-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6+xqB0JnqkS0jl9daIbmkegJ0XOs0PkE8N9aqZ9gCR+/ugqmyu0wAqmgq5+sAK2 sMqkgd+1EXSo6tMPci22uQ== /in/edgar/work/20000814/0001081316-00-000013/0001081316-00-000013.txt : 20000921 0001081316-00-000013.hdr.sgml : 20000921 ACCESSION NUMBER: 0001081316-00-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000814 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY HOLDINGS CO /NEW/ CENTRAL INDEX KEY: 0001081316 STANDARD INDUSTRIAL CLASSIFICATION: [4900 ] IRS NUMBER: 942213782 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14881 FILM NUMBER: 699571 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: 666 GRAND AVE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50309 FORMER COMPANY: FORMER CONFORMED NAME: MID AMERICAN ENERGY HOLDINGS CO /NEW/ DATE OF NAME CHANGE: 19990308 10-Q 1 0001.txt MEHC FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 Commission File No. 0-25551 MIDAMERICAN ENERGY HOLDINGS COMPANY (Exact name of registrant as specified in its charter) Iowa 94-2213782 --------------------------------- -------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 666 Grand Avenue, Des Moines, IA 50309 ---------------------------------- ------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (515) 242-4300 --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ------- As of August 11, 2000 all 9,281,087 shares of common stock of MidAmerican Energy Holdings Company were held by a limited group of investors. MIDAMERICAN ENERGY HOLDINGS COMPANY FORM 10-Q TABLE OF CONTENTS Part I: Financial Information Page No. ITEM 1. Financial Statements Independent Accountants' Report....................... 1 Consolidated Balance Sheets........................... 2 Consolidated Statements of Operations................. 3 Consolidated Statements of Cash Flows................. 4 Notes to Consolidated Financial Statements............ 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 9 Part II: Other Information ITEM 1. Legal Proceedings..................................... 22 ITEM 2. Changes in Securities................................. 22 ITEM 3. Defaults on Senior Securities......................... 22 ITEM 4. Submission of Matters to a Vote of Security Holders... 22 ITEM 5. Other Information..................................... 22 ITEM 6. Exhibits and Reports on Form 8-K...................... 22 Signatures ...................................................... 23 Exhibit Index ...................................................... 24 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Shareholders MidAmerican Energy Holdings Company Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Holdings Company (successor to MidAmerican Energy Holdings Company (Predecessor), referred to as "MEHC (Predecessor)") and subsidiaries (the "Company") as of June 30, 2000, and the related consolidated statements of operations for the three-month period ended June 30, 2000 and for the period March 14, 2000 to June 30, 2000 for the Company and for the period January 1, 2000 to March 13, 2000 and for the three-month and six-month periods ended June 30, 1999 for MEHC (Predecessor) and the related consolidated statements of cash flows for the period March 14, 2000 to June 30, 2000 for the Company and for the period January 1, 2000 to March 13, 2000 and for the six-month period ended June 30, 1999 for MEHC (Predecessor). These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of MEHC (Predecessor) and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 25, 2000 (March 14, 2000 as to Note 3), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP Des Moines, Iowa July 21, 2000 -1- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (In thousands) MEHC (Predecessor) As of June 30, December 31, 2000 1999 ------------ ------------ (Unaudited) Assets Current Assets: Cash and cash equivalents .................... $ 38,343 $ 316,327 Restricted cash and short term investments.... 12,130 36,294 Accounts receivable........................... 488,113 600,564 Other current assets.......................... 150,141 185,128 ----------- ----------- Total Current Assets....................... 688,727 1,138,313 ----------- ----------- Property, plant, contracts and equipment, net ... 5,558,831 5,463,329 Excess of cost over fair value of net assets acquired, net................................... 3,441,634 2,712,677 Regulatory assets................................ 245,926 278,757 Long-term restricted cash........................ 62,566 133,265 Long-term restricted investments................. 111,946 122,175 Nuclear decommissioning trust fund and other marketable securities........................... 228,783 226,298 Equity investments............................... 223,071 208,023 Deferred charges, other investments and other assets.......................................... 772,601 483,515 ----------- ----------- Total Assets.................................. $11,334,085 $10,766,352 =========== =========== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable..............................$ 319,435 $ 449,203 Other accrued liabilities..................... 455,981 458,667 Current portion of long-term debt............. 628,230 614,725 ----------- ------------ Total Current Liabilities.................. 1,403,646 1,522,595 ------------ ------------ Other long-term accrued liabilities.............. 948,481 1,054,440 Parent company debt.............................. 1,828,123 1,856,318 Subsidiary and project debt...................... 3,421,276 3,642,703 Deferred income taxes............................ 1,077,044 902,868 ------------ ------------ Total Liabilities............................. 8,678,570 8,978,924 ------------ ------------ Deferred income.................................. 73,950 65,509 Minority interest................................ 26,316 29,127 Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trusts..... 330,869 450,000 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts............... 454,772 - Subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts..... 100,000 101,598 Preferred securities of subsidiary............... 146,303 146,606 Shareholders' Equity: Zero coupon convertible preferred stock - authorized 50,000 shares, no par value, 34,563 share outstanding.............................. - - Common stock - authorized 60,000 and 180,000 shares, no par value; 9,281 and 82,980 shares issued, 9,281 and 59,944 shares outstanding, at June 30 2000 and December 31, 1999, respectively....... - - Additional paid in capital........................ 1,553,073 1,249,079 Retained earnings................................. 14,485 507,726 Accumulated other comprehensive loss.............. (44,253) (12,029) Treasury stock - 23,036 common shares at December 31, 1999, at cost..................... - (750,188) ---------- ----------- Total Shareholders' Equity..................... 1,523,305 994,588 ---------- ----------- Total Liabilities and Shareholders' Equity........$11,334,085 $10,766,352 =========== =========== The accompanying notes are an integral part of these financial statements. -2- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (Unaudited)
MEHC (Predecessor) MEHC (Predecessor) ------------- ----------------------------------- Three Months March 14, 2000 January 1, 2000 Six Months Ended June 30, through through Ended June 30, -------------- June 30, 2000 March 13, 2000 1999 2000 1999 -------------- ---------------- -------------- Revenues: ----------------- Operating revenue................. $1,123,233 $ 1,003,602 $1,339,157 $1,043,072 $1,801,487 Interest and other income......... 29,441 36,548 27,356 19,484 77,794 Gain on non-recurring items....... - 78,223 - - 98,396 ---------- ----------- ----------- ---------- ---------- Total revenues.................... 1,152,674 1,118,373 1,366,513 1,062,556 1,977,677 ---------- ----------- ----------- ---------- ---------- Costs and expenses: Cost of sales..................... 612,280 499,868 722,294 561,386 947,066 Operating expense................. 273,087 281,636 324,193 219,303 436,792 Depreciation and amortization..... 120,129 111,395 142,439 97,278 190,746 Interest expense.................. 124,726 131,414 148,024 101,330 248,295 Less interest capitalized......... (27,048) (16,669) (30,694) (15,516) (32,710) Loss on non-recurring item........ - - - 7,605 - ---------- ---------- ----------- ---------- ---------- Total costs and expenses............ 1,103,174 1,007,644 1,306,256 971,386 1,790,189 ---------- ---------- ----------- ---------- ---------- Income before provision for income taxes............................. 49,500 110,729 60,257 91,170 187,488 Provision for income taxes.......... 11,516 37,227 13,817 31,008 63,292 ---------- ---------- ----------- ---------- ---------- Income before minority interest..... 37,984 73,502 46,440 60,162 124,196 Minority interest................... 26,935 12,441 31,955 8,850 23,344 ---------- ---------- ----------- ---------- ---------- Income before extraordinary item.... 11,049 61,061 14,485 51,312 100,852 Extraordinary item, net of tax...... - (5,366) - - (36,886) ---------- ---------- ----------- ---------- ---------- Net income available to common shareholders...................... $ 11,049 $ 55,695 $ 14,485 $ 51,312 $ 63,966 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. -3- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
MEHC (Predecessor) --------------------------------- March 14, 2000 January 1, 2000 Six through through Months Ended June 30, 2000 March 13, 2000 June 30, 1999 -------------- --------------- ------------- Cash flows from operating activities: Net income.................................................... $ 14,485 $ 51,312 $ 63,966 Adjustments to reconcile to net cash flows from operating activities: Gain on non-recurring items................................... - - (98,396) Extraordinary item, net of tax................................ - - 36,886 Depreciation and amortization................................. 113,719 83,194 162,206 Amortization of excess of cost over fair value of net assets acquired...................................... 28,720 14,084 28,540 Amortization of deferred financing costs and other costs...... 8,053 4,334 10,907 Provision for deferred income taxes........................... 19,434 (9,342) (165,527) Undistributed earnings on equity investments.................. (11,218) (3,459) (5,939) Changes in other items: Accounts receivable and other current assets.............. 88,195 46,436 198,064 Accounts payable, accrued liabilities, deferred income and other................................................. (211,010) 80,524 29,083 ---------- ---------- ----------- Net cash flows from operating activities...................... 50,378 267,083 259,790 ---------- ---------- ----------- Cash flows from investing activities: Purchase of MEHC (Predecessor) and MidAmerican, net of cash acquired.............................................. (2,048,266) - (2,501,425) Proceeds from sale of qualified facilities, net of cash disposed................................................... - - 365,074 Purchase of marketable securities............................. (15,326) (8,251) (22,366) Proceeds from sale of marketable securities................... 23,994 10,665 382,374 Capital expenditures relating to operating projects........... (17,403) (21,685) (64,909) Construction and other development costs...................... (72,977) (56,720) (53,092) Philippine-construction in progress........................... (15,284) (22,736) (30,319) Decrease (increase) in restricted cash and investments........ 62,283 42,809 113,847 Decrease (increase) in other assets........................... (14,841) (88,096) (3,573) ---------- ---------- ---------- Net cash flows from investing activities...................... (2,097,820) (144,014) (1,814,389) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from issuances of common and preferred stock ....... 1,428,024 - - Proceeds from issuance of trust preferred securities.......... 454,772 - - Proceeds from subsidiary and project debt..................... 81,378 6,043 1,100,000 Proceeds from parent company debt............................. 25,000 - - Repayment of subsidiary and project debt...................... (135,545) (133,060) (148,018) Repayment of parent company debt.............................. (4,225) - (676,971) Purchase of treasury stock.................................... - - (64,730) Redemption of preferred trust securities of subsidiaries...... (19,686) - (588) Other......................................................... (3,317) (149) 10,293 ----------- ---------- ----------- Net cash flows from financing activities...................... 1,826,401 (127,166) 219,986 ----------- ---------- ----------- Effect of exchange rate changes on cash....................... (44,227) (8,619) (24,127) ----------- ---------- ----------- Net decrease in cash and cash equivalents..................... (265,268) (12,716) (1,358,740) Cash and cash equivalents at beginning of period.............. 303,611 316,327 1,606,148 ----------- ---------- ----------- Cash and cash equivalents at end of period.................... $ 38,343 $ 303,611 $ 247,408 =========== ========== =========== Interest paid, net of amount capitalized...................... $ 155,437 $ 35,057 $ 178,961 =========== ========== =========== Income taxes paid............................................. $ 61,495 $ - $ 47,192 =========== ========== ============ The accompanying notes are an integral part of these financial statements.
-4- MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General In the opinion of management of MidAmerican Energy Holdings Company (successor to MidAmerican Energy Holdings Company (Predecessor), referred to as "MEHC (Predecessor)") and subsidiaries (collectively referred to as the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of June 30, 2000 and the results of operations for the period March 14, 2000 to June 30, 2000 and for the three months ended June 30, 2000, for the Company and for the period January 1, 2000 to March 13, 2000 for the three and six months ended June 30, 1999 for MEHC (Predecessor) and the related consolidated statements of cash flows for the period March 14, 2000 to June 30, 2000 for the Company and for the period January 1, 2000 to March 13, 2000 and for the six month period ended June 30, 1999 for MEHC (Predecessor). The results of operations for the three months ended June 30, 2000, and the period March 14, 2000 to June 30, 2000 for the Company and for the period January 1, 2000 to March 13, 2000 and for the three and six months ended June 30, 1999 for MEHC (Predecessor) are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. Other investments and corporate joint ventures, where the Company has the ability to exercise significant influence are accounted for under the equity method. Investments, where the Company's ability to influence is limited, are accounted for under the cost method of accounting. Certain amounts in the 1999 financial statements and supporting footnote disclosures have been reclassified to conform to the 2000 presentation. Such reclassification did not impact previously reported net income or retained earnings. Reference is made to the Company's most recently issued annual report that included information necessary or useful to the understanding of the Company's business and financial statement presentations. 2. Teton Transaction On October 24, 1999, the Company and entities representing an investor group comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr., a director of the Company, and David L. Sokol, Chairman and Chief Executive Officer of the Company, executed a definitive agreement and plan of merger whereby the investor group would acquire all of the outstanding common stock of the Company for $35.05 per share in cash, representing a total purchase price of approximately $2.2 billion, including transaction costs (the "Teton Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common stock and non-dividend paying convertible preferred stock and approximately $455 million in 11% non-transferable trust preferred securities due March 14, 2010. The 11% trust preferred securities have a liquidation preference of $25 each and are subject to mandatory redemption in ten equal semi-annual installments, commencing December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating Officer of the Company, contributed cash and current securities of the Company having a value of approximately $310 million. The remaining purchase price was funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately 1% of the voting stock. The merger has been accounted for as a purchase business combination. The purchase price has been allocated to assets acquired and liabilities assumed based on preliminary valuations. The final purchase price allocation has not been completed; however, the Company does not anticipate any material changes based on currently available information. The Company recorded the estimated excess of cost over fair value of net assets acquired of approximately $945 million that is being amortized using the straight-line method over a 40-year period. -5- Unaudited pro forma combined revenue, income before extraordinary items and net income of the Company and MEHC (Predecessor) for the six months ended June 30, 2000 and 1999, as if the Teton Transaction and the MidAmerican merger had occurred at the beginning of each year after giving effect to pro forma adjustments related to the acquisitions, including the sales of the qualified facilities, the redemption of limited recourse notes, the redemption of the senior discount notes, and the issuance of the 11% trust preferred securities, were $2,429.1 million, $56.4 million and $56.4 million, respectively, compared to $2,375.8 million, $89.3 million and $52.4 million, respectively. 3. Property, Plant, Contracts and Equipment: Properties, plant, contracts and equipment comprise the following (in thousands): MEHC (Predecessor) ------------- June 30, December 31, 2000 1999 ------------ ------------- Operating assets: Utility generation and distribution system..... $6,478,297 $6,362,975 Independent power plants....................... 732,867 705,346 Wells and resource development................. 35,210 123,845 Other assets................................... 471,776 377,897 ---------- ----------- Total operating assets......................... 7,718,150 7,570,063 Less accumulated depreciation and amortization. (3,185,541) (3,062,387) ----------- ----------- Net operating assets........................... 4,532,609 4,507,676 Mineral and gas reserves and exploration assets, net.................................. 386,553 476,416 Construction in process: Casecnan................................. 344,027 306,007 Zinc recovery project.................... 142,937 92,794 Cordova.................................. 152,705 79,982 Other.................................... - 454 ---------- ---------- Total......................................... $5,558,831 $5,463,329 ========== ========== 4. Comprehensive Income: Comprehensive income (loss) for the three months ended June 30, 2000, and 1999 was $(33.2) million and $45.0 million, respectively. Comprehensive income (loss) for the period March 14, 2000 to June 30, 2000 was $(29.8) million. Comprehensive income (loss) of MEHC (Predecessor) for the period January 1, 2000 to March 13, 2000, and six months ended June 30, 1999 was $26.0 million and $40.2 million, respectively. Comprehensive income differs from net income due primarily to foreign currency translation adjustments. 5. Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was delayed by SFAS No. 137 and amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for the Company beginning January 1, 2001. The Company is in the process of evaluating the impact of this accounting pronouncement. -6- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition". SAB 101 provides additional guidance on revenue recognition criteria and related disclosure requirements. This SAB is effective beginning in the fourth quarter of 2000. Management does not anticipate that the final adoption of SAB 101 will have a material impact on the Company's consolidated financial statements. 6. Segment Information: The Company has identified five reportable business segments principally based on management structure: CalEnergy Generation-Domestic, CalEnergy Generation-Foreign (primarily the Philippines), MidAmerican (domestic utility operations), Northern (foreign utility operations), and HomeServices (real estate operations). Information related to the Company's reportable operating segments is shown below (in thousands).
MEHC (Predecessor) MEHC (Predecessor) ------------- -------------------------------------- Three Months March 14, 2000 January 1, 2000 Six Ended June 30, through through Months Ended -------------- June 30, 2000 March 13, 2000 June 30, 1999 2000 1999 ------------- -------------- ------------- ---- ---- Revenue: (1) CalEnergy Generation - Domestic....................... $ 9,954 $ 7,634 $ 9,943 $ 4,520 $ 85,307 CalEnergy Generation - Foreign........................ 47,492 50,688 57,551 42,726 103,021 MidAmerican.................... 481,477 400,870 564,696 447,583 496,718 Northern....................... 477,174 475,924 577,058 499,017 1,038,113 HomeServices................... 139,175 106,668 160,194 66,880 131,830 ---------- ---------- ---------- ---------- ---------- Segment revenue................ 1,155,272 1,041,784 1,369,442 1,060,726 1,854,989 Corporate...................... (2,598) (1,634) (2,929) 1,830 24,292 ---------- ---------- ---------- ---------- ---------- $1,152,674 $1,040,150 $1,366,513 $1,062,556 $1,879,281 ========== ========== ========== ========== ========== Operating Income: (1) (2) CalEnergy Generation - Domestic...................... $ 8,013 $ 7,270 $ 7,787 $ 3,670 $ 47,401 CalEnergy Generation - Foreign........................ 25,852 29,758 32,217 25,689 61,407 MidAmerican.................... 64,426 58,921 77,919 87,894 68,913 Northern....................... 52,746 56,164 66,958 79,862 117,134 HomeServices................... 13,270 9,517 13,955 (4,144) 11,612 -------- -------- -------- -------- -------- Segment operating income....... 164,307 161,630 198,836 192,971 306,467 Corporate...................... (17,129) (14,379) (21,249) (8,382) (1,790) -------- -------- -------- -------- -------- $147,178 $147,251 $177,587 $184,589 $304,677 ======== ======== ======== ======== ======== (1) Before non-recurring items. (2) Operating income excludes interest expense, net of capitalized interest.
-7- MEHC (Predecessor) ------------- June 30, December 31, 2000 1999 ------------ ------------- Identifiable assets: CalEnergy Generation - Domestic.............................. $ 923,586 $ 858,812 CalEnergy Generation - Foreign............................... 1,194,469 1,263,026 MidAmerican............................. 5,050,062 5,052,466 Northern................................ 2,991,414 2,972,705 HomeServices............................ 179,269 162,714 ----------- ----------- Segment identifiable assets............. 10,338,800 10,309,723 Corporate............................... 995,285 456,629 ----------- ----------- $11,334,085 $10,766,352 =========== =========== Long-lived assets: CalEnergy Generation - Domestic.............................. $ 629,695 $ 595,607 CalEnergy Generation - Foreign............................... 946,986 952,415 MidAmerican............................. 4,049,827 3,995,763 Northern................................ 2,200,140 2,438,877 HomeServices............................ 126,987 128,024 ----------- ----------- Segment long-lived assets............... 7,953,635 8,110,686 Corporate............................... 1,046,830 65,320 ----------- ----------- $ 9,000,465 $ 8,176,006 =========== =========== The remaining differences from the segment amounts to the consolidated amounts described as "Corporate" relate principally to the corporate functions including administrative costs, corporate cash and related interest income, unallocated goodwill and related goodwill amortization, and intersegment eliminations. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Company's financial condition and results of operations during the periods included in the accompanying statements of operations. Teton Transaction: On October 24, 1999, the Company and entities representing an investor group comprised of Berkshire Hathaway Inc. ("Berkshire Hathaway"), Walter Scott, Jr., a director of the Company, and David L. Sokol, Chairman and Chief Executive Officer of the Company, executed a definitive agreement and plan of merger whereby the investor group would acquire all of the outstanding common stock of the Company for $35.05 per share in cash, representing a total purchase price of approximately $2.2 billion, including transaction costs (the "Teton Transaction"). The Teton Transaction closed on March 14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common stock and non-dividend paying convertible preferred stock and approximately $455 million in 11% non-transferable trust preferred securities due March 14, 2010. The 11% trust preferred securities have a liquidation preference of $25 each and are subject to mandatory redemption in ten equal semi-annual installments, commencing December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating Officer of the Company, contributed cash and current securities of the Company having a value of approximately $310 million. The remaining purchase price was funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately 1% of the voting stock. Business of MEHC: MidAmerican Energy Holdings Company (the "Company" or "MEHC"), is a United States-based privately owned global energy company with publicly traded fixed income securities that generates, distributes and supplies energy to utilities, government entities, retail customers and other customers located throughout the world. Through its subsidiaries the Company is organized and managed on three separate platforms: MidAmerican: MidAmerican Energy Company ("MEC") is the largest energy company headquartered in Iowa and is a regulated public utility principally engaged in the business of generating, transmitting, distributing and selling electric energy and in distributing, selling and transporting natural gas. MEC distributes electricity at the retail level in Iowa, Illinois and South Dakota. It also distributes natural gas at the retail level in Iowa, Illinois, South Dakota and Nebraska. As of June 30, 2000, MEC had 665,000 retail electric customers and 639,000 retail natural gas customers. In addition to retail sales, MEC delivers electric energy to other utilities, marketers and municipalities who distribute it to end-use customers. These sales are referred to as sales for resale or off-system 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. MEC's operations are seasonal in nature with a disproportionate percentage of revenues and earnings historically being earned in the Company's first and third quarters. -9- Northern: The operations of Northern Electric plc ("Northern"), an indirect wholly owned subsidiary of the Company, consist primarily of the distribution and supply of electricity, supply of natural gas and other auxiliary businesses in the United Kingdom. Northern's operations are seasonal in nature with a disproportionate percentage of revenues and earnings historically being earned in the Company's first and fourth quarters. Northern receives electricity from the national grid transmission system and distributes it to customers' premises using its network of transformers, switchgear and cables. Substantially all of the customers in Northern's authorized area are connected to Northern's network and can only be delivered electricity through Northern's distribution system, regardless of whether it is supplied by Northern's own supply business or by other suppliers, thus providing Northern with distribution volume that is stable from year to year. Northern charges access fees for the use of the distribution system. The prices for distribution are controlled by a prescribed formula that limits increases (and may require decreases) based upon the rate of inflation in the United Kingdom and other regulatory action. Northern's supply business primarily involves the bulk purchase of electricity, through a central pool, and subsequent resale to individual customers throughout the U.K. The supply business generally is a high volume business that tends to operate at lower profitability levels than the distribution business. As of June 30, 2000, Northern supplied electricity to approximately 1.2 million customers. Northern also competes to supply gas throughout the U.K. As of June 30, 2000, Northern supplied gas to approximately 521,000 customers. CalEnergy: The Company indirectly owns the Upper Mahiao, Malitbog and Mahanagdong Projects (collectively, the "Philippine Projects"), which are geothermal power plants located on the island of Leyte in the Philippines. For purposes of consistent presentation, capacity amounts for Upper Mahiao, Malitbog and Mahanagdong are 119, 216 and 165 net MW, respectively. On February 8, 1999, the Company created a new subsidiary, CE Generation LLC ("CE Generation") and subsequently transferred its interest in the Imperial Valley Projects and Gas Plants to CE Generation. For purposes of consistent presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Elmore and Leathers (collectively the "Partnership Projects") are based on capacity amounts of 34, 38, 38, and 38 net MW, respectively, and for Salton Sea I, Salton Sea II, Salton Sea III and Salton Sea IV plants (collectively the "Salton Sea Projects") are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW, respectively (the Partnership Projects and the Salton Sea Projects are collectively referred to as the "Imperial Valley Projects"). Plant capacity factors for Saranac, Power Resources and Yuma are based on capacity amounts of 240, 200, and 50 net MW, respectively. Each plant possesses an operating margin that allows for production in excess of the amount listed above. Utilization of this operating margin is based upon a variety of factors and can be expected to vary between calendar quarters, under normal operating conditions. Due to the sale of 50% of its interests in CE Generation, the Company has accounted for CE Generation as an equity investment beginning March 3, 1999. Prior to that date, CE Generation results were fully consolidated. On February 26, 1999, the Company closed the sale of all of its ownership interests in the Navy I, Navy II and BLM, (collectively "Coso"), to Caithness Energy, LLC for $205 million in cash. -10- Results of Operations for the Quarters Ended June 30, 2000 and 1999: Operating revenue increased in the second quarter of 2000 to $1,123.2 million from $1,003.6 million for the same period in 1999, an 11.9% increase. Northern's operating revenue increased in the second quarter of 2000 to $470.2 million from $463.5 million for the same period in 1999, primarily due to higher volumes of electricity supplied outside of its authorized area partially offset by lower volumes supplied within its authorized area. MidAmerican operating revenue increased in the second quarter of 2000 to $470.1 million from $386.1 million for the same period in 1999, primarily due to increase in volumes of non-regulated gas and higher rates in regulated gas. Operating revenue of HomeServices, a majority owned subsidiary of the Company, increased in the second quarter of 2000 to $137.8 million from $106.3 million for the same period in 1999, primarily due to acquisitions. The following data represents the supply and distribution operations in the U.K.: Three Months Ended June 30, --------------------------- 2000 1999 ---- ---- Electricity Supplied (GWh).............. 4,691 4,077 Electricity Distributed (GWh)........... 3,790 3,635 Gas Supplied (Thousands of MMBtus)...... 8,721 9,349 The increase in electricity supplied for the three months ended June 30, 2000 from the same periods in 1999 is due primarily to the increase in supply volumes for customers outside the authorized area. The increase in electricity distributed for the three months ended June 30, 2000 from the same period in 1999 is due to changes in demand in the authorized area. The decrease in gas supplied in 2000 from 1999 reflects lower volume in the U.K. industrial and commercial markets. The following data represents sales from MEC: Three Months Ended June 30, ----------------------------- 2000 1999 ---- ---- Electric Retail Sales (GWh)............. 3,940 3,868 Electric Sales for Resale (GWh)......... 1,361 1,572 Regulated and Non-regulated Gas Supplied (Thousands of MMBtus)........ 31,584 21,387 MEC retail electric sales increased in the second quarter 2000 from the second quarter 1999 due to increased customers and non-weather related sales increases, partially offset by more moderate temperatures. MEC electric sales for resale decreased in the second quarter as lower production at the Cooper nuclear facility reduced available sales volumes. MEC regulated and non-regulated gas supplied decreased in the second quarter due to growth in the non-regulated markets. Interest and other income decreased in the second quarter of 2000 to $29.4 million from $36.5 million for the same period in 1999, a 19.5% decrease. The decrease is due to a reduction in interest income as a result of lower cash and lower dividend income. -11- The gain on non recurring items resulted from the sale of approximately 6.74 million shares of McLeod USA ("McLeod") Class A common stock, through a secondary offering by McLeod, at $55.625 per share. Proceeds from the sale exceeded $375 million, with a resulting after-tax gain to the Company of approximately $47.1 million. Cost of sales increased in the second quarter of 2000 to $612.3 million from $499.9 million for the same period in 1999, a 22.5% increase. The increase is primarily due to higher volumes of electricity supplied at Northern and higher volumes of non-regulated gas supplied at MEC. Operating expense decreased in the second quarter of 2000 to $273.1 million from $281.6 million for the same period in 1999, a 3.0% decrease. The decrease is primarily due to lower marketing costs at Northern, and lower nuclear costs, maintenance, IT and property tax expenses at MEC, partially offset by increased costs at HomeServices for acquisition and increased activity. Depreciation and amortization increased in the second quarter of 2000 to $120.1 million from $111.4 million for the same period in 1999, a 7.8% increase. The increase is due to higher production at CE Gas and goodwill amortization from the Teton Transaction. Interest expense, less amounts capitalized, decreased in the second quarter of 2000 to $97.7 million from $114.7 million for the same period in 1999, a 14.8% decrease. The decreases are due to the lower average outstanding debt balances and increased capitalized interest at Casecnan, Cordova and Zinc. The provision for income taxes decreased in the second quarter of 2000 to $11.5 million from $37.2 million for the same period in 1999, a 69.1% decrease. The decrease is due to lower pretax income which resulted from the gain on the sale of McLeod in 1999. Minority interest increased in the second quarter of 2000 to $26.9 million from $12.4 million for the same period in 1999, a 116.9% increase. The increase is primarily due to the issuance of 11% Company-obligated mandatorily redeemable preferred securities of subsidiary trust associated with the Teton Transaction. Income before extraordinary items decreased in the second quarter of 2000 to $11.0 million from $61.1 million for the same period in 1999. The Company redeemed $64.3 million in principal value of the 9.5% Senior Notes at an aggregate price of $71.1 million throughout the second quarter of 1999. Due to the early extinguishment of this debt, the Company recorded an extraordinary loss, net of tax, of $5.4 million, in the three months ended June 30, 1999. Results of Operations for the Periods March 14, 2000 through June 30, 2000, January 1, 2000 through March 13, 2000 and for the Six Months Ended June 30, 1999: The following is a discussion of the historical results of the Company for the period March 14, 2000 through June 30 2000, and of its predecessor (referred to as "MEHC (Predecessor)") for the period January 1, 2000, through March 13, 2000, and for the six months ended June 30, 1999. Results for the Company include the results of MEHC (Predecessor) beginning March 14, 2000, in conjunction with the Teton Transaction. The impact of the transaction is reflected in the Company's results of operations, predominately minority interest costs on issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts and the effects of purchase accounting, including goodwill amortization and fair value adjustments to the carrying value of assets and liabilities. In order to provide comparability between periods, the Company has prepared pro forma results as if the Teton Transaction and the MidAmerican Merger had occurred at the beginning of each year after giving effect to pro forma adjustments related to the acquisitions, including the sales of the qualified facilities, the redemption of limited recourse notes, the redemption of the senior discount notes and the issuance of the 11% trust preferred securities. The discussion therefore will highlight any significant variances on a pro forma basis from the six months ended June 30, 1999 to the six months ended June 30, 2000. -12- Pro forma operating revenue for the six months ended June 30, 2000 was $2,382.2 million compared with $2,189.8 million for the same period in 1999, an increase of 8.8%. Northern Electric revenue increased for the six months ended June 30, 2000 to $1,068.1 million from $1,025.0 million for the same period in 1999, primarily due to higher volumes of electricity supplied and distribution revenue from access charges. MEC revenue increased for the six months ended June 30, 2000 to $992.7 million from $862.8 million for the same period in 1999, primarily due to increases in non-regulated gas and higher rates in regulated gas. The remaining increase primarily relates to the increase of revenue at HomeServices, a majority owned subsidiary of the Company, due to acquisitions in 1999. The following data represents the supply and distribution operations in the U.K.: Six Months Ended June 30, ----------------------- 2000 1999 ---- ---- Electricity Supplied (GWh)..................... 9,915 8,641 Electricity Distributed (GWh).................. 8,210 7,859 Gas Supplied (Thousands of MMBtus)............. 25,444 27,717 The increase in electricity supplied for the six months ended June 30, 2000 is due primarily to the increase in volumes for customers outside of the authorized area. The increase in electricity distributed for the six months ended June 30, 2000 is due to changes in demand in the authorized area. The reduction in gas supplied in 2000 from 1999 reflects lower volume in the U.K. industrial and commercial markets. The following data represents sales from MEC. Six Months Ended June 30, ------------------------- 2000 1999 ---- ---- Electric Retail Sales (GWh).................... 7,884 7,706 Electric Sales for Resale (GWh)................ 3,443 3,368 Regulated and Non-regulated Gas Supplied (Thousands of MMBtus)........................ 82,571 68,240 MEC retail electric sales increased for the six months ended June 30, 2000 from the same period in 1999 due to increased customers and non-weather related sales increases partially offset by more moderate temperatures. Electric sales for resale increased for the six months ended June 30, 2000 from the same period in 1999 due to improved availability in 2000 of MEC's baseload coal plants and favorable market conditions. Retail gas supplied decreased due to milder temperatures for the six months ended June 30, 2000 compared to the same period in 1999, resulting in less heating load. Pro forma interest and other income for the six months ended June 30, 2000 was $46.8 million compared with $87.6 million for the same period in 1999. The decrease was due primarily to the reduced interest income resulting from lower corporate cash balances. The gain on non-recurring items resulted from the sale of approximately 6.74 million shares of McLeod Class A common stock, through a secondary offering by McLeod, at $55.625 per share. Proceeds from the sale exceeded $375 million, with a resulting after-tax gain to the Company of approximately $47.1 million. -13- As a result of the sales of Coso and an interest in CE Generation, the Company recorded a gain of $20.2 million in the first quarter of 1999. Pro forma cost of sales for the six months ended June 30, 2000 was $1,283.7 million compared with $1,146.0 million for the same period in 1999, an increase of 12.0%. The increase is due to increased revenue at Northern, MEC and HomeServices. Pro forma operating expenses for the six months ended June 30, 2000 was $542.8 million compared with $558.8 million for the same period in 1999. The decrease was due to lower costs at both Northern and MEC. Pro forma depreciation and amortization for the six months ended June 30, 2000 was $242.5 million compared with $233.9 million for the same period in 1999. Pro forma interest expense, less amounts capitalized, for the six months ended June 30, 2000 was $204.0 million compared with $231.7 million for the same period in 1999, a decrease of 12.0%. This decrease was due to the repayment of the 9.5% Senior Notes in 1999 and other reduced indebtedness and an increase in capitalized interest on Casecnan, Cordova and Zinc. The loss on non-recurring items of $7.6 million in the period from January 1, 2000 through March 13, 2000 represents the costs related to the Teton Transaction. Pro forma tax expense for the six months ended June 30, 2000 was $40.7 million compared with $63.7 million for the same period in 1999. The decrease is due primarily to lower pretax income in 2000. Pro forma minority interest for the six months ended June 30, 2000 was $51.5 million compared with $52.3 million for the same period in 1999. Minority interest includes the dividends on the $455 million of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts. This decrease was due to the conversion of TIDES I to common stock in May 1999. On January 15, 1999, the Company redeemed its remaining outstanding Senior Discount Notes at a redemption price of 105.125% plus accrued interest. On January 29, 1999, the Company commenced a cash offer for all of its outstanding Limited Recourse Notes. The Company received tenders from holders of an aggregate of approximately $195.8 million principal that were paid on March 3, 1999 at a redemption price of 110.025% plus accrued interest. The Company redeemed $64.3 million in principal value of the 9.5% Senior Notes at an aggregate price of $71.1 million throughout the second quarter of 1999. Due to the early extinguishment of this debt, the Company recorded an extraordinary loss, net of tax, of $5.4 million, in the three months ended June 30, 1999. Due to the early retirement of the Senior Discount Notes, the Limited Recourse Notes, and the 9.5% Senior Notes, the Company recorded an extraordinary item of approximately $36.9 million, net of tax. Liquidity and Capital Resources: The Company has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, debt retirement and other capital requirements. The Company's cash and cash equivalents were $38.3 million at June 30, 2000 as compared to $316.3 million at December 31, 1999. The majority of this decrease was due to the cash used in the Teton Transaction. In addition, the Company recorded separately restricted cash and investments of $186.6 million and $291.7 million at June 30, 2000 and December 31, 1999, respectively. The restricted cash balance as of June 30, 2000 is comprised primarily of amounts deposited in restricted accounts from which the Company will fund the various projects under construction. Additionally, the Philippine Projects' restricted cash is reserved for the service of debt obligations. -14- Teton Transaction On October 24, 1999, the Company and entities representing an investor group comprised of Berkshire Hathaway Inc., Walter Scott, Jr., a director of the Company, and David L. Sokol, Chairman and Chief Executive Officer of the Company, executed a definitive agreement and plan of merger whereby the investor group would acquire all of the outstanding common stock of the Company for $35.05 per share in cash, representing a total purchase price of approximately $2.2 billion, including transaction costs. The Teton Transaction closed on March 14, 2000 and Berkshire Hathaway invested approximately $1.24 billion in common stock and non-dividend paying convertible preferred stock and approximately $455 million in 11% non-transferable trust preferred securities due March 14, 2010. The 11% trust preferred securities have a liquidation preference of $25 each and are subject to mandatory redemption in ten equal semi-annual installments, commencing December 15, 2005. Mr. Scott, Mr. Sokol and Gregory E. Abel, Chief Operating Officer of the Company, contributed cash and current securities of the Company having a value of approximately $310 million. The remaining purchase price was funded with the Company's cash. Berkshire Hathaway owns approximately 9.7% of the voting stock, Mr. Scott owns approximately 86% of the voting stock, Mr. Sokol owns approximately 3% of the voting stock and Mr. Abel owns approximately 1% of the voting stock. Construction Minerals Extraction CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is constructing the Zinc Recovery Project that will recover zinc from the geothermal brine. Facilities are being installed near the Imperial Valley Projects sites to extract a zinc chloride solution from the geothermal brine through an ion exchange process. This solution will be transported to a central processing plant where zinc ingots will be produced through solvent extraction, electrowinning and casting processes. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tons per year and is scheduled to commence commercial operation in the third quarter of 2000. In September 1999, CalEnergy Minerals LLC entered into a sales agreement whereby all zinc produced by the Zinc Recovery Project will be sold to Cominco, LTD. The initial term of the agreement expires in December 2005. The Zinc Recovery Project is being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procurement and construction contract. Kvaerner is a wholly owned indirect subsidiary of Kvaerner ASA, an international engineering and construction firm experienced in the metals, mining and processing industries. Total project costs, including financing costs, of the Zinc Recovery Project are expected to be approximately $200.9 million. The Company has incurred $152.7 million of construction costs through June 30, 2000. Casecnan CE Casecnan Water and Energy Company, Inc., a Philippine corporation ("CE Casecnan") which at completion of the Casecnan Project is expected to be at least 70% indirectly owned by the Company, is constructing the Casecnan Project, a combined irrigation and 150 net MW hydroelectric power generation project (the "Casecnan Project") located in the central part of the island of Luzon in the Republic of the Philippines. CE Casecnan has entered into a fixed-price, date certain, turnkey engineering, procurement and construction contract to complete the construction of the Casecnan Project (the "Casecnan Construction Contract"). The work under the Casecnan Construction Contract is being conducted by a consortium consisting of Cooperative Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa working together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power Engineering Ltd. -15- On November 20, 1999, the Casecnan Construction Contract was amended to extend the Guaranteed Substantial Completion Date for the Casecnan Project to March 31, 2001. Accordingly, the Casecnan Project is now expected to become operational by the second quarter of 2001. Under the Project Agreement, if the National Irrigation Administration ("NIA") has completed certain work on its irrigation system, CE Casecnan is liable to pay NIA $5,000 per day for each day of delay in completion of the Casecnan Project beyond July 27, 2000, increasing to $13,500 per day for each day of delay in completion beyond November 27, 2000. NIA has not completed such work, and therefore CE Casecnan is not currently making such payments. CE Casecnan's ability to make payments on any of its existing and future obligations is dependent on NIA's and the Republic of the Philippines' performance of their obligations under the Project Agreement and the Performance Undertaking, respectively. No shareholders, partners or affiliates of CE Casecnan, including the Company, and no directors, officers or employees of the Company will guarantee or be in any way liable for payment of CE Casecnan's obligations. As a result, payment of CE Casecnan's obligations depends upon the availability of sufficient revenues from CE Casecnan's business after the payment of operating expenses. NIA's payments of obligations under the Project Agreement are substantially denominated in United States dollars and are expected to be CE Casecnan's sole source of operating revenues. Because of CE Casecnan's dependence on NIA, any material failure of NIA to fulfill its obligations under the Project Agreement and any material failure of the Republic of the Philippines to fulfill its obligations under the Performance Undertaking would significantly impair the ability of CE Casecnan to meet its existing and future obligations. Cordova Cordova Energy Company LLC ("Cordova Energy"), an indirect wholly owned subsidiary of the Company, has commenced construction of a 537 MW gas-fired power plant in the Quad Cities, Illinois area (the "Cordova Project"). Cordova Energy has entered into an engineering, procurement and construction ("EPC") contract with Stone & Webster Engineering Corporation to build the project. Total project costs are estimated to be approximately $288.9 million. The Company has also entered into a power sales agreement with a unit of El Paso Energy Corporation ("El Paso"). Under the power sales agreement, El Paso will purchase all the capacity and energy from the project until December 31, 2019. However, Cordova Energy has the option to elect on an annual basis to retain up to 50% of the project output for sales to others. The construction of the Cordova Project is expected to be completed in mid-2001. On September 10, 1999 Cordova Funding Corporation ("Cordova Funding"), a wholly owned subsidiary of the Company, closed the $225 million aggregate principal amount financing for the construction of the Cordova Project. As part of the financing, approximately $93.5 million of 8.64% Series A-1 Senior Secured Bonds due in 2019 were issued. An additional $31.3 million of 8.79% Series A-2 Senior Secured Bonds were issued on December 15, 1999, $29.3 million of 9.07% Series A-3 Senior Secured Bonds were issued on March 15, 2000, and $58.1 million of 8.82% Series A-4 Senior Secured Bonds were issued on June 15, 2000. Additional Series A Senior Secured Bonds will be issued as required to fund construction. Cordova Funding has loaned the proceeds to Cordova Energy. The Company has incurred $152.7 million of construction costs through June 30, 2000. Total equity funding is expected to be approximately $63.9 million. The EPC contractor's parent, Stone & Webster, Incorporated, voluntarily filed Chapter 11 bankruptcy on June 2, 2000 and has sold substantially all of its assets to Shaw Group, Inc. Shaw Group, Inc. has agreed to complete substantially all of Stone & Webster's contracts for current and future projects. The Company does not believe this situation will cause any material adverse effect on the final completion of the Cordova Project or the Company. -16- Accounting Effects of Industry Restructuring A possible consequence of deregulation in the utility industry is that Statement of Financial Accounting Standards ("SFAS") No. 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. With the exception of the generation operations serving the Illinois jurisdiction, MEC's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. If portions of its utility operations no longer meet the criteria of SFAS 71, MEC 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 resulting legislation. As of June 30, 2000, the Company had $245.9 million of net regulatory assets on its consolidated balance sheet. U.K. Rate Matters Distribution Northern charges access fees for the use of the distribution system. Most revenue of the distribution business is controlled by a distribution price control formula. The current formula requires that regulated distribution income per unit is increased or decreased each year by RPI-Xd where RPI reflects the average of the twelve months' inflation rates recorded for the previous July to December period and Xd is set at 3%. The formula also takes account of the changes in system electrical losses, the number of customers connected and the voltage at which customers receive the units of electric distributed. The formula determines the maximum average price per unit of electric distributed (in pence per kilowatt hour) which a Regional Electricity Company ("REC") is entitled to charge. The price control does not seek to constrain the profits of a REC from year to year. It is a control on revenue that operates independently of the REC's costs. During the lifetime of the price control additional cost savings therefore contribute directly to profit. The previous distribution price control period expired on March 31, 2000. Changes to the formula took effect from April 1, 2000 resulting in a one-off reduction in allowed income per unit distributed of 23%. As part of the review, the Xd factor remains at 3%. The distribution prices allowable under the current distribution price control formula are expected to be reviewed by the Office of Gas and Electricity Markets ("Ofgem") at the expiration of the formula's scheduled five-year duration in 2005. The formula may be reviewed at other times at the discretion of Ofgem, including in connection with certain proposed regulatory incentive initiatives. As a result of the new distribution price control, Northern implemented a review of expenditure and staffing requirements primarily in its distribution business. Subsequently Northern implemented a series of cost reduction initiatives including a redundancy program, following discussions with the trade unions, which has resulted in 461 employees leaving Northern prior to June 30, 2000. This is on target for the overall reduction of 500 expected by the end of the year. Supply In December 1999, Ofgem announced revised electric price controls. From April 2000, these have applied to most domestic and small commercial customers in the below 100kW market of Northern's designated area, and result in a further lowering of price caps. The new price control applies for two years to March 2002. While the impact of the latest regulatory review varied across companies, the anticipated impact on a standard Northern customer was a real price reduction of approximately 11%. The impact on customers utilizing a tariff with varying day/night rates was considerably lower at approximately 1%. -17- The supply companies are able to propose and amend the detailed structure of tariffs, but these must be submitted to Ofgem to ensure their consistency with the prescribed price caps. Prices are then monitored on an ongoing basis, and any proposed further amendments must be submitted to Ofgem for review. In addition to the constraint of regulatory price caps, competitive pressures from other suppliers are exerted against Northern's tariffs and contracts. The costs of fulfilling customer requirements are also subject to market pressures, energy prices varying on a half hourly basis. At present, electric prices are established on a national half hourly basis through the electric pool. Northern principally employs contracts for difference to hedge the risk contingent on movements in pool price. From November 2000, New Electricity Trading Arrangements ("NETA") are being introduced to replace the Pool with market arrangements more reflective of other commodities. The bulk of energy settlement under this system will occur either bilaterally or through power exchanges. Risk mitigation will be dependent on the establishment of effective load forecasting tools, addressing short and longer-term requirements. In addition, it is expected that new hedging facilities will be established, although the form of these has yet to be defined. Domestic Rate Matters: Electric Under a 1997 pricing plan settlement agreement resulting from an Iowa Utilities Board rate proceeding, electric prices for MEC's Iowa industrial and commercial customers were reduced through a retail access pilot project, negotiated individual electric contracts and a tariffed rate reduction for some non-contract commercial customers. The negotiated electric contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to ten-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MEC incurs to fulfill these contracts will vary. MEC presently intends to manage this risk through hedging and other similar arrangements. On an aggregate basis, the annual revenues under contract are approximately $180 million. Under the 1997 pricing plan settlement agreement, if MEC's annual Iowa electric jurisdictional return on common equity exceeds 12%, then earnings above the 12% level will be shared equally between customers and MEC. If the return exceeds 14%, then two-thirds of MEC's share of those earnings above the 14% level will be used for accelerated recovery of certain regulatory assets. The pricing plan settlement agreement precludes MEC from filing for increased rates prior to 2001 unless the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%. In December 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market. Under the law, beginning October 1, 1999, larger non-residential customers in Illinois and 33% of the remaining non-residential Illinois customers are allowed to select their provider of electric supply services. All other non-residential customers will have supplier choice starting December 31, 2000. Residential customers all receive the opportunity to select their electric supplier on May 1, 2002. Environmental Matters - Domestic 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. -18- MEC has evaluated or is evaluating 27 properties which 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 MEC has any responsibility for remedial action. MEC's estimate of the probable costs for these sites as of June 30, 2000, was $27 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Although the timing of potential incurred costs and recovery of costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on the Company's financial position or results of operations. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. In May 1999, the U.S. Court of Appeals for the District of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA indicating the EPA had not expressed sufficient justification for the basis of establishing the standards and ruling that the EPA has exceeded its constitutionally-delegated authority in setting the standards. As a result of the court's initial decision and the current status of the standards, the impact of any new standards on MEC is currently unknown. If the EPA successfully appeals the court's decision, however, and the new standards are implemented, then MEC would incur increased costs and a decrease in revenues. Environmental Matters - U.K. Northern carries out its activities in such a manner as to minimize the impact of its works and operations on the environment and in accordance with environmental legislation and good practice. There have been no significant environmental compliance issues. The U.K. Government introduced new contaminated land legislation in April 2000 that requires companies to: o Put in place a program for investigating the company's history to identify problem sites for which it is responsible; o make a clear commitment to meeting responsibilities for cleaning up those sites; o provide funding to make sure that this can happen; and o make commitments public. Northern is in the process of completing the evaluation work on the seven sites which may be subject to the legislation. A compliance strategy will then be developed. Exploratory work with an environmental remediation company is expected to minimize any clean up costs. The Environmental Protection Act (Disposal of PCB's and other Dangerous Substances) Regulations 2000 were introduced on May 5, 2000. The Regulations required that transformers containing over 50 parts per million (PPM) be registered with the Environment Agency by July 31, 2000. Transformers containing 500 PPM must be de-contaminated by December 31, 2000. Northern has registered 62 items above 50 PPM, de-contaminated 4 items and informed the Environment Agency that it is continuing with its sampling, labeling and registration program. Nuclear Decommissioning Each licensee of a nuclear facility is required to provide financial assurance for the cost of decommissioning its licensed nuclear facility. In general, decommissioning of a nuclear facility means to safely remove the facility from service and restore the property to a condition allowing unrestricted use by the operator. Based on information presently available, MEC expects to contribute approximately $42 million during the period 2000 through 2004 to an external trust established for the investment of funds for decommissioning Quad Cities Station. Approximately 65% of the trust's funds are invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. -19- In addition, MEC makes payments to the Nebraska Public Power District ("NPPD") related to decommissioning the Cooper power station. These payments are reflected as operating expense. NPPD estimates call for MEC to pay approximately $57 million to NPPD for Cooper decommissioning during the period 2000 through 2004. NPPD invests the funds predominately in U.S. Treasury Bonds and other U.S. Government securities. Approximately 20% was invested in domestic corporate debt. MEC's obligation for Cooper decommissioning may be affected by the actual plant shutdown date and the status of the power purchase contract at that time. In July 1997, NPPD filed a lawsuit in United States District Court for the District of Nebraska naming MEC as the defendant and seeking a declaration of MEC's rights and obligations in connection with Cooper nuclear decommissioning funding. Cooper and Quad Cities Station decommissioning costs charged to Iowa customers are to a large extent included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process. Cooper decommissioning costs charged to Illinois customers are recovered through a rate rider on customer billings that is reviewed annually. Development Activity The Company is actively seeking to develop, construct, own and operate new energy projects, both domestically and internationally, the completion of any of which is subject to substantial risk. Development can require the Company to expend significant sums for preliminary engineering, permitting, fuel supply, resource exploration, legal and other expenses in preparation for competitive bids which the Company may not win or before it can be determined whether a project is feasible, economically attractive or capable of being financed. Successful development and construction is contingent upon, among other things, negotiation on terms satisfactory to the Company of engineering, construction, fuel supply and power sales contracts with other project participants, receipt of required governmental permits and consents and timely implementation of construction. There can be no assurance that development efforts on any particular project, or the Company's development efforts generally, will be successful. The financing, construction and development of projects outside the United States entail significant political and financial risks (including, without limitation, uncertainties associated with first time privatization efforts in the countries involved, currency exchange rate fluctuations, currency repatriation restrictions, political instability, civil unrest and expropriation) and other structuring issues that have the potential to cause substantial delays or material impairment of the value of the project being developed, which the Company may not be fully capable of insuring against. The uncertainty of the legal environment in certain foreign countries in which the Company may develop or acquire projects could make it more difficult for the Company to enforce its rights under agreements relating to such projects. In addition, the laws and regulations of certain countries may limit the ability of the Company to hold a majority interest in some of the projects that it may develop or acquire. The Company's international projects may, in certain cases, be terminated by a government. Projects in operation, construction and development are subject to a number of uncertainties more specifically described in the Company's Form 8-K, dated March 26, 1999, filed with the Securities and Exchange Commission. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was delayed by SFAS No. 137 and amended by SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for the Company beginning January 1, 2001. The Company is in the process of evaluating the impact of this accounting pronouncement. -20- Forward-looking Statements Certain information included in this report contains forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). Such statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of the Company to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Reform Act, the Company has identified important factors that could cause actual results to differ materially from such expectations, including development and construction uncertainty, operating uncertainty, acquisition uncertainty, uncertainties relating to doing business outside of the United States, uncertainties relating to geothermal resources, uncertainties relating to domestic and international economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, industry deregulation and competition. Reference is made to all of the Company's SEC filings, including the Company's Report on Form 8-K dated March 26, 1999, incorporated herein by reference, for a description of such factors. The Company assumes no responsibility to update forward-looking information contained herein. -21- PART II - OTHER INFORMATION Item 1 Legal proceedings. - ------ ----------------- As of June 30, 2000, there are no material outstanding lawsuits against the Company; however as discussed in the Company's December 31, 1999 Form 10-K, several of the Company's projects and subsidiaries are involved in ongoing litigation. Item 2 Changes in Securities and Use of Proceeds. - ------ ----------------------------------------- Not applicable. Item 3 Defaults on Senior Securities. - ------ ----------------------------- Not applicable. Item 4 Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- Not applicable. Item 5 Other Information. - ------ ----------------- Not applicable. Item 6 Exhibits and Reports on Form 8-K. - ------ -------------------------------- (a) Exhibits: Exhibits Filed Herewith Exhibit 15 - Awareness Letter of Independent Accountants. Exhibit 27 - Financial Data Schedule. (b) Reports on Form 8-K: None -22- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIDAMERICAN ENERGY HOLDINGS COMPANY ----------------------------------- (Registrant) Date: August 14, 2000 /s/ Patrick J. Goodman --------------------------------- Patrick J. Goodman Senior Vice President & Chief Financial Officer -23- EXHIBIT INDEX Exhibit No. Page No. - ----------- -------- 15 Awareness Letter of Independent Accountants 25 27 Financial Data Schedule 26 -24- Exhibit 15 AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS MidAmerican Energy Holdings Company Des Moines, Iowa We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited consolidated interim financial information of MidAmerican Energy Holdings Company and subsidiaries for the period March 14, 2000 to June 30, 2000 and for the three-month period ended June 30, 2000 for MidAmerican Energy Holdings Company and for the period January 1, 2000 to March 13, 2000 and for the three-month and six-month periods ended June 30, 1999 for MidAmerican Energy Holdings Company (Predecessor), as indicated in our report dated July 21, 2000; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, is incorporated by reference in Registration Statements No. 333-30537, No. 333-45615 and No. 333-62697 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of a Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Des Moines, Iowa August 14, 2000 -25- EX-27 2 0002.txt FDS -- JUNE 30, 2000
5 0001081316 MidAmerican Energy Holdings Company 1,000 6-MOS Dec-31-2000 Jan-1-2000 Jun-30-2000 50,473 228,783 488,113 0 0 688,727 8,744,372 3,185,541 11,334,085 1,403,646 5,877,629 885,641 146,303 0 1,523,305 11,334,085 0 2,429,069 0 1,283,680 543,496 0 203,144 151,427 44,825 65,797 0 0 0 65,797 0 0
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