________.
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
- ---------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
- ----------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 242-4300
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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All of the shares of MidAmerican Energy Holdings Company are held by a limited
group of private investors. As of November 13, 2002, 9,281,087 shares of common
stock were outstanding.
MIDAMERICAN ENERGY HOLDINGS COMPANY
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Page No.
ITEM 1. Financial Statements
Independent Accountants' Report........................... 3
Consolidated Balance Sheets............................... 4
Consolidated Statements of Operations..................... 5
Consolidated Statements of Cash Flows..................... 6
Notes to Consolidated Financial Statements................ 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 22
ITEM 4 Controls and Procedures................................... 40
Part II: Other Information
ITEM 1. Legal Proceedings......................................... 41
ITEM 2. Changes in Securities and Use of Proceeds................. 41
ITEM 3. Defaults on Senior Securities............................. 41
ITEM 4. Submission of Matters to a Vote of Security Holders....... 41
ITEM 5. Other Information......................................... 41
ITEM 6. Exhibits and Reports on Form 8-K.......................... 41
Signatures .......................................................... 42
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Holdings Company and subsidiaries (the Company) as of September 30, 2002,
and the related consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2002 and 2001, and the related
consolidated statements of cash flows for the nine-month periods ended September
30, 2002 and 2001. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2001,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 17, 2002 (March 27, 2002 as to Notes 20.A. and 21 and August 2,
2002 as to Note 23), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2001, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
November 8, 2002
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of
-------------------------------------
September 30, December 31,
2002 2001
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 662,061 $ 386,745
Restricted cash and short-term investments 56,466 30,565
Accounts receivable 549,656 310,030
Inventories 132,153 135,822
Other current assets 187,773 106,124
----------- -----------
Total current assets 1,588,109 969,286
Property, plant, contracts and equipment, net 9,168,940 6,537,371
Excess of cost over fair value of net assets acquired, net 4,223,198 3,638,546
Regulatory assets 538,134 221,120
Other investments 444,183 174,185
Equity investments 274,198 261,432
Deferred charges and other assets 747,288 824,712
----------- -----------
Total Assets $16,984,050 $12,626,652
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable $ 381,983 $ 266,027
Accrued interest 201,082 130,569
Accrued taxes 93,028 88,973
Other accrued liabilities 525,750 308,924
Short-term debt 642,031 256,012
Current portion of long-term debt 483,106 317,180
----------- -----------
Total current liabilities 2,326,980 1,367,685
Other long-term accrued liabilities 612,321 537,495
Parent company debt 1,623,178 1,834,498
Subsidiary and project debt 6,388,169 4,754,811
Deferred income taxes 1,297,136 1,284,268
----------- -----------
Total Liabilities 12,247,784 9,778,757
----------- -----------
Deferred income 82,305 85,917
Minority interest 6,012 44,477
Preferred securities of subsidiaries 93,619 121,183
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts 2,062,815 788,151
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts - 100,000
Commitments and contingencies (Note 12)
Shareholders' Equity:
Zero coupon convertible preferred stock - authorized 50,000 sh
value, 41,263 and 34,563 shares issued and outstanding at
September 30, 2002, and December 31, 2001, respectively - -
Common stock - authorized 60,000 shares, no par value, 9,281 s
issued and outstanding - -
Additional paid-in capital 1,956,509 1,553,073
Retained earnings 510,766 223,926
Accumulated other comprehensive income (loss) 24,240 (68,832)
----------- -----------
Total Shareholders' Equity 2,491,515 1,708,167
----------- ------------
Total Liabilities and Shareholders' Equity $16,984,050 $12,626,652
=========== ===========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2002 2001 2002 2001
---------- ----------- ---------- ----------
Revenues:
Operating revenue $1,238,463 $1,076,786 $3,404,533 $3,756,931
Income on equity investments 10,939 6,332 29,863 23,622
Interest and other income 32,714 223,941 115,348 262,522
---------- ---------- ---------- ----------
Total revenues 1,282,116 1,307,059 3,549,744 4,043,075
----------- ---------- ----------- ----------
Costs and expenses:
Cost of sales 443,144 472,964 1,283,238 2,010,164
Operating expense 343,303 293,867 948,913 844,776
Depreciation and amortization 129,362 122,686 386,531 395,253
Interest expense 168,450 119,809 462,998 362,163
Less interest capitalized (9,152) (19,877) (24,128) (72,010)
----------- ---------- ---------- ----------
Total costs and expenses 1,075,107 989,449 3,057,552 3,540,346
---------- ---------- ---------- ----------
Income before provision for income taxes 207,009 317,610 492,192 502,729
Provision for income taxes 26,788 241,873 80,226 296,088
---------- ---------- ---------- ----------
Income before minority interest 180,221 75,737 411,966 206,641
Minority interest 45,344 27,796 105,166 79,952
---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting principle 134,877 47,941 306,800 126,689
Cumulative effect of change in accounting
principle, net of tax - - - (4,604)
---------- ---------- ---------- ---------
Net income available to common and preferred
shareholders $ 134,877 $ 47,941 $ 306,800 $ 122,085
========== ========== ========== =========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30
------------------------------
2002 2001
------------- -----------
Cash flows from operating activities:
Net income...................................................... $ 306,800 $ 122,085
Adjustments to reconcile to net cash flows from
operating activities:
Cumulative effect of change in accounting principle, net of tax. - 4,604
Gains on disposals.............................................. (57,480) (221,108)
Depreciation and amortization................................... 386,531 282,125
Amortization of excess of cost over fair value of
net assets acquired.......................................... - 74,728
Amortization of deferred financing costs and other costs........ 32,589 15,542
Provision for deferred income taxes............................. 40,518 236,901
Undistributed earnings on equity investments.................... (14,828) (23,622)
Changes in other items:
Accounts receivable.......................................... (76,621) 607,287
Other current assets......................................... 47,493 23,381
Accounts payable and accrued liabilities..................... (15,193) (389,295)
Accrued interest............................................. 79,548 78,391
Accrued taxes................................................ (43,963) (25,733)
Deferred income.............................................. (2,612) 5,704
------------ ------------
Net cash flows from operating activities........................ 682,782 790,990
------------ ------------
Cash flows from investing activities:
Acquisition of Kern River, net of cash acquired................. (419,724) -
Acquisition of Northern Natural Gas, net of cash acquired....... (899,249) -
Acquisition of Yorkshire Electricity, net of cash acquired...... (8,380) (36,860)
Proceeds from sale of Northern Supply........................... - 377,396
Purchase of convertible preferred securities.................... (275,000) -
Capital expenditures relating to operating projects............. (328,544) (242,337)
Construction and other development costs........................ (450,206) (134,625)
Receipt of liquidated damages on construction projects.......... - 29,648
Proceeds from sale of assets.................................... 210,767 10,500
Purchase of minority interests.................................. (33,262) (29,276)
Acquisition of realty companies, net of cash acquired........... (102,699) (32,565)
Change in restricted investments................................ 16,746 17,924
Change in other assets.......................................... 25,895 (8,502)
------------ ------------
Net cash flows from investing activities........................ (2,263,656) (48,697)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock........... 402,000 -
Proceeds from issuance of trust preferred securities............ 1,273,000 -
Net repayment of short-term subsidiary debt..................... (77,585) (160,288)
Net proceeds from short-term parent company debt................ 13,500 64,500
Repayment of subsidiary and project debt........................ (377,644) (278,867)
Proceeds from subsidiary and project debt....................... 780,142 200,000
Redemption of preferred securities of subsidiaries.............. (127,613) (14,616)
Change in restricted investments-debt service................... (25,901) (6,585)
Other........................................................... (44,999) (2,105)
------------ ------------
Net cash flows from financing activities........................ 1,814,900 (197,961)
------------ ------------
Effect of exchange rate changes on cash......................... 41,290 1,689
------------ ------------
Net increase in cash and cash equivalents....................... 275,316 546,021
Cash and cash equivalents at beginning of period................ 386,745 38,152
------------ ------------
Cash and cash equivalents at end of period...................... $ 662,061 $ 584,173
============ ============
Interest paid, net of amount capitalized........................ $ 404,288 $ 222,991
============ ============
Income taxes paid............................................... $ 55,437 $ 43,632
============= ============
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management of MidAmerican Energy Holdings Company and
subsidiaries (the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of September 30, 2002, and
the results of operations for the three months and nine months ended September
30, 2002 and 2001 and the related consolidated statements of cash flows for the
nine months ended September 30, 2002 and 2001. The results of operations for the
three months and nine months ended September 30, 2002 and 2001 are not
necessarily indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of MidAmerican Energy
Holdings Company and its wholly and majority owned subsidiaries. Other
investments and corporate joint ventures, where the Company has the ability to
exercise significant influence, are accounted for under the equity method.
Investments where the Company's ability to influence is limited are accounted
for under the cost method of accounting.
Certain amounts in the 2001 financial statements and supporting note disclosures
have been reclassified to conform to the 2002 presentation. Such
reclassification did not impact previously reported net income or retained
earnings.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest Annual Report on Form 10-K.
2. Acquisitions
Kern River
On March 27, 2002, the Company closed on a definitive agreement with The
Williams Companies, Inc. ("Williams") to acquire Williams' Kern River Gas
Transmission Company ("Kern River"), a 926-mile interstate pipeline transporting
Rocky Mountain and Canadian natural gas to markets in California, Nevada and
Utah.
The Kern River pipeline is an important route for the transmission of natural
gas from the vast reserves in the Rocky Mountain states to the rapidly growing
markets in Utah, Nevada and California. Constructed in 1992, the Kern River
pipeline extends from Opal, Wyoming, to the San Joaquin Valley near Bakersfield,
California, and has a design capacity of 845 million cubic feet per day.
The Company paid $419.7 million, net of cash acquired of $7.7 million and
transaction costs and working capital adjustments, for Kern River's gas pipeline
business. At the time of the acquisition, Kern River had $505 million of
indebtedness, the unamortized portion of which remains outstanding. The
acquisition has been accounted for as a purchase business combination. The
Company is in the process of completing the allocation of the purchase price to
the assets and liabilities acquired. The results of operations for Kern River
are included in the Company's results beginning March 27, 2002.
The recognition of excess of cost over fair value of net assets acquired
resulted from various attributes of Kern River's operations and business in
general. These attributes include, but are not limited to:
o Opportunities for expansion;
o High credit quality shippers contracting with Kern River; o Kern River's
strong competitive position;
o Exceptional operating track record and state-of-the-art technology;
o Strong demand for gas in the Western markets; and
o An ample supply of low-cost gas.
In connection with the acquisition of Kern River, the Company issued $323.0
million of 11% Company-obligated mandatorily redeemable preferred securities of
subsidiary trust due March 12, 2012 with scheduled principal payments beginning
in 2005 and $127.0 million of no par, zero coupon convertible preferred stock to
Berkshire Hathaway. Each share of preferred stock is convertible at the option
of the holder into one share of the Company's common stock subject to certain
adjustments as described in the Company's Amended and Restated Articles of
Incorporation.
Northern Natural Gas Company
On August 16, 2002, the Company closed on a definitive agreement with Dynegy
Inc. ("Dynegy") to acquire Dynegy's Northern Natural Gas Company ("Northern
Natural Gas"), a 16,600-mile interstate pipeline extending from southwest Texas
to the upper Midwest region of the United States.
With a design capacity of 4.4 billion cubic feet of natural gas per day,
Northern Natural Gas accesses natural gas supply from many of the larger
producing regions in North America including the Rocky Mountains, Hugoton,
Permian, Anadarko and Western Canadian basins. The system provides
transportation and storage services to approximately 70 utility customers and
numerous industrial customers in the Upper Midwest.
Northern Natural Gas also provides cross-haul and grid transportation between
other interstate and intrastate pipelines in Permian, Anadarko, Hugoton and
Midwest areas. It operates three natural gas storage facilities and two
liquefied natural gas peaking units for a total storage capacity of 59 billion
cubic feet and peak delivery capability of over 1.3 billion cubic feet of
natural gas per day.
The Company paid $899.2 million for Northern Natural Gas, net of cash acquired
of $1.4 million and transaction costs and working capital adjustments. At the
time of the acquisition, Northern Natural Gas had $950 million of debt
outstanding. The acquisition has been accounted for as a purchase business
combination. The Company is in the process of completing the working capital
negotiations and the allocation of the purchase price to the assets and
liabilities acquired. The results of operations for Northern Natural Gas are
included in the Company's results beginning August 16, 2002.
The recognition of excess of cost over fair value of net assets acquired
resulted from various attributes of Northern Natural Gas' operations and
business in general. These attributes include, but are not limited to:
o High credit quality shippers contracting with Northern Natural Gas;
o Northern Natural Gas' strong competitive position;
o Strategic location in the high demand Upper Midwest markets;
o Flexible access to an ample supply of low-cost gas;
o Exceptional operating track record; and
o Opportunities for expansion.
In connection with the acquisition of Northern Natural Gas, the Company issued
$950.0 million of 11% Company-obligated mandatorily redeemable preferred
securities of subsidiary trust due August 31, 2011, with scheduled principal
payments beginning in 2003, to Berkshire Hathaway.
The following pro forma financial information of the Company represents the
unaudited pro forma results of operations as if the Kern River and Northern
Natural Gas acquisitions, the related financings and the Yorkshire Swap, as
described in Note 3 of Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 2001, had occurred at the
beginning of each year. These pro forma results have been prepared for
comparative purposes only and do not profess to be indicative of the results of
operations which would have been achieved had these transactions been completed
at the beginning of each year, nor are the results indicative of the Company's
future results of operations (in thousands).
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue........................................ $1,204,513 $1,050,104 $3,888,873 $3,849,034
Income before cumulative effect of
change in accounting principle............... 126,389 71,421 310,359 185,154
Net income available to common and
preferred shareholders....................... 126,389 71,421 310,359 180,550
3. CalEnergy Gas Disposal
In May 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company,
executed the sale of several of its U.K. natural gas assets to Gaz de France for
(pound)137.0 million (approximately $200 million). CalEnergy Gas sold four
natural gas-producing fields located in the southern basin of the U.K. North
Sea, including Anglia, Johnston, Schooner and Windermere. The transaction also
included the sale of rights in four gas fields (in development/construction) and
three exploration blocks owned by CalEnergy Gas. As a result of the sale, the
Company's nine month results ending September 30, 2002 include pre-tax and
after-tax income of $54.3 million and $41.3 million, respectively, which
includes a write off of non-deductible goodwill of $49.6 million. The three
month results ending September 30, 2002 include $21.1 million in tax benefits
related to the sale.
4. Property, Plant, Contracts and Equipment, Net
Property, plant, contracts and equipment, net comprise the following (in
thousands):
September 30, December 31,
2002 2001
-------------- ------------
Operating assets:
Utility generation, distribution and transmission
systems ................................................ $10,102,855 $7,574,339
Independent power plants ................................. 1,406,345 1,402,102
Utility non-operational assets............................ 363,910 354,366
Power sales agreements.................................... 19,185 48,185
Realty company assets..................................... 73,785 51,150
Other assets.............................................. 54,197 53,876
----------- ----------
Total operating assets.................................... 12,020,277 9,484,018
Less accumulated depreciation and amortization............ (3,995,916) (3,650,875)
----------- ----------
Net operating assets...................................... 8,024,361 5,833,143
Mineral and gas reserves and exploration assets, net...... 280,722 387,697
Construction in progress:
Zinc Recovery Project................................ 213,923 163,366
Utility generation, distribution and transmission
systems...................................... 253,945 149,225
Kern River natural gas pipeline expansion............ 389,321 -
Other................................................ 6,668 3,940
----------- ----------
Total $9,168,940 $6,537,371
========== ==========
Zinc Recovery Project
CalEnergy Minerals, LLC, an indirect wholly owned subsidiary of the Company, is
constructing the Zinc Recovery Project. The Zinc Recovery Project is designed to
have a capacity of approximately 30,000 metric tons per year and is scheduled to
commence commercial operations in 2002. Total project costs of the Zinc Recovery
Project are expected to be approximately $244 million, net of damages received
from Kvaerner, which is being funded by $140.5 million of debt and the balance
from funds provided by the parent company. The Zinc Recovery Project has
incurred $213.9 million, net of damages, of such costs through September 30,
2002.
Utility generation, distribution and transmission systems
Through 2007, MidAmerican Energy plans to develop and construct two electric
generating plants in Iowa. MidAmerican Energy expects to invest approximately
$1.2 billion in the two plants, including the cost of related transmission
facilities and allowance for funds used during construction. The two plants may
provide approximately 950 megawatts of generating capacity for MidAmerican
Energy depending on management's on-going assessment of needs and related
factors.
The first project is a 500-megawatt (based on expected accreditation) natural
gas-fired combined cycle unit with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and operate it. MidAmerican Energy
has received a certificate from the Iowa Utilities Board allowing it to
construct the plant. Also, on May 29, 2002, the Iowa Utilities Board issued an
order that provides the ratemaking principles for the gas-fired plant, thus
limiting the regulatory risk of constructing the plant. As a result of that
order, MidAmerican Energy is proceeding with the construction of the plant. It
is anticipated that the first phase of the project will be completed in 2003,
resulting in an additional 310 megawatts of accredited capacity, with the
remainder being completed in 2005.
Kern River natural gas pipeline expansion
On July 17, 2002, Kern River received approval from FERC to construct, own and
operate a major expansion to its pipeline system (the "2003 Expansion Project").
The 2003 Expansion Project will loop most of Kern River's existing mainline,
construct three new compressor stations and upgrade or modify Kern River's six
existing compressor stations. The 2003 Expansion Project, which is expected to
be completed and operational by May 2003, will increase Kern River's capacity by
approximately 900 MMcf per day. Service will be provided under long-term
contracts subject to incremental rates. The estimated cost of the expansion is
approximately $1.2 billion.
5. Other Investments
On March 27, 2002, the Company invested $275.0 million in Williams in exchange
for shares of 9-7/8 percent cumulative convertible preferred stock of Williams.
Dividends are scheduled to be received quarterly, which commenced July 1, 2002.
This investment is accounted for under the cost method. The Company is aware
that there have been public announcements that Williams' financial condition has
deteriorated as a result of reduced liquidity. Williams' senior unsecured debt
obligations are currently rated B1 by Moody's, B by Standard & Poor's and B- by
Fitch. The Company has not recorded an impairment on this investment as of
September 30, 2002, and is monitoring the situation.
In connection with this investment, the Company issued $275.0 million of no par,
zero coupon convertible preferred stock to Berkshire Hathaway. Each share of
preferred stock is convertible at the option of the holder into one share of the
Company's common stock subject to certain adjustments as described in the
Company's Amended and Restated Articles of Incorporation.
6. Teesside Power Limited Restructuring
CE Electric UK Funding, an indirect wholly owned subsidiary of the Company, has
a 15.4% interest in Teesside Power Limited ("TPL"). TPL owns and operates an
1,875MW combined cycle gas-fired power plant. Shareholders in TPL had previously
utilized TPL's taxable losses with an obligation to reimburse TPL later in the
project's life. In May 2002, TPL executed a restructuring and stabilization
agreement with its lenders. The contract included an agreement between TPL and
its shareholders with respect to the waiver of these repayment obligations. In
May 2002, CE Electric UK Funding released $35.7 million due to the repayment
obligation being waived which is reflected as a current tax benefit in the
provision for income taxes.
7. Real Estate Company Acquisitions
During 2002, HomeServices separately acquired three real estate companies for an
aggregate purchase price of approximately $100 million, net of cash acquired,
plus working capital and certain other adjustments. For the year ended December
31, 2001, these real estate companies had combined revenue of approximately $356
million on 42,000 closed sides representing $13.7 billion of sales volume.
Additionally, HomeServices is obligated to pay a maximum earnout of $18.5
million calculated based on 2002 financial performance measures. These purchases
were financed using HomeServices' $65 million revolving credit facility and
MidAmerican Energy Holdings Company's corporate revolver for $40 million, which
was contributed to HomeServices as equity. The Company is in the process of
completing the allocation of the purchase price to the assets and liabilities
acquired.
8. Debt issuances and redemptions
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% notes due
in 2031. The proceeds are being used to refinance existing debt and preferred
securities and for other corporate purposes. On March 11, 2002, MidAmerican
Energy redeemed all $100 million of its 7.98% MidAmerican-obligated preferred
securities of subsidiary trust at 100% of the principal amount plus accrued
interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.7 million of its $7.80
series of preferred securities. The first $13.3 million of preferred securities
were redeemed at 100% of the principal amount plus accrued dividends, and the
remaining $13.4 million was redeemed at 103.9% of the principal amount plus
accrued dividends.
On June 21, 2002, Kern River closed on a bank loan facility providing for
aggregate loans of up to $875 million to be used for the construction of the
Kern River 2003 Expansion Project. The facility, which matures 15 years after
the 2003 Expansion Project commences operation, has a variable interest rate
which increases over the term of the facility from 1.375% to 4.5% over LIBOR.
Kern River has drawn $384.9 million on this facility as of September 30, 2002.
9. Accounting Policy Change
Effective January 1, 2001, the Company changed its accounting policy regarding
major maintenance and repairs for nonregulated gas projects, nonregulated plant
overhaul costs and geothermal well rework costs to the direct expense method
from the former policy of monthly accruals based on long-term scheduled
maintenance plans for the gas projects and deferral and amortization of plant
overhaul costs and geothermal well rework costs over the estimated useful lives.
The cumulative effect of the change in accounting principle for 2001 was $4.6
million, net of taxes of $.7 million.
10. Accounting Pronouncements and Reporting Issues
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which
dictates the accounting for acquired goodwill and other intangible assets. SFAS
No. 142 requires that amortization of goodwill and indefinite-lived intangible
assets be discontinued and that entities disclose net income for prior periods
adjusted to exclude such amortization and related income tax effects, as well as
a reconciliation from the originally reported net income to the adjusted net
income. The Company's related amortization consists of goodwill amortization and
the related income tax effect. Following is a reconciliation of net income as
originally reported for the periods ended September 30, 2002 and 2001, to
adjusted net income (in thousands):
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income as originally reported...... $ 134,877 $ 47,941 $ 306,800 $ 122,085
Goodwill amortization.................. - 24,739 - 74,728
Income tax benefit..................... - (503) - (1,504)
--------- --------- --------- ---------
Net income as adjusted................. $ 134,877 $ 72,177 $ 306,800 $ 195,309
========= ========= ========= =========
In accordance with SFAS No. 142, the Company has determined its reporting units
and has completed the initial impairment testing of goodwill primarily using a
discounted cash flow methodology. No impairment was indicated as a result of the
initial impairment testing. See Note 14 for allocation of goodwill to reporting
units.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires
recognition on the balance sheet of legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal operation of such assets. Additionally, at the time an
asset retirement obligation (ARO) is recognized, an ARO asset of the same amount
is recorded and depreciated. This pronouncement is effective for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact that
adoption of this standard will have on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 on January 1, 2002, did not have any impact on the Company's
consolidated financial statements.
The Emerging Issues Task Force (EITF) recently issued EITF Issue No. 02-3,
"Recognition and Reporting of Gains and Losses on Energy Trading Contracts Under
Issues No. 98-10 and 00-17." In accordance with EITF No. 02-3, all gains and
losses on energy trading contracts must be reported net on the income statement,
effective for reporting periods ending after July 15, 2002, with all prior
periods presented being reclassified to a consistent presentation. MidAmerican
Energy's nonregulated wholesale gas and electric marketing activities qualify as
"energy trading" contracts under the guidance of EITF No. 98-10. In accordance
with EITF Issue No. 02-3, effective September 30, 2002, for MidAmerican Energy,
all trading revenues are reported net of the cost of such sales. Previously,
such amounts were recorded gross. All prior periods have been reclassified to
conform to the net presentation.
11. Comprehensive Income
The differences from net income to total comprehensive income for the Company
are due to foreign currency translation adjustments, unrealized holding gains
and losses of marketable securities during the periods, and the effective
portion of net gains and losses of derivative instruments classified as cash
flow hedges. Total comprehensive income for the nine months ended September 30,
2001, includes a transition loss of $3.3 million related to the initial adoption
of SFAS No. 133. Total comprehensive income for the Company is shown in the
table below (in thousands).
Three Months Nine Months
Ended September 30 Ended September 30
------------------ ------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income.................................. $ 134,877 $ 47,941 $ 306,800 $ 122,085
Other comprehensive income-
Foreign currency translation............. 39,437 31,791 120,905 (16,681)
Marketable securities, net of tax........ 332 (7,683) (3,337) (5,816)
Cash flow hedges, net of tax............. (3,694) (3,897) (24,496) 32,598
--------- --------- --------- --------
Total comprehensive income.................. $ 170,952 $ 68,152 $ 399,872 $ 132,186
========= ========= ========= =========
12. Commitments and Contingencies
A. Financial Condition of Edison
Southern California Edison Company ("Edison"), a wholly owned subsidiary of
Edison International, is a public utility primarily engaged in the business of
supplying electric energy to retail customers in Central and Southern
California, excluding Los Angeles. Due to reduced liquidity, Edison failed to
pay approximately $119 million due under the power purchase agreement with CE
Generation affiliates for power delivered in the fourth quarter 2000 and the
first quarter 2001. Due to Edison's failure to pay contractual obligations, the
CE Generation affiliates had established an allowance for doubtful accounts of
approximately $21 million as of December 31, 2001. The final payment of the past
due amounts was received from Edison on March 1, 2002. Following the receipt of
Edison's payment of past due balances, the CE Generation affiliates released the
remaining allowance for doubtful accounts.
B. Casecnan Construction Arbitration
On May 7, 1997, CE Casecnan entered into a fixed-price, date certain,
turnkey engineering, procurement and construction contract to complete the
construction of the Casecnan Project (the "Construction Contract"). The work
under the Construction Contract was conducted by a consortium consisting of
Cooperativa Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa.,
working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and
Colenco Power Engineering Ltd. (collectively, the "Contractor").
On November 20, 1999, the Construction Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Casecnan Indenture. In January 2001, CE Casecnan received a new working schedule
from the Contractor that showed a completion date of August 31, 2001. The delay
in completion was attributable in part to the collapse in December 2000 of the
Casecnan Project's partially completed vertical surge shaft and the need to
drill a replacement surge shaft.
Upon receipt of the working schedule, CE Casecnan sought and obtained from the
lender's independent engineer approval for a revised construction schedule under
the Casecnan Indenture. In connection with the revised schedule, MidAmerican
Energy Holdings Company agreed to make available up to $11.6 million of
additional funds under certain conditions pursuant to a Shareholder Support
Letter dated February 8, 2001 (Shareholder Support Letter). MidAmerican Energy
Holdings Company has fully satisfied its obligations under the Shareholder
Support Letter.
The receipt of the new working schedule did not change the Guaranteed
Substantial Completion Date under the Construction Contract, and the Contractor
was still contractually obligated either to complete the Casecnan Project by
March 31, 2001, or to pay liquidated damages for the delay in completion. The
Casecnan Project entered into commercial operations on December 11, 2001. In
2002, CE Casecnan has received approximately $6.0 million of liquidated damages
from demands made on the demand guarantees posted by Commerzbank on behalf of
the Contractor.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001, resulting
from various alleged force majeure events. In its March 20, 2001, Supplement to
Request for Arbitration, the Contractor requested compensation for alleged
additional costs of approximately $4 million it incurred from the claimed force
majeure events to the extent it is unable to recover from its insurer. On April
20, 2001, the Contractor filed a further supplement seeking an additional
compensation for damages of approximately $62 million for the alleged force
majeure event (and geologic conditions) related to the collapse of the surge
shaft. The Contractor has alleged that the circumstances surrounding the placing
of the Casecnan Project into commercial operation on December 11, 2001, amounted
to a repudiation of the Construction Contract and has filed a claim for
unspecified quantum meruit damages. The Contractor also has alleged that the
delay liquidated damages clause in the EPC Contract is unenforceable as a
penalty. CE Casecnan believes all such allegations and claims are without merit
and is vigorously contesting the Contractor's claims. The arbitration is being
conducted applying New York law and in accordance with the rules of the
International Chamber of Commerce. Although the outcome of the arbitration, as
with any litigious proceedings, is difficult to access, CE Casecnan believes it
will prevail and receive additional liquidated damages in the arbitration.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. On April
26, 2002, CE Casecnan and the Contractor mutually agreed that no demands would
be made on the Banca di Roma demand guaranty except pursuant to a final
arbitration award. Hearings on the force majeure claims were held in London from
July 2 to 14, 2001, and hearings on the Contractor's April 20, 2001, supplement
were held from September 24 to October 3, 2001. Further hearings were held from
January 21 to February 1, 2002 and from March 14 to 19, 2002. From November 4 to
6, 2002, hearings were held on the Contractor's claim with respect to the
alleged unenforceability of the delay liquidated damages clause. On November 7,
2002, the International Chamber of Commerce issued the arbitration tribunal's
partial award with respect to the Contractor's force majeure and geologic
conditions claims. The arbitral panel awarded the Contractor 18 days of schedule
relief in the aggregate for all of the force majeure events and awarded the
Contractor $3.8 million with respect to the cost of the collapsed surge shaft.
All of the Contractor's other claims that have been heard by the arbitral
tribunal were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims are
scheduled for January 20 to 23 and 28 to 31, 2003. These claims, and the alleged
unenforceability of the delay liquidated damages clause, have not been ruled on
by the arbitration tribunal.
C. Casecnan Shareholder Issue
Pursuant to the share ownership adjustment mechanism in the Casecnan Shareholder
Agreement, which is based upon pro forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, the Company,
through its indirect wholly owned subsidiary CE Casecnan Ltd., has advised the
minority shareholder LaPrairie Group Contractors (International) Ltd. ("LPG"),
that the Company's ownership interest in CE Casecnan will increase to 100%. On
July 8, 2002, LPG filed a complaint in the Superior Court of the State of
California, City and County of San Francisco against, inter alia, CE Casecnan
Ltd. and MidAmerican Energy Holdings Company. In the complaint, LPG seeks
compensatory and punitive damages for alleged breaches of the Shareholder
Agreement and alleged breaches of fiduciary duties allegedly owed by the Company
and CE Casecnan Ltd. to LPG. The complaint also seeks injunctive relief against
all defendants and a declaratory judgment that LPG is entitled to maintain its
15% interest in Casecnan. The impact, if any, of this litigation on the Company
cannot be determined at this time.
D. Casecnan NIA Arbitration
In August 2002, CE Casecnan commenced arbitration against the National
Irrigation Administration ("NIA") in connection with the Casecnan Project by
serving it with a Request for Arbitration under International Chamber of
Commerce rules (the "Request for Arbitration"). In the Request for Arbitration,
CE Casecnan claimed that NIA has breached its obligations under the Casecnan
Project Agreement by failing to reimburse CE Casecnan for certain tax payments
and by failing to pay the portion of the Water Delivery Fee under the Casecnan
Project Agreement attributable to certain tax payments. The Casecnan Project
Agreement provides for arbitration in accordance with International Chamber of
Commerce rules by a panel of three arbitrators in Singapore. CE Casecnan is
awaiting NIA's formal answer to the Request for Arbitration. CE Casecnan intends
to vigorously pursue its claims in these proceedings.
E. Malitbog Arbitration
VGPC and PNOC-EDC have been negotiating with respect to certain disputes
concerning the Malitbog energy conversion agreement ("ECA") but have been unable
to reach a mutually acceptable resolution. Accordingly, on October 16, 2000,
VGPC commenced arbitration against PNOC-EDC by serving it with a Notice of
Arbitration and Statement of Claim (the "Notice of Arbitration"). In the Notice
of Arbitration, VGPC claimed that PNOC-EDC breached the Malitbog ECA by
improperly characterizing certain No Fault Outages as Forced Outage Hours and
then deducting them from the total number of hours each month. On December 22,
2000, VGPC filed an Amended Statement of Claim pursuant to which VGPC added a
claim that PNOC-EDC breached the Malitbog ECA by refusing to accept VGPC's
specified Nominated Capacity for contract years July 25, 1999 to July 25, 2000,
and July 25, 2000 to July 25, 2001. A Second Amended Statement of Claim was
filed on March 9, 2001, to add the Scheduled Maintenance issue. VGPC is
vigorously pursuing its claims in this proceeding. Hearings were conducted from
June 24, 2002, to July 5, 2002, in Sydney, Australia, and the Company expects a
ruling on these hearings in the fourth quarter of 2002.
F. Mahanagdong Arbitration
On September 25, 2002, CE Luzon Geothermal Power Company, Inc. ("CE Luzon"), an
indirect majority owned subsidiary of the Company, commenced arbitration against
PNOC-EDC by serving it with a Request for Arbitration (the "Request for
Arbitration") under International Chamber of Commerce rules. In the Request for
Arbitration, CE Luzon claimed that PNOC-EDC breached the Mahanagdong ECA by
refusing to accept CE Luzon's specified Nominated Capacity for contract years
July 25, 2001 to July 25, 2002 and July 25, 2002 to July 25, 2003. CE Luzon is
awaiting PNOC-EDC's formal answer. CE Luzon intends to vigorously pursue its
claims in these proceedings.
G. Regulatory Environment: Philippines
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001, which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of the bill may have an impact on
the Company's future operations and the industry as a whole, the effect of which
is not yet determinable and estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (along with four
other unrelated projects) has reportedly been identified as raising legal and
financial questions and, with those projects, has been prioritized for
renegotiation. The Company's subsidiaries' Upper Mahiao, Malitbog, and
Mahanagdong projects, which, together with the Casecnan Project, collectively
the "Philippine Projects", have also reportedly been identified as raising
financial questions. No written report has yet been issued with respect to the
interagency review, and the timing and nature of steps, if any, that the
Philippine Government may take in this regard are not known. To the extent
disputes arise under the Philippine Projects' agreements with respect to the
Philippines Projects' obligations, rights and remedies thereunder, such disputes
will be determined by international arbitration in a neutral forum conducted in
accordance with the rules of the International Chamber of Commerce or UNCITRAL,
as applicable.
Representatives of CE Casecnan Water and Energy Company, Inc. ("CE Casecnan"), a
Philippine corporation, together with certain current and former Philippine
government officials, also have been requested to appear, and have appeared,
before a Philippine Senate committee which has independently raised questions
and made allegations with respect to the Casecnan Project's tariff structure and
implementation. No further hearings are scheduled at this time. CE Casecnan has
and intends to continue to respond to such questions and to vigorously defend
the Casecnan Project against any allegations, which may be made. CE Casecnan
believes the allegations made with respect to the Casecnan Project to be without
merit.
H. Cooper Litigation
On July 23, 1997, Nebraska Public Power District ("NPPD") filed a complaint, in
the United States District Court for the District of Nebraska, naming
MidAmerican Energy as the defendant and seeking declaratory judgment as to
issues under the parties' long-term power purchase agreement for Cooper Nuclear
Station ("Cooper") capacity and energy.
On July 31, 2002, MidAmerican Energy and NPPD signed an agreement on the
restructuring of the power purchase contract for Cooper. Under the terms of the
restructured contract, MidAmerican Energy will pay NPPD through December 31,
2004, a scheduled amount per unit for 380 megawatts of the accredited capacity
of Cooper and a minimum of approximately 1.2 million megawatt-hours (MWh) in the
last five months of 2002 and approximately 2.5 million MWh in each of 2003 and
2004. NPPD also paid MidAmerican Energy $39.1 million on August 1, 2002.
In December 2000, MidAmerican Energy ceased contributing decommissioning funds
to NPPD and maintained a separate fund for estimated Cooper decommissioning
costs. At the date of the contract restructuring, $18.3 million had been accrued
and retained by MidAmerican Energy in this separate fund. In conjunction with
the power purchase contract restructuring, MidAmerican Energy is recognizing the
$39.1 million cash payment and the $18.3 million previously accrued for
decommissioning into income based on the estimated energy expected to be
received for the remainder of the contract.
Finally, both parties agreed to release each other from any and all claims, past
or present, each might have under the power purchase contract prior to being
restructured and file to dismiss the litigation currently pending in U.S.
District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD prior
to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed and
operating costs of Cooper, excluding depreciation but including debt service,
and MidAmerican Energy's share of the nuclear fuel cost, including Department of
Energy disposal fees, based on energy delivered. In addition, prior to December
2000, MidAmerican Energy contributed toward payment of one-half of Cooper's
project decommissioning costs based on an assumed 2004 shutdown of the plant.
I. Kvaerner Arbitration
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, CalEnergy Minerals, LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery Project EPC Contract, CalEnergy Minerals, LLC drew $29.6 million under
the EPC Contract Letter of Credit ("LOC") on July 20, 2001, and claimed the
retainage and balance of the contract price. The LOC draw, retainage and balance
of the contract price have been accounted for as a reduction of the capitalized
costs of the project. CalEnergy Minerals, LLC has entered into a time and
materials reimbursable engineer, procure and construction management contract
with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On May 23, 2002, following various discussions and legal filings, CalEnergy
Minerals, LLC and Kvaerner entered into a Settlement Agreement. Under the terms
of the agreement, CalEnergy Minerals, LLC retained the amounts drawn under the
LOC, the EPC retainage amounts and the EPC contract balance and will pay to
Kvaerner three equal installments of $2.25 million payable in January of 2003,
2004 and 2005.
J. Pipeline Litigation
In 1998, the United States Department of Justice informed the then current
owners of Kern River and Northern Natural Gas that Jack Grynberg, an individual,
had filed claims in the United States District Court for the District of
Colorado under the False Claims Act against such entities and certain of their
subsidiaries including Kern River and Northern Natural Gas. Mr. Grynberg has
also filed claims against numerous other energy companies and alleges that the
defendants violated the False Claims Act in connection with the measurement and
purchase of hydrocarbons. The relief sought is an unspecified amount of
royalties allegedly not paid to the federal government, treble damages, civil
penalties, attorneys' fees and costs. On April 9, 1999, the United States
Department of Justice announced that it declined to intervene in any of the
Grynberg qui tam cases, including the actions filed against Kern River and
Northern Natural Gas in the United States District Court for the District of
Colorado. On October 21, 1999, the Panel on Multi-District Litigation
transferred the Grynberg qui tam cases, including the ones filed against Kern
River and Northern Natural Gas, to the United States District Court for the
District of Wyoming for pre-trial purposes. Motions to dismiss the complaint,
filed by various defendants including Northern Natural Gas and Williams, which
was the former owner of Kern River, were denied on May 18, 2001. In connection
with the purchase of Kern River from Williams in March 2002, Williams agreed to
indemnify us against any liability for this claim; however, no assurance can be
given as to the ability of Williams to perform on this indemnity should it
become necessary. No such indemnification was obtained in connection with the
purchase of Northern Natural Gas in August 2002. We believe that the Grynberg
cases filed against Kern River and Northern Natural Gas are without merit and
Williams, on behalf of Kern River pursuant to its agreement to indemnify us, and
Northern Natural Gas, intends to defend these actions vigorously.
On June 8, 2001, a number of interstate pipeline companies, including Kern River
and Northern Natural Gas, were named as defendants in a nationwide class action
lawsuit which had been pending in the 26th Judicial District, District Court,
Stevens County Kansas, Civil Department against other defendants, generally
pipeline and gathering companies, since May 20, 1999. The plaintiffs allege that
the defendants have engaged in mismeasurement techniques that distort the
heating content of natural gas, resulting in an alleged underpayment of
royalties to the class of producer plaintiffs. In November 2001, Kern River and
Northern Natural Gas, along with the coordinating defendants, filed a motion to
dismiss under Rules 9B and 12B of the Kansas Rules of Civil Procedure. In
January 2002, Kern River and Northern Natural Gas and most of the coordinating
defendants filed a motion to dismiss for lack of personal jurisdiction. The
court has yet to rule on these motions. The plaintiffs filed for certification
of the plaintiff class on September 16, 2002. Williams has agreed to indemnify
us against any liability associated with Kern River for this claim; however, no
assurance can be given as to the ability of Williams to perform on this
indemnity should it become necessary. Williams, on behalf of Kern River and
other entities, anticipates joining with Northern Natural Gas and other
defendants in contesting certification of the plaintiff class. Kern River and
Northern Natural Gas believe that this claim is without merit and that Kern
River's and Northern Natural Gas' gas measurement techniques have been in
accordance with industry standards and its tariff.
K. Pipeline Expansion Guarantee
On July 17, 2002, Kern River received approval from the FERC to construct, own
and operate the 2003 Expansion Project. The 2003 Expansion Project will loop
most of Kern River's existing mainline, construct three new compressor stations
and upgrade or modify Kern River's six existing compressor stations. The 2003
Expansion Project, which is expected to be completed and operational by May
2003, will increase Kern River's capacity by approximately 900mmcf/day. Service
will be provided under long-term contracts subject to incremental rates. The
estimated cost of the expansion is approximately $1.2 billion, which will be
financed with 70% debt and 30% equity, consistent with Kern River's existing
capital structure, the application for the FERC approval described above and the
limitations contained in the indenture for Kern River's existing secured senior
notes.
Construction will initially be funded with the proceeds of an $875 million
credit facility entered into by Kern River on June 21, 2002, until 70% of the
projected capitalized costs of the 2003 Expansion Project has been spent. The
final 30% of the capitalized costs of the 2003 Expansion Project will be funded
with equity from the Company. The credit facility is structured as a two-year
construction facility followed by a term loan with a final maturity 15 years
after completion of the 2003 Expansion Project. However, Kern River presently
intends to refinance the credit facility through a bond offering or other
capital markets transaction following completion of the 2003 Expansion Project.
Prior to completion of the 2003 Expansion Project, the credit facility lenders
will have limited recourse to Kern River and its assets and cash flow, and will
have recourse to the Company's completion guarantee described below. Following
completion of the 2003 Expansion Project, until such time as the Kern River
credit facility is refinanced, the lenders under the credit facility will share
equally and ratably with the existing Kern River senior secured noteholders in
all of the collateral pledged to such senior secured noteholders.
Pursuant to the Company's completion guarantee, it has guaranteed that
"completion" of the 2003 Expansion Project will occur on or prior to the
earliest of any abandonment by Kern River of the project, the occurrence of
certain other acceleration events and June 30, 2004. The potential acceleration
events include any downgrading of the Company's public debt rating to below
investment grade by either S&P or Moody's unless a satisfactory substitute
guarantor assumes the Company's obligations under the completion guarantee
within 60 days after any such downgrade; Berkshire Hathaway ceasing to own at
least a majority of the outstanding capital stock of the Company; and certain
other customary events of default by the Company. In the completion guarantee,
the Company has also agreed to cause capital contributions to be made to Kern
River in a minimum aggregate amount of at least $375 million by June 30, 2004 or
upon any earlier event of abandonment of the project. For purposes of the
Company's completion guarantee, the term "completion" is defined in the Kern
River credit agreement to mean satisfaction of a number of conditions, the most
significant of which include the requirements that the 2003 Expansion Project be
substantially complete and operable and able to permit Kern River to perform its
obligations under all of the long-term firm gas transportation service
agreements entered into in connection with the 2003 Expansion Project; that the
shippers under such agreements shall have begun to incur the obligation to pay
reservation fees thereunder; and that the FERC shall have authorized Kern River
to begin collecting rates under its tariff and its shipper agreements; provided
that the 2003 Expansion Project shall still be deemed to have been completed if
it is less than substantially complete but it demonstrates at least 80% design
capacity and Kern River's debt service coverage ratios as defined in its senior
secured note indenture are not less than 1:55 to 1:0. There are a number of
other conditions to completion, including requirements that all conditions to
completion of the expansion contained in Kern River's senior secured note
indenture be satisfied and all of Kern River's obligations under its credit
agreement then share pari passu in all collateral available to Kern River's
senior secured noteholders. The Company's completion guarantee shall terminate
upon the earlier of completion of the 2003 Expansion Project or repayment in
full of all obligations under the Kern River credit facility.
L. Manufactured Gas Plant
The U.S. Environmental Protection Agency ("EPA"), and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at such
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$30 million. MidAmerican Energy's estimate of the probable cost for these sites
as of September 30, 2002, was $18 million. The estimate consists of $1 million
for investigation costs, $6 million for remediation costs, $9 million for ground
water treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 5 years.
The estimate of probable remediation costs is established on a site-specific
basis. Initially, a determination is made as to whether MidAmerican Energy has
potential remedial liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. When a potential remedial
liability exists, the best estimate of projected site closure costs are accrued.
The estimates are evaluated and revised quarterly as appropriate based on
additional information obtained during investigation and remedial activities.
The estimated recorded liabilities for these properties include incremental
direct costs of the remediation effort and oversight by the appropriate
regulatory authority, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liability could change materially
based on facts and circumstances derived from site investigations, changes in
required remedial action and changes in technology relating to remedial
alternatives. Insurance recoveries have been received for some of the sites
under investigation. Those recoveries are intended to be used principally for
accelerated remediation, as specified by the Iowa Utilities Board, and are
recorded as a regulatory liability. Additionally, as viable potentially
responsible parties are identified, those parties are evaluated for potential
contributions, and cost recovery is pursued when appropriate.
Although the timing of potential incurred costs and recovery of costs in rates
may affect the results of operations in individual periods, management believes
that the outcome of these issues will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
13. Subsequent Events
On October 4, 2002, the Company issued $200 million of 4.625% Senior Notes due
in 2007 and $500 million of 5.875% Senior Notes due in 2012. The proceeds are
being used for general corporate purposes including to reduce short-term
obligations, to make a $150 million equity contribution to Northern Natural Gas,
and to make funds available to Kern River for its 2003 Expansion Project.
On October 15, 2002, Northern Natural Gas issued $300 million of 5.375% Senior
Notes due in 2012. The proceeds, along with the $150 million equity contribution
from the Company, were used to refinance a $450 million short-term debt
obligation.
14. Segment Information
The Company has identified seven reportable operating segments principally based
on management structure: MidAmerican Energy (domestic utility operations), CE
Electric UK Funding (foreign utility operations), Kern River and Northern
Natural Gas (domestic natural gas pipeline operations), CalEnergy
Generation-Domestic, CalEnergy Generation-Foreign (primarily the Philippines),
and HomeServices (real estate operations). Information related to the Company's
reportable operating segments is shown below (in thousands).
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
Operating Revenue: 2002 2001 2002 2001
---- ---- ---- ----
MidAmerican Energy......................... $ 538,696 $ 507,661 $1,582,609 $1,897,792
CE Electric UK Funding..................... 193,360 316,252 596,958 1,222,324
Kern River................................. 39,867 - 87,048 -
Northern Natural Gas....................... 39,098 - 39,098 -
CalEnergy Generation - Domestic............ 13,717 25,592 27,627 32,635
CalEnergy Generation - Foreign............. 84,227 48,782 234,686 147,589
HomeServices............................... 340,692 193,123 855,919 473,457
----------- ---------- ---------- ----------
Segment operating revenue.................. 1,249,657 1,091,410 3,423,945 3,773,797
Corporate.................................. (11,194) (14,624) (19,412) (16,866)
---------- ---------- --------- ----------
$1,238,463 $1,076,786 $3,404,533 $3,756,931
========== ========== ========== ==========
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
Income (loss) on equity investments: 2002 2001 2002 2001
---- ---- ---- ----
MidAmerican Energy ...................... $ (4,582) $ 878 $ 1,394 $ 1,595
CalEnergy Generation - Domestic.......... 12,424 5,454 21,194 22,027
HomeServices............................. 3,071 - 6,984 -
--------- ---------- --------- ----------
Segment income on equity investments..... 10,913 6,332 29,572 23,622
Corporate................................ 26 - 291 -
--------- ---------- --------- ----------
$ 10,939 $ 6,332 $ 29,863 $ 23,622
========= ========== ========= ==========
Depreciation and amortization:
MidAmerican Energy....................... $ 66,946 $ 63,017 $ 208,726 $ 217,260
CE Electric UK Funding................... 28,390 31,219 87,200 97,141
Kern River............................... 4,900 - 12,161 -
Northern Natural Gas..................... 5,755 - 5,755 -
CalEnergy Generation - Domestic.......... 2,160 2,058 6,517 3,375
CalEnergy Generation - Foreign........... 22,009 16,537 66,273 49,715
HomeServices............................. 5,722 4,207 18,035 12,618
--------- ---------- --------- ---------
Segment depreciation and amortization.... 135,882 117,038 404,667 380,109
Corporate................................ (6,520) 5,648 (18,136) 15,144
--------- ---------- --------- ---------
$ 129,362 $ 122,686 $ 386,531 $ 395,253
========= ========== ========= =========
Interest expense, net:
MidAmerican Energy ...................... $ 30,220 $ 28,359 $ 89,489 $ 86,789
CE Electric UK Funding................... 47,819 22,933 136,250 67,308
Kern River............................... 12,877 - 22,406 -
Northern Natural Gas..................... 7,992 - 7,992 -
CalEnergy Generation - Domestic.......... 5,005 5,063 15,040 5,900
CalEnergy Generation - Foreign........... 16,923 6,584 51,853 22,160
HomeServices............................. 1,121 822 3,334 2,930
--------- ---------- --------- ---------
Segment interest expense, net............ 121,957 63,761 326,364 185,087
Corporate................................ 37,341 36,171 112,506 105,066
--------- ---------- --------- ---------
$ 159,298 $ 99,932 $ 438,870 $ 290,153
========= ========== ========= =========
Income (loss) before provision for income
taxes:
MidAmerican Energy....................... $ 108,577 $ 80,453 $ 218,565 $ 204,348
CE Electric UK Funding................... 39,968 98,961 197,223 186,248
Kern River............................... 16,774 - 39,387 -
Northern Natural Gas..................... (1,015) - (1,015) -
CalEnergy Generation - Domestic.......... 14,649 22,994 12,983 37,383
CalEnergy Generation - Foreign........... 40,208 20,757 103,994 66,330
HomeServices............................. 26,475 19,077 52,506 31,689
--------- ---------- --------- ---------
Segment income before provision for incom
taxes.................................... 245,636 242,242 623,643 525,998
Corporate................................ (38,627) 75,368 (131,451) (23,269)
--------- ---------- --------- ---------
$ 207,009 $ 317,610 $ 492,192 $ 502,729
========= ========== ========== =========
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
Provision (benefit) for income taxes: 2002 2001 2002 2001
---- ---- ---- ----
MidAmerican Energy....................... $ 44,702 $ 36,079 $ 89,705 $ 92,349
CE Electric UK Funding................... (9,627) 177,700 5,949 205,407
Kern River............................... 6,297 - 15,001 -
Northern Natural Gas..................... (399) - (399) -
CalEnergy Generation - Domestic.......... 844 7,013 (3,318) 5,137
CalEnergy Generation - Foreign........... 5,575 4,793 18,256 11,982
HomeServices............................. 11,131 7,439 21,161 12,051
--------- ---------- --------- ---------
Segment provision for income taxes....... 58,523 233,024 146,355 326,926
Corporate................................ (31,735) 8,849 (66,129) (30,838)
--------- ---------- --------- ---------
$ 26,788 $ 241,873 $ 80,226 $ 296,088
========= ========== ========= =========
September 30, December 31,
2002 2001
------------- -------------
Identifiable assets:
MidAmerican Energy........................... $ 5,986,212 $ 5,848,035
CE Electric UK Funding....................... 4,526,923 4,340,147
Kern River................................... 1,342,424 -
Northern Natural Gas......................... 2,041,842 -
CalEnergy Generation - Domestic.............. 928,731 870,664
CalEnergy Generation - Foreign............... 983,702 950,035
HomeServices................................. 515,328 322,552
------------- -------------
Segment identifiable assets.................. 16,325,162 12,331,433
Corporate.................................... 658,888 295,219
------------- -------------
$ 16,984,050 $ 12,626,652
============= =============
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate" relate principally to the corporate functions including
administrative costs, corporate cash and related interest income, goodwill
amortization in 2001, intersegment eliminations, and fair value and goodwill
adjustments relating to acquisitions and disposals.
Excess of cost over fair value of net assets acquired, net:
Northern CalEnergy
MidAmerican CE Electric Natural Generation
Energy UK Funding Kern River Gas - Domestic HomeServices Total
----------- ---------- ---------- -------- ---------- ------------ -----
Goodwill at
December 31, 2001...... $2,148,859 $1,100,489 $ - $ - $ 158,708 $ 230,490 $3,638,546
Acquisitions/purchase
price accounting
adjustments............ - 56,626 32,704 379,464 - 106,054 574,848
Impairment losses...... - - - - - - -
Goodwill written off
related to sale of
business unit.......... - (49,587) - - - - (49,587)
Translation
adjustment............. - 62,262 - - 62,262
Other adjustments...... (1,776) (601) - - (324) (170) (2,871)
---------- ---------- ---------- ---------- ---------- --------- ----------
Goodwill at
September 30, 2002..... $2,147,083 $1,169,189 $ 32,704 $ 379,464 $ 158,384 $ 336,374 $4,223,198
========== ========== ========== ========== ========== ========= ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
MidAmerican Energy Holdings Company, (the "Company"), during the periods
included in the accompanying statements of operations. This discussion should be
read in conjunction with the Company's historical financial statements and the
notes to those statements.
As a result of the recent acquisitions of Northern Natural Gas and Kern River,
the acquisition of the electricity distribution business of Yorkshire
Electricity and the simultaneous sale of the electricity and gas supply business
of Northern Electric to the former owner of Yorkshire Electricity, which
together are referred to as the Northern Electric/Yorkshire Electricity swap,
and the acquisition by a private investor group on March 14, 2000, the Company's
future results will differ from the Company's historical results.
Forward-looking Statements
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such statements are based on current expectations and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and performance of the Company to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development uncertainty, operating
uncertainty, acquisition uncertainty, uncertainties relating to doing business
outside of the United States, uncertainties relating to geothermal resources,
the financial condition of and relationships with customers and suppliers, the
availability and price of fuel and other inputs, uncertainties relating to
domestic and international economic and political conditions and uncertainties
regarding the impact of regulations, changes in government policy, environmental
policies, industry deregulation and competition. Reference is made to all of the
Company's SEC filings, including the Company's Report on Form 8-K dated November
13, 2002, incorporated herein by reference, for a description of such factors.
The Company assumes no responsibility to update forward-looking information
contained herein.
Business of MEHC
The Company is a United States-based privately owned global energy company with
publicly traded fixed income securities that generates, distributes and supplies
energy to utilities, government entities, retail customers and other customers
located throughout the world. Through its subsidiaries, the Company is organized
and managed on seven distinct platforms: MidAmerican Energy, CE Electric UK
Funding (which includes Northern Electric and Yorkshire Electricity), Kern
River, Northern Natural Gas, CalEnergy Generation-Domestic, CalEnergy Generation
- - Foreign and HomeServices. These platforms, with the exception of Kern River
and Northern Natural Gas, are discussed in detail in the Company's latest Annual
Report on Form 10-K.
Kern River Gas Transmission Company
On March 27, 2002, the Company acquired Kern River from a subsidiary of The
Williams Companies, Inc. ("Williams"). Kern River owns and operates a 926-mile
interstate natural gas pipeline extending from Wyoming to markets in California,
Nevada and Utah and accessing natural gas supply from large producing regions in
the Rocky Mountains and Canada. The Company paid $419.7 million, net of cash
acquired of $7.7 million and transaction costs and working capital adjustments,
for Kern River. At the time of the acquisition, Kern River had $505 million of
indebtedness, the unamortized portion of which remains outstanding. The design
capacity of the existing Kern River pipeline is 100% contracted through 2011 and
84% contracted through 2016.
In connection with the Kern River acquisition, the Company issued $323 million
of 11% mandatorily redeemable preferred securities of a subsidiary trust due
March 12, 2012 with equal semi-annual principal payments beginning in June 2005,
and $127 million of no par, zero coupon convertible preferred stock to Berkshire
Hathaway. Each share of such preferred stock is convertible at the option of the
holder into one share of Company common stock subject to certain adjustments as
described in the Company's amended and restated articles of incorporation.
Northern Natural Gas Company
On August 16, 2002, the Company acquired all of the outstanding capital stock of
Northern Natural Gas from Dynegy, Inc. and its affiliates for $899.2 million,
net of cash acquired of $1.4 million, and is subject to adjustment for working
capital. At the time of the acquisition, Northern Natural Gas had $950 million
of debt outstanding.
Northern Natural Gas owns a 16,600-mile interstate natural gas pipeline
extending from southwest Texas to the upper Midwest region of the United States
with a design capacity of 4.4 Bcf of natural gas per day. Northern Natural Gas
also operates three natural gas storage facilities and two liquefied natural gas
peaking units with a total storage capacity of 59 Bcf and peak delivery
capability of over 1.3 Bcf of natural gas per day. Northern Natural Gas accesses
natural gas supply from many of the larger producing regions in North America,
including the Rocky Mountains, Hugoton, Permian, Anadarko and Western Canadian
basins. The pipeline system provides transportation and storage services to
utilities, municipalities, other pipeline companies, gas marketers and
industrial and commercial users.
In connection with the Northern Natural Gas acquisition, the Company issued $950
million of 11% mandatorily redeemable preferred securities of a subsidiary trust
due August 31, 2011 to Berkshire Hathaway. These preferred securities have
annual principal payments of $150 million in 2003 and $100 million in each
subsequent year beginning in 2004.
Critical Accounting Policies
The preparation of financial statements and related documents in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statement and accompanying notes.
Note 2 of Notes to Consolidated Financial Statements in the Annual Report on
Form 10-K for the year ended December 31, 2001 describes the significant
accounting policies and methods used in the preparation of the financial
statements. Estimates are used for, but not limited to, the accounting for
revenue, the effects of certain types of regulation, impairment of long-lived
assets, and contingent liabilities. Actual results could differ from these
estimates. The following critical accounting policies are impacted significantly
by judgments, assumptions and estimates used in the preparation of the financial
statements.
Revenue Recognition
Revenues are recorded based upon services rendered and electricity, gas and
steam delivered, distributed or supplied to the end of the period. Where there
is an over recovery of United Kingdom distribution business revenues against the
maximum regulated amount, revenues are deferred equivalent to the over recovered
amount. The deferred amount is deducted from revenue and included in other
liabilities. Where there is an under recovery, no anticipation of any potential
future recovery is made.
The Company also records unbilled revenues representing the estimated amounts
customers will be billed for services rendered between the meter reading dates
in a particular month and the end of that month. The unbilled revenues estimate
is reversed in the following month. To the extent the estimated amount differs
from that amount subsequently billed, the timing of revenues will be affected.
Accrued unbilled revenues are included in accounts receivable on the
consolidated balance sheets.
Revenues from the transportation and storage of gas are recognized based on
contractual terms and the related volumes. Kern River and Northern Natural Gas
are subject to FERC regulations and, accordingly, certain revenues collected may
be subject to possible refunds upon final orders in pending rate cases. Kern
River and Northern Natural Gas record rate refund liabilities considering their
regulatory proceedings and other third party regulatory proceedings, advice of
counsel and estimated total exposure, as discounted and risk weighted, as well
as collection and other risks.
SFAS No. 71 - Accounting for the Effects of Certain Types of Regulation
MidAmerican Energy, Kern River and Northern Natural Gas prepare their financial
statements in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 71, which differs in certain respects from the
application of generally accepted accounting principles ("GAAP") by
non-regulated businesses. In general, SFAS No. 71 recognizes that accounting for
rate-regulated enterprises should reflect the economic effects of regulation. As
a result, a regulated utility is required to defer the recognition of costs (a
regulatory asset) or the recognition of obligations (a regulatory liability) if
it is probable that, through the rate-making process, there will be a
corresponding increase or decrease in future rates. Accordingly, MidAmerican
Energy, Kern River and Northern Natural Gas have deferred certain costs, which
will be amortized over various future periods. To the extent that collection of
such costs or payment of liability is no longer probable as a result of changes
in regulation, the associated regulatory assets or liability is charged or
credited to income.
A possible consequence of deregulation of the regulated energy industry is that
SFAS No. 71 may no longer apply. If portions of the Company's regulated energy
operations no longer meet the criteria of SFAS No. 71, the Company could be
required to write off the related regulatory assets and liabilities from its
balance sheet, and thus, a material adjustment to earnings in that period could
result if regulatory assets are not recovered in transition provisions of any
deregulation legislation.
The Company continues to evaluate the applicability of SFAS No. 71 to its
regulated energy operations and the recoverability of these assets and
liabilities through rates as there are on-going changes in the regulatory and
economic environment.
Impairment of Long-Lived Assets
The Company's long-lived assets consist primarily of property, plant and
equipment, goodwill and intangible assets that were acquired in business
acquisitions. The Company believes the useful lives assigned to the depreciable
assets, which range from 1 to 87 years, are reasonable.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Triggering events include a significant change in the extent or
manner in which long-lived assets are being used or in its physical condition,
in legal factors, or in the business climate that could affect the value of the
long-lived assets, including changes in regulation. The interpretation of such
events requires judgment from management as to whether such an event has
occurred and is required. If an event occurs that could affect the carrying
value of the asset and management does not identify it as triggering event,
future results of operations could significantly be affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Company expects to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value which is based on discounted estimated cash flows from the future use
of the asset.
The estimate of cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Company would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires
that amortization of goodwill and indefinite-lived intangible assets be
discontinued and that these assets be tested for impairment annually. During the
second quarter of fiscal 2002, the Company completed its initial impairment
testing of goodwill primarily using a discounted cash flow methodology. No
impairment was indicated as a result of the initial testing.
Contingent Liabilities
The Company establishes reserves for estimated loss contingencies when it is
management's assessment that a loss is probable and the amount of the loss can
be reasonably estimated. Revisions to contingent liabilities are reflected in
income in the period in which different facts or information become known or
circumstances change that affect the previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities are based upon
management's assumptions and estimates, advice of legal counsel or other third
parties regarding the probable outcomes of any matters. Should the outcomes
differ from the assumptions and estimates, revisions to the estimated reserves
for contingent liabilities would be required.
Results of Operations:
Operating revenue for the three months ended September 30, 2002, was $1,238.5
million compared with $1,076.8 million for the same period in 2001, an increase
of 15.0%. MidAmerican Energy operating revenue increased for the three months
ended September 30, 2002, to $538.7 million from $507.7 million for the same
period in 2001, primarily due to higher volumes for regulated electricity. CE
Electric UK Funding operating revenue decreased for the three months ended
September 30, 2002, to $193.4 million from $316.3 million for the same period in
2001, primarily due to the sale of Northern Electric's electricity and gas
supply business ("Northern Supply") in September 2001 of $209 million, partially
offset by Yorkshire Electricity distribution revenue of $103 million. The
remaining change in operating revenue primarily relates to (i) the increase of
revenue at HomeServices of $147.6 million primarily due to acquisitions in 2002
and late 2001, (ii) the acquisition of Kern River in March 2002, which accounted
for $39.9 million of operating revenue and (iii) the acquisition of Northern
Natural Gas in August 2002, which accounted for $39.1 million of operating
revenue.
Operating revenue for the nine months ended September 30, 2002, was $3,404.5
million compared with $3,756.9 million for the same period in 2001, a decrease
of 9.4%. MidAmerican Energy operating revenue decreased for the nine months
ended September 30, 2002, to $1,582.6 million from $1,897.8 million for the same
period in 2001, primarily due to lower volumes and rates for regulated and
non-regulated gas. CE Electric UK Funding operating revenue decreased for the
nine months ended September 30, 2002, to $597.0 million from $1,222.3 million
for the same period in 2001, primarily due to the sale of Northern Supply in
September 2001 of $889 million, partially offset by Yorkshire Electricity
distribution revenue of $276 million. The remaining change in operating revenue
primarily relates to (i) the increase of revenue at HomeServices of $382.5
million primarily due to acquisitions in 2002 and late 2001, (ii) the
acquisition of Kern River in March 2002, which accounted for $87.0 million of
operating revenue and (iii) the acquisition of Northern Natural Gas in August
2002, which accounted for $39.1 million of operating revenue.
The following data represents sales from MidAmerican Energy:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Electricity Retail Sales (GWh)............... 4,987 4,679 13,254 12,502
Electricity Sales for Resale (GWh)........... 2,506 1,772 7,485 6,341
Regulated and Non-Regulated Gas Supplied
(Thousands of MMBtus)........................ 38,936 53,605 169,200 198,789
MidAmerican Energy electric retail sales and electric sales for resale increased
for three months ended September 30, 2002, from the same period in 2001 due to
hotter temperatures in the third quarter of 2002. Retail gas supplied decreased
due to decreased non-regulated activity for the three months ended September 30,
2002, compared to the same period in 2001.
MidAmerican Energy electric retail sales increased for the nine months ended
September 30, 2002 from the same period in 2001 due primarily to warmer
temperatures in 2002, primarily in the third quarter of 2002. Electric sales for
resale increased for the nine months ended September 30, 2002 from the same
period in 2001 due to availability of Cordova, an indirect wholly owned
subsidiary of the Company, and lower retail usage in the first quarter of 2002,
allowing for more energy to be sold in the wholesale markets. Regulated and
non-regulated gas supplied decreased due to colder temperatures during the first
quarter of 2001 and decreased non-regulated activity.
CE Electric UK Funding distributed 9,473 GWh of electricity in the three months
ended September 30, 2002, compared with 4,457 GWh of electricity in the same
period in 2001. CE Electric UK Funding distributed 30,252 GWh of electricity in
the nine months ended September 30, 2002, compared with 13,016 GWh of
electricity in the same period in 2001. The increase in electricity distributed
for both periods ended September 30, 2002, is primarily due to the acquisition
of Yorkshire Electricity distribution.
Kern River transported 90,532,000 MMBtus in the three months ended September 30,
2002, and 190,195,000 MMBtus since the Company acquired Kern River on March 27,
2002.
Northern Natural Gas transported 121,028,500 MMBtus since the Company acquired
Northern Natural Gas on August 16, 2002.
Income on equity investments for the three months ended September 30, 2002, was
$10.9 million compared with $6.3 million for the same period in 2001. The
increase was primarily due to higher earnings at CE Generation as a result of
higher energy prices in 2002 and the allowance for doubtful accounts accrual in
2001, and income from a HomeServices' joint venture which was fully consolidated
in 2001, partially offset by lower equity earnings due to impairment of
alternative energy project funds in 2002.
Income on equity investments for the nine months ended September 30, 2002, was
$29.9 million compared with $23.6 million for the same period in 2001. The
increase was primarily due to income from a HomeServices' joint venture that was
fully consolidated in 2001.
Interest and other income for the three months ended September 30, 2002, was
$32.7 million compared with $223.9 million for the same period in 2001. The
decrease was primarily due to the $200.3 million gain on the sale of Northern
Supply in September 2001.
Interest and other income for the nine months ended September 30, 2002, was
$115.3 million compared with $262.5 million for the same period in 2001. The
decrease was primarily due to the gain on sale of Northern Supply in September
2001, partially offset by the $54.3 million gain on the sale of various
CalEnergy Gas assets in May 2002.
Cost of sales for the three months ended September 30, 2002, was $443.1 million
compared with $473.0 million for the same period in 2001, a decrease of 6.3%.
Cost of sales for the nine months ended September 30, 2002, was $1,283.2 million
compared with $2,010.2 million for the same period in 2001, a decrease of 36.2%.
The decreases for both periods relates primarily to the sale of Northern Supply
and decreased gas revenue at MidAmerican Energy, partially offset by increase
cost of sales at HomeServices due to higher commission on the higher revenues as
a result of acquisitions.
Operating expenses for the three months ended September 30, 2002, were $343.3
million compared with $293.9 million for the same period in 2001. The increase
was primarily due to higher costs at HomeServices of $32.3 million as a result
of acquisitions and operating expenses due to the acquisition of Northern
Natural Gas of $26.6 million, partially offset by lower costs at MidAmerican
Energy of $23.4 million due to the restructuring of the Cooper contract and
lower energy efficiency expenses.
Operating expenses for the nine months ended September 30, 2002, were $948.9
million compared with $844.8 million for the same period in 2001. The increase
was primarily due to higher costs at HomeServices of $77.5 million as a result
of acquisitions and operating expenses due to the acquisitions of Northern
Natural Gas of $26.6 million and Kern River of $18.2 million, partially offset
by lower costs at MidAmerican Energy of $22.0 million due to the restructuring
of the Cooper contract and lower energy efficiency expenses.
Depreciation and amortization for the three months ended September 30, 2002, was
$129.4 million compared with $122.7 million for the same period in 2001. The
increase was primarily due to higher depreciation at MidAmerican Energy of $12.5
million primarily due to higher Iowa revenue sharing accruals, the commencement
of commercial operation at Casecnan of $5.8 million, and depreciation expense
due to the acquisitions of Northern Natural Gas of $5.8 million and Kern River
of $4.9 million, partially offset by the discontinuance of amortizing goodwill
beginning January 1, 2002 of $24.8 million.
Depreciation and amortization for the nine months ended September 30, 2002, was
$386.5 million compared with $395.3 million for the same period in 2001. The
decrease was primarily due to discontinuance of amortizing goodwill beginning
January 1, 2002 of $74.7 million, partially offset by the commencement of
commercial operations at Casecnan of $17.6 million, higher depreciation at
MidAmerican Energy of $17.3 million primarily due to higher Iowa revenue sharing
accruals, depreciation expense due to the acquisitions of Kern River of $12.2
million and Northern Natural Gas of $5.8 million and increased amortization at
HomeServices of $8.9 million due to intangible assets amortization related to
acquisitions.
Interest expense, less amounts capitalized, for the three months ended September
30, 2002, was $159.3 million compared with $99.9 million for the same period in
2001, an increase of 59.5%. The increase was due primarily to the increase of
interest expense at CE Electric UK Funding of $24.4 million predominantly due to
the debt related to the Yorkshire Electricity acquisition, the discontinuance
of capitalizing interest related to the Casecnan Project of $13.0 million, and
interest expense due to the acquisitions of Kern River and Northern Natural Gas
of $12.9 million and $8.1 million, respectively.
Interest expense, less amounts capitalized, for the nine months ended September
30, 2002, was $438.9 million compared with $290.2 million for the same period in
2001, an increase of 51.2%. The increase was primarily due to the increase of
interest expense at CE Electric UK Funding of $68.4 million predominantly due to
the debt related to the Yorkshire Electricity acquisition, the discontinuance
of capitalizing interest related to the Casecnan and Cordova Projects of $37.7
million and $9.7 million, respectively, and interest expense due to debt related
to the acquisitions of Kern River and Northern Natural Gas of $22.4 million
and $8.1 million, respectively.
Tax expense for the three months ended September 30, 2002, was $26.8 million
compared with $241.9 million for the same period in 2001. The decrease is due
primarily to the tax expense of $199.9 million related to the sale of the
Northern Supply business in September 2001 and the recognition of a tax benefit
of $21.1 million in connection with the sale of the CalEnergy Gas assets in May
2002.
Tax expense for the nine months ended September 30, 2002, was $80.2 million
compared to $296.1 million for the same period in 2001. The decrease is due
primarily to the tax expense related to the sale of the Northern Supply business
in September 2001, the release of the tax obligation of $35.7 million in
connection with the execution of the TPL restructuring agreement in the U.K.,
and the recognition of a tax benefit in connection with the sale of the
CalEnergy Gas assets in 2002.
Minority interest for the three months ended September 30, 2002, was $45.3
million compared with $27.8 million for the same period in 2001. Minority
interest for the nine months ended September 30, 2002, was $105.2 million
compared with $80.0 million for the same periods in 2001. Minority interest
includes the dividends on the Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts. The increases in minority interest for both
periods is primarily due to the issuance of Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts relating to the Kern River
and Northern Natural Gas acquisitions.
Effective January 1, 2001, the Company changed its accounting policy regarding
major maintenance and repairs for nonregulated gas projects, nonregulated plant
overhaul costs and geothermal well rework costs to the direct expense method
from the former policy of monthly accruals based on long-term scheduled
maintenance plans for the gas projects and deferral and amortization of plant
overhaul costs and geothermal well rework costs over the estimated useful lives.
The cumulative effect of the change in accounting principle for 2001 was $4.6
million, net of taxes of $.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has available a variety of sources of liquidity and capital
resources, both internal and external. These resources provide funds required
for current operations, construction expenditures, debt retirement and other
capital requirements. The Company may from time to time seek to retire its
outstanding debt through cash purchases in the open market, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, the Company's liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material.
The Company's cash and cash equivalents were $662.1 million at September 30,
2002, compared to $386.7 million at December 31, 2001. Each of MidAmerican
Energy Holdings Company's direct or indirect subsidiaries is organized as a
legal entity separate and apart from MidAmerican Energy Holdings Company and its
other subsidiaries. Pursuant to separate financing agreements at each
subsidiary, the assets of each subsidiary may be pledged or encumbered to
support or otherwise provide the security for their own project or subsidiary
debt. It should not be assumed that any asset of any subsidiary of MidAmerican
Energy Holdings Company will be available to satisfy the obligations of
MidAmerican Energy Holdings Company or any of its other subsidiaries; provided,
however, that unrestricted cash or other assets which are available for
distribution may, subject to applicable law and the terms of financing
arrangements for such parties, be advanced, loaned, paid as dividends or
otherwise distributed or contributed to MidAmerican Energy Holdings Company or
affiliates thereof.
The Company generated cash flows from operations of $682.8 million for the nine
months ended September 30, 2002, compared with $791.0 million for the same
period in 2001. The decrease was primarily due to timing of changes in working
capital activities, partially offset by positive impacts of the Kern River and
real estate companies acquisitions.
The remaining increase to cash and cash equivalents is primarily due to the
issuances of convertible preferred stock, trust preferred securities and
subsidiary and project debt and cash proceeds from sale of assets, partially
offset by the Kern River and Northern Natural Gas acquisitions, purchase of
convertible preferred securities, repayment of subsidiary and project debt and
capital expenditures for operating and construction projects.
In addition, the Company recorded separately restricted cash and investments of
$63.9 million and $54.8 million at September 30, 2002, and December 31, 2001,
respectively. The restricted cash balance as of September 30, 2002, is comprised
primarily of amounts deposited in restricted accounts which is reserved for the
service of debt obligations.
Other Investments
On March 27, 2002, the Company invested $275.0 million in Williams in exchange
for shares of 9-7/8 percent cumulative convertible preferred stock of Williams.
Dividends are scheduled to be received quarterly, which commenced July 1, 2002.
This investment is accounted for under the cost method. The Company is aware
that there have been public announcements that Williams' financial condition has
deteriorated as a result of reduced liquidity. Williams' senior unsecured debt
obligations are currently rated B1 by Moody's, B by Standard & Poor's and B- by
Fitch. The Company has not recorded an impairment on this investment as of
September 30, 2002, and is monitoring the situation.
In connection with this investment, the Company issued $275 million of no par,
zero coupon convertible preferred stock to Berkshire Hathaway.
Yorkshire Electricity
In August 2002, CE Electric UK Funding acquired the remaining 5.25% of Yorkshire
Electricity for $33.3 million that it did not already own from Xcel Energy
International, an affiliate of Xcel Energy Inc.
Debt issuances and redemptions
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% notes due
in 2031. The proceeds were used to refinance existing debt and preferred
securities and for other corporate purposes. On March 11, 2002, MidAmerican
Energy redeemed all $100 million of its 7.98% MidAmerican-obligated preferred
securities of subsidiary trust at 100% of the principal amount plus accrued
interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.7 million of its $7.80
series of preferred securities. The first $13.3 million of preferred securities
were redeemed at 100% of the principal amount plus accrued dividends, and the
remaining $13.4 million was redeemed at 103.9% of the principal amount plus
accrued dividends.
On June 21, 2002, Kern River closed on a bank loan facility providing for
aggregate loans of up to $875 million to be used for the construction of the
Kern River 2003 Expansion Project. The facility, which matures 15 years after
the 2003 Expansion Project commences operation has a variable interest rate
which increases over the term of the facility from 1.375% to 4.5% over LIBOR.
Kern River has drawn $384.9 million on this facility as of September 30, 2002.
Subsequent Events
On October 4, 2002, the Company issued $200 million of 4.625% Senior Notes due
in 2007 and $500 million of 5.875% Senior Notes due in 2012. The proceeds are
being used for general corporate purposes including to reduce short-term
obligations, to make a $150 million equity contribution to Northern Natural Gas,
and to make funds available to Kern River for its 2003 Expansion Project.
On October 15, 2002, Northern Natural Gas issued $300 million of 5.375% Senior
Notes due in 2012. The proceeds, along with the $150 million equity contribution
from the Company, were used to refinance a $450 million short-term debt
obligation.
Real Estate Companies Acquisitions
During 2002, HomeServices separately acquired three real estate companies for an
aggregate purchase price of approximately $100 million, net of cash acquired,
plus working capital and certain other adjustments. For the year ended December
31, 2001, these real estate companies had combined revenue of approximately $356
million on 42,000 closed sides representing $13.7 billion of sales volume.
Additionally, HomeServices is obligated to pay a maximum earnout of $18.5
million calculated based on 2002 financial performance measures. These purchases
were financed using HomeServices' $65 million revolving credit facility and
MidAmerican Energy Holdings Company's corporate revolver for $40 million, which
was contributed to HomeServices as equity. The Company is in the process of
completing the allocation of the purchase price to the assets and liabilities
acquired.
CalEnergy Gas Disposal
In May 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company,
executed the sale of several of its U.K. natural gas assets to Gaz de France for
(pound)137.0 million (approximately $200 million). CalEnergy Gas sold four
natural gas-producing fields located in the southern basin of the U.K. North Sea
including Anglia, Johnston, Schooner and Windermere. The transaction also
included the sale of rights in four gas fields (in development/construction) and
three exploration blocks owned by CalEnergy Gas.
Accounts Receivable Sold
In 1997, MidAmerican Energy entered into a revolving agreement, which expired on
October 29, 2002, to sell all of its right, title and interest in the majority
of its billed accounts receivable to MidAmerican Energy Funding Corporation, a
special purpose entity established to purchase accounts receivable from
MidAmerican Energy. MidAmerican Energy Funding Corporation in turn sold
receivable interests to outside investors. In consideration for the sale,
MidAmerican Energy received cash and a subordinated note, bearing interest at
8%, from MidAmerican Energy Funding Corporation. As of September 30, 2002, the
revolving cash balance was $36 million and the amount outstanding under the
subordinated note was $89.2 million. The agreement was structured as a true
sale, under which the creditors of MidAmerican Energy Funding Corporation were
entitled to be satisfied out of the assets of MidAmerican Energy Funding
Corporation prior to any value being returned to MidAmerican Energy or its
creditors. Therefore, the accounts receivable sold are not reflected on the
Company's consolidated balance sheets. As of September 30, 2002, $126.0 million
of accounts receivable, net of reserves, were sold under the agreement.
MidAmerican Energy did not extend or replace this agreement.
Construction
MidAmerican Energy
MidAmerican Energy's primary need for capital is for utility construction
expenditures. For the first nine months of 2002, utility construction
expenditures totaled $228.8 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations.
Forecasted MidAmerican Energy utility construction expenditures, including
allowances for funds used during construction are $382 million for 2002 and
$1.614 billion for 2003 through 2006. Capital expenditure needs are reviewed
regularly by management and may change significantly as a result of such
reviews.
MidAmerican Energy has announced plans to construct an electric generating
plant, the Greater Des Moines Energy Center, in Iowa. The plant will provide
service to regulated retail electricity customers and be included in MidAmerican
Energy's regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales
may also be made from the plant to the extent the power is not needed for
regulated retail service. The plant will be a 540 MW (500 MW based on expected
accreditation) natural gas-fired unit with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and will operate it. The plant
will be operated in simple cycle mode during 2003 and 2004, with combined cycle
operation commencing in 2005. MidAmerican Energy commenced construction of the
plant in 2002 following receipt of two orders from the IUB. The first order
authorized construction of the plant. The second order, issued May 29, 2002,
specified the principles that will apply to the plant over its life for purposes
of Iowa ratemaking and was sought by MidAmerican Energy to limit regulatory
risk.
MidAmerican Energy presently expects that all utility construction expenditures
for the next five years will be met with the issuance of long-term debt and cash
generated from utility operations, net of dividends. The actual level of cash
generated from utility operations is affected by, among other things, economic
conditions in the utility service territory, weather and federal and state
regulatory actions.
Kern River Expansion
On July 17, 2002, Kern River received approval from the FERC to construct, own
and operate the 2003 Expansion Project. The 2003 Expansion Project will loop
most of Kern River's existing mainline, construct three new compressor stations
and upgrade or modify Kern River's six existing compressor stations. The 2003
Expansion Project, which is expected to be completed and operational by May
2003, will increase Kern River's capacity by approximately 900mmcf/day. Service
will be provided under long-term contracts subject to incremental rates. The
estimated cost of the expansion is approximately $1.2 billion, which will be
financed with 70% debt and 30% equity, consistent with Kern River's existing
capital structure, the application for the FERC approval described above and the
limitations contained in the indenture for Kern River's existing secured senior
notes.
Construction will initially be funded with the proceeds of an $875 million
credit facility entered into by Kern River on June 21, 2002, until 70% of the
projected capitalized costs of the 2003 Expansion Project has been spent. The
final 30% of the capitalized costs of the 2003 Expansion Project will be funded
with equity from the Company. The credit facility is structured as a two-year
construction facility followed by a term loan with a final maturity 15 years
after completion of the 2003 Expansion Project. However, Kern River presently
intends to refinance the credit facility through a bond offering or other
capital markets transaction following completion of the 2003 Expansion Project.
Prior to completion of the 2003 Expansion Project, the credit facility lenders
will have limited recourse to Kern River and its assets and cash flow, and will
have recourse to the Company's completion guarantee described below. Following
completion of the 2003 Expansion Project, until such time as the Kern River
credit facility is refinanced, the lenders under the credit facility will share
equally and ratably with the existing Kern River senior secured noteholders in
all of the collateral pledged to such senior secured noteholders.
Pursuant to the Company's completion guarantee, it has guaranteed that
"completion" of the 2003 Expansion Project will occur on or prior to the
earliest of any abandonment by Kern River of the project, the occurrence of
certain other acceleration events and June 30, 2004. The potential acceleration
events include any downgrading of the Company's public debt rating to below
investment grade by either S&P or Moody's unless a satisfactory substitute
guarantor assumes the Company's obligations under the completion guarantee
within 60 days after any such downgrade; Berkshire Hathaway ceasing to own at
least a majority of the outstanding capital stock of the Company; and certain
other customary events of default by the company. In the completion guarantee,
the Company has also agreed to cause capital contributions to be made to Kern
River in a minimum aggregate amount of at least $375 million by June 30, 2004 or
upon any earlier event of abandonment of the project. For purposes of the
Company's completion guarantee, the term "completion" is defined in the Kern
River credit agreement to mean satisfaction of a number of conditions, the most
significant of which include the requirements that the 2003 Expansion Project be
substantially complete and operable and able to permit Kern River to perform its
obligations under all of the long-term firm gas transportation service
agreements entered into in connection with the 2003 Expansion Project; that the
shippers under such agreements shall have begun to incur the obligation to pay
reservation fees thereunder; and that the FERC shall have authorized Kern River
to begin collecting rates under its tariff and its shipper agreements; provided
that the 2003 Expansion Project shall still be deemed to have been completed if
it is less than substantially complete but it demonstrates at least 80% design
capacity and Kern River's debt service coverage ratios as defined in its senior
secured note indenture are not less than 1:55 to 1:0. There are a number of
other conditions to completion, including requirements that all conditions to
completion of the expansion contained in Kern River's senior secured note
indenture be satisfied and all of Kern River's obligations under its credit
agreement then share pari passu in all collateral available to Kern River's
senior secured noteholders. The Company's completion guarantee shall terminate
upon the earlier of completion of the 2003 Expansion Project or repayment in
full of all obligations under the Kern River credit facility.
Zinc Recovery Project
CalEnergy Minerals LLC is constructing the Zinc Recovery Project. The Zinc
Recovery Project is designed to have a capacity of approximately 30,000 metric
tons per year and is scheduled to commence initial commercial operations in
2002. Total project costs of the Zinc Recovery Project are expected to be
approximately $244 million, net of damages received from Kvaerner, which is
being funded by $140.5 million of debt and the balance from funds provided by
the parent company. The Zinc Recovery Project has incurred $213.9 million, net
of damages, of such costs through September 30, 2002.
Development Activity
MidAmerican Energy has announced plans to develop a 750 MW
super-critical-temperature, coal-fired plant fueled with Powder River low-sulfur
coal. MidAmerican Energy will operate the plant and expects to own 450 MW of the
plant. Municipal, cooperative and public power utilities will own the remainder,
which is a typical ownership arrangement for large baseload plants in Iowa.
MidAmerican Energy's investment in the plant is projected to be approximately
$785 million, including the cost of related transmission facilities, taxes and
allowance for funds used during construction. The plant will provide service to
regulated customers and be included in MidAmerican Energy's regulated rate base
in Iowa, Illinois and South Dakota. Wholesale sales may also be made from the
plant to the extent the power is not needed for regulated retail service.
MidAmerican Energy has made a filing with the IUB for a certificate to construct
this plant and expects to make a filing with the IUB for approval of ratemaking
principles for this plant during the fourth quarter of 2002. The development of
this plant is subject to obtaining environmental and other required permits, as
well as to receiving orders from the IUB approving construction of the plant and
associated transmission facilities and establishing ratemaking principles which
are satisfactory to MidAmerican Energy.
The Company's subsidiary, Fox Energy Company LLC, is developing a 530 net MW gas
fired power generating facility in Outagamie County, Wisconsin. A subsidiary of
TransAlta Corporation has agreed to participate in the ownership and development
of this project at a level of 50%. The Company's subsidiary, CE Obsidian Energy
LLC, is developing a 185 net MW geothermal facility in Imperial Valley,
California, known as Salton Sea VI. An affiliate of El Paso Corporation, or El
Paso, has elected to participate in the ownership and development of this
project at a level of 50%.
The Company is actively seeking to develop, construct, own and operate
additional new energy projects, both domestically and internationally, the
completion of any of which is subject to substantial risk. Development can
require the Company to expend significant sums for preliminary engineering,
permitting, fuel supply, resource exploration, legal and other expenses in
preparation for competitive bids which the Company may not win or before it can
be determined whether a project is feasible, economically attractive or capable
of being financed. Successful development and construction is contingent upon,
among other things, negotiation on terms satisfactory to the Company of
engineering, construction, fuel supply, sales contracts and, if the Company
intends to own less than 100% of the project, joint venture or similar
agreements, with other project participants, receipt of required governmental
permits and consents and timely implementation of construction. There can be no
assurance that development efforts on any particular project, or the Company's
development efforts generally, will be successful.
Cooper Contract Restructuring
On July 31, 2002, MidAmerican Energy and NPPD signed an agreement on the
restructuring of the power purchase contract for Cooper. Under the terms of the
restructured contract, MidAmerican Energy will pay NPPD through December 31,
2004, a scheduled amount per unit for 380 megawatts of the accredited capacity
of Cooper and a minimum of approximately 1.2 million megawatt-hours (MWh) in the
last five months of 2002 and approximately 2.5 million MWh in each of 2003 and
2004. NPPD also paid MidAmerican Energy $39.1 million on August 1, 2002.
In December 2000, MidAmerican Energy ceased contributing decommissioning funds
to NPPD and maintained a separate fund for estimated Cooper decommissioning
costs. Through July 31, 2002, $18.3 million had been accrued and retained by
MidAmerican Energy in this separate fund. In conjunction with the power purchase
contract restructuring, MidAmerican Energy is recognizing the $39.1 million cash
payment and the $18.3 million previously accrued for decommissioning into income
plans based on the estimated energy expected to be received for the remainder of
the contract.
Finally, both parties agreed to release each other from any and all claims, past
or present, each might have under the power purchase contract prior to being
restructured and file to dismiss the litigation currently pending in U.S.
District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD prior
to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed and
operating costs of Cooper, excluding depreciation but including debt service,
and MidAmerican Energy's share of the nuclear fuel cost, including Department of
Energy disposal fees, based on energy delivered. In addition, prior to December
2000, MidAmerican Energy contributed toward payment of one-half of Cooper's
project decommissioning costs based on an assumed 2004 shutdown of the plant.
These obligations ceased pursuant to the restructuring of the power purchase
contract for Cooper.
Domestic Rate Matters: Gas Retail
On March 15, 2002, MidAmerican Energy made a filing with the Iowa Utilities
Board requesting an increase in rates of approximately $26.6 million for its
Iowa retail natural gas customers. As part of the filing, MidAmerican Energy
requested an interim rate increase of approximately $20.4 million annually. On
June 12, 2002, the Iowa Utilities Board issued an order granting an interim rate
increase of approximately $13.8 million annually, effective immediately and
subject to refund with interest. On July 15, 2002, MidAmerican Energy and the
Office of Consumer Advocate filed a proposed settlement agreement with the Iowa
Utilities Board. The settlement agreement, which was approved by the Iowa
Utilities Board on November 8, 2002, provides for an increase in rates of $17.7
million annually for MidAmerican Energy's Iowa retail natural gas customers and
freezes such rates for two years after the date the Iowa Utilities Board
approves tariffs implementing the settlement agreement. MidAmerican Energy
anticipates implementing the new rates in the fourth quarter of 2002.
Domestic Rate Matters: Gas Transmission
As interstate pipelines, Kern River and Northern Natural Gas' rates, services
and operations are regulated by FERC. FERC administers, among other things, the
Natural Gas Act and the Natural Gas Policy Act of 1978.
FERC has jurisdiction over, among other things, the construction and operation
of pipelines and related facilities used in the transportation, storage and sale
for resale of natural gas in interstate commerce, including the extension,
enlargement or abandonment of such facilities. FERC also has jurisdiction over
the rates and charges and terms and conditions of service for the transportation
of natural gas in interstate commerce, as well as accounting practices.
Kern River
Kern River's rates are set using a "levelized cost-of-service" methodology so
that the rate is constant over the contract period. This is achieved by using a
FERC-approved depreciation schedule in which depreciation increases as interest
expense decreases.
When Kern River commenced service in 1992, shippers signed 15-year long-term
firm transportation contracts that were to expire in 2007. Under terms of a 1995
rate settlement, Kern River agreed that new rates would be filed by May 1, 1999.
Instead of filing a rate case, Kern River negotiated a "pre-settlement" of the
rate case with its shippers. This was approved by the FERC, which included an
agreement for a moratorium on rate cases until May 1, 2002, under which Kern
River may be required to file a rate case by May 1, 2004. In order to reduce
transportation rates further and extend contract terms beyond 2007, Kern River
initiated an open season in October 1998 to measure interest in lower, extended
term rates ("ET Rates") for extended term contracts. Shippers were offered the
choice of new 10- or 15-year contracts (4-9 year extensions of their existing
contracts) with both options starting on October 1, 2001, and expiring on either
September 30, 2011 or September 30, 2016. On February 8, 2001, the FERC approved
implementation of the ET Rates. All existing shippers have signed up under the
ET Rates program. All of the pipeline's existing firm capacity will continue to
be contractually committed under the ET Rates contracts until September 2011.
Approximately 84% of the existing firm pipeline volume is contracted until
September 2016.
Kern River has 18 long-term firm transportation service agreements with 17
shippers for over 99% of the 2003 Expansion Project's capacity. The term for all
these service agreements is either 10 or 15 years from when transportation
services of the 2003 Expansion Project commence.
Northern Natural Gas
Northern Natural Gas has implemented a straight fixed variable rate design which
provides that all fixed costs assignable to firm capacity customers, including a
return on equity, are to be recovered through fixed monthly demand or capacity
reservation charges which are not a function of throughput volumes.
On May 1, 1998, Northern Natural Gas filed a general rate case proceeding with
FERC to increase its rates to reflect increased costs and to modify its rate and
service structure to more closely match the needs of its customers and
accommodate changes in the marketplace. On April 16, 1999, Northern Natural Gas
filed a settlement with FERC which resolves all issues in its rate case
proceeding. The settlement was approved on June 18, 1999 and provided for
increased seasonality in Northern Natural Gas' rate design effective November 1,
1999 for the Market Area and the Field Area. In addition, the settlement
provided for other revisions to Northern Natural Gas' transportation schedules.
The increased seasonality and service structure under the settlement recognized
the market value of capacity for the peak heating season and changes in the
marketplace due to LDC unbundling. Subject to certain limitations, the
settlement provides our customers with rate certainty. Pursuant to the
settlement, Northern Natural Gas may file a new general rate case no earlier
than May 1, 2003, with rates to be effective no earlier than November 1, 2003,
and must file no later than May 1, 2004.
Pipeline Safety Regulation
Kern River and Northern Natural Gas' pipeline operations are subject to
regulation by the United States Department of Transportation under the Natural
Gas Pipeline Safety Act of 1969, as amended, relating to design, installation,
testing, construction, operation and management of our pipeline system. The
Natural Gas Pipeline Safety Act requires any entity that owns or operates
pipeline facilities to comply with applicable safety standards, to establish and
maintain inspection and maintenance plans and to comply with such plans. Kern
River and Northern Natural Gas conduct internal audits of their facilities every
four years, with more frequent reviews of those they deem higher risk. The
United States Department of Transportation routinely audits their pipelines.
Compliance issues that arise during these audits or during the normal course of
business are addressed on a timely basis.
The aging pipeline infrastructure in the United States has led to heightened
regulatory and legislative scrutiny of pipeline safety and integrity practices.
The Natural Gas Pipeline Safety Act was amended by the Pipeline Safety Act of
1992 to require the Department of Transportation's Office of Pipeline Safety to
consider protection of the environment when developing minimum pipeline safety
regulations. In addition, the amendments require that the Department of
Transportation issue pipeline regulations concerning, among other things, the
circumstances under which emergency flow restriction devices should be required,
training and qualification standards for personnel involved in maintenance and
operation, and requirements for periodic integrity inspections, as well as
periodic inspection of facilities in navigable waters which could pose a hazard
to navigation or public safety. In addition, the amendments narrowed the scope
of our gas pipeline exemption pertaining to underground storage tanks under the
Resource Conservation and Recovery Act.
The Company believes its pipeline systems comply in all material respects with
the Natural Gas Pipeline Safety Act, but the industry could be required to incur
additional capital expenditures and increased costs depending upon final
regulations issued by the Department of Transportation under the Natural Gas
Pipeline Safety Act. While the effect of new legislation is still being
determined, the Company expects to spend the capital or make the operational
changes necessary to comply with all pipeline integrity legislation. The Company
currently projects that it will make significant expenditures to meet these new
regulations.
Environmental Matters: Domestic
The U.S. Environmental Protection Agency ("EPA"), and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at such
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$30 million. MidAmerican Energy's estimate of the probable cost for these sites
as of September 30, 2002, was $18 million. The estimate consists of $1 million
for investigation costs, $6 million for remediation costs, $9 million for ground
water treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 5 years.
The estimate of probable remediation costs is established on a site-specific
basis. Initially, a determination is made as to whether MidAmerican Energy has
potential remedial liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. When a potential remedial
liability exists, the best estimate of projected site closure costs are accrued.
The estimates are evaluated and revised quarterly as appropriate based on
additional information obtained during investigation and remedial activities.
The estimated recorded liabilities for these properties include incremental
direct costs of the remediation effort and oversight by the appropriate
regulatory authority, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liability could change materially
based on facts and circumstances derived from site investigations, changes in
required remedial action and changes in technology relating to remedial
alternatives. Insurance recoveries have been received for some of the sites
under investigation. Those recoveries are intended to be used principally for
accelerated remediation, as specified by the Iowa Utilities Board, and are
recorded as a regulatory liability. Additionally, as viable potentially
responsible parties are identified, those parties are evaluated for potential
contributions, and cost recovery is pursued when appropriate.
Although the timing of potential incurred costs and recovery of costs in rates
may affect the results of operations in individual periods, management believes
that the outcome of these issues will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. Based on
data to be obtained from monitors located throughout each state, the EPA will
determine which states have areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). The standards were subjected
to legal proceedings, and in February 2001, United States Supreme Court upheld
the constitutionality of the standards, through remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the U.S. Circuit Court of Appeals for the District of Columbia, the
EPA is moving forward in implementation of the standard and analyzing existing
monitored data and determining attainment status.
The impact of the new standards on the Company is currently unknown. MidAmerican
Energy's generating stations may be subject to emission reductions if the
stations are located in nonattainment areas or contribute to nonattainment areas
in other states. As part of an overall state plan to achieve attainment of the
standards, MidAmerican Energy could be required to install control equipment on
its generating stations or decrease the number of hours during which these
stations operate.
In 2001, the state of Iowa passed legislation that, in part, requires
rate-regulated utilities to develop a multi-year plan and budget for managing
regulated emissions from their generating facilities in a cost-effective manner.
MidAmerican Energy's proposed plan and associated budget (the Plan) was filed
with the Iowa Utilities Board on April 1, 2002, in accordance with state law.
MidAmerican Energy expects the Iowa Utilities Board to rule on the prudence of
the Plan in 2003. MidAmerican Energy is required to file Plan updates at least
every two years.
The Plan provides MidAmerican Energy's projected air emission reductions
considering current proposals being debated at the federal level and describes a
coordinated long-range plan to achieve these air emission reductions. The Plan
provides specific actions to be taken at each coal-fired generating facility and
related costs and timing for each action.
The Plan outlines $732.0 million in environmental investments to existing
coal-fired generating units, some of which are jointly owned, over a nine-year
period from 2002 through 2010. MidAmerican Energy's share of these investments
is $546.6 million, $67.9 million of which is projected to be incurred during the
2002-2005 rate freeze period. The Plan also identifies expenses that will be
incurred at the generating facilities to operate and maintain the environmental
equipment installed as a result of the Plan.
Following the expiration of the 2001 rate settlement agreement on December 31,
2005, the Plan proposes the use of an adjustment mechanism for recovery of Plan
costs, similar to the tracker mechanisms for cost recovery of renewable energy
and energy efficiency expenditures that are presently part of MidAmerican
Energy's electric regulated rates.
Environmental Matters: U.K.
The United Kingdom Government introduced new contaminated land legislation in
April 2000 under Part IIA of the Environmental Protection Act 1990 (the
`Contaminated Land Regime'). In certain circumstances, the Contaminated Land
Regime imposes strict and retrospective liability for the remediation of
contaminated land. Under the Contaminated Land Regime, those who `cause' or
`knowingly permit' contamination are primarily liable for the cost of
remediation. However, if polluters in this category cannot be found, the owner
or occupier of the land can be liable.
Local governmental units are the primary regulators under the regime. Local
governments are under an obligation to inspect their areas to identify
contaminated land. Where land is identified as contaminated and is capable of
causing significant harm, a remediation notice will be served whenever a
voluntary agreement cannot be reached with those responsible for remediation.
The standard of remediation is based on the `suitable for use' approach. This
use will be the existing use of the property unless a planning application has
been submitted for a change of use.
CE Electric UK Funding is in the process of completing the evaluation work on
the three sites that may be subject to the Contaminated Land Regime. Exploratory
work with an environmental remediation company is in progress on these sites.
The Environmental Protection Act (Disposal of Polychlorinated Biphenyl's
("PCB's") and other Dangerous Substances) (England and Wales) Regulations 2000
were introduced on May 4, 2000. The regulations required that transformers
containing less than 500 parts per million of PCB's and other dangerous
substances be registered with the Environment Agency by July 31, 2000.
Transformers containing 500 parts per million had to be de-contaminated by
December 31, 2000. CE Electric UK Funding has de-contaminated all items above
500 parts per million and informed the Environment Agency of the details.
Transformers containing PCB's in concentrations of less than 500 parts per
million can be retained until the end of their useful life. An annual statement
of transformers in this category is provided to the Environment Agency.
The Groundwater Regulations 1998 seek to prevent listed hazardous substances
from entering groundwater and strengthen the powers of the environmental
regulator in Great Britain to require additional protective measures, especially
in areas of important groundwater supplies. Mineral oils and hydrocarbons are
included in the list of more tightly controlled substances, or List I
substances. This affects the high voltage fluid filled electricity cable network
incorporating an insulating fluid currently in the List I category. Further
research may result in recategorization because of the biodegradable qualities
of the cable fluid. The existing voluntary Operating Code of Practice, as agreed
between the Agency and the Electricity Supply Industries, is undergoing revision
through the services of the Electricity Association to address the regulatory
changes. The existing voluntary Operating Code of Practice is, and any revised
Operating Code of Practice will be, incorporated into the operating practices of
CE Electric UK Funding. Any revisions which are made are not expected to have a
material impact on the Company.
The Control of Pollution (Oil Storage) (England) Regulations 2001, which began
to become effective in 2002, require the introduction of secondary containment
measures (bunding) for all above ground oil storage locations where the capacity
is more than 200 liters. The primary containers must be in sound condition, leak
free, and positioned away from vehicle traffic routes. The secondary containment
must be impermeable to water and oil (without drainage valve) and be subject to
routine maintenance. The capacity of the bund must be sufficient to hold up to
110% of the largest stored vessel or 25% of the maximum stored capacity,
whichever is the greater. The full impact of the regulations will be phased in
over the next three years. On March 1, 2002, these regulations came into effect
for all new oil storage facilities. On September 1, 2003, the regulations become
effective for exiting storage facilities at "significant risk" (i.e. within 10
meters of a water course), and on September 1, 2005 the regulations come into
effect for all remaining storage facilities. A detailed study on the impacts has
been carried out and a plan of action prepared to ensure compliance. The Company
expects that the cost of compliance with such regulations will not be material.
Standard Electricity Market Design
On July 31, 2002, FERC issued a notice of proposed rulemaking with respect to
Standard Market Design for the electric industry. The FERC has characterized the
proposal as portending "sweeping changes" to the use and expansion of the
interstate transmission and the wholesale bulk power systems in the United
States. The proposal includes numerous proposed changes to the current
regulation of transmission and generation facilities designed "to promote
economic efficiency" and replace the "obsolete patchwork we have today,"
according to FERC's chairman. The final rule, if adopted as currently proposed,
would require all public utilities operating transmission facilities subject to
FERC jurisdiction to file revised open access transmission tariffs that would
require changes to the basic services these public utilities currently provide.
The proposed rule may impact the pricing of MidAmerican Energy's electricity and
transmission products. FERC does not envision that a final rule will be fully
implemented until September 30, 2004. The Company is evaluating the proposed
rule and the Company believes that the final rule could vary considerably from
the initial proposal. Accordingly, the Company is presently unable to quantify
the likely impact of the proposed rule on the Company and its subsidiaries.
Regulatory Environment: Philippines
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001, which is aimed at restructuring the Philippine power industry,
privatization of the NPC and introduction of a competitive electricity market,
among other initiatives. The implementation of the bill may have an impact on
the Company's future operations and the industry as a whole, the effect of which
is not yet determinable and estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (along with four
other unrelated projects) has reportedly been identified as raising legal and
financial questions and, with those projects, has been prioritized for
renegotiation. The Company's subsidiaries' Upper Mahiao, Malitbog, and
Mahanagdong projects, which, together with the Casecnan Project, collectively
the "Philippine Projects", have also reportedly been identified as raising
financial questions. No written report has yet been issued with respect to the
interagency review, and the timing and nature of steps, if any, that the
Philippine Government may take in this regard are not known. To the extent
disputes arise under the Philippine Projects' agreements with respect to the
Philippines Projects' obligations, rights and remedies thereunder, such disputes
will be determined by international arbitration in a neutral forum conducted in
accordance with the rules of the International Chamber of Commerce or UNCITRAL,
as applicable.
Representatives of CE Casecnan Water and Energy Company, Inc. ("CE Casecnan"), a
Philippine corporation, together with certain current and former Philippine
government officials, also have been requested to appear, and have appeared,
before a Philippine Senate committee which has independently raised questions
and made allegations with respect to the Casecnan Project's tariff structure and
implementation. No further hearings are scheduled at this time. CE Casecnan has
and intends to continue to respond to such questions and to vigorously defend
the Casecnan Project against any allegations, which may be made. CE Casecnan
believes the allegations made with respect to the Casecnan Project to be without
merit.
Nuclear Decommissioning
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator.
Based on information presently available, the Company expects to contribute
approximately $41 million during the period 2002 through 2006 to an external
trust established for the investment of funds for decommissioning Quad Cities
Station. Approximately 55% of the fair value of the trust's funds are now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds. Quad Cities
Station decommissioning costs properly charged to Iowa customers are included in
base rates, and recovery of any increases in those amounts must be sought
through the normal ratemaking process.
As a result of a restructuring of the power purchase contract between
MidAmerican Energy and NPPD, MidAmerican Energy will no longer be accruing for
decommissioning costs for the Cooper Nuclear Station. Refer to Note 12E of the
Company's Notes to Consolidated Financial Statements for a discussion of the
contract restructuring.
New Accounting Pronouncements and Reporting Issues
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires
recognition on the balance sheet of legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal operation of such assets. Additionally, at the time an
asset retirement obligation (ARO) is recognized, an ARO asset of the same amount
is recorded and depreciated. This pronouncement is effective for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact that
adoption of this standard will have on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 on January 1, 2002, did not have any impact on the Company's
consolidated financial statements.
The Emerging Issues Task Force (EITF) recently issued EITF Issue No. 02-3,
"Recognition and Reporting of Gains and Losses on Energy Trading Contracts Under
Issues No. 98-10 and 00-17." In accordance with EITF No. 02-3, all gains and
losses on energy trading contracts must be reported net on the income statement,
effective for reporting periods ending after July 15, 2002, with all prior
periods presented being reclassified to a consistent presentation. MidAmerican
Energy's nonregulated wholesale gas and electric marketing activities qualify as
"energy trading" contracts under the guidance of EITF No. 98-10. In accordance
with EITF Issue No. 02-3, effective September 30, 2002, for MidAmerican Energy,
all trading revenues are reported net of the cost of such sales. Previously,
such amounts were recorded gross. All prior periods have been reclassified to
conform to the net presentation.
Obligations and Commitments
As of September 30, 2002, Northern Natural Gas had $13.8 million of obligations
to deliver 4.0 bcf of natural gas in 2002 and $46.0 million of obligations to
deliver 12.2 bcf of natural gas in 2003. The obligations are revalued based on
market prices for natural gas, with changes in value included in the statement
of operations. In 2002, Northern entered into natural gas commodity price swaps
and index basis swaps to effectively fix the deferred obligation balance. Any
further changes in the market value of the deferred obligations will be offset
by a corresponding change in the opposite direction in the market value of the
swaps.
Other than the delivery of natural gas issue described above, the issuance of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust in connection with the Northern Natural Gas and Kern River acquisitions as
described in Note 2 in the notes to the consolidated financial statements, and
the issuance of long-term debt as described in Note 8 in the notes to the
consolidated financial statements, there have been no other material changes to
the obligations and commitments as described in the Annual Report on Form 10-K
for the year ended December 31, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk, including changes in the market price of
certain commodities and interest rates. To manage the price volatility relating
to these exposures, the Company enters into various financial derivative
instruments. Senior management provides the overall direction, structure,
conduct and control of the Company's risk management activities, including the
use of financial derivative instruments, authorization and communication of risk
management policies and procedures, strategic hedging program guidelines,
appropriate market and credit risk limits, and appropriate systems for
recording, monitoring and reporting the results of transactional and risk
management activities.
During the nine months ended September 30, 2002, the Company issued long-term
debt as described in Note 8 in the notes to the consolidated financial
statements and assumed additional debt with the acquisitions of Northern Natural
Gas and Kern River. However, the Company does not believe it has any material
change in regard to exposure to interest rate risk.
Refer to Note 16 in Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 2001, for discussion on
derivatives used to hedge price risk. The Company's exposure to commodity price
risk did not change materially from December 31, 2001.
PART I - FINANCIAL INFORMATION (CONTINUED)
Item 4 Controls and Procedures
MidAmerican Energy Holdings Company's chief executive officer and chief
financial officer have established "disclosure controls and procedures" (as
defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities and Exchange Act
of 1934) to ensure that material information of the companies and their
subsidiaries is made known to them by others within the respective companies.
Under their supervision, an evaluation of the disclosure controls and procedures
was performed within 90 days prior to the filing of this quarterly report. Based
on that evaluation, the above-mentioned officers have concluded that, as of the
date of the evaluation, the disclosure controls and procedures were operating
effectively. Additionally, the above-mentioned officers find that there have
been no signification changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date of that
evaluation.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.
In addition to the proceedings described in Note 12 in the notes to the
consolidated financial statements, the Company and its subsidiaries are
currently parties to various minor items of litigation or arbitration, none of
which, if determined adversely, would have a material adverse effect on the
Company.
Item 2 Changes in Securities and Use of Proceeds.
Not applicable.
Item 3 Defaults on Senior Securities.
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 Other Information.
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
On July 18, 2002, the Company filed a Form 8-K , dated July 17, 2002, stating
that Kern River Gas Transmission Company, an indirect subsidiary of the Company,
had received approval from the Federal Energy Regulatory Commission ("FERC") to
construct and operate the Kern River 2003 Expansion Project.
On July 30, 2002, the Company filed a Form 8-K, dated July 30, 2002, stating
that the Company had reached a definitive agreement with Dynegy Inc. to acquire
100 percent of Northern Natural Gas Company.
On August 14, 2002, the Company filed a Form 8-K with certifications of the
chief executive officer and chief financial officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
On August 23, 2002, the Company filed a Form 8-K, dated August 23, 2002, stating
that the Company completed its acquisition of Northern Natural Gas Company on
August 16, 2002.
On September 23, 2002, the Company filed a Form 8-K, dated September 23, 2002,
stating that the Company intends to offer an aggregate of approximately $600
million of senior notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Registrant)
Date: November 14 , 2002 /s/ Patrick J. Goodman
------------------------------------
Patrick J. Goodman
Senior Vice President & Chief
Financial Officer
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, David L. Sokol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Holdings Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to theregistrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------------
David L. Sokol
Chief Executive Officer
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Patrick J. Goodman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Holdings Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
-----------------------
Patrick J. Goodman
Senior Vice President and
Chief Financial Officer