UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
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(Exact name of registrant as specified in its charter)
Iowa 94-2213782
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, Iowa 50309
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(Address of principal executive offices) (Zip Code)
(515) 242-4300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
All of the shares of MidAmerican Energy Holdings Company are held by a limited
group of private investors. As of May 12, 2003, 9,281,087 shares of common stock
were outstanding.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 25
Item 4. Controls and Procedures.......................................... 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 26
Item 2. Changes in Securities and Use of Proceeds........................ 26
Item 3. Defaults Upon Senior Securities.................................. 26
Item 4. Submission of Matters to a Vote of Security Holders.............. 26
Item 5. Other Information................................................ 26
Item 6. Exhibits and Reports on Form 8-K................................. 26
SIGNATURES ................................................................. 27
CERTIFICATIONS.............................................................. 28
EXHIBIT INDEX............................................................... 30
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
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 March 31, 2003,
and the related consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2003 and 2002. 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 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, 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated January 24, 2003, 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, 2002 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
May 8, 2003
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
-----------------------------
MARCH 31, DECEMBER 31,
2003 2002
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 852,868 $ 844,430
Restricted cash and short-term investments ............... 72,695 50,808
Accounts receivable, net ................................. 734,901 707,731
Inventories .............................................. 62,326 126,938
Other current assets ..................................... 238,454 212,888
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Total current assets ................................... 1,961,244 1,942,795
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Properties, plants and equipment, net ...................... 10,135,056 9,898,796
Excess of cost over fair value of net assets acquired ...... 4,259,574 4,258,132
Regulatory assets, net ..................................... 568,882 415,804
Other investments .......................................... 444,679 446,732
Equity investments ......................................... 278,755 273,707
Deferred charges and other assets .......................... 760,770 780,489
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TOTAL ASSETS ............................................... $ 18,408,960 $ 18,016,455
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 418,367 $ 462,960
Accrued interest ......................................... 182,348 192,015
Accrued taxes ............................................ 93,622 75,097
Other accrued liabilities ................................ 518,838 457,058
Short-term debt .......................................... 70,932 79,782
Current portion of long-term debt ........................ 364,358 470,213
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Total current liabilities .............................. 1,648,465 1,737,125
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Other long-term accrued liabilities ........................ 1,275,554 1,100,917
Parent company debt ........................................ 2,325,756 2,324,456
Subsidiary and project debt ................................ 7,231,794 7,077,087
Deferred income taxes ...................................... 1,284,195 1,238,421
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Total liabilities ........................................ 13,765,764 13,478,006
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Deferred income ............................................ 77,695 80,078
Minority interest .......................................... 6,533 7,351
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts .......................... 2,063,935 2,063,412
Preferred securities of subsidiaries ....................... 93,028 93,325
Commitments and contingencies (Note 6)
Stockholders' equity:
Zero-coupon convertible preferred stock - authorized
50,000 shares, no par value, 41,263 shares outstanding ... -- --
Common stock - authorized 60,000 shares, no par value,
9,281 shares issued and outstanding ...................... -- --
Additional paid-in capital ................................. 1,956,509 1,956,509
Retained earnings .......................................... 714,645 584,009
Accumulated other comprehensive loss ....................... (269,149) (246,235)
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Total stockholders' equity ............................... 2,402,005 2,294,283
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 18,408,960 $ 18,016,455
============ ============
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
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(UNAUDITED)
REVENUE:
Operating revenue ........................................ $ 1,562,834 $ 1,041,752
Income on equity investments ............................. 7,455 14,120
Interest and dividend income ............................. 13,871 8,355
Other income ............................................. 19,794 5,350
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Total revenue .......................................... 1,603,954 1,069,577
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COSTS AND EXPENSES:
Cost of sales ............................................ 672,750 409,283
Operating expense ........................................ 356,493 279,667
Depreciation and amortization ............................ 141,849 126,244
Interest expense ......................................... 186,845 141,300
Capitalized interest ..................................... (15,532) (6,647)
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Total costs and expenses ............................... 1,342,405 949,847
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INCOME BEFORE PROVISION FOR INCOME TAXES ................... 261,549 119,730
Provision for income taxes ............................... 73,000 29,130
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INCOME BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS .... 188,549 90,600
Minority interest and preferred dividends ................ 57,913 25,851
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NET INCOME AVAILABLE TO COMMON AND PREFERRED STOCKHOLDERS .. $ 130,636 $ 64,749
=========== ===========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
-----------------------
2003 2002
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 130,636 $ 64,749
Adjustments to reconcile net cash flows from operating activities:
Income in excess of distributions on equity investments .......... (3,541) (11,745)
Depreciation and amortization .................................... 141,849 126,244
Amortization of deferred financing costs ......................... 9,555 9,005
Amortization of regulatory assets and liabilities and other ...... (9,709) (1,656)
Provision for deferred income taxes .............................. 58,923 4,797
Changes in other items:
Accounts receivable, net ....................................... (20,651) (137,731)
Other current assets ........................................... 53,018 54,595
Accounts payable and other accrued liabilities ................. 14,896 44,164
Accrued interest ............................................... (9,357) 28,551
Accrued taxes .................................................. 15,291 (15,560)
Deferred income ................................................ (2,214) (492)
Other ............................................................ 7,097 17,701
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Net cash flows from operating activities ......................... 385,793 182,622
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ................................. (36,575) (493,696)
Purchase of convertible preferred securities ....................... -- (275,000)
Capital expenditures relating to operating projects ................ (133,845) (95,673)
Construction and other development costs ........................... (244,033) (22,372)
(Increase) decrease in restricted cash and investments ............. (603) 5,423
Other .............................................................. (28,944) (5,372)
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Net cash flows from investing activities ......................... (444,000) (886,690)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiary and project debt .......................... 287,572 395,428
Proceeds from parent company debt .................................. -- 120,500
Repayments of subsidiary and project debt .......................... (211,268) (11,092)
Net repayment of subsidiary short-term debt ........................ (8,850) (46,195)
Proceeds from issuance of trust preferred securities ............... -- 323,000
Proceeds from issuance of common and preferred stock ............... -- 402,000
Redemption of preferred securities of subsidiaries ................. (294) (100,320)
Increase in restricted cash ........................................ (21,887) (23,012)
Other .............................................................. 28,276 (31,113)
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Net cash flows from financing activities ......................... 73,549 1,029,196
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Effect of exchange rate changes .................................... (6,904) (6,394)
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NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 8,438 318,734
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 844,430 386,745
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 852,868 $ 705,479
========= ==========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of interest capitalized ......................... $ 172,181 $ 146,222
========= ==========
Income taxes paid .................................................. $ 280 $ 20,167
========= ==========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of MidAmerican Energy Holdings Company and
subsidiaries ("MEHC" or 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 March 31,
2003, and the results of operations and cash flows for the three-month periods
ended March 31, 2003 and 2002. The results of operations for the three-month
period ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full year.
The unaudited 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 prior year financial statements and supporting note
disclosures have been reclassified to conform to the current year presentation.
Such reclassification did not impact previously reported net income or retained
earnings.
The unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003 the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
was immaterial.
The Company's review of its regulated entities identified legal retirement
obligations for nuclear decommissioning, wet and dry ash landfills and offshore
and minor lateral pipeline facilities. On January 1, 2003, the Company recorded
$289.3 million of asset retirement obligation ("ARO") liabilities; $13.9 million
of ARO assets, net of accumulated depreciation; $114.6 million of regulatory
assets; and reclassified $1.0 million of accumulated depreciation to the ARO
liability. The initial ARO liability recognized includes $266.5 million that
pertains to obligations associated with the decommissioning of the Quad Cities
nuclear station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded at December 31, 2002. The
adoption of this statement did not have a material impact on the operations of
the regulated entities, as the effects were offset by the establishment of
regulatory assets, totaling $114.6 million, pursuant to SFAS No. 71.
During the three-month period ended March 31, 2003, the Company recorded, as a
regulatory asset, accretion related to the ARO liability of $4.2 million
resulting in an ARO liability balance of $293.5 million at March 31, 2003.
On April 30, 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends SFAS No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS 149 clarifies
when a contract with an initial net investment meets the characteristic of a
derivative and clarifies when a derivative that contains a financing component
will require special reporting in the statement of cash flows. SFAS 149 is
effective for the Company for contracts entered into or modified after June 30,
2003. The Company and its subsidiaries are evaluating the impact of adopting the
requirements of SFAS 149.
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3. PROPERTIES, PLANTS AND EQUIPMENT, NET
Properties, plants and equipment, net comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
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Properties, plants and equipment, net:
Utility generation and distribution system ............ $ 8,226,590 $ 8,165,140
Interstate pipelines' assets .......................... 2,291,482 2,260,145
Independent power plants .............................. 1,415,538 1,410,170
Mineral and gas reserves and exploration assets ....... 508,062 500,422
Utility non-operational assets ........................ 381,269 370,811
Other assets .......................................... 136,343 131,577
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Total operating assets ................................ 12,959,284 12,838,265
Accumulated depreciation and amortization ............. (4,261,446) (4,109,954)
----------- -----------
Net operating assets .................................. 8,697,838 8,728,311
Construction in progress .............................. 1,437,218 1,170,485
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Properties, plants and equipment, net ................. $10,135,056 $ 9,898,796
=========== ===========
Construction in Progress
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Kern River Gas Transmission Company ("Kern River") completed the construction of
its 2003 Expansion Project at a total cost of approximately $1.2 billion. The
expansion, which was placed into operation on May 1, 2003, increased the design
capacity of the existing Kern River pipeline by 885,626 decatherms per day to
1,755,626 decatherms per day.
4. INVESTMENT IN CE GENERATION
The equity investment in CE Generation LLC ("CE Generation") at March 31, 2003
and December 31, 2002 was approximately $247.4 million and $244.9 million,
respectively. During the three-month period ended March 31, 2003 and 2002, the
Company recorded income from its investment in CE Generation of $2.3 million and
$7.2 million, respectively.
5. DEBT ISSUANCES AND REDEMPTIONS
On January 14, 2003, MidAmerican Energy Company ("MidAmerican Energy") issued
$275.0 million of 5.125% medium-term notes due in 2013. The proceeds were used
to refinance existing debt and for other corporate purposes.
On May 1, 2003, Kern River Funding Corporation, a wholly owned subsidiary of
Kern River, issued $836 million of its 4.893% Senior Notes with a final maturity
on April 30, 2018. The proceeds were used to repay all of the approximately $815
million of outstanding borrowings under Kern River's $875 million credit
facility. Kern River entered into this credit facility in 2002 to finance the
construction of the 2003 Expansion Project. The credit facility was canceled and
a completion guarantee issued by the Company in favor of the lenders as part of
the credit facility terminated upon completion of the 2003 Expansion Project.
On April 23, 2003, Yorkshire Power Group Limited, a wholly owned subsidiary of
MEHC, reported that it had authorized the redemption in full of the outstanding
shares of the Yorkshire Capital Trust I, 8.08% Trust Securities, due June 30,
2038. The Trust Securities will be redeemed on June 9, 2003, at a redemption
price of 100% of the principal amount ($25 liquidation amount per each Trust
Security) plus accrued distributions of $0.381555555 per Trust Security to the
redemption date. The redemption price will be paid to holders of the Trust
Security on the redemption date. At March 31, 2003 and December 31, 2002, $250.5
million and $249.7 million, respectively, of the Trust Securities are included
in subsidiary and project debt.
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6. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Plants
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The United States Environmental Protection Agency ("EPA") and the 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 such 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. MidAmerican Energy is currently conducting field investigations
at 21 sites, has conducted interim removal actions at 14 sites and has received
regulatory closure on two sites. MidAmerican Energy is continuing to evaluate
several of the sites to determine the future liability, if any, for conducting
site investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$54 million. As of March 31, 2003, MidAmerican Energy has recorded a $21 million
liability for these sites and a corresponding regulatory asset for future
recovery through the regulatory process. MidAmerican Energy projects that these
amounts will be paid or incurred over the next four years.
The estimate of probable remediation costs is established on a site-specific
basis. The costs are accumulated in a three-step process. First, a determination
is made as to whether MidAmerican Energy has potential legal liability for the
site and whether information exists to indicate that contaminated wastes remain
at the site. If so, the costs of performing a preliminary investigation and the
costs of removing known contaminated soil are accrued. As the investigation is
performed and if it is determined remedial action is required, the best estimate
of remedial costs is accrued. The estimated recorded liabilities for these
properties include incremental direct costs of the remediation effort, 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
liabilities for these properties are based upon preliminary data. Thus, actual
costs could vary significantly from the estimates. The estimate 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 ("IUB"),
and are recorded as a regulatory liability.
Although the timing of potential incurred costs and recovery of such 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 MidAmerican Energy's financial position or results of operations.
Air Quality
- -----------
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, the United States Supreme Court
upheld the constitutionality of the standards, though remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the United States Circuit Court of Appeals for the District of
Columbia, the EPA is moving forward in implementation of the ozone and fine
particulate standards and is analyzing existing monitored data to determine
attainment status.
The impact of the new standards on MidAmerican Energy 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 state implementation plans to
achieve attainment of the standards,
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MidAmerican Energy could be required to install control equipment on its
generating stations or decrease the number of hours during which these stations
operate.
The ozone and fine particulate matter standards could, in whole or in part, be
superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction initiatives to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing regulated
emissions from its generating facilities in a cost-effective manner. MidAmerican
Energy expects the IUB to rule on the prudence of the multi-year plan and budget
in 2003.
In recent years, the EPA has requested from several utilities information and
support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the New Source Review and the New Source Performance Standards
of the Clean Air Act. In December 2002, MidAmerican Energy received a request
from the EPA to provide documentation related to its capital projects from
January 1, 1980, to the present for its Neal, Council Bluffs, Louisa and
Riverside Energy Centers. MidAmerican Energy has responded to this request and
at this time cannot predict the outcome of this request.
Nuclear Decommissioning Costs
- -----------------------------
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, MidAmerican Energy expects to
contribute approximately $41 million during the period 2003 through 2007 to
external trusts established for the investment of funds for decommissioning Quad
Cities Station. Approximately 60% of the fair value of the trusts' funds is now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds. Funding for
Quad Cities Station nuclear decommissioning is reflected as depreciation expense
in the Consolidated Statements of Income. Quad Cities Station decommissioning
costs charged to Iowa customers are included in base rates, and recovery of
increases in those amounts must be sought through the normal ratemaking process.
Pipeline Litigation
- -------------------
In 1998, the United States Department of Justice informed the then current
owners of Kern River and Northern Natural Gas Company ("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 The
Williams Companies, Inc. ("Williams") which was the former owner of Kern River,
were denied on May 18, 2001. On October 9, 2002, the United States District
Court for the District of Wyoming
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dismissed Grynberg's Royalty Valuation Claims. On November 19, 2002, the Court
denied Grynberg's motion for clarification dismissing royalty valuation claims.
Grynberg has appealed this dismissal to the United States Court of Appeals for
the Tenth Circuit. In connection with the purchase of Kern River from Williams
in March 2002, Williams agreed to indemnify the Company 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. The Company believes 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 indemnification, and Northern Natural Gas, intend 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 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. On January 13, 2003, oral arguments were heard on
coordinating defendants' opposition to class certification. On April 10, 2003,
the court entered an order denying the plaintiffs' motion for class
certification. It is anticipated that the plaintiffs will appeal this decision.
Williams has agreed to indemnify the Company 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.
Philippines
- -----------
Casecnan Construction Contract
The CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") Project (the
"Casecnan Project") was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, CE
Casecnan entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce ("ICC") seeking schedule relief of 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 also seeks 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 in December 2001 amounted to a repudiation of the
Replacement Contract and has filed a claim for unspecified quantum meruit
damages, and has further alleged that the delay liquidated damages clause which
provides for payments of $125,000 per day for each day of delay in
-11-
completion of the Casecnan Project for which the Contractor is responsible is
unenforceable. The arbitration is being conducted applying New York law and
pursuant to the rules of the ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, 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. As a result of the continuing nature of that injunction, 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 an
arbitration award. As of March 31, 2003, however, 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 November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The arbitration
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. The $3.8 million is shown as part of
the accounts payable and accrued expenses balance at March 31, 2003 and December
31, 2002. All of the Contractor's other claims with respect to force majeure and
geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
hearings have been rescheduled for June 30 through July 11, 2003.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts paid to the Contractor, CE Casecnan could be liable
to make additional payments to the Contractor. CE Casecnan believes all of such
allegations and claims are without merit and is vigorously contesting the
Contractor's claims.
Casecnan NIA Arbitration
Under the terms of the Project Agreement, the Philippines National Irrigation
Administration ("NIA") has the option of timely reimbursing CE Casecnan directly
for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE
Casecnan, the taxes paid by CE Casecnan result in an increase in the Water
Delivery Fee. The payment of certain other taxes by CE Casecnan results
automatically in an increase in the Water Delivery Fee. As of March 31, 2003, CE
Casecnan has paid approximately $58.1 million in taxes, which as a result of the
foregoing provisions results in an increase in the Water Delivery Fee. NIA has
failed to pay the portion of the Water Delivery Fee each month, related to the
payment of these taxes by CE Casecnan. As a result of this non-payment, on
August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA,
seeking payment of such portion of the Water Delivery Fee and enforcement of the
relevant provision of the Project Agreement going forward. The arbitration will
be conducted in accordance with the rules of the ICC.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
("BOT") law. As such, NIA seeks dismissal of CE Casecnan's claims and a
declaration from the arbitral tribunal that the taxes which have been taken into
account in the Water Delivery Fee compensation mechanism are not recoverable
thereunder and that, at most, certain taxes may be directly reimbursed (rather
than compensated for through the Water Delivery Fee) by NIA. NIA also
counterclaims for approximately $7 million which it alleges is due to it as a
result of the delayed completion of the Casecnan Project. On April 23, 2003, NIA
filed a Supplemental Counterclaim in which it asserts that the Project Agreement
is contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the
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Project Agreement or any portions or sections thereof which may be determined to
be contrary to such law and or public policy. CE Casecnan intends to vigorously
contest all of NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the ICC and an initial
organizational hearing was held on April 28, 2003. Hearings on this matter are
scheduled for July 2004.
Included in revenue, for the three months ended March 31, 2003 and 2002, were
$5.5 million and $5.8 million, respectively, of tax compensation for Water
Delivery Fees under the Project Agreement, none of which has been paid. As of
March 31, 2003 and December 31, 2002, the net receivable for the tax
compensation piece of the Water Delivery Fees invoiced since the start of
commercial operations totaled $29.8 million and $24.3 million, respectively.
Casecnan Stockholder Litigation
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MEHC, through its indirect wholly owned subsidiary CE Casecnan
Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that MEHC's indirect ownership interest in CE
Casecnan had increased to 100% effective from commencement of commercial
operations. 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 MEHC. In the complaint, LPG seeks compensatory and punitive
damages for alleged breaches of the stockholder agreement and alleged breaches
of fiduciary duties allegedly owed by CE Casecnan Ltd. and MEHC 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 CE Casecnan. The
impact, if any, of this litigation on CE Casecnan cannot be determined at this
time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in CE
Casecnan MEHC purchased in 1998, threatened to initiate legal action in the
Philippines in connection with certain aspects of its option to repurchase such
shares on or prior to commercial operation of the Casecnan Project. CE Casecnan
believes that San Lorenzo has no valid basis for any claim and, if named as a
defendant in any action that may be commenced by San Lorenzo, will vigorously
defend any such action.
Philippine Political Risks
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together 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 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. Accordingly, it is not known
what, if any, impact the government's review will have on the operations of the
Company's Philippine Projects. CE Casecnan representatives, together with
certain current and former government officials, also have been requested to
appear, and have appeared during 2002, before a Philippine Senate committee
which has raised questions and made allegations with respect to the Casecnan
Project's tariff structure and implementation.
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case
involving an unsolicited BOT project for the development, construction and
operation of the new Manila International Airport. Various members of Congress
and labor unions initiated the action in the Philippine Supreme Court on
September 17, 2002 seeking to enjoin the enforcement of the BOT agreement with
an international consortium known as PIATCO (the "PIATCO Agreement"). The PIATCO
Consortium is unrelated to CE Casecnan or the Company. On March 4, 2003, PIATCO
separately initiated an ICC arbitration pursuant to the terms of the PIATCO
Agreement. The Supreme Court, in its ruling, stated that there were no
unresolved factual issues and therefore it had original jurisdiction and
concluded that the pendency of the arbitration did not preclude the court from
ruling on a case brought by non-parties to the PIATCO Agreement, such as members
of the Philippine Congress or non-governmental organizations. In a public speech
on November 29,
-13-
2002 prior to the December 10, 2002 oral arguments before the Philippine Supreme
Court, Philippine President Arroyo stated that she would not honor the PIATCO
Agreement because the executive branch's legal department had concluded it was
"null and void". In light of that announcement, the project owners stopped work
on the project, which is approximately 90% complete and accordingly has not been
placed into commercial operation. In its 10 to 3 ruling (with one abstention)
issued on May 5, 2003, the Philippine Supreme Court ruled that the PIATCO
Agreement was contrary to Philippine law and public policy and was "null and
void". CE Casecnan is assessing the impact of the PIATCO ruling on the Casecnan
Project.
On April 24, 2003 Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to `BB' from `BB+' as a result of S&P's downgrade of the Republic
of the Philippines. The downgrade of the Philippines by S&P reflected the
Country's growing debt burden and fiscal rigidity.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities.
7. COMPREHENSIVE INCOME
The differences from net income to total comprehensive income for the Company
are due to minimum pension liability adjustments, 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
Company is shown in the table below (in thousands).
THREE MONTHS
ENDED MARCH 31
---------------------
2003 2002
--------- --------
Net income ............................................................. $ 130,636 $ 64,749
Other comprehensive income:
Minimum pension liability adjustment, net of tax of $927................ 2,164 --
Foreign currency translation ........................................... (30,171) (28,515)
Marketable securities, net of tax of $(83) and $(1,116), respectively .. (133) (2,158)
Cash flow hedges, net of tax of $2,442 and $3,803, respectively ........ 5,226 9,819
--------- --------
Total comprehensive income ............................................. $ 107,722 $ 43,895
========= ========
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8. SEGMENT INFORMATION
The Company has identified seven reportable operating segments based on
management structure: MidAmerican Energy, Kern River, Northern Natural Gas, CE
Electric UK Funding, Inc. ("CE Electric UK"), CalEnergy Generation-Domestic,
CalEnergy Generation-Foreign, and HomeServices of America, Inc.
("HomeServices"). Information related to the Company's reportable operating
segments is shown below (in thousands).
THREE MONTHS
ENDED MARCH 31
--------------------------
2003 2002
----------- -----------
OPERATING REVENUE:
MidAmerican Energy .................................. $ 815,916 $ 575,035
Kern River .......................................... 39,030 2,198
Northern Natural Gas ................................ 170,002 --
CE Electric UK ...................................... 225,532 213,957
CalEnergy Generation - Domestic ..................... 11,233 5,105
CalEnergy Generation - Foreign ...................... 76,729 74,085
HomeServices ........................................ 257,988 174,566
----------- -----------
Segment operating revenue ......................... 1,596,430 1,044,946
Corporate/other ..................................... (33,596) (3,194)
----------- -----------
Total operating revenue ........................... $ 1,562,834 $ 1,041,752
=========== ===========
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES:
MidAmerican Energy .................................. $ 89,892 $ 70,288
Kern River .......................................... 26,376 971
Northern Natural Gas ................................ 83,639 --
CE Electric UK ...................................... 84,773 60,967
CalEnergy Generation - Domestic ..................... (5,858) (2,289)
CalEnergy Generation - Foreign ...................... 34,532 30,693
HomeServices ........................................ 7,005 (129)
----------- -----------
Segment income before provision for income taxes .. 320,359 160,501
Corporate/other ..................................... (58,810) (40,771)
----------- -----------
Total income before provision for income taxes .... $ 261,549 $ 119,730
=========== ===========
MARCH 31, DECEMBER 31,
2003 2002
----------- -----------
TOTAL ASSETS:
MidAmerican Energy .................................. $ 6,327,397 $ 6,025,452
Kern River .......................................... 2,006,722 1,797,850
Northern Natural Gas ................................ 2,307,055 2,162,367
CE Electric UK ...................................... 4,649,245 4,714,459
CalEnergy Generation - Domestic ..................... 892,019 881,633
CalEnergy Generation - Foreign ...................... 994,617 974,852
HomeServices ........................................ 543,701 488,324
----------- -----------
Segment total assets ............................. 17,720,756 17,044,937
Corporate/other ..................................... 688,204 971,518
----------- -----------
Total assets ..................................... $18,408,960 $18,016,455
=========== ===========
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate/other" relate principally to the corporate functions
including administrative costs, corporate cash and related interest income,
intersegment eliminations, and fair value adjustments relating to acquisitions.
Total assets by segment includes the allocation of goodwill.
-15-
Excess of cost over fair value as of December 31, 2002 and changes for the
period from January 1, 2003 through March 31, 2003 by segment are as follows (in
thousands):
Northern CalEnergy
MidAmerican Kern Natural CE Electric Generation- Home-
Energy River Gas UK Domestic Services Total
----------- ------- -------- ----------- ----------- -------- ----------
Goodwill at December 31, 2002...... $2,149,282 $32,547 $414,721 $1,195,321 $126,440 $339,821 $4,258,132
Acquisitions/purchase
price accounting adjustments... - 1,353 (619) - - 15,747 16,481
Translation adjustment........... - - - (15,039) - - (15,039)
---------- ------- -------- ---------- -------- -------- ----------
Goodwill at March 31, 2003......... $2,149,282 $33,900 $414,102 $1,180,282 $126,440 $355,568 $4,259,574
========== ======= ======== ========== ======== ======== ==========
-16-
ITEM 2. 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 ("MEHC" or 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. The Company's actual results in the future
could differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
From time to time, MEHC may make forward-looking statements within the meaning
of the federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of MEHC's expectations, beliefs, future plans and strategies,
anticipated events or trends and similar comments concerning matters that are
not historical facts.
These types of forward-looking 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
Private Securities Litigation Reform Act of 1995, MEHC has identified important
factors that could cause actual results to differ materially from those
expectations, including weather effects on revenues and other operating
uncertainties, uncertainties relating to economic and political conditions and
uncertainties regarding the impact of regulations, changes in government policy
and competition. The Company does not assume any responsibility to update
forward-looking information contained herein.
BUSINESS
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 Company
("MidAmerican Energy"), Kern River Gas Transmission Company ("Kern River"),
Northern Natural Gas Company ("Northern Natural Gas"), CE Electric UK Funding,
Inc. ("CE Electric UK") (which includes Northern Electric Distribution Ltd
("NED") and Yorkshire Electricity Distribution plc ("YED")), CalEnergy
Generation-Domestic, CalEnergy Generation-Foreign and HomeServices of America,
Inc. ("HomeServices"). These platforms are discussed in detail in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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 statements and accompanying
notes. Note 2 to the Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002
describes the significant accounting policies and methods used in the
preparation of the consolidated financial statements. Estimates are used for,
but not limited to, the effects of certain types of regulation, impairment of
long-lived assets, contingent liabilities and the accounting for revenue. Actual
results could differ from these estimates.
For additional discussion of the Company's critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
-17-
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003 the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). This statement provides accounting
and disclosure requirements for retirement obligations associated with
long-lived assets. The cumulative effect of initially applying this statement
was immaterial.
The Company's review of its regulated entities identified legal retirement
obligations for nuclear decommissioning, wet and dry ash landfills and offshore
and minor lateral pipeline facilities. On January 1, 2003, the Company recorded
$289.3 million of asset retirement obligation ("ARO") liabilities; $13.9 million
of ARO assets, net of accumulated depreciation; $114.6 million of regulatory
assets; and reclassified $1.0 million of accumulated depreciation to the ARO
liability. The initial ARO liability recognized includes $266.5 million that
pertains to obligations associated with the decommissioning of the Quad Cities
nuclear station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded at December 31, 2002. The
adoption of this statement did not have a material impact on the operations of
the regulated entities, as the effects were offset by the establishment of
regulatory assets, totaling $114.6 million, pursuant to SFAS No. 71.
During the three-month period ended March 31, 2003, the Company recorded, as a
regulatory asset, accretion related to the ARO liability of $4.2 million
resulting in an ARO liability balance of $293.5 million at March 31, 2003.
On April 30, 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"("SFAS 149"). SFAS 149 amends SFAS No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS 149 clarifies
when a contract with an initial net investment meets the characteristic of a
derivative and clarifies when a derivative that contains a financing component
will require special reporting in the statement of cash flows. SFAS 149 is
effective for the Company for contracts entered into or modified after June 30,
2003. The Company and its subsidiaries are evaluating the impact of adopting the
requirements of SFAS 149.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
Operating revenue for the three-month period ended March 31, 2003 increased
$521.0 million or 50.0% to $1,562.8 million from $1,041.8 million for the same
period in 2002.
MidAmerican Energy operating revenue for the three-month period ended March 31,
2003 increased $240.9 million or 41.9% to $815.9 million from $575.0 million for
the same period in 2002. The increase was primarily due to an increase in gas
revenues of $225.6 million to $479.8 million for the three-month period ended
March 31, 2003, resulting from higher gas prices and, to a lesser degree, higher
volumes.
Kern River operating revenue for the three-month period ended March 31, 2003,
increased $36.8 million to $39.0 million. Operating revenue in 2002 was recorded
for Kern River beginning on March 27, 2002, the acquisition date.
Northern Natural Gas operating revenue for the three-month period ended March
31, 2003, was $170.0 million. As Northern Natural Gas was acquired on August 16,
2002, there was no revenue recorded during the three-month period ended March
31, 2002.
HomeServices operating revenue for the three-month period ended March 31, 2003,
increased $83.4 million or 47.8% to $258.0 million from $174.6 million for the
same period in 2002. The increase was due to the impact of 2002 acquisitions
totaling $72.0 million and growth from existing operations, reflecting higher
transaction volumes and average home sales prices.
-18-
Income on equity investments for the three-month period ended March 31, 2003
decreased $6.6 million or 46.8% to $7.5 million from $14.1 million for the same
period in 2002. The decrease was primarily due to a common stock distribution
from an energy investment fund in 2002.
Interest and dividend income for the three-month period ended March 31, 2003
increased $5.5 million or 65.5% to $13.9 million from $8.4 million for the same
period in 2002. The increase is primarily due to dividends received on the
investment in The Williams Company's preferred stock.
Other income for the three-month period ended March 31, 2003 increased $14.4
million to $19.8 million from $5.4 million for the same period in 2002. The
increase was primarily due to the allowance for equity funds used during
construction at Kern River and MidAmerican Energy.
Cost of sales for the three-month period ended March 31, 2003 increased $263.5
million or 64.4% to $672.8 million from $409.3 million for the same period in
2002. MidAmerican Energy's cost of sales increased $233.4 million due primarily
to increased gas prices and the restructuring of the Cooper Nuclear Station
("Cooper") contract which increased cost of sales and decreased operating
expenses. HomeServices' cost of sales increased $57.0 million due to the prior
year acquisitions and higher commission expense on incremental sales at existing
business units.
Operating expenses for the three-month period ended March 31, 2003 increased
$76.8 million or 27.5% to $356.5 million from $279.7 million for the same period
in 2002. The increase was primarily due to Northern Natural Gas operating
expenses of $61.5 million and increased operating expenses at Kern River, due to
the inclusion of operations for the entire quarter, of $10.1 million, partially
offset by MidAmerican Energy's operating expenses decrease of $15.5 million,
primarily due to the restructuring of the Cooper contract.
Depreciation and amortization for the three-month period ended March 31, 2003
increased $15.6 million or 12.4% to $141.8 million from $126.2 million for the
same period in 2002. This was primarily due to depreciation of $11.3 million at
Northern Natural Gas and increased depreciation of $4.4 million at Kern River.
Interest expense for the three-month period ended March 31, 2003 increased $45.5
million or 32.2% to $186.8 million from $141.3 million for the same period in
2002. The increase was primarily due to $20.5 million increased interest expense
at Kern River due to the inclusion of operations for the entire quarter and
additional borrowings for the expansion project, $14.7 million due to the
acquisition of Northern Natural Gas and additional interest expense totaling
$9.7 million on the Company's $700 million debt issuance in October 2002.
Capitalized interest for the three-month period ended March 31, 2003 increased
$8.9 million to $15.5 million from $6.6 million for same period in 2002. The
increase is primarily due to the capitalization of interest on the Kern River
expansion project partially offset by the discontinuance of capitalizing
interest at the Zinc Recovery Project.
The income tax provision for the three-month period ended March 31, 2003
increased $43.9 million to $73.0 million from $29.1 million for the same period
in 2002. The effective tax rate for the three-month period ended March 31, 2003
increased to 27.9% from 24.3% for the same period in 2002. The increase in the
effective rate was due to higher income at segments with higher tax rates.
Minority interest and preferred dividends for the three-month period ended March
31, 2003 increased $32.0 million to $57.9 million from $25.9 million for the
same period in 2002. The increase was primarily due to the issuances of $323.0
million and $950.0 million of 11% trust preferred securities in March 2002 and
August 2002, respectively.
Net income available to common and preferred stockholders for the three-month
period ended March 31, 2003 increased $65.9 million to $130.6 million from $64.7
million for the same period in 2002.
-19-
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 $852.9 million at March 31, 2003,
compared $844.4 million at December 31, 2002. Each of the Company's direct or
indirect subsidiaries is organized as a legal entity separate and apart from the
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 the Company
will be available to satisfy the obligations of the 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 the Company or affiliates thereof.
In addition, the Company recorded separately, in restricted cash and short-term
investments and deferred charges and other assets, restricted cash and
investments of $81.2 million and $58.7 million at March 31, 2003, and December
31, 2002, respectively. The restricted cash balance for both periods is
comprised primarily of amounts deposited in restricted accounts which are
reserved for the service of debt obligations.
Cash flows from operating activities for the three-month period ended March 31,
2003 increased $203.2 million to $385.8 million from $182.6 million for the same
period in 2002. The increase was primarily due to timing of changes in working
capital and the positive impacts of the Kern River, Northern Natural Gas and
HomeServices acquisitions.
The remaining decrease to cash and cash equivalents is primarily due to
construction and development costs, capital expenditures related to operating
projects and repayments of debt and other obligations offset by the issuance of
subsidiary and project debt.
Kern River's 2003 Expansion Project
- -----------------------------------
Kern River has completed the construction of its 2003 Expansion Project at a
total cost of approximately $1.2 billion. The expansion, which was placed into
operation on May 1, 2003, increased the design capacity of the existing Kern
River pipeline by 885,626 decatherms per day to 1,755,626 decatherms per day.
Kern River Funding Corporation, a wholly owned subsidiary of Kern River, issued
$836 million of its 4.893% Senior Notes with a final maturity on April 30, 2018.
The proceeds were used to repay all of the approximately $815 million of
outstanding borrowings under Kern River's $875 million credit facility. Kern
River entered into this credit facility in 2002 to finance the construction of
the 2003 Expansion Project. The credit facility was canceled and a completion
guarantee issued by the Company in favor of the lenders as part of the credit
facility terminated upon completion of the 2003 Expansion Project.
MidAmerican Energy Operating Projects and Construction and Development Costs
- ----------------------------------------------------------------------------
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first three months of 2003, utility construction
expenditures at MidAmerican Energy totaled $76.6 million, including allowance
for funds used during construction, or capitalized financing costs, and Quad
Cities Station nuclear fuel purchases.
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Forecasted utility construction expenditures, including allowance for funds used
during construction, are $368 million for 2003. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2007, MidAmerican Energy plans to develop and construct three electric
generating projects in Iowa. The projects would provide service to regulated
retail electricity customers and, subject to regulatory approvals, be included
in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may
also be made from the plants to the extent the power is not needed for regulated
retail service. MidAmerican Energy expects to invest approximately $1.44 billion
in the three projects.
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, plus allowance for funds used during construction.
MidAmerican Energy will own 100% of the plant and operate it. MidAmerican Energy
has received a certificate from the Iowa Utilities Board ("IUB") allowing it to
construct the plant. Also, on May 29, 2002, the IUB issued an order that
provides the ratemaking principles for the plant. The plant will be operated in
simple cycle mode during 2003 and 2004, resulting in 327 megawatts ("MW") of
accredited capacity. Commercial operation of the simple cycle mode began on May
5, 2003. The combined cycle operation is expected to commence in 2005, resulting
in an expected additional 190 MW of accredited capacity.
The second project is currently under development and is expected to be a 790-MW
(based on expected accreditation) super-critical-temperature, coal-fired plant
fueled with low-sulfur coal. If constructed, MidAmerican Energy will operate the
plant and expects to own approximately 475 MW of the plant. MidAmerican Energy
expects to invest approximately $759 million in the project, plus allowance for
funds used during construction. Municipal, cooperative and public power
utilities will own the remainder, which is a typical ownership arrangement for
large base-load plants in Iowa. On January 23, 2003, MidAmerican Energy received
an order approving the issuance of a certificate from the IUB allowing it to
construct the plant. MidAmerican Energy has made a filing with the IUB for
approval of ratemaking principles pertaining to this plant. On March 20, 2003,
MidAmerican Energy entered into a settlement agreement, with the Iowa Office of
Consumer Advocate, related to the ratemaking principles application which
agreement was subsequently filed with the IUB. On February 12, 2003, MidAmerican
Energy executed a contract with Mitsui & Co. Energy Development, Inc. for the
engineering, procurement and construction of the plant and issued a limited
notice to proceed authorizing detailed engineering. A full notice to proceed
authorizing construction is expected following approval of the ratemaking
principles. Continued development of this plant is subject to obtaining
environmental and other required permits, as well as receiving orders from the
IUB approving construction of the associated transmission facilities and
establishing ratemaking principles which are satisfactory to MidAmerican Energy.
The third project is currently under development and is expected to be wind
power facilities totaling 310 MW based on the nameplate rating. Generally
speaking, accredited capacity ratings for wind power facilities are considerably
less than the nameplate ratings. If constructed, MidAmerican Energy will own and
operate these facilities, which are expected to cost approximately $323 million,
plus associated transmission facilities. MidAmerican Energy's plan to construct
the wind project is in conjunction with a settlement proposal to extend through
December 31, 2010, a rate freeze that is currently scheduled to expire at the
end of 2005. The proposed settlement is subject to approval by the IUB.
Casecnan Construction Contract
- ------------------------------
The CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") Project (the
"Casecnan Project") was initially constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. On
May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults by Hanbo
and HECC including the insolvency of both companies. On the same date, CE
Casecnan entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti &
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C. Spa., (collectively, the "Contractor"), working together with Siemens A.G.,
Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce ("ICC") seeking schedule relief of 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 also seeks 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 in December 2001 amounted to a repudiation of the
Replacement Contract and has filed a claim for unspecified quantum meruit
damages, and has further alleged that the delay liquidated damages clause which
provides for payments of $125,000 per day for each day of delay in completion of
the Casecnan Project for which the Contractor is responsible is unenforceable.
The arbitration is being conducted applying New York law and pursuant to the
rules of the ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002 and January 2003. As
part of those hearings, 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. As a result of the continuing nature of that injunction, 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 an
arbitration award. As of March 31, 2003, however, 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 November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The arbitration
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. The $3.8 million is shown as part of
the accounts payable and accrued expenses balance at March 31, 2003 and December
31, 2002. All of the Contractor's other claims with respect to force majeure and
geologic conditions were denied.
Further hearings on the Contractor's repudiation and quantum meruit claims, the
alleged unenforceability of the delay liquidated damages clause and certain
other matters had been scheduled for March 24 through March 28, 2003, but were
postponed as a result of the commencement of military action in Iraq. The
hearings have been rescheduled for June 30 through July 11, 2003.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts paid to the Contractor, CE Casecnan could be liable
to make additional payments to the Contractor. CE Casecnan believes all of such
allegations and claims are without merit and is vigorously contesting the
Contractor's claims.
Casecnan NIA Arbitration
- ------------------------
Under the terms of the Project Agreement, the Philippines National Irrigation
Administration ("NIA") has the option of timely reimbursing CE Casecnan directly
for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE
Casecnan, the taxes paid by CE Casecnan result in an increase in the Water
Delivery Fee. The payment of certain other taxes by CE Casecnan results
automatically in an increase in the Water Delivery Fee. As of March 31, 2003, CE
Casecnan has paid approximately $58.1 million in taxes, which as a result of the
foregoing provisions results in an increase in the Water Delivery Fee. NIA has
failed to pay the portion of the Water Delivery Fee each month, related to the
payment of these taxes by CE Casecnan. As a result of this non-payment, on
August 19, 2002, CE Casecnan
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filed a Request for Arbitration against NIA,
seeking payment of such portion of the Water Delivery Fee and enforcement of the
relevant provision of the Project Agreement going forward. The arbitration will
be conducted in accordance with the rules of the ICC.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
("BOT") law. As such, NIA seeks dismissal of CE Casecnan's claims and a
declaration from the arbitral tribunal that the taxes which have been taken into
account in the Water Delivery Fee compensation mechanism are not recoverable
thereunder and that, at most, certain taxes may be directly reimbursed (rather
than compensated for through the Water Delivery Fee) by NIA. NIA also
counterclaims for approximately $7 million which it alleges is due to it as a
result of the delayed completion of the Casecnan Project. On April 23, 2003, NIA
filed a Supplemental Counterclaim in which it asserts that the Project Agreement
is contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the Project Agreement
or any portions or sections thereof which may be determined to be contrary to
such law and or public policy. CE Casecnan intends to vigorously contest all of
NIA's assertions and counterclaims.
The three member arbitration panel has been confirmed by the ICC and an initial
organizational hearing was held on April 28, 2003. Hearings on this matter are
scheduled for July 2004.
Included in revenue, for the three months ended March 31, 2003 and 2002, were
$5.5 million and $5.8 million, respectively, of tax compensation for Water
Delivery Fees under the Project Agreement, none of which has been paid. As of
March 31, 2003 and December 31, 2002, the net receivable for the tax
compensation piece of the Water Delivery Fees invoiced since the start of
commercial operations totaled $29.8 million and $24.3 million, respectively.
Casecnan Stockholder Litigation
- -------------------------------
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MEHC, through its indirect wholly owned subsidiary CE Casecnan
Ltd., advised the minority stockholder LaPrairie Group Contractors
(International) Ltd., ("LPG"), that MEHC's indirect ownership interest in CE
Casecnan had increased to 100% effective from commencement of commercial
operations. 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 MEHC. In the complaint, LPG seeks compensatory and punitive
damages for alleged breaches of the stockholder agreement and alleged breaches
of fiduciary duties allegedly owed by CE Casecnan Ltd. and MEHC 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 CE Casecnan. The
impact, if any, of this litigation on CE Casecnan cannot be determined at this
time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in CE
Casecnan MEHC purchased in 1998, threatened to initiate legal action in the
Philippines in connection with certain aspects of its option to repurchase such
shares on or prior to commercial operation of the Casecnan Project. CE Casecnan
believes that San Lorenzo has no valid basis for any claim and, if named as a
defendant in any action that may be commenced by San Lorenzo, will vigorously
defend any such action.
Philippine Political Risks
- --------------------------
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together 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 have also reportedly been identified as raising financial
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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. Accordingly, it is not known
what, if any, impact the government's review will have on the operations of the
Company's Philippine Projects. CE Casecnan representatives, together with
certain current and former government officials, also have been requested to
appear, and have appeared during 2002, before a Philippine Senate committee
which has raised questions and made allegations with respect to the Casecnan
Project's tariff structure and implementation.
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case
involving an unsolicited BOT project for the development, construction and
operation of the new Manila International Airport. Various members of Congress
and labor unions initiated the action in the Philippine Supreme Court on
September 17, 2002 seeking to enjoin the enforcement of the BOT agreement with
an international consortium known as PIATCO (the "PIATCO Agreement"). The PIATCO
Consortium is unrelated to CE Casecnan or the Company. On March 4, 2003, PIATCO
separately initiated an ICC arbitration pursuant to the terms of the PIATCO
Agreement. The Supreme Court, in its ruling, stated that there were no
unresolved factual issues and therefore it had original jurisdiction and
concluded that the pendency of the arbitration did not preclude the court from
ruling on a case brought by non-parties to the PIATCO Agreement, such as members
of the Philippine Congress or non-governmental organizations. In a public speech
on November 29, 2002 prior to the December 10, 2002 oral arguments before the
Philippine Supreme Court, Philippine President Arroyo stated that she would not
honor the PIATCO Agreement because the executive branch's legal department had
concluded it was "null and void". In light of that announcement, the project
owners stopped work on the project, which is approximately 90% complete and
accordingly has not been placed into commercial operation. In its 10 to 3 ruling
(with one abstention) issued on May 5, 2003, the Philippine Supreme Court ruled
that the PIATCO Agreement was contrary to Philippine law and public policy and
was "null and void". CE Casecnan is assessing the impact of the PIATCO ruling on
the Casecnan Project.
On April 24, 2003 Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to `BB' from `BB+' as a result of S&P's downgrade of the Republic
of the Philippines. The downgrade of the Philippines by S&P reflected the
Country's growing debt burden and fiscal rigidity.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities.
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Other Debt Issuances and Redemptions
- ------------------------------------
On January 14, 2003, MidAmerican Energy issued $275.0 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
On April 23, 2003, Yorkshire Power Group Limited, a wholly owned subsidiary of
MEHC, reported that it had authorized the redemption in full of the outstanding
shares of the Yorkshire Capital Trust I, 8.08% Trust Securities, due June 30,
2038. The Trust Securities will be redeemed on June 9, 2003, at a redemption
price of 100% of the principal amount ($25 liquidation amount per each Trust
Security) plus accrued distributions of $0.381555555 per Trust Security to the
redemption date. The redemption price will be paid to holders of the Trust
Security on the redemption date. At March 31, 2003 and December 31, 2002, $250.5
million and $249.7 million, respectively, of the Trust Securities are included
in subsidiary and project debt.
Commercial Obligations and Contractual Commitments
- --------------------------------------------------
There have been no material changes in the contractual obligations and
commercial commitments from the information provided in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 other than the
issuance of the $836 million Kern River Funding Corporation 4.893% Senior Notes
and the $275 million MidAmerican Energy 5.125% medium-term notes as discussed in
this section.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting MEHC,
see Item 7A "Qualitative and Quantitative Disclosures About Market Risk" of
MEHC's Annual Report on Form 10-K for the year ended December 31, 2002. MEHC's
exposure to market risk has not changed materially since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
MEHC'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 Company and its subsidiaries is made known to them by others
within the respective entities. 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 significant changes in
internal controls, or in other factors that could significantly affect internal
controls, subsequent to the date of that evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 6 to the financial statements and discussion in management's discussion
and analysis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
The Company provides the following update and clarification to the information
contained in the Company's Annual Report on Form 10-K for the period ended
December 31, 2002.
Kern River
Based on published rates and fuel percentages, the Company believes Kern River
currently has the lowest transportation costs from well-head to burner tip of
any interstate pipeline serving Kern River's direct markets in southern
California, with gas transportation rates for existing transportation shippers
of approximately $0.39-$0.44 per decatherm (excluding fuel costs). The 2003
Expansion Shippers' initial tariff rates in the original Federal Energy
Regulatory Commission ("FERC") filing were approximately $0.57-$0.70 per
decatherm (excluding fuel costs). These rates were reduced to approximately
$0.56-$0.69 per decatherm (excluding fuel costs) in a recent FERC compliance
filing made effective upon placing the 2003 Expansion Project in service on May
1, 2003. These rates can be compared to published rates of approximately
$0.64-$0.97 per decatherm (excluding fuel costs) on competing pipelines. There
can be no assurance that Kern River's competitors do not or will not charge
rates which are discounted to these published rates, particularly on a
short-term basis.
CE Electric UK
Employers in the United Kingdom have an obligation to manage the exposure of
their workforce to asbestos, as it can have a detrimental impact on human
health. The Control of Asbestos at Work Regulations 2002 came into force in
England, Scotland and Wales in two tranches. Most of the regulations came into
force on November 21, 2002 and the remainder will come into force on May 21,
2003. These Regulations implement a European Directive and will increase the
obligations on employers to create a safe working environment. The regulations
could also result in expenditure having to be committed to asbestos management
plans and, in some cases, to the removal of asbestos. The Company does not
expect the cost of this new regulation to have a material impact on its results
of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as part
of this Quarterly Report.
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on January 2, 2003.
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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: May 12, 2003 /s/ Patrick J. Goodman
----------------------------------------------
Patrick J. Goodman
Senor Vice President & Chief Financial Officer
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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 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: May 12, 2003
/s/ David L. Sokol
------------------
David L. Sokol
Chief Executive Officer
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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: May 12, 2003
/s/ Patrick J. Goodman
----------------------
Patrick J. Goodman
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
- -----------
10.1 MidAmerican Energy Holdings Company Amended and Restated Long-Term
Incentive Partnership Plan dated as of January 1, 2003.
10.2 Executive Incremental Profit Sharing Plan
99.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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