UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $3.30 Series, no par value
Preferred Stock, $3.75 Series, no par value
Preferred Stock, $3.90 Series, no par value
Preferred Stock, $4.20 Series, no par value
Preferred Stock, $4.35 Series, no par value
Preferred Stock, $4.40 Series, no par value
Preferred Stock, $4.80 Series, no par value
_______________________________________________________________________________
(Title of each Class)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12-b-2 of the Act). Yes No X
---- ----
All of the member's equity of MidAmerican Funding, LLC is held by its parent
company, MidAmerican Energy Holdings Company, as of March 20, 2003.
All common stock of MidAmerican Energy Company is held by its parent company,
MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding,
LLC. As of March 20, 2003, 70,980,203 shares of MidAmerican Energy common stock,
without par value, were outstanding.
MidAmerican Funding, LLC and MidAmerican Energy Company meet the conditions set
forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format specified in General
Instruction I(2) of Form 10-K.
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MIDAMERICAN FUNDING, LLC
MIDAMERICAN ENERGY COMPANY
2002 ANNUAL REPORT ON FORM 10-K
MidAmerican Funding, LLC, or MidAmerican Funding, and MidAmerican Energy
Company, or MidAmerican Energy, separately file this combined Form 10-K.
Information relating to each individual registrant is filed by such registrant
on its own behalf. Except for its subsidiaries, MidAmerican Energy makes no
representation as to information relating to any other subsidiary of MidAmerican
Funding.
TABLE OF CONTENTS
Part I Page
------ ----
Item 1 Business
General Overview............................................ 4
Financial Information About Industry Segments............... 4
Description of Business..................................... 4
Business of MidAmerican Funding and MHC................... 4
Business of MidAmerican Energy............................ 5
Regulated Electric Operations ............................ 6
Regulated Natural Gas Operations.......................... 10
Nonregulated Operations................................... 12
Regulation................................................ 14
Business of MidAmerican Capital........................... 18
Business of Midwest Capital............................... 18
Item 2 Properties...................................................... 19
Item 3 Legal Proceedings............................................... 21
Item 4 Submission of Matters to a Vote of Security Holders............. 21
Part II
-------
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters................................... 22
Item 6 Selected Financial Data......................................... 22
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 22
Item 8 Financial Statements and Supplementary Data..................... 22
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 22
Part III
--------
Item 10 Directors and Executive Officers of the Registrant.............. 23
Item 11 Executive Compensation.......................................... 26
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............. 26
Item 13 Certain Relationships and Related Transactions.................. 26
Item 14 Controls and Procedures......................................... 26
Part IV
-------
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 27
Signatures ............................................................... 119
Certifications............................................................ 121
Exhibit Index............................................................. 131
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PART I
ITEM 1. BUSINESS
- ----------------
(A) GENERAL OVERVIEW
MidAmerican Funding, LLC, or MidAmerican Funding, is an Iowa limited
liability company that was formed in March 1999. Its sole member is MidAmerican
Energy Holdings Company, or MidAmerican Energy Holdings. MidAmerican Funding
owns all of the outstanding common stock of MHC Inc., formerly known as
MidAmerican Energy Holdings Company, which owns all of the common stock of
MidAmerican Energy Company, or MidAmerican Energy; MidAmerican Capital Company,
or MidAmerican Capital; Midwest Capital Group, Inc., or MidAmerican Capital;
MidAmerican Services Company, or MidAmerican Services; and MEC Construction
Services Co., or MEC Construction. MidAmerican Energy is a public utility
company headquartered in Des Moines, Iowa, and incorporated in the state of
Iowa.
On March 12, 1999, MidAmerican Funding acquired MHC. As a part of this
transaction, the former CalEnergy Company, Inc., a Delaware corporation, was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings. As a result, MHC and all direct and indirect subsidiaries of MHC each
became a subsidiary of MidAmerican Funding.
On March 14, 2000, an investor group including Berkshire Hathaway Inc.,
Walter Scott, Jr., David L. Sokol and Gregory E. Abel completed its acquisition
of MidAmerican Energy Holdings in accordance with a previously disclosed
agreement and plan of merger, dated October 24, 1999, among MidAmerican Energy
Holdings, Teton Formation L.L.C. and Teton Acquisition Corp. Mr. Scott is an
Omaha, Nebraska businessman and a director of MidAmerican Energy Holdings, Mr.
Sokol is Chairman and Chief Executive Officer of MidAmerican Energy Holdings and
Mr. Abel is Chief Operating Officer of MidAmerican Energy Holdings. In
accordance with the merger agreement, Teton Acquisition was merged with and into
MidAmerican Energy Holdings, maintaining the name MidAmerican Energy Holdings.
With the completion of the transaction, MidAmerican Energy Holdings is now a
privately owned company with publicly traded fixed-income securities.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information on MidAmerican Funding's segments of business is
included in Note (12) of Notes to Consolidated Financial Statements included in
Item 15 of this Form 10-K.
(C) DESCRIPTION OF BUSINESS
BUSINESS OF MIDAMERICAN FUNDING AND MHC
---------------------------------------
MidAmerican Funding conducts no business other than activities related to
the issuance of its debt securities and the ownership of MHC.
MHC conducts no business other than the ownership of its subsidiaries.
MHC's interests include 100% of the common stock of MidAmerican Energy,
MidAmerican Capital, Midwest Capital, MidAmerican Services and MEC Construction.
MidAmerican Energy is primarily engaged in the business of generating,
transmitting, distributing and selling electric energy and in distributing,
selling and transporting natural gas. It accounts for the predominant part of
MHC's assets and earnings. MidAmerican Capital manages equipment leases and
other passive investment activities. Midwest
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Capital functions as a regional business development company in MidAmerican
Energy's service territory. MidAmerican Services provides comprehensive energy
services to commercial and industrial companies, and MEC Construction provides
nonregulated utility construction services.
For the year ended December 31, 2002, 99.8% of MidAmerican Funding's
operating revenues were from MidAmerican Energy.
MidAmerican Funding and its subsidiaries had 3,735 full-time employees as
of December 31, 2002.
BUSINESS OF MIDAMERICAN ENERGY
------------------------------
MidAmerican Energy is the largest energy company headquartered in Iowa,
with $3.8 billion of assets as of December 31, 2002, and revenues for 2002
totaling $2.2 billion. MidAmerican Energy is principally engaged in the business
of generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Energy
distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge,
Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities (Davenport and
Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois); and a
number of adjacent communities and areas. It also distributes natural gas at
retail in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and
Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and a number of
adjacent communities and areas. As of December 31, 2002, MidAmerican Energy had
approximately 681,000 retail electric customers and 660,000 retail natural gas
customers.
In addition to retail sales, MidAmerican Energy sells electric energy and
natural gas to other utilities, marketers and municipalities inside and outside
of MidAmerican Energy's delivery system. These sales are referred to as
wholesale sales. It also transports natural gas through its distribution system
for a number of end-use customers who have independently secured their supply of
natural gas.
MidAmerican Energy's regulated electric and gas operations are conducted
under franchises, certificates, permits and licenses obtained from state and
local authorities. The franchises, with various expiration dates, are typically
for 25-year terms.
MidAmerican Energy has a diverse customer base consisting of residential,
agricultural, and a variety of commercial and industrial customer groups. Among
the primary industries served by MidAmerican Energy are those that are concerned
with food products, the manufacturing, processing and fabrication of primary
metals, real estate, farm and other non-electrical machinery, and cement and
gypsum products.
MidAmerican Energy also conducts a number of nonregulated business
activities. Refer to the "Nonregulated Operations" section later in Part I for
further discussion.
For the year ended December 31, 2002, MidAmerican Energy derived
approximately 61% of its gross operating revenues from its regulated electric
business, 31% from its regulated gas business and 8% from its nonregulated
business activities. For 2001 and 2000, the corresponding percentages were 56%
electric, 37% gas and 7% nonregulated; and 53% electric, 41% gas and 6%
nonregulated, respectively.
At December 31, 2002, MidAmerican Energy had 3,718 full-time employees of
which 1,739 were covered by union contracts. MidAmerican Energy has five
separate contracts with locals of the International Brotherhood of Electrical
Workers (IBEW), the United Association of Plumbers and Pipefitters and the
United Paper Workers International Union. One contract with IBEW locals 109 and
499 expires February 29, 2004, and covers 1,659 employee members.
-5-
REGULATED ELECTRIC OPERATIONS
The following tables present historical regulated electric sales data
related to customer class and jurisdictions.
Total Regulated Electric Sales
By Customer Class
------------------------------
2002 2001 2000
---- ---- ----
Residential...................... 19.8% 20.6% 20.7%
Small general service............ 14.2 15.3 15.9
Large general service............ 24.5 25.8 28.6
Other ........................... 9.1 7.3 5.4
Wholesale........................ 32.4% 31.0 29.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Regulated Retail Electric Sales
By State
------------------------------
2002 2001 2000
---- ---- ----
Iowa ........................... 88.5% 88.6% 89.3%
Illinois......................... 10.7 10.6 10.0
South Dakota..................... 0.8 0.8 0.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric business
that are principally related to the use of electricity for air conditioning. In
2002, 41% of MidAmerican Energy's regulated electric revenues were reported in
the months of June, July, August and September.
The annual hourly peak demand on MidAmerican Energy's electric system
usually occurs as a result of air conditioning use during the cooling season. In
July 2002, MidAmerican Energy reached a new record hourly peak demand of 3,889
megawatts, or MW, which was 56 MW greater than MidAmerican Energy's previous
record hourly peak demand of 3,833 MW set in July 1999.
MidAmerican Energy's accredited net generating capability in the summer of
2002 was 4,724 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican Energy's system and
consists of MidAmerican Energy-owned generation, generation under power purchase
contracts and the net amount of capacity purchases and sales. The net generating
capability at any time may be less than it would otherwise be due to regulatory
restrictions, fuel restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications. Refer to Item 2
of this Form 10-K for detail of the accredited net generating capability for the
summer of 2002.
MidAmerican Energy plans to develop and construct two electric generating
plants in Iowa. Both plants would provide service to regulated retail
electricity customers and be included in regulated rate base in Iowa, Illinois
and South Dakota. Wholesale sales may also be made from the plants to the extent
the power is not needed for regulated retail service.
The first plant will be a 500-MW (based on expected accreditation) natural
gas-fired, combined cycle plant with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and operate it. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in
-6-
310 MW of accredited capacity. The combined cycle operation will commence in
2005. MidAmerican Energy has received a certificate from the Iowa Utilities
Board, or IUB, allowing it to construct the plant. In May 2002, the IUB issued
an order that specified the Iowa ratemaking principles that will apply to the
plant over its life. As a result of that order, MidAmerican Energy is proceeding
with the construction of the plant and has initiated start-up and testing of the
simple cycle phase.
The second plant is currently under development and is expected to be a
790-MW (based on expected accreditation) super-critical-temperature, coal-fired
plant fueled with low-sulfur coal. If constructed, MidAmerican Energy will
operate the plant and expects to own approximately 475 MW of the plant.
Municipal, cooperative and public power utilities will own the remainder, which
is a typical ownership arrangement for large base-load plants in Iowa. On
January 23, 2003, the IUB issued an order granting MidAmerican Energy a
certificate to construct the plant conditioned upon retention of other required
governmental permits. MidAmerican Energy has made a filing with the IUB for
approval of Iowa ratemaking principles for this second plant. The development of
this plant is subject to obtaining environmental and other required permits, as
well as to receiving orders from the IUB approving construction of the
associated transmission facilities and establishing ratemaking principles which
are satisfactory to MidAmerican Energy.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring states and is involved in an electric power pooling agreement known
as Mid-Continent Area Power Pool, or MAPP. MAPP is a voluntary association of
electric utilities doing business in Minnesota, Nebraska, North Dakota and the
Canadian provinces of Saskatchewan and Manitoba and portions of Iowa, Montana,
South Dakota and Wisconsin. Its membership also includes power marketers,
regulatory agencies and independent power producers. MAPP facilitates operation
of the transmission system and is responsible for the safety and reliability of
the bulk electric system.
In November 2001, MAPPCOR, the contractor to MAPP, sold its
transmission-related assets to the Midwest Independent Transmission System
Operator, Inc., or Midwest ISO. The Midwest ISO now has responsibility for
administration of MAPP's Open-Access Transmission Tariff.
Each MAPP participant is required to maintain for emergency purposes a net
generating capability reserve of at least 15% above its system peak demand. If a
participant's capability reserve falls below the 15% minimum, significant
penalties could be contractually imposed by MAPP. MidAmerican Energy's reserve
margin at peak demand for 2002 was approximately 21%.
MidAmerican Energy's transmission system connects its generating facilities
with distribution substations and interconnects with 14 other transmission
providers in Iowa and five adjacent states. Under normal operating conditions,
MidAmerican Energy's transmission system is unconstrained and has adequate
capacity to deliver energy to MidAmerican Energy's distribution system and to
export and import energy with other interconnected systems. Refer to Item 2 of
this Form 10-K for additional information on transmission lines.
In December 1999, the Federal Energy Regulatory Commission, or FERC, issued
Order No. 2000 establishing, among other things, minimum characteristics and
functions for regional transmission organizations. Public utilities that were
not a member of an independent system operator at the time of the order were
required to submit a plan by which its transmission facilities would be
transferred to a regional transmission organization. On September 28, 2001,
MidAmerican Energy and five other electric utilities filed with the FERC a plan
to create TRANSLink Transmission Company LLC and to integrate their electric
transmission systems into a single, coordinated system operating as a for-profit
independent transmission company in conjunction with a FERC-approved regional
transmission organization. On April 25, 2002, the FERC issued an order approving
the transfer of control of MidAmerican Energy and
-7-
other utilities' transmission assets to TRANSLink in conjunction with
TRANSLink's participation in the Midwest Independent Transmission System
Operator, Inc. regional transmission organization. MidAmerican Energy has filed
an application for state regulatory approval with the IUB and anticipates a
ruling in mid-2003. Transferring the operations and control of MidAmerican
Energy's transmission assets to other entities could increase costs for
MidAmerican Energy; however, the actual impact of TRANSLink on MidAmerican
Energy's future transmission costs is not yet known. Transfer of control is not
anticipated until the third quarter of 2003 at the earliest.
On July 31, 2002, the FERC issued a notice of proposed rulemaking with
respect to Standard Market Design. The FERC has characterized the proposal as
portending "sweeping changes" to the use and expansion of the interstate
transmission and wholesale bulk power systems in the United States. The proposal
includes numerous proposed changes in the current regulation of transmission and
generation facilities designed "to promote economic efficiency" and replace the
"obsolete patchwork we have today," according to the FERC's chairman. The final
rule, if adopted as currently proposed, would require all public utilities
operating transmission facilities subject to the FERC jurisdiction to file
revised open access transmission tariffs that would require changes to the basic
services these public utilities currently provide. The proposed rule may impact
the pricing of MidAmerican Energy's electricity and transmission products. The
FERC does not envision that a final rule will be fully implemented until 2004.
MidAmerican Energy is still evaluating the proposed rule and recognizes the
final rule could vary considerably from the initial proposal. Accordingly, the
likely impact of the proposed rule on MidAmerican Energy's transmission and
generation businesses is unknown.
Energy Supply for Electric Operations
- -------------------------------------
MidAmerican Energy's total energy supplied to retail and wholesale electric
customers was from the following sources:
2002 2001 2000
----- ----- -----
MidAmerican Energy-owned generation........ 76.5% 82.6% 83.8%
Energy purchased under long-term contracts. 14.3 13.5 14.0
Energy purchased - other................... 9.2 3.9 2.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The increase in the percent of other energy purchased for 2002 compared to
2001 is due to additional purchases to supply an increase in wholesale sales
volumes and a portion of the increase in retail sales volumes. MidAmerican
Energy-owned generation and energy purchased under long-term contracts increased
to a lesser degree to supply a portion of the increase in retail sales volumes.
-8-
MidAmerican Energy's sources of fuel for electric generation were as
follows for the years ended December 31:
2002 2001 2000
----- ----- -----
Coal................... 73.3% 74.4% 75.9%
Nuclear (a)............ 24.4 24.3 23.6
Gas (b)................ 2.2 1.2 0.3
Oil/Hydro.............. 0.1 0.1 0.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(a) Nuclear includes energy purchased through a power purchase
contract with Nebraska Public Power District. As a result of a
contract restructuring effective August 1, 2002, energy purchased
under that contract is similar to other purchased energy in that
it is not restricted to a particular energy source. However, it
is included in Nuclear for all of 2002 for comparison purposes.
(b) Gas includes energy purchased through a power purchase contract
with Cordova Energy Company LLC. Each of these contracts is
discussed below. Refer to Item 2 of this Form 10-K for detail of
generating facilities.
MidAmerican Energy is no longer allowed to recover a portion of its energy
costs relating to retail sales through energy adjustment clauses. Accordingly,
fluctuations in energy costs now affect MidAmerican Energy's earnings.
All of the coal-fired generating stations operated by MidAmerican Energy
are fueled by low-sulfur, western coal from the Powder River Basin and Hanna
Basin mines. MidAmerican Energy's coal supply portfolio includes multiple
suppliers and mines under agreements of varying term and quantity flexibility.
MidAmerican Energy regularly monitors the western coal market, looking for
opportunities to improve its coal supply portfolio. MidAmerican Energy believes
its sources of coal supply are, and will continue to be, satisfactory.
Additional information regarding MidAmerican Energy's coal supply contracts is
included in Note (4)(f) of Notes to Consolidated Financial Statements in Item 15
of this Form 10-K.
MidAmerican Energy has agreements with Union Pacific Railroad Company to
deliver coal directly to its Neal and Council Bluffs Energy Centers. Coal for
MidAmerican Energy's Louisa and Riverside Energy Centers is delivered to an
interchange point by Union Pacific for transportation to its destination by
Iowa, Chicago & Eastern Railroad Corporation. MidAmerican Energy has the ability
to use The Burlington Northern and Santa Fe Railway Company for delivery of a
small amount of coal to the Council Bluffs, Louisa and Riverside Energy Centers
should the need arise. MidAmerican Energy believes its coal transportation
arrangements are adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for intermediate and
peak demand electric generation, igniter fuel, transmission support and standby
purposes. These sources are presently in adequate supply and available to meet
MidAmerican Energy's needs.
MidAmerican Energy has an agreement with the Nebraska Public Power
District, or NPPD, to purchase electric capacity and energy through December 31,
2004. Under the contract, as restructured effective August 1, 2002, MidAmerican
Energy will purchase 380 MW of the accredited capacity of Cooper Nuclear Station
and a minimum of approximately 2.5 million megawatt-hours in each of the years
-9-
2003 and 2004. NPPD is not required to use Cooper Nuclear Station to meet the
minimum energy requirement.
MidAmerican Energy has an agreement with Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant that started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy is a 25% joint owner of Quad Cities Generating Station,
a nuclear power plant. Exelon Generation Company, LLC, the other joint owner and
the operator of Quad Cities Station, is a subsidiary of Exelon Corporation.
Approximately one-third of the nuclear fuel assemblies in the core at Quad
Cities Station Units 1 and 2 is replaced every 24 months. MidAmerican Energy has
been advised by Exelon Generation that the majority of its uranium concentrate
and uranium conversion requirements for Quad Cities Station through 2003 can be
met under existing supplies or commitments. Exelon Generation foresees no
problem in obtaining the remaining requirements now or obtaining future
requirements. Exelon Generation further advises that enrichment services
contracted through 2007 provide flexibility as to the quantity purchased.
Commitments for fuel fabrication have been obtained at least through 2007.
Exelon Generation does not anticipate that it will have difficulty in
contracting for uranium concentrates for conversion, enrichment or fabrication
of nuclear fuel needed to operate Quad Cities Station.
REGULATED NATURAL GAS OPERATIONS
MidAmerican Energy is engaged in the procurement, transportation, storage
and distribution of natural gas for customers in the Midwest. MidAmerican Energy
purchases natural gas from various suppliers, transports it from the production
area to MidAmerican Energy's service territory under contracts with interstate
pipelines, stores it in various storage facilities to manage fluctuations in
system demand and seasonal pricing, and distributes it to customers through
MidAmerican Energy's distribution system.
MidAmerican Energy sells natural gas to end-use, or retail, customers and
to other utilities, marketers and municipalities outside of MidAmerican Energy's
delivery system. MidAmerican Energy also transports through its distribution
system natural gas purchased independently by a number of end-use customers.
During 2002, approximately 45% of total gas delivered through MidAmerican
Energy's system for end-use customers was under gas transportation service.
There are seasonal variations in MidAmerican Energy's gas business that are
principally due to the use of natural gas for heating. In 2002, 47% of
MidAmerican Energy's regulated gas revenues were reported in the months of
January, February, March, and December.
-10-
The following tables present historical regulated gas sales data, excluding
transportation throughput, related to customer class and jurisdictions.
Total Regulated Gas Sales
By Customer Class
-------------------------------
2002 2001 2000
----- ----- -----
Residential..................... 39.0% 34.5% 34.9%
Small general service........... 19.7 18.2 17.4
Large general service........... 1.5 1.5 2.2
Other .......................... 1.2 1.7 1.2
Wholesale....................... 38.6 44.1 44.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Regulated Retail Gas Sales
By State
-------------------------------
2002 2001 2000
----- ----- -----
Iowa .......................... 78.0% 78.9% 78.0%
Illinois........................ 10.0 9.8 10.2
South Dakota.................... 11.2 10.5 11.0
Nebraska........................ 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Fuel Supply and Capacity
- ------------------------
MidAmerican Energy purchases gas supplies from producers and third party
marketers. To ensure system reliability, a geographically diverse supply
portfolio with varying terms and contract conditions is utilized for the gas
supplies.
MidAmerican Energy has rights to firm pipeline capacity to transport gas to
its service territory through direct interconnects to the pipeline systems of
Northern Natural Gas Company (an affiliate company), Natural Gas Pipeline
Company of America, Northern Border Pipeline Company and ANR Pipeline Company.
At times, the capacity available through MidAmerican Energy's firm capacity
portfolio may exceed the demand on MidAmerican Energy's distribution system.
Firm capacity in excess of MidAmerican Energy's system needs can be resold to
other companies to achieve optimum use of the available capacity. Past IUB and
South Dakota Public Utilities Commission rulings have allowed MidAmerican Energy
to retain 30% of the respective jurisdictional margins earned on the resold
capacity, with the remaining 70% being returned to customers through the
purchased gas adjustment clause.
MidAmerican Energy's cost of gas is recovered from customers through
purchased gas adjustment clauses. In 1995, the IUB gave initial approval of
MidAmerican Energy's Incentive Gas Supply Procurement Program, which currently
has been extended through October 31, 2003. Under the program, as amended,
MidAmerican Energy is required to file with the IUB every six months a
comparison of its gas procurement costs to an index-based reference price. If
MidAmerican Energy's cost of gas for the period is less or greater than an
established tolerance band around the reference price, then MidAmerican Energy
shares a portion of the savings or costs with customers. A similar program is
currently in effect in South Dakota through October 31, 2005. Since the
implementation of the program, MidAmerican Energy has successfully achieved and
shared savings with its natural gas customers.
-11-
MidAmerican Energy utilizes leased gas storage to meet peak day
requirements and to manage the daily changes in demand due to changes in
weather. The storage gas is typically replaced during the summer months. In
addition, MidAmerican Energy also utilizes three liquefied natural gas plants
and two propane-air plants to meet peak day demands.
On February 2, 1996, MidAmerican Energy had its highest peak-day delivery
of 1,143,026 million British thermal units, or MMBtus. This peak-day delivery
consisted of approximately 88% traditional sales service and 12% transportation
service of customer-owned gas. MidAmerican Energy's 2002/2003 winter heating
season peak-day delivery of 1,083,647 MMBtus was reached on January 22, 2003.
This peak-day delivery included approximately 70% traditional sales service and
30% transportation service.
The supply sources utilized by MidAmerican Energy to meet its 2002/2003
peak-day deliveries to its traditional sales service customers were:
Thousands Percent
of of
MMBtus Total
--------- -------
Leased storage and peak shaving plants....... 352.1 46.1%
Firm supply.................................. 411.7 53.9
----- -----
763.8 100.0%
===== =====
MidAmerican Energy has strategically built multiple pipeline
interconnections into several of its larger communities. MidAmerican Energy
operates interconnects with Northern Natural Gas, Natural Gas Pipeline, Northern
Border, and ANR Pipeline into the Quad Cities; with Northern Natural Gas,
Natural Gas Pipeline, and Northern Border into Cedar Rapids/Iowa City; and with
Northern Natural Gas and Natural Gas Pipeline into Des Moines. Multiple pipeline
interconnects create competition among pipeline suppliers for transportation
capacity to serve those communities, thus reducing costs. In addition, multiple
pipeline interconnects give MidAmerican Energy the ability to optimize delivery
of the lowest cost supply from the various supply basins into these communities
and increase delivery reliability. Benefits to MidAmerican Energy's system
customers are shared with all jurisdictions through a consolidated purchased gas
adjustment clause.
MidAmerican Energy does not anticipate difficulties in meeting its future
demands through the use of its supply portfolio and pipeline interconnections
for the foreseeable future.
NONREGULATED OPERATIONS
MidAmerican Energy's nonregulated operations include a variety of
activities outside of the traditional regulated electric and gas services.
-12-
Historical gross margins, or revenues less related cost of sales, for
MidAmerican Energy's nonregulated operations are shown below (in millions):
2002 2001 2000
----- ----- -----
Nonregulated retail electric .......... $11.4 $ 4.6 $ 0.3
Gas and electric energy trading ....... 3.3 6.9 2.1
Income sharing arrangements under
regulated gas tariffs ............... 3.1 4.4 5.2
Incentive gas supply procurement
program award ....................... 3.4 4.1 3.9
Nonregulated retail gas ............... 2.7 2.0 1.4
Extended Service Protection Program ... 1.0 1.3 1.3
Nonregulated energy delivery services . 0.1 0.1 5.7
Other ................................. 3.4 2.2 1.5
----- ----- -----
$28.4 $25.6 $21.4
===== ===== =====
As of May 1, 2002, all retail electric customers in Illinois, except for
those served by electric cooperatives and municipalities, had been phased in to
allow them to select their provider of electric supply services. MidAmerican
Energy's nonregulated electric retail revenues include revenues related to these
supply services provided to customers within and outside of MidAmerican Energy's
delivery system who choose their energy supplier. Revenues related to non-supply
services, such as distribution and transmission, are reflected in regulated
electric revenues. In September 2002, MidAmerican Energy began serving retail
customers in Ohio.
MidAmerican Energy's gas and electric energy trading consists of
nonregulated wholesale electric and natural gas marketing operations through
which it buys from, and sells to, other utilities and marketers. These
operations qualify as "energy trading" activities under generally accepted
accounting principles, and accordingly, related revenues are recorded net of the
related cost of sales on the statements of income. Refer to the "Results of
Operations" section of Management's Discussion and Analysis in Item 15 of this
Form 10-K for further discussion.
Nonregulated operations also include earnings from sharing arrangements
under applicable state regulations and tariffs filed with the IUB and the South
Dakota Public Utilities Commission, or SDPUC, for MidAmerican Energy's regulated
natural gas operations. Under these arrangements, MidAmerican Energy is allowed
to keep a portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program, under which it can receive awards for successful performance of gas
supply procurement. Refer to the preceding "Regulated Natural Gas Operations"
section for further discussion of the sharing arrangements and the gas
procurement program.
MidAmerican Energy's nonregulated retail gas marketing services operate in
Iowa, Illinois and Ohio. MidAmerican Energy purchases gas from producers and
third party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements.
-13-
REGULATION
General Utility Regulation
- --------------------------
MidAmerican Energy is a public utility within the meaning of the Federal
Power Act and a natural gas company within the meaning of the Natural Gas Act.
Therefore, it is subject to regulation by the FERC in regard to numerous
activities, including the issuance of securities, accounting policies and
practices, electricity sales for resale rates, the establishment and regulation
of electric interconnections and transmission services and replacement of
certain gas utility property.
MidAmerican Energy is regulated by the IUB as to retail rates, services,
construction of utility property and in other respects as provided by the laws
of Iowa. MidAmerican Energy is regulated by the Illinois Commerce Commission, or
ICC, as to bundled retail rates, unbundled delivery services, services that have
not been declared to be competitive, issuance of securities, affiliate
transactions, construction, acquisition and sale of utility property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican Energy is also subject to regulation by the SDPUC as to
electric and gas retail rates and service as provided by the laws of South
Dakota.
Rate Regulation
- ---------------
Under Iowa law, temporary collection of higher rates can begin, subject to
refund, 90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common equity previously approved. If the IUB has not issued a final order
within ten months after the filing date, the temporary rates cease to be subject
to refund and any balance of the requested rate increase may then be collected
subject to refund. Exceptions to the ten-month limitation provide for extensions
due to a utility's lack of due diligence in the rate proceeding, judicial
appeals and situations involving new generating units being placed in service.
MidAmerican Energy's cost of gas is reflected in its Iowa gas rates through the
Iowa Uniform Purchased Gas Adjustment Clause.
In accordance with a 2001 rate settlement, MidAmerican Energy's Iowa retail
electric rates are effectively fixed through 2005. Additionally, under the
incentive regulation aspects of the settlement, earnings exceeding a 12% return
on equity are shared with customers. See Note (10) of Notes to Consolidated
Financial Statements in Item 15 of this Form 10-K for additional discussion of
this settlement. In accordance with a 2002 rate settlement, MidAmerican Energy's
Iowa retail gas rates are effectively fixed through November 2004.
South Dakota law authorizes its Public Utilities Commission to suspend new
rates for up to six months during the pendency of rate proceedings; however, the
rates are permitted to be implemented after six months subject to refund pending
a final order in the proceeding.
Under Illinois law, new rates may become effective 45 days after filing
with the ICC, or on such earlier date as the ICC may approve, subject to its
authority to suspend the proposed new rates, subject to hearing, for a period
not to exceed approximately eleven months after filing. Under Illinois electric
tariffs, MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in
the cost of all fuels used for electric generation, including certain fuel
transportation costs, nuclear fuel disposition costs and the effects of energy
transactions (other than capacity and margins on interchange sales) with other
utilities. MidAmerican Energy's cost of gas is reflected in its Illinois gas
rates through the Illinois Uniform Purchased Gas Adjustment Clause.
-14-
In December 1997, Illinois enacted a law to restructure Illinois' electric
utility industry. The law changes how and what electric services are regulated
by the ICC and transitions portions of the traditional electric services to a
competitive environment. In general, the law limits the ICC's regulatory
authority over a utility's generation and also relaxes its regulatory authority
over many corporate transactions, such as the transfer of generation assets to
affiliates. Special authority and limitations of authority apply during the
transition to a competitive marketplace. Also, the law permits utilities to
eliminate their fuel adjustment clauses and incorporates provisions by which
earnings in excess of allowed amounts are either partially refunded to customers
or are used to accelerate a company's regulatory asset cost recovery. Electric
rates are frozen, subject to certain exceptions allowing for increases, until
2007.
The FERC regulates MidAmerican Energy's rates charged to wholesale
customers for energy and transmission services. Most of MidAmerican Energy's
electric wholesale sales and purchases take place under market-based pricing
allowed by the FERC and are therefore subject to market volatility.
Refer to the "Legislative and Regulatory Evolution" section of Management's
Discussion and Analysis in Item 15 of this Form 10-K for additional discussion
of matters affecting utility regulation.
Nuclear Regulation
- ------------------
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy
is responsible for the selection and development of repositories for, and the
permanent disposal of, spent nuclear fuel and high-level radioactive wastes.
Exelon Generation, as required by the Nuclear Waste Act, signed a contract with
the Department of Energy to provide for the disposal of spent nuclear fuel and
high-level radioactive waste beginning not later than January 1998. The
Department of Energy did not begin receiving spent nuclear fuel on the scheduled
date, and it is expected that the schedule will be significantly delayed. The
costs incurred by the Department of Energy for disposal activities are being
financed by fees charged to owners and generators of the waste. Exelon
Generation has informed MidAmerican Energy that existing on-site storage
capability at Quad Cities Station is sufficient to permit interim storage into
2005. For Quad Cities Station, Exelon Generation has informed MidAmerican Energy
that it plans to develop interim spent fuel storage installation at Quad Cities
Station to store additional spent nuclear fuel in dry casks. Exelon Generation
expects the bulk of the construction work will be done in 2004.
MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory
Commission, or NRC, with respect to its license and 25% ownership interest in
Quad Cities Station Units 1 and 2. Exelon Generation is the operator of Quad
Cities Station and is under contract with MidAmerican Energy to secure and keep
in effect all necessary NRC licenses and authorizations.
The NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear generating stations and subject such
stations to continuing review and regulation. The NRC review and regulatory
process covers, among other things, operations, maintenance, and environmental
and radiological aspects of such stations. The NRC may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under such Act or the terms of such licenses.
Federal regulations provide that any nuclear operating facility may be
required to cease operation if the NRC determines there are deficiencies in
state, local or utility emergency preparedness plans relating to such facility,
and the deficiencies are not corrected. Exelon Generation has advised
MidAmerican Energy that an emergency preparedness plan for Quad Cities Station
has been approved by the NRC. Exelon Generation has also advised MidAmerican
Energy that state and local plans relating to Quad Cities Station have been
approved by the Federal Emergency Management Agency.
-15-
The NRC also regulates the decommissioning of nuclear power plants
including the planning and funding for the eventual decommissioning of the
plants. In accordance with these regulations, MidAmerican Energy submits a
report to the NRC every two years providing "reasonable assurance" that funds
will be available to pay the costs of decommissioning its share of Quad Cities
Station.
MidAmerican Energy has established external trusts for the investment of
funds collected for nuclear decommissioning associated with Quad Cities Station.
Electric tariffs currently in effect include provisions for annualized
collection of estimated decommissioning costs at Quad Cities Station. In Iowa,
Quad Cities Station decommissioning costs are reflected in base rates.
MidAmerican Energy's cost related to decommissioning funding in 2002 was $8.3
million.
Environmental Regulations
- -------------------------
MidAmerican Energy is subject to a number of federal, state and local
environmental laws and regulations affecting many aspects of our present and
future operations. These requirements relate to air emissions, water quality,
waste management, hazardous chemical use, noise abatement, land use aesthetics
and atomic radiation.
Environmental laws and regulations currently have, and future modifications
may have, the effect of (i) increasing the lead time for the construction of new
facilities, (ii) significantly increasing the total cost of new facilities,
(iii) requiring modification of MidAmerican Energy's existing facilities, (iv)
increasing the risk of delay on construction projects, (v) increasing
MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of
service provided by MidAmerican Energy and the amount of energy available from
MidAmerican Energy's facilities. Any of these items could have a substantial
impact on amounts required to be expended by MidAmerican Energy in the future.
Air Quality -
Essentially all utility generating units are subject to the provisions of
the Clean Air Act Amendments of 1990, or CAAA, which address continuous
emissions monitoring, permit requirements and fees and emissions of certain
substances. MidAmerican Energy has five jointly owned and six wholly owned
coal-fired generating units, which represent approximately 60% of MidAmerican
Energy's electric net accredited generating capability. MidAmerican Energy's
generating units meet all requirements under Title IV of the CAAA. Title IV,
which is also known as the Acid Rain Program, sets forth requirements for the
emission of sulfur dioxide and nitrogen oxides at electric utility generating
stations.
In accordance with the requirements of Section 112 of the CAAA, the U.S.
Environmental Protection Agency, or EPA, has performed a study of the hazards to
public health reasonably anticipated to occur as a result of emissions of
hazardous air pollutants by electric utility steam generating units. In December
2000, after research and monitoring of mercury emissions, the EPA concluded that
it is appropriate and necessary to regulate mercury emissions from coal-fired
generating units. It is anticipated that rules will be developed to regulate
these emissions in 2003 or 2004 with reductions of mercury emissions effective
in 2007. The cost to MidAmerican Energy of reducing its mercury emissions would
depend on available technology at the time, but could be material.
Refer to Note (4)(b) of Notes to Consolidated Financial Statements in Item
15 of this Form 10-K for additional information regarding air quality
regulation.
-16-
Hazardous Materials and Waste Management -
The EPA and 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 Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which MidAmerican Energy may
be a potentially responsible party. MidAmerican Energy estimates the range of
possible costs for investigation, remediation and monitoring for these sites to
be $16 million to $54 million. As of December 31, 2002, MidAmerican Energy has
recorded a liability of $17 million for these sites. MidAmerican Energy's
present rates in Iowa provide for a fixed annual recovery of manufactured gas
plant costs.
Additional information relating to MidAmerican Energy's manufactured gas
plant facilities is included under Note (4)(a) of Notes to Consolidated
Financial Statements in Item 15 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by
the EPA, MidAmerican Energy developed a comprehensive program for the use,
handling, control and disposal of all polychlorinated biphenyls, or PCBs,
contained in electrical equipment. The future use of equipment containing PCBs
will be minimized. Capacitors, transformers and other miscellaneous equipment
are being purchased with a non-PCB dielectric fluid. MidAmerican Energy's
exposure to PCB liability has been reduced through the orderly replacement of a
number of such electrical devices with similar non-PCB electrical devices.
-17-
BUSINESS OF MIDAMERICAN CAPITAL
-------------------------------
MidAmerican Capital is a wholly owned nonregulated subsidiary of MHC
primarily engaged in investment activities. Investments include marketable
securities, energy-related venture capital interests and equipment leases.
MidAmerican Capital manages these activities through its nonregulated investment
companies. Assets of MidAmerican Capital totaled $56 million as of December 31,
2002.
INVESTMENTS
MidAmerican Capital's investments totaled $56 million at December 31, 2002,
and $181 million, including a $73 million note receivable from MidAmerican
Energy Holdings, at December 31, 2001. A majority of the remaining investment
dollars relate to equipment leases and investment grade marketable securities.
As discussed below, MidAmerican Capital and its subsidiaries also have
investments in energy projects, technology development interests and venture
capital funds.
MidAmerican Capital's marketable securities portfolio totaled $5 million
and $21 million at December 31, 2002 and 2001, respectively. The marketable
securities portfolio consisted substantially of a managed preferred stock
portfolio. MidAmerican Capital continued to liquidate the portfolio in 2002 and
will complete the liquidation in the second quarter of 2003.
MidAmerican Capital holds equity participations in equipment leases
totaling $33 million and $46 million at December 31, 2002 and 2001,
respectively. At December 31, 2002, approximately $23 million was invested in
five commercial passenger aircraft. Approximately $9 million of the December 31,
2002, investment in equipment leases related to a seven percent undivided
interest in an electric generating station leased to a utility located in
Arizona. MidAmerican Capital also has investments in safe harbor lease
transactions. Refer to Note (1)(f) of MidAmerican Funding's Notes to
Consolidated Financial Statements in Item 15 of this Form 10-K for additional
discussion of equipment leases.
In addition, MidAmerican Capital and several of its subsidiaries have
indirect investments, through venture capital funds, in a variety of
nonregulated energy production technologies.
BUSINESS OF MIDWEST CAPITAL
---------------------------
Midwest Capital is a wholly owned nonregulated subsidiary of MHC with total
assets of $9 million as of December 31, 2002. Midwest Capital's primary activity
is the management of utility service area investments to support economic
development. Midwest Capital's principal interest is a 2,000-acre master planned
residential and business community in southeastern South Dakota. The major
construction phase of the planned community is complete, and the marketing phase
to sell developed residential and commercial lots is in progress.
-18-
ITEM 2. PROPERTIES
- ------------------
MidAmerican Energy's utility properties consist of physical assets
necessary and appropriate to render electric and gas service in its service
territories. Electric property consists primarily of generation, transmission
and distribution facilities. Gas property consists primarily of natural gas
mains and services pipelines, meters and related distribution equipment,
including feeder lines to communities served from natural gas pipelines owned by
others. It is the opinion of management that the principal depreciable
properties owned by MidAmerican Energy are in good operating condition and well
maintained.
Net utility plant in service by operating segment is as follows as of
December 31, 2002 (in thousands):
Generation...................... $ 975,278
Energy delivery -
Electric distribution........ 1,119,808
Gas distribution............. 508,948
Transmission.................... 203,941
Marketing and sales............. 18,101
-----------
$2,826,076
==========
-19-
The net accredited generating capacity of MidAmerican Energy, along with
participation purchases and sales, net, are shown for summer 2002 accreditation.
Company's Share of
Percent Accredited Generating
Plant Ownership Fuel Capability (MW)
- ----------------------------------- --------- ---- ---------------------
Steam electric generating plants:
Council Bluffs Energy Center
Unit No. 1........................... 100.0 Coal 45
Unit No. 2........................... 100.0 Coal 88
Unit No. 3........................... 79.1 Coal 546
George Neal Station
Unit No. 1.......................... 100.0 Coal 135
Unit No. 2.......................... 100.0 Coal 300
Unit No. 3 ......................... 72.0 Coal 371
Unit No. 4 ......................... 40.6 Coal 261
Louisa Unit........................... 88.0 Coal 616
Ottumwa Unit ......................... 52.0 Coal 368
Riverside Station
Unit No. 3.......................... 100.0 Coal 5
Unit No. 5.......................... 100.0 Coal 130
-----
2,865
-----
Combustion turbines:
Coralville - 4 units.................. 100.0 Gas/Oil 64
Electrifarm - 3 units................. 100.0 Gas/Oil 200
Moline - 4 units...................... 100.0 Gas/Oil 64
Parr - 2 units........................ 100.0 Gas/Oil 32
Pleasant Hill Energy Center - 3 units. 100.0 Oil 157
River Hills Energy Center - 8 units... 100.0 Gas/Oil 120
Sycamore Energy Center - 2 units...... 100.0 Gas/Oil 148
-----
785
-----
Nuclear: Quad Cities Station
Unit No. 1............................ 25.0 Nuclear 190
Unit No. 2............................ 25.0 Nuclear 219
-----
409
-----
Hydro: Moline - 4 units................. 100.0 Water 3
Portable power modules - 28 units........ 100.0 Oil 56
-----
Accredited generating capacity........... 4,118
Participation purchases and sales, net:
Cordova Energy Company, LLC (1)....... 250
Nebraska Public Power District (2).... 380
Other, net............................ (24)
-----
Net accredited generating capability.... 4,724
=====
(1) The amount shown above is MidAmerican Energy's entitlement (50%)
of the Cordova Energy Center's net accredited capacity under a
purchase power contract extending to May 2004. Cordova Energy
Company LLC, a subsidiary of MidAmerican Energy Holdings, owns
Cordova Energy Center.
(2) The amount shown is capacity purchased under a power purchase
contract with the NPPD extending to December 2004.
-20-
The electric transmission system of MidAmerican Energy at December 31,
2002, included 920 miles of 345 kilovolt (kV) lines and 1,111 miles of 161-kV
lines. MidAmerican Energy's electric distribution system included approximately
218,500 transformers and 377 substations at December 31, 2002.
The gas distribution facilities of MidAmerican Energy at December 31, 2002,
included 20,835 miles of gas mains and services.
Substantially all the former Iowa-Illinois Gas and Electric Company utility
property and franchises, and substantially all of the former Midwest Power
Systems electric utility property located in Iowa, or approximately 80% of gross
utility plant, is pledged to secure mortgage bonds.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
MidAmerican Funding and its subsidiaries currently have no material legal
proceedings. Information on MidAmerican Energy's environmental matters is
included in Item 1 - Business and in the "Environmental Matters" section of
Management's Discussion and Analysis in Item 15 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------
None.
-21-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- -------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
MidAmerican Funding is an Iowa limited liability company whose membership
interest is held solely by MidAmerican Energy Holdings.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
Reference is made to Note (8) of Notes to Consolidated Financial Statements
in Item 15 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
-22-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
MIDAMERICAN ENERGY
Information concerning the current directors and executive officers of
MidAmerican Energy is as follows:
(A) IDENTIFICATION
Served in Served as
Present Present Director
Name Age Position Position Since Since
---- --- -------- -------------- ----------
Jack L. Alexander 55 Senior Vice President 1998 2002
and Director
Keith D. Hartje 53 Senior Vice President 1999
Todd M. Raba 46 Senior Vice President 2001 2002
and Director
Brian K. Hankel 40 Vice President, Treasurer 1999 2002
and Director
Thomas B. Specketer 46 Vice President and 1999
and Controller
The Board of Directors elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
(B) BUSINESS EXPERIENCE
JACK L. ALEXANDER has been Director of MidAmerican Energy since September
2002 and Senior Vice President of MidAmerican Energy since November 1998. Mr.
Alexander served as Vice President of MidAmerican Energy from November 1996 to
October 1998 and held various executive and management positions with
MidAmerican Energy and its predecessors for more than five years prior thereto.
KEITH D. HARTJE has been Senior Vice President of MidAmerican Energy since
March 1999. Mr. Hartje served as Vice President of MidAmerican Energy from 1996
to March 1999 and held various executive and management positions with
MidAmerican Energy and its predecessors for more than five years prior thereto.
TODD M. RABA has been Director of MidAmerican Energy since September 2002
and Senior Vice President of MidAmerican Energy since July 2001. Mr. Raba joined
MidAmerican Energy in 1997 as Vice President. Prior to joining MidAmerican
Energy, he was employed for 13 years with Rollins Environmental Services.
-23-
BRIAN K. HANKEL has been Director of MidAmerican Energy since September
2002 and Vice President and Treasurer of MidAmerican Energy since March 1999.
Mr. Hankel has been Vice President and Treasurer of MidAmerican Energy Holdings
since January 1997.
THOMAS B. SPECKETER has been Vice President and Controller of MidAmerican
Energy since September 1999. Mr. Specketer served as Manager Tax Compliance of
MidAmerican Energy from March 1999 to August 1999 and held various other tax and
accounting management positions for MidAmerican Energy and its predecessors for
more than five years prior to that.
-24-
MIDAMERICAN FUNDING
Information concerning the current managers and executive officers of
MidAmerican Funding is as follows:
(A) IDENTIFICATION
Served in
Present Served as
Present Position Manager
Name Age Position Since Since
---- --- -------- -------- ---------
David L. Sokol 46 Chief Executive Officer
and Manager 1999 1999
Gregory E. Abel 40 President and Chief Operating
Officer and Manager 1999 2001
Douglas L. Anderson 45 Vice President and
General Counsel 2002
Patrick J. Goodman 36 Vice President and Treasurer 1999 1999
Ronald W. Roskens 70 Independent Manager 2003 2003
The Board of Managers elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
(B) BUSINESS EXPERIENCE
DAVID L. SOKOL has been MidAmerican Funding's Chief Executive Officer and
Chairman of the Board of Managers since MidAmerican Funding's formation in March
1999. Mr. Sokol has been Chief Executive Officer of MidAmerican Energy Holdings
since April 1993 and served as President of MidAmerican Energy Holdings from
April 1993 until January 1995. He has been Chairman of the Board of Directors of
MidAmerican Energy Holdings since May 1994 and a director since March 1991.
Formerly, among other positions held in the independent power industry, Mr.
Sokol served as President and Chief Executive Officer of Kiewit Energy Company
and Ogden Projects, Inc.
GREGORY E. ABEL has been MidAmerican Funding's President and Chief
Operating Officer since its formation in March 1999 and a manager since 2001.
Mr. Abel joined MidAmerican Energy Holdings in 1992. Mr. Abel is a Chartered
Accountant, and from 1984 to 1992, he was employed by PriceWaterhouse. As a
Manager in the San Francisco office of PriceWaterhouse, he was responsible for
clients in the energy industry.
DOUGLAS L. ANDERSON has been MidAmerican Funding's Vice President and
General Counsel since May 2002. Mr. Anderson joined MidAmerican Energy Holdings
in 1993 and has served in various legal positions including General Counsel of
MidAmerican Energy Holdings' independent power affiliates. From 1990 to 1993,
Mr. Anderson was a corporate attorney with Fraser, Stryker. Prior to that, Mr.
Anderson was a principal in the firm Anderson and Anderson.
-25-
PATRICK J. GOODMAN has been MidAmerican Funding's Vice President and
Treasurer since April 1999. Mr. Goodman joined MidAmerican Energy Holdings in
June 1995, and served in various accounting positions including Senior Vice
President and Chief Accounting Officer. Prior to joining MidAmerican Energy
Holdings, Mr. Goodman was a financial manager for National Indemnity Company and
a senior associate at Coopers & Lybrand.
RONALD W. ROSKENS has been MidAmerican Funding's Independent Manager since
January 2003. Dr. Roskens has served since 1996 as the President of Global
Connections, Inc. (Omaha, Nebraska), an international business consulting firm.
Dr. Roskens has previously served as Administrator of the U.S. Agency for
International Development, President of the University of Nebraska System and
Executive Vice President and professor at Kent State University. He is a
director of ConAgra Inc.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information required by Item 11 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Information required by Item 12 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information required by Item 13 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
MidAmerican Funding's and MidAmerican Energy's respective chief executive
officer and chief financial officer have established "disclosure controls and
procedures" (as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities
and Exchange Act of 1934) to ensure that material information of the companies
and their subsidiaries is made known to them by others within the respective
companies. Under their supervision, an evaluation of the disclosure controls and
procedures was performed within 90 days prior to the filing of this annual
report. Based on that evaluation, the above-mentioned officers have concluded
that, as of the date of the evaluation, the disclosure controls and procedures
were operating effectively. Additionally, the above-mentioned officers find that
there have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date of
that evaluation.
-26-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K
--------
(A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN)
Page
----
Selected Consolidated Financial Data............................ 29
Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 32
MidAmerican Energy
------------------
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 57
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 58
Consolidated Balance Sheets
As of December 31, 2002 and 2001 ............................. 59
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000.......... 60
Consolidated Statements of Capitalization
As of December 31, 2002 and 2001 ............................. 61
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 2002, 2001 and 2000.......... 62
Notes to Consolidated Financial Statements...................... 63
Independent Auditors' Report.................................... 91
MidAmerican Funding
-------------------
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 92
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001, and 2000......... 93
Consolidated Balance Sheets
As of December 31, 2002 and 2001.............................. 94
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000.......... 95
Consolidated Statements of Capitalization
As of December 31, 2002 and 2001.............................. 96
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 2002, 2001 and 2000.......... 97
Notes to Consolidated Financial Statements...................... 98
Independent Auditors' Report.................................... 116
-27-
(A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN)
The following schedules should be read in conjunction with the
aforementioned financial statements.
Page
----
MidAmerican Energy Company Consolidated Valuation and Qualifying
Accounts (Schedule II) .......................................... 117
MidAmerican Funding, LLC Consolidated Valuation and Qualifying
Accounts (Schedule II)........................................... 118
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
(A)3. EXHIBITS
See Exhibit Index on page 131.
(B) REPORTS ON FORM 8-K
On November 12, 2002, MidAmerican Funding and MidAmerican Energy filed a
joint Current Report on Form 8-K with certifications of their respective chief
executive officer and chief financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
-28-
MIDAMERICAN ENERGY COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
DECEMBER 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Revenues ............................ $2,236,159 $2,367,249 $2,271,832 $1,762,350 $1,664,953
Operating income .................... 354,997 333,574 338,756 300,064 280,920
Net income .......................... 175,821 152,778 165,456 127,331 115,593
Earnings on common stock ............ 172,888 148,234 160,501 122,376 110,641
BALANCE SHEET DATA:
Total assets ........................ $3,811,879 $3,577,892 $3,823,566 $3,609,591 $3,585,530
Long-term debt (a) .................. 1,053,418 820,594 921,682 870,499 930,966
Power purchase obligation (b) ....... -- 25,867 52,282 68,049 83,127
Short-term borrowings ............... 55,000 89,350 81,600 204,000 206,221
Preferred stock:
Not subject to mandatory redemption 31,759 31,759 31,759 31,759 31,759
Subject to mandatory redemption (c) -- 126,680 150,000 150,000 150,000
Common shareholder's equity ......... 1,307,067 1,219,057 1,161,968 1,057,855 972,278
(a) Includes amounts due within one year.
(b) In July 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were written
off. Refer to Note (1)(h) of Notes to Consolidated Financial Statements
later in Item 15 of this Form 10-K for further discussion.
(c) The years 1998-2001 include $100 million of MidAmerican Energy-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely MidAmerican Energy junior subordinated debentures.
-29-
MIDAMERICAN FUNDING, LLC
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
MIDAMERICAN FUNDING MHC (PREDECESSOR)
-------------------------------------------------- -----------------------
YEARS ENDED MAR. 12 JAN. 1 YEAR
DECEMBER 31, THROUGH THROUGH ENDED
------------------------------------- DEC. 31, MAR. 11, DEC. 31,
2002 2001 2000 1999 1999 1998
----------- ---------- ----------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Revenues ......................... $2,240,879 $2,388,650 $2,316,343 $1,411,542 $ 375,884 $1,733,688
Operating income ................. 349,988 300,085 327,560 227,133 58,898 271,412
Income from continuing
operations (a) ............... 136,716 103,087 126,784 124,077 16,789 127,154
Net income ....................... 136,716 103,087 126,784 135,335 17,210 131,318
AS OF DECEMBER 31,
------------------------------------------------- DEC. 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets ..................... $5,153,984 $5,175,472 $5,423,009 $5,212,387 $4,244,336
Long-term debt (b) ............... 1,753,418 1,544,969 1,670,636 1,642,476 1,045,548
Power purchase obligation (c) .... -- 25,867 52,282 68,049 83,127
Short-term borrowings ............ 55,000 91,780 81,600 204,000 339,826
Preferred securities not subject
to mandatory redemption ...... 31,759 31,759 31,759 31,759 31,759
Preferred securities subject
to mandatory redemption (d) . -- 126,680 150,000 151,598 150,000
Member's equity (e) .............. 1,867,119 1,974,605 1,874,787 1,800,416 1,200,950
(a) In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," beginning January 1, 2002,
MidAmerican Funding's goodwill is no longer amortized. Refer to Note (1)(k)
of MidAmerican Funding's Notes to Consolidated Financial Statements later
in Item 15 of this Form 10-K. In 2002, MidAmerican Funding recorded pre-tax
expense of $21.9 million of writedowns for impaired assets and investments,
including a $12.6 pre-tax million writedown of airplane leases. In May
1999, MidAmerican Funding sold most of its investment in the common stock
of McLeodUSA and recorded an after-tax gain of $47.1 million. For the
period ended March 11, 1999, MHC expensed $18.6 million for transaction
costs related to its acquisition by MidAmerican Energy Holdings. In 1998,
MHC recorded after-tax gains totaling $15.7 million for sales of several
properties and investments, including a portion of its investment in the
common stock of McLeodUSA, Inc. Also, in 1998, MHC expensed $4.2 million
for transaction costs related to the acquisition by MidAmerican Energy
Holdings of MHC.
(b) Includes amounts due within one year.
(c) In July 2002, MidAmerican Energy's contract with the Nebraska Public Power
District regarding Cooper Nuclear Station was restructured. As a result,
the power purchase obligation and the related asset were written off. Refer
to Note (1)(h) of Notes to Consolidated Financial Statements later in Item
15 of this Form 10-K for further discussion.
-30-
(d) The years 1998-2001 include $100 million of MidAmerican Energy-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely MidAmerican Energy junior subordinated debentures.
(e) For MHC the amounts represent common shareholders' equity.
-31-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INDEX
Page
----
Introduction......................................................... 33
Forward-Looking Statements........................................... 33
Results of Operations................................................ 34
Liquidity and Capital Resources...................................... 45
- Investing Activities and Plans.............................. 45
- Financing Activities, Plans and Availability................ 48
- Credit Ratings Risks........................................ 49
- Rate Matters................................................ 49
- Legislative and Regulatory Evolution........................ 50
- Environmental Matters....................................... 51
- Generating Capability....................................... 53
- Critical Accounting Policies and Estimates.................. 53
- New Accounting Pronouncements............................... 55
- Quantitative and Qualitative Disclosures About Market Risk.. 56
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
------------
MidAmerican Funding, LLC is an Iowa limited liability company that was
formed in March 1999. The sole member of MidAmerican Funding is MidAmerican
Energy Holdings Company. MidAmerican Funding owns all of the outstanding common
stock of MHC Inc., formerly known as MidAmerican Energy Holdings Company, which
owns all of the common stock of MidAmerican Energy Company, MidAmerican Capital
Company, Midwest Capital Group, Inc., MidAmerican Services Company and MEC
Construction Services Co.
On March 12, 1999, MidAmerican Funding acquired MHC. As a part of this
transaction, the former CalEnergy Company Inc., a Delaware corporation, was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result, MHC and all direct and indirect subsidiaries of
MHC each became a subsidiary of MidAmerican Funding.
Management's Discussion and Analysis, or MD&A, addresses the financial
statements of MidAmerican Energy and MidAmerican Funding as presented in this
joint filing. Information related to MidAmerican Energy, whether or not
segregated, also relates to MidAmerican Funding. Information related to other
subsidiaries of MidAmerican Funding pertains only to the discussion of the
financial condition and results of operations of MidAmerican Funding. Where
necessary, discussions have been segregated and labeled to allow the reader to
identify information applicable only to MidAmerican Funding.
FORWARD-LOOKING STATEMENTS
--------------------------
This annual report contains statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can typically be identified by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast,"
and similar terms. These statements represent MidAmerican Funding's and/or
MidAmerican Energy's intentions, plans, expectations and beliefs and are subject
to risks, uncertainties and other factors. Many of these factors are outside the
control of MidAmerican Funding or MidAmerican Energy and could cause actual
results to differ materially from such forward-looking statements. These factors
include, among others:
- general economic and business conditions in the United States as a
whole and in the midwestern United States and MidAmerican Energy's
service territory in particular;
- governmental, statutory, regulatory or administrative initiatives;
- weather effects on sales and revenues;
- general industry trends;
- increased competition in the power generation industry;
- fuel and power costs and availability;
- changes in business strategy, development plans or vendor
relationships;
-33-
- availability, term and deployment of capital;
- availability of qualified personnel;
- risks relating to nuclear generation;
- financial or regulatory accounting principles or policies imposed
by the Financial Accounting Standards Board, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission and
similar entities with regulatory oversight; and
- other business or investment considerations that may be disclosed
from time to time in MidAmerican Funding's or MidAmerican Energy's
Securities and Exchange Commission filings or in other publicly
disseminated written documents.
MidAmerican Funding and MidAmerican Energy undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The foregoing review of factors
should not be construed as exhaustive.
RESULTS OF OPERATIONS
---------------------
EARNINGS OVERVIEW
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $24.7 million to
$172.9 million for 2002 compared to $148.2 million for 2001. Significant factors
contributing to the improvement in earnings were: 1) warmer temperatures during
the 2002 cooling season, 2) a reduction in costs related to Cooper Nuclear
Station due to a restructuring of the power purchase contract, and 3) an
increase in retail gas rates.
MidAmerican Funding -
MidAmerican Funding's net income for 2002 totaled $136.7 million compared
to $103.1 million for 2001. In accordance with Statement of Financial Accounting
Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets," MidAmerican
Funding's goodwill ceased being amortized effective January 1, 2002. Net income
for 2001 was reduced by $34.4 million for goodwill amortization. Excluding the
difference due to goodwill amortization, net income for 2002 declined $0.8
million compared to 2001. In addition to the factors discussed above for
MidAmerican Energy, net income for 2002 reflects $4.9 million of after-tax
income related to a gain and interest income from the sale of an investment in a
communications company, $17.1 million of after-tax loss for write-downs of
impaired investments and $4.0 million of additional income taxes for an
adjustment of deferred taxes related to MidAmerican Funding's goodwill.
-34-
REGULATED GROSS MARGIN
Regulated Electric Gross Margin -
2002 2001 2000
------ ------ ------
(In millions)
Operating revenues ..................... $1,353 $1,318 $1,212
Cost of fuel, energy and capacity ...... 347 276 249
------ ------ ------
Electric gross margin .............. $1,006 $1,042 $ 963
====== ====== ======
2002 vs. 2001
Electric gross margin for 2002 decreased $36 million compared to 2001.
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District, or NPPD, restructured their contract for Cooper Nuclear Station.
Accordingly, MidAmerican Energy's costs for energy and capacity purchased from
Cooper Nuclear Station are now classified differently on the Consolidated
Statement of Income. As a result, electric gross margin for 2002 decreased by
$33.2 million compared to 2001 due to the change in classification of the
related costs. Prior to August 1, 2002, only the fuel costs for energy purchased
from Cooper Nuclear Station were classified as a cost of fuel, energy and
capacity. Other costs under the contract were classified as other operating
expenses. Following the restructuring, all costs for energy and capacity
purchased under that contract are included in MidAmerican Energy's cost of fuel,
energy and capacity, as with other purchased power. Other operating expenses
decreased accordingly. Refer to Note (1)(h) of Notes to Consolidated Financial
Statements later in Item 15 of this Form 10-K for a discussion of the contract
restructuring.
In addition to the effect of restructuring the contract for Cooper Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$23.1 million for 2002 due to a decline in prices, partially offset by a 21.1%
increase in wholesale sales volumes compared to 2001. Wholesale sales are the
sales of energy to other utilities, municipalities and marketers inside and
outside of MidAmerican Energy's delivery system.
Warmer temperatures in the 2002 cooling season resulted in approximately a
$16 million increase in electric margin compared to 2001. Electricity usage
factors not dependent on weather increased electric margin by $17.8 million
compared to 2001. An increase in the average retail rate increased electric
margin by $7.2 million. Additionally, a decrease in fuel costs related to Iowa
retail electric sales, excluding the impact of restructuring the Cooper Nuclear
Station contract, increased electric margin by $7.9 million relative to 2001.
Related financial derivative instruments used for hedging purposes resulted in a
$1.7 million decrease in electric gross margin. In total, retail electric sales
volumes increased 3.9% for 2002.
Electric revenues from the recovery of energy efficiency program costs
decreased $14.9 million compared to 2001. The decrease in 2002 was due to
completion in the third quarter of 2001 of the final recovery phase for deferred
energy efficiency costs. Deferred energy efficiency costs were costs previously
incurred by MidAmerican Energy, which, in accordance with rate treatment, were
not charged to expense until recovery from customers began. Recovery of deferred
energy efficiency costs occurred over a four-year period from the date
collection began for each phase. The decrease in recovery of deferred costs was
offset partially by an increase in the recovery of current energy efficiency
costs. Changes in these revenues are substantially matched with corresponding
changes in other operating expenses. Approximately $13.9 million of MidAmerican
Energy's 2002 electric revenues were from the recovery of energy efficiency
program costs compared to $28.8 million in 2001.
-35-
MidAmerican Energy sells and purchases electric capacity. The net margin
from those sales and purchases decreased $2.3 million compared to 2001. Also,
MidAmerican Energy's gains from sales of emission allowances decreased $3.2
million in 2002 due to a gain in 2001. Revenues from transmission services
decreased $2.5 million compared to 2001, and electric revenues from recovery
mechanisms related to Cooper Nuclear Station and manufactured gas plant costs
decreased $2.6 million.
2001 vs. 2000
Electric gross margin for 2001 increased $79 million compared to 2000.
MidAmerican Energy's gross margin on wholesale sales increased $63.5
million compared to 2000. The increase was due to an increase in the average
margin per unit sold and an 11.7% increase in related sales volumes compared to
2000.
Additionally, electric margin for 2001 increased $21.6 million compared to
2000 due to a refund accrual in 2000 that reduced electric margin. The refund
accrual was for a revenue sharing arrangement in Iowa that terminated December
31, 2000. Refer to the "Rate Matters" section of MD&A for a discussion of the
current arrangement.
The impact of temperatures increased electric gross margin approximately $2
million compared to 2000. Temperature conditions during the cooling season in
2001 were slightly hotter than 2000 while temperatures during the heating season
in 2001 were slightly milder than in 2000. Other usage factors not dependent on
weather increased electric margin by $9.7 million compared to 2000. In total,
retail sales of electricity increased 3.2% in 2001.
In 2001, MidAmerican Energy recorded gains from the sales of emission
allowances which improved electric margin by $3.3 million compared to 2000.
Revenues from transmission services increased $4.0 million compared to 2000 due
to additional revenues from the Mid-Continent Area Power Pool.
An increase in the average cost of energy per unit sold for Iowa retail
sales reduced electric gross margin by $20.3 million compared to 2000. The
increase in the average cost of energy per unit sold was due in part to an
increase in coal costs and increased use of combustion turbines and combined
cycle plants.
Electric revenues from the recovery of energy efficiency program costs
decreased $6.0 million compared to 2000 due to completion in 2001 of the final
recovery phase. Approximately $28.8 million of MidAmerican Energy's 2001
electric revenues were from the recovery of energy efficiency program costs
compared to $34.8 million in 2000.
Regulated Gas Gross Margin -
2002 2001 2000
---- ---- ----
(In millions)
Operating revenues ............... $696 $869 $930
Cost of gas sold ................. 483 675 721
---- ---- ----
Gas gross margin ............. $213 $194 $209
==== ==== ====
Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from its
retail gas utility customers. Consequently, fluctuations in the cost of gas sold
do not affect gross margin or net income because revenues reflect
-36-
comparable fluctuations from purchase gas adjustment clauses. A decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold by
approximately $135 million for 2002.
2002 vs. 2001
Gas gross margin for 2002 increased $19 million compared to 2001.
Increases in retail rates in 2002 improved gas margin by $11.5 million
compared to 2001. On February 20, 2002, the South Dakota Public Utilities
Commission approved a settlement agreement allowing increased natural gas rates
of $3.1 million annually, effective immediately. On June 12, 2002, the Iowa
Utilities Board, or IUB, issued an order granting an interim rate increase of
approximately $13.8 million annually, effective immediately. On November 8,
2002, the IUB approved a proposed settlement agreement previously filed by
MidAmerican Energy and the Office of Consumer Advocate that provides for a final
increase of $17.7 million annually for MidAmerican Energy's Iowa retail natural
gas customers. On September 11, 2002, MidAmerican Energy received a final order
from the Illinois Commerce Commission to increase its Illinois natural gas rates
by $2.2 million annually. Refer to the "Rate Matters" section of MD&A for
comments on the Iowa gas rate settlement.
Colder temperature conditions in the second and fourth quarters of 2002
compared to the same quarters in 2001, offset partially by milder temperature
conditions in the remainder of 2002, resulted in approximately a $1 million
increase in gas gross margin. A $1.3 million loss on a weather derivative
financial instrument offset the increase due to colder temperature conditions.
Other usage factors not dependent on weather increased gas margin by $7.7
million. Total natural gas retail sales volumes increased 1.3%.
2001 vs. 2000
Gas margin for 2001 decreased $15 million compared to 2000.
Warmer temperature conditions in the second and fourth quarters of 2001
compared to the same quarters in 2000 and conservation by customers due to
higher prices in early 2001 resulted in approximately a $9 million decrease in
gas margin compared to 2000. Other usage factors not dependent on weather
resulted in a $4.7 million decrease in gas margin compared to 2000. In total,
retail sales of natural gas decreased 7.2% compared to 2000. The decrease in gas
margin due to warmer temperature conditions was partially mitigated by a $1.7
million gain on a weather derivative financial instrument.
Recovery of gas energy efficiency costs decreased $1.2 million for 2001
compared to 2000 due to the completion of the final four-year recovery phase.
Additionally, margin on gas transported decreased $1.1 million.
-37-
REGULATED OPERATING EXPENSES
Other Operating Expenses -
Regulated other operating expenses for 2002 decreased $54.9 million for
MidAmerican Energy and $50.8 million for MidAmerican Funding compared to 2001.
Effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. Accordingly, MidAmerican Energy's costs for
energy and capacity purchased from Cooper Nuclear Station are now classified
differently on the Consolidated Statement of Income. As a result, other
operating expenses for 2002 decreased by $46.2 million compared to 2001. Prior
to August 1, 2002, costs under the contract other than fuel costs for energy
purchased were classified as other operating expenses. Following the
restructuring, all costs for energy and capacity purchased under that contract
are included in MidAmerican Energy's cost of fuel, energy and capacity, as with
other purchased power. Refer to Note (1)(h) of Notes to Consolidated Financial
Statements later in Item 15 of this Form 10-K for a discussion of the contract
restructuring.
Other substantive decreases included $10.4 million in energy efficiency
program costs, $6.5 million in the provision for uncollectible accounts
receivable and $2.5 million related to information technology. Numerous less
substantive decreases also contributed to the total decrease in other operating
expenses. Compared to 2001, pension and other postretirement costs increased
$10.8 million; health care costs increased $4.2 million; and Quad Cities Station
(nuclear) costs increased $3.9 million.
Regulated other operating expenses for 2001 increased $15.2 million for
MidAmerican Energy and $30.5 million for MidAmerican Funding compared to 2000.
Increases include a $15.9 million increase in pension and other postretirement
benefits costs, a $6.7 million increase in the allowance for uncollectible
accounts, a $5.5 million increase in Cooper Nuclear Station costs and a $4.2
million increase in electric distribution expense. In addition, MidAmerican
Funding's other operating expenses increased $15.3 million due to purchase
accounting adjustments relating principally to the Cooper Nuclear Station
contract. The increases were partially offset by a $7.3 million reduction in
Quad Cities Station operating expenses, a $4.5 million reduction in energy
efficiency amortization and program costs and decreases in various other costs.
Maintenance -
Maintenance expenses decreased $2.9 million for 2002 compared to 2001 due
to a $5.6 million decrease in electric distribution maintenance expenses as a
result of a reduction in costs for tree-trimming activity. Fossil-fuel
generation maintenance expenses increased $1.9 million for 2002.
Maintenance expenses for 2001 compared to 2000 increased $11.3 million.
Fossil fuel generating plant maintenance expenses increased $8.6 million, while
maintenance costs for Quad Cities Station decreased $5.7 million. Electric
distribution system maintenance increased $5.4 million in part due to a more
aggressive tree-trimming program. Gas distribution maintenance expenses
increased $3.0 million.
Depreciation and Amortization -
Depreciation and amortization expense for 2002 increased $16.7 million
compared to 2001 due to a $13.5 million increase in utility plant depreciation
due, in part, to a change in the estimated useful life of general utility plant
assets. Additionally, the charge related to the establishment of a regulatory
liability for the electric revenue sharing arrangement in Iowa increased $7.8
million for 2002 compared to 2001. Refer to the "Rate Matters" section of MD&A
for further discussion.
-38-
Depreciation and amortization expense increased $53.2 million for
MidAmerican Energy and $57.2 million for MidAmerican Funding in 2001 compared to
2000. During 2001, MidAmerican Energy recorded $47.1 million for the charge
related to the establishment of a regulatory liability for the electric revenue
sharing arrangement in Iowa that began in 2001. The IUB approved a settlement
agreement, which includes the revenue sharing arrangement, in December 2001. In
addition, utility plant depreciation expense increased as a result of an
increase in depreciation rates in 2001 and an increase in utility plant.
Property and Other Taxes -
Property and other taxes fluctuated in 2002 and 2001 compared to each
preceding year due primarily to changes in MidAmerican Energy's Iowa property
tax assessed values.
NONREGULATED GROSS MARGIN
2002 2001 2000
------ ------ ------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues:
Energy trading gross revenues ......... $261.8 $290.3 $282.5
Energy trading cost of sales .......... 258.5 283.4 280.4
------ ------ ------
Energy trading net revenues ......... 3.3 6.9 2.1
Other nonregulated revenues ........... 183.6 173.1 127.8
------ ------ ------
Total nonregulated operating revenues 186.9 180.0 129.9
Nonregulated cost of sales .............. 158.5 154.4 108.5
------ ------ ------
Nonregulated gross margin .......... $ 28.4 $ 25.6 $ 21.4
====== ====== ======
MidAmerican Funding Consolidated -
Nonregulated operating revenues:
Energy trading gross revenues ......... $261.8 $290.3 $282.5
Energy trading cost of sales .......... 258.5 283.4 280.4
------ ------ ------
Energy trading net revenues ......... 3.3 6.9 2.1
Other nonregulated revenues ........... 188.4 194.5 172.3
------ ------ ------
Total nonregulated operating revenues 191.7 201.4 174.4
Nonregulated cost of sales .............. 159.4 170.5 144.6
------ ------ ------
Nonregulated gross margin .......... $ 32.3 $ 30.9 $ 29.8
====== ====== ======
MidAmerican Energy -
The Emerging Issues Task Force, or EITF, issued EITF Issue No. 02-3,
"Recognition and Reporting of Gains and Losses on Energy Trading Contracts under
Issues No. 98-10 and 00-17." In accordance with EITF Issue No. 02-3, all gains
and losses on MidAmerican Energy's energy trading contracts are now reported net
on the statement of income, and all prior period amounts have been reclassified
to a consistent presentation. MidAmerican Energy's nonregulated wholesale gas
and electric marketing activities qualify as "energy trading" contracts under
the guidance of EITF Issue No. 02-3. The preceding tables provide the gross
revenues and cost of sales for those activities for discussion purposes. For
2002, approximately 95% of MidAmerican Energy's gross revenues from energy
trading activities were from gas trading operations.
-39-
2002 vs. 2001
MidAmerican Energy's nonregulated gross margin for 2002 increased $2.8
million compared to 2001.
Energy Trading
--------------
Energy trading net revenues decreased from $6.9 million for 2001 to $3.3
million for 2002 due principally to a reduction in net revenues, or gross
margin, on MidAmerican Energy's gas energy trading operations. Gross margin for
MidAmerican Energy's gas energy trading operations decreased $5.0 million to
$1.6 million for 2002 compared to 2001 due primarily to a decrease in the margin
per unit sold. Additionally, sales volumes decreased 1.1%, or 0.8 million
MMBtus; an MMBtu is one million British thermal units. Cost of sales for gas
energy trading decreased for 2002 due principally to an 11.5% decrease in the
average per-unit cost of gas. Related gross revenues reflect the decrease in the
average cost of gas and a reduction in the per-unit margin on sales. Gross
margin for electric trading operations increased $1.4 million compared to 2001
to $1.7 million for 2002.
Other Nonregulated Revenues and Cost of Sales
---------------------------------------------
Other nonregulated revenues and cost of sales consist substantially of
nonregulated retail natural gas marketing operations. Gross margin for
MidAmerican Energy's nonregulated retail natural gas operations increased $0.7
million to $2.7 million for 2002. The improvement in gross margin reflects a
19.8% increase in margin per unit and a 12.0% increase in sales volumes. Sales
volumes increased 2.6 million MMBtus. Revenues from nonregulated retail natural
gas operations decreased $11.8 million to $106.9 million for 2002. A decrease in
the average price per unit sold, reflective of a 20.3% decrease in the average
cost of gas, resulted in a $26.1 million decrease in revenues, but was partially
offset by the increase in sales volumes.
All electric retail customers in Illinois, except for those served by
electric cooperatives and municipalities, are allowed to select their electric
power supplier. For 2002 compared to 2001, gross margin for nonregulated retail
electric operations increased $7.6 million to $11.4 million. Related revenues
increased $29.7 million to $63.1 million for 2002 while cost of sales increased
$22.1 million to $51.7 million. The improvement in gross margin was due to an
increase in sales volumes as a result of the addition of customers and an
increase in margin per unit sold as a result of decreases in the related cost of
energy.
Nonregulated revenues include income from sharing arrangements under
regulated natural gas tariffs. Total related income decreased from $4.4 million
for 2001 to $3.1 million for 2002.
Under MidAmerican Energy's incentive gas procurement program, if
MidAmerican Energy's cost of gas varies from an established reference price
range, then the savings or cost is shared between customers and shareholders.
Nonregulated revenues in 2002 include $3.4 million of pre-tax income from awards
for successful performance under program. Similar awards totaling $4.1 million
were recorded in 2001.
MidAmerican Energy currently offers an Extended Service Protection Plan to
its customers for appliance and other maintenance related services. Revenues for
2002 totaled $2.9 million, down $0.7 million from 2001, and cost of sales
totaled $2.0 million, down $0.4 million from 2001.
Additionally, nonregulated revenues for 2002 include $1.2 million for
emergency storm restoration work performed outside of MidAmerican Energy's
service territory during the first quarter of
-40-
2002. Related costs are reflected in the line Nonregulated Operating Expenses -
Other on the Consolidated Statements of Income.
Nonregulated revenues for 2001 include $6.2 million from MidAmerican
Energy's market access service project. Related costs of sales totaled $5.4
million. The pilot project, which concluded in May 2001, allowed larger Iowa
customers that were participating in the project to choose their electric power
supplier. MidAmerican Energy's revenues from project participants related to
non-supply services, such as distribution and transmission, are reflected in
regulated electric revenues.
2001 vs. 2000
MidAmerican Energy's nonregulated gross margin for 2001 increased $4.2
million compared to 2000.
Energy Trading
--------------
Energy trading net revenues increased from $2.1 million for 2000 to $6.9
million for 2001 due to an increase in gross margin on MidAmerican Energy's gas
energy trading operations. Gross margin for MidAmerican Energy's nonregulated
wholesale natural gas operations increased $4.8 million to $6.6 million for 2001
compared to 2000 due primarily to an increase in the margin per unit sold. An
increase of 16.8 million MMBtus, or 26.3%, also contributed to the increase in
gross margin. Cost of sales for gas energy trading increased due to the
improvement in sales volumes, substantially offset by a 20.0% decrease in the
per-unit cost of gas. Related revenues increased compared to 2000, reflecting
the increase in sales volumes and the offsetting reduction in the price per-unit
sold.
Other Nonregulated Revenues and Cost of Sales
---------------------------------------------
Gross margin for MidAmerican Energy's nonregulated retail natural gas
operations increased $0.6 million to $2.0 million for 2001. The improvement in
gross margin reflects a 59.8% increase in sales volumes, offset partially by an
11.2% reduction in margin per unit sold. Sales volumes increased 8.1 million
MMBtus compared to 2001. Revenues from nonregulated retail natural gas
operations increased $47.8 million to $118.7 million for 2001. The increase in
sales volumes resulted in a $42.4 million increase in revenues. An increase in
the average price per unit sold, reflective of a 5.1% increase in the average
cost of gas, also contributed to the increase in revenues.
As of December 31, 2000, all non-residential retail customers in Illinois,
except for those served by electric cooperatives and municipalities, were phased
in to allow them to select their electric power supplier. For 2001 compared to
2000, gross margin for these nonregulated retail electric sales increased $4.5
million to $3.8 million. Related revenues increased $13.9 million to $33.4
million for 2001 while cost of sales increased $9.4 million to $29.6 million.
Nonregulated revenues from MidAmerican Energy's market access service
project totaled $6.2 million and $17.9 million for 2001 and 2000, respectively;
the related cost of sales totaled $5.4 million for 2001 and $16.9 million for
2000. As discussed above, the pilot project concluded in May 2001.
Income from sharing arrangements under regulated natural gas tariffs
decreased from $5.2 million for 2000 to $4.4 million for 2001. MidAmerican
Energy's nonregulated revenues also include pre-tax income from awards for
successful performance under its incentive gas procurement program. The awards
totaled $4.1 million and $3.9 million in 2001 and 2000, respectively.
-41-
Gross margin for MidAmerican Energy's Extended Service Protection Plan was
unchanged for 2001 compared to 2000. Revenues for 2001 totaled $3.6 million and
$3.2 million for 2000, while related cost of sales totaled $2.4 million for 2001
and $2.0 million for 2000.
Nonregulated revenues for 2000 include $5.7 million of revenues and margin
for nonregulated services performed for regulated customers of MidAmerican
Energy, including distribution maintenance. Beginning in 2001, these services
are primarily performed by another subsidiary of MidAmerican Funding.
MidAmerican Funding -
During 2001 and 2000, a subsidiary of MidAmerican Capital had nonregulated
retail natural gas marketing operations. Revenues and costs of sales in 2001
totaled $11.3 million and $11.6 million, respectively. In 2000, revenues totaled
$35.1 million and cost of sales totaled $34.2 million. All contracts of that
subsidiary have terminated.
Nonregulated revenues and cost of sales for 2001 decreased compared to 2000
due to the sale in April 2000 of security system operations. The first quarter
of 2000 includes $4.4 million of revenues and $2.6 million of cost of sales from
those operations.
NONREGULATED OPERATING EXPENSES: OTHER
MidAmerican Energy -
Nonregulated other operating expenses increased $1.5 million for 2002 due
primarily to $1.0 million of costs related to the emergency storm restoration
work discussed above. Nonregulated other operating expenses decreased $2.3
million for 2001 compared to 2000 due to a decrease in cost related to
nonregulated services for MidAmerican Energy regulated customers.
MidAmerican Funding -
MidAmerican Funding's nonregulated other operating expenses, exclusive of
MidAmerican Energy amounts, decreased $34.1 million for 2002 compared to 2001.
MidAmerican Funding's goodwill is no longer being amortized as a result of the
adoption of SFAS No. 142 on January 1, 2002. Amortization of MidAmerican
Funding's goodwill totaled $34.4 million for 2001. MidAmerican Funding's
nonregulated other operating expenses, excluding MidAmerican Energy, decreased
$3.3 million for 2001 compared to 2000 due to a decrease in sales tax expense
and goodwill amortization. Additionally, 2000 includes $1.7 million in costs
related to the security system operations sold in April 2000.
INTEREST AND DIVIDEND INCOME
MidAmerican Energy -
Interest and dividend income decreased $4.2 million for 2002 compared to
2001 due to a $5.9 million reduction in interest income on a note receivable
associated with MidAmerican Energy's accounts receivable sold. The related
agreement terminated on October 29, 2002. A more favorable cash position
increased interest income on short-term investments compared to 2001, partially
offsetting the decrease in interest income on the note receivable. The improved
cash position was due principally to the issuance of $400 million of notes in
February 2002.
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Interest and dividend income decreased $2.4 million for 2001 compared to
2000. A decrease in interest from a joint plant operator for funds held by it
reduced interest income by approximately $2.3 million, while interest related to
income tax refunds decreased $6.1 million. Interest income on the note
receivable for the accounts receivable sold increased $5.4 million in 2001.
MidAmerican Funding -
Excluding MidAmerican Energy, interest income for MidAmerican Funding
increased $2.0 million for 2002 compared to 2001. Interest income for 2002
includes $5.0 million from the settlement of an investment in a communications
company but was partially offset by a $2.6 million decrease in interest income
related to note receivables with MidAmerican Funding's parent company. Refer to
Note (1)(f) of Notes to Consolidated Financial Statements later in Item 15 of
this Form 10-K for a discussion of the notes with the parent company.
Interest income decreased $2.2 million, excluding MidAmerican Energy, for
2001 compared to 2000 due primarily to interest on the notes receivable with
MidAmerican Funding's parent company.
Dividend income decreased in 2002 and 2001 compared to each preceding year
due to the on-going liquidation of the preferred stock investment portfolio.
MARKETABLE SECURITIES GAINS AND LOSSES, NET
MidAmerican Funding -
Net losses on marketable securities increased $4.0 million for 2002
compared to 2001. In 2002, MidAmerican Funding recorded losses totaling $4.3
million for other-than-temporary declines in its available-for-sale common stock
investments. Additionally, other losses on marketable securities increased $2.0
million in 2002. The first quarter of 2001 includes a $2.4 million pre-tax loss
related to the re-characterization of marketable securities to "trading" as
allowed by SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", thus increasing 2002 income relative to 2001.
Net losses on marketable securities for 2001 decreased $2.8 million
compared to 2000 due to a decrease in net losses realized on sales of the
preferred stock investment portfolio in 2001 compared to 2000. The impact of the
decrease in net losses on the sales of the preferred stock investment portfolio
was partially offset by the comparative effect of 2000 including a $2.0 million
pre-tax gain on the sale of the remaining shares of McLeodUSA common stock held
by MidAmerican Funding. Additionally, the re-characterization of marketable
securities discussed in the preceding paragraph resulted in a $2.4 million
pre-tax loss in 2001. As a result of the re-characterization of the securities,
the Consolidated Statement of Income for 2001 reflects unrealized gains and
losses on those securities. In 2000, unrealized gains and losses on marketable
securities were recorded in equity.
OTHER INCOME AND EXPENSE
MidAmerican Energy -
As a regulated public utility, MidAmerican Energy is allowed to capitalize,
and record as income, a cost of construction for equity funds used, based on
guidelines set forth by the Federal Energy Regulatory Commission, or FERC.
Accordingly, other income for the capitalized allowance on equity funds used
during construction totaled $8.6 million in 2002, $1.6 million in 2001 and zero
in 2000. MidAmerican Energy anticipates recording income for the allowance on
equity funds used during construction over the next several years while the
announced generating plants are constructed.
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Other income includes net earnings related to the cash surrender value of
corporate-owned life insurance policies. Such income totaled $1.3 million, $5.3
million and $9.3 million for 2002, 2001 and 2000, respectively. The income for
2001 includes a gain from common stock received as a result of an initial stock
offering by one of the insurance providers. Income for 2000 includes $7.4
million related to benefits paid on several policies.
Other income for 2002 reflects $1.2 million of gain from the sale of
utility property. Other Income for 2001 reflects a $1.4 million gain on the sale
of MidAmerican Energy rail cars. Additionally, income from MidAmerican Energy's
equity method investment totaled $0.3 million in each of the years 2002 and 2001
and a loss of $0.5 million in 2000.
Other income includes income from a subservicer fee charged to MidAmerican
Energy Funding Corporation for servicing MidAmerican Energy's accounts
receivable sold to them. Subservicer fee income totaled $1.3 million, $2.9
million and $1.9 million for 2002, 2001 and 2000, respectively. Likewise, other
expense includes a discount on sold accounts receivable. The discount is
designed to cover the expenses of MidAmerican Energy Funding Corporation,
including bad debt expense, subservicer fees, monthly administrative costs and
interest. The discount is recorded in other expense because it is not reflected
in utility cost of service for regulatory purposes. The discount totaled $6.4
million, $16.0 million and $10.2 million for 2002, 2001 and 2000, respectively.
The related arrangement terminated October 29, 2002. Refer to "Accounts
Receivable Securitization" in the "Financing Activities, Plans and Availability"
section later in MD&A for further discussion.
MidAmerican Funding -
Other income of MidAmerican Funding includes $7.4 million, $4.8 million and
$2.6 million of income from MidAmerican Capital's equity method investments.
Equity income for 2002 includes $5.3 million of income for a distribution of
common stock held by one of MidAmerican Capital's venture capital fund
investments. In 2001, equity income includes $2.3 million related to a gain on a
common stock distribution by one of MidAmerican Capital's venture capital fund
investments.
Other income for 2002 also includes a $2.6 million gain on the sale of an
investment in a communications company and $0.5 million from the sale of rail
cars. In 2000, MidAmerican Funding recorded a $4.3 million gain on the sale of
its security system companies and gains totaling $2.1 million from the sale of
commercial property, rail cars and other assets.
Other expense for MidAmerican Funding in 2002 includes write-downs for
impaired assets and investments. MidAmerican Funding has investments in
commercial passenger aircraft, which it accounts for as leveraged leases.
Evaluation of these investments resulted in a $12.6 million pre-tax write-down.
Additionally, MidAmerican Funding recorded a $5.1 million loss for the permanent
impairment of an equity method investment, a $2.7 million loss related to a
receivable on a special purpose fund investment and losses totaling $1.5 million
from permanent impairments on three venture capital fund investments.
FIXED CHARGES AND PREFERRED DIVIDENDS
MidAmerican Energy -
The increase in interest on long-term debt for 2002 compared to 2001 was
due to the issuance of $400 million of notes in February 2002, net of the impact
of debt maturities in 2001 and lower variable interest rates in 2002. Interest
on long-term debt decreased in 2001 compared to 2000 due to long-term
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debt maturities and a reduction in interest rates on variable rate debt. These
decreases were partially offset by interest related to medium-term notes issued
in July 2000.
Other interest expense decreased for 2002 compared to 2001 due principally
to interest in 2001 related to income tax assessments. Additionally, other
interest expense decreased due to a reduction in short-term debt outstanding.
Other interest expense increased in 2002 for interest on regulatory liabilities
associated with the electric revenue sharing arrangement in Iowa and the
restructuring of MidAmerican Energy's contract related to Cooper Nuclear
Station.
For 2001 compared to 2000, other interest expense decreased due to a
reduction in the average amount of short-term debt outstanding and lower
interest rates. Additionally, interest for 2000 includes $0.6 million related to
a gas supplier refund that was refundable to utility customers. These decreases
were partially offset by interest related to state and federal income tax
assessments in 2001.
Preferred dividends of MidAmerican Energy's subsidiary trust decreased in
2002 due to the reacquisition of all of the related preferred securities on
March 11, 2002. Dividends for MidAmerican Energy's preferred securities, which
are reflected after Net Income on MidAmerican Energy's, Consolidated Statements
of Income, decreased due to preferred securities reacquired in May and November
2001 and May 2002. Preferred dividends for 2002 reflect a $0.7 million loss on
reacquisition of preferred securities compared to a loss of $0.2 million in
2001. Preferred dividends decreased in 2001 compared to 2000 as a result of the
reacquisition of preferred shares in April and November 2001. The loss of $0.2
million on the 2001 reacquisitions partially offset the decrease in dividends.
MidAmerican Funding -
MidAmerican Funding retired $200 million of long-term debt and issued $200
million of long-term debt in the first quarter of 2001, resulting in a relative
increase in interest on long-term debt for 2002. The increase is due to the
period of time between the retirement of the former debt series and the issuance
of the current debt series, which reduced interest expense in 2001. Also, the
current debt series has a higher interest rate than the previous debt. Interest
on long-term debt was reduced in 2002 and 2001 compared to the respective
preceding year due to the maturity of MidAmerican Capital long-term debt in the
fourth quarter of each year.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MidAmerican Energy and MidAmerican Funding have available a variety of
sources of liquidity and capital resources, both internal and external. These
resources provide funds required for current operations, construction
expenditures, dividends, debt retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican
Energy's net cash provided by operating activities was $353 million, $479
million and $360 million for 2002, 2001 and 2000, respectively. MidAmerican
Funding's net cash provided by operating activities was $366 million, $461
million and $304 million for 2002, 2001 and 2000, respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the year ended December 31, 2002, utility construction
expenditures totaled $357 million, including allowance for
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funds used during construction, or capitalized financing costs, and Quad Cities
Station nuclear fuel purchases.
Forecasted utility construction expenditures, including allowance for funds
used during construction, are $368 million for 2003. Capital expenditure needs
are reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2010, MidAmerican Energy plans to develop and construct three
electric generating projects in Iowa. The projects would provide service to
regulated retail electricity customers and, subject to regulatory approvals, be
included in regulated rate base in Iowa, Illinois and South Dakota. Wholesale
sales may also be made from the plants to the extent the power is not needed for
regulated retail service. MidAmerican Energy expects to invest approximately
$1.6 billion in the three projects, including the cost of related transmission
facilities and allowance for funds used during construction. The three projects
may provide approximately 1,285 megawatts, or MW, of generating capacity for
MidAmerican Energy depending on management's on-going assessment of energy needs
and related factors.
The first project is a 500-MW (based on expected accreditation) natural
gas-fired combined cycle unit with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and operate it. MidAmerican Energy
has received a certificate from the IUB allowing it to construct the plant.
Also, on May 29, 2002, the IUB issued an order that provides the ratemaking
principles for the gas-fired plant. As a result of that order, MidAmerican
Energy is proceeding with the construction of the plant. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in 310 MW of
accredited capacity. The combined cycle operation is expected to commence in
2005.
The second project is currently under development and is expected to be a
790-MW (based on expected accreditation) super-critical-temperature, coal-fired
plant fueled with low-sulfur coal. If constructed, MidAmerican Energy will
operate the plant and expects to own approximately 475 MW of the plant.
Municipal, cooperative and public power utilities will own the remainder, which
is a typical ownership arrangement for large base-load plants in Iowa. On
January 23, 2003, MidAmerican Energy received an order approving the issuance of
a certificate from the IUB allowing it to construct the plant. MidAmerican
Energy has made a filing with the IUB for approval of ratemaking principles
pertaining to this second plant. Continued development of this plant is subject
to obtaining environmental and other required permits, as well as receiving
orders from the IUB approving construction of the associated transmission
facilities and establishing ratemaking principles which are satisfactory to
MidAmerican Energy.
The third project is currently under development and is expected to be wind
power facilities totaling 310 MW (nameplate rating). If constructed, MidAmerican
Energy will own and operate these facilities, which are expected to cost
approximately $323 million, plus associated transmission facilities.
MidAmerican's plan to construct the wind project is in conjunction with a
settlement proposal to extend through December 31, 2010, a rate freeze that is
currently scheduled to expire at the end of 2005. The proposed settlement
requires enactment of Iowa legislation and is subject to approval by the IUB.
Refer to the "Rate Matters" section below for more discussion of the rate
aspects of the proposed settlement.
Nuclear Decommissioning -
Each licensee of a nuclear facility is required to provide financial
assurance for the cost of decommissioning its licensed nuclear facility. In
general, decommissioning of a nuclear facility means to safely remove the
facility from service and restore the property to a condition allowing
unrestricted use by the operator.
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Based on information presently available, MidAmerican Energy expects to
contribute approximately $41 million during the period 2003 through 2007 to
external trusts established for the investment of funds for decommissioning Quad
Cities Station. Approximately 60% of the fair value of the trusts' funds is now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds. Funding for
Quad Cities Station nuclear decommissioning is reflected as depreciation expense
in the Consolidated Statements of Income. Quad Cities Station decommissioning
costs charged to Iowa customers are included in base rates, and recovery of
increases in those amounts must be sought through the normal ratemaking process.
Contractual Obligations and Commercial Commitments -
MidAmerican Energy and MidAmerican Funding have various contractual
obligations and commercial commitments. Following is a table summarizing, as of
December 31, 2002, the material cash obligations of MidAmerican Energy and
MidAmerican Funding (in millions).
Period Payments are Due
--------------------------------------
2004- 2006- After
Type of Obligation Total 2003 2005 2007 2007
- ------------------ -------- ------ ------ ------ --------
MidAmerican Energy:
Long-term debt, excluding unamortized
debt premium and discount, net ................. $1,058.9 $105.7 $147.0 $162.0 $ 644.2
Operating leases (1) ............................. 20.9 7.5 8.4 4.2 0.8
Coal, electricity and natural gas
contract commitments (1) ....................... 527.0 193.2 238.7 32.9 62.2
-------- ------ ------ ------ --------
Total .......................................... 1,606.8 306.4 394.1 199.1 707.2
MidAmerican Funding parent and other subsidiaries:
Long-term debt, excluding unamortized
debt premium and discount, net ................. 700.0 -- -- -- 700.0
-------- ------ ------ ------ --------
Total .......................................... $2,306.8 $306.4 $394.1 $199.1 $1,407.2
======== ====== ====== ====== ========
(1) The operating leases and fuel and energy commitments are not reflected on
the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes to
Consolidated Financial Statements later in Item 15 of this Form 10-K for a
discussion of these commitments.
The above table includes MidAmerican Energy's and MidAmerican Funding's
unconditional purchase obligations. MidAmerican Energy has other types of
commitments that are subject to change and relate primarily to the items listed
below. For additional information, refer, where applicable, to the respective
referenced Note in Notes to Consolidated Financial Statements later in Item 15
of this Form 10-K.
- Construction expenditures: MidAmerican Energy's construction
expenditures for 2003 are estimated to be $368 million, including $122
million for the Greater Des Moines Energy Center, a 500-MW accredited
capacity natural gas-fired combined cycle unit.
- Manufactured gas plant facilities (see Note (4)(a))
- Nuclear decommissioning costs (see Note (4)(d))
- Residual guarantees on operating leases (see Note (1)(j))
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FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Debt Authorizations and Credit Facilities -
MidAmerican Energy has authority from the FERC to issue through April 14,
2003, short-term debt in the form of commercial paper and bank notes aggregating
$500 million. MidAmerican Energy currently has in place a $370.4 million
revolving credit facility that supports its $250 million commercial paper
program and its variable rate pollution control revenue obligations. The
facility expires January 15, 2004. In addition, MidAmerican Energy has a $5.0
million line of credit, which expires July 1, 2003.
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% notes
due in 2031. The proceeds were used to refinance existing debt and preferred
securities and for other corporate purposes. On March 11, 2002, MidAmerican
Energy redeemed all $100 million of its 7.98% MidAmerican-obligated preferred
securities of subsidiary trust at 100% of the principal amount plus accrued
interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.68 million of its
$7.80 series of preferred securities. The first $13.32 million of preferred
securities were redeemed at 100% of the principal amount plus accrued dividends,
and the remaining $13.36 million was redeemed at 103.9% of the principal amount
plus accrued dividends.
On January 14, 2003, MidAmerican Energy issued $275 million of 5.125%
medium-term notes due in 2013. The proceeds will be used to refinance existing
debt and other corporate purposes.
On February 10, 2003, MidAmerican Energy redeemed all $75 million of its
7.375% series of mortgage bonds, and on March 17, 2003, it redeemed all $6.94
million of its 7.45% series of mortgage bonds. Additionally, MidAmerican
Energy's 7.125% series of mortgage bonds totaling $100 million matured on
February 3, 2003.
MidAmerican Energy has on file with the Securities and Exchange Commission
a registration statement providing for an additional $425 million in various
forms of senior and subordinated, unsecured long-term debt and preferred
securities. MidAmerican Energy also has authorization from the FERC to issue,
through November 30, 2004, an additional $425 million in various forms of
long-term debt.
MidAmerican Energy is required to obtain authorization from the Illinois
Commerce Commission, or ICC, prior to issuing any securities. If 90% or more of
the proceeds from a securities issuance are used for refinancing purposes,
MidAmerican Energy need only provide the ICC with an "informational statement"
prior to the issuance which sets forth the type, amount and use of the proceeds
of the securities to be issued. If less than 90% of the proceeds are used for
refinancing, MidAmerican must file a comprehensive application seeking
authorization prior to issuance. The ICC is required to hold a hearing before
issuing its authorization. MidAmerican Energy currently has authority from the
ICC to issue up to approximately $15 million of medium-term notes for
refinancing purposes.
Accounts Receivable Securitization -
In 1997, MidAmerican Energy entered into a revolving agreement to sell all
of its right, title and interest in the majority of its billed accounts
receivable to MidAmerican Energy Funding Corporation, a special purpose entity
established to purchase accounts receivable from MidAmerican Energy and sell
them to outside investors. The agreement was structured as a true sale.
Therefore, the accounts receivable sold are not reflected on MidAmerican
Energy's or MidAmerican Funding's Consolidated Balance Sheet as of December 31,
2001. The agreement expired on October 29, 2002, and MidAmerican Energy did not
extend or replace it.
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Other Information -
MHC has a $4.0 million line of credit, expiring July 1, 2003, to provide
for short-term financing needs, none of which was outstanding at December 31,
2002. MidAmerican Capital has a $6.1 million line of credit expiring July 1,
2003, none of which was outstanding at December 31, 2002.
MidAmerican Funding or one of its subsidiaries, including MidAmerican
Energy, may from time to time seek to retire its outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. The repurchases or exchanges, if
any, will depend on prevailing market conditions, the issuing company's
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
CREDIT RATINGS RISKS
Debt and preferred securities of MidAmerican Funding and MidAmerican Energy
are rated by nationally recognized credit rating agencies. Assigned credit
ratings are based on each rating agency's assessment of MidAmerican Funding's or
MidAmerican Energy's ability to, in general, meet the obligations of the debt or
preferred securities issued by the rated company. The credit ratings are not a
recommendation to buy, sell or hold securities, and there is no assurance that a
particular credit rating will continue for any given period of time. Other than
the energy trading agreements discussed below, neither MidAmerican Funding nor
MidAmerican Energy has any credit agreements that require termination or a
material change in collateral requirements or payment schedule in the event of a
downgrade in the credit ratings of the respective company's securities.
MidAmerican Funding's long-term debt agreements provide that no additional debt
can be issued by MidAmerican Funding if doing so would cause a downgrade in
MidAmerican Funding's credit ratings.
In conjunction with its wholesale marketing and trading activities,
MidAmerican Energy must meet credit quality standards as required by
counterparties. MidAmerican Energy has energy trading agreements that, in
accordance with industry practice, either specifically require it to maintain
investment grade credit ratings or provide the right for counterparties to
demand "adequate assurances" in the event of a material adverse change in
MidAmerican Energy's creditworthiness. If one or more of MidAmerican Energy's
credit ratings decline below investment grade, MidAmerican Energy may be
required to post cash collateral, letters of credit or other similar credit
support to facilitate ongoing wholesale marketing and trading activities. As of
December 31, 2002, MidAmerican Energy's estimated potential collateral
requirements totaled approximately $83 million. MidAmerican Energy's collateral
requirements could fluctuate considerably due to seasonality, market price
volatility, a loss of key MidAmerican Energy generating facilities or other
related factors.
RATE MATTERS
Under a settlement agreement approved by the IUB on December 21, 2001,
MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000,
are effectively frozen through December 31, 2005. In approving that settlement,
the IUB specifically allows the filing of electric rate design and/or cost of
service rate changes that are intended to keep overall company revenues
unchanged but could result in changes to individual tariffs. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
is recorded as a regulatory liability to be used to offset a portion of the cost
to Iowa customers of future generating plant investments. An amount equal to the
regulatory liability is recorded as a regulatory charge in depreciation and
amortization expense when the liability is accrued. Interest expense is accrued
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on the portion of the regulatory liability related to prior years. Beginning in
2002, the liability is being relieved as it is credited against allowance for
funds used during construction, or capitalized financing costs, associated with
generating plant additions. As of December 31, 2002, the related regulatory
liability reflected on the Consolidated Balance Sheet totaled $102.9 million.
On March 20, 2003, MidAmerican Energy and the Iowa Office of Consumer
Advocate agreed upon a settlement proposal in which the rate freeze described
above would be extended through December 31, 2010. Under the settlement
proposal, for calendar years 2006 through 2010, an amount equal to 40% of
revenues associated with Iowa retail electric returns on equity between 11.75%
and 13.0%; 50% of revenues associated with Iowa retail electric returns on
equity between 13.0% and 14.0%; and 83.3% of revenues associated with Iowa
retail electric returns on equity greater than 14.0% will be applied as a
reduction to offset some of the capital costs on the Iowa portion of three
generation projects. If Iowa retail electric returns on equity fall below 10% in
any 12-month period after January 1, 2006, MidAmerican Energy has the ability to
file for a general increase in rates under the proposed settlement. The proposed
settlement requires enactment of Iowa legislation and is subject to approval by
the IUB. The IUB is expected to rule on the proposal during the second half of
2003.
On March 15, 2002, MidAmerican Energy made a filing with the IUB requesting
an increase in rates for its Iowa retail natural gas customers. On June 12,
2002, the IUB issued an order granting an interim rate increase of approximately
$13.8 million annually, effective immediately and subject to refund with
interest. On November 8, 2002, the IUB approved the proposed settlement
agreement previously filed with it by MidAmerican Energy and the Iowa Office of
Consumer Advocate. The settlement agreement provides for an increase in rates of
$17.7 million annually for MidAmerican Energy's Iowa retail natural gas
customers and effectively freezes such rates through November 2004. MidAmerican
Energy implemented the new rates for usage beginning November 25, 2002.
LEGISLATIVE AND REGULATORY EVOLUTION
Electric Deregulation -
Under Illinois law, as of December 31, 2000, all non-residential customers
in Illinois had been phased in to allow them to select their provider of
electric supply services. Residential customers all received the opportunity to
select their electric supplier beginning May 1, 2002.
Illinois law also provides for Illinois electric earnings above a computed
level of return on common equity to be shared equally between customers and
MidAmerican Energy. MidAmerican Energy's computed level of return on common
equity is based on a rolling two-year average of the Monthly Treasury Long-Term
Average Rate, as published by the Federal Reserve System, plus a premium of 8.5%
for 2000 through 2004, and a premium of 12.5% for 2005 through 2006. The
two-year average above which sharing must occur for 2002 was 14.03%. The law
allows MidAmerican Energy to mitigate the sharing of earnings above the
threshold return on common equity through accelerated recovery of regulatory
assets.
The energy crisis and related events in California have heightened concerns
nationally about deregulation of the electric utility industry. Accordingly, the
pace of deregulation in Iowa and elsewhere has slowed considerably.
Regional Transmission Organizations -
In December 1999, the FERC issued Order No. 2000 establishing, among other
things, minimum characteristics and functions for regional transmission
organizations. Public utilities that were not a
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member of an independent system operator at the time of the order were required
to submit a plan by which its transmission facilities would be transferred to a
regional transmission organization. On September 28, 2001, MidAmerican Energy
and five other electric utilities filed with the FERC a plan to create TRANSLink
Transmission Company LLC and to integrate their electric transmission systems
into a single, coordinated system operating as a for-profit independent
transmission company in conjunction with a FERC-approved regional transmission
organization. On April 25, 2002, the FERC issued an order approving the transfer
of control of MidAmerican Energy and other utilities' transmission assets to
TRANSLink in conjunction with TRANSLink's participation in the Midwest
Independent Transmission System Operator, Inc. regional transmission
organization. MidAmerican Energy has filed an application for state regulatory
approval with the IUB and anticipates a ruling in mid-2003. Transferring the
operations and control of MidAmerican Energy's transmission assets to other
entities could increase costs for MidAmerican Energy; however, the actual impact
of TRANSLink on MidAmerican Energy's future transmission costs is not yet known.
Standard Electricity Market Design -
On July 31, 2002, the FERC issued a notice of proposed rulemaking with
respect to Standard Market Design. The FERC has characterized the proposal as
portending "sweeping changes" to the use and expansion of the interstate
transmission and wholesale bulk power systems in the United States. The proposal
includes numerous proposed changes to the current regulation of transmission and
generation facilities designed "to promote economic efficiency" and replace the
"obsolete patchwork we have today," according to the FERC's chairman. The final
rule, if adopted as currently proposed, would require all public utilities
operating transmission facilities subject to the FERC jurisdiction to file
revised open access transmission tariffs that would require changes to the basic
services these public utilities currently provide. The proposed rule may impact
the pricing of MidAmerican Energy's electricity and transmission products. The
FERC does not envision that a final rule will be fully implemented until 2004.
MidAmerican Energy is still evaluating the proposed rule and recognizes the
final rule could vary considerably from the initial proposal. Accordingly, the
likely impact of the proposed rule on MidAmerican Energy's transmission and
generation businesses is unknown.
ENVIRONMENTAL MATTERS
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. As of December 31, 2002, MidAmerican Energy has recorded a $17
million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. Refer to Note (4)(a) of Notes to
Consolidated Financial Statements later in Item 15 of this Form 10-K for further
discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.
Although the timing of potential incurred costs and recovery of costs in
rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
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In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. In February
2001, the United States Supreme Court upheld the constitutionality of the
standards, though remanding the issue of implementation of the ozone standard to
the EPA. The impact of the new standards on MidAmerican Energy is currently
unknown. These standards could be superceded, in whole or in part, by a variety
of multi-pollutant emission reduction initiatives. Refer to Note (4)(b) of Notes
to Consolidated Financial Statements later in Item 15 of this Form 10-K for
further discussion of this issue.
In 2001, the state of Iowa passed legislation that, in part, requires
rate-regulated utilities to develop a multi-year plan and budget for managing
regulated emissions from their generating facilities in a cost-effective manner.
MidAmerican Energy's proposed plan and associated budget, or "the Plan" was
filed with the IUB on April 1, 2002, in accordance with state law. MidAmerican
Energy expects the IUB to rule on the prudence of the Plan in 2003. MidAmerican
Energy is required to file Plan updates at least every two years.
The Plan provides MidAmerican Energy's projected air emission reductions
considering the current proposals that are being debated at the federal level
and describes a coordinated long-range plan to achieve these air emission
reductions. The Plan also provides specific actions to be taken at each
coal-fired generating facility and the related costs and timing for each action.
The Plan outlines $732.0 million in environmental investments to existing
coal-fired generating units, some of which are jointly owned, over a nine-year
period from 2002 through 2010. MidAmerican Energy's share of these investments
is $546.6 million, $67.9 million of which was projected to be incurred in the
years 2002 through 2005, when MidAmerican Energy's Iowa retail electric rates
are effectively frozen. The Plan also identifies expenses that will be incurred
at the generating facilities to operate and maintain the environmental equipment
installed as a result of the Plan.
Following the expiration of MidAmerican Energy's 2001 settlement agreement
on December 31, 2005, the Plan proposes the use of an adjustment mechanism for
recovery of Plan costs, similar to the tracking mechanisms for cost recovery of
renewable energy and energy efficiency expenditures that are presently part of
MidAmerican Energy's regulated electric rates. Refer to the preceding "Rate
Matters" section for a discussion of the settlement agreement.
Under the New Source Review, or NSR, provisions of the Clean Air Act, or
CAA, a utility is required to obtain a permit from the EPA prior to (1)
beginning construction of a new major stationary source of an NSR-regulated
pollutant or (2) making a physical or operational change (a "major
modification") to an existing facility that potentially increases emissions,
unless the changes are exempt under the regulations. In general, projects
subject to NSR regulations are subject to pre-construction review and permitting
under the Prevention of Significant Deterioration, or PSD, provisions of the
CAA. Under the PSD program, a project that emits threshold levels of regulated
pollutants must undergo a Best Available Control Technology analysis and
evaluate the most effective emissions controls. These controls must be installed
in order to receive a permit. Routine maintenance, repair and replacement are
not subject to the NSR provisions; however, these types of activities have
historically been subject to changing interpretations under the NSR program. The
EPA recently proposed a change to the NSR provisions relating to routine
maintenance, repair and replacement. Violation of NSR regulations potentially
subjects a utility to fines and/or other sanctions. The impact on MidAmerican
Energy of any final rules is not currently known.
In recent years, the EPA has requested from several utilities information
and support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the NSR and the New Source Performance Standards of the CAA.
-52-
In December 2002, MidAmerican Energy received a request from the EPA to provide
documentation related to its capital projects from January 1, 1980, to the
present for its Neal, Council Bluffs, Louisa and Riverside Energy Centers.
MidAmerican Energy has responded to this request and at this time cannot predict
the outcome of request.
GENERATING CAPABILITY
In July 2002, retail customer usage of electricity caused a new record
hourly peak demand of 3,889 megawatts on MidAmerican Energy's energy system,
surpassing the previous record peak of 3,833 MW set in July 1999. MidAmerican
Energy is interconnected with Iowa and neighboring utilities and is involved in
an electric power pooling agreement known as Mid-Continent Area Power Pool, or
MAPP. Each MAPP participant is required to maintain for emergency purposes a net
generating capability reserve of at least 15% above its system peak demand. For
the 2002 cooling season, MidAmerican Energy's reserve was approximately 21%
above its system peak demand.
MidAmerican Energy believes it has adequate electric capacity reserve
through 2003 and continues to manage its generating resources to ensure an
adequate reserve in the future. MidAmerican Energy has announced plans to add a
500-MW (based on expected MAPP accreditation) natural gas-fired combined cycle
unit to be completed in two phases between 2003 and 2005. Up to an additional
475 MW of coal-fired generation is expected to be operational by the summer of
2007. However, significantly higher-than-normal temperatures during the cooling
season could cause MidAmerican Energy's reserve to fall below the 15% minimum.
If MidAmerican Energy fails to maintain the appropriate reserve, significant
penalties could be contractually imposed by MAPP.
MidAmerican Energy is financially exposed to movements in energy prices
since it no longer recovers fluctuations in its energy costs through an energy
adjustment clause in Iowa. Although MidAmerican Energy believes it has
sufficient generation under typical operating conditions for its retail electric
needs, a loss of adequate generation by MidAmerican Energy requiring the
purchase of replacement power at a time of high market prices could subject
MidAmerican Energy to losses on its energy sales.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MidAmerican Energy's and MidAmerican Funding's significant accounting
policies are described in Note (1) of Notes to Consolidated Financial Statements
later in Item 15 of this Form 10-K.
Accounting for Regulated Entities -
MidAmerican Funding's and MidAmerican Energy's most critical accounting
policy is the application of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation," at MidAmerican Energy. A possible consequence of
deregulation in the utility industry is that SFAS No. 71 may no longer apply.
SFAS No. 71 sets forth accounting principles for operations that are regulated
and meet the stated criteria. For operations that meet the criteria, SFAS No. 71
allows, among other things, the deferral of expense or income that would
otherwise be recognized when incurred. Predominantly all of MidAmerican Energy's
electric and gas utility operations currently meet the criteria required by SFAS
No. 71, but its applicability is periodically reexamined. If portions of its
utility operations no longer meet the criteria of SFAS No. 71, MidAmerican
Energy could be required to write off the related regulatory assets and
liabilities from its balance sheet, and thus, a material adjustment to earnings
in that period could result if regulatory assets are not recovered in transition
provisions of any deregulation legislation.
-53-
Revenue Recognition -
Revenues are recorded as services are rendered to customers. MidAmerican
Energy records unbilled revenues representing the estimated amount customers
will be billed for services rendered between the meter-reading dates in a
particular month and the end of that month. The unbilled revenues estimate is
reversed in the following month. To the extent the estimated amount differs from
the amount subsequently billed, revenues will be affected. At December 31, 2002
and 2001, $55.1 million and $43.2 million, respectively, of unbilled revenues
are included in accounts receivable.
Excess of Cost Over Fair Value of Assets Acquired -
MidAmerican Funding's excess of cost over fair value of assets acquired, or
goodwill, must be evaluated annually in accordance with SFAS No. 142 to
determine if the carrying value might be impaired. Determination of the fair
values of the related reporting units involves substantial estimates, as ready
markets are not available for all of the involved assets and liabilities.
Accordingly, a change in the assumptions and/or estimates used in the
determination of the fair values of the reporting units could significantly
affect the outcome, possibly resulting in an impairment of related goodwill.
Contingent Liabilities -
MidAmerican Funding establishes reserves for estimated loss contingencies
when it is management's assessment that a loss is probable and the amount of the
loss can be reasonably estimated. Revisions to contingent liabilities are
recorded in the period in which different facts or information become known or
circumstances change that affect the previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities and subsequent
revisions are reflected in income when the reserves or revisions are recorded or
as regulatory treatment dictates. Reserves for contingent liabilities are based
upon management's assumptions and estimates, advice of legal counsel or other
third parties regarding the probable outcomes of the matter. Should the outcome
differ from the assumptions and estimates, revisions to the estimated reserves
for contingent liabilities would be required.
Accounting for Derivatives and Energy Trading Activities -
MidAmerican Energy accounts for its energy trading activities in accordance
with EITF Issue No. 02-3 and SFAS No. 133, as amended and interpreted, which
require certain energy trading and energy derivative contracts to be accounted
for at fair value.
In accordance with EITF Issue No. 02-3, all of MidAmerican Energy's trading
revenues are now reported net of the costs of the related sales on the
Consolidated Statements of Income. Previously, the revenues and costs were
recorded gross. All prior periods have been reclassified to conform to the net
presentation.
Accounting for derivatives continues to evolve through guidance issued by
the Derivatives Implementation Group and the EITF of the Financial Accounting
Standards Board, or FASB. To the extent that changes by these standard-setting
groups modify current guidance, including the normal purchases and normal sales
determination, the accounting treatment for derivatives may change.
-54-
See Notes (1)(i) and (8) in Notes to Consolidated Financial Statements
later in Item 15 of this Form 10-K for further discussion related to accounting
for derivatives.
Accrued Pension and Postretirement Expense -
Pension and postretirement costs are accrued throughout the year based on
results of an annual study performed by external actuaries. In addition to the
benefits granted to employees, the timing of the cost of these plans is impacted
by assumptions used by the actuaries, including assumptions provided by
MidAmerican Energy for the discount rate and long-term rate of return on assets.
Both of these factors require estimates and projections by management and can
fluctuate from period to period. Actual returns on assets are significantly
affected by stock and bond markets, over which management has little control. If
management increased the discount rate by 1%, pension and postretirement costs
for 2002 would decrease by $6.2 million. Refer to Note (11) of Notes to
Consolidated Financial Statements later in Item 15 of this Form 10-K for
disclosures about MidAmerican Energy retirement plans and costs.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, MidAmerican Energy implemented SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 requires recognition on the
balance sheet of legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or normal
operation of such assets. Concurrent with the recognition of the liability, the
estimated cost of an asset retirement obligation is capitalized and depreciated
over the remaining life of the asset.
As of January 1, 2003, MidAmerican Energy recorded $275 million of asset
retirement obligation liabilities, $266 million of which pertains to obligations
associated with the decommissioning of the Quad Cities Station. Additionally, a
regulatory asset of $102 million was recognized in conjunction with the
accounting change. As of January 1, 2003, $160 million of assets are held and
restricted for satisfying the Quad Cities Station decommissioning obligation.
Adoption of SFAS No. 143 did not have a significant impact on MidAmerican
Energy's results of operation.
MidAmerican Energy has asset retirement obligations related to its
transmission and delivery assets for which the retirement date is indefinite,
and therefore, a liability cannot be reasonably estimated. Accordingly, no
liability was recorded for these obligations with the adoption of SFAS No. 143.
MidAmerican Energy does accrue for the cost of removing such assets in its
depreciation rates, in accordance with regulatory precedence. At December 31,
2002, approximately $386 million of accrued cost of removal for such assets was
included in accumulated depreciation.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," or FIN45, clarifies the accounting and disclosure for certain
guarantees. FIN45 directs that a guarantor is required to recognize at the
inception of a guarantee a liability for the fair value of the obligations it
has undertaken under the guarantee. The new disclosure requirements are
effective for financial statements of periods ending after December 15, 2002.
The requirement for recognition of a liability is for guarantees issued or
modified after December 31, 2002.
MidAmerican Energy is the lessee on operating leases for coal railcars that
contain guarantees of the residual value of such equipment throughout the term
of the leases. Events triggering the residual guarantees include termination of
the lease, loss of the equipment or purchase of the equipment. Lease terms are
for five years with provisions for extensions. At December 31, 2002, the maximum
amount of such guarantees specified in these leases totals $31.5 million.
-55-
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican Funding, including MidAmerican Energy, is exposed to market
risk from changes in factors such as the market price of certain commodities and
interest rates. To manage the price volatility relating to these exposures,
MidAmerican Funding enters into various financial derivative instruments. Senior
management provides the overall direction, structure, conduct and control of
MidAmerican Funding's risk management activities, including the use of financial
derivative instruments, authorization and communication of risk management
policies and procedures, strategic hedging program guidelines, appropriate
market and credit risk limits, and appropriate systems for recording, monitoring
and reporting the results of transactional and risk management activities.
MidAmerican Funding regularly performs sensitivity analysis of its outstanding
positions and adheres to strict value-at-risk parameters. MidAmerican Funding
uses hedge accounting for derivative instruments pertaining to its natural gas
purchasing, wholesale electricity activities and financing activities. Refer to
Notes (1)(i) and (8) in Notes to Consolidated Financial Statements later in Item
15 of this Form 10-K for further discussion of price risk and the accounting for
derivative instruments.
-56-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 1,353,431 $ 1,318,129 $ 1,212,411
Regulated gas ......................... 695,799 869,132 929,555
Nonregulated .......................... 186,929 179,988 129,866
----------- ----------- -----------
2,236,159 2,367,249 2,271,832
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 346,685 275,904 249,045
Cost of gas sold .................... 482,837 674,883 721,395
Other operating expenses ............ 394,436 449,328 434,125
Maintenance ......................... 135,487 138,343 127,076
Depreciation and amortization ....... 266,983 250,315 197,144
Property and other taxes ............ 76,025 71,705 74,778
----------- ----------- -----------
1,702,453 1,860,478 1,803,563
----------- ----------- -----------
Nonregulated:
Cost of sales ....................... 158,463 154,448 108,478
Other ............................... 20,246 18,749 21,035
----------- ----------- -----------
178,709 173,197 129,513
----------- ----------- -----------
Total operating expenses ............ 1,881,162 2,033,675 1,933,076
----------- ----------- -----------
OPERATING INCOME ...................... 354,997 333,574 338,756
----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 8,832 13,069 15,499
Other income .......................... 14,063 12,291 12,060
Other expense ......................... (8,790) (18,104) (13,515)
----------- ----------- -----------
14,105 7,256 14,044
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 71,401 60,880 61,120
Other interest expense ................ 3,412 8,401 9,056
Preferred dividends of subsidiary trust 1,574 7,980 7,980
Allowance for borrowed funds .......... (3,336) (1,661) (1,273)
----------- ----------- -----------
73,051 75,600 76,883
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 296,051 265,230 275,917
INCOME TAXES .......................... 120,230 112,452 110,461
----------- ----------- -----------
NET INCOME ............................ 175,821 152,778 165,456
PREFERRED DIVIDENDS ................... 2,933 4,544 4,955
----------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 172,888 $ 148,234 $ 160,501
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-57-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
EARNINGS ON COMMON STOCK ............................ $ 172,888 $ 148,234 $ 160,501
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ............................. (7,013) 7,690 --
Income tax (expense) benefit .................... 2,915 (3,197) --
--------- --------- ---------
(4,098) 4,493 --
--------- --------- ---------
Less reclassification adjustment for realized gains
(losses) reflected in net income during period-
Before income taxes ............................. (2,277) 1,757 --
Income tax (expense) benefit .................... 946 (731) --
--------- --------- ---------
(1,331) 1,026 --
--------- --------- ---------
Net unrealized gains (losses) ................ (2,767) 3,467 --
--------- --------- ---------
Minimum pension liability adjustment:
Before income tax benefit ......................... (8,279) (8,295) (4,087)
Income tax benefit ................................ 3,442 3,448 1,699
--------- --------- ---------
Net adjustment .................................. (4,837) (4,847) (2,388)
--------- --------- ---------
Other comprehensive income (loss) ................. (7,604) (1,380) (2,388)
--------- --------- ---------
COMPREHENSIVE INCOME ................................ $ 165,284 $ 146,854 $ 158,113
========= ========= =========
-58-
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
-----------------------
2002 2001
---------- ----------
ASSETS
UTILITY PLANT, NET
Electric .................................................. $4,731,002 $4,598,372
Gas ....................................................... 900,209 867,277
---------- ----------
5,631,211 5,465,649
Less accumulated depreciation and amortization ............ 3,011,123 2,847,979
---------- ----------
2,620,088 2,617,670
Construction work in progress ............................. 205,988 80,276
---------- ----------
2,826,076 2,697,946
---------- ----------
POWER PURCHASE CONTRACT ................................... -- 48,185
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ................................. 28,500 20,020
Receivables, less reserves of $7,615 and $627, respectively 321,321 119,740
Inventories ............................................... 88,492 83,339
Prepaid taxes ............................................. -- 23,956
Other ..................................................... 28,655 10,962
---------- ----------
466,968 258,017
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ................ 273,864 272,230
REGULATORY ASSETS ......................................... 192,514 221,120
OTHER ASSETS .............................................. 52,457 80,394
---------- ----------
TOTAL ASSETS .............................................. $3,811,879 $3,577,892
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity ............................... $1,307,067 $1,219,057
MidAmerican Energy preferred securities, not subject to
mandatory redemption .................................... 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ................. -- 26,680
MidAmerican Energy-obligated preferred securities of
subsidiary trust holding solely MidAmerican Energy
junior subordinated debentures ........................ -- 100,000
Long-term debt, excluding current portion ................. 947,691 656,740
---------- ----------
2,286,517 2,034,236
---------- ----------
CURRENT LIABILITIES
Notes payable ............................................. 55,000 89,350
Current portion of long-term debt ......................... 105,727 163,854
Current portion of power purchase contract ................ -- 17,398
Accounts payable .......................................... 239,531 171,535
Taxes accrued ............................................. 83,063 54,175
Interest accrued .......................................... 9,731 11,709
Other ..................................................... 55,464 43,814
---------- ----------
548,516 551,835
---------- ----------
OTHER LIABILITIES
Power purchase contract ................................... -- 8,469
Deferred income taxes ..................................... 424,153 513,978
Investment tax credit ..................................... 56,886 61,292
Quad Cities Station decommissioning ....................... 159,757 158,349
Regulatory liabilities .................................... 118,011 62,378
Other ..................................................... 218,039 187,355
---------- ----------
976,846 991,821
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ...................... $3,811,879 $3,577,892
========== ==========
The accompanying notes are an integral part of these financial statements.
-59-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................... $ 175,821 $ 152,778 $ 165,456
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .............................. 268,446 251,099 197,438
Deferred income taxes and investment tax credit, net ....... (63,335) (32,550) (27,743)
Amortization of other assets and liabilities ............... 32,150 44,963 48,650
Change in accrued customer rate credits .................... -- (21,531) 6,724
Power purchase contract restructuring receipt .............. 39,100 -- --
Cash inflow (outflow) of accounts receivable securitization (44,000) (26,000) 12,877
Impact of changes in working capital ....................... (66,643) 116,021 (38,847)
Other ...................................................... 11,262 (6,022) (4,468)
--------- --------- ---------
Net cash provided by operating activities ................ 352,801 478,758 360,087
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................ (356,636) (250,073) (215,727)
Non-cash and accrued utility construction expenditures ....... 25,349 (705) (660)
Quad Cities Station decommissioning trust fund ............... (8,299) (8,299) (8,302)
Nonregulated capital expenditures ............................ (822) (2,221) (1,075)
Other investing activities, net .............................. 10,362 4,597 1,411
--------- --------- ---------
Net cash used in investing activities ...................... (330,046) (256,701) (224,353)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ............................................... (80,433) (94,544) (58,955)
Issuance of long-term debt, net of issuance cost ............. 391,145 -- 160,992
Retirement of long-term debt, including reacquisition cost ... (163,957) (101,600) (110,861)
Reacquisition of preferred securities ........................ (126,680) (23,320) --
Net increase (decrease) in notes payable ..................... (34,350) 7,750 (122,400)
--------- --------- ---------
Net cash used in financing activities ...................... (14,275) (211,714) (131,224)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 8,480 10,343 4,510
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 20,020 9,677 5,167
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 28,500 $ 20,020 $ 9,677
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized .................... $ 67,068 $ 61,344 $ 63,420
========= ========= =========
Income taxes paid ............................................ $ 133,142 $ 217,140 $ 133,176
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-60-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
-----------------------------------------
2002 2001
----------------- -----------------
COMMON SHAREHOLDER'S EQUITY
Common shares, no par; 350,000,000 shares authorized;
70,980,203 shares outstanding.................................... $ 561,024 $ 560,798
Retained earnings.................................................. 757,415 662,027
Accumulated other comprehensive income (loss) net:
Unrealized gain on cash flow hedges.............................. 700 3,467
Minimum pension liability adjustment............................. (12,072) (7,235)
--------- ----------
1,307,067 57.2% 1,219,057 59.9%
--------- ----- ----------- -----
PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding; not subject to mandatory redemption:
$3.30 Series, 49,451 shares...................................... 4,945 4,945
$3.75 Series, 38,305 shares...................................... 3,831 3,831
$3.90 Series, 32,630 shares...................................... 3,263 3,263
$4.20 Series, 47,362 shares...................................... 4,736 4,736
$4.35 Series, 49,945 shares...................................... 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% 31,759 1.6%
------------ ---- --------- -----
Cumulative shares outstanding; subject to mandatory redemption:
$7.80 Series, zero and 266,800 shares, respectively.............. - -% 26,680 1.3%
------------ ---- --------- -----
MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES
MidAmerican Energy-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican Energy junior subordinated debentures:
7.98% series, zero and 4,000,000 shares, respectively......... - -% 100,000 4.9%
------------ ---- --------- -----
LONG-TERM DEBT
Mortgage bonds:
7.125% Series, due 2003.......................................... - 100,000
7.7% Series, due 2004............................................ 55,630 55,630
7.0% Series, due 2005............................................ 90,500 90,500
7.375% Series, due 2008.......................................... 75,000 75,000
7.45% Series, due 2023........................................... 6,940 6,940
6.95% Series, due 2025........................................... 12,500 12,500
Pollution control revenue obligations:
5.75% Series, due periodically through 2003...................... - 4,320
6.7% Series due 2003............................................. - 1,000
6.1% Series due 2007............................................. 1,000 1,000
5.95% Series, due 2023 (secured by general mortgage bonds)....... 29,030 29,030
The accompanying notes are an integral part of these financial statements.
-61-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
------------------------------------------
2002 2001
------------------- -----------------
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017, 1.64% and 1.77%, respectively........... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage bonds),
1.64% and 1.77%, respectively............................ 28,295 28,295
Due 2023, 1.64% and 1.77%, respectively.................... 6,850 6,850
Due 2024, 1.64% and 1.77%, respectively.................... 34,900 34,900
Due 2025, 1.64% and 1.77%, respectively.................... 12,750 12,750
Notes:
6.375% Series, due 2006...................................... 160,000 160,000
6.75% Series, due 2031....................................... 400,000 -
Obligation under capital lease................................. 2,161 1,364
Unamortized debt premium and discount, net..................... (5,465) (939)
------------ -----------
947,691 41.4% 656,740 32.3%
------------ ----- ----------- -----
TOTAL CAPITALIZATION........................................... $ 2,286,517 100.0% $2,034,236 100.0%
============ ===== ========== =====
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
BEGINNING OF YEAR ....................... $662,027 $603,793 $497,292
-------- -------- --------
NET INCOME .............................. 175,821 152,778 165,456
-------- -------- --------
DEDUCT:
Loss on reacquisition of preferred shares 750 235 --
Dividends declared on preferred shares .. 2,183 4,309 4,955
Dividends declared on common shares ..... 77,500 90,000 54,000
-------- -------- --------
80,433 94,544 58,955
-------- -------- --------
END OF YEAR ............................. $757,415 $662,027 $603,793
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-62-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
----
(1) Summary of Significant Accounting Policies ..................... 64
(2) Jointly Owned Utility Plant..................................... 69
(3) Inventories..................................................... 70
(4) Commitments and Contingencies................................... 70
(5) Long-term Debt.................................................. 74
(6) Short-term Borrowing............................................ 75
(7) Preferred Securities............................................ 75
(8) Risk Management and Energy Trading.............................. 75
(9) Concentration of Credit Risk.................................... 78
(10) Rate Matters.................................................... 80
(11) Retirement Plans................................................ 81
(12) Segment Information............................................. 84
(13) Income Taxes.................................................... 87
(14) Fair Value of Financial Instruments............................. 88
(15) Non-Operating Other Income and Expense.......................... 88
(16) Affiliated Company Transactions................................. 89
(17) Sale of Accounts Receivable..................................... 90
(18) Unaudited Quarterly Operating Results........................... 90
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MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) COMPANY STRUCTURE:
MidAmerican Energy Company is a public utility with electric and natural
gas operations and is the principal subsidiary of MHC Inc. MHC has the following
nonregulated subsidiaries: MidAmerican Capital Company, MidAmerican Services
Company, Midwest Capital Group, Inc. and MEC Construction Services Co. MHC is a
wholly owned subsidiary of MidAmerican Funding, LLC, whose sole member is
MidAmerican Energy Holdings Company.
The current corporate structure is the result of the merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings
Company) and CalEnergy Company, Inc. CalEnergy was reincorporated as an Iowa
corporation and changed its name to MidAmerican Energy Holdings Company. MHC,
MidAmerican Funding and MidAmerican Energy Holdings are exempt public utility
holding companies headquartered in Des Moines, Iowa.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying consolidated financial statements include MidAmerican
Energy and subsidiaries under its control. 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. Certain
classifications of amounts for 2002 are different than that of prior years.
Accordingly, historical amounts have been reclassified.
(C) REGULATION:
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, or IUB; the Illinois Commerce Commission, or ICC; the
South Dakota Public Utilities Commission, and the Federal Energy Regulatory
Commission, or FERC. MidAmerican Energy'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.
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards, or SFAS, No. 71, "Accounting for
the Effects of Certain Types of Regulation," may no longer apply. SFAS No. 71
sets forth accounting principles for operations that are regulated and meet the
stated criteria. For operations that meet the criteria, SFAS No. 71 allows,
among other things, the deferral of expense or income that would otherwise be
recognized when incurred. Predominantly all of MidAmerican Energy's electric and
gas utility operations currently meet the criteria of SFAS No. 71, but its
applicability is periodically reexamined. If portions of its utility operations
no longer meet the criteria of SFAS No. 71, MidAmerican Energy could be required
to write off the related regulatory assets and liabilities from its balance
sheet, and thus, a material adjustment to earnings in that period could result
if regulatory assets are not recovered in transition provisions of any
deregulation legislation. The following regulatory assets represent costs that
are expected to be recovered in future charges to utility customers. The
regulatory liabilities represent income to be recognized or returned to
customers in future periods.
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Weighted Average
Future Recovery As of December 31,
Period 2002 2001
---------------- -------- --------
(In thousands)
Regulatory assets:
Deferred income taxes, net .......... 21 years $122,301 $145,271
Debt refinancing costs .............. 6 years 22,187 24,252
Cooper Nuclear Station capital
improvement costs ................. 2 years 16,841 --
Environmental costs ................. 5 years 16,588 21,878
Nuclear generation assets ........... 10 years 8,573 10,284
Enrichment facilities
decommissioning.................... 4 years 1,459 1,687
Other ............................... Various 4,565 17,748
-------- --------
Total ............................. $192,514 $221,120
======== ========
Regulatory liabilities:
Iowa electric settlement reserve .... 4 years $102,871 $ 47,125
Environmental insurance recovery .... 4 years 8,678 8,850
Energy efficiency ................... 2 years 6,462 3,883
Coal contracts ...................... -- -- 2,520
-------- --------
Total.............................. $118,011 $ 62,378
======== ========
A return is generally not earned on the regulatory assets in setting rates
due to the fact that a cash outlay was not required for amounts listed as income
taxes, environmental costs and enrichment facilities decommissioning. The
amortization of the assets is recoverable over periods shown above.
As a result of the restructuring of the Cooper Nuclear Station power
purchase contract, Cooper Nuclear Station capital improvement costs are now
considered regulatory assets and classified as such on the Consolidated Balance
Sheet as of December 31, 2002. Refer to Note (1)(h) for additional information
regarding the power purchase contract for Cooper.
For a discussion of the Iowa electric settlement reserve, refer to Note
(10).
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
Energy records unbilled revenues representing the estimated amount customers
will be billed for services rendered between the meter-reading dates in a
particular month and the end of that month. Accrued unbilled revenues were $55.1
million and $43.2 million at December 31, 2002 and 2001, respectively, and are
included in Receivables on the Consolidated Balance Sheets.
Electric operating revenues for 2000 include provisions for rate refunds
related to a revenue sharing arrangement in Iowa that terminated December 31,
2000. The provisions reduced revenues for 2000 by $21.6 million. Under the
current revenue sharing arrangement in Iowa, the provision related to revenue
sharing is charged to depreciation expense. Refer to Note (10) for further
discussion.
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MidAmerican Energy's Illinois and South Dakota jurisdictional sales, or
approximately 11% of total retail electric sales, and all of its retail gas
sales are subject to adjustment clauses. MidAmerican Energy also has costs that
are recovered, at least in part, through bill riders, including energy
efficiency costs. The clauses and riders allow MidAmerican Energy to adjust the
amounts charged for electric and gas service as the related costs change. The
costs recovered in revenues through use of the adjustment clauses and bill
riders are charged to expense in the same period. At any given time, these costs
may be over or under collected from customers. The total (over)/under collection
included in Accounts Receivable at December 31, 2002 and 2001, was $48.3 million
and $(17.6) million, respectively.
(E) DEPRECIATION AND AMORTIZATION:
MidAmerican Energy's provisions for depreciation and amortization for its
utility operations are based on straight-line composite rates. The average
depreciation and amortization rates applied to depreciable utility plant for the
years ended December 31 were as follows:
2002 2001 2000
---- ---- ----
Electric...... 4.4% 4.2% 4.0%
Gas........... 3.5% 3.5% 3.5%
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 are eliminated from the utility plant accounts
and such cost, plus net removal cost, is charged to accumulated depreciation.
Additionally, depreciation and amortization expense for 2002 and 2001
includes $55.0 million and $47.1 million, respectively, for a regulatory charge
pursuant to the terms of an electric rate settlement in Iowa. Refer to Note (10)
for a discussion of the settlement.
An allowance for the estimated annual decommissioning costs of the Quad
Cities Generating Station equal to the level of funding is also included in
depreciation expense. See Note (4)(d) for additional information regarding
decommissioning costs.
(F) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments and Nonregulated Property, Net includes the following amounts
as of December 31 (in thousands):
2002 2001
-------- --------
Nuclear decommissioning trust fund .............. $159,757 $158,349
Rabbi trusts .................................... 90,501 85,958
Coal transportation property, net of accumulated
depreciation of $1,705 and $1,396, respectively 10,215 10,523
Other, net of accumulated depreciation of $1,293
and $1,087, respectively ...................... 13,391 17,400
-------- --------
Total ....................................... $273,864 $272,230
======== ========
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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, which is reflected in the
line Quad Cities Station Decommissioning on the Consolidated Balance Sheets.
Funds are invested in accordance with applicable federal investment guidelines
and are restricted for use as reimbursement for costs of decommissioning
MidAmerican Energy's Quad Cities Station. The investment in Rabbi trusts
represents the cash value of life insurance policies on certain key executives
and the fair value of other related investments. The Rabbi trusts were
established to administer various nonqualified executive and director
compensation plans, and investments in each trust are restricted for use in
meeting the costs and obligations of the trust and related compensation plans.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
MidAmerican Energy 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.
Net cash provided (used) from changes in working capital for the years
ended December 31 was as follows (in thousands):
2002 2001 2000
--------- --------- ---------
Receivables, net ........ $(157,581) $ 328,921 $(244,552)
Inventories ............. (5,153) (14,209) 11,519
Prepaid taxes ........... 23,956 (1,067) --
Other current assets .... (17,693) (1,173) 566
Accounts payable ........ 51,268 (134,973) 178,258
Taxes accrued ........... 28,888 (70,318) 11,830
Interest accrued ........ (1,978) (307) (909)
Other current liabilities 11,650 9,147 4,441
--------- --------- ---------
Total ................. $ (66,643) $ 116,021 $ (38,847)
========= ========= =========
(H) ACCOUNTING FOR POWER PURCHASE CONTRACT:
MidAmerican Energy has a power purchase contract with the Nebraska Public
Power District for the purchase of capacity and energy, which expires December
31, 2004. The current terms of the contract are the result of an agreement
signed by the parties that restructured the contract, effective August 1, 2002.
Under the terms of the contract prior to its restructuring, MidAmerican
Energy purchased one-half of the output of the Cooper Nuclear Station and had a
fixed obligation to pay 50% of the Nebraska Public Power District's Nuclear
Facility Revenue Bonds and other fixed liabilities. Accordingly, the
Consolidated Balance Sheet as of December 31, 2001, reflects current and
long-term liabilities representing those fixed obligations. A like amount
representing MidAmerican Energy's right to purchase power is included as an
asset in the Power Purchase Contract asset line on the Consolidated Balance
Sheet for December 31, 2001. Under the restructured terms of the contract, these
fixed obligations and the right to purchase power from Cooper no longer exist.
Accordingly, the liabilities and the related asset are not reflected on the
Consolidated Balance Sheet as of December 31, 2002.
Cooper capital improvement costs prior to 1997, including carrying costs,
were deferred in accordance with then applicable rate regulation. Prior to 2002,
these costs were included in the Power Purchase Contract asset line along with
the asset representing MidAmerican Energy's right to receive power, in
accordance with Securities and Exchange Commission regulations. As a result of
the
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restructuring of the Cooper power purchase contract, the deferred Cooper capital
improvement costs are now considered regulatory assets. These costs are being
amortized and recovered in rates over either a five-year period from the time
the related assets were put in service or the remaining term of the original
power purchase contract, namely through September 2004. From July 11, 1997,
through July 31, 2002, the Iowa portion of capital improvement costs was
recovered currently from customers and expensed as incurred. For jurisdictions
other than Iowa, MidAmerican Energy began charging Cooper capital improvement
costs to expense, as incurred in January 1997. Under the terms of the
restructured power purchase contract, MidAmerican Energy does not pay for Cooper
capital improvements.
The fuel cost portion of the original power purchase contract was included
in Cost of Fuel, Energy and Capacity on the Consolidated Statements of Income.
All other costs MidAmerican Energy incurred in relation to this long-term power
purchase contract prior to its restructuring were included in Other Operating
Expenses on the Consolidated Statements of Income. Beginning August 2002, all
costs related to this power purchase contract, excluding the amortization of
Cooper capital improvement discussed above, are reflected in Cost of Fuel,
Energy and Capacity on the Consolidated Statements of Income.
See Note (4)(c) for additional information regarding the power purchase
contract.
(I) ACCOUNTING FOR DERIVATIVES:
On January 1, 2001, MidAmerican Energy adopted SFAS Nos. 133 and 138
pertaining to the accounting for derivative instruments and hedging activities.
SFAS Nos. 133/138 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 the conditions specified in SFAS Nos.
133/138 are met, those 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. At January 1, 2001,
MidAmerican Energy recognized $21.8 million and $4.9 million of energy-related
assets and liabilities, respectively, as being subject to fair value accounting
pursuant to SFAS Nos. 133/138, all of which were accounted for as hedges, with
minimal impact to earnings. Due to the relative immateriality of the adoption of
SFAS Nos. 133/138, a cumulative-effect presentation is not reflected in the
Consolidated Statement of Income or the Consolidated Statement of Comprehensive
Income for 2001.
Pursuant to Emerging Issues Task Force Issue No. 02-3, effective July 1,
2002, revenue and cost of sales from derivative instruments used for trading
purposes are presented as net nonregulated revenue on the income statement.
Prior to that time, such amounts were presented gross. Accordingly, all
historical amounts have been reclassified to conform to the net presentation.
See Note (8) for further discussion on risk management and the use of
derivative instruments to manage such risk.
(J) NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, MidAmerican Energy implemented SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143 requires recognition on the
balance sheet of legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or normal
operation of such assets. Concurrent with the recognition of the liability, the
estimated cost of an asset retirement obligation is capitalized and depreciated
over the remaining life of the asset.
As of January 1, 2003, MidAmerican Energy recorded $275 million of asset
retirement obligation
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liabilities, $266 million of which pertains to obligations associated with the
decommissioning of the Quad Cities Station. Additionally, a regulatory asset of
$102 million was recognized in conjunction with the accounting change. As of
January 1, 2003, $160 million of assets are held and restricted for satisfying
the Quad Cities Station decommissioning obligation. Adoption of SFAS No. 143 did
not have a significant impact on MidAmerican Energy's results of operation.
MidAmerican Energy has asset retirement obligations related to its
transmission and delivery assets for which the retirement date is indefinite,
and therefore, a liability cannot be reasonably estimated. Accordingly, no
liability was recorded for these obligations with the adoption of SFAS No. 143.
MidAmerican Energy does accrue for cost of removing such assets in its
depreciation rates, in accordance with regulatory precedence. At December 31,
2002, approximately $386 million of accrued cost of removal for such assets was
included in accumulated depreciation.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," or FIN45, clarifies the accounting and disclosure for certain
guarantees. FIN45 directs that a guarantor is required to recognize at the
inception of a guarantee a liability for the fair value of the obligations it
has undertaken under the guarantee. The new disclosure requirements are
effective for financial statements of periods ending after December 15, 2002.
The requirement for recognition of a liability is for guarantees issued or
modified after December 31, 2002.
MidAmerican Energy is the lessee on operating leases for coal railcars that
contain guarantees of the residual value of such equipment throughout the term
of the leases. Events triggering the residual guarantees include termination of
the lease, loss of the equipment or purchase of the equipment. Lease terms are
for five years with provisions for extensions. At December 31, 2002, the maximum
amount of such guarantees specified in these leases totals $31.5 million.
(2) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
Energy had undivided interests at December 31, 2002, in jointly owned generating
plants as shown in the table below.
The dollar amounts below represent MidAmerican Energy'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 Energy's share of the expenses of these units (dollars in millions).
Nuclear Coal-fired
----------- -----------------------------------------------
Council
Quad 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 $ 236 $148 $301 $174 $213 $540
Accumulated depreciation $ 113 $ 99 $208 $117 $134 $322
Unit capacity in
megawatts (100%) ..... 1,541 515 675 644 715 700
Percent ownership ...... 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
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(3) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
2002 2001
------- -------
Materials and supplies, at average cost $30,265 $24,886
Coal stocks, at average cost .......... 27,863 27,855
Gas in storage, at LIFO cost .......... 27,405 27,609
Fuel oil, at average cost ............. 1,865 1,892
Other ................................. 1,094 1,097
------- -------
Total ............................... $88,492 $83,339
======= =======
At December 31, 2002 prices, the current cost of gas in storage was $68.5
million.
(4) COMMITMENTS AND CONTINGENCIES:
(A) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency, or EPA, and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at 21 sites, has conducted interim removal actions at 14 sites and has received
regulatory closure on two sites. MidAmerican Energy is continuing to evaluate
several of the sites to determine the future liability, if any, for conducting
site investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$54 million. As of December 31, 2002, MidAmerican Energy has recorded a $17
million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. MidAmerican Energy projects that
these amounts will be paid or incurred over the next 4 years.
The estimate of probable remediation costs is established on a
site-specific basis. The costs are accumulated in a three-step process. First, a
determination is made as to whether MidAmerican Energy has potential legal
liability for the site and whether information exists to indicate that
contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. As the investigation is performed and if it is determined remedial
action is required, the best estimate of remedial costs is accrued. The
estimated recorded liabilities for these properties include incremental direct
costs of the remediation effort, costs for future monitoring at sites and costs
of compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. Insurance
recoveries have been received for
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some of the sites under investigation. Those recoveries are intended to be used
principally for accelerated remediation, as specified by the IUB, and are
recorded as a regulatory liability.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position or results of operations.
(B) AIR QUALITY:
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. Based on
data to be obtained from monitors located throughout each state, the EPA will
determine which states have areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). The standards were subjected
to legal proceedings, and in February 2001, the United States Supreme Court
upheld the constitutionality of the standards, though remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the United States Circuit Court of Appeals for the District of
Columbia, the EPA is moving forward in implementation of the ozone and fine
particulate standards and is analyzing existing monitored data to determine
attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of state implementation plans to
achieve attainment of the standards, MidAmerican Energy could be required to
install control equipment on its generating stations or decrease the number of
hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part,
be superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or
other multi-pollutant emission reduction initiatives to become effective,
MidAmerican Energy has implemented a planning process that forecasts the
site-specific controls and actions required to meet emissions reductions of this
nature. On April 1, 2002, in accordance with Iowa law passed in 2001,
MidAmerican Energy filed with the IUB its first multi-year plan and budget for
managing regulated emissions from its generating facilities in a cost-effective
manner. MidAmerican Energy expects the IUB to rule on the prudence of the
multi-year plan and budget in 2003.
(C) POWER PURCHASE CONTRACT:
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District, or NPPD, restructured their power purchase contract for Cooper Nuclear
Station. Under the terms of the restructured contract, NPPD is required to
provide/deliver to MidAmerican Energy from August 1, 2002, through December 31,
2004, 380 megawatts of the accredited capacity of Cooper and a minimum of
approximately 2.5 million megawatt-hours in each of the years 2003 and 2004.
MidAmerican Energy is likewise required to purchase at the contract prices the
capacity and minimum megawatt-hours delivered. MidAmerican Energy's minimum
payments under the contract are $68.6 million and $63.8 million for 2003 and
2004, respectively. NPPD also paid MidAmerican Energy $39.1 million on August 1,
2002.
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In December 2000, MidAmerican Energy ceased contributing decommissioning
funds to NPPD and maintained a separate fund for estimated Cooper
decommissioning costs. Through July 31, 2002, MidAmerican Energy had accrued and
retained $18.3 million in this separate fund. In conjunction with the power
purchase contract restructuring, MidAmerican Energy is recognizing the $39.1
million cash payment and the $18.3 million previously accrued for
decommissioning into income based on the estimated energy expected to be
received for the remainder of the contract.
Finally, both parties agreed to release each other from any and all claims,
past or present, each might have under the power purchase contract prior to
being restructured and have filed to dismiss the litigation that was pending in
U.S. District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD
prior to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed
and operating costs of Cooper, excluding depreciation but including debt
service, and MidAmerican Energy's share of the nuclear fuel cost, including
Department of Energy disposal fees, based on energy delivered. In addition,
prior to December 2000, MidAmerican Energy contributed toward payment of
one-half of Cooper's projected decommissioning costs based on an assumed 2004
shutdown of the plant.
(D) NUCLEAR DECOMMISSIONING COSTS:
Expected decommissioning costs for Quad Cities Station have been developed
based on a site-specific decommissioning study that includes decontamination,
dismantling, site restoration, dry fuel storage cost and an assumed shutdown
date. Quad Cities Station decommissioning costs are included in base rates in
Iowa tariffs.
MidAmerican Energy's share of expected decommissioning costs for Quad
Cities Station, in 2002 dollars, is $266 million. MidAmerican Energy has
established external trusts for the investment of funds for decommissioning the
Quad Cities Station. The total accrued balance as of December 31, 2002, was
$159.8 million and is included in Quad Cities Station Decommissioning on the
Consolidated Balance Sheet. A like amount is reflected in Investments and
Nonregulated Property, Net and represents the fair value of the assets held in
the trusts.
MidAmerican Energy's depreciation expense included costs for Quad Cities
Station nuclear decommissioning of $8.3 million for each of the years 2002, 2001
and 2000. The provision charged to depreciation expense is equal to the funding
that is being collected in Iowa rates. The decommissioning funding component of
MidAmerican Energy's Iowa tariff assumes decommissioning costs, related to the
Quad Cities Station, will escalate at an annual rate of 5.0% and the assumed
annual return on funds in the trust is 6.9%. Income (loss), net of investment
fees, on the assets in the trust fund was $(6.9) million, $(3.1) million and
$3.2 million for 2002, 2001 and 2000, respectively.
(E) NUCLEAR INSURANCE:
MidAmerican Energy maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station through a combination of
insurance purchased by Exelon Generation Company, LLC (the operator and joint
owner of Quad Cities Station), insurance purchased directly by MidAmerican
Energy, 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.
Exelon Generation purchases nuclear liability insurance for Quad Cities
Station in the maximum available amount of $200 million. In accordance with the
Price-Anderson Amendments Act of 1988,
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excess liability protection above that amount is provided by a mandatory
industry-wide Secondary Financial Protection 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 Energy's aggregate maximum potential share of an
assessment for Quad Cities Station is approximately $44 million per incident,
payable in installments not to exceed $5 million annually.
The property insurance covers property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning arising out of a covered loss. For Quad Cities
Station, Exelon Generation purchased primary and excess property insurance
protection for the combined interests in Quad Cities Station, with coverage
limits totaling $2.1 billion. MidAmerican Energy also directly purchased 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 Quad Cities
Station. The property and related coverages purchased directly by MidAmerican
Energy and by Exelon Generation, which includes the interests of MidAmerican
Energy, 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 Energy from
industry mutual policies for its obligations associated with Quad Cities Station
total $6.3 million.
The master nuclear worker liability coverage, which is purchased by Exelon
Generation for Quad Cities Station, 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 in nuclear-related industries.
The current Price-Anderson Act expired in August 2002. Its contingent
financial obligations still apply to reactors licensed by the Nuclear Regulatory
Commission as of its expiration date. It is anticipated that the Price-Anderson
Act will be renewed with increased third party financial protection requirements
for nuclear incidents.
(F) FUEL, ENERGY AND OPERATING LEASE COMMITMENTS:
MidAmerican Energy has supply and related transportation contracts for its
fossil fueled generating stations. The contracts, with expiration dates ranging
from 2003 to 2007, require minimum payments of $76.4 million, $61.2 million,
$43.6 million, $2.6 million and $2.6 million for the years 2003 through 2007,
respectively. MidAmerican Energy expects to supplement these coal contracts with
additional contracts and spot market purchases to fulfill its future fossil fuel
needs.
MidAmerican Energy has a contract with Cordova Energy Company, LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant. The minimum payments
under the contract, which terminates in May 2004, are $24.7 million and $9.2
million for 2003 and 2004, respectively. The minimum payments are based on
MidAmerican Energy's 50% of the projected monthly net capacity ratings of the
plant.
MidAmerican Energy also has contracts with non-affiliated companies to
purchase electric capacity. The contracts, with expiration dates ranging from
2003 to 2028, require minimum payments of $40.2 million, $37.8 million, $2.9
million, $2.2 million and $2.2 million for the years 2003 through 2007,
respectively, and $45.6 million for the total of the years thereafter.
MidAmerican Energy has various natural gas supply and transportation
contracts for its gas operations. The minimum commitments under these contracts
are $51.9 million, $46.8 million, $37.2
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million, $13.1 million and $10.2 million for the years 2003 through 2007,
respectively, and $16.6 million for the total of the years thereafter.
MidAmerican Energy has non-cancelable operating leases primarily for
computer equipment, office space and rail cars. The minimum payments under these
leases are $7.5 million, $5.0 million, $3.4 million, $2.1 million and $2.1
million for the years 2003 through 2007, respectively, and $0.8 million for the
total of the years thereafter.
(G) OTHER COMMITMENTS AND CONTINGENCIES:
MidAmerican Energy is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of these
matters, it is not expected that their resolution will have a material adverse
effect on the results of operations and financial condition.
(5) LONG-TERM DEBT:
MidAmerican Energy's sinking fund requirements and maturities of long-term
debt for 2003 through 2007 are $106 million, $56 million, $91 million, $160
million and $1 million, respectively.
MidAmerican Energy'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 Energy, 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 rates
shown in the Consolidated Statements of Capitalization are the weighted average
interest rates as of December 31, 2002 and 2001. MidAmerican Energy maintains
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 property, is pledged to
secure mortgage bonds.
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(6) 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):
2002 2001
------- -------
Balance at year-end .............................. $55,000 $89,350
Weighted average interest rate on year-end balance 1.3% 1.9%
Average daily amount outstanding during the year . $ 8,934 $25,921
Weighted average interest rate on average
daily amount outstanding during the year ....... 1.8% 4.7%
MidAmerican Energy has authority from the FERC to issue through April 14,
2003, short-term debt in the form of commercial paper and bank notes aggregating
$500 million. MidAmerican Energy has in place a $370.4 million revolving credit
facility which supports its $250 million commercial paper program and its
variable rate pollution control revenue obligations. The facility expires
January 15, 2004. In addition, MidAmerican Energy has a $5.0 million line of
credit, which expires July 1, 2003.
(7) PREFERRED SECURITIES:
On March 11, 2002, MidAmerican Energy redeemed all $100 million of its
7.98% MidAmerican-obligated preferred securities of subsidiary trust at 100% of
the principal amount plus accrued interest.
During 2002, MidAmerican Energy redeemed all $26.68 million of its $7.80
Series Preferred Shares. The first $13.32 million of preferred securities were
redeemed at 100% of the principal amount plus accrued dividends, and the
remaining $13.36 million was redeemed at 103.9% of the principal amount plus
accrued dividends. A combined loss of $0.8 million, including the premium paid,
on the redemptions is reflected in Preferred Dividends on the Consolidated
Statement of Income.
The total outstanding cumulative preferred securities of MidAmerican Energy
not subject to mandatory redemption requirements may be redeemed at the option
of MidAmerican Energy at prices which, in the aggregate, total $32.6 million.
The aggregate total the holders of all preferred securities outstanding at
December 31, 2002, are entitled to upon involuntary bankruptcy is $31.8 million
plus accrued dividends. Annual dividend requirements for all preferred
securities outstanding at December 31, 2002, total $1.3 million.
(8) RISK MANAGEMENT AND ENERGY TRADING
MidAmerican Energy is exposed to loss of net income, cash flows and asset
values due to market risk, including changes in the market price of gas and
electricity used in its regulated business, changes in the value of open
positions in its nonregulated trading operations, variations in the severity of
weather conditions from normal and changes in interest rates. See also Note (9)
for a discussion of MidAmerican Energy's exposure to credit risk. To manage
these exposures, MidAmerican Energy enters into various financial derivative
instruments. Senior management provides the overall direction, structure,
conduct and control of MidAmerican Energy's risk management activities,
including the use of financial derivative instruments, authorization and
communication of risk management policies and procedures, strategic hedging
program guidelines, appropriate market and credit risk limits, and appropriate
systems for recording, monitoring and reporting the results of transactional and
risk management activities.
-75-
Commodity Price Risk -
Under the current regulatory framework, MidAmerican Energy is allowed to
recover in revenues the cost of gas sold from all of its regulated gas customers
through a purchased gas adjustment clause. Because the majority of MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly market index, MidAmerican Energy's regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.
MidAmerican Energy uses natural gas futures, options and over-the-counter
agreements to mitigate a portion of the market risk retained by its regulated
gas customers through the purchased gas adjustment clause. These financial
derivative instruments are identified and recorded as hedge transactions. The
net amounts exchanged or accrued under swap agreements and the realized gains or
losses on futures and options contracts are included in the cost of gas sold and
recovered in revenues from regulated gas customers.
MidAmerican Energy also derives revenues from nonregulated sales of natural
gas. Pricing provisions are individually negotiated with these customers and may
include fixed prices, prices based on a daily or monthly market index or prices
based on MidAmerican Energy's actual costs. MidAmerican Energy enters into
natural gas futures, options and swap agreements to offset the financial impact
of variations in natural gas commodity prices for physical delivery to
nonregulated customers. These financial derivative activities are also recorded
as hedge accounting transactions.
MidAmerican Energy is exposed to variations in the price of fuel for
generation and the price of purchased power in its Iowa jurisdiction, which
comprises approximately 89% of 2002 electric operating revenues. Fuel price risk
is mitigated through forward contracts. Under typical operating conditions,
MidAmerican Energy has sufficient generation to supply its regulated retail
electric needs. A loss of such generation at a time of high market prices could
subject MidAmerican Energy to losses on its energy sales. MidAmerican Energy
uses electricity forward contracts to hedge anticipated sales of excess
wholesale electric power.
Derivative instruments are used for two types of hedges. Hedges that offset
the variability in earnings and cash flows related to firm commitments are
referred to as fair value hedges. Gains and losses on fair value hedges are
recognized in income as either nonregulated operating revenues; a cost of fuel,
energy and capacity; or a cost of gas sold, depending upon the nature of the
item being hedged. Purchase and sales commitments hedged by fair value hedges
are recorded at fair value, with changes in their fair values recognized in
income and substantially offsetting the impact of the hedges on earnings. For
2002, net pre-tax unrealized gains (losses) of $37,000 and $(167,000),
representing the ineffectiveness of fair value hedges, are included in
Nonregulated Operating Revenues and Cost of Fuel, Energy and Capacity,
respectively, on the Consolidated Statements of Income.
Hedges that offset the variability in earnings and cash flows related to
forecasted transactions are referred to as cash flow hedges. The effective
portion of unrealized gains and losses on cash flow hedges is recorded in other
comprehensive income, net of associated deferred income taxes. Any ineffective
portion of unrealized gains and losses on cash flow hedges is recognized in
income as nonregulated operating revenues; a cost of fuel, energy and capacity;
or a cost of gas sold, depending upon the nature of the item being hedged. Only
hedges that are highly effective in offsetting the risk of variability in future
cash flows are accounted for in this manner. Forecasted transactions include
purchases of gas for resale to regulated and nonregulated customers, purchases
of gas for storage, and purchases and sales of wholesale electric energy. When
the associated hedged forecasted transaction occurs or if a hedging relationship
is no longer appropriate, the unrealized gains and losses are reversed from
other comprehensive income and recognized in net income. Realized gains on cash
flow hedges are recognized
-76-
in income as either nonregulated operating revenues; a cost of fuel, energy and
capacity; or a cost of gas sold, depending upon the nature of the physical
transaction being hedged.
For 2002, net pre-tax unrealized gains (losses) of $13,000, $537,000 and
$(35,000), representing the ineffectiveness of cash flow hedges, are reflected
in Nonregulated Operating Revenues; Cost of Fuel, Energy and Capacity; and Cost
of Gas Sold, respectively, on the Consolidated Statements of Income. During the
twelve months beginning January 1, 2003, it is anticipated that all of the
after-tax, net unrealized gains on cash flow hedges presently recorded as
accumulated other comprehensive income will be realized and recorded in
earnings. MidAmerican Energy has hedged a portion of its exposure to the
variability of cash flows for forecasted transactions through December 2003.
At December 31, 2002, MidAmerican Energy held derivative instruments used
for the following hedging purposes with the following fair values (in
thousands):
Maturity in Maturity in
Type 2003 2004-06 Total
---- ----------- ----------- -------
Regulated electric ..... $1,018 $ 112 $1,130
Regulated gas .......... 1,150 -- 1,150
Nonregulated gas ....... 2,027 (41) 1,986
------ ------- ------
Total................. $4,195 $ 71 $4,266
====== ======= ======
A $5.00 per megawatt hour increase in the price of electricity would
decrease the fair value of electric hedge instruments by $316,000. A $1.00 per
million British thermal units increase in the price of natural gas would
increase the fair value of gas hedge instruments by $2.3 million.
Trading Risk -
MidAmerican Energy uses natural gas and electricity derivative instruments
and forward contracts for proprietary trading purposes under strict guidelines
outlined by senior management. Derivative instruments held for trading purposes
are recorded at fair value and any unrealized gains or losses are reported in
earnings.
MidAmerican Energy uses value at risk, or VaR calculations to measure and
control its exposure to market risk sensitive instruments. VaR is an estimate of
the potential loss on a portfolio over a specified holding period, based on
normal market conditions and within a given statistical confidence interval.
MidAmerican Energy calculates VaR separately for its electric and gas
proprietary trading activities based on a variance-covariance method using
historical prices to estimate volatilities and correlations, a one-day holding
period and a 95% level of confidence. MidAmerican Energy initiated its
nonregulated proprietary electric trading activities in early 2002. Accordingly,
the following summary of MidAmerican Energy's trading VaR profile for 2001
includes only gas trading data.
VaR (in $millions)
2002 2001
---- ----
At December 31......... $0.3 $0.2
High during year....... 0.5 0.3
Low during year........ 0.1 -
Average during year.... 0.2 0.1
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The fair value of MidAmerican Energy's proprietary trading activities at
December 31, 2002 and the periods in which unrealized gains and losses are
expected to be realized are as follows (in thousands):
Maturity in Maturity in
Type 2003 2004-06 Total
---- ------------ ----------- -------
Exchange prices............. $4,683 $ 71 $4,754
Prices actively quoted...... (4,259) (159) (4,418)
Prices based on models...... 207 (14) 193
------ ----- ------
Total..................... $ 631 $(102) $ 529
====== ===== ======
Weather Risk -
MidAmerican Energy and its customers are exposed to the effect of
variations in weather conditions on sales and purchases, respectively, of
electricity and natural gas. MidAmerican Energy enters into degree day swaps to
offset a portion of the financial impact of those variations on MidAmerican
Energy and its customers for the winter heating season. Realized and unrealized
gains and losses on these instruments are included in Regulated Gas Operating
Revenues and Cost of Gas Sold on the Consolidated Statements of Income.
Interest Rate Risk -
At December 31, 2002, MidAmerican Energy had fixed-rate long-term debt
totaling $936 million with a fair value of $996 million. These instruments are
fixed-rate and therefore do not expose MidAmerican Energy to the risk of
earnings loss due to changes in market interest rates. However, the fair value
of these instruments would decrease by approximately $41 million if interest
rates were to increase by 10% from their levels at December 31, 2002. In
general, such a decrease in fair value would impact earnings and cash flows only
if MidAmerican Energy were to reacquire all or a portion of these instruments
prior to their maturity.
At December 31, 2002, MidAmerican Energy had long-term floating rate
obligations totaling $120 million and short-term floating rate obligations
totaling $55 million which expose MidAmerican Energy to risk of increased
interest expense in the event of increases in short-term interest rates. This
market risk is not hedged. The carrying value of the long-term and short-term
floating rate obligations at December 31, 2002, approximated fair value. If the
floating interest rates were to increase by 10% from December 31, 2002, levels,
MidAmerican Energy's interest expense for the floating rate obligations would
increase by approximately $0.3 million annually based on December 31, 2002,
principal balances.
(9) CONCENTRATION OF CREDIT RISK:
Regulated Utility Operations -
MidAmerican Energy's regulated electric utility operations serve
approximately 594,000 customers in Iowa, 84,000 customers in western Illinois
and 3,000 customers in southeastern South Dakota. MidAmerican Energy's regulated
gas utility operations serve 518,000 customers in Iowa, 65,000 customers in
western Illinois, 73,000 customers in southeastern South Dakota and 4,000
customers in northeastern Nebraska. The largest communities served by
MidAmerican Energy 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. MidAmerican Energy's utility operations grant unsecured
credit to customers, substantially all of whom are local businesses and
residents. As of December 31, 2002, billed receivables from MidAmerican Energy's
utility customers, totaled $130.0 million.
-78-
Unregulated Retail Operations -
MidAmerican Energy's unregulated retail operations provide energy services
to approximately 4,700 gas and electric customers in Iowa, Illinois, and Ohio.
In the ordinary course of business, MidAmerican Energy's unregulated retail
operations grant unsecured credit to customers, substantially all of who are
commercial, industrial, non-profit, or other business concerns. MidAmerican
Energy analyzes each counterparty's financial condition prior to entering into
any agreement to provide energy services. As of December 31, 2002, billed
receivables from MidAmerican Energy's unregulated retail customers totaled $15.1
million. Billed receivables from any one customer did not exceed 4.0% of total
billed receivables.
Wholesale Operations -
MidAmerican Energy extends unsecured credit to high volume industrial
end-users, other utilities, energy marketers, and financial institutions in
conjunction with wholesale energy marketing and trading activities. MidAmerican
Energy analyzes the financial condition of each wholesale counterparty before
entering into any transactions, establishes limits on the amount of unsecured
credit to be extended to each counterparty, and evaluates the appropriateness of
unsecured credit limits on an ongoing basis. Credit exposures relative to
approved limits are monitored daily, with all exceptions to approved limits
reported to senior management. MidAmerican Energy defines credit exposure as the
potential loss in value in the event of non-payment or non-performance by a
counterparty, which includes not only accounts receivable, but also the
replacement, or mark-to-market value of contracts for future performance.
MidAmerican Energy seeks to negotiate contractual arrangements with wholesale
counterparties to provide for net settlement of monthly accounts receivable and
accounts payable and net settlement of contracts for future performance in the
event of default. Accounts payable are deducted from calculations of credit
exposure for counterparties with whom such contractual arrangements exist.
MidAmerican Energy also seeks to negotiate contractual arrangements that provide
for the exchange of collateral in the event that credit exposure to a particular
counterparty (1) exceeds a specified threshold or (2) in the event of a material
adverse change in such counterparty's financial condition or downgrade in its
credit ratings to below "investment grade" by a nationally recognized
statistical rating organization such as Moody's or Standard & Poor's.
MidAmerican Energy periodically requests and receives collateral, typically in
the form of cash or letters of credit, from counterparties with credit exposure
in excess of established limits. As of December 31, 2002, 86% of MidAmerican
Energy's credit exposure, net of collateral, from wholesale operations was with
counterparties having "investment grade" credit ratings and credit exposure to
any single counterparty, net of collateral, did not exceed 10% of aggregate
credit exposure, net of collateral, to all wholesale counterparties.
MidAmerican Energy's credit exposure with respect to wholesale natural gas,
electricity, and derivatives transactions is summarized below as of December 31,
2002 (dollars in thousands).
Credit % of Credit
Credit Rating Equivalent Credit Collateral Exposure, Net Exposure, Net
(Standard & Poor's / Moody's) Exposure Held of Collateral of Collateral
- ----------------------------- -------- ---------- ------------- -------------
AA-/Aa3 and above............. $ 6,190 $ - $ 6,190 9.3%
A-/A3 to A+/A1................ 25,828 - 25,828 39.0
BBB-/Baa3 to BBB+/Baa1........ 25,093 - 25,093 37.8
BB+/Ba1 or lower.............. 1,780 21 1,759 2.7
Unrated....................... 9,208 1,753 7,455 11.2
------- ------ ------- -----
Total credit exposure.... $68,099 $1,774 $66,325 100.0%
======= ====== ======= =====
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(10) RATE MATTERS:
Under a settlement agreement approved by the IUB on December 21, 2001,
MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000,
are effectively frozen through December 31, 2005. In approving that settlement,
the IUB specifically allows the filing of electric rate design and/or cost of
service rate changes that are intended to keep overall company revenues
unchanged, but could result in changes to individual tariffs. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
is recorded as a regulatory liability to be used to offset a portion of the cost
to Iowa customers of future generating plant investments. An amount equal to the
regulatory liability is recorded as a regulatory charge in depreciation and
amortization expense when the liability is accrued. Interest expense is accrued
on the portion of the regulatory liability related to prior years. Beginning in
2002, the liability is being relieved as it is credited against allowance for
funds used during construction, or capitalized financing costs, associated with
generating plant additions. As of December 31, 2002, the related regulatory
liability reflected on the Consolidated Balance Sheet totaled $102.9 million.
Illinois law provides for Illinois electric earnings above a computed level
of return on common equity to be shared equally between customers and
MidAmerican Energy. MidAmerican Energy's computed level of return on common
equity is based on a rolling two-year average of the Monthly Treasury Long-Term
Average Rate, as published by the Federal Reserve System, plus a premium of 8.5%
for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year
average above which sharing must occur for 2002 was 14.03%. The law allows
MidAmerican Energy to mitigate the sharing of earnings above the threshold
return on common equity through accelerated recovery of electric assets.
In March 2002, MidAmerican Energy made a filing with the IUB requesting an
increase in rates for its Iowa retail natural gas customers. On June 12, 2002,
the IUB granted an interim rate increase of approximately $13.8 million
annually, effective immediately. On November 8, 2002, the IUB approved the
proposed settlement agreement previously filed with it by MidAmerican Energy and
the Office of Consumer Advocate. The settlement agreement provides for an
increase in rates of $17.7 million annually for MidAmerican Energy's Iowa retail
natural gas customers and effectively freezes such rates through November 2004.
The new rates were implemented for usage beginning November 25, 2002.
-80-
(11) RETIREMENT PLANS:
MidAmerican Energy has primarily noncontributory cash balance defined
benefit pension plans covering substantially all employees of MidAmerican Energy
Holdings and its domestic subsidiaries. Benefit obligations 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 Energy has been allowed to recover accrued pension
costs related to its employees in rates. MidAmerican Energy also maintains
noncontributory, nonqualified supplemental executive retirement plans for active
and retired participants.
MidAmerican Energy currently provides certain postretirement health care
and life insurance benefits for retired employees of MidAmerican Energy Holdings
and its domestic subsidiaries. Under the plans, substantially all of MidAmerican
Energy's employees may become eligible for these benefits if they reach
retirement age while working for MidAmerican Energy. However, MidAmerican Energy
retains the right to change these benefits anytime at its discretion.
MidAmerican Energy expenses postretirement benefit costs on an accrual basis and
includes provisions for such costs in rates.
Net periodic pension, supplemental retirement and postretirement benefit
costs included the following components for MidAmerican Energy and the
aforementioned affiliates for the years ended December 31 (in thousands).
Pension Cost Postretirement Cost
---------------------------------- ---------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- -------
Service cost ............................ $ 20,235 $ 18,114 $ 16,256 $ 5,918 $ 4,357 $ 2,609
Interest cost ........................... 34,177 33,027 35,387 12,688 10,418 8,354
Expected return on plan assets .......... (38,213) (36,326) (48,132) (4,440) (4,032) (4,931)
Amortization of net transition obligation (2,591) (2,591) (2,591) 4,110 4,110 4,110
Amortization of prior service cost ...... 2,729 2,729 2,885 425 425 425
Amortization of prior year (gain) loss .. (2,482) (3,894) (4,119) 2,385 332 (873)
Regulatory expense ...................... 6,639 -- -- -- -- --
-------- -------- -------- -------- -------- -------
Net periodic (benefit) cost ........... $ 20,494 $ 11,059 $ (314) $ 21,086 $ 15,610 $ 9,694
======== ======== ======== ======== ======== =======
In 2002 and 2001, MidAmerican Energy was allocated pension cost of $12.4
million and $5.8 million, respectively. In 2000, MidAmerican Energy was
allocated a $5.3 million pension credit. Postretirement cost allocated to
MidAmerican Energy in 2002, 2001 and 2000 totaled $19.6 million, $14.6 million
and $9.0 million, respectively. Amounts assigned to MidAmerican Energy
affiliates are reimbursed currently in accordance with its intercompany
affiliate services agreements.
The qualified pension plan assets are in external trusts and are comprised
of corporate equity securities, United States government debt, corporate bonds,
and insurance contracts. The 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.
-81-
Although the supplemental executive retirement plan had no assets as of
December 31, 2002, MidAmerican Energy has Rabbi trusts that hold corporate-owned
life insurance and other investments to provide funding for the future cash
requirements. Because this plan is nonqualified, the fair value of these assets
is not included in the following table. The fair value of the Rabbi trust
investments was $52.8 million and $50.4 million at December 31, 2002 and 2001,
respectively.
The projected benefit obligation and accumulated benefit obligation for the
supplemental executive retirement plans were $103.4 million and $99.1 million,
respectively, as of December 31, 2002, and $91.2 million and $88.2 million,
respectively, as of December 31, 2001.
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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
Consolidated Balance Sheets as of December 31 (dollars in thousands):
Pension Benefits Postretirement Benefits
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ........ $ 518,208 $ 472,349 $ 194,917 $ 131,822
Service cost ................................... 20,235 18,114 5,918 4,357
Interest cost .................................. 34,177 33,027 12,688 10,418
Participant contributions ...................... -- -- 3,656 3,059
Plan amendments ................................ -- 652 -- --
Actuarial loss ................................. 45,461 17,333 27,411 57,101
Acquisition .................................... 520 -- 2,205 --
Benefits paid .................................. (25,422) (23,267) (12,521) (11,840)
--------- --------- --------- ---------
Benefit obligation at end of year .............. $ 593,179 $ 518,208 $ 234,274 $ 194,917
--------- --------- --------- ---------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year . $ 515,890 $ 555,208 $ 81,129 $ 75,090
Employer contributions ......................... 4,681 4,576 21,887 16,022
Participant contributions ...................... -- -- 3,656 3,059
Actual return on plan assets ................... (27,376) (20,627) (4,662) (1,202)
Benefits paid .................................. (25,422) (23,267) (12,522) (11,840)
--------- --------- --------- ---------
Fair value of plan assets at end of year ....... $ 467,773 $ 515,890 $ 89,488 $ 81,129
--------- --------- --------- ---------
Funded status .................................. $(125,406) $ (2,318) $(144,786) $(113,788)
Unrecognized net (gain) loss ................... 61,289 (52,244) 97,458 63,328
Unrecognized prior service cost ................ 20,156 22,885 3,838 4,264
Unrecognized net transition obligation (asset) . (3,383) (5,974) 41,102 45,212
--------- --------- --------- ---------
Net amount recognized in the
Consolidated Balance Sheets .................. $ (47,344) $ (37,651) $ (2,388) $ (984)
========= ========= ========= =========
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost ........................... $ 11,305 $ 15,381 $ 1,493 $ 1,493
Accrued benefit liability ...................... (99,392) (88,210) (3,881) (2,477)
Intangible assets .............................. 20,082 22,796 -- --
Accumulated other comprehensive income ......... 20,661 12,382 -- --
--------- --------- --------- ---------
Net amount recognized .......................... $ (47,344) $ (37,651) $ (2,388) $ (984)
========= ========= ========= =========
Pension and Postretirement
Assumptions
--------------------------
2002 2001 2000
---- ---- ----
Assumptions used were:
Discount rate ............................ 5.75% 6.50% 7.00%
Rate of increase in compensation levels... 5.00% 5.00% 5.00%
Weighted average expected long-term
rate of return on assets ............... 7.00% 7.00% 9.00%
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For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals will increase by 9.75% in 2003
and that the rate of increase thereafter will decrease to an ultimate rate of
5.25% by the year 2007.
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 2002 would increase by $4.1 million and the postretirement
benefit obligation at December 31, 2002, would increase by $47.5 million. If the
assumed health care trend rates were to decrease by 1.0%, the total service and
interest cost for 2002 would decrease by $3.1 million and the postretirement
benefit obligation at December 31, 2002, would decrease by $37.0 million.
MidAmerican Energy sponsors defined contribution pension plans (401(k)
plans) covering substantially all employees. MidAmerican Energy'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. Total
contributions were $8.1 million, $7.2 million and $7.4 million for 2002, 2001
and 2000, respectively.
(12) SEGMENT INFORMATION:
MidAmerican Energy has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale of regulated retail electricity and natural
gas. The transmission segment obtains most of its revenue from the sale of
transmission capacity. The marketing and sales segment receives its revenue
principally from nonregulated retail sales of natural gas and electricity.
Common operating costs, interest income, interest expense, income tax expense
and equity in the net income or loss of investees are allocated to each segment.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the segments.
MidAmerican Energy's external revenues by product and services are
displayed on the Consolidated Statements of Income.
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The following tables provide information on an operating segment basis as
of and for the years ended December 31 (in thousands):
2002 2001 2000
----------- ----------- -----------
SEGMENT PROFIT INFORMATION
- --------------------------
Revenues:
External revenues -
Generation ........................... $ 415,921 $ 516,915 $ 444,109
Energy delivery ...................... 1,625,600 1,664,462 1,694,942
Transmission ......................... 20,721 22,852 17,276
Marketing & sales .................... 173,917 163,020 115,505
----------- ----------- -----------
Total .............................. 2,236,159 2,367,249 2,271,832
----------- ----------- -----------
Intersegment revenues -
Generation ........................... 651,342 606,164 588,862
Energy delivery ...................... -- -- --
Transmission ......................... 55,207 55,086 58,220
Marketing & sales .................... 2,404 2,727 2,564
----------- ----------- -----------
Total .............................. 708,953 663,977 649,646
Intersegment eliminations .............. (708,953) (663,977) (649,646)
----------- ----------- -----------
Consolidated ......................... $ 2,236,159 $ 2,367,249 $ 2,271,832
=========== =========== ===========
Depreciation and amortization expense (a):
Generation ............................. $ 139,054 $ 133,681 $ 87,480
Energy delivery ........................ 117,893 106,496 101,295
Transmission ........................... 8,972 8,900 8,663
Marketing & sales ...................... 2,527 2,022 --
----------- ----------- -----------
Total ................................ $ 268,446 $ 251,099 $ 197,438
=========== =========== ===========
Interest and dividend income:
Generation ............................. $ 3,783 $ 5,450 $ 7,935
Energy delivery ........................ 4,468 6,727 6,695
Transmission ........................... 530 822 855
Marketing & sales ...................... 51 70 14
----------- ----------- -----------
Total ................................ $ 8,832 $ 13,069 $ 15,499
=========== =========== ===========
Fixed charges:
Generation ............................. $ 29,989 $ 31,726 $ 31,799
Energy delivery ........................ 40,737 42,654 44,395
Transmission ........................... 4,892 5,401 5,630
Marketing & sales ...................... 366 363 14
----------- ----------- -----------
Total ................................ 75,984 80,144 81,838
Preferred dividends .................... (2,933) (4,544) (4,955)
----------- ----------- -----------
Consolidated ......................... $ 73,051 $ 75,600 $ 76,883
=========== =========== ===========
-85-
2002 2001 2000
----------- ----------- -----------
SEGMENT PROFIT INFORMATION (CONTINUED)
Income before income taxes:
Generation ......................... $ 150,040 $ 142,637 $ 120,993
Energy delivery .................... 101,176 84,334 124,680
Transmission ....................... 40,403 39,514 32,470
Marketing & sales .................. 1,499 (5,799) (7,181)
----------- ----------- -----------
Total ............................ 293,118 260,686 270,962
Preferred dividends ................ 2,933 4,544 4,955
----------- ----------- -----------
Consolidated ..................... $ 296,051 $ 265,230 $ 275,917
=========== =========== ===========
SEGMENT ASSET INFORMATION
Capital expenditures:
Generation ......................... $ 197,666 $ 87,296 $ 48,386
Energy delivery .................... 151,178 159,302 120,919
Transmission ....................... 7,504 3,733 22,189
Marketing & sales .................. 1,110 1,963 25,308
----------- ----------- -----------
Total ............................ $ 357,458 $ 252,294 $ 216,802
=========== =========== ===========
Total assets:
Generation ......................... $ 1,393,271 $ 1,282,677 $ 1,333,253
Energy delivery .................... 2,224,238 2,107,598 2,226,445
Transmission ....................... 222,051 226,251 247,641
Marketing & sales .................. 52,143 51,164 113,347
----------- ----------- -----------
Total ............................ 3,891,703 3,667,690 3,920,686
Reclassifications and
intersegment eliminations (b) .... (79,824) (89,798) (97,120)
----------- ----------- -----------
Consolidated ..................... $ 3,811,879 $ 3,577,892 $ 3,823,566
=========== =========== ===========
(a) Depreciation and amortization expense above includes depreciation
related to nonregulated operations, which is included in Nonregulated
Operating Expense - Other on the Consolidated Statements of Income.
(b) Reclassifications and intersegment eliminations relate principally to
the reclassification of income tax balances in accordance with
generally accepted accounting principles and the elimination of
intersegment accounts receivables and payables.
-86-
(13) INCOME TAXES:
MidAmerican Energy's income tax expense includes the following for the
years ended December 31 (in thousands):
2002 2001 2000
--------- --------- ---------
Current:
Federal ................ $ 135,657 $ 111,674 $ 105,754
State .................. 47,908 33,327 32,450
--------- --------- ---------
183,565 145,001 138,204
--------- --------- ---------
Deferred:
Federal ................ (44,179) (23,199) (18,174)
State .................. (14,750) (4,433) (4,021)
--------- --------- ---------
(58,929) (27,632) (22,195)
--------- --------- ---------
Investment tax credit, net (4,406) (4,917) (5,548)
--------- --------- ---------
Total .................. $ 120,230 $ 112,452 $ 110,461
========= ========= =========
Included in Deferred Income Taxes on the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
2002 2001
-------- --------
Deferred tax assets related to:
Investment tax credits ...................... $ 38,296 $ 41,275
Pensions .................................... 32,004 27,955
Nuclear reserves and decommissioning ........ 28,411 17,898
Revenue sharing ............................. 46,428 24,769
Accrued liabilities ......................... 1,094 2,413
Fuel cost recoveries ........................ 9,558 --
Other ....................................... 3,190 10
-------- --------
158,981 114,320
-------- --------
Deferred tax liabilities related to:
Depreciable property ........................ 418,809 412,773
Income taxes recoverable through future rates 159,411 185,222
Reacquired debt ............................. 4,914 7,544
Fuel cost recoveries ........................ -- 20,272
Other ....................................... -- 2,487
-------- --------
583,134 628,298
-------- --------
Net deferred income tax liability ............. $424,153 $513,978
======== ========
-87-
The following table is a reconciliation of the statutory federal income
tax rate and the effective income tax rate indicated by the Consolidated
Statements of Income for the years ended December 31:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate ......... 35% 35% 35%
Amortization of investment tax credit ..... (1) (2) (2)
State income tax, net of federal income
tax benefit ............................. 8 7 7
Other ..................................... (1) 2 --
--- --- ---
Effective federal and state income tax rate 41% 42% 40%
=== === ===
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amount and estimated fair value
of certain financial instruments as of December 31 (in thousands):
2002 2001
------------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- -------- --------
Financial instruments issued
by MidAmerican Energy:
MidAmerican Energy preferred securities;
subject to mandatory redemption ........... $ -- $ -- $ 26,680 $ 27,747
MidAmerican Energy-obligated preferred
securities; subject to mandatory redemption -- -- 100,000 99,640
Long-term debt, including current portion ... 1,053,418 1,113,366 820,594 843,930
Investments in the Quad Cities Station decommissioning trust are reported
at market value in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As of December 31, 2002, the total
fair value of the investments was $159.8 million and the related total amortized
cost was $143.0 million. As of December 31, 2001, the total fair value of the
investments was $158.3 million and the related total amortized cost was $130.3
million. Refer to Notes (1)(f) and (4)(d) for further discussion of the Quad
Cities Station decommissioning trust.
(15) NON-OPERATING OTHER INCOME AND EXPENSE:
Non-Operating Income - Other Income and Other Expense, as shown on the
Consolidated Statements of Income include the following for the years ended
December 31 (in thousands):
2002 2001 2000
------- ------- -------
Other income:
Allowance for equity funds used during construction $ 8,621 $ 1,571 $ --
Corporate-owned life insurance income ............. 1,333 5,258 9,299
Subservicer fee for sold receivables .............. 1,340 2,864 1,905
Gain on sale of assets ............................ 1,164 1,387 --
Other ............................................. 1,605 1,211 856
------- ------- -------
Total ........................................... $14,063 $12,291 $12,060
======= ======= =======
-88-
Other Expense consisted principally of a discount on sold receivables
totaling $6.4 million, $16.0 million and $10.2 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
(16) AFFILIATED COMPANY TRANSACTIONS:
The companies identified as affiliates are MidAmerican Energy Holdings and
its subsidiaries. The basis for these charges is provided for in service
agreements between MidAmerican Energy and its affiliates.
MHC incurred charges which are of general benefit to all of its
subsidiaries. These costs were for administrative and general salaries and
expenses, outside services, director fees, pension, deferred compensation, and
retirement costs, some of which originated at MidAmerican Energy. MHC reimbursed
MidAmerican Energy for charges originating at MidAmerican Energy in the amount
of $0.5 million, $0.4 million and $1.9 million for 2002, 2001 and 2000,
respectively. MidAmerican Energy, in turn, was allocated a share of costs from
MHC totaling $0.9 million, $1.0 million and $(0.3) million for 2002, 2001 and
2000, respectively.
MidAmerican Energy was also reimbursed for charges incurred on behalf of
its affiliates. The majority of these reimbursed expenses was for employee wages
and benefits, insurance, building rent, computer costs, administrative services,
travel expense, and general and administrative expense; including treasury,
legal, shareholder relations and accounting functions. The amount of such
expenses was $34.5 million, $27.0 million and $25.8 million for 2002, 2001 and
2000, respectively.
In 2001, MidAmerican Energy acquired a gas turbine equipment purchase
contract from MidAmerican Energy Holdings for $22.0 million. MidAmerican Energy
also reimbursed MidAmerican Energy Holdings in the amount of $10.4 million, $8.8
million and $9.5 million in 2002, 2001 and 2000, respectively, for its allocated
share of corporate expenses.
MidAmerican Energy leases unit trains from an affiliate for the
transportation of coal to MidAmerican Energy's generating stations. Unit train
costs, including maintenance, were approximately $0.1 million, $0.1 million and
$0.4 million for 2002, 2001 and 2000, respectively. MidAmerican Energy purchased
the remaining leased railcars from MidAmerican Rail, Inc. for $0.6 million in
October 2002.
MidAmerican Energy sold natural gas to AmGas, an affiliate, in the amount
of $11.6 million and $32.0 million for 2001 and 2000, respectively. In 2000,
MidAmerican Energy also purchased natural gas from AmGas. MidAmerican Energy's
cost of gas related to these purchases was $1.3 million.
MidAmerican Energy has an agreement with Cordova Energy Company, LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy's payments for monthly capacity charges totaled $21.2 million
for 2002 and $18.1 million for 2001.
In August 2002, Northern Natural Gas Company, or NNG, became an affiliate
of MidAmerican Energy when NNG was purchased by MidAmerican Energy Holdings. NNG
has been and is one of MidAmerican Energy's suppliers of natural gas
transportation capacity. MidAmerican Energy purchased $17.9 million of natural
gas transportation capacity from NNG in August through December 2002.
MidAmerican Energy had accounts receivable from affiliates of $9.4 million
and $5.0 million as of December 31, 2002 and 2001, respectively, that are
included in Receivables on the Consolidated
-89-
Balance Sheets. MidAmerican Energy also had accounts payable to affiliates of
$2.8 million and $1.9 million as of December 31, 2002 and 2001, respectively,
that are included in Accounts Payable on the Consolidated Balance Sheets.
(17) SALE OF ACCOUNTS RECEIVABLE:
In 1997, MidAmerican Energy entered into a revolving agreement to sell all
of its right, title and interest in the majority of its billed accounts
receivable to MidAmerican Energy Funding Corporation, a special purpose entity
established to purchase accounts receivable from MidAmerican Energy and sell
them to outside investors. The agreement was structured as a true sale.
Therefore, the accounts receivable sold are not reflected on MidAmerican
Energy's or MidAmerican Funding's Consolidated Balance Sheet as of December 31,
2001. The agreement expired on October 29, 2002, and MidAmerican Energy did not
extend or replace it.
(18) UNAUDITED QUARTERLY OPERATING RESULTS:
2002
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands)
Operating revenues .............. $574,284 $492,688 $554,381 $614,806
Operating income ................ 92,567 65,589 135,574 61,267
Income from continuing operations 43,384 29,251 70,510 32,676
Earnings on common stock ........ 42,536 27,821 70,183 32,348
2001
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands)
Operating revenues .............. $868,667 $520,561 $513,816 $464,205
Operating income ................ 114,576 76,614 113,340 29,044
Income from continuing operations 55,789 32,636 56,564 7,789
Earnings on common stock ........ 54,550 31,368 55,588 6,728
Quarterly data reflect seasonal variations common in the utility industry.
The increase in earnings for the fourth quarter of 2002 compared to 2001 was due
to colder weather in the fourth quarter of 2002, greater earnings from wholesale
sales of electricity, and a decrease in expenses related to Cooper Nuclear
Station as a result of the restructuring of the related contract.
-90-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of MidAmerican Energy Company and subsidiaries
(Company) as of December 31, 2002 and 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for each of the three years in the period ended December 31, 2002. Our audits
also included the consolidated financial statement schedule listed in the Index
at Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of MidAmerican Energy Company and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
January 24, 2003
-91-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
OPERATING REVENUES
Regulated electric ........................ $ 1,353,431 $ 1,318,129 $ 1,212,411
Regulated gas ............................. 695,799 869,132 929,555
Nonregulated .............................. 191,649 201,389 174,377
----------- ----------- -----------
2,240,879 2,388,650 2,316,343
----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ....... 346,685 275,904 245,926
Cost of gas sold ........................ 482,837 674,883 721,395
Other operating expenses ................ 394,436 445,192 414,643
Maintenance ............................. 135,487 138,343 127,077
Depreciation and amortization ........... 266,983 250,315 193,092
Property and other taxes ................ 76,025 71,705 74,778
----------- ----------- -----------
1,702,453 1,856,342 1,776,911
----------- ----------- -----------
Nonregulated:
Cost of sales ........................... 159,391 170,541 144,616
Other ................................... 29,047 61,682 67,256
----------- ----------- -----------
188,438 232,223 211,872
----------- ----------- -----------
Total operating expenses ................ 1,890,891 2,088,565 1,988,783
----------- ----------- -----------
OPERATING INCOME .......................... 349,988 300,085 327,560
----------- ----------- -----------
NON-OPERATING INCOME
Interest income ........................... 18,905 21,102 25,767
Dividend income ........................... 731 2,242 3,848
Marketable securities gains and losses, net (5,094) (1,124) (3,958)
Other income .............................. 26,972 21,711 25,395
Other expense ............................. (31,273) (18,737) (14,496)
----------- ----------- -----------
10,241 25,194 36,556
----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ................ 119,129 109,224 110,033
Other interest expense .................... 3,431 6,417 10,244
Preferred dividends of subsidiaries ....... 4,507 12,524 12,935
Allowance for borrowed funds .............. (3,336) (1,661) (1,273)
----------- ----------- -----------
123,731 126,504 131,939
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ................ 236,498 198,775 232,177
INCOME TAXES .............................. 99,782 95,688 105,393
----------- ----------- -----------
NET INCOME ................................ $ 136,716 $ 103,087 $ 126,784
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-92-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
NET INCOME ........................................... $ 136,716 $ 103,087 $ 126,784
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding gains (losses) during period-
Before income taxes .............................. (9,512) (5,315) 3,870
Income tax (expense) benefit ..................... 3,329 1,860 (1,355)
--------- --------- ---------
(6,183) (3,455) 2,515
--------- --------- ---------
Less reclassification adjustment for realized gains
(losses) reflected in net income during period-
Before income taxes .............................. (4,735) (2,410) (3,958)
Income tax benefit ............................... 1,657 844 1,385
--------- --------- ---------
(3,078) (1,566) (2,573)
--------- --------- ---------
Net unrealized gains (losses) .................. (3,105) (1,889) 5,088
--------- --------- ---------
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes .............................. (7,013) 7,690 --
Income tax (expense) benefit ..................... 2,915 (3,197) --
--------- --------- ---------
(4,098) 4,493 --
--------- --------- ---------
Less reclassification adjustment for realized gains
(losses) reflected in net income during period-
Before income taxes ............................. (2,277) 1,757 --
Income tax (expense) benefit .................... 946 (731) --
--------- --------- ---------
(1,331) 1,026 --
--------- --------- ---------
Net unrealized gains (losses) ................. (2,767) 3,467 --
--------- --------- ---------
Minimum pension liability adjustment:
Before income taxes ................................ (8,279) (8,295) (4,087)
Income tax benefit ................................. 3,442 3,448 1,699
--------- --------- ---------
Net adjustment ................................... (4,837) (4,847) (2,388)
--------- --------- ---------
Other comprehensive income (loss) .................. (10,709) (3,269) 2,700
--------- --------- ---------
COMPREHENSIVE INCOME ................................. $ 126,007 $ 99,818 $ 129,484
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-93-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
-----------------------
2002 2001
---------- ----------
ASSETS
UTILITY PLANT, NET
Electric .............................................................. $4,731,002 $4,598,372
Gas ................................................................... 900,209 867,277
---------- ----------
5,631,211 5,465,649
Less accumulated depreciation and amortization ........................ 3,011,123 2,847,979
---------- ----------
2,620,088 2,617,670
Construction work in progress ......................................... 205,988 80,276
---------- ----------
2,826,076 2,697,946
---------- ----------
POWER PURCHASE CONTRACT ............................................... -- 48,185
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................................. 28,915 20,270
Marketable securities, trading ........................................ 4,939 20,743
Receivables, less reserves of $7,685 and $733, respectively ........... 321,698 167,969
Inventories ........................................................... 88,492 83,339
Prepaid taxes ......................................................... -- 23,956
Other ................................................................. 30,070 12,640
---------- ----------
474,114 328,917
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............................ 333,382 519,680
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET ................ 1,275,143 1,279,143
REGULATORY ASSETS ..................................................... 192,514 221,120
OTHER ASSETS .......................................................... 52,755 80,481
---------- ----------
TOTAL ASSETS .......................................................... $5,153,984 $5,175,472
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ....................................................... $1,867,119 $1,974,605
MidAmerican Energy preferred securities, not subject to
mandatory redemption ................................................ 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ............................. -- 26,680
MidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures .. -- 100,000
Long-term debt, excluding current portion ............................. 1,647,691 1,357,782
---------- ----------
3,546,569 3,490,826
---------- ----------
CURRENT LIABILITIES
Notes payable ......................................................... 55,000 91,780
Current portion of long-term debt ..................................... 105,727 187,187
Current portion of power purchase contract ............................ -- 17,398
Accounts payable ...................................................... 242,733 185,528
Taxes accrued ......................................................... 85,987 61,269
Interest accrued ...................................................... 25,487 27,813
Other ................................................................. 56,291 44,762
---------- ----------
571,225 615,737
---------- ----------
OTHER LIABILITIES
Power purchase contract ............................................... -- 8,469
Deferred income taxes ................................................. 461,862 564,334
Investment tax credit ................................................. 56,886 61,292
Quad Cities Station decommissioning ................................... 159,757 158,349
Regulatory liabilities ................................................ 118,011 62,378
Other ................................................................. 239,674 214,087
---------- ----------
1,036,190 1,068,909
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES .................................. $5,153,984 $5,175,472
========== ==========
The accompanying notes are an integral part of these financial statements.
-94-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 136,716 $ 103,087 $ 126,784
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .......................... 269,412 286,590 230,140
Deferred income taxes and investment tax credit, net ... (74,561) (32,543) (18,547)
Amortization of other assets and liabilities ........... 29,827 38,750 19,595
Gain on sale of securities, assets and other investments (3,840) (1,358) (2,124)
Other-than-temporary declines in value of investments .. 4,363 -- --
Loss from impairment of assets and investments ......... 19,221 -- --
Income on equity investments ........................... (7,919) (5,118) (2,123)
Net changes in accrued customer rate credits ........... -- (21,531) 6,724
Power purchase contract restructuring receipt .......... 39,100 -- --
Cash inflow (outflow) of accounts receivable
securitization ....................................... (44,000) (26,000) 12,877
Impact of changes in working capital ................... (18,154) 120,780 (57,539)
Other .................................................. 15,450 (1,702) (11,528)
--------- --------- ---------
Net cash provided by operating activities ............ 365,615 460,955 304,259
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (356,636) (250,073) (215,727)
Non-cash and accrued utility construction expenditures ... 25,349 (705) (660)
Quad Cities Station decommissioning trust fund ........... (8,299) (8,299) (8,302)
Nonregulated capital expenditures ........................ (1,558) (2,541) (3,229)
Purchase of assets and long-term investments ............. (1,500) (2,274) (6,345)
Purchase of available-for-sale securities ................ -- -- (52,937)
Proceeds from sale of available-for-sale securities ...... 4,555 -- 81,840
Proceeds from sale of assets and other investments ....... 12,138 358 24,041
Note receivable from affiliate ........................... 151,888 (53,800) 24,477
Other investing activities, net .......................... 9,984 6,555 6,067
--------- --------- ---------
Net cash used in investing activities .................. (164,079) (310,779) (150,775)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid .................................... (233,493) -- (54,000)
Issuance of long-term debt, net of issuance costs ........ 391,352 198,150 160,992
Retirement of long-term debt, including reacquisition cost (187,290) (324,933) (134,293)
Reacquisition of preferred securities .................... (126,680) (23,320) --
Net increase (decrease) in notes payable ................. (36,780) 10,179 (122,400)
--------- --------- ---------
Net cash used in financing activities .................. (192,891) (139,924) (149,701)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 8,645 10,252 3,783
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 20,270 10,018 6,235
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 28,915 $ 20,270 $ 10,018
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 116,185 $ 109,026 $ 116,747
========= ========= =========
Income taxes paid ........................................ $ 124,002 $ 200,098 $ 117,593
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-95-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
---------------------------------------
2002 2001
----------------- ------------------
MEMBER'S EQUITY
Paid in capital....................................................... $1,669,753 $1,669,753
Retained earnings..................................................... 208,671 305,448
Accumulated other comprehensive income (loss), net:
Unrealized gain on securities...................................... 67 3,172
Unrealized gain on cash flow hedges................................ 700 3,467
Minimum pension liability adjustments.............................. (12,072) (7,235)
----------- ----------
1,867,119 52.6% 1,974,605 56.5%
----------- ----- ---------- -----
MIDAMERICAN ENERGY PREFERRED SECURITIES
(100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding; not subject to mandatory redemption:
$3.30 Series, 49,451 shares........................................ 4,945 4,945
$3.75 Series, 38,305 shares........................................ 3,831 3,831
$3.90 Series, 32,630 shares........................................ 3,263 3,263
$4.20 Series, 47,362 shares........................................ 4,736 4,736
$4.35 Series, 49,945 shares........................................ 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 0.9% 31,759 0.9%
------------ ---- ---------- ----
Cumulative shares outstanding; subject to mandatory redemption:
$7.80 Series, zero and 266,800 shares, respectively................ - 26,680
------------ ----------
- -% 26,680 0.8%
------------ ---- ---------- ----
MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES
MidAmerican Energy-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely
MidAmerican Energy junior subordinated debentures:
7.98% Series, zero and 4,000,000 shares, respectively............ - -% 100,000 2.9%
------------ ---- --------- ----
LONG-TERM DEBT
MidAmerican Energy mortgage bonds:
7.125% Series, due 2003............................................ - 100,000
7.7% Series, due 2004.............................................. 55,630 55,630
7.0% Series, due 2005.............................................. 90,500 90,500
7.375% Series, due 2008............................................ 75,000 75,000
7.45% Series, due 2023............................................. 6,940 6,940
6.95% Series, due 2025............................................. 12,500 12,500
MidAmerican Energy pollution control revenue obligations:
5.75% Series, due periodically through 2003........................ - 4,320
6.7% Series, due 2003.............................................. - 1,000
6.1% Series, due 2007.............................................. 1,000 1,000
5.95% Series, due 2023 (secured by general mortgage bonds)......... 29,030 29,030
Variable rate series -
Due 2016 and 2017, 1.64% and 1.77%, respectively................ 37,600 37,600
Due 2023 (secured by general mortgage bonds)
1.64% and 1.77%, respectively................................ 28,295 28,295
Due 2023, 1.64% and 1.77%, respectively......................... 6,850 6,850
Due 2024, 1.64% and 1.77%, respectively......................... 34,900 34,900
Due 2025, 1.64% and 1.77%, respectively......................... 12,750 12,750
The accompanying notes are an integral part of these financial statements.
-96-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31,
----------------------------------------
2002 2001
------------------- -----------------
LONG-TERM DEBT (CONTINUED)
MidAmerican Energy notes:
6.375% Series, due 2006............................................ $ 160,000 $ 160,000
6.75% Series, due 2031............................................. 400,000 -
Obligation under capital lease....................................... 2,161 1,364
Unamortized debt premium and discount, net........................... (5,465) (939)
---------- ----------
Total utility.................................................... 947,691 26.7% 656,740 18.8%
---------- ------ ---------- ------
MidAmerican Funding parent debt:
6.339% Senior Secured Notes Due 2009............................... 175,000 175,000
6.75% Senior Secured Notes Due 2011................................ 200,000 200,000
6.927% Senior Secured Notes Due 2029............................... 325,000 325,000
Other.............................................................. - 1,042
---------- ----------
Total MidAmerican Funding parent................................. 700,000 19.8% 701,042 20.1%
---------- ------ ---------- ------
1,647,691 46.5% 1,357,782 38.9%
---------- ------ ---------- ------
TOTAL CAPITALIZATION................................................. $3,546,569 100.0% $3,490,826 100.0%
========== ====== ========== ======
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
----------- ----------- -----------
BEGINNING OF PERIOD............................................. $305,448 $202,361 $129,577
NET INCOME...................................................... 136,716 103,087 126,784
DEDUCT DIVIDENDS DECLARED....................................... 233,493 - 54,000
-------- -------- --------
END OF PERIOD................................................... $208,671 $305,448 $202,361
======== ======== ========
The accompanying notes are an integral part of these financial statements.
-97-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Page
----
(1) Summary of Significant Accounting Policies ...... 99
(2) Jointly Owned Utility Plant...................... 103
(3) Inventories...................................... 103
(4) Commitments and Contingencies.................... 103
(5) Long-term Debt................................... 103
(6) Short-term Borrowing............................. 105
(7) Preferred Securities............................. 105
(8) Risk Management and Energy Trading............... 105
(9) Concentration of Credit Risk..................... 106
(10) Rate Matters..................................... 106
(11) Retirement Plans................................. 106
(12) Segment Information.............................. 107
(13) Income Taxes..................................... 110
(14) Fair Value of Financial Instruments.............. 111
(15) Non-Operating Other Income and Expense........... 113
(16) Affiliated Company Transactions.................. 114
(17) Sale of Accounts Receivable...................... 115
(18) Unaudited Quarterly Operating Results............ 115
-98-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) COMPANY STRUCTURE:
MidAmerican Funding, LLC is an Iowa limited liability company with
MidAmerican Energy Holdings Company as its sole member. MidAmerican Funding's
direct wholly owned subsidiary is MHC Inc., which constitutes substantially all
of MidAmerican Funding's assets, liabilities and business activities except
those related to MidAmerican Funding's long-term debt securities. MHC,
MidAmerican Funding and MidAmerican Energy Holdings are exempt public utility
holding companies headquartered in Des Moines, Iowa. MHC's principal subsidiary
is MidAmerican Energy Company, a public utility with electric and natural gas
operations. Other direct wholly owned subsidiaries of MHC are MidAmerican
Capital Company, Midwest Capital Group, Inc., MidAmerican Services Company and
MEC Construction Services Co.
The current corporate structure is the result of a merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings
Company) and CalEnergy Company, Inc. CalEnergy, was reincorporated as an Iowa
corporation and changed its name to MidAmerican Energy Holdings Company. As a
result, MHC and all direct and indirect subsidiaries of MHC each became a
subsidiary of MidAmerican Funding.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include MidAmerican
Funding and its subsidiaries. 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. Certain classification of
amounts for 2002 are different than that of prior years. Accordingly, historical
amounts have been reclassified.
(C) REGULATION:
Refer to Note (1)(c) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(D) REVENUE RECOGNITION:
Refer to Note (1)(d) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(E) DEPRECIATION AND AMORTIZATION:
Refer to Note (1)(e) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
-99-
(F) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments and Nonregulated Property, Net includes the following amounts
as of December 31 (in thousands):
2002 2001
-------- --------
Nuclear decommissioning trust fund .............. $159,757 $158,349
Notes with parent ............................... -- 151,888
Rabbi trusts .................................... 94,026 89,610
Equipment leases ................................ 32,625 46,432
Special-purpose funds ........................... 7,272 22,740
Coal transportation property, net of accumulated
depreciation of $1,705 and $3,910, respectively 10,215 10,655
Energy projects, net of accumulated depreciation
of zero and $497, respectively ................ 11,162 9,625
Communications .................................. -- 7,431
Real estate, net of accumulated depreciation of
$477 and $501, respectively ................... 5,244 5,584
Marketable securities ........................... 258 594
Other, net of accumulated depreciation of
$1,499 and $1,194, respectively ............... 12,823 16,772
-------- --------
Total ........................................ $333,382 $519,680
======== ========
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, which is reflected in Other
Liabilities - Quad Cities Station Decommissioning on the Consolidated Balance
Sheets. Funds are invested in accordance with applicable federal investment
guidelines and are restricted for use as reimbursement for costs of
decommissioning MidAmerican Energy's Quad Cities Station.
MidAmerican Funding's notes with its parent consist of a note between a
subsidiary of MHC and MidAmerican Energy Holdings carrying interest of 5.75%
annually and a $100 million revolving credit arrangement between MHC and
MidAmerican Energy Holdings carrying interest at the 30-day LIBOR rate plus 25
basis points. Outstanding balances are unsecured and due on demand.
The investment in Rabbi trusts represents the cash value of life insurance
policies on certain key executives and the fair value of other related
investments. The Rabbi trusts were established to administer various
nonqualified executive and director compensation plans, and investments in each
trust are restricted for use in meeting the costs and obligations of the trust
and related compensation plans.
Marketable securities consist generally of preferred and common stocks held
by MidAmerican Capital. Investments in marketable securities classified as
available-for-sale are reported at fair value (see Note (14)) with net
unrealized gains and losses reported as a net of tax amount in Member's Equity
until realized. An other-than-temporary decline in the value of a marketable
security is recognized through a write-down of the investment to earnings.
Equipment leases, which are accounted for as leveraged leases and held by
MidAmerican Capital, are comprised primarily of equity financing provided for
five commercial passenger aircraft leased to major domestic airlines and a seven
percent undivided interest in an electric generating station, which is leased to
a utility located in Arizona. MidAmerican Capital's initial equity investment in
the aircraft represented 20% - 34% of the purchase price; the remaining amount
was furnished by third-party non-
-100-
recourse lenders. MidAmerican Capital has also invested in safe harbor lease
transactions involving ferryboats leased to entities engaged in providing
recreational boat tours. The investments are exposed to the credit risk of the
lessees. The carrying pre-tax values as of December 31 (in thousands) and the
years of termination for the equipment leases are as follows:
Year of
2002 2001 Termination
------- ------- -----------
Aircraft....................... $23,321 $36,948 2008/2009
Electric generation station.... 8,811 8,929 2015
Safe harbor.................... 493 555 periodically
through 2015
------- -------
Total........................ $32,625 $46,432
======= =======
Energy projects consist of investments in solar electric generating
facilities, a hydroelectric development company, energy marketing assets and a
gas-fired cogeneration plant. The investments are supported by long-term sales
contracts to electric utilities primarily based on market price.
Investment in real estate is comprised primarily of a 1,920 acre planned
residential and commercial development community located in the southeast corner
of South Dakota. As of December 31, 2002, 37.9% of the development available for
sale had been sold.
(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
MidAmerican Funding 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.
Net cash provided (used) from changes in working capital for the years
ended December 31 was as follows (in thousands):
2002 2001 2000
--------- --------- ---------
Marketable securities, trading . $ 15,804 $ 30,794 $ --
Receivables, net ............... (109,729) 315,397 (254,882)
Inventories .................... (5,153) (14,209) 13,693
Prepaid taxes .................. 23,956 (1,067) --
Other current assets ........... (17,430) 1,578 (1,917)
Accounts payable ............... 40,477 (148,371) 170,920
Taxes accrued .................. 24,718 (70,109) 20,786
Interest accrued ............... (2,326) (142) (1,600)
Other current liabilities ...... 11,529 6,909 (4,539)
--------- --------- ---------
Total ........................ $ (18,154) $ 120,780 $ (57,539)
========= ========= =========
-101-
(H) ACCOUNTING FOR POWER PURCHASE CONTRACT:
Refer to Note (1)(h) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(I) ACCOUNTING FOR DERIVATIVES:
Refer to Note (1)(i) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(J) NEW ACCOUNTING PRONOUNCEMENTS:
Refer to Note (1)(j) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(K) EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET:
On January 1, 2002, MidAmerican Funding adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which dictates the accounting for acquired goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and indefinite-lived intangible assets be discontinued and that entities
disclose net income for prior periods adjusted to exclude such amortization and
related income tax effects, as well as a reconciliation from the originally
reported net income to the adjusted net income. MidAmerican Funding's related
amortization consisted solely of goodwill amortization, which had no income tax
effect. Amortization expense was included in Nonregulated Operating Expenses -
Other in the Consolidated Statements of Income. Following is a reconciliation of
net income as originally reported to adjusted net income for the years ended
December 31 (in thousands):
2002 2001 2000
-------- -------- --------
Net income as originally reported $136,716 $103,087 $126,784
Goodwill amortization ........... -- 34,415 35,406
-------- -------- --------
Net income as adjusted .......... $136,716 $137,502 $162,190
======== ======== ========
Based on MidAmerican Funding's initial goodwill impairment test and the
subsequent annual impairment test completed as of October 31, 2002, no
impairment was indicated for goodwill. In the fourth quarter of 2002,
MidAmerican Funding adjusted goodwill for a change in related deferred income
taxes due to resolution of tax issues existing at the time of purchase. The
following table shows the change in the carrying amount of goodwill by
reportable segment for the year ended December 31, 2002 (in thousands):
Energy Trans- Marketing
Generation Delivery mission & Sales Total
---------- --------- ------- --------- ----------
Balance at January 1, 2002 . $927,819 $267,152 $84,172 $ -- $1,279,143
Income tax adjustment ...... -- (4,000) -- -- (4,000)
-------- -------- ------- -------- ----------
Balance at December 31, 2002 $927,819 $263,152 $84,172 $ -- $1,275,143
======== ======== ======= ======== ==========
-102-
(2) JOINTLY OWNED UTILITY PLANT:
Refer to Note (2) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(3) INVENTORIES:
Refer to Note (3) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(4) COMMITMENTS AND CONTINGENCIES:
(A) MANUFACTURED GAS PLANT FACILITIES:
Refer to Note (4)(a) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(B) AIR QUALITY:
Refer to Note (4)(b) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(C) LONG-TERM POWER PURCHASE CONTRACT:
Refer to Note (4)(c) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(D) NUCLEAR DECOMMISSIONING COSTS:
Refer to Note (4)(d) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(E) NUCLEAR INSURANCE:
Refer to Note (4)(e) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(F) FUEL, ENERGY AND OPERATING LEASE COMMITMENTS:
Refer to Note (4)(f) of MidAmerican Energy's Notes to Consolidated
Financial Statements.
(G) OTHER COMMITMENTS AND CONTINGENCIES:
MidAmerican Capital has issued a letter of credit totaling $6.0 million in
conjunction with an energy project investment, $0.1 million of which was drawn
as of December 31, 2002. The letter of credit is reflected in Other
Liabilities-Other on MidAmerican Funding`s Consolidated Balance Sheets.
MidAmerican Funding is involved in a number of other legal proceedings and
claims. While management is unable to predict the ultimate outcome of these
matters, it is not expected that their resolution will have a material adverse
effect on the results of operations and financial condition.
(5) LONG-TERM DEBT:
MidAmerican Funding's sinking fund requirements and maturities of long-term
debt for 2003 through 2007 are $106 million, $56 million, $91 million, $160
million and $1 million, respectively.
MidAmerican Energy'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.
-103-
MidAmerican Energy, 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 rate as of December 31, 2002 and
2001. MidAmerican Energy maintains revolving credit facility agreements or
renewable lines of credit to provide liquidity for holders of these issues.
MidAmerican Funding parent company long-term debt is secured by a pledge of
the common stock of MHC. The notes and bonds:
o are the direct senior secured obligations of MidAmerican Funding;
o rank on an equal basis with all of MidAmerican Funding's other
existing and future senior obligations;
o rank senior to all of MidAmerican Funding's existing and future
subordinated indebtedness; and
o effectively rank junior to all indebtedness and other liabilities,
including preferred stock, of the direct and indirect subsidiaries of
MidAmerican Funding, to the extent of the assets of these
subsidiaries.
MidAmerican Funding may redeem any series of the notes and bonds in whole
or in part at any time at a redemption price equal to the sum of:
o the greater of the following:
(1) 100% of the principal amount of the series being redeemed, and
(2) the sum of the present values of the remaining scheduled payments
of principal and interest on the series of being redeemed,
discounted to the date of redemption on a semiannual basis at the
treasury yield plus (x) 15 basis points in the case of the 2009
notes (y) 20 basis points in the case of the 2011 notes , or (z)
25 basis points in the case of the 2029 Bonds, plus
o accrued and unpaid interest on the securities being redeemed to the
date of redemption.
MidAmerican Funding uses distributions that it receives from its
subsidiaries to make payments on the Notes and Bonds. These subsidiaries must
make payments on their own indebtedness before making distributions to
MidAmerican Funding. The distributions are also subject to utility regulatory
restrictions agreed to by MidAmerican Energy in March 1999 whereby it committed
to the Iowa Utilities Board to use commercially reasonable efforts to maintain
an investment grade rating on its long-term debt and to maintain its common
equity level above 42% of total capitalization unless circumstances beyond its
control result in the common equity level decreasing to below 39% of total
capitalization. MidAmerican Funding must seek the approval of the IUB of a
reasonable utility capital structure if MidAmerican Energy's common equity level
decreases below 42% of total capitalization, unless the decrease is beyond the
control of MidAmerican Funding. MidAmerican Funding is also required to seek the
approval of the IUB if MidAmerican Energy's equity level decreases to below 39%,
even if the decrease is due to circumstances beyond the control of MidAmerican
Funding.
Each of MidAmerican Funding's direct or indirect subsidiaries is organized
as a legal entity separate and apart from MidAmerican Funding and its other
subsidiaries. It should not be assumed that any asset of any subsidiary of
MidAmerican Funding will be available to satisfy the obligations of MidAmerican
Funding or any of its other subsidiaries; provided, however, that unrestricted
cash or other assets which are available for distribution may, subject to
applicable law and the terms of financing arrangements of such parties, be
advanced, loaned, paid as dividends or otherwise distributed or contributed to
MidAmerican Funding, one of its subsidiaries or affiliates thereof.
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 MidAmerican Energy's gross utility
plant, is pledged to secure mortgage bonds.
-104-
(6) 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):
2002 2001
------- -------
Balance at year-end .............................. $55,000 $91,780
Weighted average interest rate on year-end balance 1.3% 1.9%
Average daily amount outstanding during the year . $ 9,068 $26,299
Weighted average interest rate on average daily
amount outstanding during the year ............. 1.8% 4.7%
MidAmerican Energy has authority from the FERC to issue through April 14,
2003, short-term debt in the form of commercial paper and bank notes aggregating
$500 million. MidAmerican Energy has in place a $370.4 million revolving credit
facility expiring January 15, 2004, which supports its $250 million commercial
paper program and its variable rate pollution control revenue obligations. In
addition, MidAmerican Energy has a $5.0 million line of credit, which expires
July 1, 2003. As of December 31, 2002, commercial paper and bank notes totaled
$55.0 million for MidAmerican Energy. MHC has a $4.0 million line of credit,
expiring July 1, 2003, under which zero was outstanding at December 31, 2002.
MidAmerican Capital has a $6.1 million line of credit expiring July 1, 2003, to
support a $6.0 million letter of credit provided to an energy project in which
it has invested. A liability is reflected on MidAmerican Funding's Consolidated
Balance Sheets for the letter of credit.
(7) PREFERRED SECURITIES:
Refer to Note (7) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(8) RISK MANAGEMENT AND ENERGY TRADING
MidAmerican Funding is exposed to loss of net income, cash flows and asset
values due to market risk, including changes in the market price of gas and
electricity used in its regulated business, changes in the value of open
positions in its nonregulated trading operations, variations in the severity of
weather conditions from normal and changes in interest rates. See also Note (9)
for a discussion of MidAmerican Funding's exposure to credit risk. To manage
these exposures, MidAmerican Funding enters into various financial derivative
instruments. Senior management provides the overall direction, structure,
conduct and control of MidAmerican Funding's risk management activities,
including the use of financial derivative instruments, authorization and
communication of risk management policies and procedures, strategic hedging
program guidelines, appropriate market and credit risk limits, and appropriate
systems for recording, monitoring and reporting the results of transactional and
risk management activities.
Refer to Note (8) of MidAmerican Energy's Notes to Consolidated Financial
Statements for a discussion of MidAmerican Funding's commodity price, energy
trading and weather risks.
-105-
Interest Rate Risk -
At December 31, 2002, MidAmerican Funding had fixed-rate long-term debt
totaling $1.6 billion with a fair value of $1.7 billion. These instruments are
fixed-rate and therefore do not expose MidAmerican Funding to the risk of
earnings loss due to changes in market interest rates. However, the fair value
of these instruments would decrease by approximately $78 million if interest
rates were to increase by 10% from their levels at December 31, 2002. In
general, such a decrease in fair value would impact earnings and cash flows only
if MidAmerican Funding were to reacquire all or a portion of these instruments
prior to their maturity.
At December 31, 2002, MidAmerican Funding had long-term floating rate
obligations totaling $120 million and short-term floating rate obligations
totaling $55 million which expose MidAmerican Funding to risk of increased
interest expense in the event of increases in short-term interest rates. This
market risk is not hedged. The carrying value of the long-term and short-term
floating rate obligations at December 31, 2002, approximated fair value. If the
floating interest rates were to increase by 10% from December 31, 2002, levels,
MidAmerican Funding's interest expense for the floating rate obligations would
increase by approximately $0.3 million annually based on December 31, 2002,
principal balances.
(9) CONCENTRATION OF CREDIT RISK:
Refer to Note (9) of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding concentration of credit risk for
MidAmerican Energy.
As disclosed in Note (1)(f), MidAmerican Capital has provided equity
capital for five commercial aircraft leased to major domestic airlines. As of
December 31, 2002, the net receivables under these agreements totaled $23.3
million.
(10) RATE MATTERS:
Refer to Note (10) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(11) RETIREMENT PLANS:
MidAmerican Funding has primarily noncontributory cash balance defined
benefit pension plans covering substantially all employees of MidAmerican Energy
Holdings and its domestic subsidiaries. Benefit obligations 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 Energy has been allowed to recover pension costs
related to its employees in rates. MidAmerican Funding also maintains
noncontributory, nonqualified supplemental executive retirement plans for active
and retired participants.
MidAmerican Funding currently provides certain postretirement health care
and life insurance benefits for retired employees of MidAmerican Energy Holdings
and its domestic subsidiaries. Under the plans, substantially all of MidAmerican
Funding's employees may become eligible for these benefits if they reach
retirement age while working for MidAmerican Funding. However, MidAmerican
Funding retains the right to change these benefits anytime at its discretion.
MidAmerican Funding expenses postretirement benefit costs on an accrual basis
and includes provisions for these costs in rates.
-106-
Refer to Note (11) of MidAmerican Energy's Notes to Consolidated Financial
Statements for additional information regarding MidAmerican Funding's pension,
supplemental retirement and postretirement benefit plans.
MidAmerican Funding allocated pension and postretirement costs to its
parent and other affiliates in each of the years ended December 31, as follows
(in millions):
2002 2001 2000
---- ---- ----
Pension costs.............. $8.1 $5.2 $5.0
Postretirement costs....... 1.5 1.0 0.7
(12) SEGMENT INFORMATION:
MidAmerican Funding has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale of regulated retail electricity and natural
gas. The transmission segment obtains most of its revenue from the sale of
transmission capacity. The marketing and sales segment receives its revenue
principally from nonregulated retail sales of natural gas and electricity.
Common operating costs, interest income, interest expense, income tax expense
and equity in the net income or loss of investees are allocated to each segment.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the segments.
MidAmerican Funding's external revenues by product and services are
displayed on the Consolidated Statements of Income.
-107-
The following tables provide information on an operating segment basis as
of and for the years ended December 31 (in thousands):
2002 2001 2000
----------- ----------- -----------
SEGMENT PROFIT INFORMATION
- --------------------------
Revenues:
External revenues -
Generation .............................. $ 415,921 $ 516,915 $ 444,109
Energy delivery ......................... 1,625,600 1,664,462 1,694,942
Transmission ............................ 20,721 22,852 17,276
Marketing & sales ....................... 173,917 163,020 115,505
Other (a) ............................... 4,720 21,401 44,511
----------- ----------- -----------
Total ................................. 2,240,879 2,388,650 2,316,343
----------- ----------- -----------
Intersegment revenues -
Generation .............................. 651,342 606,164 588,862
Energy delivery ......................... -- -- --
Transmission ............................ 55,207 55,086 58,220
Marketing & sales ....................... 2,404 2,727 2,564
Other (a) ............................... -- 122 1,701
----------- ----------- -----------
Total ................................. 708,953 664,099 651,347
Intersegment eliminations ................. (708,953) (664,099) (651,347)
----------- ----------- -----------
Consolidated ............................ $ 2,240,879 $ 2,388,650 $ 2,316,343
=========== =========== ===========
Depreciation and amortization expense(b):
Generation ................................ $ 139,054 $ 133,681 $ 87,480
Energy delivery ........................... 117,893 106,496 101,295
Transmission .............................. 8,972 8,900 8,663
Marketing & sales ......................... 2,527 2,022 --
Other (a) ................................. 966 35,491 32,702
----------- ----------- -----------
Total ................................... $ 269,412 $ 286,590 $ 230,140
=========== =========== ===========
Interest income:
Generation ................................ $ 3,783 $ 5,450 $ 7,935
Energy delivery ........................... 4,468 6,727 6,695
Transmission .............................. 530 822 855
Marketing & sales ......................... 51 70 14
Other (a) ................................. 11,552 13,140 14,305
----------- ----------- -----------
Total ................................... 20,384 26,209 29,804
Intersegment eliminations ................. (1,479) (5,107) (4,037)
----------- ----------- -----------
Consolidated ............................ $ 18,905 $ 21,102 $ 25,767
=========== =========== ===========
Fixed charges:
Generation ................................ $ 29,989 $ 31,726 $ 31,799
Energy delivery ........................... 40,737 42,654 44,395
Transmission .............................. 4,892 5,401 5,630
Marketing & sales ......................... 366 363 14
Other (a) ................................. 49,226 51,467 54,138
----------- ----------- -----------
Total ................................... 125,210 131,611 135,976
Intersegment eliminations ................. (1,479) (5,107) (4,037)
----------- ----------- -----------
Consolidated ............................ $ 123,731 $ 126,504 $ 131,939
=========== =========== ===========
-108-
2002 2001 2000
----------- ----------- -----------
SEGMENT PROFIT INFORMATION (CONTINUED)
- --------------------------------------
Income before income taxes:
Generation ................................ $ 150,040 $ 142,637 $ 120,993
Energy delivery ........................... 101,176 84,334 124,680
Transmission .............................. 40,403 39,514 32,470
Marketing & sales ......................... 1,499 (5,799) (7,181)
Other (a) ................................. (56,620) (61,911) (38,785)
----------- ----------- -----------
Total ................................... $ 236,498 $ 198,775 $ 232,177
=========== =========== ===========
SEGMENT ASSET INFORMATION
Capital expenditures:
Generation ................................ $ 197,666 $ 87,296 $ 48,370
Energy delivery ........................... 151,178 159,302 120,919
Transmission .............................. 7,504 3,733 22,189
Marketing & sales ......................... 1,110 1,963 25,324
Other (a) ................................. 736 320 2,154
----------- ----------- -----------
Total ................................... $ 358,194 $ 252,614 $ 218,956
=========== =========== ===========
Total assets (c):
Generation ................................ $ 2,321,090 $ 2,210,569 $ 2,286,035
Energy delivery ........................... 2,487,390 2,374,771 2,312,881
Transmission .............................. 306,223 310,429 521,981
Marketing & sales ......................... 52,143 51,164 113,347
Other (a) ................................. 179,141 506,331 428,287
----------- ----------- -----------
Total ................................... 5,345,987 5,453,264 5,662,531
Reclassifications and
intersegment eliminations (d) ........... (192,003) (277,792) (239,522)
----------- ----------- -----------
Consolidated .............................. $ 5,153,984 $ 5,175,472 $ 5,423,009
=========== =========== ===========
(a) Other includes the combined amounts for all segments that do not meet
the requirements for being a reportable segment. It includes
MidAmerican Capital, Midwest Capital, MidAmerican Services, MEC
Construction and amounts of the parent companies.
(b) Depreciation and amortization expense above includes depreciation
related to nonregulated operations and, for 2001 and 2000, goodwill
amortization, which are included in Nonregulated Operating Expenses -
Other on the Consolidated Statements of Income.
(c) Total assets by operating segment reflect the assignment of goodwill
to applicable reporting units in accordance with SFAS No. 142.
(d) Reclassifications and intersegment eliminations relate principally to
the reclassification of income tax balances in accordance with
generally accepted accounting principles and the elimination of
intersegment accounts receivables and payables.
-109-
(13) INCOME TAXES:
MidAmerican Funding's income tax expense includes the following for the
years ended December 31 (in thousands):
2002 2001 2000
--------- --------- ---------
Current:
Federal ................ $ 129,922 $ 99,662 $ 97,205
State .................. 44,421 28,569 26,735
--------- --------- ---------
174,343 128,231 123,940
--------- --------- ---------
Deferred:
Federal ................ (54,193) (23,373) (12,358)
State .................. (15,962) (4,253) (641)
--------- --------- ---------
(70,155) (27,626) (12,999)
Investment tax credit, net (4,406) (4,917) (5,548)
--------- --------- ---------
Total .................. $ 99,782 $ 95,688 $ 105,393
========= ========= =========
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):
2002 2001
-------- --------
Deferred tax assets related to:
Investment tax credits ...................... $ 38,296 $ 41,275
Unrealized losses, net ...................... 718 151
Pensions .................................... 31,985 27,936
Nuclear reserves and decommissioning ........ 28,411 17,898
Revenue sharing ............................. 46,428 24,769
Accrued liabilities ......................... 1,094 2,413
Fuel cost recoveries ........................ 9,558 --
Other ....................................... 6,859 1,749
-------- --------
163,349 116,191
-------- --------
Deferred tax liabilities related to:
Depreciable property ........................ 460,886 465,141
Income taxes recoverable through future rates 159,411 185,222
Reacquired debt ............................. 4,914 7,544
Fuel cost recoveries ........................ -- 20,272
Other ....................................... -- 2,346
-------- --------
625,211 680,525
-------- --------
Net deferred income tax liability ............. $461,862 $564,334
======== ========
-110-
The following table is a reconciliation of the statutory federal income tax
rate and the effective income tax rate indicated by the Consolidated Statements
of Income for the years ended December 31:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate ................. 35% 35% 35%
Amortization of investment tax credit ............. (2) (2) (2)
State income tax, net of federal income tax benefit 8 8 7
Dividends received deduction ...................... -- -- (1)
Goodwill amortization ............................. -- 6 5
Other ............................................. 1 1 1
---- ---- ----
Effective Federal and state income tax rate ....... 42% 48% 45%
==== ==== ====
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following table presents the carrying amount and estimated fair value
of the named financial instruments as of December 31 (in thousands):
2002 2001
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial instruments owned:
Equity investments carried at cost ...... $ 6,072 $ 9,288 $ 14,967 $ 21,360
Financial instruments issued:
MidAmerican Energy preferred securities;
subject to mandatory redemption ....... -- -- 26,680 27,747
MidAmerican Energy-obligated preferred
securities; subject to mandatory
redemption ............................ -- -- 100,000 99,640
Long-term debt, including current portion 1,753,418 1,849,314 1,544,969 1,536,223
Substantially all of MidAmerican Funding's investments in debt and equity
securities as of December 31, 2002 and 2001, relate to its Quad Cities Station
decommissioning trust. Refer to Note (14) in MidAmerican Energy's Notes to
Consolidated Financial Statements for additional information. The amortized
-111-
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):
2002
--------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available for sale:
Equity securities ........ $ 56,265 $16,373 $(1,313) $ 71,325
Municipal bonds .......... 30,915 918 (263) 31,570
U.S. Government securities 18,511 183 (119) 18,575
Corporate securities ..... 24,752 1,135 (60) 25,827
Cash equivalents ......... 12,718 -- -- 12,718
-------- ------- ------- --------
Total .................. $143,161 $18,609 $(1,755) $160,015
======== ======= ======= ========
Held-to-maturity:
Debt securities .......... $ 2,070 $ -- $ -- $ 2,070
======== ======= ======= ========
2001
--------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Available-for-sale:
Equity securities ......... $ 53,663 $24,444 $(3,144) $ 74,963
Municipal bonds ........... 27,842 1,315 (92) 29,065
U. S. Government securities 26,725 1,910 (19) 28,616
Corporate securities ...... 18,394 808 (23) 19,179
Cash equivalents .......... 7,120 -- -- 7,120
-------- ------- ------- --------
Total ................... $133,744 $28,477 $(3,278) $158,943
======== ======= ======= ========
Held-to-maturity:
Debt securities ........... $ 2,074 $ -- $ -- $ 2,074
======== ======= ======= ========
At December 31, 2002, the debt securities held by MidAmerican Funding had
the following maturities (in thousands):
Available For Sale Held To Maturity
------------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
Within 1 year .......... $ 7,224 $ 7,384 $2,070 $2,070
1 through 5 years ...... 25,143 25,994 -- --
5 through 10 years ..... 14,190 14,574 -- --
Over 10 years .......... 27,621 28,020 -- --
-112-
The proceeds and gross realized gains and losses on the disposition of
available-for-sale and held-to-maturity investments for the years ended December
31 are shown in the following table (in thousands). Realized gains and losses
are determined by specific identification.
2002 2001 2000
-------- -------- --------
Proceeds from sales....... $151,394 $68,333 $116,119
Gross realized gains...... 7,099 2,676 8,024
Gross realized losses..... (7,792) (7,314) (13,141)
On January 1, 2001, MidAmerican Capital's portfolio of preferred stock
investments was transferred from the available-for-sale category to the trading
category, as permitted by SFAS No. 133. For trading securities held at December
31, 2002, unrealized gains and losses reflected in the Consolidated Statement of
Income totaled a net gain of $0.1 million for the year ended December 31, 2002.
Earnings for the year ended December 31, 2001, include gross gains of $3.4
million and gross losses of $5.8 million as a result of the transfer in January
2001. Unrealized gains and losses on trading securities held at December 31,
2001, including the effect of the transfer of those securities to the trading
category, totaled a net loss of $1.6 million for the year ended December 31,
2001.
(15) NON-OPERATING OTHER INCOME AND EXPENSE:
Non-Operating Income - Other Income and Other Expense as shown on the
Consolidated Statements of Income include the following for the years ended
December 31 (in thousands):
2002 2001 2000
------- ------- -------
Other income:
Allowance for equity funds used during
construction ................................... $ 8,621 $ 1,571 $ --
Income from equity method investments ............ 7,919 5,118 2,123
Gain on sale of assets, net ...................... 4,212 1,358 6,355
Subservicer fee for sold receivables ............. 1,340 2,864 1,905
Corporate-owned life insurance income ............ 1,330 5,265 9,351
Gross-up of contributions for construction ....... 969 885 993
Energy project distribution ...................... 408 857 --
Special purpose fund income ...................... 358 1,783 1,253
Other ............................................ 1,815 2,010 3,415
------- ------- -------
Total ....................................... $26,972 $21,711 $25,395
======= ======= =======
Other expense:
Discount on sold receivables ..................... $ 6,397 $16,010 $10,212
Write down of impaired airplane leases ........... 12,634 -- --
Write down of an equity method investment ........ 5,118 -- --
Write down of special purpose funds .............. 1,468 -- --
Write off interest receivable related to a special
purpose fund ................................... 2,718 -- --
Other - primarily items not recoverable from
MidAmerican Energy's regulated utility customers 2,938 2,727 4,284
------- ------- -------
Total ....................................... $31,273 $18,737 $14,496
======= ======= =======
-113-
The impairment of airplane leases was the result of the financial decline
of United Air Lines, Inc. Fair values for the leases were determined as a result
of lease restructuring negotiations and by obtaining values for similar planes
in the market at the time.
(16) AFFILIATED COMPANY TRANSACTIONS:
The companies identified as affiliates are MidAmerican Energy Holdings and
its subsidiaries. The basis for these charges is provided for in service
agreements between MidAmerican Funding and its affiliates. MidAmerican Funding
reimbursed MidAmerican Energy Holdings in the amount of $10.4 million, $13.8
million and $9.5 million in 2002, 2001 and 2000, respectively, for its allocated
share of corporate expenses. In 2001, MidAmerican Energy acquired a gas turbine
equipment purchase contract from MidAmerican Energy Holdings for $22.0 million.
MidAmerican Funding was reimbursed for charges incurred on behalf of its
affiliates. The majority of these reimbursed expenses was for allocated employee
wages and benefits, insurance, computer costs, administrative services, travel
expenses and general and administrative expenses: including treasury, legal and
accounting functions. The amount of such expenses was $29.8 million, $20.1
million and $21.1 million for 2002, 2001 and 2000, respectively.
MidAmerican Energy has an agreement with Cordova Energy Company, LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operational in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy's payment for monthly capacity charges totaled $21.2 million
for 2002 and $18.1 million for 2001.
In August 2002, Northern Natural Gas Company, or NNG, became an affiliate
of MidAmerican Energy when NNG was purchased by MidAmerican Energy Holdings. NNG
has been and is one of MidAmerican Energy's suppliers of natural gas.
MidAmerican Energy purchased $17.9 million of natural gas from NNG in August
through December 2002.
As of December 31, 2001, MidAmerican Funding had notes receivable from
MidAmerican Energy Holdings totaling $151.9 million included in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheets. Additionally,
MidAmerican Funding had accounts receivable from affiliates of $8.8 million and
$49.2 million as of December 31, 2002 and 2001, respectively, included in
Receivables on the Consolidated Balance Sheets. MidAmerican Funding also had
accounts payable to affiliates of $2.7 million and $6.9 million as of December
31, 2002 and 2001, respectively, which is included in Accounts Payable on the
Consolidated Balance Sheets.
-114-
(17) SALE OF ACCOUNTS RECEIVABLE:
Refer to Note (17) of MidAmerican Energy's Notes to Consolidated Financial
Statements.
(18) UNAUDITED QUARTERLY OPERATING RESULTS:
2002
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(In thousands)
Operating revenues .... $575,035 $493,856 $556,284 $615,704
Operating income ...... 91,379 64,817 133,803 59,989
Net income ............ 38,428 22,705 63,547 12,036
2001
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Operating revenues..... $878,997 $525,180 $515,681 $468,792
Operating income....... 104,425 68,674 103,389 23,597
Net income............. 39,312 21,754 41,403 618
Quarterly data reflect seasonal variations common in the utility industry.
The increase in earnings for the fourth quarter of 2002 compared to 2001 was due
to colder weather in the fourth quarter of 2002, greater earnings from wholesale
sales of electricity, and a decrease in expenses related to Cooper Nuclear
Station as a result of the restructuring of the related contract. These
increases were partially offset by write-downs of impaired airplane leases and
an interest receivable related to a special purpose fund.
-115-
INDEPENDENT AUDITORS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of MidAmerican Funding, LLC and subsidiaries
(Company) as of December 31, 2002 and 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for each of the three years in the period ended December 31, 2002. Our audits
also included the consolidated financial statement schedule listed in the Index
at Item 15. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of MidAmerican Funding, LLC and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note (1)(k) to the consolidated financial statements, in 2002
the Company changed its accounting policy for goodwill and other intangible
assets.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
January 24, 2003
-116-
SCHEDULE II
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Column A Column B Column C Column D Column E
Balance at Additions Balance
Beginning Charged at End
Description of Year to Income Deductions of Year
----------- ---------- --------- ---------- --------
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible
accounts receivable:
Year ended 2002 ........... $ 627 $ 8,982 $ (1,994) $ 7,615
======== ======== ======== ========
Year ended 2001 ........... $ 102 $ 15,266 $(14,741) $ 627
======== ======== ======== ========
Year ended 2000 ........... $ -- $ 8,498 $ (8,396) $ 102
======== ======== ======== ========
Reserves Not Deducted From Assets (1):
Year ended 2002 ........... $ 7,802 $ 2,798 $ (2,402) $ 8,198
======== ======== ======== ========
Year ended 2001 ........... $ 8,146 $ 2,766 $ (3,110) $ 7,802
======== ======== ======== ========
Year ended 2000 ........... $ 8,051 $ 3,316 $ (3,221) $ 8,146
======== ======== ======== ========
(1) Reserves not deducted from assets include estimated liabilities for losses
retained by MidAmerican Energy for workers compensation, public liability
and property damage claims.
-117-
SCHEDULE II
MIDAMERICAN FUNDING, LLC
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
(IN THOUSANDS)
Column A Column B Column C Column D Column E
Balance at Additions Balance
Beginning Charged at End
Description of Year to Income Deductions of Year
----------- ---------- --------- ---------- --------
Reserves Deducted From Assets
To Which They Apply:
Reserve for uncollectible
accounts receivable:
Year ended 2002 .......... $ 733 $ 8,946 $ (1,994) $ 7,685
======== ======== ======== ========
Year ended 2001 .......... $ 300 $ 15,314 $(14,881) $ 733
======== ======== ======== ========
Year ended 2000 .......... $ 469 $ 8,514 $ (8,683) $ 300
======== ======== ======== ========
Reserves Not Deducted From Assets (1):
Year ended 2002 .......... $ 8,770 $ 2,798 $ (2,402) $ 9,166
======== ======== ======== ========
Year ended 2001 .......... $ 9,867 $ 2,612 $ (3,709) $ 8,770
======== ======== ======== ========
Year ended 2000 .......... $ 8,982 $ 4,079 $ (3,194) $ 9,867
======== ======== ======== ========
(1) Reserves not deducted from assets include estimated liabilities for
losses retained by MHC for workers compensation, public liability and
property damage claims.
-118-
SIGNATURES
MIDAMERICAN ENERGY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY COMPANY
--------------------------
Registrant
Date: March 25, 2003 By /s/ Jack L. Alexander
-------------------------------
(Jack L. Alexander)
Senior Vice President
By /s/ Todd M. Raba
-------------------------------
(Todd M. Raba)
Senior Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Thomas B. Specketer Vice President and Controller March 25, 2003
- -----------------------------
(Thomas B. Specketer) (principal financial and
accounting officer)
/s/ Jack L. Alexander Senior Vice President March 25, 2003
- -----------------------------
(Jack L. Alexander) and Director
/s/ Brian K. Hankel Vice President and March 25, 2003
---------------------------
(Brian K. Hankel) Director
/s/ Todd M. Raba Senior Vice President March 25, 2003
- -----------------------------
(Todd M. Raba) and Director
-119-
MIDAMERICAN FUNDING, LLC
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MIDAMERICAN FUNDING, LLC
Registrant
Date: March 25, 2003 By /s/ David L. Sokol
------------------------------
(David L. Sokol)
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ David L. Sokol Chief Executive Officer March 25, 2003
- -----------------------
(David L. Sokol)
/s/ Patrick J. Goodman Vice President and Treasurer March 25, 2003
- -----------------------
(Patrick J. Goodman) (principal financial and
accounting officer)
/s/ Gregory E. Abel Manager March 25, 2003
- -----------------------
(Gregory E. Abel)
/s/ Ronald W. Roskens Manager March 25, 2003
- -----------------------
(Ronald W. Roskens)
-120-
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
- --------------
I, David L. Sokol, certify that:
1. I have reviewed this annual report on Form 10-K of MidAmerican Funding, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-121-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ David L. Sokol
-----------------------
David L. Sokol
Chief Executive Officer
-122-
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
- --------------
I, Patrick J. Goodman, certify that:
1. I have reviewed this annual report on Form 10-K of MidAmerican Funding, LLC;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-123-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Patrick J. Goodman
----------------------------
Patrick J. Goodman
Vice President and Treasurer
(chief financial officer)
-124-
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Jack L. Alexander, certify that:
1. I have reviewed this annual report on Form 10-K of MidAmerican Energy
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-125-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Jack L. Alexander
---------------------
Jack L. Alexander
Senior Vice President
(co-chief executive officer)
-126-
SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
- --------------
I, Todd M. Raba, certify that:
1. I have reviewed this annual report on Form 10-K of MidAmerican Energy
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Todd M. Raba
----------------------------
Todd M. Raba
Senior Vice President
(co-chief executive officer)
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SECTION 302 CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
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I, Thomas B. Specketer, certify that:
1. I have reviewed this annual report on Form 10-K of MidAmerican Energy
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report; 4. The
registrant's other certifying officers and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/ Thomas B. Specketer
-----------------------------
Thomas B. Specketer
Vice President and Controller
(chief financial officer)
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EXHIBIT INDEX
EXHIBITS FILED HEREWITH
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MidAmerican Energy
23 Consent of Deloitte & Touche LLP
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(co-chief executive officer)
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(co-chief executive officer)
99.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief financial officer)
MidAmerican Funding
99.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief executive officer)
99.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(chief financial officer)
EXHIBITS INCORPORATED BY REFERENCE
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MidAmerican Energy
3.1 Restated Articles of Incorporation of MidAmerican Energy Company, as
amended October 27, 1998. (Filed as Exhibit 3.3 to MidAmerican
Energy's Quarterly Report on Form 10-Q for the period ended
September 30, 1998, Commission File No. 1-11505.)
3.2 Restated Bylaws of MidAmerican Energy Company, as amended July 24,
1996. (Filed as Exhibit 3.1 to MidAmerican Energy's Quarterly Report
on Form 10-Q for the period ended June 30, 1996, Commission File No.
1-11505.)
MidAmerican Funding
3.1 Articles of Organization of MidAmerican Funding, LLC
3.2 Operating Agreement of MidAmerican Funding, LLC
4.1 Indenture, dated as of March 11, 1999, by and between MidAmerican
Funding, LLC and IBJ Whitehall Bank & Trust Company, as Trustee
4.2 First Supplemental Indenture, dated as of March 11, 1999, by and
between MidAmerican Funding, LLC and IBJ Whitehall Bank & Trust
Company, as Trustee
4.3 Second Supplemental Indenture, dated as of March 1, 2001, by and
between MidAmerican Funding, LLC and The Bank of New York, as Trustee
(Filed as Exhibit 4.4 to MidAmerican Funding's Registration Statement
No. 333-56624)
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4.4 Registration Rights Agreement, dated March 9, 1999, by and among
MidAmerican Funding, LLC, Credit Suisse First Boston Corporation,
Lehman Brothers, Inc., Goldman Sachs & Co. and Merrill Lynch & Co.
MidAmerican Energy and MidAmerican Funding
4.1 General Mortgage Indenture and Deed of Trust dated as of January 1,
1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust
Company of New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest
Resources Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1992, Commission File No. 1-10654.)
4.2 First Supplemental Indenture dated as of January 1, 1993, between
Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New
York, Trustee. (Filed as Exhibit 4(b)-2 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1992, Commission
File No. 1-10654.)
4.3 Second Supplemental Indenture dated as of January 15, 1993, between
Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New
York, Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual
Report on Form 10-K for the year ended December 31, 1992, Commission
File No. 1-10654.)
4.4 Third Supplemental Indenture dated as of May 1, 1993, between Midwest
Power Systems Inc. and Morgan Guaranty Trust Company of New York,
Trustee. (Filed as Exhibit 4.4 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1993, Commission File No.
1-10654.)
4.5 Fourth Supplemental Indenture dated as of October 1, 1994, between
Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee.
(Filed as Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1994, Commission File No. 1-10654.)
4.6 Fifth Supplemental Indenture dated as of November 1, 1994, between
Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee.
(Filed as Exhibit 4.6 to Midwest Resources' Annual Report on Form 10-K
for the year ended December 31, 1994, Commission File No. 1-10654.)
4.7 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947.
(Filed by Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as
Exhibit 7B to Commission File No. 2-6922.)
4.8 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by
Iowa-Illinois Gas and Electric Company as Exhibit 2.08 to Commission
File No. 2-28806.)
4.9 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as
Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the
period ended June 30, 1982, Commission File No. 1-3573.)
4.10 Resignation and Appointment of successor Individual Trustee. (Filed by
Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as Exhibit
4.B.30 to Commission File No. 33-39211.)
4.11 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed
as Exhibit 4.31.B to Iowa-Illinois' Current Report on Form 8-K dated
May 21, 1992, Commission File No. 1-3573.)
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4.12 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed
as Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated
October 7, 1993, Commission File No. 1-3573.)
4.13 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest
Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed
as Exhibit 4.15 to MidAmerican Energy's Annual Report on Form 10-K
dated December 31, 1995, Commission File No. 1-11505.)
4.14 Thirty-First Supplemental Indenture dated as of July 1, 1995, between
Iowa-Illinois Gas and Electric Company and Harris Trust and Savings
Bank, Trustee. (Filed as Exhibit 4.16 to MidAmerican Energy's Annual
Report on Form 10-K dated December 31, 1995, Commission File No.
1-11505.)
10.1 MidAmerican Energy Company Restated Executive Deferred Compensation
Plan. (Filed as Exhibit 10.2 to MidAmerican Energy's Quarterly Report
on Form 10-Q dated March 31, 1999, Commission File No. 1-11505.)
10.2 MidAmerican Energy Company Combined Midwest Resources/Iowa Resources
Restated Deferred Compensation Plan - Board of Directors. (Filed as
Exhibit 10.1 to MidAmerican Energy's Quarterly Report on Form 10-Q
dated March 31, 1999, Commission File No. 1-11505.)
10.3 MidAmerican Energy Company First Amended and Restated Supplemental
Retirement Plan for Designated Officers. (Filed as Exhibit 10.52 to
MidAmerican Energy Holding Company's Registration Statement No.
333-101699.)
10.4 Midwest Resources Inc. Supplemental Retirement Plan (formerly the
Midwest Energy Company Supplemental Retirement Plan). (Filed as
Exhibit 10.10 to Midwest Resources' Annual Report on Form 10-K for the
year ended December 31, 1993, Commission File No. 1-10654.)
10.5 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power
District, dated September 22, 1967. (Filed as Exhibit 4-C-2 to Iowa
Power Inc.'s (IPR) Registration Statement, Registration No. 2-27681.)
10.6 Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power
Inc. and Nebraska Public Power District. (Filed as Exhibit 4-C-2a to
IPR's Registration Statement, Registration No. 2-35624.)
10.7 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract
between Iowa Power Inc. and Nebraska Public Power District, dated
September 22, 1967. (Filed as Exhibit 5-C-2-b to IPR's Registration
Statement, Registration No. 2-42191.)
10.8 Amendment No. 4 dated March 28, 1974, to the Power Sales Contract
between Iowa Power Inc. and Nebraska Public Power District, dated
September 22, 1967. (Filed as Exhibit 5-C-2-c to IPR's Registration
Statement, Registration No. 2-51540.)
10.9 Iowa-Illinois Gas and Electric Company Supplemental Retirement Plan
for Principal Officers, as amended as of July 28, 1994. (Filed as an
Exhibit to Iowa-Illinois' Annual Report on Form 10-K for the year
ended December 31, 1994, Commission File No. 1-3573.)
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10.10 Iowa-Illinois Gas and Electric Company Compensation Deferral Plan for
Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit
10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended
December 31, 1993, Commission File No. 1-3573.)
10.11 Iowa-Illinois Gas and Electric Company Board of Directors'
Compensation Deferral Plan. (Filed as Exhibit 10.K.4 to Iowa-Illinois'
Annual Report on Form 10-K for the year ended December 31, 1992,
Commission File No. 1-3573.)
10.12 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement
Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on
Form 10-K for the year ended December 31, 1994, Commission File No.
1-10654.)
10.13 Form of Indemnity Agreement between MidAmerican Energy Company and
its directors and officers. (Filed as Exhibit 10.37 to MidAmerican
Energy's Annual Report on Form 10-K dated December 31, 1995,
Commission File No. 1-11505.)
10.14 Amendment No. 5 dated September 2, 1997, to the Power Sales contract
between MidAmerican Energy Company and Nebraska Public Power District,
dated September 22, 1967. (Filed as Exhibit 10.2 to Holdings' and
MidAmerican Energy's respective Quarterly Reports on the combined Form
10-Q for the quarter ended September 30, 1997, Commission File Nos.
1-12459 and 1-11505, respectively.)
10.15 Amendment No. 6, dated July 31, 2002, to the Power Sales Contract
Between MidAmerican Energy Company and Nebraska Public Power District
dated September 22, 1967. (Filed as Exhibit No. 10.1 to MidAmerican
Funding and MidAmerican Energy's Quarterly Reports on the combined
Form 10-Q for the quarter ended June 30, 2002; Commission File Nos.
333-90553 and 1-11505, respectively.)
10.16 Iowa Utilities Board Order Approving Settlement With Modifications,
issued December 21, 2001, in regards to MidAmerican Energy Company
(Filed as Exhibit 10.7 to MidAmerican Energy's Annual Report on Form
10-K dated December 31, 2001, Commission File No. 1-11505.)
Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company
has not filed as an exhibit to this Form 10-K certain instruments with
respect to long-term debt not registered in which the total amount of
securities authorized thereunder does not exceed 10% of total assets
of the Company, but hereby agrees to furnish to the Commission on
request any such instruments.
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