10-Q 1 mehc1st2002.txt MEHC 1ST QUARTER 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to___________. 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 ------- -------- All of the shares of MidAmerican Energy Holdings Company are held by a limited group of private investors. As of May 10, 2002, 9,281,087 shares of common stock were outstanding. MIDAMERICAN ENERGY HOLDINGS COMPANY FORM 10-Q TABLE OF CONTENTS Part I: Financial Information Page No. ITEM 1. Financial Statements Independent Accountants' Report.......................... 3 Consolidated Balance Sheets.............................. 4 Consolidated Statements of Operations.................... 5 Consolidated Statements of Cash Flows.................... 6 Notes to Consolidated Financial Statements............... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 16 Part II: Other Information ITEM 1. Legal Proceedings........................................ 27 ITEM 2. Changes in Securities and Use of Proceeds................ 27 ITEM 3. Defaults on Senior Securities............................ 27 ITEM 4. Submission of Matters to a Vote of Security Holders...... 27 ITEM 5. Other Information........................................ 27 ITEM 6. Exhibits and Reports on Form 8-K......................... 27 Signatures ......................................................... 28 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 and subsidiaries (the Company) as of March 31, 2002, and the related consolidated statements of operations and cash flows for the three-month periods ended March 31, 2002 and 2001. 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 MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2001, 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 17, 2002 (March 27, 2002 as to Notes 20.A. and 21), 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, 2001 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 April 26, 2002 MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (In thousands) As of ------------------------------- March 31, December 31, 2002 2001 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 705,479 $ 386,745 Restricted cash and short-term investments 53,577 30,565 Accounts receivable 463,712 310,030 Inventories 77,671 103,078 Other current assets 129,526 131,968 ----------- ----------- Total current assets 1,429,965 962,386 ----------- ----------- Property, plant, contracts and equipment, net 7,311,175 6,555,971 Excess of cost over fair value of net assets acquired, net 3,768,868 3,639,088 Regulatory assets 345,782 221,120 Long-term restricted cash and investments 18,784 24,207 Other investments 455,846 174,185 Equity investments 263,888 259,619 Deferred charges and other assets 793,115 778,757 ----------- ----------- Total Assets $14,387,423 $12,615,333 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Current liabilities: Accounts payable $ 316,001 $ 266,027 Accrued interest 133,282 130,569 Accrued taxes 79,020 88,973 Other accrued liabilities 450,003 308,924 Short-term debt 330,292 256,012 Current portion of long-term debt 438,797 317,180 ----------- ----------- Total current liabilities 1,747,395 1,367,685 ----------- ----------- Other long-term accrued liabilities 535,593 526,176 Parent company debt 1,835,701 1,834,498 Subsidiary and project debt 5,491,882 4,754,811 Deferred income taxes 1,282,588 1,284,268 ----------- ----------- Total Liabilities 10,893,159 9,767,438 Deferred income 84,425 85,917 Minority interest 42,349 44,477 Preferred securities of subsidiaries 120,888 121,183 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts 1,111,685 788,151 Subsidiary-obligated mandatorily redeemable preferred securities of subsidiary trusts - 100,000 Shareholders' Equity: Zero coupon convertible preferred stock - authorized 50,000 shares, no par value, 41,263 and 34,563 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively - - Common stock - authorized 60,000 shares, no par value, 9,281 shares issued and outstanding - - Additional paid-in capital 1,955,888 1,553,073 Retained earnings 268,715 223,926 Accumulated other comprehensive income (89,686) (68,832) ----------- ------------ Total Shareholders' Equity 2,134,917 1,708,167 ----------- ----------- Total Liabilities and Shareholders' Equity $14,387,423 $12,615,333 =========== =========== The accompanying notes are an integral part of these financial statements. MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) (Unaudited) Three Months Ended March 31, ---------------------------- 2002 2001 ---- ---- Revenues: Operating revenue.......................... $ 1,079,894 $ 1,698,864 Income on equity investments............... 14,120 7,107 Interest and other income.................. 13,705 10,578 ----------- ----------- Total revenues............................. 1,107,719 1,716,549 ----------- ----------- Costs and expenses: Cost of sales.............................. 447,425 1,109,568 Operating expense.......................... 279,667 266,503 Depreciation and amortization.............. 126,244 140,316 Interest expense........................... 141,300 121,678 Less interest capitalized.................. (6,647) (28,487) ----------- ----------- Total costs and expenses...................... 987,989 1,609,578 ----------- ----------- Income before provision for income taxes... 119,730 106,971 Provision for income taxes.................... 29,130 34,345 ----------- ----------- Income before minority interest............... 90,600 72,626 Minority interest............................. 25,851 24,711 ----------- ----------- Income before cumulative effect of change in accounting principle.......................... 64,749 47,915 Cumulative effect of change in accounting principle, net of tax......................... - (4,604) ----------- ---------- Net income available to common shareholders............................... $ 64,749 $ 43,311 =========== ========== The accompanying notes are an integral part of these financial statements. MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 2002 2001 ----------------- -------------- Cash flows from operating activities: Net income........................................................... $ 64,749 $ 43,311 Adjustments to reconcile to net cash flows from operating activities: Cumulative effect of change in accounting principle, net of tax...... - 4,604 Depreciation and amortization........................................ 126,244 115,362 Amortization of excess of cost over fair value of net assets acquired............................................... - 24,954 Amortization of deferred financing costs and other costs............. 7,349 6,035 Provision for deferred income taxes.................................. 4,797 6,221 Undistributed earnings on equity investments......................... (11,745) (7,107) Changes in other items: Accounts receivable and other current assets...................... (83,136) 111,668 Accounts payable, accrued liabilities, deferred income and other......................................................... 74,364 (122,450) ------------ ----------- Net cash flows from operating activities............................. 182,622 182,598 ------------ ----------- Cash flows from investing activities: Acquisition of Kern River, net of cash acquired...................... (422,636) - Purchase of convertible preferred securities......................... (275,000) - Capital expenditures relating to operating projects.................. (95,673) (70,395) Construction and other development costs............................. (22,372) (17,720) Philippine construction in progress.................................. - (17,491) Acquisition of realty companies, net of cash acquired................ (71,060) - Change in restricted investments..................................... 5,423 1,373 Change in other assets............................................... (5,372) (7,726) ------------ ----------- Net cash flows from investing activities............................. (886,690) (111,959) ------------- ----------- Cash flows from financing activities: Proceeds from issuance of convertible preferred stock................ 402,000 - Proceeds from issuance of trust preferred securities................. 323,000 - Net repayment of short-term subsidiary debt.......................... (46,195) (5,067) Net proceeds from parent company debt................................ 120,500 65,000 Repayment of subsidiary and project debt............................. (11,092) (228,210) Proceeds from subsidiary and project debt............................ 395,428 200,000 Redemption of preferred securities of subsidiaries................... (100,320) (301) Change in restricted investments-debt service........................ (23,012) 22,592 Other................................................................ (31,113) (1,869) ------------ ----------- Net cash flows from financing activities............................. 1,029,196 52,145 ------------ ----------- Effect of exchange rate changes on cash.............................. (6,394) (966) ------------ ----------- Net increase in cash and cash equivalents............................ 318,734 121,818 Cash and cash equivalents at beginning of period..................... 386,745 38,152 ------------ ----------- Cash and cash equivalents at end of period........................... $ 705,479 $ 159,970 ============ =========== Interest paid, net of amount capitalized............................. $ 146,222 $ 93,387 ============ =========== Income taxes paid.................................................... $ 20,167 $ 15,802 ============ ===========
The accompanying notes are an integral part of these financial statements. MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General In the opinion of management of MidAmerican Energy Holdings Company and subsidiaries (the "Company"), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of March 31, 2002 and the results of operations for the three months ended March 31, 2002 and 2001 and the related consolidated statements of cash flows for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 2002 and 2001 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 2001 financial statements and supporting note disclosures have been reclassified to conform to the 2002 presentation. Such reclassification did not impact previously reported net income or retained earnings. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. 2. Kern River Acquisition On March 27, 2002, the Company closed on a definitive agreement with The Williams Companies, Inc. ("Williams") to acquire Williams' Kern River Gas Transmission Company ("Kern River"), an interstate pipeline transporting Rocky Mountain and Canadian natural gas to markets in California, Nevada and Utah. The purchase price was $955 million, including $505 million of assumed debt. The Kern River pipeline is an important route for the transmission of natural gas from the vast reserves in the Rocky Mountain states to the rapidly growing markets in Utah, Nevada and California. Constructed in 1992, the Kern River pipeline extends 926 miles from Opal, Wyoming, to the San Joaquin Valley near Bakersfield, California, and has a design capacity of 845 million cubic feet per day. In August 2001, Williams filed an application with the Federal Energy Regulatory Commission to more than double the capacity on the Kern River system by adding approximately 900 million cubic feet per day of additional capacity from Wyoming to California and markets in between. Upon completion of the expansion project in May 2003, Kern River expects to be capable of transporting 1.7 billion cubic feet of natural gas per day. When converted to electricity, that is enough energy to power approximately 10 million homes. The expansion project has expected capital expenditures of approximately $1.2 billion. In connection with the acquisition of Kern River, the Company issued $323 million of 11% Company-obligated mandatorily redeemable preferred securities of subsidiary trust due March 12, 2012 and $127 million of no par, zero coupon convertible preferred stock to Berkshire Hathaway. Each share of preferred stock is convertible at the option of the holder into one share of the Company's common stock subject to certain adjustments as described in the Company's Amended and Restated Articles of Incorporation. The allocation of the Kern River purchase price has not been finalized. The initial determination of goodwill related to this acquisition was approximately $57 million. The recognition of goodwill resulted from various attributes of Kern River's operations and business in general. These attributes include, but are not limited to: o High credit quality shippers contracting with Kern River; o Kern River's strong competitive position; o Exceptional operating track record and state-of-the-art technology; o Strong demand for gas in the Western markets; o An ample supply of low-cost gas; and o Opportunities for expansion. The results of operations for Kern River are included in the Company's results beginning March 27, 2002. Unaudited pro forma combined revenue, income before cumulative effect of change in accounting principle and net income of the Company for the three months ended March 31, 2002 and 2001 as if the Kern River acquisition and the Yorkshire Swap, as described in Note 3 of Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2001, had occurred at the beginning of each year after giving effect to pro forma adjustments related to the acquisition and the swap were $1,147.5 million, $68.9 million and $68.9 million, respectively, compared to $1,386.6 million, $38.5 million and $33.9 million, respectively. 3. Property, Plant, Contracts and Equipment, Net Property, plant, contracts and equipment, net comprise the following (in thousands): March 31, December 31, 2002 2001 ---------- ------------ Operating assets: Utility generation and distribution system.................................... $8,385,353 $7,574,339 Independent power plants .................... 1,420,188 1,420,702 Utility non-operational assets............... 344,082 354,366 Power sales agreements....................... 46,271 48,185 Realty company assets........................ 63,299 51,150 Other assets................................. 55,459 53,876 ---------- ----------- Total operating assets....................... 10,314,652 9,502,618 Less accumulated depreciation and amortization.............................. (3,735,630) (3,650,875) ---------- ---------- Net operating assets......................... 6,579,022 5,851,743 Mineral and gas reserves and exploration assets, net................... 381,936 387,697 Construction in progress: Zinc recovery project................... 170,555 163,366 Utility generation and distribution system.................. 175,146 149,225 Other................................... 4,516 3,940 ---------- ---------- Total $7,311,175 $6,555,971 ========== ========== 4. Other Investments On March 27, 2002 the Company invested $275 million in Williams in exchange for shares of 9-7/8 percent cumulative convertible preferred stock of Williams. Dividends are scheduled to be received quarterly, commencing July 1, 2002. In connection with this investment, the Company issued $275 million of no par, zero coupon convertible preferred stock to Berkshire Hathaway. 5. Accounting Policy Change Effective January 1, 2001, the Company changed its accounting policy regarding major maintenance and repairs for nonregulated gas projects, nonregulated plant overhaul costs and geothermal well rework costs to the direct expense method from the former policy of monthly accruals based on long-term scheduled maintenance plans for the gas projects and deferral and amortization of plant overhaul costs and geothermal well rework costs over the estimated useful lives. The cumulative effect of the change in accounting principle for 2001 was $4.6 million, net of taxes of $.7 million. 6. Accounting Pronouncements On January 1, 2002, the Company 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. The Company's related amortization consists of goodwill amortization and the related income tax effect. Following is a reconciliation of net income as originally reported for the quarters ended March 31, 2002 and 2001, to adjusted net income (in thousands): 2002 2001 ---- ---- Net income as originally reported............ $64,749 $43,311 Goodwill amortization........................ - 24,954 Income tax benefit........................... - (475) ------- ------- Net income as adjusted....................... $64,749 $67,790 ======= ======= The Company is continuing to evaluate the other provisions of the standard including the determination of reporting units, the allocation of corporate assets and other liabilities, including goodwill, and the impairment testing of goodwill. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", which addresses the accounting for legal obligations associated with the retirement of tangible, long-lived assets, and the associated asset retirement costs. This pronouncement is effective for years beginning after June 15, 2002. The Company is evaluating the impact that adoption of this standard will have on its financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS No. 144 on January 1, 2002 did not have any impact on the Company's financial statements. 7. Comprehensive Income (Loss) Comprehensive income (loss) for the three months ended March 31, 2002 and 2001, was $43.9 million and $(21.8) million, respectively. The comprehensive loss for the three months ended March 31, 2001 includes a transition loss of $3.3 million related to the initial adoption of SFAS 133. Comprehensive income differs from net income due primarily to foreign currency translation adjustments, unrealized gains and losses from marketable securities, and fair value adjustments of cash flow hedges. 8. Commitments and Contingencies A. Financial Condition of Edison Southern California Edison Company ("Edison"), a wholly-owned subsidiary of Edison International, is a public utility primarily engaged in the business of supplying electric energy to retail customers in Central and Southern California, excluding Los Angeles. Due to reduced liquidity, Edison failed to pay approximately $119 million due under the power purchase agreement with CE Generation affiliates for power delivered in the fourth quarter 2000 and the first quarter 2001. Due to Edison's failure to pay contractual obligations, the CE Generation affiliates had established an allowance for doubtful accounts of approximately $21 million as of December 31, 2001. On June 20, 2001, the Imperial Valley Projects (excluding Salton Sea Unit V and CE Turbo) entered into Agreements Addressing Renewable Energy Pricing and Payment Issues with Edison ("Settlement Agreements"). On June 22, 2001, Edison made an initial $11.6 million payment to repay the past due balances under the Power Purchase Agreements (the "stipulated amounts"). On November 30, 2001, the Settlement Agreements were amended to reflect when Edison would be required to make the final payment on past due amounts. The final payment of approximately $104.6 million, representing the remaining stipulated amounts, was received March 1, 2002. Following the receipt of Edison's final payment of past due balances, the CE Generation affiliates released the remaining allowance for doubtful accounts. B. Casecnan Construction Arbitration On May 7, 1997, the Company entered into a fixed-price, date certain, turnkey engineering, procurement and construction contract to complete the construction of the Casecnan Project (the "Replacement Contract"). The work under the Replacement Contract was being conducted by a consortium consisting of Cooperativa 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. (collectively, the "Contractor"). On November 20, 1999, the Replacement Contract was amended to extend the Guaranteed Substantial Completion Date for the Casecnan Project to March 31, 2001. This amendment was approved by the lender's independent engineer under the Casecnan Indenture. On February 12, 2001, the Contractor filed a Request for Arbitration with the International Chamber of Commerce seeking an extension of the Guaranteed Substantial Completion Date by up to 153 days through August 31, 2001 resulting from various alleged force majeure events. In a March 20, 2001 Supplement to Request for Arbitration, the Contractor requested compensation for alleged additional costs of approximately $4 million it incurred from the claimed force majeure events to the extent it is unable to recover from its insurer. On April 20, 2001, the Contractor filed a further supplement seeking an additional approximately $62 million in damages for the alleged force majeure event (and geologic conditions) related to the collapse of the surge shaft. The Contractor alleged that the circumstances surrounding the placing of the Casecnan Project into commercial operation on December 11, 2001 amounted to a rescission of the Replacement Contract and filed a claim for unspecified quantum meruit damages. CE Casecnan believes such allegations and claims are without merit and is vigorously defending the Contractor's claims. The arbitration is being conducted applying New York law and pursuant to the rules of the International Chamber of Commerce. On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from making calls on the demand guaranty posted by Banca di Roma in support of the Contractor's obligations to CE Casecnan for delay liquidated damages. Hearings on the force majeure claims were held in London from July 2 to 14, 2001, and hearings on the Contractor's April 20, 2001 supplement were held in London from September 24 to October 3, 2001. Further hearings were held from January 2 to February 1, 2002 and additional hearings were held from March 14 to 19, 2002. As of March 31, 2002 the Company has received approximately $6.0 million of liquidated damages from demands made on the demand guarantees posted by Commerzbank on behalf of the Contractor. Although the outcome of the arbitration is difficult to assess, CE Casecnan believes it will prevail and receive additional liquidated damages in the arbitration. C. Casecnan Shareholder Issue Pursuant to the share ownership adjustment mechanism in the Casecnan Shareholder Agreement, which is based upon pro forma financial projections of the Casecnan Project at commencement of commercial operations, the Company, through its indirect wholly owned subsidiary CE Casecnan Ltd., has advised the minority shareholders that MidAmerican's ownership interest in the Company will increase to 100%. An initial shareholder has indicated its disagreement with the ownership adjustment and its right to up to a 15% ownership interest and has requested certain information with respect to the project's economics that form the basis for such adjustment. D. Cooper Litigation On July 23, 1997, NPPD filed a complaint, in the United States District Court for the District of Nebraska, naming MidAmerican Energy as the defendant and seeking declaratory judgment as to three issues under the parties' long-term power purchase agreement for Cooper capacity and energy. More specifically, NPPD sought a declaratory judgment in the following respects: (1) that MidAmerican Energy is obligated to pay 50% of all costs and expenses associated with decommissioning Cooper, and that in the event NPPD continues to operate Cooper after expiration of the power purchase agreement (September 2004), MidAmerican Energy is not entitled to reimbursement of any decommissioning funds it has paid to date or will pay in the future; (2) that the current method of allocating transition costs as a part of the decommissioning cost is proper under the power purchase agreement; and (3) that the current method of investing decommissioning funds is proper under the power purchase agreement. In response, MidAmerican Energy filed its answer and counterclaims. In its answer, MidAmerican Energy denied material allegations in the complaint. In its counterclaims, MidAmerican Energy sought declaratory judgments opposite to those that NPPD sought; and in addition, MidAmerican Energy sought declaratory judgments on earlier contingent versions of MidAmerican Energy's now operative counterclaims listed below at (1), (2), (4), (5), (6), (7), (8), (10) and (11). On October 6, 1999, the court rendered summary judgment for the NPPD on the above-mentioned issue concerning liability for decommissioning (issue (1) in the first paragraph, above) and the related contingent counterclaims filed by MidAmerican Energy (earlier versions of counterclaims identified as (1), (2), (5), and (6), below). The court referred all remaining issues in the case to mediation, and cancelled the November 1999 trial date. MidAmerican Energy appealed the court's summary judgment ruling. On December 12, 2000, the United States Court of Appeals for the Eighth Circuit reversed the ruling of the district court and granted summary judgment in favor of MidAmerican Energy on the earlier versions of MidAmerican Energy's counterclaims identified as (1) and (2) listed below; it remanded for trial MidAmerican Energy's counterclaims identified as (5) and (6), below; it also remanded for trial the NPPD's issues identified as (2) and (3) in the first paragraph, above, and on MidAmerican Energy's other undisposed of counterclaims. After the remand to the District Court from the Eighth Circuit Court of Appeals, NPPD was granted permission, over MidAmerican Energy's objections, to file a second amended complaint. The second amended complaint asserted in the first four "causes of action" that MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs based on alleged obligations other than those imposed on MidAmerican Energy by the power purchase agreement as originally written. NPPD's post-remand contentions in those four "causes of action" were in summary: (i) the parties, without written formal amendment, either modified the power purchase agreement or made a separate agreement that imposes unconditional liability on MidAmerican Energy for decommissioning costs; (ii) MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs based on quantum meruit and unjust enrichment; (iii) MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs based on promissory estoppel; or (iv) NPPD is entitled to have the power purchase agreement reformed to provide that MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs. Also, the second amended complaint asserted three additional "causes of action" and sought declaratory judgment(s) that (v) NPPD properly invests revenues from the sale of Cooper's power and energy under the power purchase agreement and amounts it has collected for decommissioning costs of Cooper; (vi) absent an unconditional obligation of MidAmerican Energy to pay decommissioning costs, MidAmerican Energy is barred from receiving a refund of prepaid estimated decommissioning costs; and (vii) absent an unconditional obligation of MidAmerican Energy to pay estimated decommissioning costs, a declaration defining decommissioning costs is necessary. In response to NPPD's second amended complaint, MidAmerican Energy filed its first amended answer and third amended counterclaims containing denials, several affirmative defenses, and the eleven counterclaims summarized below: (1) that MidAmerican Energy has no duty under the power purchase agreement to reimburse or pay 50% of the decommissioning costs unless conditions to reimburse- ment occur; (2) that the term "monthly power costs" as defined in the power purchase agreement does not include costs and expenses associated with decommissioning the plant; (3) that NPPD violated MidAmerican Energy's directions for application of payments; (4) that transition costs are not included in any decommis- sioning costs and are not any kind of costs that MidAmerican Energy is obligated to pay; (5) that NPPD has the duty to repay all amounts that MidAmerican Energy has prefunded for decommissioning in the event the Nebraska Public Power District operates the plant after the term of the power purchase agreement; (6) that NPPD is equitably estopped from continuing to operate the plant after the term of the power purchase agreement so long as NPPD does not repay all amounts MidAmerican Energy has prefunded for estimated decommissioning costs together with other amounts in certain funds and accounts and for so long as NPPD fails to provide MidAmerican Energy with certain requested accountings and information; (7) that certain funds, accounts, and reserves are exces- sive and are required to be paid to MidAmerican Energy or credited to MidAmerican Energy's pre-2004 monthly power costs; (8) that MidAmerican Energy has no duty to pay for nuclear fuel, operations and maintenance projects or capital improvements that have useful lives after the term of the power purchase agreement; (9) that NPPD has mismanaged the plant in numerous described transactions resulting in damage to MidAmerican Energy; (10) that NPPD has breached its contractual and other duties to MidAmerican Energy by not joining certain litigation and by failing to credit or agree to credit MidAmerican Energy with any recovery for low-level radioactive waste; and (11) that NPPD has breached its duty to MidAmerican Energy in making investments of decommissioning funds; In the course of discovery, NPPD has contended that MidAmerican Energy has some responsibility for some costs of storage of spent fuel resulting form the operation of the plant during the term of the power purchase agreement. MidAmerican Energy disputes this. Subsequent to NPPD's filing of its second amended complaint, MidAmerican Energy filed a mandamus petition with the Eighth Circuit Court of Appeals seeking an order of that court directing the District Court not to permit NPPD to pursue, at trial, the first four "causes of action" in the second amended complaint. The grounds of MidAmerican Energy's petition were that such four "causes of action" were foreclosed by the December 12, 2000, Eighth Circuit Court of Appeals decision. On April 3, 2002, the Eighth Circuit Court of Appeals granted the relief requested by MidAmerican Energy. Accordingly, NPPD will not be permitted to pursue the first four "causes of action" in the second amended complaint. However, NPPD has filed a petition, with the Eighth Circuit Court of Appeals, for rehearing. MidAmerican Energy believes that its counterclaims (1) and (2) have now been resolved by the Eighth Circuit Court of Appeals. A trial is scheduled to being on September 9, 2002, to determine: NPPD's three "causes of action" identified generally above as (v), (vi) and (vii) and MidAmerican Energy's four counterclaims referenced above in (3), (4), (5) and (6). Current plans are for MidAmerican Energy's five counterclaims referenced above in (7), (8), (9), (10) and (11) to be tried at a later time. However, the Court is currently re-examining such plans. E. Kvaerner Arbitration The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc. ("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering, procure, construct and manage contract (the "Zinc Recovery Project EPC Contract"). On June 14, 2001, CalEnergy Minerals, LLC issued notices of default, termination and demand for payment of damages to Kvaerner under the Zinc Recovery Project EPC Contract due to failure to meet performance obligations. As a result of Kvaerner's failure to pay monetary obligations under the Zinc Recovery Project EPC Contract, CalEnergy Minerals, LLC drew $29.6 million under the EPC Contract Letter of Credit on July 20, 2001. The liquidated damages have been accounted for as a reduction of the capitalized costs of the project. CalEnergy Minerals, LLC has entered into a time and materials reimbursable engineer, procure and construction management contract with AMEC E&C Services, Inc. to complete the Zinc Recovery Project. On July 11, 2001, Kvaerner filed an Amended Demand For Arbitration against CalEnergy Minerals LLC characterizing the nature of the dispute as concerns regarding change orders and performance penalties. Kvaerner did not state the amount of its claim. On August 7, 2001, CalEnergy Minerals LLC filed an Answering Statement and Counterclaim against Kvaerner. CalEnergy Minerals LLC denied all material allegations in Kvaerner's Amended Demand for Arbitration, and asserted a counterclaim against Kvaerner for breach of contract and specific performance. CalEnergy Minerals LLC alleged that its total estimated damage for Kvaerner's breach of contract are in excess of approximately $60 million; however, CalEnergy Minerals LLC has offset approximately $42.5 million of these damages by exercising its rights under the EPC Contract to claim the retainage and by drawing on the letter of credit. Therefore, CalEnergy Minerals LLC asked for a judgment in excess of approximately $20 million. The arbitration is scheduled for June 2002. F. Malitbog Arbitration VGPC and PNOC-EDC have been negotiating with respect to certain disputes concerning the Malitbog ECA but have been unable to reach a mutually acceptable resolution. Accordingly, on October 16, 2000, VGPC commenced arbitration against PNOC-EDC by serving it with a Notice of Arbitration and Statement of Claim (the "Notice of Arbitration"). In the Notice of Arbitration, VGPC claimed that PNOC-EDC breached the Malitbog ECA by improperly characterizing certain No Fault Outages as Forced Outage Hours and then deducting them from the total number of hours each month. On December 22, 2000, VGPC filed an Amended Statement of Claim pursuant to which VGPC added a claim that PNOC-EDC breached the Malitbog ECA by refusing to accept VGPC's specified Nominated Capacity for contract years July 25, 1999 to July 25, 2000, and July 25, 2000 to July 25, 2001. A Second Amended Statement of Claim was filed on March 9, 2001 to add the Scheduled Maintenance issue. VGPC intends to vigorously pursue its claims in this proceeding. Hearings are scheduled for June 24, 2002 to July 5, 2002 in Sydney, Australia. 9. Subsequent Event On April 11, 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company, announced the sale of several of its U.K. natural gas assets to Gaz de France. As part of the sale, Gaz de France would acquire four natural gas-producing fields located in the southern basin of the U.K. North Sea. Those fields include Anglia, Johnston, Schooner and Windermere. The transaction also includes the sale of rights in four gas fields (in development/construction) and three exploration blocks owned by CalEnergy Gas. The transaction requires regulatory review and approval and is expected to close in the second quarter. 10. Segment Information The Company has identified six reportable business segments principally based on management structure: MidAmerican Energy (domestic utility operations), CE Electric UK Funding (foreign utility operations), Kern River (domestic natural gas pipeline operations), CalEnergy Generation-Domestic, CalEnergy Generation-Foreign (primarily the Philippines), and HomeServices (real estate operations). Information related to the Company's reportable operating segments is shown below (in thousands). Three Months Ended March 31, ---------------------------- 2002 2001 Revenue: ---- ---- MidAmerican Energy............................. $ 623,165 $1,000,736 CE Electric UK Funding......................... 218,918 556,817 Kern River..................................... 2,230 - CalEnergy Generation - Domestic................ 12,468 8,175 CalEnergy Generation - Foreign................. 76,870 52,712 HomeServices................................... 176,464 100,041 ---------- ---------- Segment revenue................................ 1,110,115 1,718,481 Corporate...................................... (2,396) (1,932) ---------- ---------- $1,107,719 $1,716,549 ========== ========== Income (loss) on equity investments: MidAmerican Energy ............................ $ 5,296 $ (159) CalEnergy Generation - Domestic................ 7,171 7,266 HomeServices................................... 1,653 - ---------- --------- $ 14,120 $ 7,107 ========== ========= Depreciation and amortization: MidAmerican Energy............................. $ 69,947 $ 83,913 CE Electric UK Funding......................... 30,065 31,576 Kern River..................................... 531 - CalEnergy Generation - Domestic................ 2,210 557 CalEnergy Generation - Foreign................. 22,396 16,578 HomeServices................................... 6,998 3,079 ---------- --------- Segment depreciation and amortization.......... 132,147 135,703 Corporate...................................... (5,903) 4,613 ---------- --------- $ 126,244 $ 140,316 ========== ========= Three Months Ended March 31, ---------------------------- 2002 2001 Revenue: ---- ---- Interest expense, net: MidAmerican Energy............................. $ 28,786 $ 28,002 CE Electric UK Funding......................... 43,782 22,336 Kern River..................................... 514 - CalEnergy Generation - Domestic................ 5,018 163 CalEnergy Generation - Foreign................. 17,647 9,554 HomeServices................................... 1,234 1,053 --------- --------- Segment interest expense, net.................. 96,981 61,108 Corporate...................................... 37,672 32,083 --------- --------- $ 134,653 $ 93,191 ========= ========= Income (loss) before provision for income taxes MidAmerican Energy............................. $ 70,289 $ 77,178 CE Electric UK Funding......................... 60,967 67,444 Kern River..................................... 971 - CalEnergy Generation - Domestic................ (2,289) 4,374 CalEnergy Generation - Foreign................. 30,693 22,859 HomeServices................................... (129) (3,269) --------- --------- Segment income before provision for income taxes 160,502 168,586 Corporate...................................... (40,772) (61,615) --------- --------- $ 119,730 $ 106,971 ========= ========= Provision (benefit) for income taxes: MidAmerican Energy............................. $ 29,439 $ 34,571 CE Electric UK Funding......................... 18,632 20,605 Kern River..................................... 369 - CalEnergy Generation - Domestic................ (3,764) (1,099) CalEnergy Generation - Foreign................. 5,953 4,833 HomeServices................................... (207) (1,470) --------- --------- Segment provision for income taxes............. 50,422 57,440 Corporate...................................... (21,292) (23,095) --------- --------- $ 29,130 $ 34,345 ========= ========= March 31, December 31, 2002 2001 ---------- ------------ Identifiable assets: MidAmerican Energy............................. $ 5,291,810 $ 5,023,584 CE Electric UK Funding......................... 4,031,820 3,973,457 Kern River..................................... 1,019,846 - CalEnergy Generation - Domestic................ 729,575 720,293 CalEnergy Generation - Foreign............. 990,857 950,035 HomeServices................................... 328,224 226,588 ----------- ----------- Segment identifiable assets.................... 12,392,132 10,893,957 Corporate...................................... 1,995,291 1,721,376 ----------- ----------- $14,387,423 $12,615,333 =========== =========== 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 in 2001, intersegment eliminations and fair value adjustments relating to acquisitions. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 six separate platforms: MidAmerican Energy, CE Electric UK Funding, Kern River Gas Transmission, CalEnergy Generation-Domestic, CalEnergy Generation - Foreign and HomeServices. These platforms, with the exception of Kern River Gas Transmission Company, are discussed in detail in the Company's latest Annual Report on Form 10-K. 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 uncertainty, operating uncertainty, acquisition uncertainty, uncertainties relating to doing business outside of the United States, uncertainties relating to geothermal resources, the financial condition of and relationships with customers and suppliers, the availability and price of fuel and other inputs, uncertainties relating to domestic and international economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, environmental policies, 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. Critical Accounting Policies The preparation of financial statements and related documents in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements in the Company's latest Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, the accounting for revenue, contingent liabilities and impairment of long-lived assets. Actual results could differ from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. Revenue Recognition Revenues are recorded based upon services rendered and electricity, gas and steam delivered, distributed or supplied to the end of the period. Where there is an over recovery of distribution business revenues against the maximum regulated amount, revenues are deferred equivalent to the over recovered amount. The deferred amount is deducted from revenue and included in other liabilities. Where there is an under recovery, no anticipation of any potential future recovery is made. The Company also records unbilled revenues representing the estimated amounts 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 are included in accounts receivable on the consolidated balance sheets. SFAS No. 71 - Accounting for the Effects of Certain Types of Regulation A possible consequence of deregulation in the utility industry is that Statement of Financial Accounting Standards ("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. 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. Impairment of Long-Lived Assets The Company's long-lived assets consist primarily of property, plant and equipment, goodwill and intangible assets that were acquired in business acquisitions. The Company believes the useful lives assigned to the depreciable assets, which range from 3 to 50 years, are reasonable. The Company evaluates the long-lived assets for impairment when events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. These computations utilize judgments and assumptions inherent in management's estimate of undiscounted future cash flows to determine recoverability of an asset. If management's assumptions about these assets change as a result of events or circumstances, and management believes the assets may have declined in value, then the Company may record impairment charges, resulting in lower profits. On January 1, 2002, the Company 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. The Company is continuing to evaluate the other provisions of the standard including the determination of reporting units, the allocation of corporate assets and other liabilities, including goodwill, and the impairment testing of goodwill. Contingent Liabilities The Company 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 reflected in income 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 are based upon management's assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of any matters. Should the outcomes differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required. Kern River Gas Transmission Kern River Gas Transmission Company ("Kern River"), an indirect wholly owned subsidiary of the Company, owns and operates a 926-mile interstate pipeline transporting Rocky Mountain and Canadian natural gas to markets in California, Nevada and Utah. The existing firm Kern River pipeline capacity is 100% contracted through 2011 and 84% through 2016. Kern River's operations are regulated by the Federal Energy Regulatory Commission ("FERC"). Gas transported on the Kern River pipeline is used in enhanced oil recovery operations in the heavy oil fields and other markets in California. Gas is also transported to other natural gas consumers in Utah, southern Nevada and southern California for use in the production of electricity, cogeneration of electricity and steam and other applications. The Kern River pipeline is comprised of 36-inch and 42-inch diameter steel pipe, in two parts. The 707-mile section from its terminus in Opal, WY through the Central Rocky Mountains area into Daggett, CA (the "Mainline") is owned entirely by Kern River. The 219 mile section of pipeline from Daggett to Bakersfield, CA, (the "Common Facilities") after including the addition of a 2002 expansion facilities, will be jointly owned by Kern River (68%) and Mojave Pipeline Company ("Mojave") (32%) as tenants-in-common. Kern River percentage ownership will increase pursuant to subsequent agreements in connection with completed and proposed expansions. Mojave is a wholly-owned subsidiary of El Paso Natural Gas Company. The Common Facilities has a current capacity of 1.245 billion cubic feet per day. Construction of the existing pipeline began on January 2, 1991 and was completed in early 1992. Natural gas transportation began on February 15, 1992. Initial Mainline design capacity was 700 MMcf/d, although the pipeline has operated in excess of that level every year since 1993. Following the completion of several recent expansion projects, the design capacity of the pipeline is currently 845 MMcf/d. The existing Kern River pipeline incorporates eight compressor stations, including five on the Mainline and one on the common facilities and two supply area stations, and 62 metering stations, including 30 on the Mainline and 32 as part of the Common Facilities. Results of Operations for the Three Months ended March 31, 2002 and 2001: Operating revenue for the three months ended March 31, 2002 was $1,079.9 million compared with $1,698.9 million for the same period in 2001, a decrease of 36.4%. MidAmerican Energy operating revenue decreased for the three months ended March 31, 2002 to $613.2 million from $993.2 million for the same period in 2001, primarily due to lower volumes and rates in regulated and non-regulated gas. CE Electric UK Funding operating revenue decreased for the three months ended March 31, 2002 to $213.9 million from $556.0 million for the same period in 2001, primarily due to the sale of Northern Supply in September 2001, partially offset by Yorkshire distribution revenue. The remaining increase primarily relates to the increase of revenue at HomeServices due to acquisitions in 2002 and late 2001. The following data represents sales from MidAmerican Energy: Three Months Ended March 31, -------------------------- 2002 2001 ------ ------ Electricity Retail Sales (GWh)............. 3,959 4,021 Electricity Sales for Resale (GWh)......... 2,824 2,501 Regulated and Non-Regulated Gas Supplied (Thousands of MMBtus)...................... 77,844 82,414 MidAmerican Energy electric retail sales decreased for the three months ended March 31, 2002 from the same period in 2001 due to warmer temperatures partially offset by an increase in non-weather related sales. Electric sales for resale increased for the three months ended March 31, 2002 from the same period in 2001 due to improved availability in 2002 of MidAmerican Energy's base load plants. Retail gas supplied decreased due to warmer temperatures for the three months ended March 31, 2002 compared to the same period in 2001, resulting in less heating load. CE Electric UK Funding distributed 11,281 GWh of electricity in the three months ended March 31, 2002 compared with 4,508 GWh of electricity in the same period in 2001. The increase in electricity distributed for the three months ended March 31, 2002 is primarily due to the acquisition of Yorkshire distribution. Income on equity investments for the three months ended March 31, 2002 was $14.1 million compared with $7.1 million for the same period in 2001. The increase was primarily due to a common stock distribution from an energy investment fund. Interest and other income for the three months ended March 31, 2002 was $13.7 million compared with $10.6 million for the same period in 2001. The increase was primarily due to a fee received for the purchase of certain securities. Cost of sales for the three months ended March 31, 2002 was $447.4 million compared with $1,109.6 million for the same period in 2001, a decrease of 59.7%. The decrease relates primarily to the sale of Northern Supply business and decreased gas revenue at MidAmerican Energy. Operating expenses for the three months ended March 31, 2002 were $279.7 million compared with $266.5 million for the same period in 2001. The increase was due to higher costs at HomeServices as a result of acquisitions, partially offset by lower costs at CE Electric UK Funding. Depreciation and amortization for the three months ended March 31, 2002 was $126.2 million compared with $140.3 million for the same period in 2001. This decrease was primarily due to discontinuance of amortizing goodwill beginning January 1, 2002, partially offset by the commencement of commercial operations at Cordova and Casecnan and intangible assets amortization related to the HomeServices acquisitions. Interest expense, less amounts capitalized, for the three months ended March 31, 2002 was $134.7 million compared with $93.2 million for the same period in 2001, an increase of 44.5%. This increase was due to increased interest expense at CE Electric UK Funding related to the Yorkshire acquisition and the discontinuance of capitalizing interest related to the Casecnan and Cordova Projects. Tax expense for the three months ended March 31, 2002 was $29.1 million compared with $34.3 million for the same period in 2001. The decrease in the effective tax rate is due primarily to the discontinuance of nondeductible goodwill amortization. Minority interest for the three months ended March 31, 2002 was $25.9 million compared with $24.7 million for the same period in 2001. Minority interest includes the dividends on the Company-obligated mandatorily redeemable preferred securities of subsidiary trusts. Effective January 1, 2001, the Company changed its accounting policy regarding major maintenance and repairs for nonregulated gas projects, nonregulated plant overhaul costs and geothermal well rework costs to the direct expense method from the former policy of monthly accruals based on long-term scheduled maintenance plans for the gas projects and deferral and amortization of plant overhaul costs and geothermal well rework costs over the estimated useful lives. The cumulative effect of the change in accounting principle for 2001 was $4.6 million, net of taxes of $.7 million. Net income for the three months ended March 31, 2002 and 2001 was $64.7 million and $43.3 million, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, debt retirement and other capital requirements. The Company may from time to time seek to retire its outstanding debt through cash purchases in the open market, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. The Company's cash and cash equivalents were $705.5 million at March 31, 2002 compared to $386.7 million at December 31, 2001. The increase is primarily due to the issuances of convertible preferred stock, trust preferred securities and medium term notes, partially offset by the acquisition of Kern River and purchase of convertible preferred securities. In addition, the Company recorded separately restricted cash and investments of $72.4 million and $54.8 million at March 31, 2002 and December 31, 2001, respectively. The restricted cash balance as of March 31, 2002 is comprised primarily of amounts deposited in restricted accounts from which the Company will fund the various projects under construction. Additionally, the Leyte Projects', and a portion of Casecnan's and Cordova's restricted cash is reserved for the service of debt obligations. Kern River Acquisition On March 27, 2002, the Company closed on a definitive agreement with The Williams Companies, Inc. ("Williams") to acquire Williams' Kern River Gas Transmission Company ("Kern River"), a 926-mile interstate pipeline transporting Rocky Mountain and Canadian natural gas to markets in California, Nevada and Utah. The purchase price was $955 million, including $505 million of assumed debt. In connection with the acquisition of Kern River, the Company issued $323 million of 11% Company-obligated mandatorily redeemable preferred securities of subsidiary trust due March 12, 2012 and $127 million of no par, zero coupon convertible preferred stock to Berkshire Hathaway. Each share of preferred stock is convertible at the option of the holder into one share of the Company's common stock subject to certain adjustments as described in the Company's Amended and Restated Articles of Incorporation. Other Investments On March 27, 2002 the Company invested $275 million in Williams, in exchange for shares of 9-7/8 percent cumulative convertible preferred stock of Williams. Dividends are scheduled to be received quarterly, commencing July 1, 2002. In connection with this investment, the Company issued $275 million of no par, zero coupon convertible preferred stock to Berkshire Hathaway. Debt issuance and redemptions On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% medium-term notes due in 2031. The proceeds are being 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 $26.7 million of its $7.80 series of preferred securities. The first $13.3 million of preferred securities were redeemed at 100% of the principal amount plus accrued dividends, and the remaining $13.4 million was redeemed at 103.9% of the principal amount plus accrued dividends. Prudential California Acquisition In February 2002, HomeServices completed its purchase of a majority interest in Prudential California Realty. The cash purchase price of Prudential California Realty was approximately $71 million net of cash acquired, with an option to purchase the remaining interests. Additionally, HomeServices is obligated to pay a maximum earnout of $18.5 million calculated based on certain 2002 financial performance measures. The purchase price was financed using the Company's corporate revolver for $40 million which was contributed to HomeServices as equity and the remaining funds were borrowed from available credit under the HomeServices's $65 million revolving credit facility. It is anticipated that the borrowings in connection with this acquisition will be repaid from HomeServices' generated funds. The Company is in the process of completing the allocation of the purchase price to the assets and liabilities acquired. On May 1, 2002, HomeServices acquired a 50% interest in Prudential California Realty's mortgage operations. Subsequent Event On April 11, 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company, announced the sale of several of its U.K. natural gas assets to Gaz de France. As part of the sale, Gaz de France would acquire four natural gas-producing fields located in the southern basin of the U.K. North Sea. Those fields include Anglia, Johnston, Schooner and Windermere. The transaction also includes the sale of rights in four gas fields (in development/construction) and three exploration blocks owned by CalEnergy Gas. The transaction requires regulatory review and approval and is expected to close in the next several weeks. Accounts Receivable Sold In 1997, MidAmerican Energy entered into a revolving agreement, which expires in October 2002, 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. MidAmerican Energy Funding Corporation in turn sells receivable interests to outside investors. In consideration for the sale, MidAmerican Energy received cash and a subordinated note, bearing interest at 8%, from MidAmerican Energy Funding Corporation. As of March 31, 2002, the revolving cash balance was $36 million and the amount outstanding under the subordinated note was $55.6 million. The agreement is structured as a true sale, under which the creditors of MidAmerican Energy Funding Corporation will be entitled to be satisfied out of the assets of MidAmerican Energy Funding Corporation prior to any value being returned to MidAmerican Energy or its creditors. Therefore, the accounts receivable sold are not reflected on MidAmerican Energy's or MidAmerican Funding's Consolidated Balance Sheets. As of March 31, 2002, $90.7 million of accounts receivable, net of reserves, were sold under the agreement. Construction Zinc Recovery Project CalEnergy Minerals LLC is constructing the Zinc Recovery Project. The Zinc Recovery Project is designed to have a capacity of approximately 30,000 metric tons per year and is scheduled to commence commercial operations in 2002. Total project costs of the Zinc Recovery Project are expected to be approximately $224.9 million, net of damages, which is being funded by $140.5 million of debt and the balance from funds provided by the parent company. The Zinc Recovery Project has incurred $170.6 million, net of damages, of such costs through March 31, 2002. MidAmerican Energy MidAmerican Energy's primary need for capital is utility construction expenditures. For the first three months of 2002, utility construction expenditures totaled $62 million, including allowance for funds used during construction, or capitalized financing costs, and Quad Cities Station nuclear fuel purchases. All such expenditures were met with cash generated from utility operations, net of dividends. Forecasted utility construction expenditures, including allowances for funds used during construction are $382 million for 2002 and $1.614 billion for 2003 through 2006. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. Through 2007, MidAmerican Energy plans to develop and construct two electric generating plants in Iowa, requiring an investment of approximately $1.8 billion. Participation by others in a portion of the second plant is being discussed. The two plants will provide approximately 1,400 megawatts of generating capacity. The first project is a 500-megawatt natural gas-fired combined cycle unit with an estimated cost of $416 million. MidAmerican Energy has received a certificate from the Iowa Utilities Board allowing it to construct the 500-megawatt gas unit. In accordance with an Iowa law passed in 2001, MidAmerican Energy has sought Iowa Utilities Board approval for the ratemaking principles that will govern cost recovery for the gas plant. A ruling is expected late in the second quarter or early in the third quarter. That ruling will impact whether MidAmerican Energy continues with the project. Assuming favorable regulatory treatment is obtained for the ratemaking principles proceeding, it is anticipated that the first phase of the project will be completed by 2003 with the remainder being completed in 2005. MidAmerican Energy has incurred preliminary costs on the first project. MidAmerican Energy expects to make filing for a certificate and approval of ratemaking principles for the second project during the third quarter of 2002. MidAmerican Energy presently expects that all utility construction expenditures for the next five years will be met with the issuance of long-term debt and cash generated from utility operations, net of dividends. The actual level of cash generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions. Kern River Expansion On August 1, 2001, Kern River filed an application with FERC requesting authorization to construct, own and operate a major expansion to its pipeline system. Kern River proposed to loop most of its existing mainline, construct three new compressor stations and upgrade or modify its six existing compressor stations. The proposed facilities will increase Kern River's capacity by approximately 900 MMcf per day. Construction is expected to commence in August 2002, subject to receipt of the final FERC certificates, and the expansion is expected to be completed and operational by May 2003. Service will be provided under long-term contracts subject to incremental rates. The estimated cost of the expansion is approximately $1.2 billion. Domestic Rate Matters: Electric On March 15, 2002, MidAmerican Energy made a filing with the Iowa Utilities Board requesting an increase in rates of approximately $26.6 million for its Iowa retail natural gas customers. As part of the filing, MidAmerican Energy requested an interim rate increase of approximately $20.4 million annually. The Iowa Utilities Board may adjust the requested interim amount and delay its implementation for up to ninety days. MidAmerican Energy expects the final rates, which may differ from the requested amount, to be implemented in early 2003. Domestic Rate Matters: Gas Transmission The FERC regulates Kern River under the Natural Gas Act, the Natural Gas Policy Act of 1978 and other applicable FERC regulations. The FERC has jurisdiction over Kern River with respect to virtually all aspects of its business. Kern River holds certificates of public convenience and necessity issued by the FERC covering its facilities, activities and services. Kern River's rates and transportation charges are regulated by the FERC. FERC regulations and Kern River's tariff allow Kern River to recover all operations and maintenance costs, taxes, interest, depreciation and amortization and a regulated return on equity. Natural gas transportation companies may not grant any undue preference to any shipper, or maintain any unreasonable difference in their rates or other terms of service. Kern River's rates are set using a "levelized cost-of-service" methodology so that the rate is constant over the contract period. This is achieved by using a FERC-approved depreciation schedule in which depreciation increases as interest expense decreases. When Kern River commenced service in 1992, shippers signed 15-year long-term firm transportation contracts that were to expire in 2007. Under terms of a 1995 rate settlement, Kern River agreed that new rates would be filed by May 1, 1999. Instead of filing a rate case, Kern River negotiated a "pre-settlement" of the rate case with its shippers. This was approved by the FERC (the "1999 Settlement"), which included an agreement for a moratorium on rate cases until May 1, 2002 under which Kern River may be required to file a rate case by May 1, 2004. In order to reduce transportation rates further and extend contract terms beyond 2007, Kern River initiated an open season in October 1998 to measure interest in lower, extended term rates ("ET Rates") for extended term contracts. Shippers were offered the choice of new 10- or 15-year contracts (4-9 year extensions of their existing contracts) with both options starting on October 1, 2001 and expiring on either September 30, 2011 or September 30, 2016. On February 8, 2001 the FERC approved implementation of the ET Rates. All existing shippers have signed up under the ET Rates program. All of the pipeline's existing firm capacity will continue to be contractually committed under the ET Rates contracts until September 2011. Approximately 84% of the existing firm pipeline volume is contracted until September 2016. 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. MidAmerican Energy 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 MidAmerican Energy has any responsibility for remedial action. Investigations of the sites are at various stages, and MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy is continuing to evaluate several of the sites to determine the appropriate site remedies, if any, necessary to obtain site closure from the agencies. MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be $21 million to $68 million. MidAmerican Energy's estimate of the probable cost for these sites as of March 31, 2002 was $21 million. The estimate consists of $2 million for investigation costs, $6 million for remediation costs, $11 million for ground water treatment and monitoring costs and $2 million for closure and administrative costs. This estimate has been recorded as a liability and a regulatory asset for future recovery. MidAmerican Energy projects that these amounts will be paid or incurred over the next 5 years. The estimate of probable remediation costs is established on a site-specific basis. Initially, a determination is made as to whether MidAmerican Energy has potential remedial liability for the site and whether information exists to indicate that contaminated wastes remain at the site. When a potential remedial liability exists, the best estimate of projected site closure costs are accrued. The estimates are evaluated and revised quarterly as appropriate based on additional information obtained during investigation and remedial activities. The estimated recorded liabilities for these properties include incremental direct costs of the remediation effort and oversight by the appropriate regulatory authority, costs for future monitoring at sites and costs of compen- sation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liability could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. Insurance recoveries have been received for some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board, and are recorded as a regulatory liability. Additionally, as viable potentially responsible parties are identified, those parties are evaluated for potential contributions, and cost recovery is pursued when appropriate. The Illinois Commerce Commission has approved the use of a tariff rider that permits recovery of the actual costs of litigation, investigation and remediation relating to decommissioned manufactured gas plant sites. MidAmerican Energy's present rates in Iowa provide for a fixed annual recovery of manufactured gas plant costs. 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. 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, United States Supreme Court upheld the constitutionality of the standards, through remanding the issue of implementation of the ozone standard to the EPA. 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 an overall state plan 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. 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 (the Plan) was filed with the Iowa Utilities Board on April 1, 2002, in accordance with state law. Following a contested case proceeding, the Iowa Utilities Board is required to rule on the prudence of the Plan. MidAmerican Energy is required to file Plan updates at least every two years. The Plan provides MidAmerican Energy's projected air emission reductions considering current proposals being debated at the federal level and describes a coordinated long-range plan to achieve these air emission reductions. The Plan provides specific actions to be taken at each coal-fired generating facility and 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 is projected to be incurred during the 2002-2005 rate freeze period. 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 the 2001 settlement agreement on December 31, 2005, MidAmerican Energy proposes the use of an adjustment mechanism for recovery of Plan costs, similar to the tracker mechanisms for cost recovery for Cooper Nuclear Station, renewable energy and energy efficiency expenditures that are presently part of MidAmerican Energy's electric regulated rates. Environmental Matters: U.K. 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. CE Electric UK Funding is in the process of completing the evaluation work on the three sites that may be subject to the legislation. Exploratory work with an environmental remediation company is in progress on these sites. The Environmental Protection Act (Disposal of PCB's and other Dangerous Substances) Regulations 2001 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. CE Electric UK Funding has registered 140 items above 50 PPM on 74 sites, decontaminated 18 items and informed the Environment Agency that it is continuing with its sampling, labeling and registration program. The Groundwater Regulations seek to prevent List I and List II substances entering groundwater and strengthens the UK Environment Agencies powers to require additional protective measures, especially in areas of important groundwater supplies. Mineral oils and hydrocarbons are included in the more tightly controlled List I substances. This affects the high voltage fluid filled electricity cable network incorporating an insulating fluid currently in the List I category. Further research may result in recategorization because of the biodegradable qualities of the cable fluid. The existing voluntary Operating Code of Practice, as agreed between the Agency and the Electricity Supply Industries, is undergoing revision through the services of the Electricity Association to address the regulatory changes. Helpful discussions with the Environment Agency continue. The Oil Storage Regulations come into force in 2002 and requires the introduction of secondary containment measures (bunding) for all above ground oil storage locations where the capacity is more than 200 litres. The primary containers must be in sound condition, leak free, and positioned away from vehicle traffic routes. The secondary containment must be impermeable to water and oil (without drainage valve) and be subject to routine maintenance. The capacity of the bund must be sufficient to hold up to 110% of the largest stored vessel or 25% of the maximum stored capacity, whichever is the greater. The full impact of the regulations will be phased in over the next three years. The Regulations come into effect as follows: o March 1, 2002 for all new oil stores. o September 1, 2003 for existing stores at "significant risk" (i.e. within 10 meters of a water course). o September 1, 2005 for all remaining stores. A detailed study of the impacts has been carried out and a plan of action prepared to ensure compliance. 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, the Company expects to contribute approximately $41 million during the period 2002 through 2006 to an external trust established for the investment of funds for decommissioning Quad Cities Station. Approximately 60% of the fair value of the trust's funds are now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Based on information presently available and assuming a September 2004 shutdown of Cooper, MidAmerican Energy expects to accrue approximately $54 million for Cooper decommissioning during the period 2002 through 2004. MidAmerican Energy's obligation, if any, for Cooper decommissioning will be affected by the actual plant shutdown date. In July 1997, the Nebraska Public Power District ("NPPD") filed a lawsuit in United States District Court for the District of Nebraska naming MidAmerican Energy as the defendant and seeking a declaration of MidAmerican Energy's rights and obligations in connection with Cooper nuclear decommissioning funding. See discussion in Note 8 in the notes to the consolidated financial statements. Cooper and 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. Cooper decommissioning costs charged to Illinois customers are recovered through a rate rider on customer billings. Cooper Nuclear Station Under a long-term power purchase contract with NPPD, MidAmerican Energy purchases one-half of the output of Cooper. On April 1, 2002, the Nuclear Regulatory Commission ("NRC") placed Cooper in its "Multiple Repetitive Degraded Cornerstone" category of the NRC's Reactor Oversight Process Action Matrix. As a result, the NRC will conduct extensive diagnostic inspections at Cooper, which are currently anticipated to be completed during the month of June 2002. MidAmerican Energy cannot, at this time, predict the outcome of the NRC inspections and their impact on the operation of Cooper. NPPD has informed MidAmerican Energy that it is currently developing an improvement plan which it believes will address the issues that caused Cooper to be placed into this category. 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 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 Pronouncements In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses the accounting for legal obligations associated with the retirement of tangible, long-lived assets, and the associated asset retirement costs. This pronouncement is effective for years beginning after June 15, 2002. The Company is evaluating the impact that adoption of this standard will have on its financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk, including charges in the market price of certain commodities and interest rates. To manage the price volatility relating to these exposures, the Company enters into various financial derivative instruments. Senior management provides the overall direction, structure, conduct and control of the Company'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 16 in Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2001 for discussion on derivatives used to hedge price risk. The Company's exposure to commodity price risk and interest rate risk did not change materially from December 31, 2001. PART II - OTHER INFORMATION Item 1 Legal Proceedings. In addition to the proceedings described in Note 8 in the notes to the consolidated financial statements, the Company and its subsidiaries are currently parties to various minor items of litigation or arbitration, none of which, if determined adversely, would have a material adverse effect on the Company. 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: None (b) Reports on Form 8-K: On March 8, 2002, the Company filed a Form 8-K, dated March 8, 2002, stating it had reached a definitive agreement with The Williams Companies, Inc. to acquire William's Kern River Gas Transmission Company. On March 28, 2002, the Company filed a Form 8-K, dated March 28, 2002, stating it had completed its acquisition of Kern River Gas Transmission from The Williams Companies, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIDAMERICAN ENERGY HOLDINGS COMPANY ----------------------------------- (Registrant) Date: May 15, 2002 /s/ Patrick J. Goodman ----------------------------------- Patrick J. Goodman Senior Vice President & Chief Financial Officer