-----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, KUhFdsG4M5MWZbHKXivv0Yvj/kd4wAxaot+CD1YrM2cIU/FKP/iwX5JyfFskJjj1 acpprT4kmL3sgFdC6ATGXQ== 0000928576-03-000004.txt : 20030806 0000928576-03-000004.hdr.sgml : 20030806 20030806161051 ACCESSION NUMBER: 0000928576-03-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY CO CENTRAL INDEX KEY: 0000928576 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 421425214 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-15387 FILM NUMBER: 03826375 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: P O BOX 657 CITY: DES MOINES STATE: IA ZIP: 50306-9244 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 9244 CITY: DES MOINES STATE: IA ZIP: 50306-9244 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN FUNDING LLC CENTRAL INDEX KEY: 0001098296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 470819200 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-90553 FILM NUMBER: 03826376 BUSINESS ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303 BUSINESS PHONE: 515-242-4300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303 10-Q 1 mecllc630-2003.txt MEC - MIDAMERICAN FUNDING LLC 10Q 6-30-2003 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, 2003 Commission Registrant's Name, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. - ----------- ---------------------------- ------------------ 333-90553 MIDAMERICAN FUNDING, LLC 47-0819200 (AN IOWA LIMITED LIABILITY COMPANY) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (AN IOWA CORPORATION) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of July 25, 2003, all of the member's equity of MidAmerican Funding, LLC was held by its parent company, MidAmerican Energy Holdings Company. As of July 25, 2003, all 70,980,203 outstanding shares of MidAmerican Energy Company's voting stock were held by its parent company, MHC Inc., a direct, wholly owned subsidiary of MidAmerican Funding, LLC. This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and MidAmerican Energy Company. Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, MidAmerican Energy Company makes no representation as to information relating to any other subsidiary of MidAmerican Funding, LLC. TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements................................................ 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................21 Item 3. Quantitative and Qualitative Disclosures About Market Risk..........37 Item 4. Controls and Procedures.............................................37 PART II. OTHER INFORMATION Item 1. Legal Proceedings...................................................38 Item 2. Changes in Securities and Use of Proceeds...........................38 Item 3. Defaults Upon Senior Securities.....................................38 Item 4. Submission of Matters to a Vote of Security Holders.................38 Item 5. Other Information...................................................38 Item 6. Exhibits and Reports on Form 8-K....................................38 SIGNATURES....................................................................39 EXHIBIT INDEX ................................................................40 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Page MidAmerican Energy Company Independent Accountants' Report......................................... 4 Consolidated Balance Sheets............................................. 5 Consolidated Statements of Income....................................... 6 Consolidated Statements of Comprehensive Income......................... 7 Consolidated Statements of Cash Flows................................... 8 Notes to Consolidated Financial Statements.............................. 9 MidAmerican Funding, LLC Independent Accountants' Report.........................................14 Consolidated Balance Sheets.............................................15 Consolidated Statements of Income.......................................16 Consolidated Statements of Comprehensive Income.........................17 Consolidated Statements of Cash Flows...................................18 Notes to Consolidated Financial Statements..............................19 -3- INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Shareholder MidAmerican Energy Company Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Company and subsidiaries (the "Company") as of June 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2003 and 2002, and of cash flows for the six-month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our reviews 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 and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Energy Company and subsidiaries as of December 31, 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, 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, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa July 30, 2003 -4- MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (In thousands)
AS OF --------------------------- JUNE 30, DECEMBER 31, 2003 2002 ----------- ------------ (UNAUDITED) ASSETS UTILITY PLANT, NET Electric .............................................. $ 4,991,165 $ 4,731,002 Gas ................................................... 914,284 900,209 ----------- ----------- 5,905,449 5,631,211 Accumulated depreciation and amortization ............. (3,158,552) (3,011,123) ----------- ----------- 2,746,897 2,620,088 Construction work in progress ......................... 106,017 205,988 ----------- ----------- 2,852,914 2,826,076 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ............................. 94,129 28,500 Receivables, net ...................................... 256,170 321,321 Inventories ........................................... 49,050 88,492 Other ................................................. 17,338 28,655 ----------- ----------- 416,687 466,968 ----------- ----------- INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 286,069 273,864 REGULATORY ASSETS ..................................... 284,395 192,514 OTHER ASSETS .......................................... 35,955 52,457 ----------- ----------- TOTAL ASSETS .......................................... $ 3,876,020 $ 3,811,879 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity ........................... $ 1,311,171 $ 1,307,067 MidAmerican Energy preferred securities ............... 31,759 31,759 Long-term debt, excluding current portion ............. 1,084,903 947,691 ----------- ----------- 2,427,833 2,286,517 ----------- ----------- CURRENT LIABILITIES Notes payable ......................................... - 55,000 Current portion of long-term debt ..................... 56,833 105,727 Accounts payable ...................................... 131,280 239,531 Taxes accrued ......................................... 90,868 83,063 Interest accrued ...................................... 10,479 9,731 Other ................................................. 52,542 55,464 ----------- ----------- 342,002 548,516 ----------- ----------- OTHER LIABILITIES Deferred income taxes ................................. 427,049 424,153 Investment tax credits ................................ 54,698 56,886 Asset retirement obligations .......................... 283,141 159,757 Regulatory liabilities ................................ 137,734 118,011 Other ................................................. 203,563 218,039 ----------- ----------- 1,106,185 976,846 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES .................. $ 3,876,020 $ 3,811,879 =========== ===========
The accompanying notes are an integral part of these financial statements. -5- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- ------------------------ 2003 2002 2003 2002 -------- -------- ---------- ---------- (UNAUDITED) OPERATING REVENUES Regulated electric .................... $329,287 $325,810 $ 644,229 $ 632,588 Regulated gas ......................... 155,075 126,070 568,854 346,127 Nonregulated .......................... 51,521 40,808 137,996 88,257 -------- -------- ---------- ---------- 535,883 492,688 1,351,079 1,066,972 -------- -------- ---------- ---------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity ... 82,454 72,868 170,872 145,317 Cost of gas sold .................... 111,747 86,805 441,274 235,319 Other operating expenses ............ 89,221 107,592 171,869 206,191 Maintenance ......................... 37,447 31,751 65,729 60,696 Depreciation and amortization ....... 77,797 71,345 146,282 140,669 Property and other taxes ............ 19,373 19,295 39,930 36,589 -------- -------- ---------- ---------- 418,039 389,656 1,035,956 824,781 -------- -------- ---------- ---------- Nonregulated: Cost of sales ....................... 43,360 32,846 120,749 73,809 Other ............................... 4,336 4,597 8,068 10,226 -------- -------- ---------- ---------- 47,696 37,443 128,817 84,035 -------- -------- ---------- ---------- Total operating expenses ............ 465,735 427,099 1,164,773 908,816 -------- -------- ---------- ---------- OPERATING INCOME ...................... 70,148 65,589 186,306 158,156 -------- -------- ---------- ---------- NON-OPERATING INCOME Interest and dividend income .......... 1,383 2,831 2,509 5,277 Other income .......................... 5,461 2,356 9,899 4,721 Other expense ......................... (523) (2,583) (872) (4,743) -------- -------- ---------- ---------- 6,321 2,604 11,536 5,255 -------- -------- ---------- ---------- FIXED CHARGES Interest on long-term debt ............ 18,012 18,302 36,570 34,888 Other interest expense ................ 927 883 1,946 1,708 Preferred dividends of subsidiary trust - - - 1,574 Allowance for borrowed funds .......... (1,092) (669) (2,683) (1,265) -------- -------- ---------- ---------- 17,847 18,516 35,833 36,905 -------- -------- ---------- ---------- INCOME BEFORE INCOME TAXES ............ 58,622 49,677 162,009 126,506 INCOME TAXES .......................... 25,490 20,426 70,185 53,871 -------- -------- ---------- ---------- NET INCOME ............................ 33,132 29,251 91,824 72,635 PREFERRED DIVIDENDS ................... 327 1,430 764 2,278 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK .............. $ 32,805 $ 27,821 $ 91,060 $ 70,357 ======== ======== ========== ==========
The accompanying notes are an integral part of these financial statements. -6- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2003 2002 2003 2002 -------- -------- -------- -------- (UNAUDITED) EARNINGS ON COMMON STOCK ..................... $ 32,805 $ 27,821 $ 91,060 $ 70,357 -------- -------- -------- -------- OTHER COMPREHENSIVE LOSS Unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) during period- Before income taxes ...................... 967 682 11,635 (2,204) Income tax (expense) benefit ............. (402) (283) (4,837) 916 -------- -------- -------- -------- 565 399 6,798 (1,288) -------- -------- -------- -------- Less realized gains (losses) reflected in earnings on common stock during period- Before income taxes .................... 2,112 1,586 12,843 (380) Income tax (expense) benefit ........... (878) (659) (5,339) 158 -------- -------- -------- -------- 1,234 927 7,504 (222) -------- -------- -------- -------- Other comprehensive loss ..................... (669) (528) (706) (1,066) -------- -------- -------- -------- COMPREHENSIVE INCOME ......................... $ 32,136 $ 27,293 $ 90,354 $ 69,291 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. -7- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED JUNE 30, ----------------------- 2003 2002 --------- ---------- (UNAUDITED) NET CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 91,824 $ 72,635 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ..................................... 146,856 141,229 Deferred income taxes and investment tax credit, net .............. 1,210 1,771 Amortization of other assets and liabilities ...................... 14,105 19,789 Cash outflows of accounts receivable securitization ............... - (8,000) Impact of changes in working capital .............................. 24,160 (27,069) Other, net ........................................................ (2,045) 18,416 --------- --------- Net cash provided by operating activities ....................... 276,110 218,771 --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ................................... (151,637) (135,911) Less non-cash and change in accrued utility construction expenditures (4,290) 1,988 Quad Cities Station decommissioning trust fund ...................... (4,150) (4,150) Nonregulated capital expenditures ................................... (557) (381) Other investing activities, net ..................................... 7,496 66 --------- --------- Net cash used in investing activities ............................. (153,138) (138,388) --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ...................................................... (87,014) (32,278) Issuance of long-term debt, net ..................................... 272,572 391,236 Retirement of long-term debt, including reacquisition cost .......... (187,901) (2,478) Reacquisition of preferred securities ............................... - (126,680) Net decrease in notes payable ....................................... (55,000) (89,350) --------- --------- Net cash provided by (used in) financing activities ............... (57,343) 140,450 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 65,629 220,833 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,500 20,020 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 94,129 $ 240,853 ========= ========= ADDITIONAL CASH FLOW INFORMATION Interest paid, net of amounts capitalized ........................... $ 32,114 $ 21,390 ========= ========= Income taxes paid, net .............................................. $ 63,240 $ 28,723 ========= =========
The accompanying notes are an integral part of these financial statements. -8- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The consolidated financial statements included herein have been prepared by MidAmerican Energy Company ("MidAmerican Energy"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Energy, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation. All significant intercompany transactions have been eliminated. Although MidAmerican Energy believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican Energy's latest Annual Report on Form 10-K. MidAmerican Energy is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc ("MHC"). MHC is a direct, wholly owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), whose sole member is MidAmerican Energy Holdings Company. 2. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, MidAmerican Energy adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Concurrent with the recognition of the liability, the estimated cost of an asset retirement obligation is capitalized and depreciated over the remaining life of the asset. On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset retirement obligation ("ARO") liabilities; $12.6 million of associated ARO assets, net of accumulated depreciation; $101.8 million of regulatory assets; and reclassified $1.0 million of accumulated depreciation to the ARO liability in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not impact net income. The initial ARO liability recognized includes $266.5 million that pertains to obligations associated with the decommissioning of the Quad Cities Station. The $266.5 million includes a $159.8 million nuclear decommissioning liability that had been recorded as of December 31, 2002. As of June 30, 2003, $173.1 million of assets reflected in Investments and Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for satisfying the Quad Cities Station obligation. The change in the balance of the ARO liability during the first half of 2003 is summarized as follows (in thousands): Balance January 1, 2003 ...... $275,228 Capitalized accretion ........ 7,913 -------- Balance June 30, 2003 ........ $283,141 ======== Capitalized accretion is charged to a regulatory asset. In addition to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued for the cost of removing other electric and gas assets through its depreciation rates, in accordance with accepted regulatory practices. As of June 30, 2003, the estimated amount of such accruals included in accumulated depreciation was approximately $395 million based on the cost of removal component in current depreciation rates. -9- On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements and will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for MidAmerican Energy and MidAmerican Funding for contracts entered into or modified after June 30, 2003. MidAmerican Energy and MidAmerican Funding are evaluating the impact of adopting the requirements of SFAS No. 149. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for MidAmerican Funding and MidAmerican Energy for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the third quarter of 2003. MidAmerican Funding and MidAmerican Energy do not currently have financial instruments within the scope of SFAS No. 150. 3. ENVIRONMENTAL MATTERS a. Manufactured Gas Plant Facilities: The United States Environmental Protection Agency ("EPA"), and the state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute a health or environmental risk, and whether MidAmerican Energy has any responsibility for remedial action. MidAmerican Energy is actively working with the regulatory agencies and has received regulatory closure on four sites. MidAmerican Energy is continuing to evaluate several of the sites to determine the future liability, if any, for conducting site investigations or other site activity. MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be $16 million to $54 million. As of June 30, 2003, MidAmerican Energy has recorded a $19.0 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. MidAmerican Energy projects that these amounts will be incurred or paid over the next four years. The estimated liability is the cumulation of a site-specific cost evaluation process. First, a determination is made as to whether MidAmerican Energy has potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at the site. If so, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. If it is determined during the preliminary investigation that remedial action is required, then the best estimate of the costs is accrued. The estimate includes incremental direct costs of remediation, site monitoring costs and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. Insurance recoveries have been received for -10- some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board ("IUB"), and are recorded as a regulatory liability. Although the timing of potential incurred costs and recovery of such costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position, results of operations or cash flows. b. Air Quality: In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). The standards were subjected to legal proceedings, and in February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. As a result of a decision rendered by the United States Circuit Court of Appeals for the District of Columbia, the EPA is moving forward in implementation of the ozone and fine particulate standards and is analyzing existing monitored data to determine attainment status. The impact of the new standards on MidAmerican Energy is currently unknown. MidAmerican Energy's generating stations may be subject to emission reductions if the stations are located in nonattainment areas or contribute to nonattainment areas in other states. As part of state implementation plans to achieve attainment of the standards, MidAmerican Energy could be required to install control equipment on its generating stations or decrease the number of hours during which these stations operate. The ozone and fine particulate matter standards could, in whole or in part, be superceded by one of a number of multi-pollutant emission reduction proposals currently under consideration at the federal level. In July 2002, legislation was introduced in Congress to implement the Administration's "Clear Skies Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen oxides and mercury through a cap-and-trade system. Reductions would begin in 2008 with additional emission reductions being phased in through 2018. While legislative action is necessary for the Clear Skies Initiative or other multi-pollutant emission reduction initiatives to become effective, MidAmerican Energy has implemented a planning process that forecasts the site-specific controls and actions required to meet emissions reductions of this nature. On April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy filed with the IUB its first multi-year plan and budget for managing regulated emissions from its generating facilities in a cost-effective manner. An administrative law judge issued a ruling approving MidAmerican Energy's plan but disallowing the proposed recovery of plan costs through a tracker mechanism. MidAmerican Energy appealed the disallowance of the tracker and asked the IUB to declare the tracker moot as it would not be used until at least 2010 if the IUB approves a pending settlement that will "freeze" MidAmerican Energy's Iowa electric rates through 2010. The Iowa Office of Consumer Advocate's appealed asking the IUB to find that Iowa law allows the IUB to conduct a separate review of plan investments for reasonableness when the costs are proposed for recovery in a rate case. On July 17, 2003, the IUB issued an order affirming the administrative law judge's decision. Accordingly, the IUB has rejected the future application of a tracker mechanism to recover emission reduction costs. However, the approved expenditures will not be subject to a subsequent prudence review in a future electric rate case. In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the New Source Review and the New Source Performance Standards of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy received requests from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for its Neal, Council Bluffs, Louisa and Riverside Energy Centers. MidAmerican Energy will continue to respond to requests from the EPA and at this time cannot predict the outcome of these requests. -11- 4. RATE MATTERS Under a settlement agreement approved by the IUB on December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000, are effectively frozen through December 31, 2005. In approving that settlement, the IUB specifically allows the filing of electric rate design and/or cost of service rate changes that are intended to keep overall company revenue unchanged, but could result in changes to individual tariffs. The 2001 settlement agreement further provides that an amount equal to 50% of revenues associated with Iowa retail electric returns on equity between 12% and 14%, and 83.33% of revenues associated with Iowa retail electric returns on equity above 14%, in each year is recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investment. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Interest expense is accrued on the portion of the regulatory liability related to prior years. Beginning in 2002, the liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction, or capitalized financing costs, associated with generating plant additions. As of June 30, 2003 and December 31, 2002, the related regulatory liability reflected on the Consolidated Balance Sheets was $123.2 million and $102.9 million, respectively. Illinois law provides for Illinois earnings above a computed level of return on common equity to be shared equally between regulated retail electric customers and MidAmerican Energy. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which sharing must occur for 2002 was 14.03%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of electric assets. On November 8, 2002, the IUB approved a settlement agreement previously filed with it by MidAmerican Energy and the Iowa Office of Consumer Advocate. The settlement agreement provided for an increase in rates of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas customers and effectively froze base rates through November 2004. However, MidAmerican Energy will continue collecting fluctuations in gas costs through its purchased gas adjustment clause. The new rates were implemented for usage beginning November 25, 2002. 5. SEGMENT INFORMATION MidAmerican Energy has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense, income tax expense and equity in the net income or loss of investees are allocated to each segment. The energy delivery and transmission segments and substantially all of the generation segment are regulated as to rates, and other factors, related to services to external customers. For internal segment reporting purposes, MidAmerican Energy has developed transfer prices for services provided between the segments. MidAmerican Energy's external revenues by product and services are displayed on the Consolidated Statements of Income. -12- The following tables provide MidAmerican Energy's operating revenues, income before income taxes and total assets on an operating segment basis (in thousands):
Three Months Six Months Ended June 30, Ended June 30, ---------------------- -------------------------- 2003 2002 2003 2002 --------- --------- ----------- ----------- Operating revenues: External revenues - Generation ................. $ 108,172 $ 113,186 $ 265,708 $ 222,924 Energy delivery ............ 375,008 353,178 944,735 779,120 Transmission ............... 5,856 5,211 12,104 10,136 Marketing & sales .......... 46,847 21,113 128,532 54,792 --------- --------- ----------- ----------- Total .................... 535,883 492,688 1,351,079 1,066,972 --------- --------- ----------- ----------- Intersegment revenues - Generation ................. 148,689 161,285 279,044 292,327 Transmission ............... 14,486 13,801 28,973 27,601 Marketing & sales .......... 754 776 754 776 --------- --------- ----------- ----------- Total .................... 163,929 175,862 308,771 320,704 Intersegment eliminations .... (163,929) (175,862) (308,771) (320,704) --------- --------- ----------- ----------- Consolidated ............... $ 535,883 $ 492,688 $ 1,351,079 $ 1,066,972 ========= ========= =========== =========== Income before income taxes: Generation ................... $ 34,129 $ 26,307 $ 62,960 $ 41,173 Energy delivery .............. 12,967 11,286 73,547 63,432 Transmission ................. 10,605 10,928 23,047 20,844 Marketing & sales ............ 594 (274) 1,691 (1,221) --------- --------- ----------- ----------- Total ...................... 58,295 48,247 161,245 124,228 Preferred dividends .......... 327 1,430 764 2,278 --------- --------- ----------- ----------- Consolidated ............... $ 58,622 $ 49,677 $ 162,009 $ 126,506 ========= ========= =========== ===========
As of --------------------------- June 30, December 31, 2003 2002 ----------- ----------- Total assets: Generation ................... $ 1,411,294 $ 1,393,271 Energy delivery .............. 2,277,627 2,224,238 Transmission ................. 222,433 222,051 Marketing & sales ............ 40,072 52,143 ----------- ----------- Total ...................... 3,951,426 3,891,703 Reclassifications and intersegment eliminations(a) (75,406) (79,824) ----------- ----------- Consolidated ................. $ 3,876,020 $ 3,811,879 =========== =========== (a) Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables. -13- INDEPENDENT ACCOUNTANTS' REPORT Board of Managers and Member MidAmerican Funding, LLC Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries (the "Company") as of June 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2003 and 2002, and of cash flows for the six-month periods ended June 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our reviews 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 and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Funding, LLC and subsidiaries as of December 31, 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, 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, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa July 30, 2003 -14- MIDAMERICAN FUNDING, LLC CONSOLIDATED BALANCE SHEETS (In thousands)
AS OF --------------------------- JUNE 30, DECEMBER 31, 2003 2002 ----------- ----------- (UNAUDITED) ASSETS UTILITY PLANT, NET Electric .................................................. $ 4,991,165 $ 4,731,002 Gas ....................................................... 914,284 900,209 ----------- ----------- 5,905,449 5,631,211 Accumulated depreciation and amortization ................. (3,158,552) (3,011,123) ----------- ----------- 2,746,897 2,620,088 Construction work in progress ............................. 106,017 205,988 ----------- ----------- 2,852,914 2,826,076 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ................................. 94,226 28,915 Receivables, net .......................................... 260,115 321,698 Inventories ............................................... 49,050 88,492 Other ..................................................... 18,600 35,009 ----------- ----------- 421,991 474,114 ----------- ----------- INVESTMENTS AND NONREGULATED PROPERTY, NET ................ 340,905 333,382 GOODWILL .................................................. 1,275,143 1,275,143 REGULATORY ASSETS ......................................... 284,395 192,514 OTHER ASSETS .............................................. 36,241 52,755 ----------- ----------- TOTAL ASSETS .............................................. $ 5,211,589 $ 5,153,984 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Member's equity ........................................... $ 1,856,851 $ 1,867,119 MidAmerican Energy preferred securities ................... 31,759 31,759 Long-term debt, excluding current portion ................. 1,784,903 1,647,691 ----------- ----------- 3,673,513 3,546,569 ----------- ----------- CURRENT LIABILITIES Notes payable ............................................. - 55,000 Current portion of long-term debt ......................... 66,833 105,727 Accounts payable .......................................... 132,150 242,733 Taxes accrued ............................................. 94,459 85,987 Interest accrued .......................................... 26,260 25,487 Other ..................................................... 53,225 56,291 ----------- ----------- 372,927 571,225 ----------- ----------- OTHER LIABILITIES Deferred income taxes ..................................... 466,026 461,862 Investment tax credits .................................... 54,698 56,886 Asset retirement obligations .............................. 283,141 159,757 Regulatory liabilities .................................... 137,734 118,011 Other ..................................................... 223,550 239,674 ----------- ----------- 1,165,149 1,036,190 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES ...................... $ 5,211,589 $ 5,153,984 =========== ===========
The accompanying notes are an integral part of these financial statements. -15- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF INCOME (In thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------ -------------------------- 2003 2002 2003 2002 --------- ----------- ----------- ----------- (UNAUDITED) OPERATING REVENUES Regulated electric .......................... $ 329,287 $ 325,810 $ 644,229 $ 632,588 Regulated gas ............................... 155,075 126,070 568,854 346,127 Nonregulated ................................ 52,078 41,976 139,273 90,176 --------- ----------- ----------- ----------- 536,440 493,856 1,352,356 1,068,891 --------- ----------- ----------- ----------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity ......... 82,454 72,868 170,872 145,317 Cost of gas sold .......................... 111,747 86,805 441,274 235,319 Other operating expenses .................. 89,221 107,592 171,869 206,191 Maintenance ............................... 37,447 31,751 65,729 60,696 Depreciation and amortization ............. 77,797 71,345 146,282 140,669 Property and other taxes .................. 19,373 19,295 39,930 36,589 --------- ----------- ----------- ----------- 418,039 389,656 1,035,956 824,781 --------- ----------- ----------- ----------- Nonregulated: Cost of sales ............................. 43,390 33,041 120,896 74,135 Other ..................................... 5,407 6,342 10,157 13,779 --------- ----------- ----------- ----------- 48,797 39,383 131,053 87,914 --------- ----------- ----------- ----------- Total operating expenses .................. 466,836 429,039 1,167,009 912,695 --------- ----------- ----------- ----------- OPERATING INCOME ............................ 69,604 64,817 185,347 156,196 --------- ----------- ----------- ----------- NON-OPERATING INCOME Interest and dividend income ................ 1,223 4,513 2,465 8,757 Marketable securities gains and (losses), net 107 (306) 201 (3,524) Other income ................................ 6,652 3,879 11,809 12,842 Other expense ............................... (657) (2,720) (3,208) (5,014) --------- ----------- ----------- ----------- 7,325 5,366 11,267 13,061 --------- ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt .................. 29,793 30,269 60,133 58,822 Other interest expense ...................... 994 884 2,038 1,712 Preferred dividends of subsidiaries ......... 327 1,430 764 3,852 Allowance for borrowed funds ................ (1,092) (669) (2,683) (1,265) --------- ----------- ----------- ----------- 30,022 31,914 60,252 63,121 --------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES .................. 46,907 38,269 136,362 106,136 INCOME TAXES ................................ 20,614 15,564 59,716 45,003 --------- ----------- ----------- ----------- NET INCOME .................................. $ 26,293 $ 22,705 $ 76,646 $ 61,133 ========= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -16- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- (UNAUDITED) NET INCOME ................................................ $ 26,293 $ 22,705 $ 76,646 $ 61,133 -------- -------- -------- -------- OTHER COMPREHENSIVE LOSS Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) during period- Before income taxes ................................... 602 (1,697) 136 (8,614) Income tax (expense) benefit .......................... (211) 594 (48) 3,015 -------- -------- -------- -------- 391 (1,103) 88 (5,599) -------- -------- -------- -------- Less realized gains (losses) reflected in net income during period- Before income taxes ................................. 481 109 71 (2,931) Income tax (expense) benefit ........................ (169) (38) (25) 1,026 -------- -------- -------- -------- 312 71 46 (1,905) -------- -------- -------- -------- Net unrealized gains (losses) ..................... 79 (1,174) 42 (3,694) -------- -------- -------- -------- Unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) during period- Before income taxes ................................... 967 682 11,635 (2,204) Income tax (expense) benefit .......................... (402) (283) (4,837) 916 -------- -------- -------- -------- 565 399 6,798 (1,288) -------- -------- -------- -------- Less realized gains (losses) reflected in net income during period- Before income taxes ................................. 2,112 1,586 12,843 (380) Income tax (expense) benefit ........................ (878) (659) (5,339) 158 -------- -------- -------- -------- 1,234 927 7,504 (222) -------- -------- -------- -------- Net unrealized losses ............................. (669) (528) (706) (1,066) -------- -------- -------- -------- Other comprehensive loss .................................. (590) (1,702) (664) (4,760) -------- -------- -------- -------- COMPREHENSIVE INCOME ...................................... $ 25,703 $ 21,003 $ 75,982 $ 56,373 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. -17- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED JUNE 30, ---------------------- 2003 2002 --------- --------- (UNAUDITED) NET CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 76,646 $ 61,133 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ..................................... 146,950 141,781 Deferred income taxes and investment tax credit, net .............. 2,335 1,004 Amortization of other assets and liabilities ...................... 12,816 18,288 Loss from impairment of assets and investments .................... 2,069 2,913 Income on equity investments ...................................... (1,188) (6,388) Cash outflows of accounts receivable securitization ............... - (8,000) Impact of changes in working capital .............................. 23,900 (32,432) Other, net ........................................................ 7 18,298 --------- --------- Net cash provided by operating activities ....................... 263,535 196,597 --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ................................... (151,637) (135,911) Less non-cash and change in accrued utility construction expenditures (4,290) 1,988 Quad Cities Station decommissioning trust fund ...................... (4,150) (4,150) Nonregulated capital expenditures ................................... (1,121) (550) Notes receivable from affiliate ..................................... 10,000 21,532 Other investing activities, net ..................................... 9,553 5,741 --------- --------- Net cash used in investing activities ............................. (141,645) (111,350) --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid ............................................... (86,250) (30,000) Issuance of long-term debt, net ..................................... 272,572 391,236 Retirement of long-term debt, including reacquisition cost .......... (187,901) (2,478) Reacquisition of preferred securities ............................... - (126,680) Net decrease in notes payable ....................................... (55,000) (89,680) --------- --------- Net cash provided by financing activities ......................... (56,579) 142,398 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 65,311 227,645 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,915 20,270 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 94,226 $ 247,915 ========= ========= ADDITIONAL CASH FLOW INFORMATION Interest paid, net of amounts capitalized ........................... $ 55,733 $ 45,939 ========= ========= Income taxes paid, net .............................................. $ 50,950 $ 23,969 ========= =========
The accompanying notes are an integral part of these financial statements. -18- MIDAMERICAN FUNDING, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The consolidated financial statements included herein have been prepared by MidAmerican Funding, LLC ("MidAmerican Funding"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Funding, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation. All significant intercompany transactions have been eliminated. Although MidAmerican Funding believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican Funding's latest Annual Report on Form 10-K. MidAmerican Funding is an Iowa limited liability company with MidAmerican Energy Holdings Company as its sole member. MidAmerican Funding's direct, wholly owned subsidiary is MHC Inc. ("MHC"). MHC, MidAmerican Funding and MidAmerican Energy Holdings Company are exempt public utility holding companies headquartered in Des Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company, a public utility with electric and natural gas operations. Other direct, wholly owned subsidiaries of MHC include MidAmerican Capital Company, Midwest Capital Group, Inc., MidAmerican Services Company and MEC Construction Services Co. 2. NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 2 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's new accounting pronouncements. 3. ENVIRONMENTAL MATTERS Refer to Note 3 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's environmental matters. 4. RATE MATTERS Refer to Note 4 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's rate matters. 5. SEGMENT INFORMATION MidAmerican Funding has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense, income tax expense and equity in the net income or loss of investees are allocated to each segment. -19- The energy delivery and transmission segments and substantially all of the generation segment are regulated as to rates, and other factors, related to services to external customers. For internal segment reporting purposes, MidAmerican Energy has developed transfer prices for services provided between the segments. MidAmerican Funding's external revenues by product and services are displayed on the Consolidated Statements of Income. The following tables provide MidAmerican Funding's operating revenues, income before income taxes and total assets on an operating segment basis (in thousands):
Three Months Six Months Ended June 30, Ended June 30, ---------------------- -------------------------- 2003 2002 2003 2002 --------- --------- ----------- ----------- Operating revenues: External revenues - Generation ................. $ 108,172 $ 113,186 $ 265,708 $ 222,924 Energy delivery ............ 375,008 353,178 944,735 779,120 Transmission ............... 5,856 5,211 12,104 10,136 Marketing & sales .......... 46,847 21,113 128,532 54,792 Other ...................... 557 1,168 1,277 1,919 --------- --------- ----------- ----------- Total .................... 536,440 493,856 1,352,356 1,068,891 --------- --------- ----------- ----------- Intersegment revenues - Generation ................ 148,689 161,285 279,044 292,327 Transmission .............. 14,486 13,801 28,973 27,601 Marketing & sales ......... 754 776 754 776 --------- --------- ----------- ----------- Total ................... 163,929 175,862 308,771 320,704 Intersegment eliminations ... (163,929) (175,862) (308,771) (320,704) --------- --------- ----------- ----------- Consolidated .............. $ 536,440 $ 493,856 $ 1,352,356 $ 1,068,891 ========= ========= =========== =========== Income before income taxes: Generation ................... $ 34,129 $ 26,307 $ 62,960 $ 41,173 Energy delivery .............. 12,967 11,286 73,547 63,432 Transmission ................. 10,605 10,928 23,047 20,844 Marketing & sales ............ 594 (274) 1,691 (1,221) Other ........................ (11,388) (9,978) (24,883) (18,092) --------- --------- ----------- ----------- Total ...................... $ 46,907 $ 38,269 $ 136,362 $ 106,136 ========= ========= =========== ===========
As of --------------------------- June 30, December 31, 2003 2002 ----------- ------------ Total assets (a): Generation ................... $ 2,339,113 $ 2,321,090 Energy delivery .............. 2,540,779 2,487,390 Transmission ................. 306,605 306,223 Marketing & sales ............ 40,072 52,143 Other ........................ 193,109 179,141 ----------- ----------- Total ...................... 5,419,678 5,345,987 Reclassifications and intersegment eliminations(b) (208,089) (192,003) ----------- ----------- Consolidated ................. $ 5,211,589 $ 5,153,984 =========== =========== (a) Total assets by operating segment reflect the assignment of goodwill to applicable reporting units in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." (b) Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables. -20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary within MidAmerican Funding, LLC ("MidAmerican Funding"). Management's Discussion and Analysis ("MD&A") addresses the financial statements of MidAmerican Funding and MidAmerican Energy as presented in this joint filing. Information in MD&A related to MidAmerican Energy, whether or not segregated, also relates to MidAmerican Funding. Information related to other subsidiaries of MidAmerican Funding pertains only to the discussion of the financial condition and results of operations of MidAmerican Funding. Where necessary, discussions have been segregated and labeled to allow the reader to identify information applicable only to MidAmerican Funding. MD&A should be read in conjunction with the financial statements included in this Form 10-Q and the notes to those statements, together with MD&A in MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS From time to time, MidAmerican Funding, or one of its subsidiaries individually, including MidAmerican Energy, may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of MidAmerican Funding or any of its subsidiaries individually. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of MidAmerican Funding's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. These type of forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of MidAmerican Funding 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 Private Securities Litigation Reform Act of 1995, MidAmerican Funding has identified important factors that could cause actual results to differ materially from those expectations, including weather effects on sales volumes and revenues, fuel prices, fuel transportation and other operating uncertainties, acquisition uncertainty, uncertainties relating to economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, utility industry deregulation and competition. Neither MidAmerican Funding, nor any one of its subsidiaries individually, assumes any responsibility to update forward-looking information contained herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES MidAmerican Energy's and MidAmerican Funding's significant accounting policies are described in their respective Note (1) of Notes to Consolidated Financial Statements in Item 15 of their most recently filed Annual Report on Form 10-K. For a discussion of their critical accounting policies and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in their most recently filed Annual Report on Form 10-K. NEW ACCOUNTING PRONOUNCEMENT In January 2003, MidAmerican Energy adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Concurrent with the recognition of the liability, the estimated cost of an asset retirement obligation is capitalized and depreciated over the remaining life of the asset. -21- On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset retirement obligation ("ARO") liabilities; $12.6 million of associated ARO assets, net of accumulated depreciation; $101.8 million of regulatory assets; and reclassified $1.0 million of accumulated depreciation to the ARO liability in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not impact net income. The initial ARO liability recognized includes $266.5 million that pertains to obligations associated with the decommissioning of the Quad Cities Station. The $266.5 million includes a $159.8 million nuclear decommissioning liability that had been recorded as of December 31, 2002. As of June 30, 2003, $173.1 million of assets reflected in Investments and Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for satisfying the Quad Cities Station obligation. The change in the balance of the ARO liability during the first half of 2003 is summarized as follows (in thousands): Balance January 1, 2003 ...... $275,228 Capitalized accretion ........ 7,913 -------- Balance June 30, 2003 ........ $283,141 ======== Capitalized accretion is charged to a regulatory asset. In addition to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued for the cost of removing other electric and gas assets through its depreciation rates, in accordance with accepted regulatory practices. As of June 30, 2003, the estimated amount of such accruals included in accumulated depreciation was approximately $395 million based on the cost of removal component in current depreciation rates. On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements and will require contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and clarifies when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 is effective for MidAmerican Energy and MidAmerican Funding for contracts entered into or modified after June 30, 2003. MidAmerican Energy and MidAmerican Funding are evaluating the impact of adopting the requirements of SFAS No. 149. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for MidAmerican Funding and MidAmerican Energy for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the third quarter of 2003. MidAmerican Funding and MidAmerican Energy do not currently have financial instruments within the scope of SFAS No. 150. -22- RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 Regulated Electric Gross Margin - ------------------------------- Three Months Ended June 30, --------------- 2003 2002 ------ ------ (In millions) Operating revenues ................... $329.3 $325.8 Cost of fuel, energy and capacity .... 82.5 72.9 ------ ------ Electric gross margin .............. $246.8 $252.9 ====== ====== Electric gross margin for the second quarter of 2003 decreased $6.1 million compared to the second quarter of 2002. Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power District ("NPPD") restructured their contract for Cooper Nuclear Station. Accordingly, MidAmerican Energy's costs for energy and capacity purchased from Cooper Nuclear Station are now classified differently on the statement of income. As a result, electric gross margin for the second quarter of 2003 decreased by $10.1 million compared to the second quarter of 2002 due to the change in classification of the related costs. Prior to August 1, 2002, only the fuel costs for energy purchased from Cooper Nuclear Station were classified as a cost of fuel, energy and capacity. Other costs under the contract were classified as other operating expenses. Following the restructuring, all costs for energy and capacity purchased under that contract are included in MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased power costs. Other operating expenses decreased accordingly. Refer to Note (1)(h) of Notes to Consolidated Financial Statements in Item 15 of MidAmerican Energy's most recently filed Annual Report on Form 10-K for a discussion of the contract restructuring. Temperature conditions during the second quarter of 2003 were milder than in the second quarter of 2002, resulting in approximately a $10.2 million decrease in electric margin. Electricity usage and rate factors not dependent on weather increased electric margin by $4.1 million compared to the second quarter of 2002. In total, retail electric sales volumes decreased 3.7% for the three months ended June 30, 2003. Lower fuel costs related to Iowa retail electric sales, excluding the impact of restructuring the Cooper Nuclear Station contract, increased electric margin by $3.8 million relative to the second quarter of 2002. The decrease in fuel costs for Iowa electric retail sales includes the Iowa portion of $10.9 million of cost recovery recognized in the second quarter of 2003 related to MidAmerican Energy's coal purchase contract with Enron Corp. ("Enron"). In November 2001, MidAmerican Energy received collateral from Enron for costs to MidAmerican Energy related to the coal purchase contract as a result of a downgrade in Enron's credit ratings in 2001. MidAmerican Energy deferred recognition of the value of the collateral at that time, pending resolution of related bankruptcy proceedings. MidAmerican Energy and Enron agreed on a settlement of their bankruptcy claims, including the coal purchase contract, and received the final required approval in June 2003. Accordingly, MidAmerican Energy recognized the reduced costs associated with the collateral for the settlement of the coal purchase contract. The decrease in fuel costs due to the coal purchase contract with Enron was partially offset by the Iowa portion of $5.1 million of expense related to the write-off of the remaining value of failed nuclear fuel at Quad Cities Station. In addition to the effect of restructuring the contract for Cooper Nuclear Station, MidAmerican Energy's gross margin on electric wholesale sales increased $6.5 million for the second quarter of 2003 due to an increase in prices, partially offset by a decrease in sales volumes, compared to the second quarter of 2002. Wholesale sales are the sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system. -23- Regulated Gas Gross Margin - -------------------------- Three Months Ended June 30, --------------- 2003 2002 ------ ------ (In millions) Operating revenues ...... $155.1 $126.1 Cost of gas sold ........ 111.7 86.8 ------ ------ Gas gross margin ..... $ 43.4 $ 39.3 ====== ====== Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations from purchased gas adjustment clauses. An 83.8% increase in the average per-unit cost of gas for the three-month period ended June 30, 2003, compared to the same period in 2002, increased revenues and cost of gas sold by approximately $51 million. These increases were partially offset by the impact of a 10.3% decrease in sales volumes. Gas margin for the three months ended June 30, 2003, increased $4.1 million compared to the three months ended June 30, 2002. Increases in retail gas rates that largely took effect subsequent to the second quarter of 2002 improved gas margin by $2.8 million compared to the second quarter of 2002. On June 12, 2002, the Iowa Utilities Board ("IUB") issued an order granting an interim rate increase of approximately $13.8 million annually, effective immediately. On November 8, 2002, the IUB approved a proposed settlement agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer Advocate that provided for a final increase, implemented on November 25, 2002, of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas customers. On September 11, 2002, MidAmerican Energy received a final order from the Illinois Commerce Commission to increase its Illinois natural gas rates by $2.2 million annually and implemented the rates on September 18, 2002. Refer to the "Rate Matters" section of MD&A for comments on the Iowa gas rate settlement. Additionally, gas gross margin increased compared to the second quarter of 2002 due to a $1.0 million increase in revenues from the recovery of energy efficiency costs. Regulated Operating Expenses - ---------------------------- Regulated other operating expenses for the second quarter of 2003 decreased $18.4 million compared to the second quarter of 2002. Effective August 1, 2002, MidAmerican Energy and NPPD restructured their contract for Cooper Nuclear Station. Prior to August 1, 2002, costs under the contract other than fuel costs for energy purchased were classified as other operating expenses. Following the restructuring, all costs for energy and capacity purchased under that contract are included in MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased power. As a result, other operating expenses for the second quarter of 2003 decreased by $24.1 million compared to the second quarter of 2002. In addition, other operating expenses related to Quad Cities Station decreased $2.0 million compared to the second quarter of 2002. The decreases in other operating expenses were partially offset by increases totaling $6.5 million related to employee costs for compensation, health care and pension and other postretirement costs. Maintenance expenses increased $5.7 million compared to the second quarter of 2002 due primarily to a $3.0 million increase in Quad Cities Station maintenance costs attributable mostly to fuel assembly replacement. Maintenance costs related to fossil fuel generation and electric distribution also increased compared to the second quarter of 2002. Depreciation and amortization expense increased $6.5 million compared to the three months ended June 30, 2003, due principally to increases in expense related to revenue sharing arrangements in Iowa and Illinois. -24- Interest and Dividend Income - ---------------------------- MidAmerican Energy - The decrease in interest and dividend income was due principally to a $1.0 million decrease in interest income on a note receivable related to MidAmerican Energy's accounts receivable sold. The related arrangement terminated in October 2002. MidAmerican Funding - Interest income related to notes receivable with MidAmerican Funding's parent company decreased $1.4 million. The note receivable balances have been zero throughout 2003. Other Income and Other Expense - ------------------------------ MidAmerican Energy - The increase in MidAmerican Energy's other income is due primarily to an increase in net earnings related to the cash surrender value of corporate-owned life insurance. Related net earnings increased $3.0 million to $2.6 million for the second quarter of 2003. As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). Other income for the capitalized allowance on equity funds used during construction totaled $2.7 million in the second quarter of 2003 compared to $2.1 million in the second quarter of 2002. MidAmerican Energy anticipates recording income for the allowance on equity funds used during construction over the next several years while the announced generating plants are constructed. Other expense includes a discount on MidAmerican Energy's accounts receivable sold to MidAmerican Energy Funding Corporation. The discount was designed to cover the expenses of MidAmerican Energy Funding Corporation, including bad debt expense, subservicer fees, monthly administrative costs and interest. The discount was recorded in other expense because it is not reflected in utility cost of service for regulatory purposes. The discount totaled $1.9 million for the second quarter of 2002. The related arrangement terminated in October 2002. Fixed Charges and Preferred Dividends - ------------------------------------- The decrease in interest on long-term debt was due to the effect of debt maturities in 2002 and 2003 offset partially by interest on $275 million of MidAmerican Energy notes issued in January 2003. MidAmerican Energy's preferred dividends decreased compared to the second quarter of 2002 due to the reacquisition of preferred securities in May 2002 and the related loss on reacquistion. -25- RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 Regulated Electric Gross Margin - ------------------------------- Six Months Ended June 30, --------------- 2003 2002 ------ ------ (In millions) Operating revenues ................... $644.2 $632.6 Cost of fuel, energy and capacity .... 170.9 145.3 ------ ------ Electric gross margin .............. $473.3 $487.3 ====== ====== Electric gross margin for the first six months of 2003 decreased $14.0 million compared to the first six months of 2002. Electric gross margin for the first six months of 2003 decreased by $18.0 million compared to the first six months of 2002 due to the change in classification of costs related to MidAmerican Energy's contract for Cooper Nuclear Station. Refer to the "Regulated Electric Gross Margin" section in three-month results of operations discussion above for additional information regarding this change. The effect of milder temperature conditions during the second quarter of 2003 compared to the second quarter of 2002, partially offset by colder temperature conditions in the first quarter of 2003 compared to the first quarter of 2002, resulted in approximately a $1.7 million decrease in electric margin. Electricity usage and rate factors not dependent on weather decreased electric margin by $0.9 million compared to the first six months of 2002. In total, retail electric sales volumes increased 0.4% for the six months ended June 30, 2003. Lower fuel costs for Iowa retail electric sales, excluding the impact of restructuring the Cooper Nuclear Station contract, increased electric margin by $6.3 million relative to first six months of 2002. As discussed in the three-month discussion of regulated electric gross margin, the decrease in fuel costs for Iowa retail electric sales was affected by income related to a coal purchase contract with Enron and the write-off of nuclear fuel. Electric revenues from the recovery of energy efficiency program costs increased $1.3 million compared to the first six months of 2002. Changes in these revenues are substantially matched with corresponding changes in other operating expenses. In addition to the effect of restructuring the contract for Cooper Nuclear Station, MidAmerican Energy's gross margin on electric wholesale sales increased $3.9 million for the first six months of 2003 compared to the first six months of 2002 due to an increase in prices, partially offset by a decrease in sales volumes. MidAmerican Energy sells and purchases electric capacity in the wholesale market. The net margin from those sales and purchases decreased $4.9 million compared to the first six months of 2002. Regulated Gas Gross Margin - -------------------------- Six Months Ended June 30, --------------- 2003 2002 ------ ------ (In millions) Operating revenues ..... $568.9 $346.1 Cost of gas sold ....... 441.3 235.3 ------ ------ Gas gross margin ..... $127.6 $110.8 ====== ====== -26- Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. A 92.0% increase in the average per-unit cost of gas for the six-month period ended June 30, 2003, compared to the same period in 2002, increased revenues and cost of gas sold by approximately $211 million. Gas gross margin for the six months ended June 30, 2003, increased $16.8 million compared to the six months ended June 30, 2002. Increases in retail gas rates that largely took effect subsequent to the second quarter of 2002 improved gas margin by $11.3 million compared to the first six months of 2002. In addition to the rate increases discussed in the three-month "Regulated Gas Gross Margin" section, on February 20, 2002, the South Dakota Public Utilities Commission approved a settlement agreement allowing increased natural gas rates of $3.1 million annually, effective immediately. The effect of colder temperature conditions during the first quarter of 2003 compared to the same quarter in 2002 was partially offset by the effect of milder temperature conditions in the second quarter of 2003 compared to the second quarter of 2002. Accordingly, gas gross margin for the first six months of 2003 increased approximately $6 million compared to the first six months of 2002. A $2.2 million loss on a weather hedge partially offset the increase due to temperature conditions. Other usage factors not dependent on weather decreased gas margin by $4.0 million compared to the first six months of 2002. Total natural gas retail sales volumes increased 8.9%. Gas gross margin increased compared to the first six months of 2002 due to a $3.0 million increase in revenues from the recovery of energy efficiency costs and a $2.7 million increase from gas transported. Regulated Operating Expenses - ---------------------------- Regulated other operating expenses for the first six months of 2003 decreased $34.3 million compared to the first six months of 2002 due to a $48.2 million decrease in costs related to Cooper Nuclear Station. Cooper Nuclear Station costs are now classified differently on the statement of income as a result of the restructuring of the related contract. Refer to the three-month discussion of regulated operating expenses for additional comments on the restructuring of the contract. The decrease in other operating expenses due to Cooper Nuclear Station costs was partially offset by increases totaling $10.4 million related to employee costs for compensation, health care costs, and pension and other postretirement costs; and by a $4.4 million increase in energy efficiency program costs. Maintenance expenses increased $5.0 million compared to the first six months of 2002 due principally to a $2.3 million increase in maintenance costs at Quad Cities Station and a $1.2 million increase in fossil fuel generation maintenance. Depreciation and amortization expense increased $5.6 million compared to the first six months of 2002 due to a $3.5 million increase in utility plant depreciation and amortization and a $2.8 million increase related to an Illinois revenue sharing arrangement. Expense related to the Iowa revenue sharing arrangement decreased $1.0 million compared to the first six months of 2002. Refer to the "Legislative and Utility Regulatory Matters" section for an explanation of these revenue sharing arrangements. Property and other taxes increased $3.3 million due to an increase in property taxes as a result of higher levels of electricity generated and delivered. Iowa law provides for property taxes for electric utilities to be based predominantly on energy consumption. -27- Nonregulated Operating Revenues and Operating Expenses - ------------------------------------------------------ Six Months Ended June 30, -------------- 2003 2002 ------ ----- (In millions) MidAmerican Energy - Nonregulated operating revenues ..... $138.0 $88.3 Nonregulated cost of sales .......... 120.7 73.8 ------ ----- Nonregulated gross margin ........... $ 17.3 $14.5 ====== ===== MidAmerican Funding Consolidated - Nonregulated operating revenues ..... $139.3 $90.2 Nonregulated cost of sales .......... 120.9 74.1 ------ ----- Nonregulated gross margin ........... $ 18.4 $16.1 ====== ===== MidAmerican Energy - All gains and losses on MidAmerican Energy's energy trading contracts are now reported net on the statement of income in accordance with Emerging Issues Task Force ("EITF") Issue No. 02-3, and 2002 amounts have been reclassified to a consistent presentation. MidAmerican Energy's nonregulated wholesale gas and electric marketing activities qualify as "energy trading" contracts under the guidance of EITF Issue No. 02-3. MidAmerican Energy's nonregulated gross margin for the first six months of 2003 increased $2.8 million compared to the first six months of 2002. Nonregulated revenues and cost of sales consist substantially of nonregulated retail natural gas marketing operations. Gross margin for MidAmerican Energy's nonregulated retail natural gas operations increased $1.1 million for the first six months of 2003. The improvement in gross margin reflects a 68.2% increase in margin per unit and a 13.0% increase in sales volumes. An increase in related revenues was due principally to an increase in the average price per unit sold, which reflects a 58.4% increase in the average cost of gas and accounts for $35.5 million of the increase in nonregulated retail natural gas revenues. Electric retail customers in Illinois, except for those served by electric cooperatives and municipalities, are allowed to select their electric power supplier. Related revenues increased $6.9 million to $31.0 million for the first six months of 2003 while cost of sales increased $6.1 million to $26.2 million. Additionally, nonregulated revenues include income from sharing arrangements under regulated natural gas tariffs. Related income totaled $4.0 million for the first six months of 2003 and $1.6 million for the first six months of 2002. Interest and Dividend Income - ---------------------------- MidAmerican Energy - The decrease in interest and dividend income was due principally to a $2.2 million decrease in interest income on a note receivable related to MidAmerican Energy's accounts receivable sold. The related arrangement terminated in October 2002. MidAmerican Funding - Interest income related to notes receivable with MidAmerican Funding's parent company decreased $2.8 million compared to the first six months of 2002. The related note receivable balances have been zero throughout 2003. -28- Marketable Securities Gains and Losses, Net - ------------------------------------------- MidAmerican Funding - Net losses on marketable securities decreased $3.7 million compared to the first six months of 2002 due primarily to a $2.9 million loss recorded in the 2002 period related to other-than-temporary declines in two of MidAmerican Funding's common stock investments. Other Income and Other Expense - ------------------------------ MidAmerican Energy - Other income from net earnings related to the cash surrender value of corporate-owned life insurance totaled $3.0 million for the first six months of 2003 and $0.2 million for the first six months of 2002. Other income for the capitalized allowance on equity funds used during construction totaled $6.6 million in the first six months of 2003 compared to $3.3 million in the first six months of 2002. Other expense includes a discount on MidAmerican Energy's accounts receivable sold to MidAmerican Energy Funding Corporation. The discount totaled $3.5 million for the first six months of 2002. The related arrangement terminated in October 2002 MidAmerican Funding - Other income for the first six months of 2003 and 2002 includes $1.2 million and $6.0 million, respectively, of income from MidAmerican Capital's equity method investments. Equity income for 2002 includes $5.3 million of income for a distribution of common stock held by one of MidAmerican Capital's venture capital fund investments. Other expense for the first six months of 2003 includes a $2.1 million write down for the impairment of a special purpose fund investment. Fixed Charges and Preferred Dividends - ------------------------------------- The increase in interest on long-term debt was due to interest on $400 million of MidAmerican Energy notes issued in February 2002 and another $275 million issued in January 2003. The increase was partially offset by the effect of debt maturities in 2002 and 2003. MidAmerican Energy's preferred dividends of its subsidiary trust decreased due to the reacquisition of all of the related preferred securities on March 11, 2002. In addition, preferred dividends decreased due to the reacquisition of preferred securities in May 2002. -29- LIQUIDITY AND CAPITAL RESOURCES MidAmerican Energy and MidAmerican Funding have available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements. As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy's net cash provided by operating activities was $276.1 million and $218.8 million for the six months ended June 30, 2003 and 2002, respectively. MidAmerican Funding's net cash provided by operating activities was $263.5 million and $196.6 million for the six months ended June 30, 2003 and 2002, respectively. Investing Activities and Plans - ------------------------------ Utility Construction Expenditures - MidAmerican Energy's primary need for capital is utility construction expenditures. For the first six months of 2003, utility construction expenditures totaled $151.6 million, including allowance for funds used during construction, or capitalized financing costs, and Quad Cities Station nuclear fuel purchases. Forecasted utility construction expenditures, including allowance for funds used during construction, are $374 million for 2003. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. Through 2007, MidAmerican Energy plans to develop and construct three electric generating projects in Iowa. The projects would provide service to regulated retail electricity customers and, subject to regulatory approvals, be included in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may also be made from the plants to the extent the power is not needed for regulated retail service. MidAmerican Energy expects to invest approximately $1.44 billion in the three projects. The first project is a natural gas-fired combined cycle unit with an estimated cost of $357 million, plus allowance for funds used during construction. MidAmerican Energy will own 100% of the plant and operate it. Commercial operation of the simple cycle mode began on May 5, 2003. The plant will be operated in simple cycle mode during 2003 and 2004, resulting in 327 megawatts ("MW") of accredited capacity. The combined cycle operation is expected to commence in December 2004, resulting in an expected additional 190 MW of accredited capacity. The second project is currently under development and is expected to be a 790-MW (based on expected accreditation) super-critical-temperature, coal-fired plant fueled with low-sulfur coal. If constructed, MidAmerican Energy will operate the plant and expects to own approximately 475 MW of the plant. MidAmerican Energy expects to invest approximately $759 million in the project, plus allowance for funds used during construction. Municipal, cooperative and public power utilities will own the remainder, which is a typical ownership arrangement for large base-load plants in Iowa. On May 29, 2003, the IUB issued an order that approves the ratemaking principles for the plant, and on June 27, 2003, MidAmerican Energy received a certificate from the IUB allowing MidAmerican Energy to construct the plant. On February 12, 2003, MidAmerican Energy executed a contract with Mitsui & Co. Energy Development, Inc. for the engineering, procurement and construction of the plant and issued a limited notice to proceed authorizing detailed engineering. A full notice to proceed authorizing construction is expected in the third quarter of 2003. MidAmerican Energy is also seeking an order from the IUB approving construction of the associated transmission facilities. The third project is currently under development and is expected to be wind power facilities totaling 310 MW based on the nameplate rating. Generally speaking, accredited capacity ratings for wind power facilities are considerably less than the nameplate ratings due to the varying nature of wind. The current projected accredited capacity for these wind power facilities is approximately 53 MW. If constructed, MidAmerican Energy will own and operate these facilities, which are expected to cost approximately $323 million. MidAmerican Energy's plan -30- to construct the wind project is in conjunction with a settlement proposal to extend through December 31, 2010, an Iowa electric rate freeze that is currently scheduled to expire at the end of 2005. The proposed settlement, which was filed with the IUB as part of MidAmerican Energy's application for ratemaking principles for the wind project, is subject to approval by the IUB. MidAmerican Energy has received authorization from the IUB to construct the wind power facilities and expects an order on its requested ratemaking principles for the project in the third quarter of 2003. Refer to the "Rate Matters" section below for more discussion of the rate aspects of the proposed settlement. Nuclear Decommissioning - Each licensee of a nuclear facility is required to provide financial assurance for the cost of decommissioning its licensed nuclear facility. In general, decommissioning of a nuclear facility means to safely remove the facility from service and restore the property to a condition allowing unrestricted use by the operator. Based on information presently available, MidAmerican Energy expects to contribute approximately $41 million during the period 2003 through 2007 to external trusts established for the investment of funds for decommissioning Quad Cities Station. Approximately 65% of the fair value of the trusts' funds is now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is reflected as depreciation expense in the Consolidated Statements of Income. Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process. Contractual Obligations and Commercial Commitments - MidAmerican Energy and MidAmerican Funding have various contractual obligations and commercial commitments. The following table, which has been updated from December 31, 2002, to reflect issuances and retirements of long-term debt and on-going changes in commitments due to operating lease and fuel transactions, summarizes as of June 30, 2003, the material cash obligations of MidAmerican Energy and MidAmerican Funding (in millions).
Period Payments are Due ------------------------------------------- July 1 to Dec. 31, 2004 - 2006 - After Type of Obligation Total 2003 2005 2007 2007 - ------------------ -------- --------- ------ ------ -------- MidAmerican Energy: Long-term debt, excluding unamortized debt premium and discount, net ................. $1,147.5 $ 1.2 $147.0 $162.0 $ 837.3 Operating leases (1) ............................. 17.6 3.8 8.8 4.2 0.8 Coal, electricity and natural gas contract commitments (1) ....................... 599.4 91.2 293.7 124.5 90.0 -------- ----- ------ ------ -------- Total .......................................... 1,764.5 96.2 449.5 290.7 928.1 MidAmerican Funding parent and other subsidiaries: Long-term debt, excluding unamortized debt premium and discount, net ................. 700.0 - - - 700.0 -------- ----- ------ ------ -------- Total .......................................... $2,464.5 $96.2 $449.5 $290.7 $1,628.1 ======== ===== ====== ====== ========
(1) The operating leases and fuel and energy commitments are not reflected on the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes to Consolidated Financial Statements in Item 15 of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K for a discussion of the nature of these commitments. -31- MidAmerican Energy has other types of commitments that are subject to change and relate primarily to the items listed below. For additional information, refer, where applicable, to the respective referenced note in Notes to Consolidated Financial Statements of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K. - Construction expenditures: Refer to the "Utility Construction Expenditures" section above. - Manufactured gas plant facilities (see Note 3 a. of this Form 10-Q) - Nuclear decommissioning costs (see Note (4)(d) of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K) - Residual guarantees on operating leases (see Note (1)(j) of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K) Financing Activities, Plans and Availability - -------------------------------------------- Debt Authorizations and Credit Facilities - MidAmerican Energy has authority from the FERC to issue through April 14, 2005, short-term debt in the form of commercial paper and bank notes aggregating $500 million. MidAmerican Energy currently has in place a $370.4 million revolving credit facility that supports its $250 million commercial paper program and its variable rate pollution control revenue obligations. The facility expires January 15, 2004. On January 14, 2003, MidAmerican Energy issued $275 million of 5.125% medium-term notes due in 2013. The proceeds were used to refinance existing debt and for other corporate purposes. On February 10, 2003, MidAmerican Energy redeemed all $75 million of its 7.375% series of mortgage bonds, and on March 17, 2003, it redeemed all $6.94 million of its 7.45% series of mortgage bonds. Additionally, MidAmerican Energy's 7.125% series of mortgage bonds totaling $100 million matured on February 3, 2003. MidAmerican Energy has on file with the Securities and Exchange Commission a registration statement providing for an additional $425 million in various forms of senior and subordinated, unsecured long-term debt and preferred securities. MidAmerican Energy also has authorization from the FERC to issue, through November 30, 2004, an additional $425 million in various forms of long-term debt. MidAmerican Energy is required to obtain authorization from the Illinois Commerce Commission ("ICC") prior to issuing any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican Energy need only provide the ICC with an "informational statement" prior to the issuance which sets forth the type, amount and use of the proceeds of the securities to be issued. If less than 90% of the proceeds are used for refinancing, MidAmerican Energy must file a comprehensive application seeking authorization prior to issuance. The ICC is required to hold a hearing before issuing its authorization. MidAmerican Energy currently has authority from the ICC to issue up to approximately $15 million of medium-term notes for refinancing purposes and intends to file an application requesting authority to issue additional long-term debt. Other Information - MidAmerican Funding or one of its subsidiaries, including MidAmerican Energy, may from time to time seek to retire its outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. The repurchases or exchanges, if any, will depend on prevailing market conditions, the issuing company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. -32- CREDIT RATINGS RISKS Debt and preferred securities of MidAmerican Funding and MidAmerican Energy are rated by nationally recognized credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of MidAmerican Funding's or MidAmerican Energy's ability to, in general, meet the obligations of the debt or preferred securities issued by the rated company. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time. Other than the energy trading agreements discussed below, neither MidAmerican Funding nor MidAmerican Energy has any credit agreements that require termination or a material change in collateral requirements or payment schedule in the event of a downgrade in the credit ratings of the respective company's securities. MidAmerican Funding's long-term debt agreements provide that no additional debt can be issued by MidAmerican Funding if doing so would cause a downgrade in MidAmerican Funding's credit ratings. In conjunction with its wholesale marketing and trading activities, MidAmerican Energy must meet credit quality standards as required by counterparties. MidAmerican Energy has energy trading agreements that, in accordance with industry practice, either specifically require it to maintain investment grade credit ratings or provide the right for counterparties to demand "adequate assurances" in the event of a material adverse change in MidAmerican Energy's creditworthiness. If one or more of MidAmerican Energy's credit ratings decline below investment grade, MidAmerican Energy may be required to post cash collateral, letters of credit or other similar credit support to facilitate ongoing wholesale marketing and trading activities. As of June 30, 2003, MidAmerican Energy's estimated potential collateral requirements totaled approximately $74 million. MidAmerican Energy's collateral requirements could fluctuate considerably due to seasonality, market price volatility, a loss of key MidAmerican Energy generating facilities or other related factors. LEGISLATIVE AND UTILITY REGULATORY MATTERS Electric Deregulation - --------------------- Under Illinois law, as of December 31, 2000, all non-residential customers in Illinois had been phased in to allow them to select their provider of electric supply services. Residential customers all received the opportunity to select their electric supplier beginning May 1, 2002. In Iowa and elsewhere, the pace of deregulation has slowed considerably as a result of the energy crisis and related events in California that have heightened concerns nationally about deregulation of the electric utility industry. Rate Matters - ------------ Under a settlement agreement approved by the IUB on December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000, are effectively frozen through December 31, 2005. In approving that settlement, the IUB specifically allows the filing of electric rate design and/or cost of service rate changes that are intended to keep overall company revenue unchanged but could result in changes to individual tariffs. The 2001 settlement agreement further provides that an amount equal to 50% of revenues associated with Iowa retail electric returns on equity between 12% and 14%, and 83.33% of revenues associated with Iowa retail electric returns on equity above 14%, in each year is recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investment. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Interest expense is accrued on the portion of the regulatory liability related to prior years. Beginning in 2002, the liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction, or capitalized financing costs, associated with generating plant additions. As of June 30, 2003 and December 31, 2002, the related regulatory liability reflected on the Consolidated Balance Sheets was $123.2 million and $102.9 million, respectively. -33- On March 20, 2003, MidAmerican Energy and the Iowa Office of Consumer Advocate agreed upon a proposed settlement in which the rate freeze described above would be extended through December 31, 2010. Under the proposed settlement, for calendar years 2006 through 2010, an amount equal to 40% of revenues associated with Iowa retail electric returns on equity between 11.75% and 13.0%; 50% of revenues associated with Iowa retail electric returns on equity between 13.0% and 14.0%; and 83.3% of revenues associated with Iowa retail electric returns on equity greater than 14.0% will be applied as a reduction to offset some of the capital costs on the Iowa portion of three generation projects. In addition, the proposed settlement provides that if Iowa retail electric returns on equity fall below 10% in any consecutive 12-month period after January 1, 2006, MidAmerican Energy may seek to file for a general increase in rates. However, prior to filing for a general increase in rates, MidAmerican Energy is required by the proposed settlement to conduct 30 days of good faith negotiations with all of the signatories to the proposed settlement to attempt to avoid a general increase in rates. The proposed settlement, which is subject to approval by the IUB, was filed with the IUB on May 27, 2003, as part of MidAmerican Energy's application for ratemaking principles on its wind power project. The IUB is expected to rule on the ratemaking application, including the proposed settlement, in the third quarter of 2003. Illinois law provides for Illinois earnings above a computed level of return on common equity to be shared equally between regulated retail electric customers and MidAmerican Energy. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which sharing must occur for 2002 was 14.03%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of electric assets. TRANSLink - --------- In December 1999, the FERC issued Order No. 2000 establishing, among other things, minimum characteristics and functions for regional transmission organizations. Public utilities that were not a member of an independent system operator at the time of the order were required to submit either a plan by which its transmission facilities would be transferred to a regional transmission organization or an alternate filing providing a detailed explanation of a utility's plans with respect to the future operation of its transmission assets. MidAmerican Energy's filing was an alternative compliance filing indicating that MidAmerican Energy expects to participate in a regional transmission organization and that MidAmerican Energy is actively engaged in developing an independent transmission company that would be a member of a regional transmission organization. In September 2001, MidAmerican Energy and five other electric utilities filed with the FERC a plan to create TRANSLink Transmission Company LLC and to integrate their electric transmission systems into a single, coordinated system operating as a for-profit independent transmission company in conjunction with a FERC-approved regional transmission organization. On April 25, 2002, the FERC issued an order approving the transfer of control of MidAmerican Energy and other utilities' transmission assets to TRANSLink in conjunction with TRANSLink's participation in the Midwest Independent Transmission System Operator, Inc. regional transmission organization. In December 2002, MidAmerican Energy filed an application for state regulatory approval with the IUB. On June 13, 2003, the IUB issued an order disapproving the application based primarily on the uncertainty of related issues at the federal level with respect to requirements for the independent operation of transmission assets on a regional basis. In the Order, the IUB invites MidAmerican Energy to refile its application after some of the questions at the federal level are answered. MidAmerican Energy is currently evaluating its options in light of the IUB's decision. In addition, applications by other TRANSLink participants are pending before the state public utility commissions. The outcomes of these proceedings could impact the future viability of TRANSLink. Transferring the operations and control of MidAmerican Energy's transmission assets to other entities could increase costs for MidAmerican Energy; however, the actual impact of TRANSLink, or alternate strategies that might be employed to comply with FERC requirements, on MidAmerican Energy's future transmission costs is not yet known. -34- Standard Electricity Market Design - ---------------------------------- On July 31, 2002, the FERC issued a notice of proposed rulemaking with respect to "Standard Market Design" for the electric industry. The FERC initially characterized the proposal as portending "sweeping changes" to the use and expansion of the interstate transmission and wholesale bulk power systems in the United States. The proposal includes numerous proposed changes to the current regulation of transmission and generation facilities designed "to promote economic efficiency" and to replace the "obsolete patchwork we have today," according to the FERC's chairman. On April 28, 2003, the FERC issued a "White Paper" describing how it intends to change the proposed rulemaking. The White Paper, which uses the term "Wholesale Market Platform" in lieu of the term "Standard Market Design," indicates that a final rule may focus on the formation of regional transmission organizations and allow for regional differences. Any final rule may impact the costs of MidAmerican Energy's electricity and transmission products. A final rule is unlikely to be fully implemented until at least 2004. MidAmerican Energy is still evaluating the proposed rule and recognizes there is uncertainty as to the timing and outcome of this rulemaking. Accordingly, the likely impact of the proposed rule on MidAmerican Energy's transmission and generation businesses is unknown. ENVIRONMENTAL MATTERS The U.S. Environmental Protection Agency ("EPA") and state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if these contaminants are in sufficient quantities and at sufficient concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. As of June 30, 2003, MidAmerican Energy has recorded a $19 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. Refer to Note 3a of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for further discussion of MidAmerican Energy's environmental activities related to manufactured gas plant sites and cost recovery. Although the timing of potential incurred costs and recovery of costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position or results of operations. In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. In February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. The impact of the new standards on MidAmerican Energy is currently unknown. These standards could be superceded, in whole or in part, by a variety of multi-pollutant emission reduction initiatives. Refer to Note 3b of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for further discussion of this issue. In 2001, the state of Iowa passed legislation that, in part, requires rate-regulated utilities to develop a multi-year plan and budget for managing regulated emissions from their generating facilities in a cost-effective manner. MidAmerican Energy's proposed plan, including the associated budget, was filed with the IUB on April 1, 2002, in accordance with state law. An administrative law judge issued a ruling approving MidAmerican Energy's plan but disallowing the proposed recovery of plan costs through a tracker mechanism. MidAmerican Energy appealed the disallowance of the tracker and asked the IUB to declare the tracker moot as it would not be used until at least 2010 if the IUB approves a pending settlement that will "freeze" MidAmerican Energy's Iowa electric rates through 2010. The Iowa Office of Consumer Advocate's appealed asking the IUB to find that Iowa law allows the IUB to conduct a separate review of plan investments for reasonableness when the costs are proposed for recovery in a rate case. On July 17, 2003, the IUB issued an order affirming the administrative law -35- judge's decision. Accordingly, the IUB has rejected the future application of a tracker mechanism to recover emission reduction costs. However, the approved expenditures will not be subject to a subsequent prudence review in a future electric rate case. MidAmerican Energy is required to file updates to the plan at least every two years. The plan provides MidAmerican Energy's projected air emission reductions considering the current proposals that are being debated at the federal level and describes a coordinated long-range plan to achieve these air emission reductions. The plan also provides specific actions to be taken at each coal-fired generating facility and the related costs and timing for each action. MidAmerican Energy's plan outlines $732.0 million in environmental investments to existing coal-fired generating units, some of which are jointly owned, over a nine-year period from 2002 through 2010. MidAmerican Energy's share of these investments is $546.6 million, $67.9 million of which was projected to be incurred in the years 2002 through 2005, when MidAmerican Energy's Iowa retail electric rates are effectively frozen. The plan also identifies expenses that are expected to be incurred at the generating facilities to operate and maintain the environmental equipment. Under the New Source Review ("NSR") provisions of the Clean Air Act ("CAA") a utility is required to obtain a permit from the EPA prior to (1) beginning construction of a new major stationary source of an NSR-regulated pollutant or (2) making a physical or operational change (a "major modification") to an existing facility that potentially increases emissions, unless the changes are exempt under the regulations. In general, projects subject to NSR regulations are subject to pre-construction review and permitting under the Prevention of Significant Deterioration ("PSD") provisions of the CAA. Under the PSD program, a project that emits threshold levels of regulated pollutants must undergo a Best Available Control Technology analysis and evaluate the most effective emissions controls. These controls must be installed in order to receive a permit. Routine maintenance, repair and replacement are not subject to the NSR provisions; however, these types of activities have historically been subject to changing interpretations under the NSR program. The EPA has proposed a change to the NSR provisions relating to routine maintenance, repair and replacement. Violation of NSR regulations potentially subjects a utility to fines and/or other sanctions. The impact on MidAmerican Energy of any final rules is not currently known. In recent years, the EPA has requested, from several utilities, information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the NSR and the New Source Performance Standards of the CAA. In December 2002, MidAmerican Energy received a request from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for a number of its generating plants. A second request was received in April 2003. MidAmerican Energy will continue to respond to requests from the EPA and at this time cannot predict the outcome of these requests. GENERATING CAPABILITY In July 2002, retail customer usage of electricity caused a new record hourly peak demand of 3,889 megawatts on MidAmerican Energy's energy system. MidAmerican Energy is interconnected with Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool ("MAPP"). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. For the 2002 cooling season, MidAmerican Energy's reserve was approximately 21% above its system peak demand. MidAmerican Energy believes it has adequate electric capacity reserve through 2003 and continues to manage its generating resources to ensure an adequate reserve in the future. MidAmerican Energy is in the process of constructing a natural gas-fired combined cycle unit to be completed in two phases. The first phase, totaling 327 MW, began commercial operation on May 5, 2003. MidAmerican Energy expects the second phase to begin commercial operation in December 2004 and to provide approximately 190 MW of additional accredited capacity. Up to an additional 475 MW of owned coal-fired generation is expected to be operational by the summer of 2007. -36- MidAmerican Energy has also announced a plan to construct wind power facilities, subject to approval by the IUB. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican Energy's reserve to fall below the 15% minimum. If MidAmerican Energy fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP. MidAmerican Energy is financially exposed to movements in energy prices since it no longer recovers fluctuations in its energy costs through an energy adjustment clause in Iowa. Although MidAmerican Energy believes it has sufficient generation under typical operating conditions for its retail electric needs, a loss of adequate generation by MidAmerican Energy requiring the purchase of replacement power at a time of high market prices could subject MidAmerican Energy to losses on its energy sales. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Reference is made to MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K, and in particular, Notes (1)(i) and (8) in Notes to Consolidated Financial Statements in Item 15 of that report. As of June 30, 2003, there have been no material changes in the market risks described therein. ITEM 4. CONTROLS AND PROCEDURES. With the supervision and participation of MidAmerican Funding's and MidAmerican Energy's management, including their respective chief executive officer and chief financial officer, each company performed an evaluation regarding the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2003. Based on that evaluation, MidAmerican Funding's and MidAmerican Energy's management, including their respective chief executive officer and chief financial officer, concluded that their respective disclosure controls and procedures were effective. There have been no significant changes in MidAmerican Funding's or MidAmerican Energy's internal controls or in other factors that could significantly affect internal controls. -37- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. MidAmerican Funding and its subsidiaries currently have no material legal proceedings. Information on MidAmerican Energy's environmental matters is included in the "Environmental Matters" section of Management's Discussion and Analysis in Item 2 of this Form 10-Q. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS Reference is made to the accompanying Exhibit Index for a list of exhibits filed as a part of this Quarterly Report. (B) REPORTS ON FORM 8-K None. -38- 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 FUNDING, LLC MIDAMERICAN ENERGY COMPANY -------------------------- (Registrants) Date: August 6, 2003 /s/ Patrick J. Goodman -------------- -------------------------------------------- Patrick J. Goodman Vice President and Treasurer of MidAmerican Funding, LLC (principal financial and accounting officer) /s/ Thomas B. Specketer -------------------------------------------- Thomas B. Specketer Vice President and Controller of MidAmerican Energy Company (principal financial and accounting officer) -39- EXHIBIT INDEX EXHIBIT NO. - ----------- MidAmerican Energy - ------------------ 15 Awareness Letter of Independent Accountants 31.1 Section 302 Certification for Form 10-Q (co-chief executive officer) 31.2 Section 302 Certification for Form 10-Q (co-chief executive officer) 31.3 Section 302 Certification for Form 10-Q (chief financial officer) 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (co-chief executive officer) 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (co-chief executive officer) 32.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief financial officer) MidAmerican Funding - ------------------- 31.4 Section 302 Certification for Form 10-Q (chief executive officer) 31.5 Section 302 Certification for Form 10-Q (chief financial officer) 32.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief executive officer) 32.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief financial officer) -40- EX-15 3 exh15.txt ACCOUNTANTS AWARENESS LETTER EXHIBIT 15 AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS MidAmerican Energy Company Des Moines, Iowa We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited consolidated interim financial information of MidAmerican Energy Company and subsidiaries for the three-month and six-month periods ended June 30, 2003 and 2002, as indicated in our report dated July 30, 2003; 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, 2003, is incorporated by reference in Registration Statement No. 333-101800 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 the 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. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa August 6, 2003 EX-31.1 4 exh31-1.txt 302 CERTIFICATION (CO-CHIEF EXECUTIVE OFFICER) EXHIBIT 31.1 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Jack L. Alexander, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2003 /s/ Jack L. Alexander --------------------- Jack L. Alexander Senior Vice President (co-chief executive officer) EX-31.2 5 exh31-2.txt 302 CERTIFICATION (CO-CHIEF EXECUTIVE OFFICER) EXHIBIT 31.2 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Todd M. Raba, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2003 /s/ Todd M. Raba ---------------- Todd M. Raba Senior Vice President (co-chief executive officer) EX-31.3 6 exh31-3.txt 302 CERTIFICATION (CHIEF FINANCIAL OFFICER) EXHIBIT 31.3 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Thomas B. Specketer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2003 /s/ Thomas B. Specketer ----------------------- Thomas B. Specketer Vice President and Controller (chief financial officer) EX-31.4 7 exh31-4.txt SEC. 302 CERTIFICATION (CHIEF EXECUTIVE OFFICER) EXHIBIT 31.4 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, David L. Sokol, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2003 /s/ David L. Sokol ------------------ David L. Sokol Chief Executive Officer EX-31.5 8 exh31-5.txt SEC. 302 CERTIFICATION (CHIEF FINANCIAL OFFICER) EXHIBIT 31.5 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Patrick J. Goodman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2003 /s/ Patrick J. Goodman ---------------------- Patrick J. Goodman Vice President and Treasurer (chief financial officer) EX-32.1 9 exh32-1.txt 906 CERTIFICATION (CO-CHIEF EXECUTIVE OFFICER) EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jack L. Alexander, Senior Vice President of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 6, 2003 /s/ Jack L. Alexander --------------------- Jack L. Alexander Senior Vice President (co-chief executive officer) EX-32.2 10 exh32-2.txt 906 CERTIFICATION (CO-CHIEF EXECUTIVE OFFICER) EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Todd M. Raba, Senior Vice President of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 6, 2003 /s/ Todd M. Raba ---------------- Todd M. Raba Senior Vice President (co-chief executive officer) EX-32.3 11 exh32-3.txt 906 CERTIFICATION (CHIEF FINANCIAL OFFICER) EXHIBIT 32.3 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas B. Specketer, Vice President and Controller of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 6, 2003 /s/ Thomas B. Specketer ----------------------- Thomas B. Specketer Vice President and Controller (chief financial officer) EX-32.4 12 exh32-4.txt 906 CERTIFICATION (CHIEF EXECUTIVE OFFICER) EXHIBIT 32.4 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, David L. Sokol, Chief Executive Officer of MidAmerican Funding, LLC (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 6, 2003 /s/ David L. Sokol ------------------ David L. Sokol Chief Executive Officer EX-32.5 13 exh32-5.txt 906 CERTIFICATION (CHIEF FINANCIAL OFFICER) EXHIBIT 32.5 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick J. Goodman, Vice President and Treasurer of MidAmerican Funding, LLC (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 6, 2003 /s/ Patrick J. Goodman ---------------------- Patrick J. Goodman Vice President and Treasurer (chief financial officer) -----END PRIVACY-ENHANCED MESSAGE-----