-----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, FdydVPDPNJWuu8c1Lb1VnpciVgZqAOe3Rp5GYEKsyoHrziLDZrm6rfK+ofQ9af3Z 2j4dQxtUqAOO4/PyhBDUkA== 0000928576-99-000016.txt : 19990816 0000928576-99-000016.hdr.sgml : 19990816 ACCESSION NUMBER: 0000928576-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: SEC FILE NUMBER: 333-15387 FILM NUMBER: 99688410 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 POST OFFICE BOX 9244 STREET 2: 666 GRAND AVENUE POST OFFICE BOX 9244 CITY: DES MOINES STATE: IA ZIP: 50306-9244 10-Q 1 2ND QUARTER - MIDAMERICAN ENERGY COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 ------------- Commission Registrant's Name, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. - ----------- ------------------------------------------ ----------------- 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (AN IOWA CORPORATION) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of Each Class On which Registered ------------------- ----------------------- 7.98% MidAmerican Energy Company - Obligated Preferred Securities of Subsidiary Trust New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, $3.30 Series, no par value Preferred Stock, $3.75 Series, no par value Preferred Stock, $3.90 Series, no par value Preferred Stock, $4.20 Series, no par value Preferred Stock, $4.35 Series, no par value Preferred Stock, $4.40 Series, no par value Preferred Stock, $4.80 Series, no par value Preferred Stock, $5.25 Series, no par value Preferred Stock, $7.80 Series, no par value - ------------------------------------------------------------------------------- Title of each Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- As of July 31, 1999, all 70,980,203 outstanding shares of MidAmerican Energy Company's voting stock were held by its parent company, MHC Inc. MIDAMERICAN ENERGY COMPANY FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements Independent Accountants' Report.............................. 3 Consolidated Statements of Income............................ 4 Consolidated Balance Sheets.................................. 5 Consolidated Statements of Cash Flows........................ 6 Notes to Consolidated Financial Statements................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 27 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ........................................... 27 ITEM 6. Exhibits and Reports on Form 8-K............................. 28 Signatures................................................................ 29 Exhibit Index............................................................. 30 -2- 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, 1999, and the related consolidated statements of income and cash flows for the three-month and six-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Des Moines, Iowa July 23, 1999 -3-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- OPERATING REVENUES Regulated electric .................... $ 279,350 $ 287,094 $ 541,478 $ 543,448 Regulated gas ......................... 71,282 67,288 242,060 240,488 Nonregulated .......................... 27,709 21,124 63,051 38,836 --------- --------- --------- --------- 378,341 375,506 846,589 822,772 --------- --------- --------- --------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity ... 50,681 57,643 101,667 103,400 Cost of gas sold .................... 38,596 32,648 135,454 137,969 Other operating expenses ............ 104,387 114,031 221,026 222,498 Maintenance ......................... 31,934 31,347 58,471 54,380 Depreciation and amortization ....... 47,687 44,191 97,378 88,382 Property and other taxes ............ 20,662 21,403 40,813 44,733 --------- --------- --------- --------- 293,947 301,263 654,809 651,362 --------- --------- --------- --------- Nonregulated: Cost of sales ....................... 24,305 17,781 58,404 33,742 Depreciation and amortization ....... 148 - 148 - Other ............................... 4,037 2,112 7,974 3,220 --------- --------- --------- --------- 28,490 19,893 66,526 36,962 --------- --------- --------- --------- Total operating expenses .............. 322,437 321,156 721,335 688,324 --------- --------- --------- --------- OPERATING INCOME ...................... 55,904 54,350 125,254 134,448 --------- --------- --------- --------- NON-OPERATING INCOME Interest and dividend income .......... 588 1,447 1,687 3,394 Other, net ............................ (3,338) (2,113) (5,379) (4,990) --------- --------- --------- --------- (2,750) (666) (3,692) (1,596) --------- --------- --------- --------- FIXED CHARGES Interest on long-term debt ............ 16,618 17,592 33,107 35,145 Other interest expense ................ 2,674 3,529 8,086 6,697 Preferred dividends of subsidiary trust 1,995 1,995 3,990 3,990 Allowance for borrowed funds .......... (300) (921) (606) (1,675) --------- --------- --------- --------- 20,987 22,195 44,577 44,157 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES ............ 32,167 31,489 76,985 88,695 INCOME TAXES .......................... 11,815 13,109 30,449 37,136 --------- --------- --------- --------- NET INCOME ............................ 20,352 18,380 46,536 51,559 PREFERRED DIVIDENDS ................... 1,238 1,238 2,477 2,475 --------- --------- --------- --------- EARNINGS ON COMMON STOCK .............. $ 19,114 $ 17,142 $ 44,059 $ 49,084 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. -4-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF ------------------------------------- JUNE 30 DECEMBER 31 ----------------------- ----------- 1999 1998 1998 ---------- ---------- ----------- (UNAUDITED) ASSETS UTILITY PLANT Electric ............................................... $4,301,654 $4,109,989 $4,258,061 Gas .................................................... 793,745 766,127 786,169 ---------- ---------- ---------- 5,095,399 4,876,116 5,044,230 Less accumulated depreciation and amortization ......... 2,498,306 2,352,465 2,428,954 ---------- ---------- ---------- 2,597,093 2,523,651 2,615,276 Construction work in progress .......................... 27,641 82,671 26,369 ---------- ---------- ---------- 2,624,734 2,606,322 2,641,645 ---------- ---------- ---------- POWER PURCHASE CONTRACT ................................ 139,383 164,739 144,875 ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents .............................. 9,727 113,655 5,370 Receivables ............................................ 119,170 109,376 168,764 Inventories ............................................ 71,735 62,641 92,745 Other .................................................. 31,678 1,799 32,126 ---------- ---------- ---------- 232,310 287,471 299,005 ---------- ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET ............. 210,930 126,195 183,279 ---------- ---------- ---------- REGULATORY ASSETS ...................................... 279,489 311,979 305,489 ---------- ---------- ---------- OTHER ASSETS ........................................... 26,838 11,282 11,237 ---------- ---------- ---------- TOTAL ASSETS ........................................... $3,513,684 $3,507,988 $3,585,530 ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity ............................ $ 979,537 $ 977,627 $ 972,278 MidAmerican preferred securities, not subject to mandatory redemption ................................. 31,759 31,760 31,759 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities ..................... 50,000 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures .................... 100,000 100,000 100,000 Long-term debt (excluding current portion) ............. 759,784 929,327 870,069 ---------- ---------- ---------- 1,921,080 2,088,714 2,024,106 ---------- ---------- ---------- CURRENT LIABILITIES Notes payable .......................................... 149,900 41,500 206,221 Current portion of long-term debt ...................... 170,773 199,351 60,897 Current portion of power purchase contract ............. 15,034 14,361 15,034 Accounts payable ....................................... 96,917 85,542 159,420 Taxes accrued .......................................... 129,181 103,801 106,132 Interest accrued ....................................... 13,444 18,977 13,473 Other .................................................. 37,442 26,942 35,405 ---------- ---------- ---------- 612,691 490,474 596,582 ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract ................................ 68,093 83,143 68,093 Deferred income taxes .................................. 582,918 589,808 584,675 Investment tax credit .................................. 74,589 80,274 77,421 Other .................................................. 254,313 175,575 234,653 ---------- ---------- ---------- 979,913 928,800 964,842 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ................... $3,513,684 $3,507,988 $3,585,530 ========== ========== ==========
The accompanying notes are an integral part of these statements -5-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................ $ 20,352 $ 18,380 $ 46,536 $ 51,559 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ......................... 51,406 48,642 102,828 96,415 Net decrease in deferred income taxes and investment tax credit, net ......................... (1,211) (2,960) (4,075) (5,885) Amortization of other assets .......................... 9,843 9,868 20,007 19,033 Impact of changes in working capital .................. 18,187 (20,212) 37,632 73,018 Other ................................................. 8,338 2,487 (13,660) 1,559 --------- --------- --------- --------- Net cash provided .................................. 106,915 56,205 189,268 235,699 --------- --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ......................... (52,023) (43,906) (77,865) (68,592) Quad Cities Nuclear Power Station decommissioning trust fund ............................ (2,844) (2,844) (5,658) (5,658) Proceeds from sale of assets and other investments ........ - 19,854 - 19,854 Other investing activities, net ........................... (8) 183 (1,230) (19,116) --------- --------- --------- --------- Net cash used ......................................... (54,875) (26,713) (84,753) (73,512) --------- --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ............................................ (1,238) (29,838) (39,183) (59,676) Issuance of long-term debt, net of issuance cost .......... - 158,440 - 158,440 Retirement of long-term debt, including reacquisition cost (494) (486) (629) (75,611) Reacquisition of preferred shares ......................... - (1) - (3) Cash outflow of accounts receivable securitization ........ (14,025) - (4,025) - Net decrease in notes payable ............................. (41,695) (73,602) (56,321) (81,000) --------- --------- --------- --------- Net cash provided (used) .............................. (57,452) 54,513 (100,158) (57,850) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... (5,412) 84,005 4,357 104,337 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 15,139 29,650 5,370 9,318 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 9,727 $ 113,655 $ 9,727 $ 113,655 ========= ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized ................. $ 15,752 $ 12,223 $ 37,213 $ 39,526 ========= ========= ========= ========= Income taxes paid ......................................... $ 24,843 $ 33,352 $ 24,843 $ 33,436 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. -6- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. GENERAL: The consolidated financial statements included herein have been prepared by MidAmerican Energy Company (MidAmerican), 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, 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 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's latest Annual Report on Form 10-K. MidAmerican is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. (MHC). MHC is an indirect, wholly owned subsidiary of MidAmerican Energy Holdings Company. The current corporate structure is the result of a merger transaction completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings Company) and CalEnergy Company, Inc. (CalEnergy). CalEnergy, through a reincorporation transaction, was renamed MidAmerican Energy Holdings Company (Holdings). Holdings is an exempt public utility holding company headquartered in Des Moines, Iowa. B. ENVIRONMENTAL MATTERS: (1) MANUFACTURED GAS PLANT FACILITIES - The United States Environmental Protection Agency (EPA) and the state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant (MGP) 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 is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether MidAmerican has any responsibility for remedial action. MidAmerican is currently conducting field investigations at eighteen sites and has conducted interim removal actions at six of the eighteen sites. In addition, MidAmerican has completed investigations and removals at four sites. MidAmerican is continuing to evaluate several of the sites to determine the future liability, if any, for conducting site investigations or other site activity. MidAmerican's estimate of probable remediation costs for the sites discussed above as of June 30, 1999, was $24 million. This estimate has been recorded as a liability and a regulatory asset for future recovery. The Illinois Commerce Commission (ICC) has approved the use of a tariff rider which permits recovery of the actual costs of litigation, investigation and remediation relating to former MGP sites. MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue recovery of the remediation costs from other PRPs and its insurance carriers. The estimate of probable remediation costs is established on a site specific basis. The costs are accumulated in a three-step process. First, a determination is made as to whether MidAmerican has -7- potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at the site. If so, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. As the investigation is performed and if it is determined remedial action is required, the best estimate of remediation costs is accrued. If necessary, the estimate is revised when a consent order is issued. The estimated recorded liabilities for these properties include incremental direct costs of the remediation effort, costs for future monitoring at sites and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. In addition, insurance recoveries for some or all of the costs may be possible, but the liabilities recorded have not been reduced by any estimate of such recoveries. 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's financial position or results of operations. (2) CLEAN AIR ACT - Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making a significant contribution to nonattainment of the ozone standard in downwind states in the eastern half of the United States. The nonattainment of the downwind states is based on the ozone standard established prior to the 1997 revisions discussed below. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MidAmerican's facilities are not currently subject to additional emissions reductions as a result of this initiative. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards (NAAQS) for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. In May 1999, the U.S. District Court of Appeals for the District of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA indicating the EPA had not expressed sufficient justification for the basis of establishing the standards and ruling that the EPA has exceeded its constitutionally-delegated authority in setting the standards. The EPA has appealed the court's ruling to the full panel of the U.S. District Court of Appeals for the District of Columbia Circuit. Argument in the appeal proceeding is scheduled for the fall of 1999. As a result of the court's decision and the current status of the standards, the impact of any new standards on MidAmerican is currently unknown. C. RATE MATTERS: (1) ELECTRIC - In Iowa on June 1, 1998, prices for electric residential customers were reduced by an amount which will have a $5.0 million annual impact on revenues. The decrease was the last of three for Iowa residential customers as a result of a 1997 settlement agreement. Through several steps from mid-1997 to the end of 1998, electric prices for Iowa industrial customers were reduced by an amount which will have a $6 million annual impact on revenues and electric -8- prices for Iowa commercial customers were reduced by an amount which will have a $4 million annual impact on revenues. The reductions were achieved through a retail access pilot project, negotiated individual electric contracts and a $1.5 million tariffed rate reduction for certain non-contract commercial customers. The negotiated electric contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to ten-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $180 million. If MidAmerican's annual Iowa electric jurisdictional return on common equity (ROE) exceeds 12%, then earnings above the 12% level will be shared equally between customers and MidAmerican; if the ROE exceeds 14%, two-thirds of MidAmerican's share of those earnings will be used for accelerated recovery of certain regulatory assets. The 1997 pricing plan settlement agreement precludes MidAmerican from filing for increased rates prior to 2001 unless the ROE falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the ROE after reflecting credits to customers, exceeds 14%. On April 14, 1999, the Iowa Utilities Board (IUB) approved, subject to additional refund, MidAmerican's 1998 ROE calculation. During the second quarter of 1999, MidAmerican refunded $2.2 million to its Iowa non-contract customers related to the ROE calculation for 1998. Under an Illinois restructuring law enacted in 1997, a similar sharing mechanism is in place for MidAmerican's Illinois electric operations. Two-year average ROEs greater than a two-year average benchmark will trigger an equal sharing of earnings on the excess. The benchmark is a calculation of average 30-year Treasury Bond rates plus 5.5% for 1998 and 1999. Legislation passed in July 1999 increases the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond rate. The initial calculation, which is still being defined and is due March 31, 2000, will be based on 1998 and 1999 results. (2) GAS - In October 1998, MidAmerican made a filing with the IUB requesting a rate increase for its Iowa retail gas customers. An interim rate increase of approximately $6.7 million annually was approved by the IUB on January 22, 1999, effective immediately. On April 23, 1999, the IUB issued an order approving a settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties which provides for an annual increase of $13.9 million. The new rates were implemented May 27, 1999. In November 1998, MidAmerican filed with the South Dakota Public Utilities Commission (SDPUC) requesting a rate increase for its South Dakota retail gas customers. The SDPUC, on April 23, 1999, issued an order approving a rate increase of $2.4 million annually, effective May 1, 1999. D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: MidAmerican's utility operations are subject to the regulation of the IUB, the ICC, the SDPUC, and the Federal Energy Regulatory Commission (FERC). MidAmerican's accounting policies and the accompanying Consolidated Financial Statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process. -9- Statement of Financial Accounting Standards (SFAS) No. 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A possible consequence of the changes in the utility industry is the discontinued applicability of SFAS 71. The majority of MidAmerican's electric and gas utility operations currently meet the criteria of SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of industry restructuring legislation in Illinois. Thus in 1997, MidAmerican was required to write off the regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. The net amount of such write-offs was not material. If other portions of its utility operations no longer meet the criteria of SFAS 71, MidAmerican could be required to write off the related regulatory assets and liabilities from its balance sheet and thus, a material adjustment to earnings in that period could result. E. MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES: The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures included in the Consolidated Balance Sheets were issued by MidAmerican Energy Financing I (the Trust), a wholly owned statutory business trust of MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican 7.98% Series A Debentures due 2045. F. SEGMENT INFORMATION: MidAmerican has two reportable operating segments: electric and gas. The electric segment derives most of its revenue from retail sales of regulated electricity to residential, commercial, and industrial customers and sales to other utilities; whereas the gas segment derives most of its revenue from retail sales of regulated natural gas to residential, commercial, and industrial customers. The gas segment also earns significant revenues by transporting gas owned by others through its distribution systems. Pricing for electric and gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. Common operating costs are allocated to each segment. The following tables provide certain MidAmerican information on an operating segment basis (in thousands): Three Months Six Months Ended June 30 Ended June 30 ---------------------- --------------------- 1999 1998 1999 1998 --------- --------- --------- -------- Electric: Revenues .................. $ 279,350 $ 287,094 $ 541,478 $543,448 Operating income .......... 62,562 60,368 106,924 114,014 Gas: Revenues .................. 71,282 67,288 242,060 240,488 Operating income .......... (5,877) (7,813) 21,805 17,559 Nonregulated and other (a): Revenues .................. 27,709 21,124 63,051 38,836 Operating income (loss) ... (781) 1,795 (3,475) 2,875 -10- June 30 December 31 ----------------------- ----------- 1999 1998 1998 ---------- ---------- ---------- Total Assets: Electric ............................ $2,897,678 $2,882,669 $2,897,657 Gas ................................. 600,854 606,910 672,072 Nonregulated and other (a) .......... 15,152 18,409 15,801 (a) "Nonregulated and other" consists of nonregulated gas operations, CBEC Railway and other nonregulated activities. G. OTHER COMPREHENSIVE INCOME: For the six months ended June 30, 1999 and 1998, there were no differences between MidAmerican's comprehensive income and earnings on common stock. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION ------------ MidAmerican Energy Company (MidAmerican) is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. (MHC). MHC is headquartered in Des Moines, Iowa, and is a wholly owned subsidiary of MidAmerican Funding, LLC, which is an indirect, wholly owned subsidiary of MidAmerican Energy Holdings Company. The current corporate structure is the result of the merger transaction completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings Company) and CalEnergy Company, Inc. (CalEnergy). CalEnergy, through a reincorporation transaction, was renamed MidAmerican Energy Holdings Company (Holdings). Holdings is an exempt public utility holding company headquartered in Des Moines. FORWARD-LOOKING STATEMENTS From time to time, MidAmerican may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond its control. 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's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of MidAmerican and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, fuel prices, fuel transportation, competitive factors, general economic conditions in MidAmerican's service territory, interest rates, inflation and federal and state regulatory actions. RESULTS OF OPERATIONS --------------------- EARNINGS DISCUSSION MidAmerican's earnings on common stock for the second quarter of 1999 were $19.1 million compared to $17.1 million for the second quarter of 1998. Earnings on common stock for the six months ended June 30, 1999 and 1998, were $44.1 million and $49.1 million, respectively. Below is a list of some of the significant factors contributing to the change in earnings. The amounts represent the variance between the respective periods. Therefore, a factor that had a negative impact on earnings in both periods, but which had less of a negative impact in the 1999 period than in the 1998 period, would be displayed as a positive factor for comparison purposes. For purposes of the following table, expenses related to amortization of deferred energy efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear Station (Cooper) costs are netted against the related recovery. As a result, the "O&M expenses" line below does not reflect the impact of these expenses, and the net effect of the revenues and expenses is included in the amounts on the "Other factors" line under gross margin. -12- The discussions that follow address the listed items and other variations. Approximate Earnings Variances Periods Ended June 30, 1999 vs. 1998 Three Months Six Months ------------ ---------- (In millions) Variation in gross margin due to - Weather effect............................... $(0.9) $0.9 Other retail sales factors & customer growth. (2.1) - Off-system sales margin & energy costs....... 7.3 13.1 Electric retail prices....................... (4.1) (7.9) Gas retail prices............................ 0.8 1.7 Other factors................................ (2.8) (4.9) O&M expenses.................................... 5.5 (2.1) Depreciation & amortization..................... (2.1) (5.3) Property and other taxes........................ 0.4 2.3 Utility nonregulated operating activities....... (1.2) (3.2) REGULATED GROSS MARGIN Regulated Electric Gross Margin: - -------------------------------- Three Months Six Months Ended June 30 Ended June 30 -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In millions) Operating revenues .................. $279 $287 $541 $543 Cost of fuel, energy and capacity ... 51 58 102 103 ---- ---- ---- ---- Electric gross margin ............... $228 $229 $439 $440 ==== ==== ==== ==== MidAmerican's electric gross margin for the three-month and six-month periods ended June 30, 1999, was relatively unchanged from the comparable periods in 1998. The impact of various factors affecting electric margin are discussed in the following paragraphs. A decrease in revenues from energy efficiency cost recovery accounted for $2.1 million and $3.9 million of the decrease in revenues and margin for the three- and six-month comparisons, respectively. Approximately $9.3 million and $18.8 million of MidAmerican's electric revenues for the 1999 three- and six-month periods, respectively, were from the recovery of energy efficiency program costs. Collection of deferred energy efficiency costs decreased in 1999 compared to the 1998 periods due to the completion of one of the four recovery periods. Changes in revenues from energy efficiency cost recovery are substantially offset by corresponding changes in other operating expenses. Refer to the discussion under "Energy Efficiency" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A for further discussion. Revenues and gross margin for the 1999 periods reflect price reductions which were not in effect, or were only partially in effect, during the 1998 periods presented. In June 1998, revenues from Iowa residential customers were reduced $5 million annually. Since July 1997, MidAmerican has reduced revenues from its Iowa commercial and industrial customers a total of approximately $10 million annually through negotiated contracts and a tariffed rate reduction. These reductions were only partially in effect in the 1998 periods. Revenues from Illinois customers were reduced $0.9 million in August 1998 related to Illinois utility industry restructuring. MidAmerican also recorded a refund accrual for a revenue sharing arrangement in Iowa. The accrual reduced revenues and margin by $5.1 million and $9.0 million for the -13- quarter and year-to-date periods ended June 30, 1999, respectively. Refer to "Rate Matters: Electric" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A for a discussion of revenue sharing. The combined effect of the revenue reductions and the revenue sharing accrual decreased revenues and electric margin by $7.1 million for the second quarter of 1999 compared to the second quarter of 1998 and $13.5 million for six months ended June 30, 1999, compared to the same period in 1998. For the second quarter of 1999, temperatures were milder than normal, resulting in a $5 million reduction of electric margin for the period. Compared to the second quarter of 1998, which was also milder than normal, the effect of temperatures decreased electric margin by $2 million. A decrease in sales not dependent on weather also reduced revenues and electric margin compared to the second quarter of 1998. Moderate growth in the number of customers increased electric margin by $1.5 million. In total, retail sales of electricity decreased 1.5%. Temperatures during the six months ended June 30, 1999, were milder than normal resulting in a $10 million reduction of electric margin for the period. Compared to the six-month period ended June 30, 1998, electric margin decreased $1 million from the effect of temperatures. A decrease in sales not dependent on weather also reduced revenues and electric margin compared to the first six months of 1998. Moderate growth in the number of customers increased electric margin by $3.5 million. In total, retail sales of electricity decreased 0.1%. MidAmerican also sells energy and capacity in the off-system market. Margins on off-system sales, which account for most of MidAmerican's sales for resale, contributed $12.4 million and $22.2 million more to gross margin in the three- and six-month periods ended June 30, 1999, than in the comparable periods in 1998. Related sales volumes increased 24.6% and 20.9% compared to the three- and six-month periods in 1998 due in part to improved availability of Quad Cities Nuclear Power Station (Quad Cities Station) in 1999. Deregulation of the Illinois electric utility industry resulted in changes in the way certain taxes are assessed in Illinois. One of the taxes is now assessed directly on the energy consumer instead of through the utility. Accordingly, MidAmerican's electric revenues and electric margin reflect reductions of $1.2 million and $2.5 million in the quarter and six-month period ended June 30, 1999, respectively, for this tax collection change. Regulated Gas Gross Margin: - --------------------------- Three Months Six Months Ended June 30 Ended June 30 ----------------- -------------- 1999 1998 1999 1998 ----- ----- ---- ---- (In millions) Operating revenues... $ 71 $ 67 $242 $240 Cost of gas sold..... 39 33 135 138 ---- ---- ---- ---- Gas gross margin..... $ 32 $ 34 $107 $102 ==== ==== ==== ==== MidAmerican's regulated gas revenues include purchase gas adjustment clauses (PGAs) through which MidAmerican is allowed to recover the cost of gas sold from most of its gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations in revenues from PGAs. An increase in the per-unit cost of gas for the second quarter of 1999 compared to the second quarter of 1998 increased revenues and cost of gas sold by approximately $5.6 million. For the six-month period comparison, revenues and cost of gas decreased $6.1 million due to a change in the average per-unit cost of gas. -14- Recovery of gas energy efficiency program costs decreased $0.5 million and $0.8 million for the 1999 three- and six-month periods presented compared to the same periods in 1998. Approximately $3.9 million and $8.0 million of MidAmerican's gas revenues for the 1999 three- and six-month periods, respectively, were from the recovery of gas energy efficiency program costs. Again, changes in revenues from energy efficiency cost recovery are substantially offset by corresponding changes in other operating expenses. Refer to the discussion under "Energy Efficiency" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A for further discussion. On January 22, 1999, the IUB approved a $6.7 million annual interim increase in gas rates for Iowa retail customers effective immediately. An additional increase was implemented on May 27, 1999, as a result of the IUB's approval of a final rate increase of $13.9 million annually. These increases contributed approximately $1.4 million and $2.9 million to the comparative increase in gas margin for the three- and six-month periods ended June 30, 1999, respectively. Temperatures in the second quarter of 1999 were milder than normal. However, due to the relatively low volume of gas sales during the second quarter in the Midwest, the milder-than-normal temperatures had little impact on revenues and gas margin. Compared to the second quarter of 1998, gas margin increased approximately $1 million due to the effect of temperatures. Customer growth resulted in a $0.4 million improvement in gas margin in the 1999 quarter. In total, retail sales of natural gas in the second quarter of 1999 increased 1.2% compared to the 1998 quarter. Temperatures in the first six months of 1999 were warmer than normal, resulting in a $6 million decrease in gas gross margin for the period. Compared to the same period in 1998, gas margin increased $3 million due to the effect of temperatures. Customer growth resulted in a $1.4 million improvement in gas margin in the 1999 period. In total, retail sales of natural gas in the first six months of 1999 increased 2.6% compared to the 1998 period. REGULATED OPERATING EXPENSES Other operating expenses decreased $9.6 million for the second quarter of 1999 compared to the second quarter of 1998 and decreased $1.5 million for the six months ended June 30, 1999, compared to the six months ended June 30, 1998. As mentioned in the gross margin discussions, the recovery of one phase of deferred energy efficiency costs is complete, and accordingly, the costs for that phase have been fully amortized to expense. As a result, energy efficiency costs decreased $2.2 million and $4.0 million for the three- and six-month period comparisons, respectively. Expense related to the Cooper Tracker (a cost recovery mechanism begun in 1997) increased $2.5 million and $3.1 million for the three- and six-month comparisons to 1998, respectively. MidAmerican is recovering on a current basis the Iowa portion of these costs from its Iowa electric customers. Reductions in marketing and sales-related expenses, gas distribution costs, certain administrative and general costs and customer service costs also contributed to the decrease in other operating expenses in the second quarter of 1999 compared to the second quarter of 1998. Increased expenses in the six months ended June 30, 1999, for information technology, consulting and customer service costs were offset by decreases in marketing and sales expenses, certain employee benefits costs, gas distribution costs and other administrative and general costs. The increase in information technology costs was due in part to year 2000 preparation and support for various new systems. -15- Maintenance expenses increased $0.6 million and $4.1 million for the 1999 quarter and year-to-date periods, respectively, compared to the same periods in 1998 due to the timing of generating plant maintenance and increased electric and gas distribution maintenance. The increases in these areas were partially offset by a $3.0 million decrease in both 1999 periods for maintenance at the Quad Cities Station. Property and other taxes decreased $0.7 million and $3.9 million for the three months and six months ended June 30, 1999, respectively, compared to the same periods in 1998. MidAmerican's Iowa property tax decreased for the 1999 periods due to reduced assessed values. Deregulation of the Illinois electric utility industry resulted in changes in the way certain taxes are assessed in Illinois. The changes resulted in decreases in MidAmerican's tax expense for the 1999 three- and six-month periods compared to the 1998 periods. One of the taxes is now assessed directly on the energy consumer instead of through the utility. Accordingly, MidAmerican's electric revenues reflect an equal reduction in the 1999 periods for this tax collection change. NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Revenues and Cost of Sales - Revenues from wholesale natural gas marketing operations increased $5.7 million and $23.0 million for the three months and six months ended June 30, 1999, respectively, compared to the same periods in 1998. The primary cause of the increase in revenues for the 1999 quarter was an increase in the average price per unit, driven by an increase in the average cost of gas. Related sales volumes increased 723,000 MMBtus (7%) compared to the second quarter of 1998 due in part to additional contracts which were previously serviced by a nonregulated affiliate of MidAmerican. Cost of sales related to natural gas marketing reflects the increases in sales volumes and the average cost of gas. Total gross margin (total price less cost of gas) on nonregulated natural gas sales was relatively unchanged. For the six-month period, related sales volumes increased 13 million MMBtus (77%). The increase in sales volumes is due primarily to gas marketing contracts previously serviced by a nonregulated affiliate of MidAmerican that started being renewed as MidAmerican contracts in May 1998. A decrease in the average price per unit, reflective of a lower cost of gas per unit, partially offset the effect of increased sales. Cost of sales related to natural gas marketing for the six months ended June 30, 1999, reflects the increase in sales and the decrease in the average cost of gas per unit. Total gross margin on nonregulated natural gas sales decreased $0.6 million compared to the first six months of 1998. The decrease was due to lower than anticipated gas prices in part of the first quarter of 1999, as well as lower than anticipated sales volumes due in part to mild weather during the same quarter. Other increases in revenues relate to growth in two of the Company's nonregulated programs and revenues of a railway subsidiary which began operations in the fourth quarter of 1998. Other Nonregulated Operating Expenses - Other nonregulated operating expenses increased in the 1999 periods compared to the same periods in 1998 due to costs of initiatives for new nonregulated products and services. -16- NON-OPERATING INCOME AND INTEREST EXPENSE Interest and Dividend Income - Interest income decreased in the three months and six months ended June 30, 1999, compared to the same periods in 1998 due to a decrease in temporary cash investments and a note receivable related to the sale of MidAmerican's accounts receivable. Other, Net - Other, Net reflects the discount on sold accounts receivable, net of a fee for servicing the accounts. The net discount was recorded as an expense in Other, Net in the amount of $1.7 million and $1.4 million for the second quarter of 1999 and 1998, respectively. For the six months ended June 30, the net discount was an expense of $4.6 million and $3.1 million for 1999 and 1998, respectively. Fixed Charges - The decrease in interest on long-term debt is due to long-term debt maturities and refinancing in 1998. Other interest expense increased in the six months ended June 30, 1999, compared to the 1998 six-month period due primarily to an increase in commercial paper outstanding. A decrease in other short-term debt interest expense in the second quarter of 1999 was due to interest expense in 1998 related to a Federal income tax payment which offset the impact of the commercial paper increase for the quarterly comparison. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- MidAmerican has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements. As reflected on the Consolidated Statements of Cash Flows, MidAmerican's net cash provided from operating activities was $189 million and $236 million the first six months of 1999 and 1998, respectively. INVESTING ACTIVITIES AND PLANS Utility Construction Expenditures - MidAmerican's primary need for capital is utility construction expenditures. For the first six months of 1999, utility construction expenditures totaled $78 million, including allowance for funds used during construction (AFUDC) and Quad Cities Station nuclear fuel purchases. All such expenditures were met with cash generated from utility operations, net of dividends. Forecasted utility construction expenditures, including AFUDC, for 1999 are $179 million and $720 million for 2000 through 2003. Capital expenditure needs are reviewed regularly by MidAmerican's management and may change significantly as a result of such reviews. MidAmerican presently expects that all utility construction expenditures for the next five years will be met with cash generated from utility operations, net of dividends. The actual level of cash generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions. -17- 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 expects to contribute approximately $42 million during the period 1999 through 2003 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Approximately 65% of the trust's funds are now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. In addition, MidAmerican makes payments to Nebraska Public Power District (NPPD) related to decommissioning Cooper. These payments are reflected in other operating expenses in the Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay approximately $57 million to NPPD for Cooper decommissioning during the period 1999 through 2003. NPPD invests the funds predominately in U.S. Treasury Bonds and other U.S. Government securities. Approximately 20% was invested in domestic corporate debt. MidAmerican's obligation for Cooper decommissioning may be affected by the actual plant shutdown date and the status of the power purchase contract at that time. In July 1997, NPPD filed a lawsuit in United States District Court for the District of Nebraska naming MidAmerican as the defendant and seeking a declaration of MidAmerican's rights and obligations in connection with Cooper nuclear decommissioning funding. Refer to Part II, Item 1. Legal Proceedings, for further discussion of the litigation. Cooper and Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process. Decommissioning costs charged to Illinois customers are recovered through a rate rider on customer billings. FINANCING ACTIVITIES, PLANS AND AVAILABILITY MidAmerican currently has authority from the FERC to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of June 30, 1999, MidAmerican had a $250 million revolving credit facility agreement and a $5 million bank line of credit. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit. MidAmerican also has a revolving credit facility which is dedicated to providing liquidity for its obligations under outstanding pollution control revenue bonds that are periodically remarketed. In 1997, MidAmerican entered into a revolving agreement, which expires in 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a special purpose entity established to purchase accounts receivable from MidAmerican. Funding Corp. in turn sold receivable interests to outside investors. In consideration for the sale, MidAmerican received $70 million in cash and the remaining balance in the form of a subordinated note from Funding Corp. As of June 30, 1999, the revolving cash balance was $56 million due to a decline during the second quarter of 1999 in accounts receivable available for sale. The agreement is structured as a true sale, as determined by Statement of Financial Accounting Standards (SFAS) No. 125, under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors. Therefore, the accounts receivable sold are not reflected on MidAmerican's Consolidated Balance Sheets. As of June 30, 1999, $87.4 million of accounts receivable, net of reserves, were sold under the agreement. MidAmerican has authorization from the FERC to issue up to an additional $500 million in various forms of long-term debt. MidAmerican will also need authorization from the ICC prior to issuing -18- any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican need only provide the ICC with an "informational statement" prior to the issuance which sets forth the type, amount and use of the proceeds of the securities to be issued. If less than 90% of the proceeds are used for refinancing, MidAmerican must file a comprehensive application seeking authorization prior to issuance. The ICC is required to hold a hearing before issuing its authorization. OPERATING ACTIVITIES AND OTHER MATTERS Industry Evolution - The utility industry continues to evolve into an increasingly competitive environment. In virtually every region of the country, legislative and regulatory actions are being taken which result in customers having more choices in their energy decisions. In the electric industry, the traditional vertical integration of generation, delivery and marketing is being unbundled, with the generation and marketing functions being deregulated. For local gas distribution businesses, the supply, local delivery and marketing functions are similarly being separated and opened to competitors for all classes of customers. While retail electric competition is presently not permitted in Iowa, MidAmerican's primary market, legislation to do so was introduced in the Iowa legislature in the last session. Deregulation of the gas supply function related to small volume customers is also being considered by the IUB. MidAmerican is actively participating in the legislative and regulatory processes shaping the new environment in which its businesses will operate. The generation and retail portions of MidAmerican's electric business will be most affected by competition. The introduction of competition in the wholesale market has resulted in a proliferation of power marketers and a substantial increase in market activity. As retail choice evolves, competition from other traditional utilities, power marketers and customer-owned generation could put pressure on utility margins. During the transition to full competition, increased volatility in the marketplace can be expected. With the elimination of the energy adjustment clause in Iowa, MidAmerican is exposed to movements in energy prices. Although MidAmerican has sufficient low cost generation under typical operating conditions for its retail electric needs, a loss of adequate generation by MidAmerican at a time of high market prices could subject MidAmerican to losses on its energy sales. Legislative and Regulatory Evolution - In December 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market. Under the law, larger non-residential customers in Illinois and 33% of the remaining non-residential Illinois customers will be allowed to select their provider of electric supply services, beginning October 1, 1999. All other non-residential customers will have supplier choice starting December 31, 2000. Residential customers all receive the opportunity to select their electric supplier on May 1, 2002. The law required a 15% electric rate reduction for all Illinois residential customers in 1998. To satisfy its obligation, MidAmerican received credit for its 1996 and 1997 Illinois rate reductions, totaling $15.5 million, and reduced rates an additional $0.9 million annually, effective August 1, 1998. MidAmerican is exempted from the requirement to join an independent system operator (ISO) or to form an in-state ISO. In addition, the law provides for Illinois earnings above a certain level of ROE to be shared equally between customers and MidAmerican beginning in April 2000. MidAmerican's ROE level will be based on a rolling two-year average, with the first determination being based on an average of 1998 and 1999. -19- The ROE level at which MidAmerican will be required to share earnings is a multi-step calculation of average 30-year Treasury Bond rates plus 5.50% for 1998 and 1999. Legislation passed in July 1999 increases the benchmark for 2000 through 2004 to 8.5% above the 30-year Treasury bond rate. If the resulting average Treasury Bond rate were equal to the December 1998 30-year Treasury Bond rate, the ROE level above which sharing must occur would be approximately 10.6% for 1998 and 1999 and 13.6% for 2000 through 2004. The law allows MidAmerican to mitigate the sharing of earnings above the threshold ROE through accelerated cost recognition that would reduce MidAmerican's earnings. MidAmerican continues to evaluate its strategy regarding the sharing mechanism. The law also addresses charges to customers for transition costs based on a lost-revenue approach. These transition fees, designed to help utilities recover stranded costs, will end December 31, 2006, subject to possible extension. MidAmerican continues its involvement in proceedings which detail the new competitive environment and to evaluate the impact of the law on its operations and the opportunities the law presents. In Iowa, a replacement of the prior utility property tax system, which was supported by MidAmerican, went into effect on January 1, 1999. The replacement tax is primarily a consumption-based tax on the user of energy and assures stability in tax collections as the industry is deregulated in Iowa. With resolution of the utility property tax issue, MidAmerican is pursuing the adoption of electric utility industry restructuring legislation. Progress was made during the 1999 Iowa legislative session, and MidAmerican continues working toward adoption of new legislation in a future session. Residential and Commercial Pilot Project - On August 21, 1998, the IUB issued an Order approving MidAmerican's proposal to allow at least 15,000 Iowa families and 2,000 small businesses to have the opportunity to select among competing electricity providers. The two-year pilot program will allow participating retail customers in the selected test area to choose among several electricity providers, including MidAmerican, and to have that energy delivered by MidAmerican. Customer enrollment is currently allowed and the pilot is expected to begin in 1999 after additional suppliers are registered. Businesses in the test area will be eligible for the program if their annual peak demand is less than four megawatts. New suppliers participating in the program will have to be certified by the IUB and meet specified requirements. Accounting Effects of Industry Restructuring - A possible consequence of competition in the utility industry is that SFAS 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A majority of MidAmerican's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of industry restructuring legislation in Illinois. Thus, in 1997 MidAmerican was required to write off the regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. The net amount of such write-offs was not material. If other portions of its utility operations no longer meet the criteria of SFAS 71, MidAmerican could be required to write off the related regulatory assets and liabilities from its balance sheet, and thus, a material adjustment to earnings in that period could result. As of June 30, 1999, MidAmerican had $279 million of regulatory assets on its Consolidated Balance Sheet. -20- Energy Efficiency - MidAmerican's regulatory assets as of June 30, 1999, included $55.6 million of deferred energy efficiency costs. Based on the current level of recovery, MidAmerican expects to recover these costs by the end of 2001. MidAmerican is also allowed to recover its ongoing energy efficiency costs on a current basis. Recovery of these costs is being collected from customers based on projected annual costs of $17.4 million, which may be adjusted annually. Amortization of the deferred energy efficiency costs and current expenditures for energy efficiency costs will be reflected in other operating expenses over the related periods of recovery. The total of such costs for the years 1999, 2000 and 2001 is estimated to be $43 million, $40 million and $35 million, respectively. Rate Matters: Electric - Through several steps from mid-1997 to the end of 1998, electric prices for Iowa industrial customers were reduced by an amount which will have a $6 million annual impact on revenues and electric prices for Iowa commercial customers were reduced by an amount which will have a $4 million annual impact on revenues. The reductions were achieved through a retail access pilot project, negotiated individual electric contracts and a $1.5 million tariffed rate reduction for certain non-contract commercial customers. The negotiated electric contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to ten-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $180 million. If MidAmerican's annual Iowa electric jurisdictional ROE exceeds 12%, then earnings above the 12% level will be shared equally between customers and MidAmerican; if the ROE exceeds 14%, then two-thirds of MidAmerican's share of those earnings will be used for accelerated recovery of certain regulatory assets. A 1997 pricing plan settlement agreement precludes MidAmerican from filing for increased rates prior to 2001 unless the ROE falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the ROE, after reflecting credits to customers, exceeds 14%. On April 14, 1999, the IUB approved, subject to additional refund, MidAmerican's 1998 ROE calculation. During the second quarter of 1999, MidAmerican refunded $2.2 million to its Iowa non-contract customers related to the ROE calculation for 1998. The agreement also eliminated MidAmerican's energy adjustment clause, and, as a result, the cost of fuel is not directly passed on to customers. Rate Matters: Gas - In October 1998, MidAmerican made a filing with the IUB requesting a rate increase for its Iowa retail gas customers. An interim rate increase of approximately $6.7 million annually was approved by the IUB on January 22, 1999, effective immediately. On April 23, 1999, the IUB issued an order approving a settlement agreement between MidAmerican, the OCA and other parties which provides for an annual increase of $13.9 million. The new rates were implemented May 27, 1999. In November 1998, MidAmerican filed with the South Dakota Public Utilities Commission (SDPUC) requesting a rate increase for its South Dakota retail gas customers. The SDPUC in April 1999 approved a rate increase of $2.4 million annually, effective May 1, 1999. -21- Environmental Matters - The EPA and state environmental agencies have determined that contaminated wastes remaining at certain decommissioned MGP 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 is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a PRP. The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether MidAmerican has any responsibility for remedial action. MidAmerican's estimate of probable remediation costs for these sites as of June 30, 1999, was $24 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note B (1) of Notes to Consolidated Financial Statements for further discussion of MidAmerican's environmental activities related to MGP sites and cost recovery. 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's financial position or results of operations. Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making significant contribution to nonattainment of the ozone standard in "downwind states" in the eastern half of the United States. The nonattainment of the "downwind states" is based on the ozone standard established prior to the 1997 revisions discussed below. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MidAmerican's facilities are not currently subject to additional emissions reductions as a result of this initiative. On July 18, 1997, the EPA adopted revisions to the NAAQS for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout the states, the EPA will make a determination of whether the states have any areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. In May 1999, the U.S. District Court of Appeals for the District of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA indicating the EPA had not expressed sufficient justification for the basis of establishing the standards and ruling that the EPA has exceeded its constitutionally-delegated authority in setting the standards. The EPA has appealed the court's ruling to the full panel of the U.S. District Court of Appeals for the District of Columbia Circuit. Argument in the appeal proceeding is scheduled for the fall of 1999. As a result of the court's decision and the current status of the standards, the impact of any new standards on MidAmerican is currently unknown. In December 1997, negotiators from more than 150 nations met in Kyoto, Japan to negotiate an international agreement designed to address global climate change impacts by attempting to reduce so-called greenhouse gas emissions. Some scientists contend that these gases build up in the Earth's atmosphere and cause global temperatures to rise. The primary target of these emissions is carbon dioxide (CO2) which is formed by, among other things, the combustion of fossil fuels. The agreement currently calls for the United States to reduce its emissions of CO2 and other greenhouse gases to 7% below 1990 levels in the 2008-2012 time frame. The United States became a signatory to the agreement on November 12, 1998. In order for the agreement to become binding upon the United States, ratification by the U.S. Senate is necessary. The cost to the utility industry in general, and to MidAmerican, of reducing its CO2 -22- emissions levels by 7% below 1990 levels would depend on available technology at the time, but could be material. Quad Cities Nuclear Power Station - Quad Cities Station is operated by, and 75% owned by, Commonwealth Edison Company (ComEd). On May 6, 1999, the Nuclear Regulatory Commission (NRC) advised ComEd that it had classified Quad Cities Station in the NRC's Routine Oversight category (the best of three NRC new categories) for nuclear power plants, removing the station from the Trending (adversely) Letter status initiated in January 1998. During the first six months of 1999, the station capacity factor was in excess of 91%. Generating Capability - In July 1998, retail customer usage of electricity caused an hourly peak demand of 3,643 MW on MidAmerican's energy system. Preliminary information indicates that retail customer usage of electricity during the hot weather in July 1999 has resulted in a new hourly peak demand on MidAmerican's energy system of 3,844 MW. MidAmerican is interconnected with certain 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. MidAmerican was able to maintain its capacity reserve requirement during the hot weather in July 1999 and was not adversely affected by the resultant high prices in the off-system market. MidAmerican believes it has adequate electric capacity reserve and continues to manage its generating resources to ensure an adequate reserve in the future. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican's reserve to fall below the 15% minimum. If MidAmerican fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP. ACTIVITIES REGARDING YEAR 2000 DATE ISSUES The following discussion of year 2000 issues describes MidAmerican's plans to address technical problems relating to calculations, manipulations, storage and other uses of date-sensitive data which could cause some computer-controlled systems, applications and processes (hereinafter referred to as "Systems") to incorrectly process critical financial and operational information, or stop processing altogether. The discussion contains by necessity many forward-looking statements. MidAmerican wishes to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and in order to do so includes the following meaningful cautionary statements with regard to the forward looking statements of its year 2000 plans. MidAmerican's intentions, expectations, and predictions relating to its year 2000 efforts are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Such risks and uncertainties include, among others, the effects of weather, federal and state regulatory actions, and other matters, many of which are beyond MidAmerican's control. In addition, MidAmerican claims the full protections established by the Year 2000 Information and Readiness Disclosure Act for Year 2000 Statements and Year 2000 Readiness Disclosure. Project Description - MidAmerican has undertaken an extensive ongoing project to address its information technology (IT) and non-IT (including embedded technology) Systems potentially affected by the year 2000 date change. MidAmerican's approach is based on a five-phase project methodology - inventory, assessment, planning, resolution and implementation - designed to result in the identification and evaluation of -23- potential problems, and remediation of MidAmerican's Systems. MidAmerican generally defines the five phases as follows: 1. Inventory Phase - The purpose of the inventory phase is to identify and document Systems used by MidAmerican that may have a date-sensitive function. 2. Assessment Phase - The purpose of the assessment phase is to collect information about inventoried Systems, including the business and technical context in which individual Systems operate, to make an informed judgment concerning an appropriate plan to mitigate year 2000 related risks. 3. Planning Phase - The purpose of the planning phase is to develop strategic and tactical plans for Systems that require replacement, repairs, upgrades or other appropriate actions (collectively referred to as "remedial actions"). 4. Resolution Phase - The purpose of the resolution phase is to execute the plan developed during the preceding phases. Testing of Systems and/or components of Systems, as well as any preceding or subsequent remedial action, is commenced during this phase. 5. Implementation Phase - The purpose of the implementation phase is to examine the Systems to determine whether they will function adequately in a production environment and to perform follow-up administrative tasks as required to develop appropriate documentation in support of year 2000 readiness. MidAmerican classifies all Systems ranging from low- to high-priority based on their importance to carrying out MidAmerican's business mission. System priority is based on potential impacts resulting from year 2000 problems on public and employee safety, prolonged and widespread service outages, long-term shareholder value, and ability to comply with regulatory requirements. In the case of low-priority Systems, year 2000 readiness may be delayed beyond January 1, 2000, or perhaps indefinitely. MidAmerican plans to use the last six months of 1999 to perform post-implementation testing, address selected lower priority Systems and conduct preparedness exercises. Vendors, customers and other third parties may affect MidAmerican's ability to achieve year 2000 readiness. Because service reliability and financial stability are dependent on MidAmerican's supply chain, a concerted effort is being made to investigate important third parties to assess their ability to continue to supply products or services to, or purchase products or services from, MidAmerican. State of Readiness - Due to factors such as the overlapping nature of the project phases and the varying degree of complexity of the Systems being addressed, it is difficult to accurately determine the status of completion of a particular phase of the project at any given point in time. MidAmerican uses three methods to measure the status of project completion: 1. As an entity with public utility operations, MidAmerican must comply with certain year 2000 regulatory requirements imposed by the North American Electric Reliability Council (NERC). NERC reporting data is limited primarily to Systems that are directly associated with transmission grid stability. The transmission grid consists of the interconnected transmission systems of North American utilities. Reporting categories include nuclear generation, non-nuclear generation, Energy Management Systems and Supervisory Control and Data Acquisition (SCADA) system, telecommunications systems, substation controls and system protection, and IT business information systems. MidAmerican reported in its July compliance filing with NERC that it is "100% Y2K Ready" on systems considered mission-critical by NERC definition. 2. A "checklist" approach is used to monitor the completion status of each System that is unique to a given organizational group. For example, identical substation meters may be located in several -24- individual substations, but the meter is counted as only one System. All Systems are viewed as equivalent, regardless of priority, in the checklist approach. Systems are categorized as complete or not complete, without regard to percentage of completion of the System in total or percentage of completion of any particular phase of the project. As of July 30, 1999, there were 5,554 separate Systems in MidAmerican's inventory. Of these, 5,510, or 99%, had been completed. 3. MidAmerican's internally developed measure is more sensitive than the methods discussed above and is based on business risk/priority, weighted tasks and weighted phases. Only high- and medium-risk/priority Systems are included in the status of completion calculation. The data related to Systems that could impact grid stability pertains only to those Systems that directly affect MidAmerican's customers. Also, progress toward completion is measured. As of July 30, 1999, MidAmerican as a whole is generally in the resolution phase. Percentage of completion for six areas of business operations is a follows: A. IT - Applications: 90-95% complete B. IT - Operations & Infrastructure: 95-100% complete C. Generation: 95-100% complete D. Energy Delivery: 95-100% complete E. Retail: 90-95% complete F. Corporate Services (excluding IT): 95-100% complete The investigation of supply chain issues consists of documenting the nature of business relationships in correspondence, surveys and meetings with third parties and making determinations regarding their year 2000 readiness status based on the responses received. MidAmerican has initiated contact with vendors and business partners it considers to represent a significant financial or operational risk if they were to experience year 2000 problems. In addition, interconnected utilities and wholesale customers, as well as high-volume retail customers, have been contacted for the purpose of reviewing the status of their year 2000 readiness efforts. To date, information made available to MidAmerican has not been uniform in terms of quality and quantity. Although none of the information has suggested that the year 2000 readiness efforts of these vendors, business partners and customers have been inadequate, MidAmerican intends to maintain ongoing communications with some third parties through the last half of 1999. MidAmerican will also continue monitoring information about specific products in MidAmerican's inventory. Costs - As of June 30, 1999 approximately $9.3 million in operating expenses have been incurred to carry out year 2000 activities. It is anticipated that up to $5.7 million in additional operating expenses and capital costs will need to be incurred to complete the project. Although additional unforeseen costs may be incurred, at this time MidAmerican has not become aware of any material costs which may arise in order to achieve year 2000 readiness. Future progress toward achievement of year 2000 readiness could change this outlook. MidAmerican has renovated or replaced several high-priority Systems (e.g., management information, materials management information, work management information, customer service, electric outage management, meter control and inventory, and others) to gain enhanced functionalities. For example, the development and installation of a new customer service system (CSS) and related applications was an outcome of the merger which created MidAmerican in July of 1995. Although potential year 2000 problems existing in the predecessor companies' CSS products were recognized, the decision to implement the new CSS was primarily in response to integration difficulties and the need for additional application functionalities. The costs of these renovations and replacements are not reported herein as their development and installation was not driven by year 2000 concerns. -25- Contingency Plans - A contingency plan identifying credible worst-case scenarios is being developed. The contingency plan is comprised of both mitigation and recovery aspects. Mitigation entails planning to reduce the impact of unresolved year 2000 problems, and recovery entails planning to restore services in the event that year 2000 problems occur. MidAmerican's contingency plan is under final review by senior management. Although the plan is substantially complete, it will be refined throughout the remainder of the year based on results of contingency planning drills and changes in circumstances. Although a number of factors come into play in defining reasonably likely worst case scenarios, the loss of voice and data communications, volatile load patterns, and inability to control generation and/or return generation units to service are viewed as the most serious threats. The relative seriousness of these threats is based on recognition that the occurrence of any of these types of problems could have an immediate and significant effect on service reliability and financial performance. MidAmerican participated in a contingency planning drill coordinated by NERC on April 9, 1999. The drill focused on managing problems resulting from a simulated partial loss of voice and data communications services. MidAmerican also plans to participate in a second NERC-coordinated drill, which has been scheduled to take place on September 8-9, 1999. It is likely that additional drills will be conducted at MidAmerican's own discretion, as well. Risks - Despite the comprehensive nature of MidAmerican's year 2000 project and the results the project is designed to produce, MidAmerican may experience random, widespread and simultaneous failures in its generation, distribution and Systems during year 2000 transition periods. Contingency plans for any known or reasonably anticipated risk of interruption to the generation or distribution of energy are being developed to plan for resources needed to be put in place to reduce the potential outage period to a minimum. Although the impact on future operations and revenues is unknown, failure of MidAmerican's Systems to perform because of year 2000 implications could result in operating problems and costs material to MidAmerican. Although management believes the project will be completed sufficiently in advance of January 1, 2000, unforeseen and other factors could cause delays in the project, the results of which may have a material effect on MidAmerican's results of operations. In addition, there is no assurance that MidAmerican will not be affected by year 2000 problems experienced by third parties. ACCOUNTING ISSUES In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", which was delayed by SFAS 137 and is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires an entity to recognize all of its derivatives as either assets or liabilities in its statement of financial position and measure those instruments at fair value. The Company is in the process of evaluating the impact of this accounting standard. -26- PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------- ----------------- MidAmerican and its subsidiaries have no material legal proceedings except for the following: Environmental Matters - --------------------- For information relating to MidAmerican's Environmental Matters, reference is made to Part I, Note B of Notes to Consolidated Financial Statements. Cooper Litigation - ----------------- On July 23, 1997, NPPD filed a Complaint, in the United States District Court for the District of Nebraska, naming MidAmerican as the defendant and seeking declaratory judgment as to three issues under the parties' long-term power purchase agreement for Cooper capacity and energy. More specifically, NPPD seeks a declaratory judgment in the following respects: (1) that MidAmerican is obligated to pay 50% of all costs and expenses associated with decommissioning Cooper, and that in the event NPPD continues to operate Cooper after expiration of the power purchase agreement (September 2004), MidAmerican is not entitled to reimbursement of any decommissioning funds it has paid to date or will pay in the future; (2) that the current method of allocating transition costs as a part of the decommissioning cost is proper under the power purchase agreement; and (3) that the current method of investing decommissioning funds is proper under the power purchase agreement. MidAmerican filed its answer and contingent counterclaims. The contingent counterclaims filed by MidAmerican are generally as follows: (1) that MidAmerican has no duty under the power purchase agreement to reimburse or pay 50% of the decommissioning costs unless certain conditions occur; (2) that NPPD has the duty to repay all amounts that MidAmerican has prefunded for decommissioning in the event NPPD operates the plant after the term of the power purchase agreement; (3) that NPPD is equitably estopped from continuing to operate the plant after the term of the power purchase agreement; (4) that NPPD has granted MidAmerican an option to continue taking 50% of the power from the plant; (5) that the term "monthly power costs" as defined in the power purchase agreement does not include costs and expenses associated with decommissioning the plant; (6) that MidAmerican has no duty to pay for nuclear fuel, O&M projects or capital improvements that have useful lives after the term of the power purchase agreement; (7) that transition costs are not included in any decommissioning costs and expenses; (8) that NPPD has breached its duty to MidAmerican in making investments of certain funds; (9) that reserves in certain accounts are excessive and should be refunded to MidAmerican; and (10) that NPPD must credit MidAmerican for certain payments by MidAmerican for low-level radioactive waste disposal. MidAmerican and NPPD are currently involved in discovery. The trial in this case is presently scheduled for November 1999. MidAmerican is vigorously defending and pursuing its interest in this proceeding. North Star Steel Company - ------------------------ On December 8, 1997, North Star Steel Company (NSS), a retail MidAmerican electric customer, filed a Complaint in the United States District Court for the Southern District of Iowa naming MHC and MidAmerican as defendants. The Complaint alleged that MidAmerican's refusal to allow NSS to obtain retail electric service from an unspecified alternative energy company amounted to a violation of federal antitrust laws. NSS sought to recover an unspecified level of damages, and to require MidAmerican to provide retail wheeling service so that NSS could obtain electricity from an unnamed supplier. On June 23, 1998, the District Court issued an Order Granting Summary Judgment in favor of MidAmerican. -27- On July 20, 1998, NSS appealed that decision to the United States Court of Appeals for the Eighth Circuit. On July 7, 1999, the United States Court of Appeals for the Eighth Circuit affirmed the District Court grant of summary judgment in favor of MidAmerican. NSS has indicated it plans to appeal this decision. In a related matter NSS unsuccessfully appealed to the Iowa District Court an Iowa Utilities Board declaratory ruling that was favorable to MidAmerican. NSS now has pending before the Iowa Supreme Court an appeal of that adverse decision. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (A) EXHIBITS Exhibits Filed Herewith - ----------------------- Exhibit 12 - Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. Exhibit 15 - Awareness Letter of Independent Accountants Exhibit 27 - Financial Data Schedules (for electronic filing only). (B) REPORTS ON FORM 8-K None. -28- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN ENERGY COMPANY ------------------------------------------------- (Registrant) Date August 13, 1999 /s/ Patrick J. Goodman ------------------- ------------------------------------------------- Patrick J. Goodman Senior Vice President and Chief Financial Officer -29- EXHIBIT INDEX Exhibit No. - ----------- 12 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. 15 Awareness Letter of Independent Accountants 27 Financial Data Schedules (for electronic filing only). -30- EX-12 2 MEC - COMPUTATION OF RATIOS EXHIBIT 12 MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (In Thousands) (Unaudited)
Twelve Months Ended Twelve Months Ended June 30, 1999 December 31, 1998 -------------------------------- ------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ...................... $110,570 $ -- $110,570 $115,593 $ -- $115,593 -------- -------- -------- -------- ------- -------- Add (Deduct): Total income taxes ..................................... 69,355 -- 69,355 76,042 -- 76,042 Interest on long-term debt ............................. 68,155 2,628 70,783 70,193 2,931 73,124 Other interest charges ................................. 15,517 -- 15,517 14,128 -- 14,128 Preferred stock dividends of subsidiary trust .......... 7,980 -- 7,980 7,980 -- 7,980 Interest on leases ..................................... 195 -- 195 212 -- 212 -------- -------- -------- --------- ------- -------- 161,202 2,628 163,830 168,555 2,931 171,486 -------- -------- -------- --------- ------- -------- Earnings available for fixed charges ............... 271,772 2,628 274,400 284,148 2,931 287,079 -------- -------- -------- --------- ------- -------- Fixed Charges: Interest on long-term debt ............................. 68,155 2,628 70,783 70,193 2,931 73,124 Other interest charges ................................. 15,517 -- 15,517 14,128 -- 14,128 Preferred stock dividends of subsidiary trust .......... 7,980 -- 7,980 7,980 -- 7,980 Interest on leases ..................................... 195 -- 195 212 -- 212 -------- -------- -------- --------- ------- -------- Total fixed charges ................................ 91,847 2,628 94,475 92,513 2,931 95,444 -------- -------- -------- --------- ------- -------- Ratio of earnings to fixed charges ..................... 2.96 -- 2.90 3.07 -- 3.01 ======== ======== ======== ========= ======= ======== Preferred stock dividends .............................. $ 4,954 $ -- $ 4,954 $ 4,952 $ -- $ 4,952 Ratio of net income before income taxes to net income .. 1.6272 -- 1.6272 1.6578 -- 1.6578 -------- -------- -------- --------- ------- -------- Preferred stock dividend requirements before income tax 8,061 -- 8,061 8,209 -- 8,209 -------- -------- -------- --------- ------- -------- Fixed charges plus preferred stock dividend requirements 99,908 2,628 102,536 100,722 2,931 103,653 -------- -------- -------- --------- ------- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ......... 2.72 -- 2.68 2.82 -- 2.77 ======== ======== ======== ========= ======== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -1- EXHIBIT 12 MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (In Thousands) (Unaudited)
Twelve Months Ended Twelve Months Ended December 31, 1997 December 31,1996 -------------------------------- ------------------------------- Supplemental (a) Supplemental (a) ---------------------- ------------------ As As Adjustment Adjusted Adjustment Adjusted ---------- -------- --------- -------- Income from continuing operations ...................... $125,941 $ -- $125,941 $165,132 $ -- $165,132 -------- -------- -------- -------- -------- -------- Add (Deduct): Total income taxes ..................................... 76,317 -- 76,317 112,927 -- 112,927 Interest on long-term debt ............................. 78,120 3,760 81,880 79,434 3,615 83,049 Other interest charges ................................. 10,027 -- 10,027 10,842 -- 10,842 Preferred stock dividends of subsidiary trust .......... 7,980 -- 7,980 288 -- 288 Interest on leases ..................................... 268 -- 268 375 -- 375 -------- -------- -------- -------- -------- -------- 172,712 3,760 176,472 203,866 3,615 207,481 -------- -------- -------- -------- -------- -------- Earnings available for fixed charges ............... 298,653 3,760 302,413 368,998 3,615 372,613 -------- -------- -------- -------- -------- -------- Fixed Charges: Interest on long-term debt ............................. 78,120 3,760 81,880 79,434 3,615 83,049 Other interest charges ................................. 10,027 -- 10,027 10,842 -- 10,842 Preferred stock dividends of subsidiary trust .......... 7,980 -- 7,980 288 -- 288 Interest on leases ..................................... 268 -- 268 375 -- 375 -------- -------- -------- -------- -------- -------- Total fixed charges ................................ 96,395 3,760 100,155 90,939 3,615 94,554 -------- -------- -------- -------- -------- -------- Ratio of earnings to fixed charges ..................... 3.10 -- 3.02 4.06 -- 3.94 ======== ======== ======== ======== ======== ======== Preferred stock dividends .............................. $ 6,488 $ -- $ 6,488 $ 10,401 $ -- $ 10,401 Ratio of net income before income taxes to net income .. 1.6060 -- 1.6060 1.6839 -- 1.6839 -------- -------- -------- -------- -------- -------- Preferred stock dividend requirements before income tax 10,420 -- 10,420 17,514 -- 17,514 -------- -------- -------- -------- -------- -------- Fixed charges plus preferred stock dividend requirements 106,815 3,760 110,575 108,453 3,615 112,068 -------- -------- -------- -------- -------- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ......... 2.80 -- 2.73 3.40 -- 3.32 ======== ======== ======== ======== ======== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -2- EXHIBIT 12 MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (In Thousands) (Unaudited)
Twelve Months Ended Twelve Months Ended December 31,1995 December 31, 1994 ------------------------------ ------------------------------- Supplemental (a) Supplemental (a) --------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ...................... $132,489 $ -- $132,489 $121,145 $ -- $121,145 -------- -------- -------- -------- -------- -------- Add (Deduct): Total income taxes ..................................... 84,098 -- 84,098 66,759 -- 66,759 Interest on long-term debt ............................. 80,133 4,595 84,728 73,922 5,428 79,350 Other interest charges ................................. 9,396 -- 9,396 6,639 -- 6,639 Preferred stock dividends of subsidiary trust .......... -- -- -- -- -- -- Interest on leases ..................................... 1,088 -- 1,088 1,211 -- 1,211 -------- -------- -------- -------- -------- -------- 174,715 4,595 179,310 148,531 5,428 153,959 -------- -------- -------- -------- -------- -------- Earnings available for fixed charges ............... 307,204 4,595 311,799 269,676 5,428 275,104 -------- -------- -------- -------- -------- -------- Fixed Charges: Interest on long-term debt ............................. 80,133 4,595 84,728 73,922 5,428 79,350 Other interest charges ................................. 9,396 -- 9,396 6,639 -- 6,639 Preferred stock dividends of subsidiary trust .......... -- -- -- -- -- -- Interest on leases ..................................... 1,088 -- 1,088 1,211 -- 1,211 -------- -------- -------- -------- -------- -------- Total fixed charges ................................ 90,617 4,595 95,212 81,772 5,428 87,200 -------- -------- -------- -------- -------- -------- Ratio of earnings to fixed charges ..................... 3.39 -- 3.27 3.30 -- 3.15 ======== ======== ======== ======== ======== ======== Preferred stock dividends .............................. $ 8,059 $ -- $ 8,059 $ 10,551 $ -- $ 10,551 Ratio of net income before income taxes to net income .. 1.6348 -- 1.6348 1.5511 -- 1.5511 -------- -------- -------- -------- -------- -------- Preferred stock dividend requirements before income tax 13,175 -- 13,175 16,366 -- 16,366 -------- -------- -------- -------- -------- -------- Fixed charges plus preferred stock dividend requirements 103,792 4,595 108,387 98,138 5,428 103,566 -------- -------- -------- -------- -------- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ......... 2.96 -- 2.88 2.75 -- 2.66 ======== ======== ======== ======== ======== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -3- EX-15 3 AWARENESS LETTER - INDEPENDENT ACCOUNTANTS EXHIBIT 15 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, 1999 as indicated in our report dated July 23, 1999; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly report on Form 10-Q for the quarter ended June 30, 1999, is incorporated by reference in Registration Statement No. 333-15387 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 part of a Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. DELOITTE & TOUCHE LLP Des Moines, Iowa August 13, 1999 -31- EX-27.1 4 FDS -- MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of June 30, 1999, and the related consolidated statements of income and cash flows for the six months ended June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000928576 MIDAMERICAN ENERGY COMPANY 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 PER-BOOK 2,624,734 210,930 232,310 279,489 166,221 3,513,684 560,562 0 418,975 979,537 150,000 31,759 759,784 0 0 149,900 170,773 0 0 0 1,271,931 3,513,684 846,589 30,449 654,809 654,809 125,254 (3,692) 121,562 44,577 46,536 2,477 44,059 36,706 33,107 189,268 0 0 Income Tax Expense includes operating and nonoperating income taxes and is excluded from Total Operating Expenses above and on the Consolidated Statement of Income.
EX-27.2 5 FDS -- MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of June 30, 1998, and the related consolidated statements of income and cash flows for the six months ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000928576 MIDAMERICAN ENERGY COMPANY 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 2,606,322 126,195 287,471 311,979 176,021 3,507,988 560,562 0 417,065 977,627 150,000 31,760 929,327 0 0 41,500 199,351 0 0 0 1,178,423 3,507,988 822,772 37,136 651,362 651,362 134,448 (1,596) 132,852 44,157 51,559 2,475 49,084 57,200 35,145 235,699 0 0 Income Tax Expense includes operating and nonoperating income taxes and is excluded from Total Operating Expenses above and on the Consolidated Statement of Income.
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