-----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, HEp66YMsQ7hQgJtfcB6UirRmTLixEyO34JurHQ32RWvlahw96Y6Yh2WXoJ6jsLXe o55fxFBitUqzsVXg1PfeoQ== 0001081316-99-000028.txt : 19990812 0001081316-99-000028.hdr.sgml : 19990812 ACCESSION NUMBER: 0001081316-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY HOLDINGS CO /NEW/ CENTRAL INDEX KEY: 0001081316 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC, GAS & SANITARY SERVICES [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: 99684578 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 2ND QUARTER - MIDAMERICAN ENERGY HOLDINGS 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, 1999 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 ------ ----- Former name, former address and former fiscal year, if changed since last report. N/A ------ 61,161,585 shares of Common Stock, no par value, were outstanding as of June 30, 1999. 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, June 30, 1999 and December 31, 1998. 4 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998............................ 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998........................ 6 Notes to Consolidated Financial Statements....................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 14 PART II: OTHER INFORMATION ITEM 1. Legal Proceedings................................................ 30 ITEM 2. Changes in Securities............................................ 30 ITEM 3. Defaults on Senior Securities.................................... 30 ITEM 4. Submission of Matters to a Vote of Security Holders.............. 30 ITEM 5. Other Information................................................ 30 ITEM 6. Exhibits and Reports on Form 8-K................................. 31 Signatures................................................................. 32 Exhibit Index ............................................................. 33 -2- INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholders MidAmerican Energy Holdings Company Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries as of June 30, 1999, and the related consolidated statements of operations for the three and six month periods ended June 30, 1999 and 1998 and the related consolidated statements of cash flows for the six month periods ended June 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated January 28, 1999 (March 12, 1999 as to Note 3 and Note 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, 1998 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 26, 1999 -3-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) AS OF --------------------------- JUNE 30 DECEMBER 31 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Cash and investments ..................................................... $ 247,408 $ 1,606,148 Marketable securities .................................................... 130,079 - Restricted cash and investments .......................................... 385,484 637,571 Accounts receivable ...................................................... 471,152 528,116 Properties, plant, contracts and equipment, net .......................... 5,661,656 4,236,039 Excess of cost over fair value of net assets acquired, net ............... 2,729,196 1,538,176 Regulatory assets ........................................................ 279,489 - Equity investments ....................................................... 190,118 125,036 Deferred charges and other assets ........................................ 754,138 432,438 ------------ ----------- TOTAL ASSETS ........................................................... $ 10,848,720 $ 9,103,524 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable ......................................................... $ 336,285 $ 305,757 Accrued liabilities ...................................................... 1,750,757 1,009,091 Parent company debt ...................................................... 2,016,522 2,645,991 Subsidiary and project-level debt ........................................ 4,255,781 3,093,810 Deferred income taxes .................................................... 822,185 543,391 ------------ ----------- Total Liabilities ...................................................... 9,181,530 7,598,040 ------------ ----------- Deferred income .......................................................... 61,693 58,468 Preferred securities of subsidiaries ..................................... 147,196 66,033 Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trusts .................. 450,000 553,930 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts ........................................ 101,598 - Commitments and contingencies (Note 6) Stockholders' Equity: Preferred stock - authorized 2,000 shares, no par value .................. - - Common stock - authorized 180,000 shares, no par value; 82,980 shares issued; 61,162 and 59,605 shares outstanding at June 30, 1999 and December 31, 1998, respectively ................... - - Additional paid in capital ............................................... 1,239,517 1,238,690 Retained earnings ........................................................ 404,462 340,496 Accumulated other comprehensive income ................................... (23,721) 45 Treasury stock - 21,818 and 23,375 common shares at June 30, 1999 and December 31, 1998, respectively, at cost ............. (713,555) (752,178) ------------ ----------- Total Stockholders' Equity ............................................. 906,703 827,053 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 10,848,720 $ 9,103,524 ============ ===========
The accompanying notes are an integral part of these financial statements -4-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------ ------------------------ 1999 1998 1999 1998 ----------- --------- ----------- ----------- REVENUES: Operating revenue ...................................... $ 1,003,602 $ 590,589 $ 1,801,487 $ 1,212,440 Interest and other income .............................. 33,617 29,929 73,577 52,389 Gain on sale of qualified facilities ................... - - 20,173 - Gain on sale of McLeod ................................. 78,223 - 78,223 - ----------- --------- ----------- ----------- TOTAL REVENUES ........................................... 1,115,442 620,518 1,973,460 1,264,829 ----------- --------- ----------- ----------- COSTS AND EXPENSES: Cost of sales .......................................... 499,868 269,768 947,066 582,413 Operating expense ...................................... 267,655 111,131 409,673 213,778 General and administration ............................. 11,050 10,814 22,902 22,858 Depreciation and amortization .......................... 111,395 85,659 190,746 165,584 Interest expense ....................................... 131,414 93,648 248,295 188,206 Less interest capitalized .............................. (16,669) (15,059) (32,710) (28,477) ----------- --------- ----------- ----------- TOTAL COSTS AND EXPENSES ................................. 1,004,713 555,961 1,785,972 1,144,362 ----------- --------- ----------- ----------- Income before provision for income taxes ................. 110,729 64,557 187,488 120,467 Provision for income taxes ............................... 37,227 21,952 63,292 40,483 ----------- --------- ----------- ----------- Income before minority interest .......................... 73,502 42,605 124,196 79,984 Minority interest ........................................ 12,441 10,139 23,344 20,223 ----------- --------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM ......................... 61,061 32,466 100,852 59,761 Extraordinary item, net of tax ........................... (5,366) - (36,886) - ----------- --------- ----------- ----------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS .............. $ 55,695 $ 32,466 $ 63,966 $ 59,761 =========== ========= =========== =========== NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM - BASIC.... $ 1.02 $ .54 $ 1.69 $ .99 Extraordinary item ....................................... (.09) - (.62) - ----------- ---------- ----------- ----------- NET INCOME PER SHARE...................................... $ .93 $ .54 $ 1.07 $ .99 =========== ========= =========== =========== Average number of common shares outstanding ............. 60,037 60,235 59,622 60,658 =========== ========= =========== =========== NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM - DILUTED.. $ .91 $ .51 $ 1.53 $ .95 Extraordinary item ....................................... (.07) - (.51) - ----------- ----------- ----------- ----------- NET INCOME PER SHARE - DILUTED............................ $ .84 $ .51 $ 1.02 $ .95 =========== ========= =========== =========== Diluted shares outstanding ............................... 72,638 74,346 72,945 74,641 =========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements. -5-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED JUNE 30 -------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................. $ 63,966 $ 59,761 Adjustments to reconcile to net cash flows from operating activities: Gain on sale of QFs ...................................................... (20,173) - Gain on sale of McLeod ................................................... (78,223) - Extraordinary item, net of tax ........................................... 36,886 - Depreciation and amortization ............................................ 162,206 143,598 Amortization of excess of cost over fair value of net assets acquired .... 28,540 21,986 Amortization of deferred financing costs and other costs ................. 10,907 8,458 Provision for deferred income taxes ...................................... (165,527) 21,316 Undistributed earnings on equity investments ............................. (5,939) 3,097 Income applicable to minority interest ................................... 6,085 2,242 Changes in other items: Accounts receivable .................................................... 36,634 (86,712) Accounts payable, accrued liabilities and deferred income .............. 22,998 (2,177) ----------- ----------- NET CASH FLOWS FROM OPERATING ACTIVITIES ................................... 98,360 171,569 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of MidAmerican and Kiewit's interests, net of cash acquired ....... (2,501,425) (502,916) Proceeds from sale of QFs, net of cash disposed ............................ 365,074 - Purchase of marketable securities .......................................... (22,366) - Proceeds from sale of marketable securities ................................ 382,374 - Capital expenditures relating to operating projects ........................ (64,909) (120,615) Acquisition of CE Gas assets ............................................... - (35,677) Domestic - construction in progress ........................................ (58,668) - Indonesian and other development costs net of recoveries.................... 4,881 (86,846) Philippine-construction in progress ........................................ (30,319) (61,002) Decrease in restricted cash and investments ................................ 113,847 160,850 Increase in other assets ................................................... (2,878) (25,340) ----------- ----------- NET CASH FLOWS FROM INVESTING ACTIVITIES ................................... (1,814,389) (671,546) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from subsidiary and project debt .................................. 1,100,000 107,234 Proceeds from securitization ............................................... 161,430 - Repayment of subsidiary and project debt ................................... (148,018) (103,402) Repayment of parent company debt ........................................... (676,971) - Deferred financing costs ................................................... 7,685 (20,094) Purchase of treasury stock ................................................. (64,730) (689,592) Other ...................................................................... 2,020 18,538 ----------- ----------- NET CASH FLOWS FROM FINANCING ACTIVITIES ................................... 381,416 (687,316) ----------- ----------- Effect of exchange rate changes on cash .................................... (24,127) 8,329 ----------- ----------- Net decrease in cash and cash equivalents .................................. (1,358,740) (1,178,964) Cash and cash equivalents at beginning of period ........................... 1,606,148 1,451,410 ----------- ----------- Cash and cash equivalents at end of period ................................. $ 247,408 $ 272,446 =========== =========== Interest paid, net of amount capitalized................................... $ 178,961 $ 139,395 =========== =========== Income taxes paid.......................................................... $ 47,192 $ 29,417 =========== ===========
The accompanying notes are an integral part of these financial statements. -6- MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL: In the opinion of management of MidAmerican Energy Holdings Company (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, 1999 and the results of operations for the three and six months ended June 30, 1999 and 1998, and cash flows for the six months ended June 30, 1999 and 1998. The results of operations for the three and six months ended June 30, 1999 and 1998 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 it's wholly and majority owned subsidiaries. Other investments and corporate joint ventures, including CE Generation (defined herein) 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 1998 financial statements and supporting footnote disclosures have been reclassified to conform to the 1999 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. MIDAMERICAN MERGER: On August 11, 1998, the Company entered into an Agreement and Plan of Merger ("MidAmerican Merger") with MHC Inc., formerly MidAmerican Energy Holdings Company ("MHC"). The MidAmerican Merger closed on March 12, 1999 and the Company paid $27.15 in cash for each outstanding share of MHC common stock for a total of approximately $2.42 billion in a merger pursuant to which MHC became an indirect wholly owned subsidiary of the Company. Additionally, the Company reincorporated in the State of Iowa and was renamed MidAmerican Energy Holdings Company and upon closing became an exempt public utility holding company. The consummation of the MidAmerican Merger was conditioned upon receipt of a number of regulatory and shareholder approvals. In addition, regulatory approval required the disposition of partial interests in certain of the Company's independent power generating facilities prior to the consummation of the MidAmerican Merger in order to maintain the qualifying facilities status of such power generating facilities. See Note 3. The MidAmerican Merger has been accounted for as a purchase business combination and as such the results of operations of the Company include the results of MHC beginning March 12, 1999. The purchase price has been allocated to assets acquired and liabilities assumed based on preliminary valuations and the Company is awaiting final valuations. The Company recorded goodwill of approximately $1.5 billion which is being amortized using the straight line method over a 40 year period. -7- On March 11, 1999, MidAmerican Funding, LLC, a wholly owned subsidiary of the Company, issued $200 million of 5.85% Senior Secured Notes due 2001, $175 million of 6.339% Senior Secured Notes due 2009, and $325 million of 6.927% Senior Secured Bonds due 2029. The proceeds from the offering were used to complete the MidAmerican Merger. Unaudited pro forma combined revenue, income before extraordinary item, net income and basic earnings per share of the Company and MHC for the six months ended June 30, 1999 and 1998, as if the acquisition had occurred at the beginning of the year after giving effect to certain pro forma adjustments related to the acquisitions, including the sales of the qualified facilities, the issuance of senior secured notes and bonds and the redemptions of certain limited recourse notes and senior discount notes, were $2.38 billion, $114.7 million, $77.8 million and $1.31, respectively, compared to $1.81 billion, $29.5 million, $29.5 million and $.49, respectively, for the same period last year. 3. QUALIFIED FACILITIES DISPOSITIONS: The consummation of the MidAmerican Merger was conditioned upon receipt of a number of regulatory approvals. Regulatory approval required the disposition of partial interests in certain of the Company's independent power generating facilities prior to the consummation of the MidAmerican Merger in order to maintain the qualifying facilities status of such power generating facilities. To accomplish this disposition, the following events occurred in the first quarter of 1999: On February 8, 1999, the Company created a new subsidiary, CE Generation LLC ("CE Generation") and subsequently transferred its interest in the Company's power generation assets in the Imperial Valley and the Gas Plants to CE Generation. On February 26, 1999, the Company closed the sale of all of its indirect ownership interests in the Coso Joint Ventures ("Coso") to Caithness Energy LLC. The price includes $205 million in cash and $5 million in contingent payments. On March 2, 1999, CE Generation closed the sale of $400 million aggregate principal amount of its 7.416% Senior Secured Bonds due 2018 and distributed the proceeds to the Company. On March 3, 1999, the Company closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation for an aggregate consideration of approximately $245 million in cash, $6.5 million in contingent payments and $23.5 million in equity commitments. Including the gross proceeds from the CE Generation debt offering, the aggregate consideration was approximately $675 million. 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. 4. EXTRAORDINARY ITEMS: The remaining outstanding Senior Discount Notes were redeemed on January 15, 1999 at a redemption price of 105.125% plus accrued interest. Due to the early extinguishment of the Senior Discount Notes, the Company recorded an extraordinary loss of approximately $14 million, net of tax. 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 which were paid on March 3, 1999, at a redemption price of 110.025% plus accrued interest. Due to the -8- early retirement of the Limited Recourse Notes, the Company recorded an extraordinary loss of approximately $17.5 million, net of tax. 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 of $5.4 million net of tax. 5. PROPERTIES, PLANTS, CONTRACTS AND EQUIPMENT: Properties, plants, contracts and equipment comprise the following (in thousands): June 30 December 31 1999 1998 ----------- ----------- (Unaudited) Operating assets: Utility system ................................... $ 3,822,365 $ 1,305,806 Power plants ..................................... 851,266 1,868,002 Wells and resource development ................... 171,479 473,237 Power sales agreements ........................... 105,276 193,868 Other assets ..................................... 297,963 313,029 ----------- ----------- Total operating assets ........................... 5,248,349 4,153,942 Less accumulated depreciation and amortization ... (473,294) (769,526) ----------- ----------- Net operating assets ............................. 4,775,055 3,384,416 Mineral and gas reserves and exploration assets, net .................... 385,687 375,208 Construction in progress: Casecnan .................................... 274,267 243,948 Indonesia ................................... 190,502 190,175 Zinc recovery project, Salton Sea V and other 36,145 42,292 ----------- ----------- Total ............................................ $ 5,661,656 $ 4,236,039 =========== =========== 6. COMMITMENTS AND CONTINGENCIES: INDONESIA On December 2, 1994, subsidiaries of the Company, Himpurna California Energy Ltd. ("HCE") and Patuha Power, Ltd. ("PPL", together with HCE, the "Indonesian Subsidiaries") executed separate joint operation contracts for the development of geothermal steam fields and geothermal power facilities located in Central Java in Indonesia with Perusahaan Pertambangan Minyak Dan Gas Bumi Negara ("Pertamina"), the Indonesian national oil company, and executed separate "take-or-pay" energy sales contracts ("ESCs") with both Pertamina and P.T. PLN (Persero) ("PLN"), the Indonesian national electric utility. The Government of Indonesia provided sovereign performance undertakings of the obligations under the joint operating and "take-or-pay" contracts. -9- In 1997 and 1998 a series of Indonesian government decrees and other actions (including the non-payment of all monthly invoices from HCE's Dieng Unit I, which became operational in March 1998) created significant uncertainty as to whether PLN and the Indonesian government would honor their contractual obligations to the Indonesian Subsidiaries. Accordingly, the Indonesian Subsidiaries commenced arbitration proceedings, as provided under the Indonesian Subsidiaries' contracts with PLN. On May 4, 1999, the Company announced that an international arbitration panel entered unanimous awards in favor of the Indonesian Subsidiaries in the arbitration matters brought by them against PLN. Finding that PLN had breached the provisions of the ESCs between PLN and both HCE and PPL, the arbitration panel awarded HCE approximately $391.7 million and PPL approximately $180.6 million in damages and ordered PLN to pay these amounts immediately. Since the above amounts have not been paid to HCE and PPL, as required by the arbitration panel, HCE and PPL are proceeding with arbitration against the Government of Indonesia under the sovereign performance undertakings provided to HCE and PPL by the Ministry of Finance. NYSEG On February 14, 1995, New York State Electric & Gas ("NYSEG") filed with the Federal Energy Regulatory Commission ("FERC") a Petition for a Declaratory Order, Complaint, and Request for Modification of Rates in Power Purchase Agreements Imposed Pursuant to the Public Utility Regulatory Policies Act of 1978 ("Petition") seeking FERC (i) to declare that the rates NYSEG pays under the Saranac Power Purchase Agreement ("Saranac PPA"), which was approved by the New York Public Service Commission (the "PSC"), were in excess of the level permitted under PURPA and (ii) to authorize the PSC to reform the Saranac PPA. On March 14, 1995, the Saranac Partnership intervened in opposition to the Petition asserting, inter alia, that the Saranac PPA fully complied with PURPA, that NYSEG's action was untimely and that the FERC lacked authority to modify the Saranac PPA. On March 15, 1995, the Company intervened also in opposition to the Petition and asserted similar arguments. On April 12, 1995, the FERC by a unanimous (5-0) decision issued an order denying the various forms of relief requested by NYSEG and finding that the rates required under the Saranac PPA were consistent with PURPA and the FERC's regulations. On May 11, 1995, NYSEG requested rehearing of the order and, by order issued July 19, 1995, the FERC unanimously (5-0) denied NYSEG's request. On June 14, 1995, NYSEG petitioned the United States Court of Appeals for the District of Columbia Circuit (the "Court of Appeals") for review of FERC's April 12, 1995 order. FERC moved to dismiss NYSEG's petition for review on July 28, 1995. On October 30, 1996, all parties filed final briefs and the Court of Appeals heard oral arguments on December 2, 1996. On July 11, 1997, the Court of Appeals dismissed NYSEG's appeal from FERC's denial of the petition on jurisdictional grounds. On August 7, 1997, NYSEG filed a complaint in the U.S. District Court for the Northern District of New York against the FERC, the PSC (and the Chairman, Deputy Chairman and the Commissioners of the PSC as individuals in their official capacity), the Saranac Partnership and Lockport Energy Associates, L.P. ("Lockport") concerning the power purchase agreements that NYSEG entered into with Saranac Partners and Lockport. NYSEG's suit asserts that the PSC and the FERC improperly implemented PURPA in authorizing the pricing terms that NYSEG, the Saranac Partnership and Lockport agreed to in those contracts. The action raises similar legal arguments to those rejected by the FERC in its April and July 1995 orders. NYSEG in addition asks for retroactive reformation of the contracts as of the date of commercial operation and seeks a refund of $281 million from the Saranac Partnership. The Saranac Partnership and other parties have filed motions to dismiss and oral arguments on those motions were heard on March 2, 1998 and again on March 3, 1999. The Court's decision is pending. The Saranac -10- Partnership believes that NYSEG's claims are without merit for the same reasons described in the FERC's orders. COOPER LITIGATION On July 23, 1997, Nebraska Public Power District ("NPPD") filed a Complaint, in the United States District Court for the District of Nebraska, naming MidAmerican Energy Company ("MEC"), an indirectly wholly owned subsidiary of the Company, as the defendant and seeking declaratory judgment as to three issues under the parties' long-term power purchase agreement for Cooper Nuclear Station ("Cooper") capacity and energy. More specifically, NPPD seeks a declaratory judgment in the following respects: (1) that MEC 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), MEC 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. MEC filed its answer and contingent counterclaims. The contingent counterclaims filed by MEC are generally as follows: (1) that MEC has no duty under the power purchase agreement to reimburse or pay 50% of the decommissioning costs unless certain conditions occur; (2) that NPPD has the duty to repay all amounts that MEC has prefunded for decommissioning in the event NPPD operates the plant after the term of the power purchase agreement; (3) that NPPD is equitably estopped from continuing to operate the plant after the term of the power purchase agreement; (4) that NPPD has granted MEC an option to continue taking 50% of the power from the plant; (5) that the term "monthly power costs" as defined in the power purchase agreement does not include costs and expenses associated with decommissioning the plant; (6) that MEC has no duty to pay for nuclear fuel, O&M projects or capital improvements that have useful lives after the term of the power purchase agreement; (7) that transition costs are not included in any decommissioning costs and expenses; (8) that NPPD has breached its duty to MEC in making investments of certain funds; (9) that reserves in certain accounts are excessive and should be refunded to MEC; and (10) that NPPD must credit MEC for certain payments by MEC for low-level radioactive waste disposal. MEC and NPPD are currently involved in discovery. The trial in this case is presently scheduled for November 1999. MEC is vigorously defending and pursuing its interest in this proceeding. 7. COMPREHENSIVE INCOME: Comprehensive income for the three months ended June 30, 1999 and 1998 was $45.0 million and $30.0 million, respectively, and for the six months ended June 30, 1999 and 1998 was $40.2 million and $68.1 million, respectively. Comprehensive income differs from net income due primarily to foreign currency translation adjustments. 8. ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which established accounting and reporting standards for derivative instruments and for hedging activities. It -11- 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 was amended by SFAS No. 137 which delayed implementation. This statement is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is in the process of evaluating the impact of this accounting pronouncement. 9. SEGMENT INFORMATION: The Company has identified four reportable business segments principally based on geographic area: Domestic electricity generation, foreign electricity generation (primarily the Philippines), domestic utility operations and foreign utility operations (primarily the United Kingdom). Information related to the Company's reportable operating segments are shown below (in thousands). THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ----------- REVENUE: Domestic generation ......... $ 4,855 $ 142,213 $ 87,365 $ 264,808 Foreign generation .......... 50,832 55,755 103,060 112,328 Domestic utility ............ 582,830 - 702,554 - Foreign utility ............. 475,924 419,935 1,038,113 882,377 ---------- ---------- ---------- ---------- Segment revenue ............. 1,114,441 617,903 1,931,092 1,259,513 Corporate ................... 1,001 2,615 42,368 5,316 ---------- ---------- ---------- ---------- $1,115,442 $ 620,518 $1,973,460 $1,264,829 ========== ========== ========== ========== OPERATING INCOME: (1) Domestic generation ......... $ 4,381 $ 72,658 $ 49,379 $ 131,541 Foreign generation .......... 29,902 33,213 60,929 71,455 Domestic utility ............ 146,661 - 158,748 - Foreign utility ............. 56,164 44,430 117,134 94,326 ---------- ---------- ---------- ---------- Segment operating income .... 237,108 150,301 386,190 297,322 Corporate ................... (11,634) (7,155) 16,883 (17,126) ---------- ---------- ---------- ---------- $ 225,474 $ 143,146 $ 403,073 $ 280,196 ========== ========== ========== ========== CAPITAL EXPENDITURES: Domestic generation ......... $ 36,291 $ 25,149 $ 64,844 $ 42,364 Foreign generation .......... 20,180 41,013 38,849 128,243 Domestic utility ............ 73,603 - 78,634 - Foreign utility (2) ......... 19,910 12,330 45,826 105,466 ---------- ---------- ---------- ---------- Segment capital expenditures 149,984 78,492 228,153 276,073 Corporate ................... 15 734 52 1,044 ---------- ---------- ---------- ---------- $ 149,999 $ 79,226 $ 228,205 $ 277,117 ========== ========== ========== ========== (1) Operating income excludes interest expense, net of capitalized interest. (2) Capital expenditures at the foreign utility exclude the effect of exchange rate changes. -12- JUNE 30 DECEMBER 31 1999 1998 ----------- ----------- IDENTIFIABLE ASSETS: Domestic generation ................. $ 703,242 $2,458,842 Foreign generation .................. 1,781,491 1,956,387 Domestic utility .................... 5,173,685 - Foreign utility ..................... 2,753,647 3,095,839 ----------- ---------- Segment identifiable assets ......... 10,412,065 7,511,068 Corporate ........................... 436,655 1,592,456 ----------- ---------- $10,848,720 $9,103,524 =========== ========== LONG-LIVED ASSETS: Domestic generation ................. $ 473,808 $1,930,347 Foreign generation .................. 1,410,300 1,305,190 Domestic utility .................... 4,193,361 - Foreign utility ..................... 2,276,202 2,519,615 ----------- ---------- Segment long-lived assets ........... 8,353,671 5,755,152 Corporate ........................... 37,181 19,063 ----------- ---------- $ 8,390,852 $5,774,215 =========== ========== 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 as well as the gain on the sale of the qualified facilities. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: - ---------------------- The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition and results of operations during the periods included in the accompanying statements of operations. As a result of the acquisition of MHC and the sales of Coso and an interest in CE Generation, the Company's future results will differ significantly from the Company's historical results. ACQUISITIONS: On August 11, 1998, the Company entered into an Agreement and Plan of Merger with MHC. The MidAmerican Merger closed on March 12, 1999 and the Company paid $27.15 in cash for each outstanding share of MHC common stock for a total of approximately $2.42 billion in a merger, pursuant to which MHC became an indirect wholly owned subsidiary of the Company. Additionally, the Company reincorporated in the State of Iowa, was renamed MidAmerican Energy Holdings Company and upon closing became an exempt public utility holding company. The consummation of the MidAmerican Merger was conditioned upon receipt of a number of regulatory and shareholder approvals and the disposition of partial interests in certain of the Company's power generating facilities in order to maintain the qualifying facilities status of such independent power generating facilities. On February 26, 1999, the Company closed the sale of all of its ownership interests in the Coso Project to Caithness Energy LLC ("Caithness"). The price includes $205 million in cash and $5 million in contingent payments plus the assumption of approximately $67.7 million in debt. 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. On March 2, 1999, CE Generation closed the sale of $400 million aggregate principal amount of its 7.416% Senior Secured Bonds due 2018. On March 3, 1999, the Company closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation for an aggregate consideration of approximately $245 million in cash, $6.5 million in contingent payments and $23.5 million in equity commitments. Including the gross proceeds from the CE Generation debt offering, the aggregate consideration was approximately $675 million. BUSINESS OF MHC: MHC's interests include 100% of the common stock of MEC, MidAmerican Capital Company and Midwest Capital Group and 95% of the common stock of MidAmerican Realty Services. MEC is primarily engaged in the business of generating, transmitting, distributing and selling electricity and in distributing, selling and transporting natural gas. MidAmerican Capital Company manages marketable securities and passive investment activities, security services and other energy-related, nonregulated activities. Midwest Capital Group functions as a regional business development company in MEC's service territory. MidAmerican Realty Services includes MHC's real estate brokerage operations and offers integrated real estate services in ten states including residential brokerage, relocation, title, abstract and mortgage services. -14- Currently, MEC has gas and electric operations in Iowa, Illinois and South Dakota and gas operations in Nebraska. Most of MEC's business is conducted in a rate-regulated environment and accordingly, many of its decisions as to the source and use of resources and other strategic matters are evaluated from a utility business perspective. BUSINESS OF 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. The supply business generally is a high volume business which tends to operate at lower profitability levels than the distribution business. Prior to November 4, 1998, Northern was the exclusive supplier of electricity to premises in its authorized area, except where the maximum demand of a customer was greater than 100kW. The income received by the supply business from customers with demand under 100kW was controlled by a prescribed formula, while income received from other customers was not regulated. In the competitive market between 100kW and 1MW of electricity demand, Northern has significantly increased its sales during 1998 and 1999. In the April 1999 contract round, sales increased by an additional 85% over the amount of business that was at risk. Northern is now the third largest electricity supplier in this sector of the U.K. market. Beginning November 4, 1998, liberalization of the entire market in Northern's area commenced in stages with complete liberalization achieved in Northern's authorized area by the end of April 1999. Northern also competes to supply gas inside and outside its authorized area. In the supply of gas to the business market, Northern expects to more than double its annual gas sales in 1999 from 1997. In the residential market Northern currently supplies gas to 550,000 customers and has approximately 100,000 additional customers progressing through the registration system. Northern is now the third largest gas supplier in the U.K. residential market. Northern continues to expand its electricity and gas supply customer base through the Dual Fuel marketing program. POWER GENERATION PROJECTS: 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. On March 2, 1999, CE Generation closed the sale of $400 million aggregate principal amount of its 7.416% Senior Secured Bonds due 2018. On March 3, 1999, the Company closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation for an aggregate -15- consideration of approximately $245 million in cash, $6.5 million in contingent payments and $23.5 million in equity commitments. Including the gross proceeds from the CE Generation debt offering, the aggregate consideration was approximately $675 million. 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. For purposes of consistent presentation, plant capacity factors for Vulcan, Hoch (Del Ranch), Elmore and Leathers (collectively the "Partnership Project") 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 Project") are based on capacity amounts of 10, 20, 49.8 and 39.6 net MW respectively (the Partnership Project and the Salton Sea Project are collectively referred to as the "Imperial Valley Project"). Plant capacity factors for Saranac, Power Resources, NorCon and Yuma (collectively the "Gas Plants") are based on capacity amounts of 240, 200, 80, and 50 net MW, respectively. Capacity amounts for Upper Mahiao, Malitbog and Mahanagdong (collectively, the "Philippine Projects") are 119, 216 and 165 net MW, respectively. Each plant possesses an operating margin which 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. On February 26, 1999, the Company closed the sale of all of its ownership interests in the Navy I, Navy II and BLM, collectively the Coso Project, to Caithness. The price includes $205 million in cash and $5 million in contingent payments plus the assumption of approximately $67.7 million in debt. RESULTS OF OPERATIONS FOR THE PERIODS ENDED JUNE 30, 1999 AND 1998: Operating revenue increased in the second quarter of 1999 to $1,003.6 million from $590.6 million for the same period in 1998, a 69.9% increase. Operating revenue increased in the six months ended June 30, 1999 to $1,801.5 million from $1,212.4 million for the same period in 1998, a 48.6% increase. Northern's operating revenue increased in the second quarter of 1999 to $463.5 million from $412.4 million for the same period in 1998 and for the six months ended June 30, 1999 to $1,025.0 million from $872.6 million for the same period in 1998, primarily due to higher volumes of gas supplied as well as higher electricity supply revenues. Operating revenue decreased due to the sales of Coso and the 50% interest in CE Generation. The acquisition of MHC accounted for $492.4 million in operating revenue in the second quarter of 1999 and $611.2 million in the six months ended June 30, 1999. The following data represents the supply and distribution operations in the U.K.: Three Months Six Months Ended June 30 Ended June 30 -------------- --------------- 1999 1998 1999 1998 ----- ----- ----- ----- Electricity Supplied (GWh) ........ 4,077 3,554 8,641 7,305 Electricity Distributed (GWh) ..... 3,635 3,783 7,859 7,954 Gas Supplied (Therms in millions) . 93.5 64.1 277.2 152.5 The increases in electricity supplied for the three months ended June 30, 1999 and the six months ended June 1999 from the same periods in 1998 are due primarily to the increase in supply volumes for customers -16- outside of the franchise area. The decreases in electricity distributed for the three months ended June 30, 1999 and year to date ended June 1999 from the same periods in 1998 are due to lower demand in the franchise area which is expected to grow later in the year. The increase in gas supplied in 1999 from 1998 reflects the increased volume as the domestic gas supply business in the U.K. opened up to competition as a result of regulatory changes and the successful dual fuel marketing campaign. The following data represents sales from utility operations for MEC. The financial results of MEC are consolidated with the Company beginning on March 12, 1999. Three Months Six Months Ended June 30 Ended June 30 --------------- --------------- 1999 1998 1999 1998 ----- ----- ----- ----- Electric Retail Sales (GWh) ........... 3,840 3,898 7,678 7,682 Electric Sales for Resale (GWh) ....... 1,572 1,272 3,368 2,809 Gas Throughput (Therms in millions) .. 245 242 811 787 The following operating data represents the aggregate capacity and electricity production of the domestic geothermal projects: Three Months Six Months Ended June 30 Ended June 30 --------------------- --------------------- 1999 1998 1999* 1998 --------- --------- --------- --------- Overall capacity factor ...... 94.0% 96.4% 95.7% 95.1% kWh produced (in thousands) .. 549,200 1,068,200 1,441,900 2,096,200 Capacity (net MW) ............ 267.4 507.4 346.9 507.4 * The six months ended June 30, 1999 is a weighted average for the disposition of the Coso Project. The capacity factor for the three months ended June 30, 1999 decreased compared to the same period in 1998, due to scheduled turbine overhauls at Del Ranch, Leathers and Elmore. The decrease in kWh produced for both the three and six month periods ending June 1999 compared to June 1998 is the result of the sale of Coso. -17- The following operating data represents the aggregate capacity and electricity production of the Gas Plants: Three Months Six Months Ended June 30 Ended June 30 ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Overall capacity factor .... 89.0% 81.8% 86.8% 78.8% kWh produced (in thousands) 1,107,900 1,018,540 2,149,400 1,950,040 Capacity NMW ............... 570 570 570 570 The capacity factor of the Gas Plants reflects certain contractual curtailments. The increases from the prior period was primarily due to the severe winter snow and ice storms which caused transmission curtailments at Saranac, as well as a turbine overhaul at PRI in the first quarter of 1998. Interest and other income increased in the second quarter of 1999 to $33.6 million from $29.9 million for the same period in 1998, a 12.4% increase. The increase is primarily due to increased earnings in equity investments. Interest and other income increased for the year to date period ended June 1999 to $73.6 million from $52.4 million in the same period in 1998. Higher corporate cash balances and the addition of MHC amounts due to the acquisition accounted for the increase. On May 18,1999, the Company announced the sale of approximately 6.74 million shares of McLeodUSA ("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 or $0.65 per diluted share. Cost of sales increased in the second quarter of 1999 to $499.9 million from $269.8 million for the same period in 1998, an 85.3% increase. Cost of sales increased in the six months ended June 1999 to $947.1 million from $582.4 million from the same period in 1998, a 62.6% increase. The increases are primarily due to higher volumes of gas and electricity supplied at Northern and the acquisition of MHC. Operating expense increased in the second quarter of 1999 to $267.7 million from $111.1 million for the same period in 1998, a 141.0% increase. Operating expenses increased in the year to date ended June 1999 to $409.7 million from $213.8 million for the same period in 1998, a 91.6% increase. The increases are primarily due to the acquisition of MHC partially offset by the sales of Coso and an interest in CE Generation. General and administration costs increased marginally in the second quarter of 1999 to $11.1 million from $10.8 million for the same period in 1998, a 2.8% increase. General and administration costs were constant for the six months ended June 1999 at $22.9 million compared with the same period in 1998. Depreciation and amortization increased in the second quarter of 1999 to $111.4 million from $85.7 million for the same period in 1998. Depreciation and amortization increased in the year to date June 1999 to $190.7 from $165.6 million in the same period in 1998, a 15.2% increase. The increases are due to the acquisition of MHC, partially offset by the sales of Coso and the 50% interest in CE Generation. -18- Interest expense, less amounts capitalized, increased in the second quarter of 1999 to $114.7 million from $78.6 million for the same period in 1998, a 45.9% increase. Interest expense, less amounts capitalized, increased in the year to date June 1999 to $215.6 million from $159.7 million, a 35.0% increase. The increases are primarily due to the acquisition of MHC and the greater average outstanding debt balances. The provision for income taxes increased in the second quarter of 1999 to $37.2 million from $22.0 million for the same period in 1998, a 69.1% increase. The provision for income taxes increased in the year to date ended June 1999 to $63.3 million from $40.5 million for the same period in 1998, a 56.3% increase. The increases are due to higher pretax income during the comparable periods of 1999. Minority interest increased in the second quarter to $12.4 million from $10.1 million for the same period in 1998, a 22.8% increase. Minority interest increased in the six months ended June 1999 to $23.3 million from $20.2 million in the same period in 1998, a 15.3% increase. The increase is primarily due to the acquisition of MHC which has minority interests in the form of preferred stock outstanding. Income before extraordinary items increased in the second quarter of 1999 to $61.1 million or $1.02 per share, from $32.5 million or $.54 per share for the same period in 1998. Income before extraordinary items increased in the year to date ended June 1999 to $100.9 million or $1.69 per share from $59.8 million or $0.99 per share for the same period in 1998. Due to the early retirements of the Senior Discount Notes, the Limited Recourse Notes and the 9.5% Senior Notes, the Company recorded extraordinary losses of approximately $5.4 million and $36.9 million, net of tax, in the three and six months ended June 30, 1999, 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's cash and cash equivalents were $247.4 million at June 30, 1999 as compared to $1,606.1 million at December 31, 1998. The majority of this decrease was due to the cash used to acquire MHC. In addition, the Company recorded separately restricted cash and investments of $385.5 million and $637.6 million at June 30, 1999 and December 31, 1998, respectively. The restricted cash balance as of June 30, 1999 is comprised primarily of amounts deposited in restricted accounts from which the Company will fund the various projects under construction. Additionally, the accounts include the Dieng Project and the Patuha Project restricted cash accounts; and the Philippine Projects' cash reserves for the debt service reserve funds. Financing Activity On March 11, 1999, MidAmerican Funding, LLC, a wholly-owned subsidiary of the Company, issued $200 million of 5.85% Senior Secured Notes due 2001, $175 million of 6.339% Senior Secured Notes due 2009, and $325 million of 6.927% Senior Secured Bonds due 2029. The proceeds from the offering were used to complete the MidAmerican Merger. The remaining outstanding Senior Discount Notes were redeemed on January 15, 1999 at a redemption price of 105.125% plus accrued interest. -19- 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 of principal which 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 of $5.4 million. As of June 30, 1999, the Company held 21.8 million shares of treasury stock at a cost of $713.6 million. On May 25, 1999 the Company announced that it had increased to 3.75 million the number of shares of its common stock authorized for repurchase on the open market. The Company has repurchased 2.0 million shares of common stock in 1999 at an aggregate cost of $64.7 million. The treasury shares will provide shares for issuance under the Company's employee stock option and share purchase plan and other outstanding convertible securities. The stock repurchase plan minimizes the dilutive effect of the additional shares issued under these plans. On May 18, 1999, CalEnergy Capital Trust, a subsidiary of the Company, effected the conversion of $103.8 million of 6 1/4% Convertible Preferred Securities into approximately 3.5 million shares of common stock of the Company. The Securities were converted at a rate of 1.6728 shares of common stock of the Company for each Security, equivalent to a conversion price of $29.89 per share of Company common stock. Acquisitions and Dispositions On August 11, 1998, the Company entered into an Agreement and Plan of Merger with MHC. The MidAmerican Merger closed on March 12, 1999 and the Company paid $27.15 in cash for each outstanding share of MHC common stock for a total of approximately $2.42 billion in a merger, pursuant to which MHC became an indirect wholly owned subsidiary of the Company. Additionally, the Company reincorporated in the State of Iowa, was renamed MidAmerican Energy Holdings Company and upon closing became an exempt public utility holding company. The consummation of the MidAmerican Merger was conditioned upon receipt of a number of regulatory and shareholder approvals. In addition, the disposition of partial interests in certain of the Company's power generating facilities was required prior to the consummation of the MidAmerican Merger in order to maintain the qualifying facilities status of such independent power generating facilities. On February 26, 1999, the Company closed the sale of all of its indirect ownership interest in the Coso Project to Caithness. The price includes $205 million in cash and $5 million in contingent payments plus the assumption of approximately $67.7 million in debt. On February 8, 1999, the Company created a new subsidiary, CE Generation and subsequently transferred its interest in the Imperial Valley Projects and Gas Plants to CE Generation. On March 2, 1999, CE Generation closed the sale of $400 million aggregate principal amount of its 7.416% Senior Secured Bonds due 2018. On March 3, 1999, the Company closed the sale of 50% of its ownership interests in CE Generation to an affiliate of El Paso Energy Corporation for an aggregate consideration of approximately $245 million in cash, $6.5 million in contingent payments and $23.5 million in equity commitments. Including the gross proceeds from the CE Generation debt offering, the aggregate consideration was approximately $675 million. -20- On May 18,1999, the Company announced the sale of approximately 6.74 million shares of McLeodUSA ("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 or $0.65 per diluted share. In July 1999, the Company's wholly-owned subsidiary, CE Gas, closed its acquisition of a 67% interest in the Anglia Field located in the Southern Gas Basin in the North Sea. The producing field is expected to provide the Company with 89 billion cubic feet of natural gas reserves, which will give the Company further options in support of its growing gas supply business in the U.K. On July 16, 1999, the Company announced that HomeServices.Com Inc., a subsidiary of the Company, filed a registration statement with the Securities and Exchange Commission ("SEC") for an initial public offering of common stock. HomeServices.Com, which will be the surviving entity of a merger with MidAmerican Realty Services, intends to use the net proceeds received by it in the offering for general corporate purposes, which are expected to include acquisitions and the continued development of its E-commerce operations. Minerals Extraction The Company developed and owns the rights to proprietary processes for the extraction of minerals from elements in solution in the geothermal brine and fluids utilized at its Imperial Valley plants (the "Salton Sea Extraction Project") as well as the production of power to be used in the extraction process. A pilot plant has successfully produced commercial quality zinc at the Company's Imperial Valley Project. The Company intends to sequentially develop facilities for the extraction of manganese, silver, gold, lead, boron, lithium and other products as it further develops the extraction technology. The Company is also investigating producing silica as an extraction project. Silica is used as a filler for such products as paint, plastics and high temperature cement. CalEnergy Minerals LLC, an indirect wholly owned subsidiary of the Company, is constructing the Zinc Recovery Project which will recover zinc from the geothermal brine (the "Zinc Recovery Project"). Facilities will be installed near Imperial Valley Project 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 mid-2000. The zinc produced by the Zinc Recovery Project is expected to be sold primarily to U.S. West Coast customers such as steel companies, alloyers and galvanizers. 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 (the "Zinc Recovery Project EPC 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 of the Zinc Recovery Project are expected to be approximately $200.9 million. The Company has incurred $43.2 million of such costs through June 30, 1999. -21- Imperial Valley Construction Projects Salton Sea Power LLC, an indirect wholly owned subsidiary of CE Generation, is constructing Salton Sea V. Salton Sea V will be a 49 net MW geothermal power plant which will sell approximately one-third of its net output to the Zinc Recovery Project. The remainder will be sold through the California Power Exchange ("PX"). Salton Sea V will be constructed pursuant to a date certain, fixed price, turnkey engineering, procurement and construction contract (the "Salton Sea V EPC Contract") by Stone & Webster Engineering Corporation ("SWEC"). SWEC is one of the world's leading engineering and construction firms for the construction of electric power plants and, in particular, geothermal power plants. Salton Sea V is scheduled to commence commercial operation in mid-2000. Total project costs of Salton Sea V are expected to be approximately $119.1 million. Salton Sea Power LLC has incurred approximately $32.4 million of such costs through June 30, 1999. CE Turbo LLC, an indirect wholly owned subsidiary of CE Generation is constructing the CE Turbo Project. The CE Turbo Project will have a capacity of 10 net MW. The net output of the CE Turbo Project will be sold to the Zinc Recovery Project or sold through the PX. The Partnership Projects are upgrading the geothermal brine processing facilities at the Vulcan and Del Ranch Projects with the Region 2 brine facilities construction. In addition to incorporating the pH modification process, which has reduced operating costs at the Salton Sea Projects, the more efficient facilities are expected to achieve additional economies through improved brine processing systems and the utilization of more modern equipment. The Partnership Projects expect these improvements will reduce brine-handling operating costs at the Vulcan Project and the Del Ranch Project. The CE Turbo Project and the Region 2 brine facilities construction are being constructed by SWEC pursuant to a date certain, fixed price, turnkey engineering, procurement and construction contract (the "Region 2 Upgrade EPC Contract"). The obligations of SWEC are guaranteed by Stone & Webster, Incorporated. The CE Turbo Project is scheduled to commence initial operations in mid-2000 and the Region 2 brine facilities construction is scheduled to be completed in early-2000. Total project costs for both the CE Turbo Project and the Region 2 brine facilities construction are expected to be approximately $63.7 million. 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 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 -22- Engineering Ltd. Construction of the Casecnan Project is expected to be completed in 2000. No further equity funding is expected. Indonesia On December 2, 1994, subsidiaries of the Company, Himpurna California Energy Ltd. ("HCE") and Patuha Power, Ltd. ("PPL", together with HCE, the "Indonesian Subsidiaries") executed separate joint operation contracts for the development of geothermal steam fields and geothermal power facilities located in Central Java in Indonesia with Perusahaan Pertambangan Minyak Dan Gas Bumi Negara ("Pertamina"), the Indonesian national oil company, and executed separate "take-or-pay" energy sales contracts ("ESCs") with both Pertamina and P.T. PLN (Persero) ("PLN"), the Indonesian national electric utility. The Government of Indonesia provided sovereign performance undertakings of the obligations under the joint operating and "take-or-pay" contracts. In 1997 and 1998 a series of Indonesian government decrees and other actions (including the non-payment of all monthly invoices from HCE's Dieng Unit I, which became operational in March 1998) created significant uncertainty as to whether PLN and the Indonesian government would honor their contractual obligations to the Indonesian Subsidiaries. Accordingly, the Indonesian Subsidiaries commenced arbitration proceedings as provided under the Indonesian Subsidiaries' contracts with PLN. On May 4, 1999 the Company announced that an international arbitration panel entered unanimous awards in favor of the Indonesian Subsidiaries in the arbitration matters brought by them against PLN. Finding that PLN had breached the provisions of the ESCs between PLN and both HCE and PPL, the arbitration panel awarded HCE approximately $391.7 million and PPL approximately $180.6 million in damages and ordered PLN to pay these amounts immediately. Since the above amounts have not been paid to HCE and PPL, as required by the arbitration panel, HCE and PPL are proceeding with arbitration against the Government of Indonesia under the sovereign performance undertakings provided to HCE and PPL by the Ministry of Finance. Cordova Cordova Energy Company LLC, ("Cordova") an indirect wholly owned subsidiary of the Company, proposes to construct a 537 MW gas-fired power plant in the Quad Cities, Illinois area (the "Cordova Project"). Cordova has entered into an engineering, procurement and construction contract with SWEC to build the project, estimated to cost $247 million, excluding financing, contingencies and interest during construction. 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 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 commence in August 1999 and to be completed in mid-2001. Evolution of the Domestic Utility Industry The U.S. utility industry continues to evolve into an increasingly competitive environment. In virtually every region of the country, legislative and regulatory actions are being taken which result in customers having more choices in their energy decisions. -23- In the electric industry, the traditional vertical integration of generation, delivery and marketing is being unbundled, with the generation and marketing functions being deregulated. For local gas distribution businesses, the supply, local delivery and marketing functions are similarly being separated and opened to competitors for all classes of customers. While retail electric competition is presently not permitted in Iowa, MEC's primary market, legislation to do so was introduced in Iowa's legislature during the last session. Deregulation of the gas supply function related to small volume customers is also being considered by the Iowa Utilities Board ("IUB"). MEC is actively participating in the legislative and regulatory processes shaping the new environment in which its businesses will operate. The generation and retail portions of MEC's electric business will be most affected by competition. The introduction of competition in the wholesale market has resulted in a proliferation of power marketers and a substantial increase in market activity. As retail choice evolves, competition from other traditional utilities, power marketers and customer-owned generation could put pressure on utility margins. During the transition to full competition, increased volatility in the marketplace can be expected. With the elimination of the energy adjustment clause in Iowa, MEC is exposed to movements in energy prices. Although MEC has sufficient low cost generation under typical operating conditions for its retail electric needs, a loss of adequate generation by MEC at a time of high market prices could subject MEC to losses on its energy sales. Legislative and Regulatory Evolution 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, larger non-residential customers in Illinois and 33% of the remaining non-residential Illinois customers will be allowed to select their provider of electric supply services, beginning October 1, 1999. 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. In addition, the law provides for Illinois earnings above a certain level of return on common equity ("ROE") to be shared equally between customers and MEC beginning in April 2000. MidAmerican's ROE level will be based on a rolling two-year average, with the first determination being based on an average of 1998 and 1999. The ROE level at which MEC will be required to share earnings is a multi-step calculation of average 30-year Treasury Bond rates plus 5.50% for 1998 and 1999. Legislation passed in July 1999 increases the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond rate. If the resulting average Treasury Bond rate were equal to the December 1998 30-year Treasury Bond rate, the ROE level above which sharing must occur would be approximately 10.6% for 1998 and 1999 and 13.6% for 2000 - 2004. The law allows MEC to mitigate the sharing of earnings above the threshold ROE through accelerated cost recognition that would reduce MEC's earnings. MEC continues to evaluate its strategy regarding the sharing mechanism. Accounting Effects of Industry Restructuring A possible consequence of competition in the utility industry is that SFAS 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. A majority of 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 -24- 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. As of June 30, 1999, MEC had $279 million of regulatory assets on its balance sheet. Domestic Rate Matters: Electric Electric revenue from MEC's Iowa industrial customers were reduced by $6 million annually and electric prices for MEC's Iowa commercial customers were reduced by $4 million annually through several steps from mid-1997 to the end of 1998. The reductions were achieved through a retail access pilot project, negotiated individual electric contracts and a $1.5 million tariffed rate reduction for certain 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 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MEC incurs to fulfill these contracts will vary. On an aggregate basis, the annual revenues under contract are approximately $180 million. If MEC's annual Iowa electric jurisdictional ROE exceeds 12%, then earnings above the 12% level will be shared equally between customers and MEC; if the ROE exceeds 14%, then two-thirds of MEC's share of those earnings will be used for accelerated recovery of certain regulatory assets. A 1997 pricing plan settlement agreement precludes MEC from filing for increased rates prior to 2001 unless the ROE falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the ROE, after reflecting credits to customers, exceeds 14%. On April 14, 1999, the IUB approved, subject to additional refund, MEC's ROE calculation. During the second quarter of 1999, MEC refunded $2.2 million to its Iowa non-contract customers related to the 1998 ROE calculation. The agreement also eliminated MEC's energy adjustment clause, and, as a result, the cost of fuel is not directly passed on to customers. Environmental Matters Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making a significant contribution to nonattainment of the ozone standard in downwind states in the eastern half of the United States. The nonattainment of the "downwind states" is based on the ozone standard established prior to the 1997 revisions discussed below. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MEC's facilities are not currently subject to additional emissions reductions as a result of this initiative. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards (NAAQS) for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as -25- nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. In May 1999, the U.S. District 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. The EPA has appealed the court's ruling to the full panel of the U.S. District Court of Appeals for the District of Columbia Circuit. Argument in the appeal proceeding is scheduled for the fall of 1999. As a result of the court's decision and the current status of the standards, the impact of any new standards on MidAmerican is currently unknown. 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 1999 through 2003 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Approximately 65% 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. MEC makes payments to Nebraska Public Power District ("NPPD") related to decommissioning Cooper. These payments are reflected in operating expenses in the income statement. NPPD estimates call for MEC to pay approximately $57 million to NPPD for Cooper decommissioning during the period 1999 through 2003. 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. See Note 6 to the financial statements regarding Cooper litigation. 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. MEC currently recovers Quad Cities Station decommissioning costs charged to Illinois customers through a rate rider on customer billings. Securitization of Accounts Receivable In 1997, MEC entered into a revolving agreement, which expires in 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a special purpose entity established to purchase accounts receivable from MEC. Funding Corp. in turn sold receivable interests to outside investors. In consideration for the sale, MEC received $70 million in cash and the remaining balance in the form of a subordinated note from Funding Corp. The agreement is structured as a true sale, as determined by SFAS No. 125, under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MEC or its creditors. Therefore, the accounts receivable sold are not reflected on -26- the balance sheet. As of June 30, 1999, $87.4 million of accounts receivable, net of reserves, were sold under the agreement. In December 1998, Northern entered into a revolving receivable purchase agreement with Kitty Hawk Funding Corporation ("Kitty Hawk"), an unaffiliated special purpose entity established to purchase accounts receivable. The agreement, which expires in December 1999, allows Northern to sell all of its rights, title and interest in the majority of its billed electricity accounts receivable and to borrow against its unbilled electricity accounts receivable. In March 1999, Northern received $161 million in cash associated with the agreement, $143 million of which was accounted for as a sale and $18 million of which was accounted for as a loan. 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 Company believes that the international independent power market holds opportunities for financially attractive energy product development. 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. Year 2000 What is generally known as the year 2000 ("Y2K") computer issue arose because many existing computer programs and embedded systems use only the last two digits to refer to a year. Therefore, those computer programs do not properly distinguish between a year that begins with "20" instead of "19". If not corrected, many computer applications could fail or create erroneous results. The failure to correct a material Y2K item could result in an interruption in, or a failure of, certain normal business activities or operations including the generation, distribution, and supply of electricity and natural gas. -27- Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Y2K issue creates uncertainty for the Company from potential issues with its own computer systems and from third parties with whom the Company deals on transactions worldwide. The Company's operations utilize systems and equipment provided by other organizations. As a result, Y2K readiness of suppliers, vendors, service providers or customers could impact the Company's operations. The Company is assessing the readiness of such constituent entities and the impacts on those entities that rely upon the Company's services. The Company is unable to determine at this time whether the consequences of Y2K failures of third parties will have a material impact on the Company's results of operations, liquidity or financial condition. The Company has commenced, for all of its information systems, a Y2K date conversion project to address all necessary code changes, testing and implementation in order to resolve the Y2K issue. The Company created a worldwide Y2K project team to identify, assess and correct all of its information technology (IT) and non-IT systems, as well as, identify and assess third party systems. The Company has identified and assessed substantially all of its IT and non-IT systems and is currently in the process of repairing or replacing those systems which it believes are not Year 2000 compliant. As of June 30, 1999, the Company is approximately 98% complete in repairing or replacing those systems. The Company expects to be 100% complete of correcting, testing, and compliance by October 1999. Total Y2K expenditures, for both repairing or replacing non-compliant systems and contingency planning, are expected to total approximately $22.3 million. Through June 30, 1999, the Company has paid approximately $14.8 million of Y2K expenditures. The Company has renovated or replaced several non-compliant systems to gain enhanced functionalities. The cost of these types of renovations and replacements is not reported herein since their development and installation were not driven by Y2K concerns. The Company is not aware of any additional material costs necessary to bring all of its systems into compliance however, there is no assurance that additional costs will not be incurred. A contingency plan identifying credible worst-case scenarios is being developed. The contingency plan is comprised of both mitigation and recovery aspects. Mitigation entails planning to reduce the impact of unresolved year 2000 problems, and recovery entails planning to restore services in the event that year 2000 problems occur. It is expected that the contingency plan will be finalized in the third quarter of 1999. MEC participated in a contingency planning drill coordinated by the North American Electric Reliability Council on April 9, 1999, and intends to participate in a second drill on September 8-9, 1999. Although management believes that the Y2K project will be substantially complete before January 1, 2000, any unforeseen failures of the Company's and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business. 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 -28- 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, uncertainties relating to domestic and international (and in particular, Indonesia) 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. -29- PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS. - ------ ------------------ As of June 30, 1999, there are no material outstanding lawsuits against the Company; however see Note 6, Commitments and Contingencies regarding litigation involving the Company's projects and subsidiaries. ITEM 2 CHANGES IN SECURITIES. - ------ ---------------------- Not applicable. ITEM 3 DEFAULTS ON SENIOR SECURITIES. - ------ ------------------------------ Not applicable. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------ ---------------------------------------------------- The Company held its 1999 Annual Meeting of Shareholders on May 20, 1999. At the Annual Meeting, shareholders voted on two issues. The results of the votes are as follows: 1. Vote regarding election of Class I directors nominated by the Board of Directors. For Withheld ---------- --------- Judith E. Ayres 48,441,474 1,463,635 Stanley J. Bright 48,441,240 1,463,869 Jack W. Eugster 48,433,529 1,471,580 David L. Sokol 48,431,031 1,474,078 David E. Wit 48,433,696 1,471,413 2. Vote regarding ratification of the appointment of Deloitte & Touche as the Company's auditors for fiscal year 1999. For Against Abstaining ---------- ------- ---------- 49,828,538 53,691 22,880 ITEM 5 OTHER INFORMATION. - ------ ------------------ Not applicable. -30- ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K. - ------ --------------------------------- (A) EXHIBITS: Exhibits Filed Herewith - ----------------------- Exhibit 10 - Restated Deferred Compensation Plan - Board of Directors Exhibit 11 - Calculation of Earnings Per Share. Exhibit 15 - Awareness Letter of Independent Accountants. Exhibit 27 - Financial Data Schedule. (B) REPORTS ON FORM 8-K During the quarter ended June 30, 1999 the Company filed the following: (i) Form 8-K/A dated May 14, 1999 amending Form 8-K dated February 26, 1999 and filed on March 15, 1999 and Form 8-K dated March 12, 1999 and filed March 26, 1999, and providing required financial information relating to the MHC Inc. (formerly MidAmerican Energy Holdings Company) merger, the CE Generation sale and the Coso Partnerships sale. -31- 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 11, 1999 /s/ Patrick J. Goodman ----------------------------------------------- Patrick J. Goodman Senior Vice President & Chief Financial Officer -32- EXHIBIT INDEX Exhibit No. - ----------- 10 Restated Deferred Compensation Plan - Board of Directors 11 Calculation of Earnings Per Share 15 Awareness Letter of Independent Accountants 27 Financial Data Schedule -33- EX-10 2 RESTATED DEFERRED COMPENSATION PLAN - BOD MIDAMERICAN ENERGY HOLDINGS COMPANY RESTATED DEFERRED COMPENSATION PLAN BOARD OF DIRECTORS ARTICLE I ESTABLISHMENT AND PURPOSE 1.1 BACKGROUND OF PLAN. MidAmerican Energy Holdings Company presently maintains a deferred compensation plan for its Board of Directors. This restated Plan shall replace that Plan if the Merger, as defined in Section 1.4 below closes in 1999, and shall replace that Plan as of the closing date of the Merger. The Plan shall be maintained as an unfunded plan of deferred compensation for its Board of Directors. 1.2 PURPOSE OF PLAN. The purpose of this Plan is to provide the Company's Board of Directors with an additional way to defer portions of their Board of Directors fees. 1.3 APPLICABILITY OF PLAN. The provisions of this Plan are applicable to members of the Company's Board of Directors who serve on the Board on or after January 1, 1999, and, with respect to amounts deferred under any Predecessor Plan, are applicable to participants who still have account balances under any such Plan. This Plan shall not accept any deferrals with respect to any Director fees payable after the closing date of the Merger. 1.4 MERGER OF PREDECESSOR PLANS. For ease of administration, and in recognition of the need to change earnings credit and method of valuation in the Predecessor Plan in light of the anticipated acquisition of MidAmerican Energy Holdings Company by CalEnergy Company, Inc. (through a merger of a subsidiary of CalEnergy with and into MidAmerican Energy Holdings Company ("Merger")), the accounts under the Predecessor Plan are hereby merged into the Plan, effective as of the date of closing of the Merger. ARTICLE 2 DEFINITIONS Whenever used in this Plan, the following terms shall have the meanings set forth below unless otherwise expressly provided. When the defined meaning is intended, the term is capitalized. The definition of any term in the singular shall also include the plural, whichever is appropriate in the context. 2.1 ACCOUNT. Account means the bookkeeping account maintained for each Participant that represents the Participant's total interest under the Plan as of any Valuation Date. It shall also consist of any accounts transferred from Predecessor Plans. A Participant shall have a fully vested and nonforfeitable interest at all times in his or her Account. 2.2 BENEFICIARY. Beneficiary means the person or persons designated by the Participant to receive any benefits payable from the Participant's Account after his or her death. Each Participant shall designate his or her Beneficiary (or change this designation) at a time and in a manner specified by the Committee. If no person is designated as a Beneficiary, if a designation is revoked, or if no designated Beneficiary survives the Participant, the Beneficiary shall be the Participant's estate. 2.3 CODE. Code means the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. A reference to a particular section of the Code shall also include the regulations promulgated under such section. 2.4 COMMITTEE. Committee means the Compensation Committee established by the Board of Directors of the Company. 2.5 COMPANY. Company means MidAmerican Energy Holdings Company. 2.6 DIRECTOR. Director means any person serving as a member of the Board of Directors of the Company. 2.7 INVESTMENT FUND. Investment Fund means an investment benchmark or fund designated by the Committee as an investment medium for the hypothetical investment of a Participant's Account. There shall be a choice between the S&P 500 Stock Index Benchmark, the Lehman Brothers Aggregate Bond Index Benchmark and the Stable Fund Fixed Rate Benchmark. The Committee shall have the discretion to establish and terminate investment benchmarks or funds as it may deem appropriate. (a) S&P 500 Stock Index Benchmark means the S&P 500 Stock Index Value as published by Standard and Poor as of the end of each business day, including dividends reinvested. (b) Lehman Brothers Aggregate Bond Index Benchmark means the Aggregate Bond Index Value as published by Lehman Brothers as of the end of each business day. (c) Stable Fund Fixed Rate Benchmark shall be an account in which the credits in the account do not fluctuate in value, and the values in the account are credited with an annual interest rate, compounded annually. The annual interest rate shall be set for each calendar year based on the one-year U.S. Treasury Bill rate on October 15 in -2- the prior year (or the previous business day if October 15 is not a business day), except that for 1999, the rate shall be 4.3%. 2.8 PARTICIPANT. Participant means a Director who has elected to participate in the Plan. It also means any person with an account balance under this Plan. 2.9 PLAN. Subsequent to the closing date of the Merger, Plan means this MidAmerican Energy Holdings Company Restated Deferred Compensation Plan - Board of Directors, as it may be amended from time to time. Prior to the closing date of the Merger, Plan means the MidAmerican Energy Holdings Company Deferred Compensation Plan - Board of Directors in existence prior to this restated Plan. 2.10 PLAN YEAR. Plan Year means the calendar year. 2.11 PREDECESSOR PLAN. The following plan shall be considered a Predecessor Plan: (a) MidAmerican Energy Holdings Company Deferred Compensation Plan - Board of Directors 2.12 VALUATION DATE. Valuation Date means the last business day of each calendar year and any other date that the Committee selects in its sole discretion for the revaluation and adjustment of Accounts. ARTICLE 3 PARTICIPATION 3.1 PARTICIPATION. A Participant with an Account under the Plan as of the closing date of the Plan shall continue to be a Participant under the Plan until all amounts have been distributed from his or her Account. ARTICLE 4 DEFERRAL ELECTIONS 4.1 NO DEFERRALS AFTER MERGER. Following the closing date of the Merger, no additional deferrals shall be made or credited under this Plan with respect to any Director fees payable after such date except for Director fees earned for services rendered before such date. ARTICLE 5 PARTICIPANTS' ACCOUNTS 5.1 INVESTMENT OF 1999 DEFERRALS. With respect to each deferral election a Participant made under this Plan for 1999 prior to the closing date of the Merger, the Participant shall elect in writing, -3- prior to the closing date of the Merger, to hypothetically deem to have the deferrals made on his or her behalf invested in any one or more of the Investment Funds in 1 percent increments. The account value for each amount deferred shall be determined based on the Investment Fund's value on the date the amount deferred would have otherwise been paid. This investment election shall supersede and replace the investment election made by the Participant with respect to amounts deferred for 1999 under the Plan prior to the closing date of the Merger. 5.2 INVESTMENT CHANGES FOR PREDECESSOR PLANS. With respect to account balances in the Predecessor Plan, if the valuation of any account is dependent upon the book value or fair market value of MidAmerican Energy Holdings Company common stock, or if earnings on an account are determined by the dividend rate on MidAmerican Energy Holdings Company common stock, each Participant who has such an account balance shall file an election form with the Committee prior to, or within fifteen (15) days after, the closing date of the Merger, designating, pursuant to the procedures in section 5.1, the Investment Funds in which such account is deemed to be invested. To the extent the value of an account, as of the closing date of the Merger, is based on the value of MidAmerican Energy Holdings Company common stock, the value of each stock unit in any such account shall be deemed to be $27.15. In any account based on a fixed value with crediting of interest only, but which varies in the interest rate credited from time to time, interest on the account shall be credited through date of closing of the Merger. Amounts converted to the Investment Funds as of the closing date of the Merger shall be converted based on the Investment Fund benchmark values on the date of closing. 5.3 CHANGES IN INVESTMENTS. A Participant may change the hypothetical investment allocation in his or her account no more than once during any calendar quarter by filing an appropriate form with the Committee (or its designated administrative representative) specifying the change to be made. The change shall be processed within five (5) business days of receipt of the change request by the Committee. 5.4 VALUATION OF ACCOUNTS. (a) ALLOCATION OF EARNINGS AND LOSSES. A Participant's Account shall be adjusted as of each Valuation Date to reflect any gains or losses that would have been credited or debited to the Account if it had actually been invested in the manner described in section 5.1. Accounts where an investment change request has been received between these dates will be credited or charged for any investment gains or losses since the last Valuation Date through the effective date of the investment change. -4- (b) CHARGES AGAINST ACCOUNT. Any payments made to a Participant or Beneficiary under Article 6 shall be charged against the Participant's Account. 5.5 FINANCING. The benefits under this Plan shall be paid out of the general assets of the Company, except to the extent they are paid from the assets of a grantor trust established by the Company to pay these benefits. 5.6 UNSECURED INTEREST. No Participant shall have any interest whatsoever in any specific asset of the Company. To the extent that any person acquires a right to receive payments under this Plan, this right shall be no greater than the right of any unsecured general creditor of the Company. 5.7 NONTRANSFERABILITY. In no event shall the Company make any payments under this Plan to any assignee or creditor of a Participant or Beneficiary. Prior to the time of payment hereunder, no Participant or Beneficiary shall have any right by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law. ARTICLE 6 PAYMENT OF ACCOUNTS 6.1 CONDITIONS ON RIGHT TO RECEIVE PAYMENT. A Participant shall not be entitled to payment of any deferred compensation from his or her account until the time elected by the Participant as set forth on the written deferral election form filed with the Corporate Secretary of the Company, or until his or her death or permanent disability, whichever occurs first. The election form shall state the date the payment shall commence and the period over which payment shall be made. The Participant may elect to receive deferred compensation and accumulated earnings thereon in his or her Account either in a lump sum payment or in annual installments. Once an election is filed, it shall not be changed except by approval of the Board of Directors of the Company. If annual installments are selected, each annual installment shall not be less than an amount equal to the value of the account at the beginning of the Plan Year in which distribution is to be made divided by the life expectancy of the Participant at the beginning of such Plan Year (or the joint life expectancy of the Participant and spouse if the Participant is married). Each annual installment shall be made within fifteen (15) days following the first day of each Plan Year. If an election is made to receive a lump sum payment, payment shall be made within fifteen (15) days following the first day of the Plan Year in which payment is to be made, and the amount of the lump sum payment shall be equal to the value of the account as of December 31 of the preceding Plan Year. Payment of a lump sum amount or any annual installment shall be made in cash. -5- 6.2 CHANGE IN ELECTION UNDER PREDECESSOR PLAN. Except as provided below, with respect to elections filed for deferred amounts under a Predecessor Plan, such election as to method and timing of payment shall continue to be applicable to the accounts transferred from a Predecessor Plan. A Participant may file a revised election with respect to the account transferred from a Predecessor Plan. The revised election form shall specify the new timing and method of payout (either lump sum or annual installments). If the new election serves to accelerate the payout of a lump sum or to elect a lump sum payment where annual installments had been previously elected, and if the new lump sum election is for payment to occur within three years of the date of closing of the Merger, the value of the account shall be reduced by 6% as of the new date elected for payout. If the new election form does not accelerate payments to within three years following the date of closing of the Merger, no reduction shall be made in the value of the account to be paid. A change may be made with respect to revising the timing of payout of substantially equal annual installments as long as the final annual payment does not occur any earlier than January 1, 2002. Any new elections as to timing or method of payout must be made within fifteen (15) days following the closing date of the Merger. 6.3 PAYMENT IN THE EVENT OF DEATH. In the event of the death of a Participant occurring either before the commencement of payment or before the full balance of the Participant's account has been paid, the unpaid balance in the Account shall be paid in a lump sum to the Participant's designated beneficiary or estate, payment shall be made within thirty (30) days following the date of death. The value of the Account shall be based upon the value of the Investment Funds in his or her account on the date of death (or on the preceding business day, if date of death is not a business day). ARTICLE 7 GENERAL PROVISIONS 7.1 GENERAL PROVISIONS. (a) UNFUNDED PLAN. (i) This Plan is intended to be an unfunded plan maintained primarily to provide benefits to a "select group of management or highly compensated employees" within the meaning of Section 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and as amended from time to time or any successor thereto, and, therefore, is further intended to be exempt from the provisions of Parts 2, 3 and 4 of -6- Title I of ERISA. Accordingly, the Compensation Committee may terminate the Plan for any or all Participants in order to achieve and maintain this intended result, provided that previously accrued benefits hereunder shall not be reduced or otherwise adversely affected without the written consent of the affected Participants. (ii) The obligations hereunder shall at all times be unsecured and payments with respect to any benefits hereunder shall be paid out of the general operating revenue of the Company. A trust may be established to provide for the payment of benefits to Participants hereunder as long as the assets of such trust are subject to the claims of general creditors of the Company with respect to the deferrals (and earnings thereon, if applicable). (b) WITHHOLDING. The Company shall have the right to require Participants to remit to the Company an amount sufficient to satisfy Federal, state and local tax withholding requirements, or to deduct from any or all payments made pursuant to the Plan amounts sufficient to satisfy such withholding tax requirements. (c) COSTS OF THE PLAN. All costs of implementing and administering the Plan shall be borne by the Company. (d) NON-ALIENATION OF BENEFITS. No right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or claims of the person entitled to such benefit. If any Participant or designated beneficiary hereunder should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit hereunder, then such right or benefit shall, in the discretion of the Compensation Committee, cease, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant or the designated beneficiary, his or her spouse, children, or other dependents, or any of them, in such manner and in such proportion as the Compensation Committee may deem proper. (e) SUCCESSORS. All obligations of the Company under the Plan shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the direct or indirect result of a merger or reorganization involving the Company or the purchase or other -7- acquisition, of all or substantially all of the business or assets of the Company. (f) AMENDMENT OR TERMINATION OF PLAN. (i) The Board of Directors reserves the right at any time and from time to time to amend, suspend or terminate the Plan without the consent of any Participant or other person claiming a right under the Plan. (ii) Any amendment or termination of this Plan shall not adversely affect the rights of Participants or designated beneficiaries to payments of amounts credited to Participants in their Account at the time of such amendment or termination. (g) SEPARABILITY. If any term or provision of this Plan as presently in effect or as amended from time to time, or the application thereof to any payments or circumstances, shall to any extent be invalid or unenforceable, the remainder of the Plan, and the application of such term or provision to payments or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term or provision of the Plan shall be valid and enforced to the fullest extent permitted by law. (h) CONSTRUCTION. The provisions of this Plan shall be construed, administered and enforced according to the laws of the State of Iowa. (i) TITLES. The titles of the Articles and Sections herein are included for convenience of reference only and shall not be construed as part of this Plan, or have any effect upon the meaning of the provisions hereof. (j) IMPOSSIBILITY OF ACTION. In case it becomes impossible for the Company to perform any act under this Plan, that act shall be preformed which in the judgment of the Company will most nearly carry out the intent and purposes of this Plan. All parties concerned shall be bound by any such acts performed under such conditions. (k) AUTHORIZED OFFICERS. Whenever the Company under the terms of the Plan is permitted and required to perform any act or matter or thing, it shall be done and performed by a duly authorized officer of the Company. -8- L:\TCH\MIDAMER\EXHIBIT.I EX-11 3 COMPUTATION OF PER SHARE EARNINGS
MIDAMERICAN ENERGY HOLDINGS COMPANY CALCULATION OF EARNINGS PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ----------- ------------ ----------- Actual weighted average shares outstanding for the period ............. 60,037,264 60,234,895 59,621,665 60,658,253 Dilutive stock options and warrants using average market prices ............ 955,190 784,037 841,625 655,885 Additional dilutive stock options assuming conversion of convertible preferred securities of subsidiary trusts ........ 11,645,456 13,326,683 12,481,425 13,326,683 ------------ ----------- ------------ ----------- Diluted shares outstanding ............... 72,637,910 74,345,615 72,944,715 74,640,821 ============ =========== ============ =========== Income before extraordinary item ......... $ 61,061 $ 32,466 $ 100,852 $ 59,761 Extraordinary item, net of tax ........... (5,366) - (36,886) - ------------ ----------- ------------ ----------- Net income available to common stockholders .................... $ 55,695 $ 32,466 $ 63,966 $ 59,761 ============ =========== ============ =========== Income per share before extraordinary item ..................... $ 1.02 $ .54 $ 1.69 $ .99 Extraordinary item ....................... (.09) - (.62) - ------------ ----------- ------------ ----------- Net income per share ..................... $ .93 $ .54 $ 1.07 $ .99 ============ =========== ============ =========== Diluted income per share before extraordinary item(1) .................. $ .91 $ .51 $ 1.53 $ .95 ============ =========== ============ =========== Diluted income per share based on SEC interpretive release No. 34-9083(1) .... $ .84 $ .51 $ 1.02 $ .95 ============ =========== ============ ===========
(1)-Net income available to common stockholders for the three and six months ended June 30, 1999 was increased by dividends on convertible preferred securities of subsidiary trusts, net of tax effect, of $4,984 and $10,455, respectively, compared with $5,471 and $10,942, respectively, for the same periods in 1998. EX-15 4 INDEPENDENT ACCOUNTANTS' AWARENESS LETTER 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 interim financial information of MidAmerican Energy Holdings Company for the three and six month periods ended June 30, 1999 and 1998 as indicated in our report dated July 26, 1999; 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, 1999, is incorporated by reference in Registration Statements No. 33-26256, No. 33-38431, No. 33-41152, No. 33-44934, No. 33-52147, No. 33-64897, No. 333-30395 and No. 333-74691 on Form S-8 and 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 11, 1999 EX-27 5 ART.5 FDS FOR 2ND QUARTER 10-Q
5 This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Holdings Company as of June 30, 1999, and the related consolidated statements of operations and cash flows for the six months ended June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0001081316 MIDAMERICAN ENERGY HOLDINGS COMPANY 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 632,892 130,079 471,152 0 0 0 6,148,451 486,795 10,848,720 0 6,272,303 551,598 147,196 0 906,703 10,848,720 0 1,973,460 0 1,356,739 22,902 0 215,585 187,488 63,292 100,852 0 (36,886) 0 63,966 1.07 1.02
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