EXHIBIT 99.2
MIDAMERICAN ENERGY HOLDINGS COMPANY
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996.... 2
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996.... 3
Consolidated Balance Sheets
As of December 31, 1998 and 1997........................ 4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996.... 5
Consolidated Statements of Capitalization
As of December 31, 1998 and 1997........................ 6
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 1998, 1997 and 1996.... 7
Notes to Consolidated Financial Statements................ 8
Report of Independent Accountants......................... 36
-1-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................................... $ 1,169,810 $ 1,126,300 $ 1,099,008
Regulated gas ......................................... 429,870 536,306 536,753
Nonregulated .......................................... 340,470 306,931 275,443
----------- ----------- -----------
1,940,150 1,969,537 1,911,204
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ................... 225,736 235,760 234,317
Cost of gas sold .................................... 243,451 346,016 345,014
Other operating expenses ............................ 460,937 429,794 350,174
Maintenance ......................................... 107,891 98,090 88,621
Depreciation and amortization ....................... 182,211 170,540 164,592
Property and other taxes ............................ 99,163 101,317 92,630
----------- ----------- -----------
1,319,389 1,381,517 1,275,348
----------- ----------- -----------
Nonregulated:
Cost of sales ....................................... 236,761 276,711 249,453
Other ............................................... 103,784 34,583 37,004
----------- ----------- -----------
340,545 311,294 286,457
----------- ----------- -----------
Total operating expenses .......................... 1,659,934 1,692,811 1,561,805
----------- ----------- -----------
OPERATING INCOME ...................................... 280,216 276,726 349,399
----------- ----------- -----------
NON-OPERATING INCOME
Interest income ....................................... 9,857 5,318 4,012
Dividend income ....................................... 10,251 13,792 16,985
Realized gains and losses on securities, net .......... 11,204 7,798 1,895
Other, net ............................................ 4,877 15,891 (9,781)
----------- ----------- -----------
36,189 42,799 13,111
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............................ 80,908 89,898 102,909
Other interest expense ................................ 14,611 10,034 10,941
Preferred dividends of subsidiaries ................... 12,932 14,468 10,689
Allowance for borrowed funds .......................... (3,377) (2,597) (4,212)
----------- ----------- -----------
105,074 111,803 120,327
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . 211,331 207,722 242,183
INCOME TAXES .......................................... 80,013 68,390 98,422
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ..................... 131,318 139,332 143,761
----------- ----------- -----------
DISCONTINUED OPERATIONS
Income (Loss) from operations (net of income taxes) ... - (118) 2,117
Loss on disposal (net of income taxes) ................ - (4,110) (14,832)
----------- ----------- -----------
- (4,228) (12,715)
----------- ----------- -----------
NET INCOME ............................................ $ 131,318 $ 135,104 $ 131,046
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING ..................... 94,038 98,058 100,752
EARNINGS PER COMMON SHARE - BASIC:
Continuing operations.................................. $ 1.40 $ 1.42 $ 1.43
Discontinued operations ............................... - (0.04) (0.13)
----------- ----------- -----------
Earnings per average common share...................... $ 1.40 $ 1.38 $ 1.30
=========== =========== ===========
EARNINGS PER COMMON SHARE - DILUTED:
Continuing operations.................................. $ 1.39 $ 1.42 $ 1.43
Discontinued operations ............................... - (0.04) (0.13)
----------- ----------- -----------
Earnings per average common share...................... $ 1.39 $ 1.38 $ 1.30
=========== =========== ===========
DIVIDENDS DECLARED PER SHARE........................... $ 1.20 $ 1.20 $ 1.20
=========== =========== ===========
The accompanying notes are an integral part of these statements.
-2-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- -------- ---------
NET INCOME ............................................ $ 131,318 $135,104 $ 131,046
--------- -------- ---------
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period ....... (14,743) 223,927 1,501
Less reclassification adjustment for realized gains
(losses) reflected in net income during period .... 11,204 7,787 (4,612)
--------- -------- ---------
(25,947) 216,140 6,113
Income tax expense (benefit) .......................... (9,002) 75,567 2,468
--------- -------- ---------
Other comprehensive income (loss), net ............ (16,945) 140,573 3,645
--------- -------- ---------
COMPREHENSIVE INCOME .................................. $ 114,373 $275,677 $ 134,691
========= ======== =========
The accompanying notes are an integral part of these statements.
-3-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31
------------------------
1998 1997
---------- ----------
ASSETS
UTILITY PLANT
Electric ........................................................ $4,255,058 $4,084,920
Gas ............................................................. 786,169 756,874
---------- ----------
5,041,227 4,841,794
Less accumulated depreciation and amortization .................. 2,426,564 2,275,099
---------- ----------
2,614,663 2,566,695
Construction work in progress ................................... 26,369 55,418
---------- ----------
2,641,032 2,622,113
---------- ----------
POWER PURCHASE CONTRACT ......................................... 150,401 173,107
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ....................................... 9,221 10,468
Receivables, less reserves of $5,480 and $347, respectively ..... 211,241 207,471
Inventories ..................................................... 94,771 86,091
Other ........................................................... 46,360 18,452
---------- ----------
361,593 322,482
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ...................... 777,543 799,524
---------- ----------
OTHER ASSETS .................................................... 403,364 360,865
---------- ----------
TOTAL ASSETS .................................................... $4,333,933 $4,278,091
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity ..................................... $1,200,950 $1,301,286
MidAmerican preferred securities, not subject to
mandatory redemption .......................................... 31,759 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities .............................. 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated debentures ... 100,000 100,000
Long-term debt (excluding current portion) ...................... 975,563 1,034,211
---------- ----------
2,358,272 2,517,260
---------- ----------
CURRENT LIABILITIES
Notes payable ................................................... 364,895 138,054
Current portion of long-term debt ............................... 106,430 144,558
Current portion of power purchase contract ...................... 15,034 14,361
Accounts payable ................................................ 172,779 145,855
Taxes accrued ................................................... 106,732 92,629
Interest accrued ................................................ 16,185 22,355
Other ........................................................... 71,598 43,641
---------- ----------
853,653 601,453
---------- ----------
OTHER LIABILITIES
Power purchase contract ......................................... 68,093 83,143
Deferred income taxes ........................................... 733,331 756,920
Investment tax credit ........................................... 77,421 83,127
Other ........................................................... 243,163 236,188
---------- ----------
1,122,008 1,159,378
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ............................ $4,333,933 $4,278,091
========== ==========
The accompanying notes are an integral part of these statements.
-4-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................... $ 131,318 $ 135,104 $ 131,046
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .............................. 203,464 197,454 190,511
Net decrease in deferred income taxes and
investment tax credit, net ............................... (24,917) (71,191) (7,894)
Amortization of other assets ............................... 41,518 33,761 20,541
Loss from discontinued operations .......................... - 4,228 12,715
Gain on sale of securities, assets and other investments ... (24,433) (9,996) (10,132)
Other-than-temporary decline in value of investments ....... 273 3,795 15,566
Impact of changes in working capital, net of effects
from discontinued operations ............................. 32,456 32,973 (53,752)
Other ...................................................... (1,872) (3,883) 22,786
--------- --------- ---------
Net cash provided ........................................ 357,807 322,245 321,387
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................ (193,354) (166,932) (154,198)
Quad Cities Nuclear Power Station decommissioning trust fund . (11,409) (9,819) (8,607)
Deferred energy efficiency expenditures ...................... - (12,258) (20,390)
Nonregulated capital expenditures ............................ (48,213) (14,066) (55,788)
Purchase of real estate brokerage companies................... (107,571) - -
Purchase of securities ....................................... (143,324) (159,770) (198,947)
Proceeds from sale of securities ............................. 217,459 180,890 243,290
Proceeds from sale of assets and other investments ........... 38,165 57,433 33,285
Investment in discontinued operations ........................ - 181,321 (5,984)
Other investing activities, net .............................. (3,618) (1,360) 8,308
--------- --------- ---------
Net cash provided (used) ................................... (251,865) 55,439 (159,031)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ........................................ (113,144) (117,605) (120,770)
Issuance of long-term debt, net of issuance cost ............. 193,414 - 99,500
Retirement of long-term debt, including reacquisition cost ... (302,531) (122,300) (136,616)
Reacquisition of preferred shares ............................ (4) (6) (58,176)
Reacquisition of common shares ............................... (101,765) (96,618) -
Issuance of preferred shares, net of issuance cost ........... - - 96,850
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility ........................ - (174,500) 44,500
Cash inflows (outflows) of accounts receivable securitization. (10,000) 70,000 -
Net increase (decrease) in notes payable ..................... 226,841 (23,936) (22,810)
--------- --------- ---------
Net cash used .............................................. (107,189) (464,965) (97,522)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... (1,247) (87,281) 64,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 10,468 97,749 32,915
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 9,221 $ 10,468 $ 97,749
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized .................... $ 92,080 $ 96,805 $ 107,179
========= ========= =========
Income taxes paid ............................................ $ 100,958 $ 130,521 $ 85,894
========= ========= =========
The accompanying notes are an integral part of these statements.
-5-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
----------------------------------------
1998 1997
----------------- ------------------
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
91,201,582 and 95,300,882 shares outstanding, respectively....... $ 724,778 $ 753,873
Retained earnings.................................................... 355,000 409,296
Accumulated other comprehensive income, net.......................... 121,172 138,117
---------- -----------
1,200,950 50.9% 1,301,286 51.7%
---------- ----- ----------- -----
MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,451 and 49,481 shares, respectively............... 4,945 4,948
$3.75 Series, 38,305 and 38,310 shares, respectively............... 3,831 3,831
$3.90 Series, 32,630 shares ....................................... 3,263 3,263
$4.20 Series, 47,362 and 47,369 shares, respectively............... 4,736 4,737
$4.35 Series, 49,945............................................... 4,994 4,994
$4.40 Series, 50,000 shares........................................ 5,000 5,000
$4.80 Series, 49,898 shares........................................ 4,990 4,990
-------- ----------
31,759 1.4% 31,763 1.2%
-------- ---- ---------- -----
Cumulative shares outstanding; subject to mandatory redemption:
$5.25 Series, 100,000 shares....................................... 10,000 10,000
$7.80 Series, 400,000 shares....................................... 40,000 40,000
--------- ----------
50,000 2.1% 50,000 2.0%
--------- ----- ---------- -----
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% Series, 4,000,000 shares..................................... 100,000 4.2% 100,000 4.0%
--------- ---- ----------- ------
LONG-TERM DEBT
MidAmerican mortgage bonds:
7.875% Series, due 1999............................................ - 60,000
6% Series, due 2000................................................ 35,000 35,000
6.75% Series, due 2000............................................. 75,000 75,000
7.125% Series, due 2003............................................ 100,000 100,000
7.70% Series, due 2004............................................. 55,630 55,630
7% Series, due 2005................................................ 90,500 90,500
7.375% Series, due 2008............................................ 75,000 75,000
8% Series, due 2022................................................ - 50,000
7.45% Series, due 2023............................................. 6,940 6,940
8.125% Series, due 2023............................................ - 100,000
6.95% Series, due 2025............................................. 12,500 12,500
MidAmerican pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003............... 7,704 8,064
5.95% Series, due 2023 (secured by general mortgage bonds)......... 29,030 29,030
The accompanying notes are an integral part of these statements.
-6-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
-------------------------------------------
1998 1997
----------------- ------------------
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017, 3.7%........................................ $ 37,600 $ 37,600
Due 2023 (secured by general mortgage bonds, 3.7%)............. 28,295 28,295
Due 2023, 3.7%................................................. 6,850 6,850
Due 2024, 3.7%................................................. 34,900 34,900
Due 2025, 3.7%................................................. 12,750 12,750
MidAmerican notes:
8.75% Series, due 2002............................................ 240 240
6.5% Series, due 2001............................................. 100,000 100,000
6.375% Series, due 2006........................................... 160,000 -
6.4% Series, due 2003 through 2007................................ 2,000 2,000
Obligation under capital lease........................................ 1,539 2,104
Unamortized debt premium and discount, net............................ (1,925) (3,192)
--------- ---------
Total utility.................................................. 869,553 919,211
--------- ---------
Nonregulated subsidiaries notes:
7.76% Series, due 1999............................................ - 45,000
8.52% Series, due 2000 through 2002............................... 70,000 70,000
7.0% Series, due 2000 through 2003................................ 678 -
8.5% Series, due 2000 through 2003................................ 332 -
7.12% Series, due 2004 through 2010............................... 35,000 -
--------- ---------
Total nonregulated subsidiaries................................ 106,010 115,000
--------- ---------
975,563 41.4% 1,034,211 41.1%
---------- ------ ---------- ------
TOTAL CAPITALIZATION.................................................. $2,358,272 100.0% $2,517,260 100.0%
========== ====== ========== ======
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------
BEGINNING OF YEAR.................................................... $ 409,296 $ 440,971 $ 430,589
--------- --------- ---------
NET INCOME........................................................... 131,318 135,104 131,046
--------- --------- ---------
DEDUCT (ADD):
Loss on repurchase of common shares.................................. 72,470 49,174 -
Dividends declared on common shares of $1.20......................... 113,144 117,605 120,770
Other................................................................ - - (106)
--------- --------- ---------
185,614 166,779 120,664
--------- --------- ---------
END OF YEAR.......................................................... $ 355,000 $ 409,296 $ 440,971
========= ========= =========
The accompanying notes are an integral part of these statements.
-7-
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) COMPANY STRUCTURE:
MidAmerican Energy Holdings Company (Company or Holdings) is a holding
company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital
Company (MidAmerican Capital), Midwest Capital Group, Inc. (Midwest Capital) and
MidAmerican Realty Services Company (MidAmerican Realty). Prior to December 1,
1996, MidAmerican held the capital stock of MidAmerican Capital and Midwest
Capital. Effective December 1, 1996, each share of MidAmerican common stock was
exchanged for one share of Holdings common stock. As part of the transaction,
MidAmerican distributed the capital stock of MidAmerican Capital and Midwest
Capital to Holdings.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and
its subsidiaries. For 1998, certain nonregulated operations of MidAmerican,
which were previously included in Other, Net in the income statements, are
presented in nonregulated operations lines. Prior year amounts have been
reclassified accordingly. All significant intercompany transactions have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(C) REGULATION:
MidAmerican's utility operations are subject to the regulation of the Iowa
Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission
(FERC). MidAmerican's accounting policies and the accompanying Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican's electric and gas utility
operations currently meet the criteria of SFAS 71, but its applicability is
periodically reexamined. On December 16, 1997, MidAmerican's generation
operations serving Illinois were no longer subject to the provisions of SFAS 71
due to passage of industry restructuring legislation in Illinois. Thus, in 1997,
MidAmerican was required to write off the regulatory assets and liabilities from
its balance sheet related to its Illinois generation operations. The net amount
of such write-offs was not material. If other portions of its utility operations
no longer meet the criteria of SFAS 71, MidAmerican could be required to write
off the related regulatory assets and liabilities from its balance sheet and
thus, a material adjustment to earnings in that period could result. The
following regulatory assets, primarily included in Other Assets in the
Consolidated Balance Sheets, represent probable future revenue to MidAmerican
because these costs are expected to be recovered in charges to utility customers
(in thousands):
-8-
1998 1997
-------- --------
Deferred income taxes................... $148,036 $143,851
Energy efficiency costs................. 74,509 111,471
Debt refinancing costs.................. 40,233 34,923
FERC Order 636 transition costs......... - 9,279
Environmental costs..................... 23,427 20,417
Enrichment facilities decommissioning... 8,659 8,781
Unamortized costs of retired plant ..... 3,537 5,771
Other................................... 7,088 4,796
-------- --------
Total................................. $305,489 $339,289
======== ========
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
records unbilled revenues, and related energy costs, representing the estimated
amount customers will be billed for services rendered between the meter-reading
dates in a particular month and the end of such month. Accrued unbilled revenues
were $79.8 million and $80.2 million at December 31, 1998 and 1997,
respectively, and are included in Receivables on the Consolidated Balance
Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or
approximately 12% of total retail electric sales, and the majority of its total
retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican to adjust the amounts charged for electric and gas service as the
costs of gas, fuel for generation or purchased power change. The costs recovered
in revenues through use of the adjustment clauses are charged to expense in the
same period.
Commission income from real estate brokerage transactions and related
amounts due to agents are recognized upon the signing of the sales contract by
all parties. It is the Company's experience that not all sales contracts are
consummated. At December 31, 1998, the Company had recorded fees and other
receivables of $13.5 million, net of an allowance for contract cancellations of
$3.0 million, to reflect open contracts which are unlikely to close.
Fees related to loan originations are recognized when the related loan is
delivered to the third party purchasers. At December 31, 1998, the Company had
$13.4 million in fees and other receivables related to undelivered loans for
which purchase commitments had been received.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican's provisions for depreciation and amortization for its utility
operations are based on straight-line composite rates. The average depreciation
and amortization rates for the years ended December 31 were as follows:
1998 1997 1996
---- ---- ----
Electric.................... 3.9% 3.8% 3.8%
Gas......................... 3.4% 3.4% 3.7%
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to plant
accounts. The cost of depreciable units of utility plant retired or disposed of
in the normal course of business is eliminated from the utility plant accounts
and such cost, plus net removal cost, is charged to accumulated depreciation.
-9-
An allowance for the estimated annual decommissioning costs of the Quad
Cities Nuclear Power Station (Quad Cities Station) equal to the level of funding
is included in depreciation expense. See Note 4(e) for additional information
regarding decommissioning costs.
(F) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments, managed primarily through the Company's nonregulated
subsidiaries, and nonregulated property, net include the following amounts as of
December 31 (in thousands):
1998 1997
-------- --------
Marketable securities................. $393,584 $467,207
Equipment leases...................... 72,068 73,928
Nuclear decommissioning trust fund.... 116,973 93,251
Energy projects....................... 17,891 21,180
Special-purpose funds................. 9,069 10,057
Real estate........................... 57,867 42,424
Corporate owned life insurance........ 43,945 33,471
Coal transportation property.......... 12,538 14,516
Communications........................ 19,750 10,000
Security ............................. 9,664 8,551
Other................................. 24,194 24,939
-------- --------
Total............................... $777,543 $799,524
======== ========
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value with net
unrealized gains and losses reported as a net of tax amount in Common
Shareholders' Equity until realized. Investments in marketable securities that
are classified as held-to-maturity are reported at amortized cost. An
other-than-temporary decline in the value of a marketable security is recognized
through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities Station units are classified as available-for-sale and are reported at
fair value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The Company considers all cash and highly liquid debt instruments purchased
with a remaining maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
-10-
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
1998 1997 1996
-------- -------- ---------
Receivables.................. $ 6,230 $ 34,544 $(84,802)
Inventories.................. (8,680) 4,773 (5,629)
Other current assets ........ (27,908) (7,421) 6,732
Accounts payable............. 26,924 (23,950) 47,751
Taxes accrued................ 14,103 10,375 356
Interest accrued............. (6,170) (6,158) (2,122)
Other current liabilities.... 27,957 20,810 (16,038)
-------- -------- --------
Total...................... $ 32,456 $ 32,973 $(53,752)
======== ======== ========
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District (NPPD), expiring in 2004, MidAmerican purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican's fixed obligation to pay 50% of
NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like amount
representing MidAmerican's right to purchase power is shown as an asset.
Cooper capital improvement costs prior to 1997, including carrying costs,
were deferred in accordance with then applicable rate regulation and are being
amortized and recovered in rates over either a five-year period or the term of
the NPPD contract. Beginning July 11, 1997, the Iowa portion of capital
improvement costs is recovered currently from customers and is expensed as
incurred. MidAmerican began charging the remaining Cooper capital improvement
costs to expense as incurred in January 1997.
The fuel cost portion of the power purchase contract is included in Cost of
Fuel, Energy and Capacity on the Consolidated Statements of Income. All other
costs MidAmerican incurs in relation to its long-term power purchase contract
with NPPD are included in Other Operating Expenses on the Consolidated
Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The Company is exposed to market value risk from changes in interest rates
for certain fixed rate sinking fund preferred and perpetual preferred stocks
(fixed rate preferred stocks) included in Investments on the Consolidated
Balance Sheets. The Company reviews the interest rate sensitivity of these
securities and purchases put options on U.S. Treasury securities (put options)
to reduce interest rate risk on preferred stocks. The Company does not purchase
or sell put options for speculative purposes. The Company's intent is to
substantially offset any change in market value of the fixed rate preferred
stocks due to a change in interest rates with a change in market value of the
put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a part of Accumulated
Other Comprehensive Income, Net in shareholders' equity. Unrealized gains and
losses on the associated put options are included in the determination of the
fair value of the preferred stocks. The fair value of the put options, including
unrealized gains and losses, included in the determination of the fair value of
the preferred securities as of December 31, 1998 and 1997, was $2.9 million and
$1.9 million, respectively. Realized gains and losses on the put options are
included in Realized Gains and Losses on Securities, Net in the Consolidated
-11-
Statements of Income in the period the underlying hedged fixed rate preferred
stocks are sold. At December 31, 1998, the Company held put options with a
notional value of $89.1 million.
2) Gas Futures Contracts and Swaps:
The Company uses gas futures contracts and swap contracts to reduce the
volatility in the price of natural gas purchased to meet the needs of its
customers. Investments in natural gas futures contracts, which total $0.3
million and $1.6 million as of December 31, 1998 and 1997, respectively, are
included in Receivables on the Consolidated Balance Sheets. Gains and losses on
gas futures contracts that qualify for hedge accounting are deferred and
reflected as adjustments to the carrying value of the hedged item or included in
Other Assets on the Consolidated Balance Sheets until the underlying physical
transaction is recorded if the instrument is used to hedge an anticipated future
transaction. The net gain or loss on gas futures contracts is included in the
determination of income in the same period as the expense for the physical
delivery of the natural gas. Realized gains and losses on gas futures contracts
and the net amounts exchanged or accrued under the natural gas swap contracts
are included in Cost of Gas Sold or Nonregulated Costs of Sales consistent with
the expense for the physical commodity. Deferred net gains (losses) related to
the Company's gas futures contracts are $(1.9) million and $(0.4) million as of
December 31, 1998 and 1997, respectively.
The Company periodically evaluates the effectiveness of its natural gas
hedging programs. If a high degree of correlation between prices for the hedging
instruments and prices for the physical delivery is not achieved, the contracts
are recorded at fair value and the gains or losses are included in the
determination of income. At December 31, 1998, the Company held the following
hedging instruments:
Weighted Average
Notional Volume Market Value
(MMBtu) (Per MMBtu)
--------------- ----------------
Natural Gas Futures (Long)............. 6,970,000 $1.857
Natural Gas Futures (Short)............ 7,320,000 $1.854
Natural Gas Swaps (Variable to Fixed).. 16,322,181
Weighted average variable price... $1.922
Weighted average fixed price...... $2.098
3) Interest Rate Swap:
The Company has entered into a 3-year interest rate swap agreement to
reduce the impact of changes in interest rates on a $25 million variable rate
(LIBOR) revolving credit facility. The swap agreement has a notional value of
$12.5 million and effectively changes the interest rate on that portion of the
credit facility to a fixed 6.3%.
4) New Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
for hedging activities. SFAS 133 is effective for the Company on January 1,
2000. SFAS 133 requires an entity to recognize all of its derivatives as either
assets or liabilities in its statement of financial position and measure those
instruments at fair value. If certain conditions are met, such instruments may
be designated as hedges. Changes in the value of hedge instruments would not
impact earnings, except to the extent that the instrument is not perfectly
effective as a hedge. An entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use in
assessing the effectiveness of the derivative. The Company is in the process of
evaluating the impact of this accounting pronouncement.
-12-
(J) GOODWILL:
The Company's Consolidated Balance Sheets include goodwill related to
various acquisitions. The following schedule summarizes the goodwill, net of
accumulated amortization, remaining on the Consolidated Balance Sheets as of
December 31 (in thousands):
1998 1997
-------- -------
Natural gas utility operations...... $ 13,925 $14,723
Real estate brokerage companies..... 74,111 -
Natural gas marketing companies..... 3,736 4,107
Security companies.................. 8,816 7,763
-------- -------
$100,588 $26,593
======== =======
Goodwill is amortized using the straight-line method. Amortization expense
included in the Company's Consolidated Statements of Income totaled $2.5
million, $1.4 million and $1.1 million for 1998, 1997 and 1996, respectively.
The weighted average remaining life of goodwill as of December 31, 1998, is 34
years.
(K) DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES:
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income refers,
in general, to changes in the Company's equity, except those resulting from
transactions with shareholders. "Unrealized holding gains (losses)" reflects the
overall increase (decrease) in the market value of marketable securities held by
the Company as available-for-sale. The "reclassification adjustment" removes any
gains (losses) that have been realized from sales of those securities and
reflected in the Company's Net Income. The following table shows the income tax
expense or benefit related to each component (in thousands):
1998 1997 1996
--------- --------- --------
Unrealized holding gains (losses)
during period
Before income taxes ..................... $ (14,743) $ 223,927 $ 1,501
Income tax (expense)/benefit ............ 5,081 (78,289) (525)
--------- --------- -------
(9,662) 145,638 976
--------- --------- -------
Less reclassification adjustment
for realized gains (losses)
reflected in net income during period
Before income taxes ..................... 11,204 7,787 (4,612)
Income tax (expense)/benefit ............ (3,921) (2,722) 1,943
--------- --------- -------
7,283 5,065 (2,669)
--------- --------- -------
Other Comprehensive Income ................ $ (16,945) $ 140,573 $ 3,645
========= ========= =======
(2) LONG-TERM DEBT:
The Company's sinking fund requirements and maturities of long-term debt
for 1999 through 2003 are $106 million, $134 million, $125 million, $26 million
and $106 million, respectively.
MidAmerican's Variable Rate Pollution Control Revenue Obligations bear
interest at rates that are periodically established through remarketing of the
bonds in the short-term tax-exempt market. MidAmerican, at its option, may
change the mode of interest calculation for these bonds by selecting from among
several alternative floating or fixed rate modes. The interest rate shown in the
Consolidated Statements of Capitalization is the weighted average interest
-13-
rate as of December 31, 1998 and 1997. MidAmerican maintains dedicated revolving
credit facility agreements or renewable lines of credit to provide liquidity for
holders of these issues.
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of gross utility plant, is pledged to
secure mortgage bonds.
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
had undivided interests at December 31, 1998, in jointly owned generating plants
as shown in the table below.
The dollar amounts below represent MidAmerican's share in each jointly
owned unit. Each participant has provided financing for its share of each unit.
Operating Expenses on the Consolidated Statements of Income include
MidAmerican's share of the expenses of these units (dollars in millions).
Nuclear Coal fired
------- -----------------------------------------
Quad Council
Cities Neal Bluffs Neal Ottumwa Louisa
Units Unit Unit Unit Unit Unit
No.1&2 No.3 No.3 No.4 No.1 No.1
------- ----- ------- ------ ------- ------
In service date 1972 1975 1978 1979 1981 1983
Utility plant in service $ 242 $127 $298 $161 $210 $530
Accumulated depreciation $ 98 $ 82 $175 $ 92 $109 $252
Unit capacity-MW 1,529 515 675 624 716 700
Percent ownership 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1999 are estimated to be $194
million, including $9 million for Quad Cities Station nuclear fuel. Nonregulated
capital expenditures depend upon the availability of investment opportunities
and other factors. During 1999, such expenditures are estimated to be
approximately $13 million.
(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain 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 is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). The purpose of these evaluations is to determine whether waste materials
are present, whether such materials constitute an environmental or health risk,
and whether MidAmerican has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at eighteen sites and has conducted
interim removal actions at five of the eighteen sites. In addition, MidAmerican
has completed investigations and removals at four sites. MidAmerican is
continuing to evaluate several of the sites to determine the future liability,
if any, for conducting site investigations or other site activity.
-14-
MidAmerican's estimate of probable remediation costs for the sites
discussed above as of December 31, 1998, was $24 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The ICC has
approved the use of a tariff rider which permits recovery of the actual costs of
litigation, investigation and remediation relating to former MGP sites.
MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP
costs. MidAmerican intends to pursue recovery of the remediation costs from
other PRPs and its insurance carriers.
The estimate of probable remediation costs is established on a site
specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican has potential legal liability
for the site and whether information exists to indicate that contaminated wastes
remain at the site. If so, the costs of performing a preliminary investigation
and the costs of removing known contaminated soil are accrued. As the
investigation is performed and if it is determined remedial action is required,
the best estimate of remediation costs is accrued. If necessary, the estimate is
revised when a consent order is issued. The estimated recorded liabilities for
these properties include incremental direct costs of the remediation effort,
costs for future monitoring at sites and costs of compensation to employees for
time expected to be spent directly on the remediation effort. The estimated
recorded liabilities for these properties are based upon preliminary data. Thus,
actual costs could vary significantly from the estimates. The estimate could
change materially based on facts and circumstances derived from site
investigations, changes in required remedial action and changes in technology
relating to remedial alternatives. In addition, insurance recoveries for some or
all of the costs may be possible, but the liabilities recorded have not been
reduced by any estimate of such recoveries.
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's financial position or results of operations.
(C) CLEAN AIR ACT:
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making a significant
contribution to nonattainment of the ozone standard in downwind states in the
eastern half of the United States. In September 1998, the EPA issued its final
rules in this proceeding. Iowa is not subject to the emissions reduction
requirements in the final rules, and, as such, MidAmerican's facilities are not
currently subject to additional emissions reductions as a result of this
initiative.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) for ozone and a new standard for fine particulate
matter. Based on data to be obtained from monitors located throughout each
state, the EPA will determine which states have areas that do not meet the air
quality standards (i.e., areas that are classified as nonattainment). If a state
has area(s) classified as nonattainment area(s), the state is required to submit
a State Implementation Plan specifying how it will reach attainment of the
standards through emission reductions or other means. In August 1998, the Iowa
Environmental Protection Commission adopted by reference the NAAQS for ozone and
fine particulate matter.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
-15-
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican's share of
nuclear fuel cost (including nuclear fuel disposal) based on energy delivered.
The debt service portion is approximately $1.5 million per month for 1999 and is
not contingent upon the plant being in service. In addition, MidAmerican pays
one-half of NPPD's decommissioning funding related to Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to NPPD
were $14.4 million, $13.8 million and $14.5 million and the net interest
component was $2.9 million, $3.8 million and $3.6 million each for the years
1998, 1997 and 1996, respectively.
MidAmerican's payments for the debt principal portion of the power purchase
contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $15.0 million, $15.8 million, $16.6 million, $17.4
million and $18.3 million for 1999 through 2003, respectively.
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican's share of expected decommissioning costs for Cooper and Quad Cities
Station, in 1998 dollars, is $256 million and $242 million, respectively. In
Illinois, nuclear decommissioning costs are included in customer billings
through a mechanism that permits annual adjustments. Such costs are reflected as
base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
assumes that decommissioning costs will escalate at an annual rate of 4.0%.
Although Cooper's operating license expires in 2014, the funding plan assumes
decommissioning will start in 2004, the anticipated plant shutdown date.
As of December 31, 1998, MidAmerican's share of funds set aside by NPPD in
internal and external accounts for decommissioning was $97.5 million. In
addition, the funding plan also assumes various funds and reserves currently
held to satisfy NPPD bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually. NPPD
is recognizing decommissioning costs over the life of the power sales contract.
MidAmerican makes payments to NPPD related to decommissioning Cooper. These
payments are included in MidAmerican's power purchase costs. The Cooper
decommissioning component of MidAmerican's payments to NPPD was $7.9 million,
$11.3 million and $9.9 million for the years 1998, 1997, and 1996, respectively,
and is included in Other Operating Expenses in the Consolidated Statements of
Income. Earnings from the internal and external trust funds, which are
recognized by NPPD as the owner of the plant, are tax exempt and serve to reduce
future funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities Station. The total accrued balance as of
December 31, 1998, was $117.0 million and is included in Other Liabilities and a
like amount is reflected in Investments and represents the fair value of the
assets held in the trusts.
MidAmerican's provision for depreciation included costs for Quad Cities
Station nuclear decommissioning of $11.4 million, $9.8 million and $8.6 million
for 1998, 1997 and 1996, respectively. The provision charged to expense is equal
to the funding that is being collected in rates. The decommissioning funding
component of MidAmerican's Illinois and Iowa tariffs assumes decommissioning
costs, related to the Quad Cities Station, will escalate at an annual rate of
4.9% and the assumed annual return on funds in the trust is 6.9%. Earnings, net
of investment fees, on the assets in the trust fund were $1.7 million, $4.5
million and $3.2 million for 1998, 1997 and 1996, respectively. See Note (14)
for information regarding unrealized gains and losses.
-16-
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station and Cooper through a
combination of insurance purchased by NPPD (the owner and operator of Cooper)
and Commonwealth Edison (ComEd, the joint owner and operator of Quad Cities
Station), insurance purchased directly by MidAmerican, and the mandatory
industry-wide loss funding mechanism afforded under the Price-Anderson
Amendments Act of 1988. The general types of coverage are: nuclear liability,
property coverage and nuclear worker liability.
NPPD and ComEd each purchase nuclear liability insurance for Cooper and
Quad Cities Station, respectively, in the maximum available amount of $200
million. In accordance with the Price-Anderson Amendments Act of 1988, excess
liability protection above that amount is provided by a mandatory industry-wide
program under which the licensees of nuclear generating facilities could be
assessed for liability incurred due to a serious nuclear incident at any
commercial nuclear reactor in the United States. Currently, MidAmerican's
aggregate maximum potential share of such an assessment for Cooper and Quad
Cities Station combined is $88.1 million per incident, payable in installments
not to exceed $10 million annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities Station, ComEd purchases primary and
excess property insurance protection for the combined interests in Quad Cities,
with coverage limits totaling $2.1 billion. For Cooper, MidAmerican and NPPD
separately purchase primary and excess property insurance protection for their
respective obligations, with coverage limits of $1.375 billion each. This
structure provides that both MidAmerican and NPPD are covered for their
respective 50% obligation in the event of a loss totaling up to $2.75 billion.
MidAmerican also directly purchases extra expense/business interruption coverage
for its share of replacement power and/or other extra expenses in the event of a
covered accidental outage at Cooper or Quad Cities Station. The coverages
purchased directly by MidAmerican, and the property coverages purchased by
ComEd, which includes the interests of MidAmerican, are underwritten by an
industry mutual insurance company and contain provisions for retrospective
premium assessments should two or more full policy-limit losses occur in one
policy year. Currently, the maximum retrospective amounts that could be assessed
against MidAmerican from industry mutual policies for its obligations associated
with Cooper and Quad Cities Station combined, total $11.2 million.
The master nuclear worker liability coverage, which is purchased by NPPD
and ComEd for Cooper and Quad Cities Station, respectively, is an industry-wide
guaranteed-cost policy with an aggregate limit of $200 million for the nuclear
industry as a whole, which is in effect to cover tort claims of workers in
nuclear-related industries as a result of radiation exposure.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican has entered into supply and related transportation contracts
for its fossil fueled generating stations. The contracts, with expiration dates
ranging from 1999 to 2003, require minimum payments of $110.2 million, $75.8
million, $28.0 million, $8.1 million and $2.6 million for the years 1999 through
2003, respectively. The Company expects to supplement these coal contracts with
spot market purchases to fulfill its future fossil fuel needs.
MidAmerican has entered into various natural gas supply and transportation
contracts for its utility operations. The minimum commitments under these
contracts are $57.4 million, $40.1 million, $33.3 million, $18.7 million and
$13.7 million for the years 1999 through 2003, respectively, and $60.7 million
for the total of the years thereafter.
(H) OPERATING LEASE COMMITMENTS:
The Company has entered into various operating lease agreements covering
facilities, computer and transportation equipment. Rental payments on operating
leases were $32.6 million for 1998, $20.8 million for 1997, and $21.3 million
for 1996. The approximate future minimum annual commitments under all operating
leases are
-17-
$25.2 million, $21.9 million, $14.4 million, $11.5 million and $7.9 million for
the years 1999 through 2003, respectively, and $9.7 million for the total of the
years thereafter. Included in the minimum annual commitments are payments to
related parties totaling $3.2 million, $2.8 million, $1.6 million, $1.3 million
and $1.0 million for the years 1999 through 2003, respectively, and $1.3 million
for the total of the years thereafter.
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
1998 1997 1996
----------------- ------------------ ------------------
Amount Shares Amount Shares Amount Shares
------ ------ ------ ------ ------ ------
Balance, beginning of year..... $753,873 95,301 $801,431 100,752 $801,227 100,752
Changes due to:
Repurchase of common shares.. (29,295) (4,099) (47,444) (5,451) - -
Stock options................ (168) - 210 - 623 -
Capital stock expense ...... 368 - (289) - (419) -
Other...................... - - (35) - -
-------- ------ -------- ------- -------- -------
Balance, end of year........... $724,778 91,202 $753,873 95,301 $801,431 100,752
======== ====== ======== ======= ======== =======
(6) RETIREMENT PLANS:
The Company has primarily noncontributory defined benefit pension plans
covering substantially all employees, except those of MidAmerican Realty.
Benefits under the plans are based on participants' compensation, years of
service and age at retirement. Funding is based upon the actuarially determined
costs of the plans and the requirements of the Internal Revenue Code and the
Employee Retirement Income Security Act. MidAmerican has been allowed to recover
funding contributions in rates.
The Company currently provides certain health care and life insurance
(postretirement) benefits for retired employees. Under the plans, substantially
all of the Company's employees other than those of MidAmerican Realty may become
eligible for these benefits if they reach retirement age while working for the
Company. However, the Company retains the right to change these benefits anytime
at its discretion. MidAmerican expenses postretirement benefit costs on an
accrual basis and includes provisions for such costs in rates.
The Company also maintains noncontributory, nonqualified supplemental
executive retirement plans for active and retired participants.
Net periodic pension, supplemental retirement and postretirement benefit
costs includes the following components for the years ended December 31 (in
thousands):
Pension Cost Postretirement Cost
------------------------------ -----------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------- -------- --------
Service cost.............................. $ 11,284 $ 10,092 $ 12,323 $ 3,558 $ 2,680 $ 2,118
Interest cost............................. 29,941 29,623 31,109 9,344 8,822 8,341
Expected return on plan assets............ (42,578) (37,617) (33,635) (3,651) (2,573) (1,895)
Amortization of net transition obligation. (2,591) (2,591) (2,591) 5,291 5,291 5,291
Amortization of prior service cost........ 1,871 1,871 3,183 650 650 -
Amortization of prior year (gain) loss.... (2,802) (1,797) 806 - (298) -
Regulatory deferral of incurred cost...... - 5,423 568 - 4,888 5,112
-------- ------- -------- ------- ------- -------
Net periodic (benefit) cost............... $ (4,875) $ 5,004 $ 11,763 $15,192 $19,460 $18,967
======== ======= ======== ======= ======= =======
-18-
The pension plan assets are in external trusts and are comprised of
corporate equity securities, United States government debt, corporate bonds, and
insurance contracts. Postretirement benefit plans assets are in external trusts
and are comprised primarily of corporate equity securities, corporate bonds,
money market investment accounts and municipal bonds.
Although the supplemental executive retirement plans had no assets as of
December 31, 1998, the Company had Rabbi trusts which held corporate-owned life
insurance to provide funding for the future cash requirements. Because these
plans are nonqualified, the fair value of these assets is not included in the
following table. The cash value of the life insurance policies was $27.2 million
and $21.5 million at December 31, 1998 and 1997, respectively.
The projected benefit obligation and accumulated benefit obligation for the
supplemental executive plans were $55.1 million and $49.9 million, respectively,
as of December 31, 1998, and $48.6 million and $40.3 million, respectively, as
of December 31, 1997.
The following table presents a reconciliation of the beginning and ending
balances of the benefit obligation, fair value of plan assets and the funded
status of the aforementioned plans to the net amounts recognized in the
Company's Consolidated Balance Sheets as of December 31 (dollars in thousands):
Pension Benefits Postretirement Benefits
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ........ $ 430,043 $ 428,713 $ 127,347 $ 116,505
Service cost ................................... 11,285 10,091 3,558 2,680
Interest cost .................................. 29,941 29,623 9,344 8,822
Participant contributions ...................... 127 125 1,404 1,704
Plan amendments ................................ - (16,211) (21,607) 8,927
Actuarial (gain) loss .......................... 15,793 8,088 9,463 (3,025)
Benefits paid .................................. (30,714) (30,386) (9,321) (8,266)
--------- --------- --------- ---------
Benefit obligation at end of year .......... 456,475 430,043 120,188 127,347
--------- --------- --------- ---------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year . 483,668 427,828 52,174 36,783
Employer contributions ......................... 3,445 6,362 10,095 19,668
Participant contributions ...................... 127 125 1,404 1,704
Actual return on plan assets ................... 67,982 79,739 8,741 2,285
Benefits paid .................................. (30,714) (30,386) (9,321) (8,266)
--------- --------- --------- ---------
Fair value of plan assets at end of year ... 524,508 483,668 63,093 52,174
--------- --------- --------- ---------
Funded status .................................. 68,033 53,625 (57,095) (75,173)
Unrecognized net loss (gain) ................... (101,860) (95,051) (6,873) (11,248)
Unrecognized prior service cost ................ 19,868 21,739 2,555 8,277
Unrecognized net transition obligation (asset) . (13,748) (16,339) 57,543 79,370
--------- --------- --------- ---------
Net amount recognized in Holdings'
Consolidated Balance sheets ............. $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= ========= ========= =========
Amounts recognized in the Consolidated
Balance Sheets of Holdings consist of:
Prepaid benefit cost............................ $ 4,350 $ - $ - $ 1,226
Accrued benefit liability....................... (49,874) (47,591) (3,870) -
Intangible asset................................ 17,817 11,565 - -
--------- --------- --------- ---------
Net amount recognized....................... $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= ========= ========= =========
-19-
Pension and Postretirement
Assumptions
--------------------------
1998 1997
---- ----
Assumptions used were:
Discount rate................................... 6.75% 7.0%
Rate of increase in compensation levels......... 5.0% 5.0%
Weighted average expected long-term
rate of return on assets.................... 9.0% 9.0%
The postretirement plan was amended on January 1, 1999, increasing the
retiree co-payment for prescription drugs. This decrease in benefit obligation
is reflected for December 31, 1998.
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 8.4% in 1999 and that the rate of increase thereafter will decline by 1.0%
annually to an ultimate rate of 5.25% by the year 2003. For covered individuals
age 65 and older, it is assumed health care costs will increase by 6.0% in 1999
and 5.5% in 2000.
If the assumed health care trend rates used to measure the expected cost of
benefits covered by the plans were increased by 1.0%, the total service and
interest cost for 1998 would increase by $2.4 million, and the postretirement
benefit obligation at December 31, 1998, would increase by $18.3 million. If the
assumed health care trend rates were to decrease by 1.0%, the total service and
interest cost for 1998 would decrease by $1.9 million and the postretirement
benefit obligation at December 31, 1998, would decrease by $15.3 million.
The Company sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees, including those of MidAmerican Realty. The
Company's contributions vary depending on the plan, but are based primarily on
each participant's level of contribution and cannot exceed the maximum allowable
for tax purposes. The Company's total contributions were $6.8 million, $4.6
million and $4.4 million for 1998, 1997 and 1996, respectively. The increase in
contributions in 1998 reflects the addition of the MidAmerican Realty plans.
(7) STOCK-BASED COMPENSATION PLANS:
The Company has stock-based compensation arrangements for employees and
directors as described below. The Company accounts for these plans under
Accounting Principles Board Opinion No. 25 and the related interpretations. The
total compensation cost recognized in income for stock-based compensation awards
was $0.3 million, $1.3 million, and $0.6 million for 1998, 1997, and 1996,
respectively. Had the Company used Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), pro-forma net income for
common stock would be $130.9 million, $135.3 million, and $130.9 million, while
earnings per share would be $1.39, $1.38, and $1.30 for the years ended 1998,
1997, and 1996 respectively.
Stock options and performance share awards have been granted pursuant to
the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the Plan). Up to
four million shares are authorized to be granted under the Plan.
-20-
STOCK OPTIONS - Under the Plan, the Board of Directors granted options to
purchase shares of the Company's common stock (the Options) at the fair market
value of the shares on the date of the grant. The options granted in 1998 and
1997 vest over a 3-year period at a rate of 33.3% per year and options granted
in 1995 and 1996 vest over a 4-year period at a rate of 25% per year. Under the
plan, all options expire ten years after the date of grant. Stock option
activity for 1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
-------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- -------- -------- -------- ------- --------
Outstanding, beginning of year. 566,666 $15.12 800,000 $14.66 700,000 $14.50
Granted ...................... 289,000 $25.25 46,666 $17.36 100,000 $15.75
Exercised...................... (70,000) $14.50 (165,000) $14.58 - -
Forfeited...................... (10,000) $17.38 (115,000) $14.93 - -
------- -------- -------
Outstanding, end of year....... 775,666 $18.72 566,666 $15.12 800,000 $14.66
======= ======== =======
Exercisable, end of year....... 369,710 $14.70 315,000 $14.54 175,000 $14.50
======== ======== =======
Weighted average fair value of
options granted during year.. $3.21 $1.66 $1.48
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
1998 1997 1996
-------- -------- --------
Dividend rate per share.. $ 1.20 $ 1.20 $ 1.20
Expected volatility...... 17.52% 16.55% 17.62%
Expected life............ 10 Years 10 Years 10 Years
Risk free interest rate.. 5.27% 6.14% 6.53%
The options outstanding at December 31, 1998, have an exercise price range
of $14.50 to $25.25, with a weighted average contractual life of 8.27 years.
PERFORMANCE SHARES - Under the Plan, participants were granted contingent
shares of Holdings common stock. The shares are contingent upon the attainment
of specified performance measures within a 3-year performance period. During the
performance period, the participant is entitled to receive dividends and vote
the stock. The stock is vested upon achievement of the performance measures. If
the specified criteria is not met within the 3-year performance period, the
shares are forfeited. The following table provides certain information regarding
contingent performance incentive shares granted under the Plan:
1998 1997 1996
-------- -------- --------
Number of performance shares granted....... 77,441 77,105 68,189
Fair value at date of grant (in thousands). $ 1,645 $ 1,335 $ 1,176
Weighted average per share amount.......... $21.2372 $17.3125 $17.2500
End of performance period.................. 6/30/01 6/30/00 6/30/99
-21-
In addition, the Company granted 1,200 restricted shares to each
non-employee director in 1998 and 800 restricted shares to each non-employee
director in 1997 and 1996, respectively. Non-employee directors are restricted
from disposing of granted shares until such time as they cease to be a director
of the company. The following table provides certain information regarding the
directors restricted shares granted under the Plan.
1998 1997 1996
-------- -------- --------
Number of shares granted.................... 14,400 11,200 12,000
Fair value at date of grant (in thousands).. $ 295 $ 194 $ 207
Weighted average price per share amounts.... $20.4658 $17.3125 $17.2500
EMPLOYEE STOCK OWNERSHIP PLAN - Employees of the Company are allowed to
purchase Company stock up to the lesser of 15% of their annual compensation or
$25,000 at a 15% discount. The number of shares acquired by employees under the
plan were 146,299, 140,943, and 150,899 in 1998, 1997 and 1996, respectively.
The Company acquired shares in the open market for this plan. Participants who
purchase shares under the Plan are required to hold purchased shares for 180
days.
SALES ASSOCIATE STOCK PURCHASE PLAN - Eligible sales associates of
MidAmerican Realty are allowed to purchase Company stock at a 15% discount
through deductions from commission payments. Each deduction cannot exceed 15% of
the commission payment, and the annual aggregate amount cannot exceed $21,250.
Associates must hold shares purchased through the plan for 180 days. During
1998, associates purchased 49,794 shares through the plan.
(8) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program
may be obtained from the sale of commercial paper or short-term borrowing from
banks. Information regarding short-term debt follows (dollars in thousands):
1998 1997 1996
-------- -------- --------
Balance at year-end.......................... $364,895 $138,054 $161,990
Weighted average interest rate
on year-end balance........................ 6.1% 5.9% 5.4%
Average daily amount outstanding
during the year............................ $187,466 $117,482 $151,318
Weighted average interest rate on average
daily amount outstanding during the year... 5.6% 5.7% 5.5%
MidAmerican has authority from FERC to issue short-term debt in the form of
commercial paper and bank notes aggregating $400 million. As of December 31,
1998, MidAmerican had a $250 million revolving credit facility and lines of
credit totaling $90 million and Holdings had lines of credit totaling $145
million. MidAmerican's commercial paper borrowings are supported by the
revolving credit facility and the line of credit. As of December 31, 1998,
commercial paper and bank notes totaled $206.2 million and $99.1 million for
MidAmerican and Holdings, respectively.
MidAmerican Capital has two unsecured revolving credit facility agreements
totaling $114 million which mature March 31, 1999. Borrowings under these
agreements may be on a fixed rate, floating rate or competitive bid rate basis.
As of December 31, 1998, $34.6 million was borrowed under these facilities.
MidAmerican Realty has a $25 million revolving credit facility for which the
maximum available credit reduces at least $1.5 million every six months,
terminating in November 2003. MidAmerican Realty had drawn down $25 million as
of December 31, 1998. All subsidiary long-term borrowings outstanding at
December 31, 1998, are without recourse to Holdings.
-22-
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican reduced its
Illinois electric service rates by annual amounts of $13.1 million and $2.4
million, effective November 3, 1996, and June 1, 1997, respectively. MidAmerican
implemented an additional $0.9 million annual rate reduction for its Illinois
residential customers, effective August 1, 1998, in connection with Illinois'
electric utility restructuring law.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other
parties. Four major components of the settlement and their status are as
follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998, respectively, for a total annual decrease of $23.5
million.
2) Prices for industrial customers were reduced by $6 million annually and
prices for commercial customers were reduced by $4 million annually. MidAmerican
was given permission to implement these reductions through a retail access pilot
project, negotiated individual contracts and tariffed rate reductions. On
January 1, 1999, MidAmerican reduced base rates for certain non-contract
commercial customers by approximately $1.5 million annually, subject to IUB
approval. Additionally, MidAmerican will make a one-time refund for reductions
that were not in place by the June 1, 1998, deadline. The remainder of the
commercial and industrial price reductions were achieved through negotiated
contracts and a retail access pilot project.
The negotiated contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose programs,
tax changes, and transition costs. While the contract prices are fixed (except
for the potential adjustment elements), the costs MidAmerican incurs to fulfill
these contracts will vary. On an aggregate basis the annual revenues under
contract are approximately $180 million.
3) The Iowa energy adjustment clause (EAC) was eliminated. Prior to July
11, 1997, MidAmerican collected fuel costs from Iowa customers on a current
basis through the EAC, and thus, fuel costs had little impact on net income.
Since then, base rates for Iowa customers include a factor for recovery of a
representative level of fuel costs. If the actual per-unit fuel cost varies from
that factor, pre-tax earnings are affected. The fuel cost factor was to be
reviewed in February 1999 and adjusted prospectively if the actual 1998 fuel
cost per unit varied by more than 15% above or below the factor included in base
rates. Based on 1998 actual fuel costs, MidAmerican will reduce the fuel cost
recovery factor in 1999 base rates. The estimated annual reduction in revenues
associated with this adjustment is $1.1 million.
4) If MidAmerican's annual Iowa electric jurisdictional return on common
equity exceeds 12%, an equal sharing between customers and shareholders of
earnings above the 12% level begins; if it exceeds 14%, two-thirds of
MidAmerican's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The agreement precludes MidAmerican from filing for
increased rates prior to 2001 unless the return on common equity falls below 9%.
Other parties signing the agreement are prohibited from filing for reduced rates
prior to 2001 unless the return on common equity, after reflecting credits to
customers, exceeds 14%.
Under a restructuring law enacted in 1997, a similar sharing mechanism is
in place for Illinois operations. Two-year average ROE's greater than a two-year
average benchmark will trigger an equal sharing of earnings on the excess. The
benchmark is a calculation of average 30-year Treasury Bond rates plus 5.5% for
1998 and 1999 and 6.5% for 2000 through 2004. The initial calculation, due March
31, 2000, will be based on 1998 and 1999 results.
-23-
(10) DISCONTINUED OPERATIONS:
In the third quarter of 1996, the Company announced the discontinuation of
certain nonstrategic businesses in support of its strategy of becoming the
leading regional energy and complementary services provider. In November of
1996, the Company signed a definitive agreement with KCS Energy, Inc. (KCS) to
sell an oil and gas exploration and development subsidiary and completed the
sale on January 3, 1997. The Company recorded an after-tax loss of $7.1 million
for the disposition in 1996 and an additional $0.9 million in 1997. In October
1997, the Company sold its subsidiary that developed and operated a computerized
information system facilitating the real-time exchange of power in the electric
industry. The Company recorded a $4.0 million estimated after-tax loss on
disposal in the third quarter of 1996 and an additional $3.2 million in
September 1997. In addition, in the third quarter of 1996 the Company received a
final settlement from the sale of a coal mining subsidiary which was reflected
as a discontinued operation by a predecessor company in 1982. The final
settlement, which resulted in an after-tax loss of $3.3 million, included the
reacquisition of preferred equity by the buyer and the settlement of reclamation
reserves.
Proceeds received from the disposition of the oil and gas subsidiary
included $210 million in cash and 870,000 warrants, after a stock split in 1997,
to purchase KCS common stock. The warrants were valued at $6 million. Proceeds
received from the disposition of the subsidiary that operates a computerized
information system for the exchange of power in the electric industry included
an unsecured note receivable for $0.7 million and warrants to purchase twenty
percent of the acquirer which have been valued at zero. Proceeds received from
the disposition of the coal mining subsidiary settlement were $15 million.
Revenues from discontinued activities, as well as the results of operations
and the estimated loss on the disposal of discontinued operations for the years
ended December 31 are as follows (in thousands):
1998 1997 1996
------ -------- --------
OPERATING REVENUES................. $ - $ - $233,952
====== ======== ========
INCOME FROM OPERATIONS
Income (loss) before income taxes.. $ - $ (200) $ 1,638
Income tax benefit (expense)....... - 82 479
------ -------- --------
Income (loss) from Operations...... $ - $ (118) $ 2,117
====== ======== ========
LOSS ON DISPOSAL
Income (loss) before income taxes.. $ - $(10,106) $ 9,047
Income tax benefit (expense) ...... - 5,996 (23,879)
------ -------- --------
Loss on disposal................... $ - $ (4,110) $(14,832)
====== ======== ========
(11) CONCENTRATION OF CREDIT RISK:
The Company's electric utility operations serve 565,000 customers in Iowa,
85,000 customers in western Illinois and 3,000 customers in southeastern South
Dakota. The Company's gas utility operations serve 489,000 customers in Iowa,
65,000 customers in western Illinois, 64,000 customers in southeastern South
Dakota and 4,000 customers in northeastern Nebraska. The largest communities
served by the Company are the Iowa and Illinois Quad-Cities; Des Moines, Sioux
City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux
Falls, South Dakota. The Company's utility operations grant unsecured credit to
customers, substantially all of whom are local businesses and residents. As of
December 31, 1998, billed receivables from the Company's utility customers
totaled $20.1 million. As described in Note 18, billed receivables related to
utility services have been sold to a wholly owned unconsolidated subsidiary.
-24-
MidAmerican Capital has investments in preferred stocks of companies in the
utility industry. As of December 31, 1998, the total cost of these investments
was $54 million. MidAmerican Capital has an investment in the common stock of
McLeodUSA Incorporated, the total cost of which was $44 million at December 31,
1998.
MidAmerican Capital has entered into leveraged lease agreements with
companies in the airline industry. As of December 31, 1998, the receivables
under these agreements totaled $33 million.
(12) PREFERRED SHARES:
The $5.25 Series Preferred Shares, which were not redeemable prior to
November 1, 1998, for any purpose, are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100 per
share each May 1, beginning in 2001 through May 1, 2006.
The total outstanding cumulative preferred stock of MidAmerican not subject
to mandatory redemption requirements may be redeemed at the option of the
Company at prices which, in the aggregate, total $32.2 million. The aggregate
total the holders of all preferred stock outstanding at December 31, 1998, are
entitled to upon involuntary bankruptcy is $181.8 million plus accrued
dividends. Annual dividend requirements for all preferred stock outstanding at
December 31, 1998, total $12.9 million.
During 1996, MidAmerican redeemed all shares of the $1.7375 Series of
preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
(13) SEGMENT INFORMATION:
In 1998, the Company adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information."
The Company has two reportable operating segments: electric and gas. The
electric segment derives most of its revenue from retail sales of regulated
electricity to residential, commercial and industrial customers, and sales to
other utilities; whereas the gas segment derives most of its revenue from retail
sales of regulated natural gas to residential, commercial and industrial
customers. The gas segment also earns significant revenues by transporting gas
owned by others through its distribution systems. Pricing for electric and gas
sales are established separately by regulated agencies; therefore, management
also reviews each segment separately to make decisions regarding allocation of
resources and in evaluating performance. Common operating costs, interest
income, interest expense, income tax expense, and equity in the net loss of
investees are allocated to each segment
-25-
The following tables provide certain Company information on an operating
segment basis as of and for the years ended December 31 (in thousands):
1998 1997 1996
---------- ---------- ----------
SEGMENT PROFIT INFORMATION
ELECTRIC:
Revenues................................ $1,169,810 $1,126,300 $1,099,008
Depreciation and amortization expense... 156,546 145,931 140,939
Interest income......................... 4,945 1,820 1,360
Interest expense........................ 66,784 71,138 72,484
Income tax expense...................... 75,831 64,017 90,544
Equity in the net loss of investees..... (219) (161) -
Net income.............................. 109,539 101,534 119,583
GAS:
Revenues................................ 429,870 536,306 536,753
Depreciation and amortization expense... 25,665 24,609 23,653
Interest income......................... 1,169 501 237
Interest expense........................ 14,011 14,412 13,580
Income tax expense (benefit)............ (800) 9,698 20,023
Equity in the net loss of investee...... (45) (32) -
Net income.............................. (435) 14,177 28,460
NONREGULATED AND OTHER (a):
Revenues................................ 340,470 306,931 275,443
Depreciation and amortization........... 6,900 3,436 4,854
Interest income......................... 3,743 2,997 2,415
Interest expense........................ 11,347 11,785 23,574
Income tax expense (benefit)............ 4,982 (5,325) (12,145)
Equity in net income of investees....... 6,039 1,273 2,510
Net income.............................. 26,925 19,784 (16,997)
SEGMENT ASSET INFORMATION
ELECTRIC:
Total assets............................ $2,891,646 $2,833,256 $3,031,287
Capital expenditures.................... 158,596 128,544 116,243
Investment in equity method investments. 1,388 1,292 -
GAS:
Total assets............................ 670,862 681,649 730,575
Capital expenditures.................... 34,758 38,388 37,955
Investment in equity method investments. 256 615 -
Nonregulated and other (a):
Total assets............................ 771,425 763,186 759,986
Capital expenditures.................... 48,213 14,066 55,788
Investment in equity method investments. 10,171 10,212 17,613
(a) "Nonregulated and Other" consists of MidAmerican Capital, Midwest
Capital, MidAmerican Realty, CBEC Railway and other nonregulated operations and
holding company net loss and corporate assets.
-26-
Dividend income related to Holdings common stock held by MidAmerican
Capital of $0.5 and $0.4 million for 1998 and 1997, respectively, is included in
Nonregulated and Other Net Income above but has been eliminated in Net Income in
the Consolidated Statements of Income. In addition, a realized gain of $4.2
million from MidAmerican Capital's sale of such stock to Holdings in 1998 has
also been eliminated in Net Income in the Consolidated Statements of Income.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for the Company's utility
services are established based on historical cost ratemaking. Therefore, the
impact of any realized gains or losses related to financial instruments
applicable to the Company's utility operations is dependent on the treatment
authorized under future ratemaking proceedings.
Cash and cash equivalents - The carrying amount approximates fair value due
to the short maturity of these instruments.
Quad Cities Station nuclear decommissioning trust fund - Fair value is
based on quoted market prices of the investments held by the fund.
Marketable securities - Fair value is based on quoted market prices.
Debt securities - Fair value is based on the discounted value of the future
cash flows expected to be received from such investments.
Equity investments carried at cost - Fair value is based on an estimate of
the Company's share of partnership equity, offers from unrelated third parties
or the discounted value of the future cash flows expected to be received from
such investments.
Notes payable - Fair value is estimated to be the carrying amount due to
the short maturity of these issues.
Preferred shares - Fair value of preferred shares with mandatory redemption
provisions is estimated based on the quoted market prices for similar issues.
Long-term debt - Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
-27-
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- -----------
Financial Instruments Owned by the Company:
Equity investments carried at cost ........ $ 27,464 $ 27,372 $ 29,707 $ 32,209
Financial Instruments Issued by the Company:
MidAmerican preferred securities; subject
to mandatory redemption.................. $ 50,000 $ 53,317 $ 50,000 $ 53,650
MidAmerican-obligated preferred securities;
subject to mandatory redemption.......... $ 100,000 $ 102,500 $ 100,000 $ 104,250
Long-term debt, including current portion.. $1,081,993 $1,126,010 $1,178,769 $1,214,951
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as follows
(in thousands):
1998
----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale:
Equity securities.......... $225,857 $214,936 $(15,789) $425,004
Municipal bonds............ 28,645 2,037 (8) 30,674
U.S. Government securities. 15,411 1,410 - 16,821
Corporate securities....... 28,051 698 (4) 28,745
Cash equivalents........... 6,470 - - 6,470
-------- -------- -------- --------
$304,434 $219,081 $(15,801) $507,714
======== ======== ======== ========
Held-to-maturity:
Equity securities.......... $ 2,843 $ - $ - $ 2,843
Debt securities............ 11,837 - - 11,837
-------- -------- -------- -------
$ 14,680 $ - $ - $ 14,680
======== ======== ======== ========
-28-
1997
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale:
Equity securities........... $257,316 $226,747 $(10,522) $473,541
Municipal bonds............. 35,217 2,116 (1) 37,332
U. S. Government securities. 18,753 800 (4) 19,549
Corporate securities........ 13,579 222 (3) 13,798
Cash equivalents............ 9,862 - - 9,862
-------- -------- -------- --------
$334,727 $229,885 $(10,530) $554,082
======== ======== ======== ========
Held-to-maturity:
Equity securities........... $ 6,376 $ - $ - $ 6,376
Debt securities............. 4,567 345 - 4,912
-------- -------- -------- --------
$ 10,943 $ 345 $ - $ 11,288
======== ======== ======== ========
At December 31, 1998, the debt securities held by the Company had the
following maturities (in thousands):
Available for Sale Held to Maturity
-------------------- -------------------
Amortizd Fair Amortized Fair
Cost Value Cost Value
-------- ------ --------- -----
Within 1 year................. 1,397 1,397 9,757 9,757
1 through 5 years........... 21,793 22,852 11 11
5 through 10 years.......... 14,595 15,820 2,069 2,069
Over 10 years............... 14,891 16,387 - -
The proceeds and the gross realized gains and losses on the disposition
of investments held by the Company for the years ended December 31, are as
follows (in thousands):
1998 1997 1996
-------- -------- --------
Proceeds from sales........... $230,804 $211,691 $250,772
Gross realized gains.......... 23,050 14,320 9,920
Gross realized losses......... (14,199) (6,480) (7,950)
During 1996, the Company sold a portion of its held-to-maturity securities
due to a significant deterioration in the issuer's credit worthiness. Such
securities had a carrying value of $4.8 million and proceeds from the sale were
$4.3 million.
-29-
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following
for the years ended December 31 (in thousands):
1998 1997 1996
-------- -------- --------
Current
Federal.................. $ 83,457 $ 91,627 $ 80,165
State.................... 21,396 21,619 22,100
-------- -------- --------
104,853 113,246 102,265
-------- -------- --------
Deferred
Federal.................. (12,012) (29,257) 2,627
State.................... (5,675) (8,242) (264)
-------- -------- --------
(17,687) (37,499) 2,363
Investment tax credit, net. (7,153) (7,357) (6,206)
-------- -------- --------
Total.................... $ 80,013 $ 68,390 $ 98,422
======== ======== ========
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
1998 1997
-------- --------
Deferred tax assets
related to:
Investment tax credits............... $ 52,139 $ 55,998
Unrealized losses.................... 7,391 7,880
Pensions............................. 15,677 17,339
Nuclear reserves and decommissioning. 17,715 15,287
Other................................ 8,516 6,464
-------- --------
Total.............................. $101,438 $102,968
======== ========
Deferred tax liabilities
related to:
Depreciable property................. $496,367 $504,594
Income taxes recoverable
through future rates............... 198,364 197,877
Unrealized gains..................... 75,070 81,501
Energy efficiency.................... 27,186 40,902
Reacquired debt...................... 16,385 15,346
FERC Order 636....................... (941) 2,857
Other................................ 22,338 16,811
-------- --------
Total.............................. $834,769 $859,888
======== ========
-30-
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of a subsidiary trust, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the years ended December 31:
1998 1997 1996
------ ----- ------
Effective federal and state
income tax rate ............................. 36% 31% 39%
Amortization of investment tax credit ......... 3 3 2
State income tax, net of federal income
tax benefit ................................. (5) (4) (6)
Dividends received deduction .................. 2 2 2
Other ......................................... (1) 3 (2)
--- --- ---
Statutory federal income tax rate ............. 35% 35% 35%
=== === ===
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
1998 1997
------- -------
Materials and supplies, at average cost... $30,914 $31,425
Coal stocks, at average cost.............. 22,266 14,225
Gas in storage, at LIFO cost.............. 37,306 35,430
Fuel oil, at average cost................. 1,294 2,344
Other .................................... 2,991 2,667
------- -------
Total................................... $94,771 $86,091
======= =======
At December 31, 1998 prices, the current cost of gas in storage was $43.0
million.
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a wholly
owned statutory business trust of MidAmerican, issued 4,000,000 shares of 7.98%
Series MidAmerican-obligated mandatorily redeemable preferred securities (the
Preferred Securities). The sole assets of the Trust are $103.1 million of
MidAmerican 7.98% Series A Debentures due 2045 (the Debentures). There is a full
and unconditional guarantee by MidAmerican of the Trust's obligations under the
Preferred Securities. MidAmerican has the right to defer payments of interest on
the Debentures by extending the interest payment period for up to 20 consecutive
quarters. If interest payments on the Debentures are deferred, distributions on
the Preferred Securities will also be deferred. During any deferral,
distributions will continue to accrue with interest thereon, and MidAmerican may
not declare or pay any dividend or other distribution on, or redeem or purchase,
any of its capital stock.
The Debentures may be redeemed by MidAmerican on or after December 18,
2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion thereof, are redeemed, the Trust must
redeem a like amount of the Preferred Securities. If a termination of the Trust
occurs, the Trust will distribute to the holders of the Preferred Securities a
like amount of the Debentures unless such a distribution is determined not to be
practicable. If such determination is made, the holders of the Preferred
Securities will be entitled to receive, out of the assets of the trust after
satisfaction of its liabilities, a liquidation amount of $25 for each Preferred
Security held plus accrued and unpaid distributions.
-31-
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican entered into a revolving agreement, which expires in
2002, to sell all of its right, title and interest in the majority of its billed
accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a
special purpose entity established to purchase accounts receivable from
MidAmerican. Funding Corp. in turn has sold receivable interests to outside
investors. In consideration of the sale, MidAmerican received $70 million in
cash and the remaining balance in the form of a subordinated note from Funding
Corp. In 1998, the revolving balance was reduced to $60 million due to a decline
in accounts receivable available for sale. The agreement is structured as a true
sale under which the creditors of Funding Corp. will be entitled to be satisfied
out of the assets of Funding Corp. prior to any value being returned to
MidAmerican or its creditors and, as such, the accounts receivable sold are not
reflected on Holdings' Consolidated Balance Sheets. At December 31, 1998, $97.4
million of accounts receivable, net of reserves, was sold under the agreement.
(19) EARNINGS PER SHARE
Reconciliation for the Income and Shares of the Basic and Diluted per share
computations for income from continuing operations for the years ended December
31 are as follows (in thousands, except per share amounts):
1998 1997
--------------------------- ----------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------- ------- --------- -------- ------ ---------
INCOME FROM CONTINUING
OPERATIONS.................... $131,318 $139,332
-------- --------
BASIC EPS
Income Available to Common
Shareholders.................. 131,318 94,038 $1.40 $139,332 98,058 $1.42
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock Options.................... - 171 - 107
-------- ------ -------- ------
DILUTED EPS
Income Available to Common
Shareholders.................. $131,318 94,209 $1.39 $139,332 98,165 $1.42
======== ====== ===== ======== ====== =====
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1996
------------------------------------
Per Share
Income Shares Amount
-------- ------ ---------
INCOME FROM CONTINUING OPERATIONS .. $143,761
--------
BASIC EPS
Income Available to Common
Shareholders .................... $143,761 100,752 $1.43
=====
EFFECT OF DILUTIVE SECURITIES
Stock Options ...................... - 89
-------- -------
DILUTED EPS
Income Available to Common
Shareholders .................... $143,761 100,841 $1.43
======== ======= =====
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1998
----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
Operating revenues ........................ $488,148 $407,640 $525,446 $518,916
Operating income .......................... 77,285 55,572 114,264 33,095
Income from continuing operations ......... 38,733 21,000 53,622 17,963
Income (loss) from discontinued operations. - - - -
Earnings on common stock .................. 38,733 21,000 53,622 17,963
Earnings per average common share and
Earnings per average common share
assuming dilution:
Income from continuing operations ......... $ 0.41 $ 0.22 $ 0.57 $ 0.19
Income (loss) from discontinued operations. - - - -
-------- -------- -------- --------
$ 0.41 $ 0.22 $ 0.57 $ 0.19
======== ======== ======== ========
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1997
----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share amounts)
Operating revenues ........................ $589,045 $395,580 $446,207 $538,705
Operating income .......................... 78,487 57,442 99,315 41,482
Income from continuing operations ......... 34,174 24,176 49,705 31,277
Income (loss)from discontinued operations.. (234) 408 (2,793) (1,609)
Earnings on common stock .................. 33,940 24,584 46,912 29,668
Earnings per average common share and
Earnings per average common share
assuming dilution:
Income from continuing operations ......... $ 0.34 $ 0.24 $ 0.51 $ 0.33
Income (loss) from discontinued operations. - 0.01 (0.03) (0.02)
-------- -------- -------- --------
$ 0.34 $ 0.25 $ 0.48 $ 0.31
======== ======== ======== ========
The quarterly data reflect seasonal variations common in the utility
industry.
(21) OTHER INFORMATION:
Non-Operating - Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
1998 1997 1996
------- -------- --------
Gain on sale of assets, net .................. $ 7,409 $ 10,213 $ 974
Discount on sold receivables ................. (8,716) (439) -
Subservice fee from Funding Corp. ............ 1,714 153 -
Merger costs ................................. (4,243) - (8,689)
Income from equity method investments ........ 3,765 1,273 2,510
Special purpose fund income .................. 2,088 1,989 3,301
Other-than-temporary declines in value
of investments and other assets .......... - (3,443) (15,566)
Energy efficiency carrying charges ........... 197 4,993 3,255
Gain on sale of cushion gas .................. - 855 3,182
Gain (loss) on reacquisition of long-term debt - (923) 1,105
NPPD settlement .............................. - 2,248 -
Other ........................................ 2,663 (1,028) 147
------- -------- --------
Total ........................................ $ 4,877 $ 15,891 $ (9,781)
======= ======== ========
(22) ACQUISITIONS:
In 1998, the Company established MidAmerican Realty as a holding company
for its real estate brokerage operations. The Company, through MidAmerican
Realty, then acquired several real estate brokerage operations and related
businesses.
The Company purchased all of the outstanding capital stock of the following
companies: Iowa Realty Co. Inc., Edina Financial Services, Inc., Home Real
Estate Company of Omaha and CBS Real Estate Company. Additionally, the Company
purchased all assets of J.C. Nichols Residential, Inc. and Nebraska Land Title &
Abstract Company. The aggregate cost of these acquisitions was $108 million.
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Each acquisition was accounted for as a purchase business combination. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the acquisition price equal to their fair value at the date of acquisition. The
Company's Consolidated Income Statements reflect the results of operations of
the acquired businesses from the date of their respective acquisition dates,
which range from May 27, 1998, through September 1, 1998, except for a minor
acquisition in December 1998.
The following selected financial information presents the Company's results
of operations on a pro forma basis as if the above entities were acquired on
January 1, 1997, adjusted to the accounting basis recognized in recording the
purchases (in thousands, except earnings per share amounts):
1998 1997
---------- ----------
Revenues............... $2,094,226 $2,244,998
Income before
extraordinary items . 137,524 140,170
Net income ............ 137,524 140,170
Earnings per share .... 1.46 1.43
(23) RELATED PARTY TRANSACTIONS:
Certain officers and employees of MidAmerican Realty were issued shares of
common stock in MidAmerican Realty upon its formation, with a corresponding
receivable recorded for the fair market value of the stock. The shares carry the
same dividend and voting rights as the shares held by the Company. The officers
and employees held a 5% interest as of December 31, 1998.
As certain performance levels are achieved over a five-year period, a
portion of the receivable balance is forgiven and considered compensation to the
officers and employees. The amount accrued to the allowance for estimated
forgiveness and expensed as compensation in 1998 was $0.7 million. The balance
of the note receivable, net of allowance, as of December 31, 1998, was $0.8
million. MidAmerican Realty charges interest on the outstanding receivable
balance at a rate equal to its average annual borrowing rate.
(24) SUBSEQUENT EVENT - MERGER:
On August 11, 1998, a definitive merger agreement was entered into between
the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy
services. On March 12, 1999, the merger transaction was completed, and the
Company became an indirect wholly owned subsidiary of CalEnergy, which
subsequently changed its name to MidAmerican Energy Holdings Company. In
accordance with the merger agreement, each outstanding share of the Company's
common stock was converted to the right to receive $27.15 in cash.
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REPORT OF INDEPENDENT ACCOUNTANTS
To MidAmerican Energy Holdings Company and Subsidiaries:
We have audited the accompanying consolidated financial statements of
MidAmerican Energy Holdings Company and subsidiaries listed in the accompanying
index on page 1. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MidAmerican Energy
Holdings Company and subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Kansas City, Missouri
January 22, 1999, except with respect to Note 24,
as to which the date is March 12, 1999
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