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, 2004
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)
(Registrant's telephone number, including area code) (515) 242-4300
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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 March 31, 2004, 9,081,087 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures. 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
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, 2004,
and the related consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2004 and 2003. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that should
be made to such consolidated interim 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, 2003,
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 February 9, 2004 (March 1, 2004 as to Notes 2, 5 and 20), 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, 2003 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
April 30, 2004
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
AS OF
-------------------------------
MARCH 31, DECEMBER 31,
2004 2003
------------ ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 977,830 $ 660,213
Restricted cash and short-term investments ....................................... 141,573 55,281
Accounts receivable, net ......................................................... 694,823 666,063
Inventories ...................................................................... 69,048 123,301
Other current assets ............................................................. 269,958 371,855
------------ ------------
Total current assets ........................................................... 2,153,232 1,876,713
------------ ------------
Properties, plants and equipment, net .............................................. 11,355,046 11,180,979
Goodwill ........................................................................... 4,327,395 4,305,643
Regulatory assets .................................................................. 532,955 512,549
Other investments .................................................................. 236,953 228,896
Equity investments ................................................................. 234,395 234,370
Deferred charges and other assets .................................................. 840,918 829,039
------------ ------------
TOTAL ASSETS ....................................................................... $ 19,680,894 $ 19,168,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 317,970 $ 345,237
Accrued interest ................................................................. 188,531 189,635
Accrued taxes .................................................................... 115,811 112,823
Other accrued liabilities ........................................................ 513,976 443,531
Short-term debt .................................................................. 2,976 48,036
Current portion of long-term debt ................................................ 455,345 500,941
Current portion of parent company subordinated debt .............................. 100,000 100,000
------------ ------------
Total current liabilities ...................................................... 1,694,609 1,740,203
------------ ------------
Other long-term accrued liabilities ................................................ 1,900,287 1,827,633
Parent company senior debt ......................................................... 3,028,679 2,777,878
Parent company subordinated debt ................................................... 1,772,741 1,772,146
Subsidiary and project debt ........................................................ 6,630,390 6,674,640
Deferred income taxes .............................................................. 1,550,339 1,433,144
------------ ------------
Total liabilities ................................................................ 16,577,045 16,225,644
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Deferred income .................................................................... 67,730 69,201
Minority interest .................................................................. 9,863 9,754
Preferred securities of subsidiaries ............................................... 90,422 92,145
Commitments and contingencies (Note 7)
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, 9,081 and 9,281 shares
issued and outstanding at March 31, 2004 and December 31, 2003, respectively...... - -
Additional paid-in capital ......................................................... 1,950,267 1,957,277
Retained earnings .................................................................. 1,133,827 999,627
Accumulated other comprehensive loss, net .......................................... (148,260) (185,459)
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Total stockholders' equity ....................................................... 2,935,834 2,771,445
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 19,680,894 $ 19,168,189
============ ============
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------------
2004 2003
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(UNAUDITED)
REVENUE:
Operating revenue ..................................... $ 1,745,255 $ 1,576,885
Income on equity investments .......................... 3,468 7,455
Interest and dividend income .......................... 7,169 13,871
Other income .......................................... 8,361 17,424
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Total revenue ....................................... 1,764,253 1,615,635
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COSTS AND EXPENSES:
Cost of sales ......................................... 741,991 684,431
Operating expense ..................................... 378,654 356,493
Depreciation and amortization ......................... 170,283 141,849
Interest expense ...................................... 238,402 186,845
Less interest capitalized ............................. (3,608) (15,532)
----------- -----------
Total costs and expenses ............................ 1,525,722 1,354,086
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INCOME BEFORE PROVISION FOR INCOME TAXES ................ 238,531 261,549
Provision for income taxes ............................ 88,588 73,000
----------- -----------
INCOME BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS . 149,943 188,549
Minority interest and preferred dividends ............. 2,753 57,913
----------- -----------
NET INCOME AVAILABLE TO COMMON AND PREFERRED STOCKHOLDERS $ 147,190 $ 130,636
=========== ===========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
THREE MONTHS
ENDED MARCH 31,
-----------------------
2004 2003
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(UNAUDITED)
Cash flows from operating activities:
Net income ................................................................. $ 147,190 $ 130,636
Adjustments to reconcile net income to cash flows from operating activities:
Distributions less income on equity investments .......................... (1,014) (3,541)
Loss on other items ...................................................... 10,985 2,067
Depreciation and amortization ............................................ 170,283 141,849
Amortization of regulatory assets and liabilities and other .............. 149 (9,709)
Amortization of deferred financing costs ................................. 5,115 9,555
Provision for deferred income taxes ...................................... 57,264 58,923
Other .................................................................... 21,820 5,030
Changes in other items:
Accounts receivable and other current assets ........................... 22,477 32,367
Accounts payable and other accrued liabilities ......................... 55,084 20,830
Deferred income ........................................................ (1,307) (2,214)
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Net cash flows from operating activities ............................. 488,046 385,793
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired ....................................... (807) (36,575)
Proceeds from note receivable ............................................ 97,000 -
Capital expenditures relating to operating projects ...................... (159,700) (133,845)
Construction and other development costs ................................. (51,651) (244,033)
Other .................................................................... 3,486 (29,547)
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Net cash flows from investing activities ............................... (111,672) (444,000)
--------- ---------
Cash flows from financing activities:
Proceeds from subsidiary and project debt ................................ 10,584 287,572
Proceeds from parent company senior debt ................................. 249,765 -
Repayments of subsidiary and project debt ................................ (169,622) (211,268)
Net repayment of subsidiary short-term debt .............................. (45,061) (8,850)
Purchase and retirement of common stock .................................. (20,000) -
Increase in restricted cash and investments .............................. (86,010) (21,887)
Redemption of preferred securities of subsidiaries ....................... (1,724) (294)
Other .................................................................... (3,531) 28,276
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Net cash flows from financing activities ............................... (65,599) 73,549
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Effect of exchange rate changes .......................................... 6,842 (6,904)
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NET CHANGE IN CASH AND CASH EQUIVALENTS .................................... 317,617 8,438
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 660,213 844,430
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 977,830 $ 852,868
========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of interest capitalized ............................... $ 225,671 $ 172,181
========= =========
Income taxes (refunded) paid ............................................. $ (74,620) $ 280
========= =========
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,
2004, and the results of operations and of cash flows for the three-month
periods ended March 31, 2004 and 2003. The results of operations for the
three-month period ended March 31, 2004 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 excluding certain finance subsidiaries for which adoption of
Financial Accounting Standards Board ("FASB") Interpretation No. 46R ("FIN
46R"), "Consolidation of Variable Interest Entities - An Interpretation of ARB
No. 51" as of October 1, 2003 required deconsolidation. 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.
The Company's operations are 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 ("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").
Certain amounts in the prior year financial statements and supporting note
disclosures have been reclassified to conform to the current year presentation.
Such reclassifications 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, 2003.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FIN 46R which served to clarify guidance in
FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51" ("FIN 46"), and provided
additional guidance surrounding the application of FIN 46. The Company adopted
and applied the provisions of FIN 46R, related to certain finance subsidiaries,
as of October 1, 2003. The adoption required the deconsolidation of certain
finance subsidiaries, which resulted in the amounts previously classified as
mandatorily redeemable preferred securities of subsidiary trusts, in the amount
of $1.9 billion, being reclassified to parent company subordinated debt in the
accompanying consolidated balance sheet. In addition, the associated amounts
previously recorded in minority interest and preferred dividends are now
recorded as interest expense in the accompanying consolidated statement of
operations. For the quarter ended March 31, 2004, the Company has recorded $50.2
million of interest expense related to these securities. In accordance with the
requirements of FIN 46R, no amounts prior to adoption on October 1, 2003 have
been reclassified. The amount included in minority interest and preferred
dividends related to these securities for the quarter ended March 31, 2003 was
$55.1 million. The Company adopted the provisions of FIN 46R related to
non-special purpose entities in the first quarter of 2004. The Company has
considered the provisions of FIN 46R for all subsidiaries and their related
power purchase, power sale, or tolling agreements. Factors considered in the
analysis include the duration of the agreements, how capacity and energy
payments are determined, source and payment terms for fuel, as well as
responsibility and payment for operating and maintenance expenses. As a result
of these considerations, the Company has determined its power purchase, power
sale and tolling agreements do not represent significant variable interests.
Accordingly, the Company has concluded that it is appropriate to continue to
consolidate its power plant projects.
In January 2004, the FASB issued FASB Staff Position No. 106-1 ("FSP 106-1"),
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003". FSP 106-1 permits a sponsor of
a postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare
Act"), which was signed into law on December 8, 2003. The Medicare Act
introduced a prescription drug benefit under Medicare, as well as a
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federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare. These provisions of
the new law will affect accounting measurements of the Company's postretirement
benefit obligation and expense. As permitted by FSP 106-1, the Company made a
one-time election to defer accounting for the effect of the Medicare Act until
specific authoritative guidance is issued. Therefore, the amounts included in
the consolidated financial statements related to the Company's postretirement
benefit plans do not reflect the effects of the Medicare Act.
3. PROPERTIES, PLANTS AND EQUIPMENT, NET
Properties, plants and equipment, net comprise the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Utility generation and distribution systems .... $ 9,445,339 $ 9,154,054
Interstate pipelines' assets ................... 3,517,298 3,483,672
Independent power plants ....................... 1,396,906 1,395,782
Mineral and gas reserves and exploration assets 571,020 554,780
Utility non-operational assets ................. 440,771 429,228
Other assets ................................... 150,385 146,286
------------ ------------
Total operating assets ....................... 15,521,719 15,163,802
Accumulated depreciation and amortization ...... (4,446,268) (4,260,643)
------------ ------------
Net operating assets ......................... 11,075,451 10,903,159
Construction in progress ....................... 279,595 277,820
------------ ------------
Properties, plants and equipment, net ........ $ 11,355,046 $ 11,180,979
============ ============
4. INVESTMENTS
Equity Investment in CE Generation
The equity investment in CE Generation LLC ("CE Generation") at March 31, 2004
and December 31, 2003 was $210.3 million and $209.3 million, respectively.
During the three-month periods ended March 31, 2004 and 2003, the Company
recorded income from its investment in CE Generation of $1.2 million and $2.3
million, respectively.
ROP Note
On October 15, 2003, CE Casecnan Water and Energy Company, Inc. ("CE Casecnan"),
an indirect, majority-owned subsidiary of the Company, closed a transaction
settling the CE Casecnan NIA Arbitration, which arose from a Statement of Claim
made by CE Casecnan, on August 19, 2002, against the Republic of the Philippines
("ROP") National Irrigation Administration ("NIA"). In connection with the
settlement, NIA delivered to CE Casecnan a ROP $97.0 million 8.375% Note due
2013 (the "ROP Note"), which contained a put provision granting CE Casecnan the
right to put the ROP Note to the ROP for a price of par plus accrued interest
for a 30-day period commencing on January 14, 2004. The ROP Note was included in
the other current assets on the December 31, 2003 consolidated balance sheet.
On January 14, 2004, CE Casecnan exercised its right to put the ROP Note to the
ROP and, in accordance with the terms of the put option, CE Casecnan received
$99.2 million (representing $97.0 million par value plus accrued interest) from
the ROP on January 21, 2004.
5. DEBT ISSUANCES, REDEMPTIONS AND STOCK TRANSACTIONS
On February 12, 2004, MEHC completed the sale of $250 million in aggregate
principal amount of its 5.00% senior notes due February 15, 2014. The proceeds
were used to satisfy a demand made by its affiliate, Salton Sea Funding
Corporation ("Funding Corporation"), for the amount remaining on MEHC's
guarantee of the Funding Corporation's Series F Bonds and for other general
corporate purposes.
On March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of approximately $136.4 million of its 7.475% Senior Secured
Series F Bonds due November 30, 2018 ("Series F Bonds"), pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC for the full amount remaining on MEHC's guarantee of the Series F
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Bonds in order to fund the redemption. MEHC made the requisite payment and, as a
result, it has no further payment obligation under the guarantee. The Company
had a non-cash loss recorded in interest expense of $10.8 million as a result of
the redemption of the Series F Bonds.
On January 6, 2004, the Company purchased two hundred thousand shares of common
stock owned by the Company's chairman and chief executive officer, for an
aggregate purchase price of $20.0 million.
6. REGULATORY MATTERS
MidAmerican Energy
Under two settlement agreements approved by the Iowa Utilities Board ("IUB"),
MidAmerican Energy's Iowa retail electric rates are effectively frozen through
December 31, 2010. The settlement agreements specifically allow the filing of
electric rate design or cost of service rate changes that are intended to keep
MidAmerican Energy's overall Iowa retail electric revenue unchanged, but could
result in changes to individual tariffs. The settlement agreements also each
provide that portions of revenues associated with Iowa retail electric returns
on equity within specified ranges will be recorded as a regulatory liability to
be used to offset a portion of the cost to Iowa customers of future generating
plant investment.
Under the first settlement agreement, which was approved by the IUB on December
21, 2001, and is effective through December 31, 2005, an amount equal to 50% of
revenues associated with returns on equity between 12% and 14%, and 83.33% of
revenues associated with returns on equity above 14%, in each year is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy's application for ratemaking principles on a
wind power project and was approved by the IUB on October 17, 2003, provides
that during the period January 1, 2006 through December 31, 2010, an amount
equal to 40% of revenues associated with returns on equity between 11.75% and
13%, 50% of revenues associated with returns on equity between 13% and 14%, and
83.3% of revenues associated with returns on equity above 14%, in each year will
be recorded as a regulatory liability. An amount equal to the regulatory
liability is recorded as a regulatory charge in depreciation and amortization
expense when the liability is accrued. Future depreciation will be reduced as a
result of the credit applied to generating plant balances as the regulatory
liability is reduced. The liability is being reduced as it is credited against
plant in service in amounts equal to the allowance for funds used during
construction associated with generating plant additions. Interest expense is
accrued on the portion of the regulatory liability balance recorded in prior
years. As of March 31, 2004 and December 31, 2003, the related regulatory
liability reflected on the consolidated balance sheets within other long-term
accrued liabilities was $173.2 million and $144.4 million, respectively.
The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any consecutive 12-month period after January 1,
2006, MidAmerican Energy may seek to file for a general increase in rates.
However, prior to filing for a general increase in rates, MidAmerican Energy is
required by the settlement agreement to conduct 30 days of good faith
negotiations with all of the signatories to the settlement agreement to attempt
to avoid a general increase in rates. Also, if MidAmerican Energy does not
construct the wind power facilities by December 31, 2006, the rate extension
from January 1, 2006, through December 31, 2010, may terminate.
Illinois bundled electric rates are frozen until 2007, subject to certain
exceptions allowing for increases, at which time bundled rates are subject to
cost-based ratemaking. Illinois law provides for Illinois earnings above a
computed level of return on common equity to be shared equally between regulated
retail electric customers and MidAmerican Energy. MidAmerican Energy's computed
level of return on common equity is based on a rolling two-year average of the
Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve
System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for
2005 and 2006. The two-year average above which sharing must occur for 2003 was
13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings
above the threshold return on common equity through accelerated recovery of
electric assets.
Kern River
Kern River was required to file a general rate case no later than May 1, 2004
pursuant to the terms of its Federal Energy Regulatory Commission ("FERC")
Docket No. RP99-274 rate case settlement. Kern River filed its rate case on
April 30, 2004 which supports a revenue increase of approximately $40.1 million
representing a 13% increase from its existing cost of service and a proposed
overall cost of service of $347.4 million. Since its last rate case, Kern River
has increased the capacity of its system from 724,500 decatherm ("Dth") per day
to 1,755,626 Dth per day at a cost of approximately $1.3 billion resulting in a
total rate base of approximately $1.8 billion. Kern River proposed that the rate
increase should be
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effective as of June 1, 2004, although it anticipates that the FERC will suspend
the effectiveness of the rate increase until November 1, 2004.
Northern Natural Gas
Northern Natural Gas has implemented a straight fixed variable rate design which
provides that all fixed costs assignable to firm capacity customers, including a
return on equity, are to be recovered through fixed monthly demand or capacity
reservation charges which are not a function of throughput volumes.
On May 1, 2003, Northern Natural Gas filed a request for increased rates with
the FERC. The rate increase is primarily attributable to four main cost areas:
the capital investment made by Northern Natural Gas in the five years since its
last rate case, an increase in Northern Natural Gas' depreciation rates,
increased return on equity, and changes in the level of contract entitlement.
The rate filing provides evidence in support of a $71 million increase to
Northern Natural Gas' annual revenue requirement. However, Northern Natural Gas
is requesting that only $55 million of this increase be effectuated. Northern
Natural Gas' new rates went into effect November 1, 2003, subject to refund.
Additionally, Northern Natural Gas filed on January 30, 2004 with the FERC to
increase its revenue requirement by an incremental $30 million to that requested
in the May 1, 2003 filing. The increased rates are primarily attributable to
ongoing pipeline integrity initiative costs that Northern Natural Gas has
undertaken since the May 1, 2003 rate filing. The FERC suspended the rate
increase until August 1, 2004 and consolidated the 2003 and 2004 rate cases due
to the similarity of issues in both cases and the updated costs. A hearing on
the consolidated cases is scheduled for January 2005.
CE Electric UK
The majority of the revenue of the Distribution License Holders ("DLHs") in the
United Kingdom is controlled by a distribution price control formula which is
set out in the license of each DLH. It has been the practice of the Office of
Gas and Electricity Markets ("Ofgem") (and its predecessor body, the Office of
Electricity Regulation), to review and reset the formula at five-year intervals,
although the formula may be further reviewed at other times at the discretion of
the regulator. Any such resetting of the formula requires the consent of the
DLH. If the DLH does not consent to the formula reset, it is reviewed by the
United Kingdom's competition authority, whose recommendations can then be given
effect by license modifications made by Ofgem.
The current formula requires that regulated distribution income per unit is
increased or decreased each year by RPI-Xd where RPI means the Retail Price
Index ("RPI"), reflecting the average of the 12-month inflation rates recorded
for each month in the previous July to December period. The Xd factor in the
formula was established by Ofgem at the last price control review (and continues
to be set) at 3%. The formula also takes account of the changes in system
electrical losses, the number of customers connected and the voltage at which
customers receive the units of electricity distributed. The distribution price
control formula determines the maximum average price per unit of electricity
distributed (in pence per kilowatt ("kWh")) which a DLH is entitled to charge.
The distribution price control formula permits DLHs to receive additional
revenue due to increased distribution of units and a predetermined increase in
end users. The price control does not seek to constrain the profits of a DLH
from year to year. It is a control on revenue that operates independently of
most of the DLH's costs. During the lifetime of the price control, cost savings
or additional costs have a direct impact on profit.
The procedure and methodology adopted at a price control review is at the
reasonable discretion of Ofgem. At the last such review, concluded in 1999 and
effective April 2000, Ofgem's judgment of the future allowed revenue of
licensees was based upon, among other things:
o the actual operating costs of each of the licensees;
o the operating costs which each of the licensees would incur if it were
as efficient as, in Ofgem's judgment, the most efficient licensee;
o the regulatory value to be ascribed to each of the licensees'
distribution network assets;
o the allowance for depreciation of the distribution network assets of
each of the licensees; o the rate of return to be allowed on
investment in the distribution network assets by all licensees; and
o the financial ratios of each of the licensees and the license
requirement for each licensee to maintain an investment grade status.
As a result of the last review, the allowed revenue of NED's distribution
business was reduced by 24%, in real terms, and the allowed revenue of YED's
distribution business was reduced by 23%, in real terms, with effect from April
1, 2000. The range of reductions for all licensees in Great Britain was between
4% and 33%.
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Ofgem has commenced the process of reviewing each DLH's existing price control
formula, with a revised formula for each DLH (including NED and YED) expected to
take effect from April 1, 2005 for an expected period of five years. To date,
the process has involved the collection of data from each DLH via written
submissions and meetings with representatives of the various companies. It is
expected that Ofgem will announce preliminary proposals for the new price
control formulas for the DLHs in June, 2004, with the final proposals issued in
November, 2004. Each DLH will then have until December, 2004 to accept or reject
the proposals, which if accepted will be implemented through a license
modification in the first quarter of 2005, having effect from April 1, 2005.
7. COMMITMENTS AND CONTINGENCIES
Manufactured Gas Plants
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 a health or
environmental risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is actively working with the regulatory
agencies and has received regulatory closure on four 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 approximately $12
million to $29 million. As of March 31, 2004 and December 31, 2003, MidAmerican
Energy had recorded a liability of $13.4 million and $14.0 million,
respectively, for these sites and a corresponding regulatory asset for future
recovery through the regulatory process. MidAmerican Energy projects that these
amounts will be incurred or paid over the next four years.
The estimated liability is determined through a site-specific cost evaluation
process. The estimate includes incremental direct costs of remediation, site
monitoring costs 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 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, results of operations or cash
flows.
Air Quality
MidAmerican Energy's generating facilities are subject to applicable provisions
of the Clean Air Act and related air quality standards promulgated by the EPA.
The Clean Air Act provides the framework for regulation of certain air emissions
and permitting and monitoring associated with those emissions. MidAmerican
Energy believes it is in material compliance with current air quality
requirements.
The EPA has in recent years implemented more stringent standards for ozone and
fine particulate matter. Designations regarding attainment of the eight-hour
ozone standard have recently been reviewed by the EPA, and the EPA has concluded
that the entire state of Iowa is in attainment of the standards. On December 4,
2003, the EPA announced the development of its Interstate Air Quality Rule, a
proposal to require coal-burning power plants in 29 states and the District of
Columbia to reduce emissions of sulfur dioxide ("SO2") and nitrogen oxides
("NOX") in an effort to reduce ozone and fine particulate matter in the Eastern
United States. It is likely that MidAmerican Energy's coal-burning facilities
will be impacted by this proposal.
-11-
In December 2000, the EPA concluded that mercury emissions from coal-fired
generating stations should be regulated. The EPA is currently considering two
regulatory alternatives that would reduce emissions of mercury from coal-fired
utilities. One of these alternatives would require reductions of mercury from
all coal-fired facilities greater than 25 megawatts through application of
Maximum Achievable Control Technology with compliance assessed on a facility
basis. The other alternative would regulate the mercury emissions of coal-fired
facilities that pose a health hazard through a market based cap-and-trade
mechanism similar to the SO2 allowance system. The EPA is currently under a
deadline to finalize the mercury rule by December 2004.
The Interstate Air Quality Rule or the mercury reduction rule could, in whole or
in part, be superceded or made more stringent by one of a number of
multi-pollutant emission reduction proposals currently under consideration at
the federal level, including the "Clear Skies Initiative", and other pending
legislative proposals that contemplate 70% to 90% reductions of SO2, NOX and
mercury, as well as possible new federal regulation of carbon dioxide and other
gasses that may affect global climate change.
Depending on the outcome of the final Interstate Air Quality and the mercury
reduction rules or any superseding legislation passed by Congress, MidAmerican
Energy may be required to install control equipment on its generating stations
or decrease the number of hours during which its generating stations operate.
However, until final regulations or legislation is enacted, the impact of the
regulations on MidAmerican Energy cannot be predicted.
MidAmerican Energy has implemented a planning process that forecasts the
site-specific controls and actions may be required to meet emissions reductions
as contemplated by the EPA. On April 1, 2002, in accordance with an Iowa law
passed in 2001, MidAmerican Energy filed with the IUB its first multi-year plan
and budget for managing SO2 and NOX from its generating facilities in a
cost-effective manner. The plan provides specific actions to be taken at each
coal-fired generating facility and the related costs and timing for each action.
Mercury emissions reductions were not addressed in the plan. On July 17, 2003,
the IUB issued an order that affirmed an administrative law judge's approval of
the plan, as amended. Accordingly, the IUB order provides that the approved
expenditures will not be subject to a subsequent prudence review in a future
electric rate case, but it rejected the future application of a tracker
mechanism to recover emission reduction costs. However, pursuant to an unrelated
rate settlement agreement approved by the IUB on October 17, 2003, if prior to
January 1, 2011, capital and operating expenditures to comply with environmental
requirements cumulatively exceed $325 million, then MidAmerican Energy may seek
to recover the additional expenditures from customers. At this time, MidAmerican
Energy does not expect these capital expenditures to exceed such amount.
Under the New Source Review ("NSR") provisions of the Clean Air Act, a utility
is required to obtain a permit from the EPA or a state regulatory agency prior
to (1) beginning construction of a new major stationary source of an
NSR-regulated pollutant or (2) making a physical or operational change (a "major
modification") to an existing facility that potentially increases emissions,
unless the changes are exempt under the regulations (including routine
maintenance, repair and replacement of equipment). In general, projects subject
to NSR regulations are subject to pre-construction review and permitting under
the Prevention of Significant Deterioration ("PSD") provisions of the Clean Air
Act. Under the PSD program, a project that emits threshold levels of regulated
pollutants must undergo a Best Available Control Technology analysis and
evaluate the most effective emissions controls. These controls must be installed
in order to receive a permit. Violations of NSR regulations, which may be
alleged by the EPA, states and environmental groups, among others, potentially
subject a utility to material expenses for fines or other sanctions and remedies
including requiring installation of enhanced pollution controls and funding
supplemental environmental projects.
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 NSR and the New Source Performance Standards of the Clean
Air Act. In December 2002 and April 2003, MidAmerican Energy received requests
from the EPA to provide documentation related to its capital projects from
January 1, 1980, to April 2003 for a number of its generating plants.
MidAmerican Energy has submitted information to the EPA in responses to these
requests, and there are currently no outstanding data requests pending from the
EPA. MidAmerican Energy cannot predict the outcome of these requests at this
time. However, on August 27, 2003, the EPA announced changes to its NSR rules
that clarify what constitutes routine repair, maintenance and replacement for
purposes of triggering NSR requirements. The EPA concluded equipment that is
repaired, maintained or replaced with an expenditure not greater than 20 percent
of the value of the source will not trigger the New Source Revisions of the
Clean Air Act. Since the NSR changes were announced, the EPA's enforcement
branch indicated it would apply the clarified routine repair, maintenance and
replacement rules to its pending investigation. However, a number of states and
local air districts have challenged the EPA's clarification of the rule and a
panel of the U.S. Circuit Court of Appeals for the District of Columbia issued
an order on December 24, 2003 staying
-12-
the EPA's implementation of its clarification of the equipment replacement rule;
therefore, the previous rules without the clarified exemption remain in effect.
On February 26, 2004, the EPA issued final requirements to reduce hazardous air
pollutants from stationary reciprocating internal combustion engines, such as
those used at pipeline compressor stations, built after December 19, 2002. The
standards apply to all new and certain existing reciprocating internal
combustion engines above 500 horsepower that are located at facilities
characterized under the Clean Air Act as a "major source" of toxic air
pollutants. The impact of the regulation of hazardous air pollutants from
stationary reciprocating internal combustion engines may have a significant
impact on existing and new facilities.
Nuclear Decommissioning
Expected decommissioning costs for Quad Cities Station have been developed based
on a site-specific decommissioning study that includes decontamination,
dismantling, site restoration, dry fuel storage cost and an assumed shutdown
date. Quad Cities Station decommissioning costs are included in base rates in
Iowa tariffs.
MidAmerican Energy's share of expected decommissioning costs for Quad Cities
Station, in 2003 dollars, is $260 million and is the asset retirement obligation
for Quad Cities Station. MidAmerican Energy has established external trusts for
the investment of funds for decommissioning the Quad Cities Station. The fair
value of the assets held in the trusts is reflected in deferred charges and
other assets in the consolidated balance sheets.
Natural Gas Commodity Litigation
MidAmerican Energy is one of dozens of companies named as defendants in a
January 20, 2004 consolidated class action lawsuit filed in the U.S. District
Court for the Southern District of New York. The suit alleges that the
defendants have engaged in unlawful manipulation of the prices of natural gas
futures and options contracts traded on the New York Mercantile Exchange
("NYMEX") during the period January 1, 2000 to December 31, 2002. MidAmerican
Energy is mentioned as a company that has engaged in wash trades on Enron Online
(an electronic trading platform) that had the effect of distorting prices for
gas trades on the NYMEX. The plaintiffs to the class action do not specify the
amount of alleged damages. At this time, MidAmerican Energy does not believe
that it has any material exposure in this lawsuit.
The original complaint in this matter, Cornerstone Propane Partners, L.P. v.
Reliant, et al. ("Cornerstone"), was filed on August 18, 2003 in the United
States District Court, Southern District of New York naming MidAmerican Energy
and the Company. On October 1, 2003, a second complaint, Roberto, E. Calle
Gracey, et al. ("Calle Gracey"), was filed in the same court but did not name
MidAmerican Energy or the Company. On November 14, 2003, a third complaint,
Dominick Viola ("Viola"), et al., was filed in the same court and named
MidAmerican Energy and MidAmerican Energy Holdings Company as defendants. On
November 19, 2003, an Order of Voluntary Dismissal Without Prejudice of
MidAmerican Energy Holdings Company was entered by the court dismissing
MidAmerican Energy Holdings Company from the Cornerstone and Viola complaints
and MidAmerican Energy Holdings Company was dismissed from the suit. On December
5, 2003, the court entered Pretrial Order No. 1, which among other procedural
matters, ordered the consolidation of the Cornerstone, Calle Gracey and Viola
complaints and permitted plaintiffs to file an amended complaint in this matter.
On January 20, 2004, plaintiffs filed In Re: Natural Gas Commodity Litigation as
the amended complaint reasserting their previous allegations. On February 19,
2004, MidAmerican Energy filed a Motion to Dismiss and joined with several other
defendants to file a joint Motion to Dismiss. The plaintiff's response is due
May 19, 2004. MidAmerican Energy will coordinate with the other defendants and
vigorously defend the allegations against it.
Philippines
CE Casecnan Construction Contract Arbitration
The Casecnan project was constructed pursuant to a fixed-price, date-certain,
turnkey construction contract 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.
In 2001, the Contractor filed a Request for Arbitration (and two supplements)
with the International Chamber of Commerce ("ICOC") seeking schedule relief of
up to 153 days, compensation for alleged additional costs of approximately $4
million
-13-
and compensation for damages of approximately $62 million resulting from alleged
force majeure events (and geologic conditions). The Contractor further alleged
that the circumstances surrounding the placing of the Casecnan project into
commercial operation in December 2001 amounted to a repudiation of the
construction contract resulting in a claim for unspecified quantum meruit
damages, and that the delay liquidated damages clause which provides for
payments of $125,000 per day to CE Casecnan for each day of delay in completion
of the Casecnan project was unenforceable.
On November 7, 2002, the ICOC issued the arbitration tribunal's partial award
with respect to the Contractor's force majeure and geological 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 to the extent losses are not covered by insurance. All of the
Contractor's other claims with respect to force majeure and geologic conditions
were denied.
On April 7, 2004, CE Casecnan entered into an agreement with the Contractor
settling the ICOC arbitration. Pursuant to the settlement agreement, on April
14, 2004, CE Casecnan received $18.9 million from the Contractor and the
Contractor and CE Casecnan executed mutual releases and agreed to dismiss the
arbitration. An amount of $24.4 million will be recorded as a reduction of
properties, plants and equipment in the second quarter of 2004, reflecting the
receipt of the Contractor payment and the release of other costs accrued in
connection with the arbitration proceedings.
CE 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's indirect wholly-owned subsidiary, CE Casecnan Ltd.,
advised the minority stockholder, LaPrairie Group Contractors (International)
Ltd. ("LPG"), that MEHC's ownership interest in CE Casecnan had increased to
100% effective from commencement of commercial operations. In April 2002, CE
Casecnan Ltd. and LPG entered into a status quo agreement pursuant to which CE
Casecnan Ltd. agreed not to take any action to exercise control over or transfer
LPG's shares in CE Casecnan. On July 8, 2002, LPG filed a complaint in the
Superior Court of the State of California, City and County of San Francisco
against, among others, 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 a 15%
interest in CE Casecnan. On January 21, 2004, CE Casecnan Ltd. and LPG entered
into a second status quo agreement pursuant to which the parties agreed to set
aside certain distributions related to the shares subject to the LPG dispute and
CE Casecnan agreed not to take any further actions with respect to such
distributions without at least 15 days prior notice to LPG. Accordingly, 15% of
the CE Casecnan dividend distributions declared in the first quarter of 2004
amounting to $8.0 million, was set aside by CE Casecnan in an unsecured CE
Casecnan account. The initial phase in the case has been set for trial in May
2004. The impact, if any, of this litigation on the Company cannot be determined
at this time.
8. COMPREHENSIVE INCOME
The differences from net income to total comprehensive income for the Company
are due to foreign currency translation adjustments, unrealized holding gains
and losses of marketable securities during the periods, and the effective
portion of net gains and losses of derivative instruments classified as cash
flow hedges. Total comprehensive income for the Company is shown in the table
below (in thousands):
THREE MONTHS
ENDED MARCH 31,
---------------------
2004 2003
-------- ---------
Net income ........................................................ $147,190 $ 130,636
Other comprehensive income:
Foreign currency translation .................................... 34,325 (28,007)
Marketable securities, net of tax of $72 and $(83), respectively 108 (133)
Cash flow hedges, net of tax of $1,211 and $2,442, respectively 2,766 5,226
-------- ---------
Total comprehensive income ........................................ $184,389 $ 107,722
======== =========
-14-
9. RETIREMENT PLANS
Domestic Operations
MidAmerican Energy sponsors a noncontributory defined benefit pension plan
covering substantially all employees of MEHC and its domestic energy
subsidiaries. MidAmerican Energy also currently sponsors certain postretirement
health care and life insurance benefits covering substantially all retired
employees of MEHC and its domestic energy subsidiaries. Net periodic pension,
supplemental retirement and postretirement benefit costs included the following
components for MidAmerican Energy and the aforementioned affiliates for the
three-month periods ended March 31 (in thousands):
PENSION COST POSTRETIREMENT COST
-------------------- -------------------
2004 2003 2004 2003
------- -------- ------- -------
Components of net periodic benefit cost:
Service cost ............................ $ 6,598 $ 6,744 $ 1,962 $ 1,951
Interest cost ........................... 8,700 9,336 4,183 3,834
Expected return on plan assets .......... (9,634) (10,499) (1,861) (1,434)
Amortization of net transition balance .. (198) (709) 1,028 981
Amortization of prior service cost ...... 687 705 148 142
Amortization of prior year loss ......... 419 375 834 887
Regulatory expense ...................... - 908 - -
------- -------- ------- -------
Net periodic cost ....................... $ 6,572 $ 6,860 $ 6,294 $ 6,361
======= ======== ======= =======
MEHC previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected MidAmerican Energy to contribute $5.1
million and $27.6 million in 2004 to its pension and postretirement plans,
respectively. As of March 31, 2004, $1.3 million and $6.6 million of
contributions have been made to the pension and postretirement plans,
respectively.
In December 2003, the President signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Medicare Act"). The Medicare Act
introduces a prescription drug benefit under Medicare as well as a subsidy to
sponsors of retiree health care plans that provide a benefit to participants
that is at least actuarially equivalent to Medicare Part D. The Medicare Act is
expected to ultimately reduce the Company's postretirement costs from what they
would have been absent such changes. Detailed regulations pertaining to the
Medicare Act have yet to be promulgated, and therefore, the Company cannot
determine whether its plan meets the actuarial equivalency requirements of
Medicare Part D. Accordingly, the Company continues to defer recognizing the
effects of the Medicare Act in its postretirement plan accounting.
United Kingdom Operations
CE Electric UK, through a wholly-owned subsidiary, participates in the
Electricity Supply Pension Scheme, which provides pension and other related
defined benefits, based on final pensionable pay, to substantially all employees
throughout the electricity supply industry in the United Kingdom. Net periodic
pension costs included the following components for CE Electric UK for the
three-month periods ended March 31 (in thousands):
PENSION COST
---------------------
2004 2003
-------- --------
Components of net periodic benefit cost:
Service cost ........................... $ 3,045 $ 2,589
Interest cost .......................... 18,503 17,095
Expected return on plan assets ......... (24,778) (24,326)
Amortization of prior service cost ..... 415 402
Amortization of prior year loss ........ 4,245 491
-------- --------
Net periodic (benefit) cost ............ $ 1,430 $ (3,749)
======== ========
MEHC previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected CE Electric UK to contribute $14.0 million
in 2004 to their pension plans. As of March 31, 2004, $3.5 million of
contributions have been made to the pension plans.
-15-
10. SEGMENT INFORMATION
The Company has identified seven reportable operating segments based on
management structure: MidAmerican Energy, Kern River, Northern Natural Gas, CE
Electric UK, CalEnergy Generation-Domestic, CalEnergy Generation-Foreign, and
HomeServices. Information related to the Company's reportable operating segments
is shown below (in thousands):
THREE MONTHS
ENDED MARCH 31,
---------------------------
2004 2003
----------- -----------
OPERATING REVENUE:
MidAmerican Energy .............................. $ 840,946 $ 815,916
Kern River ...................................... 75,613 39,030
Northern Natural Gas ............................ 190,339 170,639
CE Electric UK .................................. 262,608 225,532
CalEnergy Generation - Domestic ................. 11,901 11,233
CalEnergy Generation - Foreign .................. 69,591 76,729
HomeServices .................................... 314,686 257,988
----------- -----------
Segment operating revenue ....................... 1,765,684 1,597,067
Corporate/other(1) ............................ (20,429) (20,182)
----------- -----------
Total operating revenue ......................... $ 1,745,255 $ 1,576,885
=========== ===========
INTEREST EXPENSE:
MidAmerican Energy .............................. $ 30,591 $ 31,384
Kern River ...................................... 19,535 19,673
Northern Natural Gas ............................ 13,124 15,573
CE Electric UK .................................. 48,798 50,067
CalEnergy Generation - Domestic ................. 8,531 7,601
CalEnergy Generation - Foreign .................. 11,259 15,361
HomeServices .................................... 705 1,049
----------- -----------
Segment interest expense ........................ 132,543 140,708
Corporate/other(1) ............................ 55,680 46,137
Parent company subordinated debt(2) ........... 50,179 -
----------- -----------
Total interest expense ........................ $ 238,402 $ 186,845
=========== ===========
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES:
MidAmerican Energy .............................. $ 88,554 $ 89,892
Kern River ...................................... 30,472 26,376
Northern Natural Gas ............................ 102,656 83,639
CE Electric UK .................................. 109,206 84,773
CalEnergy Generation - Domestic ................. (13,478) (5,858)
CalEnergy Generation - Foreign .................. 33,789 34,532
HomeServices .................................... 9,659 7,005
----------- -----------
Segment income before provision for income taxes 360,858 320,359
Corporate/other(1)(2) ......................... (122,327) (58,810)
----------- -----------
Total income before provision for income taxes .. $ 238,531 $ 261,549
=========== ===========
-16-
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
IDENTIFIABLE ASSETS: (3)
MidAmerican Energy ............. $ 6,714,044 $ 6,596,849
Kern River ..................... 2,193,885 2,200,201
Northern Natural Gas ........... 2,280,346 2,167,621
CE Electric UK ................. 5,398,868 5,038,880
CalEnergy Generation - Domestic 847,318 842,148
CalEnergy Generation - Foreign . 854,282 951,155
HomeServices ................... 627,628 567,736
----------- -----------
Segment identifiable assets .... 18,916,371 18,364,590
Corporate/other(1) ........... 764,523 803,599
----------- -----------
Total identifiable assets ...... $19,680,894 $19,168,189
=========== ===========
(1) The remaining differences from the segment amounts to the consolidated
amounts described as "Corporate/other" relate principally to the corporate
functions including administrative costs, interest expense, corporate cash
and related interest income, intersegment eliminations, and fair value
adjustments relating to acquisitions.
(2) The Company adopted and applied the provisions of FIN 46R, related to
certain finance subsidiaries as of October 1, 2003. The adoption required
amounts previously recorded in minority interest and preferred dividends to
be recorded as interest expense in the accompanying consolidated statement
of operations. For the period from January 1, 2004 to March 31, 2004 the
Company has recorded $50.2 million of interest expense related to these
finance subsidiaries. In accordance with the requirements of FIN 46R, no
amounts prior to adoption on October 1, 2003 have been reclassified. The
amount included in minority interest and preferred dividends for the
three-month period ended March 31, 2003 was $55.1 million.
(3) Identifiable assets by segment includes the allocation of goodwill.
Goodwill as of December 31, 2003 and changes for the period from January 1, 2004
through March 31, 2004 by segment are as follows (in thousands):
NORTHERN CE CALENERGY
MIDAMERICAN KERN NATURAL ELECTRIC GENERATION HOME-
ENERGY RIVER GAS UK DOMESTIC SERVICES TOTAL
----------- ------- --------- ---------- ---------- --------- ----------
Goodwill at January 1, 2004.. $ 2,139,223 $33,900 $ 379,148 $1,261,583 $ 126,308 $ 365,481 $4,305,643
Goodwill from acquisitions
during the year ............. - - - - - 702 702
Other goodwill
adjustments(1) .............. (4,762) - (4,843) 32,606 (6) (1,945) 21,050
----------- ------- --------- ---------- --------- --------- ----------
Goodwill at March 31,2004 ... $ 2,134,461 $33,900 $ 374,305 $1,294,189 $ 126,302 $ 364,238 $4,327,395
=========== ======= ========= ========== ========= ========= ==========
(1) Other goodwill adjustments include income tax, foreign currency translation
and purchase price adjustments.
-17-
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 consolidated 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, the Company 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 and
rate case 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, 2003.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
In the three months ended March 31, 2004, net income available to common and
preferred stockholders was $147.2 million compared with $130.6 million for the
same period in 2003.
Operating revenue for the three months ended March 31, 2004 increased $168.4
million or 10.7% to $1,745.3 million from $1,576.9 million for the same period
in 2003. The following table summarizes operating revenue by segment for the
three months ended March 31 (in millions):
THREE MONTHS
ENDED MARCH 31,
---------------------------------
2004 2003 $ CHANGE
-------- -------- --------
Operating revenue:
MidAmerican Energy ............. $ 841.0 $ 815.9 $ 25.1
Kern River ..................... 75.6 39.0 36.6
Northern Natural Gas ........... 190.3 170.6 19.7
CE Electric UK ................. 262.6 225.5 37.1
CalEnergy Generation - Domestic 11.9 11.3 0.6
CalEnergy Generation - Foreign . 69.6 76.7 (7.1)
HomeServices ................... 314.7 258.0 56.7
-------- -------- ------
Segment operating revenue ...... 1,765.7 1,597.0 168.7
Corporate/other ................ (20.4) (20.1) (0.3)
-------- -------- ------
Total operating revenue ........ $1,745.3 $1,576.9 $168.4
======== ======== ======
-18-
MidAmerican Energy's operating revenue for the three months ended March 31,
2004, increased $25.1 million, or 3.1%, to $841.0 million. Regulated and
non-regulated electric revenues increased $53.0 million, or 16.0%, to $383.5
million for the three months ended March 31, 2004, primarily due to higher
volumes and higher off-system prices. Gas revenues decreased $26.3 million, or
5.5% to $453.5 million for the three months ended March 31, 2004, mainly due to
lower volumes and lower wholesale gas prices.
Operating revenue at both pipelines is principally derived by providing firm or
interruptible transportation services under long-term gas transportation service
agreements. Northern Natural Gas also derives part of its revenue from storing
gas. The $36.6 million increase in Kern River's operating revenue was primarily
due to the transportation fees earned in connection with the 2003 expansion
project ("Kern River 2003 Expansion Project") which began operation May 1, 2003.
On May 1, 2003, Northern Natural Gas filed a request for increased rates with
the Federal Energy Regulatory Commission. The rate filing provides evidence in
support of a $71 million increase to Northern Natural Gas' annual revenue
requirement. However, in this case, Northern Natural Gas is requesting that only
$55 million of this increase be effectuated. Northern Natural Gas' new rates
went into effect November 1, 2003, subject to refund. The $19.7 million increase
in Northern Natural Gas' operating revenue reflects the impact of the new rates
and the Company's estimate of the expected outcome of the rate case.
CE Electric UK operating revenue increased during the three months ended March
31, 2004 as a result of the weaker U.S. dollar, higher distribution revenue and
slightly higher revenue at its contracting business.
Operating revenue for CalEnergy Generation - Foreign decreased in the three
months ended March 31, 2004 primarily due to the settlements with the National
Irrigation Administration and the Philippine National Oil Company-Energy
Development Corporation effective in the fourth quarter of 2003.
HomeServices' operating revenue, consisting mainly of commission revenue from
real estate brokerage transactions, increased $56.7 million, or 22.0%. The
increase is due to growth from existing operations totaling $34.1 million
reflecting higher unit sales and average sales prices and acquisitions made in
2003 totaling $22.6 million. During the three months ended March 31, 2004,
HomeServices closed 36,090 brokerage sides up 9.5% from 32,968 closed sides in
the comparable 2003 period. Closed brokerage volume was $10.6 billion during the
three months ended March 31, 2004, up 27.7% from $8.3 billion in 2003.
Income on equity investments for the three months ended March 31, 2004,
decreased $4.0 million to $3.5 million for the same period in 2003. Equity
income from non-regulated generation equity investments decreased $1.1 million
to $1.2 million mainly due to the expiration of a contract at an independent
power plant. Equity income from HomeServices for the three months ended March
31, 2004 decreased by $2.6 million to $2.3 million due to decreased refinancing
activity at mortgage joint ventures.
Interest and dividend income for the three months ended March 31, 2004,
decreased $6.7 million to $7.2 million. The decrease is mainly due to dividends
received in 2003 from the Company's investment in The Williams Companies
Cumulative Convertible Preferred Stock. The investment was sold in the second
quarter of 2003.
Other income for the three months ended March 31, 2004, decreased $9.0 million
to $8.4 million, primarily due to lower allowance for equity funds used during
the construction related to the Kern River 2003 Expansion Project.
Cost of sales for the three months ended March 31, 2004, increased $57.6
million, or 8.4%, to $742.0 million from $684.4 million in the comparable 2003
period. HomeServices' cost of sales, consisting primarily of commissions on real
estate brokered transactions, increased $43.6 million due to higher commission
expense on incremental sales at existing business units and acquisitions made in
2003. CE Electric UK cost of sales increased $5.6 million primarily due to the
weaker U.S. dollar. MidAmerican Energy cost of sales increased $5.0 million, due
to higher regulated electric volumes and cost per megawatt-hour, partially
offset by lower gas volumes and lower average gas prices.
Operating expenses for the three months ended March 31, 2004, increased $22.2
million, or 6.2%, to $378.7 million from $356.5 million in the comparable 2003
period. HomeServices' operating expenses, consisting mainly of compensation,
marketing and other administrative costs, increased $8.3 million. CE Electric UK
operating expenses increased $4.8 million, primarily due to the weaker U.S.
dollar. Kern River operating expenses increased $4.0 million due to the
commencement of operations of the Kern River 2003 Expansion Project.
-19-
Depreciation and amortization for the three months ended March 31, 2004,
increased $28.5 million, or 20.0%, to $170.3 million from $141.8 million in the
comparable 2003 period. MidAmerican Energy's expense increased $14.1 million due
primarily to an increase in regulatory expense related to its revenue sharing
arrangement, Kern River's expense increased $6.4 million due to the commencement
of operation of the Kern River 2003 Expansion Project, and Northern Natural Gas'
expense increased $5.2 million due to higher depreciation rates consistent with
the rate case filings.
Interest expense for the three months ended March 31, 2004, increased $51.6
million to $238.4 million. On October 1, 2003, the Company adopted Financial
Accounting Standards Board, ("FASB") Interpretation No. 46R, "Consolidation of
Variable Interest Entities - An Interpretation of ARB No. 51" ("FIN 46R")
related to certain finance subsidiaries. The adoption required that amounts
previously recorded in minority interest and preferred dividends be recorded as
interest expense in the accompanying consolidated statement of operations. For
the period from January 1, 2004 to March 31, 2004, the Company has recorded
$50.2 million of interest expense related to these finance subsidiaries. In
accordance with the requirements of FIN 46R, no amounts prior to adoption on
October 1, 2003 have been reclassified. The amount included in minority interest
and preferred dividends for the three-month period ended March 31, 2003 was
$55.1 million.
The remaining $1.4 million increase in interest expense resulted from charges
associated with the early redemption of $136.4 million of Salton Sea Funding
Corporation ("Funding Corporation") debt totaling $10.8 million, additional
interest expense totaling $5.6 million on the Company's debt issuances of $450.0
million of 3.5% Senior Notes (May 2003) and $250.0 million of 5.0% Senior Notes
(February 2004). These increases were partially offset by decreased interest,
totaling $12.4 million, due to the Company's scheduled redemption of $215.0
million of 6.96% Senior Notes (September 2003), redemption in full of the
outstanding shares of the Yorkshire Capital Trust I, 8.08% trust securities
(June 2003), and reductions in CalEnergy Generation - Foreign project debt.
Capitalized interest for the three months ended March 31, 2004, decreased $11.9
million to $3.6 million. The decrease was primarily due to the discontinuance of
capitalizing interest on the Kern River 2003 Expansion Project.
The income tax provision for the three months ended March 31, 2004, increased
$15.6 million to $88.6 million mainly due to higher pre-tax earnings, increased
taxes at CalEnergy Generation-Foreign as a result of the expiration of the
income tax holiday at a Leyte project and higher taxes on other foreign
earnings.
Minority interest and preferred dividends for the three months ended March 31,
2004 decreased $55.1 million to $2.8 million. This decrease was due to the
adoption of FIN 46R described above.
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 $977.8 million at March 31, 2004,
compared to $660.2 million at December 31, 2003. Each of MEHC's direct or
indirect subsidiaries is organized as a legal entity separate and apart from
MidAmerican Energy Holdings Company and its other subsidiaries. Pursuant to
separate financing agreements at each subsidiary, the assets of each subsidiary
may be pledged or encumbered to support or otherwise provide the security for
their own project or subsidiary debt. It should not be assumed that any asset of
any subsidiary of MEHC will be available to satisfy the obligations of MEHC 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 MEHC 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 $205.2 million and $119.5 million at March 31, 2004, and December
31, 2003, 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, customer deposits held in escrow,
and distributions.
-20-
Cash flows from Operating Activities
- ------------------------------------
The Company generated cash flows from operations of $488.0 million for the three
months ended March 31, 2004, compared with $385.8 million for the comparable
period in 2003. The increase was mainly due to a refund of $79.0 million from
the Internal Revenue Service as a result of a 2003 net operating loss. The net
operating loss was primarily due to bonus depreciation as a result of the Kern
River 2003 Expansion Project becoming operational in 2003. Also contributing to
higher cash flows from operations are higher earnings and non-cash charges for
depreciation and amortization.
Cash Flows from Investing Activities
- ------------------------------------
Cash flows used in investing activities for the three months ended March 31,
2004 were $111.7 million, compared with $444.0 million for the same period in
2003. The decrease was due to lower capital expenditures in 2004 along with the
collection of the Republic of the Philippines ("ROP") Note as described below.
Put of ROP Note and Receipt of Cash
On January 14, 2004, CE Casecnan Water and Energy Company, Inc. ("CE Casecnan"),
an indirect, majority-owned subsidiary of the Company, exercised its right to
put the ROP Note to the ROP and, in accordance with the terms of the put option,
CE Casecnan received $99.2 million (representing $97.0 million par value plus
accrued interest) from the ROP on January 21, 2004.
Capital Expenditures, Construction and Other Development Costs
Capital expenditures, construction and other development costs were $211.4
million for the three months ended March 31, 2004 as compared with $377.9
million for the same period in 2003. The following table summarizes the
expenditures by business segment (in millions):
THREE MONTHS
ENDED MARCH 31,
----------------
2004 2003
------ ------
MidAmerican Energy .............. $117.4 $ 77.3
Kern River ...................... 4.5 216.0
Northern Natural Gas ............ 16.5 13.0
CE Electric UK .................. 68.6 61.1
CalEnergy Generation - Domestic . 0.7 4.5
CalEnergy Generation - Foreign .. 0.4 1.7
HomeServices .................... 2.6 4.2
------ ------
Segment capital expenditures .... 210.7 377.8
Corporate/other ................. 0.7 0.1
------ ------
Total capital expenditures ...... $211.4 $377.9
====== ======
Forecasted capital expenditures, construction and other development costs for
fiscal 2004 are expected to be approximately $1.3 billion. Capital expenditure
needs are reviewed regularly by management and may change significantly as a
result of such reviews. The Company expects to meet these capital expenditures
with cash flows from operations and the issuance of long-term debt. Capital
expenditures relating to operating projects, consisting mainly of recurring
expenditures were $159.7 million for the three months ended March 31, 2004.
Construction and other development costs were $51.7 million for the three months
ended March 31, 2004. These costs consist mainly of expenditures for large
scale, generation projects as follows:
MidAmerican Energy
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first three months of 2004, utility construction
expenditures totaled $117.4 million, including allowance for funds used during
construction and Quad Cities Station nuclear fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $912 million for 2004.
-21-
MidAmerican Energy anticipates a continuing increase in demand for electricity
from its regulated customers. To meet anticipated demand and ensure adequate
electric generation in its service territory, MidAmerican Energy is currently
constructing two electric generating projects in Iowa and is developing a third.
Upon completion, the projects will provide service to regulated retail
electricity customers. MidAmerican Energy has obtained regulatory approval to
include the actual costs of the generation projects in its Iowa rate base as
long as actual costs do not exceed the agreed caps that MidAmerican Energy has
deemed to be reasonable. If the caps are exceeded, MidAmerican Energy has the
right to demonstrate the prudence of the expenditures above the caps subject to
regulatory review. Wholesale sales may also be made from the projects to the
extent the power is not needed for regulated retail service. MidAmerican Energy
expects to invest approximately $1.4 billion in the three projects, of which
approximately $382 million has been invested through March 31, 2004.
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, excluding allowance for funds used during construction.
MidAmerican Energy will own and operate the plant. Commercial operation of the
simple cycle mode began on May 5, 2003. The plant, which will continue to be
operated in simple cycle mode during 2004, resulted in 327 megawatt ("MW") of
accredited capacity in the summer of 2003. The combined cycle operation is
expected to commence in December 2004 and achieve an expected additional
accredited capacity of 190 MW.
The second project is currently under construction and will be a 790 MW (based
on expected accreditation) super-critical-temperature, low-sulfur coal-fired
plant. MidAmerican Energy will operate the plant and hold an undivided ownership
interest as a tenant in common with the other owners of the plant. MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy expects its share of the estimated cost of the project to be
approximately $713 million, excluding 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 May 29, 2003, the Iowa Utilities Board ("IUB") issued an order that
approves the ratemaking principles for the plant, and on June 27, 2003,
MidAmerican Energy received a certificate from the IUB allowing MidAmerican
Energy to construct the plant. On February 12, 2003, MidAmerican Energy executed
a contract with Mitsui & Co. Energy Development, Inc. for the engineering,
procurement and construction of the plant. On September 9, 2003, MidAmerican
Energy began construction of the plant, which it expects to be completed in the
summer of 2007. MidAmerican Energy is also seeking an order from the IUB
approving construction of the associated transmission facilities.
The third project is currently under development and is comprised of wind power
facilities totaling 310 MW based on the nameplate rating. Generally speaking,
accredited capacity ratings for the wind power facilities are considerably less
than the nameplate ratings due to the varying nature of wind. The current
projected accredited capacity for these wind power facilities is approximately
53 MW. If constructed, MidAmerican Energy will own and operate these facilities,
which are expected to cost approximately $323 million. MidAmerican Energy's plan
to construct the wind project is in conjunction with a settlement agreement that
extends through December 31, 2010, an Iowa retail electric rate freeze that was
previously scheduled to expire at the end of 2005. The settlement agreement,
which was filed with the IUB as part of MidAmerican Energy's application for
ratemaking principles for the wind project, was approved by the IUB on October
17, 2003. The obligation of MidAmerican Energy to construct the wind project may
be terminated by MidAmerican Energy if the federal production tax credit
applicable to the wind energy facilities is not available at a rate of 1.8 cents
per kilowatt ("kWh") for a period of at least ten years after the facilities
begin generating electricity. Congress is currently considering legislation that
would allow a 1.8 cent per kWh tax credit for a period of ten years. MidAmerican
Energy has also received authorization from the IUB to construct the wind power
project. If MidAmerican Energy does not construct the wind facilities by
December 31, 2006, the rate extension from January 1, 2006 through December 31,
2010 may terminate.
Kern River
On May 1, 2003, Kern River completed the construction of its Kern River 2003
Expansion Project at a total cost of approximately $1.2 billion. The expansion
increased the design capacity of the existing Kern River pipeline by 885,626
decatherms per day to 1,755,626 decatherms per day.
Cash Flows from Financing Activities
- ------------------------------------
Cash flows used in financing activities for the three months ended March 31,
2004 were $65.6 million. During 2004, the Company used cash for financing
activities of $214.7 million for repayments of subsidiary obligations, and
generated cash from financing activities of $260.3 million from the issuances of
subsidiary, project and parent company debt. Cash flows
-22-
from financing activities for the three months ended March 31, 2003 were $73.5
million. During 2003, the Company generated cash from financing activities,
totaling $287.6 million, from the issuance of subsidiary and project company
debt, and used cash for financing activities, totaling $220.1 million, for
repayments of parent company and subsidiary obligations.
Recent Debt Issuances, Redemptions and Stock Transactions
On February 12, 2004, MEHC completed the sale of $250 million in aggregate
principal amount of its 5.00% senior notes due February 15, 2014. The proceeds
were used to satisfy a demand made by its affiliate, Funding Corporation, for
the amount remaining on MEHC's guarantee of the Funding Corporation's Series F
Bonds and for other general corporate purposes.
On March 1, 2004, Funding Corporation completed the redemption of an aggregate
principal amount of approximately $136.4 million of its 7.475% Senior Secured
Series F Bonds due November 30, 2018 ("Series F Bonds"), pro rata, at a
redemption price of 100% of such aggregate outstanding principal amount, plus
accrued interest to the date of redemption. Funding Corporation also made a
demand on MEHC for the full amount remaining on MEHC's guarantee of the Series F
Bonds in order to fund the redemption. MEHC made the requisite payment and, as a
result, it has no further payment obligation under the guarantee.
On January 6, 2004, the Company purchased two hundred thousand shares of common
stock owned by the Company's chairman and chief executive officer, for an
aggregate purchase price of $20.0 million.
Restricted Cash and Short-term Investments
During the three months ended March 31, 2004, CE Casecnan increased its
restricted cash related to obligations for debt service and unpaid dividends
declared.
CREDIT RISK RATINGS
Debt and preferred securities of the Company may be rated by nationally
recognized credit rating agencies. Assigned credit ratings are based on each
rating agency's assessment of the rated company's ability to, in general, meet
the obligations of its debt or preferred securities. The credit ratings are not
a recommendation to buy, sell or hold securities, and there is no assurance that
a particular credit rating will continue for any given period of time. The
Company does not have any credit agreements that require termination or a
material change in collateral requirements or payment schedule in the event of a
downgrade in the credit ratings of the respective company's securities.
In conjunction with its wholesale marketing and trading activities, MidAmerican
Energy must meet credit quality standards as required by counterparties.
MidAmerican Energy has energy trading agreements that, in accordance with
industry practice, either specifically require it to maintain investment grade
credit ratings or provide the right for counterparties to demand "adequate
assurances" in the event of a material adverse change in MidAmerican Energy's
creditworthiness. If one or more of MidAmerican Energy's credit ratings decline
below investment grade, MidAmerican Energy may be required to post cash
collateral, letters of credit or other similar credit support to facilitate
ongoing wholesale marketing and trading activities. As of March 31, 2004,
MidAmerican Energy's estimated potential collateral requirements totaled
approximately $119 million. MidAmerican Energy's collateral requirements could
fluctuate considerably due to seasonality, market price volatility, and a loss
of key MidAmerican Energy generating facilities or other related factors.
Yorkshire Power Group Limited, a subsidiary of CE Electric UK, entered into
certain currency rate swap agreements for its Yankee Bonds with three large
multi-national financial institutions. The swap agreements effectively convert
the U.S. dollar fixed interest rate to a fixed rate in Sterling. For the $281.1
million of the 6.496% Yankee Bonds outstanding at March 31, 2004, the agreements
extend until February 25, 2008 and convert the U.S. dollar interest rate to a
fixed Sterling rate ranging from 7.3175% to 7.345%. The estimated fair value of
these swap agreements at March 31, 2004 was $71.5 million based on quotes from
the counterparties to these instruments and represents the estimated amount that
the Company would expect to pay if these agreements were terminated. Certain of
these counterparties have the option to terminate the swap agreements and demand
payment of the fair value of the swaps if Yorkshire Power Group Limited's credit
ratings from the three recognized credit rating agencies decline below
investment grade. As of March 31, 2004, Yorkshire Power Group Limited's credit
ratings from the three recognized credit rating agencies were investment grade;
however, if the ratings fell below investment grade, payment requirements would
have been approximately $33.3 million.
-23-
REGULATORY MATTERS
MidAmerican Energy
Under two settlement agreements approved by the Iowa Utilities Board ("IUB"),
MidAmerican Energy's Iowa retail electric rates are effectively frozen through
December 31, 2010. The settlement agreements specifically allow the filing of
electric rate design or cost of service rate changes that are intended to keep
MidAmerican Energy's overall Iowa retail electric revenue unchanged, but could
result in changes to individual tariffs. The settlement agreements also each
provide that portions of revenues associated with Iowa retail electric returns
on equity within specified ranges will be recorded as a regulatory liability to
be used to offset a portion of the cost to Iowa customers of future generating
plant investment.
Under the first settlement agreement, which was approved by the IUB on December
21, 2001, and is effective through December 31, 2005, an amount equal to 50% of
revenues associated with returns on equity between 12% and 14%, and 83.33% of
revenues associated with returns on equity above 14%, in each year is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy's application for ratemaking principles on a
wind power project and was approved by the IUB on October 17, 2003, provides
that during the period January 1, 2006 through December 31, 2010, an amount
equal to 40% of revenues associated with returns on equity between 11.75% and
13%, 50% of revenues associated with returns on equity between 13% and 14%, and
83.3% of revenues associated with returns on equity above 14%, in each year will
be recorded as a regulatory liability. An amount equal to the regulatory
liability is recorded as a regulatory charge in depreciation and amortization
expense when the liability is accrued. Future depreciation will be reduced as a
result of the credit applied to generating plant balances as the regulatory
liability is reduced. The liability is being reduced as it is credited against
plant in service in amounts equal to the allowance for funds used during
construction associated with generating plant additions. Interest expense is
accrued on the portion of the regulatory liability balance recorded in prior
years. As of March 31, 2004 and December 31, 2003, the related regulatory
liability reflected on the consolidated balance sheets within other long-term
accrued liabilities was $173.2 million and $144.4 million, respectively.
The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any consecutive 12-month period after January 1,
2006, MidAmerican Energy may seek to file for a general increase in rates.
However, prior to filing for a general increase in rates, MidAmerican Energy is
required by the settlement agreement to conduct 30 days of good faith
negotiations with all of the signatories to the settlement agreement to attempt
to avoid a general increase in rates. Also, if MidAmerican Energy does not
construct the wind power facilities by December 31, 2006, the rate extension
from January 1, 2006, through December 31, 2010, may terminate.
Illinois bundled electric rates are frozen until 2007, subject to certain
exceptions allowing for increases, at which time bundled rates are subject to
cost-based ratemaking. Illinois law provides for Illinois earnings above a
computed level of return on common equity to be shared equally between regulated
retail electric customers and MidAmerican Energy. MidAmerican Energy's computed
level of return on common equity is based on a rolling two-year average of the
Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve
System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for
2005 and 2006. The two-year average above which sharing must occur for 2003 was
13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings
above the threshold return on common equity through accelerated recovery of
electric assets.
Kern River
Kern River was required to file a general rate case no later than May 1, 2004
pursuant to the terms of its Federal Energy Regulatory Commission ("FERC")
Docket No. RP99-274 rate case settlement. Kern River filed its rate case on
April 30, 2004 which supports a revenue increase of approximately $40.1 million
representing a 13% increase from its existing cost of service and a proposed
overall cost of service of $347.4 million. Since its last rate case, Kern River
has increased the capacity of its system from 724,500 decatherm ("Dth") per day
to 1,755,626 Dth per day at a cost of approximately $1.3 billion resulting in a
total rate base of approximately $1.8 billion. Kern River proposed that the rate
increase should be effective as of June 1, 2004, although it anticipates that
the FERC will suspend the effectiveness of the rate increase until November 1,
2004.
Northern Natural Gas
Northern Natural Gas has implemented a straight fixed variable rate design which
provides that all fixed costs assignable to firm capacity customers, including a
return on equity, are to be recovered through fixed monthly demand or capacity
reservation charges which are not a function of throughput volumes.
-24-
On May 1, 2003, Northern Natural Gas filed a request for increased rates with
the FERC. The rate increase is primarily attributable to four main cost areas:
the capital investment made by Northern Natural Gas in the five years since its
last rate case, an increase in Northern Natural Gas' depreciation rates,
increased return on equity, and changes in the level of contract entitlement.
The rate filing provides evidence in support of a $71 million increase to
Northern Natural Gas' annual revenue requirement. However, Northern Natural Gas
is requesting that only $55 million of this increase be effectuated. Northern
Natural Gas' new rates went into effect November 1, 2003, subject to refund.
Additionally, Northern Natural Gas filed on January 30, 2004 with the FERC to
increase its revenue requirement by an incremental $30 million to that requested
in the May 1, 2003 filing. The increased rates are primarily attributable to
ongoing pipeline integrity initiative costs that Northern Natural Gas has
undertaken since the May 1, 2003 rate filing. The FERC suspended the rate
increase until August 1, 2004 and consolidated the 2003 and 2004 rate cases due
to the similarity of issues in both cases and the updated costs. A hearing on
the consolidated cases is scheduled for January 2005.
CE Electric UK
The majority of the revenue of the Distribution License Holders ("DLHs") in the
United Kingdom is controlled by a distribution price control formula which is
set out in the license of each DLH. It has been the practice of the Office of
Gas and Electricity Markets ("Ofgem") (and its predecessor body, the Office of
Electricity Regulation), to review and reset the formula at five-year intervals,
although the formula may be further reviewed at other times at the discretion of
the regulator. Any such resetting of the formula requires the consent of the
DLH. If the DLH does not consent to the formula reset, it is reviewed by the
United Kingdom's competition authority, whose recommendations can then be given
effect by license modifications made by Ofgem.
The current formula requires that regulated distribution income per unit is
increased or decreased each year by RPI-Xd where RPI means the Retail Price
Index ("RPI"), reflecting the average of the 12-month inflation rates recorded
for each month in the previous July to December period. The Xd factor in the
formula was established by Ofgem at the last price control review (and continues
to be set) at 3%. The formula also takes account of the changes in system
electrical losses, the number of customers connected and the voltage at which
customers receive the units of electricity distributed. The distribution price
control formula determines the maximum average price per unit of electricity
distributed (in pence per kWh) which a DLH is entitled to charge. The
distribution price control formula permits DLHs to receive additional revenue
due to increased distribution of units and a predetermined increase in end
users. The price control does not seek to constrain the profits of a DLH from
year to year. It is a control on revenue that operates independently of most of
the DLH's costs. During the lifetime of the price control, cost savings or
additional costs have a direct impact on profit.
The procedure and methodology adopted at a price control review is at the
reasonable discretion of Ofgem. At the last such review, concluded in 1999 and
effective April 2000, Ofgem's judgment of the future allowed revenue of
licensees was based upon, among other things:
o the actual operating costs of each of the licensees;
o the operating costs which each of the licensees would incur if it were
as efficient as, in Ofgem's judgment, the most efficient licensee;
o the regulatory value to be ascribed to each of the licensees'
distribution network assets;
o the allowance for depreciation of the distribution network assets of
each of the licensees;
o the rate of return to be allowed on investment in the distribution
network assets by all licensees; and
o the financial ratios of each of the licensees and the license
requirement for each licensee to maintain an investment grade status.
As a result of the last review, the allowed revenue of NED's distribution
business was reduced by 24%, in real terms, and the allowed revenue of YED's
distribution business was reduced by 23%, in real terms, with effect from April
1, 2000. The range of reductions for all licensees in Great Britain was between
4% and 33%.
Ofgem has commenced the process of reviewing each DLH's existing price control
formula, with a revised formula for each DLH (including NED and YED) expected to
take effect from April 1, 2005 for an expected period of five years. To date,
the process has involved the collection of data from each DLH via written
submissions and meetings with representatives of the various companies. It is
expected that Ofgem will announce preliminary proposals for the new price
control formulas for the DLHs in June, 2004, with the final proposals issued in
November, 2004. Each DLH will then have until December, 2004 to accept or reject
the proposals, which if accepted will be implemented through a license
modification in the first quarter of 2005, having effect from April 1, 2005.
-25-
COMMITMENTS AND CONTINGENCIES
There have been no material changes in commitments and contingencies from the
information provided in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003, other than the item described below. Refer to Note 7 of
Notes to the Consolidated Financial Statements for more discussion on
commitments and contingencies.
CE Casecnan Construction Contract Arbitration
The Casecnan project was constructed pursuant to a fixed-price, date-certain,
turnkey construction contract 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.
In 2001, the Contractor filed a Request for Arbitration (and two supplements)
with the International Chamber of Commerce ("ICOC") seeking schedule relief of
up to 153 days, compensation for alleged additional costs of approximately $4
million and compensation for damages of approximately $62 million resulting from
alleged force majeure events (and geologic conditions). The Contractor further
alleged that the circumstances surrounding the placing of the Casecnan project
into commercial operation in December 2001 amounted to a repudiation of the
construction contract resulting in a claim for unspecified quantum meruit
damages, and that the delay liquidated damages clause which provides for
payments of $125,000 per day to CE Casecnan for each day of delay in completion
of the Casecnan project was unenforceable.
On November 7, 2002, the ICOC issued the arbitration tribunal's partial award
with respect to the Contractor's force majeure and geological 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 to the extent losses are not covered by insurance. All of the
Contractor's other claims with respect to force majeure and geologic conditions
were denied.
On April 7, 2004, CE Casecnan entered into an agreement with the Contractor
settling the ICOC arbitration. Pursuant to the settlement agreement, on April
14, 2004, CE Casecnan received $18.9 million from the Contractor and the
Contractor and CE Casecnan executed mutual releases and agreed to dismiss the
arbitration. An amount of $24.4 million will be recorded as a reduction of
properties, plants and equipment in the second quarter of 2004, reflecting the
receipt of the Contractor payment and the release of other costs accrued in
connection with the arbitration proceedings.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued FASB Interpretation No. 46R ("FIN 46R") which
served to clarify guidance in FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51" ("FIN 46"), and provided additional guidance surrounding the application
of FIN 46. The Company adopted and applied the provisions of FIN 46R, related to
certain finance subsidiaries, as of October 1, 2003. The adoption required the
deconsolidation of certain finance subsidiaries, which resulted in the amounts
previously classified as mandatorily redeemable preferred securities of
subsidiary trusts, in the amount of $1.9 billion, being reclassified to parent
company subordinated debt in the accompanying consolidated balance sheet. In
addition, the associated amounts previously recorded in minority interest and
preferred dividends are now recorded as interest expense in the accompanying
consolidated statement of operations. For quarter ended March 31, 2004, the
Company has recorded $50.2 million of interest expense related to these
securities. In accordance with the requirements of FIN 46R, no amounts prior to
adoption on October 1, 2003 have been reclassified. The amount included in
minority interest and preferred dividends related to these securities for the
quarter ended March 31, 2003 was $55.1 million. The Company adopted the
provisions of FIN 46R related to non-special purpose entities in the first
quarter of 2004. The Company has considered the provisions of FIN 46R for all
subsidiaries and their related power purchase, power sale, or tolling
agreements. Factors considered in the analysis include the duration of the
agreements, how capacity and energy payments are determined, source and payment
terms for fuel, as well as responsibility and payment for operating and
maintenance expenses. As a result of these considerations, the Company has
determined its power purchase, power sale and tolling agreements do not
represent significant variable interests. Accordingly, the Company has concluded
that it is appropriate to continue to consolidate its power plant projects.
In January 2004, the FASB issued FASB Staff Position No. 106-1 ("FSP 106-1"),
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits a sponsor of
a postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the "Medicare
Act"), which was
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signed into law on December 8, 2003. The Medicare Act introduced a prescription
drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare. These provisions of the new law will affect accounting
measurements of the Company's postretirement benefit obligation and expense. As
permitted by FSP 106-1, the Company made a one-time election to defer accounting
for the effect of the Medicare Act until specific authoritative guidance is
issued. Therefore, the amounts included in the consolidated financial statements
related to the Company's postretirement benefit plans do not reflect the effects
of the Medicare Act.
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, 2003
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, 2003. The Company's critical accounting policies have not
changed materially since December 31, 2003.
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, 2003. MEHC's
exposure to market risk has not changed materially since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
the Company's management, including the chief executive officer and chief
financial officer, regarding the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 2004. Based on that evaluation, the Company's management, including
the chief executive officer and chief financial officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material changes in legal proceedings from the information
provided in Item 3. of the Company's Annual Report on Form 10K for the year
ended December 31, 2003 other than the CE Casecnan Construction Contract
Arbitration. On April 7, 2004, CE Casecnan entered into an agreement with the
Contractor settling the ICOC arbitration. Pursuant to the settlement agreement,
on April 14, 2004, CE Casecnan received $18.9 million from the Contractor and
the Contractor and CE Casecnan executed mutual releases and agreed to dismiss
the arbitration. An amount of $24.4 million will be recorded as a reduction of
properties, plants and equipment in the second quarter of 2004, reflecting the
receipt of the Contractor payment and the release of other costs accrued in
connection with the arbitration proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
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.
Not applicable.
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:
MEHC filed the following Current Reports on Form 8-K during the first
quarter of 2004:
o MEHC filed a Current Report on Form 8-K on January 23, 2004.
o MEHC filed a Current Report on Form 8-K on January 30, 2004.
o MEHC filed a Current Report on Form 8-K on February 12, 2004.
o MEHC filed a Current Report on Form 8-K on February 18, 2004.
o MEHC filed a Current Report on Form 8-K on March 1, 2004.
o MEHC filed a Current Report on Form 8-K on March 30, 2004.
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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)
/s/ Patrick J. Goodman
---------------------
Date: May 4, 2004 Patrick J. Goodman
Senior Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
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10.68 Fiscal Agency Agreement, dated as of May 4, 1993, among Northern
Natural Gas Company, Enron Corp. and Continental Bank, National
Association, Fiscal Agent, relating to the $100,000,000 in principal
amount of the 6.875% Senior Notes due 2005.
10.69 Fiscal Agency Agreement, dated as of September 4, 1998, between
Northern Natural Gas Company and Chase Bank of Texas, National
Association, Fiscal Agent, relating to the $150,000,000 in principal
amount of the 6.75% Senior Notes due 2008.
10.70 Fiscal Agency Agreement, dated as of May 24, 1999, between Northern
Natural Gas Company and Chase Bank of Texas, National Association,
Fiscal Agent, relating to the $250,000,000 in principal amount of the
7.00% Senior Notes due 2011.
10.71 Trust Indenture, dated as of September 10, 1999, between Cordova
Funding Corporation and Chase Manhattan Bank and Trust Company,
National Association, Trustee, relating to the $225,000,000 in
principal amount of the 8.75% Senior Secured Bonds due 2019.
10.72 Indenture, dated as of December 15, 1997, among CE Electric UK
Funding Company, The Bank of New York, as Trustee, and Banque
Internationale A Luxembourg S.A., as Paying Agent.
10.73 First Supplemental Indenture, dated as of December 15, 1997, among CE
Electric UK Funding Company, The Bank of New York, Trustee, and Banque
Internationale A Luxembourg S.A., Paying Agent, relating to the
$125,000,000 in principal amount of the 6.853% Senior Notes due 2004
and to the $237,000,000 in principal amount of the 6.995% Senior Notes
due 2007.
10.74 Trust Deed, dated as of February 4, 1998 among Yorkshire Power
Finance Limited, Yorkshire Power Group Limited and Bankers Trustee
Company Limited, Trustee, relating to the (pound) 200,000,000 in
principal amount of the 7.25% Guaranteed Bonds due 2028.
10.75 First Supplemental Trust Deed, dated as of October 1, 2001, among
Yorkshire Power Finance Limited, Yorkshire Power Group Limited and
Bankers Trustee Company Limited, Trustee, relating to the
(pound)200,000,000 in principal amount of the 7.25% Guaranteed Bonds
due 2028.
10.76 Third Supplemental Trust Deed, dated as of October 1, 2001, among
Yorkshire Electricity Distribution plc, Yorkshire Electricity Group
PLC and Bankers Trustee Company Limited, Trustee, relating to the
(pound)200,000,000 in principal amount of the 9.25% Bonds due 2020.
10.77 Indenture, dated as of February 1, 1998, and Second Supplemental
Indenture, dated as of February 25, 1998, each among Yorkshire Power
Finance Limited, Yorkshire Power Group Limited, The Bank of New York,
Trustee, and Banque Internationale du Luxembourg S.A., Paying Agent,
relating to the $300,000,000 in principal amount of the 6.496% Notes
due 2008.
10.78 Indenture, dated as of February 1, 2000, among Yorkshire Power
Finance 2 Limited, Yorkshire Power Group Limited and The Bank of New
York, Trustee.
10.79 First Supplemental Indenture, dated as of February 16, 2000, among
Yorkshire Power Finance 2 Limited, Yorkshire Power Group Limited and
The Bank of New York, Trustee, relating to the (pound)155,000,000 in
principal amount of the Reset Senior Notes due 2020.
10.80 Trust Agreement, dated as of February 1, 2000, among Yorkshire Power
Group Limited, YPG Holdings LLC and The Bank of New York, Trustee,
relating to the $250,000,000 in principal amount of the 8.25%
Pass-Through Asset Trust Securities due 2005.
10.81 First Supplemental Trust Deed, dated as of September 27, 2001, among
Northern Electric Finance plc, Northern Electric plc, Northern
Electric Distribution Limited and The Law Debenture Trust Corporation
p.l.c., Trustee, relating to the (pound)100,000,000 in principal
amount of the 8.625% Guaranteed Bonds due 2005 and to the
(pound)100,000,000 in principal amount of the 8.875% Guaranteed Bonds
due 2020.
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10.82 Stock Redemption Agreement, dated as of January 8, 2004, between
David L. Sokol and MidAmerican Energy Holdings Company.
10.83 Trust Deed, dated as of January 17, 1995, between Yorkshire
Electricity Group plc and Bankers Trustee Company Limited, Trustee,
relating to the (pound)200,000,000 in principal amount of the 9 1/4%
Bonds due 2020.
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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