-----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, JiufXxlZqNgCb91RB8X4yamExBEHUO+yN9AVR0UD10LSSiB3YC9MBQmiY3R6mghL LrNtuUoIeRYOOXCX6mLbIg== 0001009526-97-000007.txt : 19990521 0001009526-97-000007.hdr.sgml : 19990521 ACCESSION NUMBER: 0001009526-97-000007 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY HOLDINGS CO CENTRAL INDEX KEY: 0001009526 STANDARD INDUSTRIAL CLASSIFICATION: 4900 IRS NUMBER: 421451822 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12459 FILM NUMBER: 97567800 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY CO CENTRAL INDEX KEY: 0000928576 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 421425214 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11505 FILM NUMBER: 97567801 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-K405 1 MEC - YEAREND FINANCIAL STATEMENTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 1996 ----------------- or [ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from to ----- ----- Commission Registrant State of Incorporation IRS Employer File Number Address and Telephone Number Identification No. - - ----------- ---------------------------- ------------------ 1-12459 MIDAMERICAN ENERGY HOLDINGS COMPANY 42-1451822 (An Iowa Corporation) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (An Iowa Corporation) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Registrant Title of Each Class On which Registered - - ---------- ------------------- ------------------- MidAmerican Energy Holdings Company Common Stock, no par value New York Stock Exchange MidAmerican Energy 7.98% MidAmerican Energy Company Company Olbigated Preferred Securities New York Stock Exchange of Subsidiary Trust Securities registered pursuant to Section 12(g) of the Act: MidAmerican Energy Preferred Stock, $3.30 Series, no par value Company 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 - - ------------------------------------------------------------------------------- Registrant Title of each Class Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X* No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. --- The aggregate market value of voting stock held by non-affiliates of MidAmerican Energy Holdings Company (Holdings) was $1,668,169,740 as of February 21, 1997, when 100,751,713 shares of common stock, without par value, were outstanding. The aggregate market value of voting stock held by non-affiliates of MidAmerican Energy Company was $0 as of February 21, 1997, when 100,751,713 shares of common stock, without par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: A portion of Holding's Proxy Statement relating to its 1997 Annual Meeting of Shareholders is incorporated by reference in Part III hereof. * MidAmerican Energy Holdings Company (Holdings) became the parent holding company for MidAmerican Energy Company (MidAmerican) pursuant to a statutory share exchange. The effective date of the share exchange was December 1, 1996, and prior to such effective date, Holdings had no assets or operations. Prior to such effective date, MidAmerican was subject to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), and accordingly filed in a timely manner all reports required to be filed pursuant to Sections 13 or 15(d) of the Exchange Act during the preceding 12 months. -2- MIDAMERICAN ENERGY HOLDINGS COMPANY AND MIDAMERICAN ENERGY COMPANY 1996 Annual Report on Form 10-K This combined Form 10-K is separately filed by MidAmerican Energy Holdings Company (Holdings or the Company) and MidAmerican Energy Company (MidAmerican or the Utility). Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiary, MidAmerican makes no representation as to information relating to any other subsidiary of Holdings. TABLE OF CONTENTS Part I ------ Page ---- Item 1 Business General Development of Business........................... 7 Financial Information About Industry Segments............. 7 Narrative Description of Business......................... 8 Business of MidAmerican................................. 8 Rate Matters.......................................... 9 Electric Operations .................................. 11 Natural Gas Operations................................ 13 Construction Program.................................. 14 General Utility Regulation............................ 15 Nuclear Regulation.................................... 16 Environmental Regulations............................. 17 Business of MidAmerican Capital Company................. 18 Business of Midwest Capital Group....................... 19 Item 2 Properties.................................................. 19 Item 3 Legal Proceedings........................................... 21 Item 4 Submission of Matters to a Vote of Security Holders......... 21 Other Information Executive Officers of the Registrant........................ 22 Business Transaction Policy Statement....................... 22 Part II ------- Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters................................. 23 Item 6 Selected Financial Data..................................... 23 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Item 8 Financial Statements and Supplementary Data................. 23 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 23 -3- Part III -------- Item 10 Directors and Executive Officers of the Registrant......... 24 Item 11 Executive Compensation..................................... 25 Item 12 Security Ownership of Certain Beneficial Owners and Management........................................... 26 Item 13 Certain Relationships and Related Transactions............. 27 Part IV ------- Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 28 Signatures.......................................................... 101 Exhibits Index...................................................... 104 -4- DEFINITIONS The following terms are used in this document with the following meanings: TERM MEANING AFUDC Allowance for funds used during construction ANR ANR Pipeline Company Bcf Billion cubic feet Btu British Thermal Unit, the quantity of heat required to raise the temperature of one pound of water one degree Fahrenheit CAA Clean Air Act Amendments of 1990 Coalition Illinois Coalition for Responsible Electricity ComEd Commonwealth Edison Company Company MidAmerican Energy Holdings Company Cooper Cooper Nuclear Station DOE United States Department of Energy EMFs Electric and magnetic fields Energy Services InterCoast Energy Marketing and Services Company EAC Energy Adjustment Clause EPAct Energy Policy Act EPA United States Environmental Protection Agency Exchange Act Securities Exchange Act of 1934, as amended FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission Holdings MidAmerican Energy Holdings Company ICC Illinois Commerce Commission InterCoast InterCoast Energy Company InterCoast Capital InterCoast Capital Company Iowa-Illinois Iowa-Illinois Gas and Electric Company IPM InterCoast Power Marketing Company IPO Initial public offering IUB Iowa Utilities Board KCS KCS Energy Inc. KW Kilowatt, a thousand watts KWH Kilowatt-hour, one thousand watts used for one hour LDC Local distribution company LES Lincoln Electric System MAAP Mid-Continent Area Power Pool Mcf One thousand cubic feet McLeod McLeod, Inc. MD&A Management's Discussion and Analysis of Financial Condition and Results of Operations MidAmerican MidAmerican Energy Company, a wholly-owned subsidiary of Holdings MidAmerican Capital MidAmerican Capital Company, a wholly-owned subsidiary of Holdings Midwest Capital Midwest Capital Group, Inc., a wholly-owned subsidiary of Holdings -5- Midwest Midwest Power Systems Inc. Midwest Resources Midwest Resources Inc. MGP Manufactured gas plant MMcf One million cubic feet MW Megawatts, a million watts NGPL Natural Gas Pipeline Company of America NNG Northern Natural Gas NPDES National Pollutant Discharge Elimination System NPPD Nebraska Public Power District NRC Nuclear Regulatory Commission NWPA Nuclear Waste Policy Act of 1982 OASIS Open Access Same Time Information System OCA Iowa Office of Consumer Advocate OPEB Other postretirement employee benefits Order 636 or Orders FERC Order 636 and related orders PCBs Polychlorinated biphenyls PGA Purchase gas adjustment clause PRPs Potentially responsible parties Rail Services InterCoast Rail Services and Investments SDPUC South Dakota Public Utilities Commission SFAS Statement of Financial Accounting Standards Utility MidAmerican Energy Company Quad Cities Station Quad Cites Nuclear Power Station -6- PART I ITEM 1. BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Holdings is an exempt public utility holding company and an Iowa corporation. Effective December 1, 1996, it became the parent company of MidAmerican, MidAmerican Capital and Midwest Capital pursuant to a share exchange between MidAmerican and the Company. Prior to the effective date of the exchange, MidAmerican Captial and Midwest Capital were direct subsidiaries of MidAmerican. MidAmerican is a public utility and accounts for the predominant part of the Company's assets and earnings. MidAmerican Capital and Midwest Capital are the first-tier, nonregulated subsidiaries of the Company. MidAmerican was formed on July 1, 1995, through the merger of Iowa- Illinois, Midwest Resources and Midwest. The merger was accounted for as a pooling-of-interests. MidAmerican Capital (then InterCoast Energy Company) was a wholly owned nonregulated subsidiary of Iowa-Illinois. Midwest Resources was an exempt public utility holding company with two wholly owned subsidiaries: Midwest and Midwest Capital. MidAmerican is primarily engaged in the business of generating, transmitting, distributing and selling electric energy and in distributing, selling and transporting natural gas. Midwest Capital functions as a regional business development company in the utility service territory. MidAmerican Capital engages primarily in nonregulated energy and complementary services-related businesses. During 1996, the Company changed the name of its nonregulated subsidiary, InterCoast Energy Company, to MidAmerican Capital Company. As part of the restructuring of that subsidiary, the Company formed a new subsidiary under MidAmerican Capital, named InterCoast Energy Company (InterCoast). The new InterCoast had as its subsidiaries the Company's wholesale nonregulated energy companies, including oil and gas exploration and development operations. MidAmerican Capital retained as direct subsidiaries the rail service businesses, the marketable securities and passive investment activities, and a nonregulated retail natural gas subsidiary. During the third quarter of 1996, the Company discontinued its oil and gas exploration and development operations as well as a subsidiary that developed and operates a computerized information system that facilitates real-time exchange of power in the electric industry. The Company sold its oil and gas exploration and development subsidiary and expects to sell the computer information system subsidiary in 1997. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Financial information on the Company's and MidAmerican's segments of business is included under the respective Notes titled "Segment Information" in Notes to Consolidated Financial Statements included in Part IV, Item 14 of this Form 10-K. -7- (C) NARRATIVE DESCRIPTION OF BUSINESS BUSINESS OF MIDAMERICAN MidAmerican distributes electric energy in Council Bluffs, Des Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa, the Quad-Cities (Davenport and Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois) and a number of adjacent communities and areas. MidAmerican distributes natural gas in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa; the Quad-Cities; Sioux Falls, South Dakota; and a number of adjacent communities and areas. MidAmerican's electric and gas operations are conducted under franchises, certificates, permits and licenses obtained from state and local authorities. The franchises, with various expiration dates, are typically for 25-year terms. The population of MidAmerican's utility service territory is approximately 1.7 million. As of December 31, 1996, MidAmerican had 642,000 retail electric customers and 610,000 natural gas customers. MidAmerican has a residential, agricultural, commercial and diversified industrial customer group, in which no single industry or customer accounted for more than 3.5% (food and kindred products industry) of its total 1996 electric operating revenues or 4.0% (food and kindred products industry) of its total 1996 gas operating margin. Among the primary industries served by MidAmerican are those which are concerned with the manufacturing, processing and fabrication of primary metals, real estate, food products, farm and other non-electrical machinery, and cement and gypsum products. For the year ended December 31, 1996, gross operating revenues from utility operations represented 87% of the Company's total gross operating revenues. For 1995 and 1994, 94% and 93%, respectively, of gross operating revenues were from utility operations. For the year ended December 31, 1996, the Company derived approximately 59% of its gross operating revenues from its electric business and 28% from its gas business. For 1995 and 1994, the corresponding percentages were 66% electric and 28% gas, and 63% electric and 30% gas, respectively. Historical electric sales by customer class as a percent of total electric sales and retail electric sales data by state as a percent of total retail electric sales are shown below: Total Electric Sales By Customer Class 1996 1995 1994 ----- ----- ----- Residential 21.1% 23.2% 24.7% Small General Service 16.2 19.1 22.3 Large General Service 27.6 26.1 28.0 Other 4.5 4.7 5.2 Sales for Resale 30.6 26.9 19.8 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== -8- Retail Electric Sales By State 1996 1995 1994 ----- ----- ----- Iowa 88.7% 88.4% 88.6% Illinois 10.6 11.0 10.9 South Dakota 0.7 0.6 0.5 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Historical gas sales, excluding transportation throughput, by customer class as a percent of total gas sales and by state as a percent of total retail gas sales are shown below: Total Gas Sales By Customer Class 1996 1995 1994 ----- ----- ----- Residential 61.1% 57.3% 55.3% Small General Service 33.3 32.9 33.0 Large General Service 4.6 6.2 8.4 Sales for Resale and Other 1.0 3.6 3.3 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Retail Gas Sales By State 1996 1995 1994 ----- ----- ----- Iowa 78.0% 77.1% 76.6% Illinois 11.0 11.6 11.9 South Dakota 10.3 10.6 10.8 Other 0.7 0.7 0.7 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== There are seasonal variations in MidAmerican's electric and gas businesses which are principally related to the use of energy for air conditioning and heating. In 1996, 38% of MidAmerican's electric revenues were reported in the months of June, July, August and September, reflecting the use of electricity for cooling, and 53% of MidAmerican's gas revenues were reported in the months of January, February, March and December, reflecting the use of gas for heating. At December 31, 1996, MidAmerican had 3,370 full-time employees. RATE MATTERS Under Iowa law, temporary collection of higher rates can begin (subject to refund) 90 days after filing with the IUB for that portion of such higher rates approved by the IUB based on prior ratemaking principles and a rate of return on common equity previously approved. If the IUB has not issued a final order within ten months after -9- the filing date, the temporary rates cease to be subject to refund and any balance of the requested rate increase may then be collected subject to refund. Exceptions to the ten-month limitation are provided for extensions due to a utility's lack of due diligence in the rate proceeding, judicial appeals and situations involving new generating units being placed in service. Under Illinois law, new rates may be put into effect by MidAmerican 45 days after filing with the ICC, or on such earlier date as the ICC may approve, subject to the power of the ICC to suspend the proposed new rates for a period not to exceed eleven months after filing, pending a hearing. South Dakota law authorizes the SDPUC to suspend new rates for up to six months during the pendency of rate proceedings; however, the rates are permitted to be implemented after six months subject to refund pending a final order in the proceeding. Additional information on MidAmerican's current rate proceedings is included in Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form 10-K. In April 1992, the FERC issued Order No. 636, directing a restructuring by interstate pipeline companies of their natural gas sales and transportation services. Under the FERC Order, transitional gas supply realignment costs related to this restructuring may be billed by interstate pipelines to their customers. At December 31, 1996, MidAmerican had a regulatory asset of $25 million, with an offsetting non-current Other Liability, recorded for transition costs. In addition, MidAmerican estimates it may incur other future billings of approximately $8 million related to such restructuring. MidAmerican is currently recovering such costs through rates. MidAmerican has established an external trust for the investment of funds collected for nuclear decommissioning associated with Quad Cities Station of which MidAmerican is a 25% owner. The owner and operator of Cooper, from which MidAmerican purchases 50% of the output pursuant to a long-term agreement, maintains a decommissioning fund into which MidAmerican makes contributions as a component of its power purchase payments. Electric tariffs in effect for 1996 include provisions for annual decommissioning costs at Quad Cities Station and Cooper of approximately $18.5 million. In Illinois, nuclear decommissioning costs are included in customer billings through a mechanism that permits annual adjustments. In Iowa, such costs are reflected in base rates. MidAmerican's Iowa electric tariffs contain a Uniform Electric Energy Adjustment Clause under which MidAmerican's billings reflect changes in the cost of all fuels used for electric generation, including nuclear fuel disposition costs, as well as the net effect of energy transactions (other than capacity) with other utilities. Changes in the cost of gas to MidAmerican are reflected in its Iowa gas rates through the Iowa Uniform Purchased Gas Adjustment Clause. A discussion of a proposed Iowa rate settlement that would impact the electric adjustment clause is included in the "Rate Matters" Note in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K. Under Illinois electric tariffs, MidAmerican's Fuel Cost Adjustment Clause reflects changes in the cost of all fuels used for electric generation, including certain fuel transportation costs, nuclear fuel disposition costs and the effects of energy transactions (other than capacity and margins on interchange sales) with other utilities. Changes in the cost of gas to MidAmerican are reflected in its Illinois gas rates through the Illinois Uniform Purchased Gas Adjustment Clause. -10- ELECTRIC OPERATIONS The annual hourly peak demand occurs principally as a result of air conditioning use during the cooling season. MidAmerican's highest hourly peak demand in 1996 was 3,537 MW, which was 16 MW less than MidAmerican's record hourly peak of 3,553 MW set in 1995. MidAmerican is interconnected with certain Iowa and neighboring utilities and is involved in an electric power pooling agreement known as MAPP. The purpose of MAPP is to coordinate the planning, construction and operation of generation and transmission facilities, including the purchase and sale of power and energy among members. The EPAct was enacted in 1992 to promote competition in the wholesale electric market. In April 1996, the FERC issued final rules (Orders 888 and 889) to direct the implementation of EPAct. In general, Orders 888 and 889 require public utilities and other transmission providers and users to provide other companies the same transmission access, service and pricing that they provide themselves. In compliance with Order 888, which was effective July 9, 1996, MidAmerican has filed a pro forma open access transmission tariff and is currently operating under it. In accordance with Order 889, which was effective January 3, 1997, MidAmerican has separated its electric wholesale marketing and transmission operation functions. Order 889 establishes standards of conduct for this functional separation and further requires transmission providers such as MidAmerican to either create or participate in an Open Access Same Time Information System (OASIS). MidAmerican has elected to participate in the MAPP OASIS. These developments assure that all transmission customers of MidAmerican, including MidAmerican's own wholesale marketing function, can obtain transmission information at the same time and can request service on the same basis. The IUB initiated a formal inquiry proceeding (Notice of Inquiry, Docket No. NOI-95-1) in 1995, titled "Emerging Competition in the Electric Utility Industry," primarily as an information gathering device. Since early in 1995, meetings were held with a variety of interested parties, and the IUB established an advisory panel of which MidAmerican was a member. The IUB staff authored a report on the findings and potential options for restructuring in December 1996. The IUB accepted the report of its staff, as well as other information submitted in the case and closed the docket. The IUB has not determined its future course of action. No legislation has yet been introduced in Iowa to allow generation or retail service competition. Additional information on anticipated changes in the utility industry is included in the "Operating Activities" section of Management Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Part IV, Item 14 of this Form 10-K. MidAmerican's accredited 1996 summer net generating capacity was 4,301 megawatts. The net generating capacity at any time may be less due to regulatory restrictions, fuel restrictions and generating units being temporarily out of service for inspection, maintenance, refueling or modifications. -11- Fuel Supply for Electric Operations MidAmerican's sources of fuel for electric generation were as follows for the periods shown: Year Ended December 31, 1996 1995 1994 ----- ----- ----- Fuel Source: Coal 75.6% 77.6% 83.4% Nuclear 23.9 21.6 15.7 Gas 0.4 0.7 0.7 Oil 0.1 0.1 0.2 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== The average costs of fuels received (including transportation and handling costs) were as follows for the periods shown: Year Ended December 31, 1996 1995 1994 ------ ------ ------ (Cents per million BTUs consumed) Fuel Source: Nuclear 44.85 44.19 47.08 Coal 92.45 95.14 95.90 Gas 318.80 226.92 297.08 Oil 412.13 422.80 422.13 Total Weighted Average 88.74 90.21 90.96 The average cost of coal received (including transportation) per ton for the years 1996, 1995 and 1994 has been $15.18, $15.61 and $15.67, respectively. MidAmerican has contracts with rail shippers providing for the delivery of coal to its generating stations. In addition, MidAmerican has used spot market purchases of coal to effectively manage inventory levels and take advantage of near-term coal market opportunities. MidAmerican is continuing to satisfy its coal requirements with a combination of contract and spot purchases. MidAmerican believes its sources of coal for its fossil-fueled generating stations are and will continue to be satisfactory. Renewal of expiring contracts and negotiations of new agreements will be pursued as required. Natural gas and oil are used for peak demand electric generation and for standby purposes. These sources are presently in adequate supply and available to meet MidAmerican's needs. MidAmerican is a 25% joint owner of Quad Cities Station. MidAmerican has been advised by Commonwealth Edison (ComEd), the joint owner and operator of Quad Cities Station, that the majority of its uranium concentrate and uranium conversion requirements for Quad Cities Station for 1997 can be met under existing supplies or commitments. ComEd foresees no problem in obtaining the remaining requirements now or obtaining future requirements. ComEd further advises that all enrichment requirements have been contracted through 1999. Commitments for fuel fabrication have been obtained at least through 2000. ComEd does not anticipate that it will have any difficulty in contracting for uranium concentrates for conversion, enrichment or fabrication of nuclear fuel needed to operate Quad Cities Station. -12- MidAmerican purchases one-half of the power and energy of Cooper through a long-term power purchase contract with NPPD. Approximately 30% of the fuel in the core at Cooper must be replaced every 18 months. The next refueling cycle is currently scheduled to begin in March of 1997. NPPD has informed MidAmerican that it either has sufficient materials and services available to meet foreseeable Cooper requirements or that such materials and services are readily available from suppliers. Under the NWPA, the DOE is responsible for the selection and development of repositories for, and the permanent disposal of, spent nuclear fuel and high-level radioactive wastes. ComEd and NPPD, as required by the NWPA, have signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste beginning not later than January 1998. The DOE has stated, however, that the delivery schedule for spent nuclear fuel may be delayed, and it is expected that it will be significantly delayed. The costs incurred by the DOE for disposal activities are being financed by fees charged to owners and generators of the waste. ComEd has informed MidAmerican that there is on-site storage capability at the Quad Cities Station sufficient to permit such interim storage at least through 2008. NPPD has informed MidAmerican that there is on-site storage capability at the Cooper Station sufficient to permit such interim storage at least through 2004, the remaining term of the long-term power purchase contract. Meeting spent nuclear fuel storage requirements beyond such time could require modifications to the spent fuel storage pools or new and separate storage facilities, the costs of which have not been determined at this time. Industry activities are underway to utilize dry casks for the interim storage of high-level radioactive waste. This may provide an alternative for interim on-site storage of such waste. NATURAL GAS OPERATIONS MidAmerican is engaged in the procurement, transportation, and distribution of natural gas for utility and end-use customers in the Midwest. With the implementation in 1993 of FERC Order 636 and related orders (Order 636 or Orders), MidAmerican began operating in a more competitive environment. MidAmerican has complete responsibility for natural gas procurement, transportation and storage, a responsibility which had previously resided with the interstate pipeline suppliers. These Orders directly impact the operations, revenues and costs of LDCs, including MidAmerican, and create new opportunities. MidAmerican has firm rights to pipeline capacity to transport gas from the production area to its service territory. With the restructuring of the industry, if MidAmerican does not need the capacity (due to fluctuations in anticipated system demand), it can resell such capacity to other companies. To provide incentives for the achievement of optimum use of available transportation capacity, past IUB rulings have allowed MidAmerican to retain 30% of Iowa margins earned on the resold capacity and return 70% to customers through the purchased gas adjustment. Information on the impact of FERC Order 636 is included in the "Operating Activities and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K. Fuel Supply and Capacity MidAmerican purchases the majority of its gas supplies from producers or third party marketers and transports the gas on a firm or interruptible basis through the NNG, NGPL and ANR systems. To insure system reliability, a geographically diverse supply portfolio with varying terms and conditions is utilized for the gas supplies. -13- MidAmerican utilizes leased gas storage to meet peak day requirements and to manage the daily changes in demand due to changes in weather. The storage gas is typically replaced during the summer months. In addition, MidAmerican also utilizes three liquefied natural gas plants and two propane-air peak shaving plants to meet peak day demands. On February 2, 1996, MidAmerican had its highest peak-day delivery of 1,143,026 MMBtus. This peak-day delivery included approximately 88.4% from traditional sales service customers and 11.6% from customer owned gas transported through MidAmerican's system. MidAmerican's 1996/97 winter heating season peak-day delivery of 1,093,503 MMBtus was reached on January 10, 1997. This peak-day delivery included approximately 81.5% from traditional sales service customers and 18.5% from customer owned gas transported through MidAmerican's system. The supply sources utilized by MidAmerican to meet its peak-day deliveries to its sales service customers were: Thousands Percent of of MMBtus Total ------- ------- Underground Storage 320.2 35.9 Firm Supply 476.1 53.4 LNG Facilities 80.8 9.1 LP Facilities 14.0 1.6 ------ ----- Total 891.1 100.0 ===== ===== MidAmerican does not anticipate difficulties in meeting its future demands through the use of its supply portfolio and pipeline interconnections for the foreseeable future. CONSTRUCTION PROGRAM The table below shows actual utility capital expenditures for 1996 and budgeted utility expenditures for 1997 and for the period 1998 - 2001. 1996 1997 1998-2001 Actual Budgeted Budgeted -------- -------- --------- (Thousands of Dollars) Electric Property Production $ 27,770 $ 37,316 $108,385 Transmission 23,435 32,670 89,257 Distribution 34,416 34,402 162,939 Gas 33,257 31,916 131,000 Administration and Other 15,955 44,032 60,686 -------- -------- -------- Subtotal 134,833 180,336 552,267 Quad Cities Fuel 12,249 10,473 50,079 Cooper Additions 7,116 8,844 37,584 -------- -------- -------- Total $154,198 $199,653 $639,930 ======== ======== ======== The amounts shown above include allowance for funds used during construction. Of the $145.7 million of budgeted electric production expenditures for the 1997-2001 period, $38.1 million are for expenditures at the -14- Quad Cities Station. Also included in the amounts above, are capital expenditures required to maintain compliance with the CAA. See "Environmental Regulations" under this Item for additional information. In addition to the amounts shown above, the Company also expects to contribute a total of approximately $50 million to external trusts for Quad Cities nuclear decommissioning during the 1997-2001 period. GENERAL UTILITY REGULATION MidAmerican is a public utility within the meaning of the Federal Power Act and a natural gas company within the meaning of the Natural Gas Act. Therefore, it is subject to regulation by FERC in regard to numerous activities, including the issuance of securities, accounting policies and practices, sales for resale rates, the establishment and regulation of electric interconnections and transmission services and replacement of certain gas utility property. MidAmerican is a public utility under the laws of Illinois and is regulated by the ICC as to retail rates, services, accounts, issuance of securities, affiliate transactions, construction, acquisition and sale of utility property, acquisition and sale of securities and in other respects as provided by the laws of Illinois. MidAmerican is also a public utility under the laws of Iowa and is regulated by the IUB as to retail rates, services, accounts, construction of utility property and in other respects as provided by the laws of Iowa. MidAmerican is also subject to regulation by the SDPUC as to electric and gas retail rates and service. While MidAmerican's electricity prices are presently based on traditional cost of service ratemaking, a number of initiatives are in progress that could change that framework. In Illinois legislation has been introduced that would restructure the industry and allow Illinois customers to choose their electric supplier. Although the Company cannot predict the final outcome of such legislation, passage of some form of restructuring bill is possible during 1997. At the federal level, a number of bills have been introduced addressing restructuring of the industry beyond the provisions of FERC Orders 888 and 889. Such legislation would lay the framework for the transition to a competitive retail market environment on a nationwide basis. The Company can not predict the final outcome of such legislation. No industry restructuring legislation was introduced in the 1997 session of the Iowa legislature. Additional information on the status of industry restructuring initiatives is included under the "Operating Activities and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K. In May 1996, the Iowa legislature approved a bill enhancing energy efficiency program flexibility, eliminating mandatory spending levels for energy efficiency programs, and allowing more timely recovery of energy efficiency expenditures as determined by the IUB. The new legislation became effective July 1, 1996. Previously, electric and gas utilities in Iowa were required to spend approximately 2.0% and 1.5%, respectively, of their annual Iowa jurisdictional revenues on energy efficiency activities. MidAmerican expects final rules on the implementation of the new legislation in the first half of 1997, following which MidAmerican will seek approval to accelerate recovery of deferred and current energy efficiency costs. Additional information on MidAmerican's energy efficiency activities is included under the "Operating Activities and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K. -15- NUCLEAR REGULATION MidAmerican is subject to the jurisdiction of the NRC with respect to its license and 25 percent ownership interest in the Quad Cities Station. ComEd is the operator of the Quad Cities Station and is under contract with MidAmerican to secure and keep in effect all necessary NRC licenses and authorizations. Under the terms of a long-term power purchase agreement, MidAmerican has contracted to purchase one-half of the power and energy from Cooper located near Brownville, Nebraska, through September 22, 2004. Cooper is owned and operated by NPPD. Under the terms of the contract, NPPD is the sole NRC licensee of Cooper and is required to comply with all NRC regulations. MidAmerican is responsible for one-half of the fixed and operating costs of Cooper (excluding depreciation but including debt service) and MidAmerican's share of fuel costs (including disposal costs) based upon energy delivered. Refer to "Management's Discussion and Analysis" and Notes 1(h), 4(c), 4(d) and 4(e) in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K. MidAmerican is not subject to the jurisdiction of the NRC with respect to Cooper and the long-term power purchase contract with NPPD. NPPD, because it is the sole owner, licensee and operator of Cooper, is thereby the only entity subject to the jurisdiction of the NRC. Under the terms of the long-term power purchase contract, NPPD is required to assure that Cooper is in compliance with all the NRC regulations. The NRC regulations control the granting of permits and licenses for the construction and operation of nuclear generating stations and subject such stations to continuing review and regulation. The NRC review and regulatory process covers, among other things, operations, maintenance, and environmental and radiological aspects of such stations. The NRC may modify, suspend or revoke licenses and impose civil penalties for failure to comply with the Atomic Energy Act, the regulations under such Act or the terms of such licenses. Federal regulations provide that any operating facility may be required to cease operation if the NRC determines there are deficiencies in state, local or utility emergency preparedness plans relating to such facility and the deficiencies are not corrected. ComEd and NPPD have advised MidAmerican that emergency preparedness plans for the Quad Cities Station and Cooper, respectively, have been approved by the NRC. ComEd and NPPD have also advised MidAmerican that state and local plans relating to the Quad Cities Station and Cooper, respectively, have been approved by the Federal Emergency Management Agency. The NRC has required ComEd to submit information to allow the NRC to determine what actions, if any, should be taken to assure that ComEd can safely operate its six nuclear generating stations while sustaining performance improvement at each site. While the NRC acknowledged improvements at Quad Cities Station, it also noted performance declines at certain other ComEd nuclear facilities. ComEd has indicated that it intends to provide the NRC with the information requested. In June 1988, the NRC adopted final regulations with respect to the decommissioning of nuclear power plants. In 1996, the NRC enacted revisions to provide clarification of these regulations. Among other things, the regulations and amendments address the planning and funding for the eventual decommissioning of nuclear power plants. In response to these regulations, MidAmerican submitted a report to the NRC in July 1990 indicating that it will provide "reasonable assurance" that funds will be available to pay the costs of decommissioning its share of the Quad Cities Station, by making monthly deposits to an external trust fund. NPPD has advised MidAmerican that a decommissioning plan for Cooper has been submitted and approved by the NRC. Monthly payments to NPPD by MidAmerican include monies to fund decommissioning as determined by NPPD. -16- ENVIRONMENTAL REGULATIONS MidAmerican is subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, land use aesthetics and atomic radiation. State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of certain of MidAmerican's existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing MidAmerican's cost of waste disposal and (vi) possibly reducing the reliability of service provided by MidAmerican and the amount of energy available from MidAmerican's facilities. Any of such items could have a substantial impact on amounts required to be expended by MidAmerican in the future. Air Quality The CAA were signed into law in November 1990. MidAmerican has five jointly owned and six wholly owned coal-fired generating stations, which represent approximately 65% of MidAmerican's electric generating capability. Essentially all utility generating units are subject to the provisions of the CAA which address continuous emission monitoring, permit requirements and fees and emission of certain substances. By the year 2000, some MidAmerican coal-fired generating units will be required to install emissions monitoring system replacements or upgrades. Under current regulations, MidAmerican does not anticipate its construction costs for the installation of emissions monitoring system upgrades to exceed $4 million for 1997 through 2000. The EPA has initiated rulemaking proceedings to change the National Ambient Air Quality Standards for particulate matter and ozone. These new standards, if implemented as proposed, could require MidAmerican to install additional control equipment at its coal-fired units to reduce certain emissions. MidAmerican cannot predict whether the proposed regulations will be adopted. If the proposed regulations were adopted in their current form, MidAmerican's costs of compliance could be substantial. Water Quality Under the Federal Water Pollution Control Act Amendments of 1972, as amended, MidAmerican is required to obtain NPDES permits to discharge effluents (including thermal discharges) from its properties into various waterways. All NPDES permits are subject to renewal after specified time periods not to exceed five years. MidAmerican has obtained all necessary NPDES permits for its generating stations and, when such permits are expected to expire, MidAmerican will file applications for renewal. Hazardous Materials and Waste Management 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. -17- MidAmerican is evaluating 27 properties which were, at one time, sites of MGP facilities in which it may be a potentially responsible party. MidAmerican's present estimate of probable remediation costs of these sites is $21 million. The 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. Additional information relating to the Company's MGP facilities is included under the Note "Commitments and Contingencies" in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K. Pursuant to the Toxic Substances Control Act, a federal law administered by the EPA, MidAmerican developed a comprehensive program for the use, handling, control and disposal of all PCB contained in electrical equipment. The future use of equipment containing PCBs will be minimized. Capacitors, transformers and other miscellaneous equipment are being purchased with a non-PCB dielectric fluid. MidAmerican's exposure to PCB liability has been reduced through the orderly replacement of a number of such electrical devices with similar non-PCB electrical devices. An unresolved issue is whether exposure to EMFs may result in adverse health effects. EMFs are produced by all devices carrying or using electricity, including transmission and distribution lines and home appliances. Recent studies have proven inconclusive as to the health effects of EMFs. MidAmerican cannot predict the effect on construction costs of electric utility facilities or operating costs if EMF regulations were to be adopted. Although MidAmerican is not the subject of any suit involving EMFs, litigation has been filed in a number of jurisdictions against a variety of defendants alleging that EMFs had an adverse effect on health. If such litigation were successful, the impact on MidAmerican and on the electric utility industry in general could be significant. BUSINESS OF MIDAMERICAN CAPITAL COMPANY MidAmerican Capital is a wholly owned nonregulated subsidiary of the Company. The nonregulated activities emphasize energy and complementary service-related businesses, credit quality and liquidity. MidAmerican Capital participates in energy and complementary services industries through three nonregulated business groups: Energy Services, Rail Services and InterCoast Capital . Energy Services provides electric, natural gas and energy management services to both retail and wholesale markets. Energy Services' assets at December 31, 1996 and 1995 were $5 million and $6 million, respectively. AmGas Inc., a part of the Energy Services group, was organized in anticipation of new opportunities under Order 636. AmGas Inc. markets natural gas and energy management services to commercial and industrial clients in the Midwest. IPM, a part of the Energy Services group, was established in September 1993 to offer wholesale power brokering and marketing services to utilities and other power supply agencies. In July 1995, IPM was granted "marketer" status by the FERC enabling it to directly buy and sell power. InterCoast Trade and Resources, Inc., part of the Energy Services group, was established in 1995 to provide wholesale natural gas marketing services. -18- Rail Services provides railcar leasing, management and maintenance services through UNITRAIN, Inc. and Cornhusker Railcar Services, Inc. These services are primarily provided to electric utility companies within Iowa and surrounding states. In addition, Rail Services has indirect investments in a variety of nonregulated energy production technologies including wind, solar, hydroelectric, and natural gas and coal-fueled generation, equity investments in two developing companies which provide products and services for the electric and gas utility industries, an equity investment in a company that services and markets fiber-optic and telecommunications systems, an equity investment in a company constructing a digital radio network, an equity investment in a residential and commercial security company and equity interests in special purpose funds that invest in venture capital and leveraged buy-out opportunities. InterCoast Capital manages MidAmerican Capital's financial investments. Such investments consist primarily of investment grade marketable securities and aircraft leases. InterCoast Capital's total investments at December 31, 1996 and 1995 were $310 million and $362 million, respectively. InterCoast Capital's marketable securities portfolio, totaling $220 million and $270 million at December 31, 1996 and 1995, respectively, focuses on energy securities consisting primarily of preferred stocks issued by utility companies. All such preferred stocks have been issued by companies having investment grade senior debt ratings by Moody's or Standard & Poor's. In addition to the preferred stocks, InterCoast Capital has investments in common stocks and independently managed mutual funds. InterCoast Capital also holds equity participations in equipment leases for passenger and freight transport aircraft. Such investments totaled $90 million and $91 million at December 31, 1996 and 1995, respectively. BUSINESS OF MIDWEST CAPITAL GROUP, INC. Midwest Capital is a wholly owned nonregulated subsidiary of the Company. Midwest Capital's primary activity is the management of utility service area investments to support economic development. Midwest Capital's principal interest is a 2,000-acre planned residential and business community near Sioux City, Iowa. The major construction phase of the planned community is complete, and the marketing phase to sell developed residential and commercial lots is in progress. ITEM 2. PROPERTIES The Company's utility properties consist of physical assets necessary and appropriate to rendering electric and gas service in its service territories. Electric property consists primarily of generation, transmission and distribution facilities. Gas property consists primarily of distribution plant, including feeder lines to communities served from natural gas pipelines owned by others. It is the opinion of management that the principal depreciable properties owned by the Company's subsidiaries are in good operating condition and well maintained. -19- The net accredited generating capacity, along with the participation purchases and sales, net, and firm purchases and sales, net, are shown for summer 1996 accreditation.
Company's Share of Accredited Percent Generating Plant Ownership Fuel Capability (MW) - - --------------------------------- --------- ---- --------------- Steam Electric Generating Plants: Council Bluffs Energy Center Unit No. 1 100.0 Coal 46 Unit No. 2 100.0 Coal 88 Unit No. 3 79.1 Coal 534 George Neal Station Unit No. 1 100.0 Coal 135 Unit No. 2 100.0 Coal 300 Unit No. 3 72.0 Coal 371 Unit No. 4 40.6 Coal 253 Louisa Unit 88.0 Coal 616 Ottumwa Unit 52.0 Coal 372 Riverside Station Unit No. 3 100.0 Coal 5 Unit No. 5 100.0 Coal 130 ----- 2,850 Combustion Turbines: Coralville - 1 unit 100.0 Gas/Oil 64 Electrifarm - 3 units 100.0 Gas/Oil 185 Moline - 4 units 100.0 Gas/Oil 64 Parr - 2 units 100.0 Gas/Oil 31 Pleasant Hill Energy Center-3 units 100.0 Oil 148 River Hills Energy Center-8 units 100.0 Gas/Oil 116 Sycamore Energy Center-2 units 100.0 Gas/Oil 149 ----- 757 Nuclear: Cooper (1) (1) Nuclear 387 Quad-Cities Station (2) Unit No. 1 25.0 Nuclear 192 Unit No. 2 25.0 Nuclear 193 ----- 772 Hydro: Moline - 4 units 100.0 Water 3 ----- Net Accredited Generating Capacity 4,382 Participation Purchases and Sales, Net (81) ----- Total Net Accredited Generating Capability 4,301 Firm Purchases and Sales, Net (120) ----- Adjusted Net Accredited Generating Capability 4,181 =====
(1) Cooper is owned by NPPD and the amount shown is MidAmerican's entitlement (50%) of Cooper's accredited capacity under a power purchase agreement extending to the year 2004. (2) See the "Nuclear Regulation" section in Item 1 for information regarding NRC communications with the operator of Quad-Cities Station. -20- The electric system of MidAmerican at December 31, 1996, included 871 miles of 345-kV transmission lines, 1,294 miles of 161-kV lines, 1,812 miles of 69-kV lines and 261 miles of 34.5-kV lines. The gas distribution facilities of MidAmerican at December 31, 1996, included 18,732 miles of gas mains and services. Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest electric utility property located in Iowa, or approximately 82% of gross utility plant, is pledged to secure mortgage bonds. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries have no material legal proceedings except for the following: Environmental Matters Information on the Company's environmental matters is included in Item 1 - Business and under the Note "Environmental Matters" in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K. Cooper Litigation On May 26, 1995, a predecessor of MidAmerican filed a lawsuit naming NPPD as defendant. The action is filed in the U.S. District Court for the Southern District of Iowa and is identified as No. 4-95-CV-80356. The legal proceeding is based upon a long-term power purchase agreement between MidAmerican and NPPD, pursuant to which MidAmerican purchases one-half the output of NPPD's Cooper and pays one-half the cost of operating Cooper. NPPD, in turn, is obligated to operate the plant in an efficient and economical manner consistent with good business and utility practices and in compliance with the terms of its operating license issued to it by the Nuclear Regulatory Commission (NRC). In 1993 and 1994, as a response to NPPD actions, the NRC issued numerous notices of violations to NPPD; as a result of these violations and other safety issues identified by the NRC and NPPD, Cooper experienced unplanned outages and outages were unduly extended. MidAmerican's position is that NPPD's failure to meet its obligations with respect to the operation of Cooper deprived MidAmerican of the benefits it was entitled to under the power sales contract, causing MidAmerican to lose profits and incur increased costs of operation, which damages MidAmerican seeks to collect from NPPD. The matter is scheduled to go to trial on June 9, 1997. Similar litigation has been filed against NPPD by LES, a municipal utility serving the City of Lincoln, Nebraska, and purchasing one-eighth of the output of Cooper pursuant to a similar power purchase contract. The LES legal proceeding is pending in Nebraska state court. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. -21- OTHER INFORMATION EXECUTIVE OFFICERS OF HOLDINGS The names, ages and positions of the executive officers of the Company are listed below.
Name Age Positions Held ---- --- -------------- Russell E. Christiansen 61 Chairman of the Board Stanley J. Bright 56 President and Chief Executive Officer Ronald W. Stepien 50 Executive Vice President Philip G. Lindner 53 Senior Vice President and Chief Financial Officer John A. Rasmussen, Jr. 51 Senior Vice President and General Counsel
Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other person pursuant to which the officer was selected. Each of the officers has served in the above stated capacity since December 1, 1996, and has been employed by Holdings and/or its subsidiaries or predecessor companies for five or more years as an executive officer . BUSINESS TRANSACTION POLICY STATEMENT In response to the competitive forces and regulatory changes being faced by the Company, the Company has from time to time considered, and expects to continue to consider, various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate changes in its utility business. These strategies may include business combinations with other companies, internal restructuring involving the complete or partial separation of its wholesale and retail businesses, and additions to, or dispositions of, portions of its franchised service territories. The Company may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding one or more of these potential strategies. No assurances can be given as to whether any potential transaction of the type described above may actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of the Company. The Company's management is mindful of the importance of informing investors about Company operations. Management must also pay heed to the legally sensitive nature of certain matters, and that is particularly true about any business transaction involving an acquisition, disposition or combination of businesses which the Company may be considering. Therefore, the Company's management has adopted a policy to announce consideration of any such transaction only after it would enter into a definitive agreement or an agreement in principle describing the material terms of such a transaction. Until that point, the Company would respond with "no comment" to any inquiry concerning any such transaction, whether or not the Company is considering, discussing or negotiating for any acquisitions, dispositions or combinations of businesses. The Company's management believes this policy is consistent both with investors' need for information and with the Company's concern for appropriate disclosure regarding legally sensitive matters. -22- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION AND DIVIDENDS Holdings' common stock is listed on the New York Stock Exchange under the symbol "MEC." The following table sets forth, for the periods indicated, the dividends declared per share of common stock and the high and low market prices of the common stock of MidAmerican, Midwest Resources and Iowa-Illinois, as reported in The Wall Street Journal for the New York Stock Exchange Composite Tape.
Price Range ---------------------------------------------------------- Dividends Declared MidAmerican Iowa-Illinois Resources ----------------------- ----------------- ------------------ ----------------- MEC IWG MWR High Low High Low High Low ----- ------- ----- ------- ------- -------- ------- ------- ------- 1996 4th Quarter $0.30 $ - $ - $16 1/4 $14 3/4 $ - $ - $ - $ - 3rd Quarter 0.30 - - 17 3/4 15 3/8 - - - - 2nd Quarter 0.30 - - 17 7/8 16 1/4 - - - - 1st Quarter 0.30 - - 18 7/8 16 1/4 - - - - 1995 4th Quarter $0.30 $ - $ - $17 1/8 $15 $ - $ - $ - $ - 3rd Quarter 0.30 - - 15 5/8 13 5/8 - - - - 2nd Quarter - 0.4325 0.29 - - 22 19 7/8 15 13 5/8 1st Quarter - 0.4325 0.29 - - 22 1/8 19 14 5/8 13 3/8
HOLDERS On February 21, 1997, there were approximately 65,000 shareholders of record of Holdings' common stock. MidAmerican's outstanding common stock is held entirely by its parent company, Holdings, and is not publicly traded. On December 1, 1996, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. All other common dividends are included in the amounts displayed for Holdings. ITEM 6. SELECTED FINANCIAL DATA Reference is made to Part IV of this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to Part IV of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -23- PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT Holdings The information required by Item 10 relating to directors who are nominees for election as directors at Holdings 1997 Annual Meeting of Shareholders is set forth in Holdings' Proxy Statement filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934. Therefore, such information is incorporated herein by reference to the material appearing under the caption "ELECTION OF DIRECTORS" on pages 2 through 6 of the Proxy Statement. Information required by Item 10 relating to Executive Officers of the Registrant is set forth under a separate caption in Part I hereof. MidAmerican Information concerning the directors and executive officers of MidAmerican is as follows: (A) IDENTIFICATION
Served in Served as Present Present Director Name Age Position Position Since Since ---- --- -------- -------------- --------- Russell E. Christiansen 61 Director 1996 1983 Stanley J. Bright 56 Chairman, President and Chief Executive Officer 1996 1987 Lynn K. Vorbrich 58 Executive Vice President 1996 - Ronald W. Stepien 50 Executive Vice President 1996 1996 Dave J. Levy 42 Senior Vice President 1996 1996 Philip G. Lindner 53 Senior Vice President and Chief Financial Officer 1996 1996 John A. Rasmussen, Jr. 51 Senior Vice President and General Counsel 1996 1996 Stephen E. Shelton 49 Senior Vice President 1995 1996 Beverly A. Wharton 43 Senior Vice President 1996 1996
Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other person pursuant to which the officer was selected. (B) BUSINESS EXPERIENCE RUSSELL E. CHRISTIANSEN Chairman of Holdings since December 1, 1996, Chairman of MidAmerican from 1995 to December 1, 1996 and Chairman of the Office of the Chief Executive Officer from 1995 to July 1, 1996. Chairman and Chief Executive Officer of Midwest Resources from 1992 to 1995 and President form 1990 to 1995. Director of McLeod, Inc. -24- STANLEY J. BRIGHT President and Chief Executive Officer of Holdings since December 1, 1996. Chairman of MidAmerican since December 1, 1996, Chief Executive Officer since July 1, 1996, President since 1995 and President of the Office of the Chief Executive Officer from 1995 to July 1, 1996. Chairman, President and Chief Executive Officer of Iowa-Illinois from 1991 to 1995. Director of Norwest Bank Iowa, N.A. and Utilx Corporation. LYNN K. VORBRICH Executive Vice President of MidAmerican since November 1, 1996 and President, Electric Division from 1995 to November 1, 1996. Executive Vice President, Midwest from 1991 to 1995. Director of Norwest Bank Quad Cities. RONALD W. STEPIEN Executive Vice President of Holdings since December 1, 1996. Executive Vice President of MidAmerican since November 1, 1996 and Group Vice President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from 1990 to 1995. DAVE J. LEVY Senior Vice President of MidAmerican since November 1, 1996 and Vice President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from 1993 to 1995 and manager prior to 1993. PHILIP G. LINDNER Senior Vice President and Chief Financial Officer of Holdings since December 1, 1996. Senior Vice President and Chief financial Officer of MidAmerican since November 1, 1996, Group Vice President and Chief Financial Officer from August 1, 1996 to November 1, 1996 and Group Vice President from 1995 to August 1, 1996. Group Vice President of Midwest from 1992 to 1995. JOHN A. RASMUSSEN, JR. Senior Vice President and General Counsel of Holdings since December 1, 1996. Senior Vice President and General Counsel of MidAmerican since November 1, 1996 and Group Vice President and General Counsel from July 1, 1995 to November 1, 1996. Vice President and General Counsel of Midwest from 1991 to 1995. STEVEN E. SHELTON Senior Vice President of MidAmerican since 1995. Vice President of Iowa-Illinois from 1985 to 1995. BEVERLY A. WHARTON Senior Vice President of MidAmerican since November 1, 1996 and President, Gas Division from 1995 to November 1, 1996. Group Vice President of Midwest from 1992 to 1995. Director of Security National Bank. ITEM 11. EXECUTIVE COMPENSATION Holdings and MidAmerican The information required by Item 11 is incorporated herein by reference to the material appearing under the caption "EXECUTIVE COMPENSATION" on pages 9 through 20 of Holdings' Proxy Statement filed with the SEC. -25- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS To the Company's knowledge, no single entity has beneficial ownership of 5 percent or more of the outstanding Common Stock of Holdings. Holdings owns 100 percent of the outstanding Common Stock of MidAmerican. (B) SECURITY OWNERSHIP OF MANAGEMENT Holdings Security ownership of management as outlined on pages 7 and 8 of the Company's Proxy Statement filed with the SEC under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference. MidAmerican The following table shows the beneficial ownership, reported to MidAmerican as of February 21, 1997, of Holdings Common Stock of each director, the two individuals serving in the office of the chief executive officer of MidAmerican Energy Company until July 1, 1996, and the four other most highly compensated executive officers and, as a group, directors, and executive officers. No member of the group owned any of the preferred stock of MidAmerican. To MidAmerican's knowledge, no single entity owns of record or beneficially more than five percent of any class of the outstanding voting securities of Holdings.
Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership (1) Class ------------------------ ------------------------ --------- Stanley J. Bright................. 71,061 (2) * Russell E. Christiansen........... 84,950 (3) * Ronald W. Stepien................. 17,839 (4) * Lynn K. Vorbrich.................. 32,671 (5) * Stephen E. Shelton................ 15,451 (6) * Beverly A. Wharton................ 31,782 (7) * Philip G. Lindner................. 17,969 (8) * Dave J. Levy...................... 6,062 (9) * John A. Rasmussen, Jr............. 22,795 (10) * Directors and executive officers as a group (9) persons.......... 300,580 (11) *
___________________ * Less than one percent of the shares of MidAmerican Common Stock outstanding. (1) Beneficial ownership of each of the shares of MidAmerican Common Stock listed in the foregoing table is comprised of sole voting power and sole investment power, unless otherwise noted. (2) Includes 37,500 shares which Mr. Bright has the right to acquire within 60 days upon the exercise of stock options, 6,423 shares held in a Section 401(k) defined contribution plan as of December 31, 1996 and 1,697 shares beneficially owned by Mr. Bright and his spouse. -26- (3) Includes 37,500 shares which Mr. Christiansen has the right to acquire within 60 days upon the exercise of stock options, 12,052 shares held in a Section 401(k) defined contribution plan as of December 31, 1996 and 8,040 shares beneficially owned by Mr. Christiansen and his spouse. (4) Includes 10,000 shares which Mr. Stepien has the right to acquire within 60 days upon the exercise of stock options, 1,162 shares held in a Section 401(k) defined contribution plan as of December 31, 1996. (5) Includes 15,000 shares which Mr. Vorbrich has the right to acquire within 60 days upon the exercise of stock options, 2,674 shares held in a Section 401(k) defined contribution plan as of December 31, 1996 and 784 shares beneficially owned by Mr. Vorbrich and his spouse. (6) Includes 7,400 shares held in a Section 401(k) defined contribution plan as of December 31, 1996. (7) Includes 15,000 shares which Mrs. Wharton has the right to acquire within 60 days upon the exercise of stock options, 1,326 shares held in a Section 401(k) defined contribution plan as of December 31, 1996, 4,678 shares beneficially owned by Mrs. Wharton and her spouse and 450 shares beneficially owned in a custodial account for a minor child. (8) Includes 10,000 shares which Mr. Lindner has the right to acquire within 60 days upon the exercise of stock options, 161 shares held in a Section 401(k) defined contribution plan as of December 31, 1996, and 1,138 shares beneficially owned by Mr. Lindner and his spouse. (9) Includes 44 shares held in a Section 401(k) defined contribution plan as of December 31, 1996 and 493 shares beneficially owned by Mr. Levy and his spouse. (10) Includes 10,000 shares which Mr. Rasmussen has the right to acquire within 60 days upon the exercise of stock options, 3,050 shares held in a Section 401(k) defined contribution plan as of December 31, 1996 and 2,700 shares beneficially owned by Mr. Rasmussen and his spouse. (11) Includes 135,000 shares which the executive officers have the right to acquire within 60 days upon the exercise of stock options, shares held in defined contribution plans as of December 31, 1996 and shares beneficially owned jointly with and individually by family members of directors and executive officers. (C) CHANGES IN CONTROL There are no arrangements known to the registrants, the operation of which may at a subsequent date result in a change in control of Holdings or MidAmerican. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. -27- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN) Page No. -------- Selected Consolidated Financial Data......................... 30 Management's Discussion and Analysis of Financial Condition And Results of Operations.................................. 31 Index to Financial Statements: ------------------------------ MidAmerican Energy Holdings Company Consolidated Statements of Income For the Year Ended December 31, 1996, 1995 and 1994........ 46 Consolidated Statements of Cash Flows For the Year Ended December 31, 1996, 1995 and 1994........ 47 Consolidated Balance Sheets As of December 31, 1996 and 1995 .......................... 48 Consolidated Statements of Capitalization As of December 31, 1996 and 1995 .......................... 49 Consolidated Statements of Retained Earnings For the Year Ended December 31, 1996, 1995 and 1994........ 50 Notes to Consolidated Financial Statements................... 51 Management's Responsibility for Financial Statements......... 73 Reports of Independent Public Accountants.................... 74 MidAmerican Energy Company Consolidated Statements of Income For the Year Ended December 31, 1996, 1995 and 1994........ 75 Consolidated Statements of Cash Flows For the Year Ended December 31, 1996, 1995 and 1994........ 76 Consolidated Balance Sheets As of December 31, 1996 and 1995 .......................... 77 Consolidated Statements of Capitalization As of December 31, 1996 and 1995 .......................... 78 Consolidated Statements of Retained Earnings For the Year Ended December 31, 1996, 1995 and 1994........ 79 Notes to Consolidated Financial Statements................... 80 Management's Responsibility for Financial Statements......... 92 Reports of Independent Public Accountants.................... 93 Index to Supplemental Information --------------------------------- Five-Year Financial Statistics............................... 94 Five-Year Consolidated Statements of Income.................. 95 Five-Year Consolidated Balance Sheets........................ 96 Five-Year Utility Statistics................................. 97 -28- (A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN) The following schedules should be read in conjunction with the aforementioned financial statements. Page No. -------- MidAmerican Energy Holdings Company Consolidated Valuation and Qualifying Accounts (Schedule II) ........... 99 MidAmerican Energy Company Consolidated Valuation and Qualifying Accounts (Schedule II) ..................... 100 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (A)3. EXHIBITS See Exhibit Index on page 104. (B) REPORTS ON FORM 8-K On October 18, 1996, MidAmerican filed a report on Form 8-K, dated October 17, 1996. The report included information regarding the announcement that MidAmerican had entered into a letter of intent to sell certain of its nonregulated oil and gas subsidiaries to KCS Energy Inc. of Edison, New Jersey. The press release issued in conjunction with the announcement was filed as an Exhibit to the report. On December 2, 1996, Holdings filed a report on Form 8-K, dated December 2, 1996. The report included information regarding the formation of Holdings. The press release issued with respect to the holding company formation was filed as an Exhibit to the report. On December 20, 1996, Holdings filed a report on From 8-K, dated December 18, 1996, regarding the adoption of a Shareholder Rights Agreement. Pursuant to such Agreement, the Company will make a dividend distribution of one preferred stock purchase right for each outstanding share of Common Stock of the Company as of the close of business on December 30, 1996. The Shareholder Rights Agreement dated as of December 18, 1996, between the Company and Continental Stock Transfer and Trust Company, as Rights Agent and the news release issued announcing the adoption of the Shareholder Rights Agreement were filed as Exhibits to the report. -29- SELECTED FINANCIAL DATA - - ----------------------- MidAmerican Energy Holdings Company - - -----------------------------------
DECEMBER 31 --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Revenues........................................... $1,872,612 $1,649,341 $1,631,225 $1,627,956 $1,462,580 Operating income (a)............................... 343,638 292,354 264,492 267,938 211,159 Income from continuing operations (b).............. 143,761 119,705 123,098 134,325 75,045 Average common shares outstanding.................. 100,752 100,401 98,531 97,762 95,430 Earnings per average common share from continuing operations..................... $ 1.43 $ 1.19 $ 1.25 $ 1.38 $ 0.79 Cash dividends declared per share.................. $ 1.20 $ 1.18 $ 1.17 $ 1.17 $ 1.28 BALANCE SHEET DATA: Total assets....................................... $4,559,283 $4,470,097 $4,388,894 $4,352,073 $4,103,420 Long-term debt (c)................................. 1,474,701 1,468,617 1,471,127 1,407,374 1,401,736 Power purchase obligation (d)...................... 111,222 125,729 137,809 151,485 146,150 Short-term borrowings.............................. 161,990 184,800 124,500 173,035 120,244 Preferred stock: Not subject to mandatory redemption............ 31,769 89,945 89,955 109,871 74,242 Subject to mandatory redemption (e)............ 150,000 50,000 50,000 50,000 48,625 Common stock equity................................ 1,239,946 1,225,715 1,204,112 1,180,510 1,159,676 Book value per common share........................ $ 12.31 $ 12.17 $ 12.08 $ 12.07 $ 11.86
MidAmerican Energy Company - - --------------------------
DECEMBER 31 --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Revenues.......................................... $1,635,761 $1,554,235 $1,513,675 $1,541,959 $1,420,714 Operating income (a).............................. 249,207 219,238 198,491 203,780 176,472 Net income from continuing operations (b)......... 165,132 132,489 121,145 133,888 86,713 Earnings on common from continuing operations..... 154,731 124,430 110,594 125,521 77,978 BALANCE SHEET DATA: Total assets...................................... $3,774,653 $3,976,201 $3,879,847 $3,832,569 $3,583,705 Long-term debt (c)................................ 1,136,515 1,110,525 1,109,617 1,051,144 1,075,245 Power purchase obligation (d)..................... 111,222 125,729 137,809 151,485 146,150 Short-term borrowings............................. 161,700 184,800 124,500 160,800 110,600 Preferred stock: Not subject to mandatory redemption........... 31,769 89,945 89,955 109,871 74,242 Subject to mandatory redemption (e)........... 150,000 50,000 50,000 50,000 48,625 Common stock equity (f)........................... 986,825 1,225,715 1,204,112 1,180,510 1,159,676
(a) MidAmerican Energy Holdings Company (Holdings) operating income includes $33.4 million of costs related to a restructuring and work force reduction plan implemented and completed in 1995, and MidAmerican Energy Company (MidAmerican) operating income includes $31.9 million of such costs. (b) Holdings recorded after-tax losses of approximately $9.4 million and $10.2 million for the write-down of certain nonregulated assets during 1996, and 1995, respectively. In 1993, MidAmerican recorded an $11.5 million after-tax gain on an exchange of natural gas service territories. (c) Includes long-term debt due within one year. (d) Includes power purchase obligation due within one year. (e) 1996 includes MidAmerican-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures. (f) 1996 Reflects the distribution of capital stock of MidAmerican Capital Company and Midwest Capital Group, Inc. to Holdings. -30- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION ------------ COMPANY STRUCTURE MidAmerican Energy Holdings Company (Holdings or the Company), is an exempt public utility holding company headquartered in Des Moines, Iowa. Effective December 1, 1996, Holdings became the parent company of MidAmerican Energy Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). Prior to December 1, 1996, MidAmerican Capital and Midwest Capital were subsidiaries of MidAmerican. MidAmerican was formed on July 1, 1995, as a result of the merger (the merger) of Iowa-Illinois Gas and Electric Company, Midwest Resources Inc. (Resources) and Midwest Power Systems Inc., the utility subsidiary of Resources. MidAmerican is a public utility with electric and natural gas operations and is the principal subsidiary of Holdings. MidAmerican Capital (formerly InterCoast Energy Company), discussed below, and Midwest Capital are Holdings' nonregulated subsidiaries. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. During the second quarter of 1996, the Company restructured one of its nonregulated subsidiaries, the former InterCoast Energy Company, and changed the subsidiary's name to MidAmerican Capital Company. In addition, the Company formed a new subsidiary under MidAmerican Capital, named InterCoast Energy Company (InterCoast). The new InterCoast had as its subsidiaries the Company's wholesale nonregulated energy companies, including InterCoast Oil and Gas Company, formerly named Medallion Production Company. MidAmerican Capital retained as direct subsidiaries the rail service businesses, the marketable securities and passive investment activities, and a nonregulated retail natural gas subsidiary. DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS The merger is accounted for as a pooling-of-interests, and the consolidated financial statements are presented as if the merger occurred as of the beginning of the earliest period presented. In addition, the consolidated financial statements of MidAmerican present amounts related to MidAmerican Capital and Midwest Capital as discontinued operations for all periods presented to reflect their transfer to Holdings in December 1996. Portions of the following discussion provide information related to material changes in the financial condition and results of operations of Holdings and MidAmerican for the periods presented based on the combined historical information of the predecessor companies. It is not necessarily indicative of what would have occurred had the predecessor companies actually merged at the beginning of the earliest period. The information presented in this management's discussion and analysis addresses the financial statements of Holdings and MidAmerican as presented in this joint filing. Information related to MidAmerican also relates to Holdings. Information related to MidAmerican Capital and Midwest Capital pertains only to the discussion of the financial condition and results of operations of Holdings. To the extent necessary, certain discussions have been segregated to allow the reader to identify information applicable only to Holdings. -31- DISCONTINUED OPERATIONS Holdings: - - -------- The Company is redeploying certain of its nonregulated investments as part of its strategy of becoming a leading regional provider of energy and complementary services. As discussed below, the Company discontinued some of its nonregulated operations during the second half of 1996. The related income or loss from operations and the anticipated losses on disposal are reflected as discontinued operations in each of the periods presented in the Consolidated Statements of Income. Also included in discontinued operations in the Consolidated Statements of Income are amounts related to the Company's construction subsidiaries which were discontinued in 1994. Net assets of the discontinued operations are separately presented in the Consolidated Balance Sheets as Investment in Discontinued Operations. In the fourth quarter of 1996, the Company and KCS Energy, Inc. (KCS) of Edison, New Jersey, signed a definitive agreement to sell a portion of the Company's nonregulated operations to KCS for $210 million in cash and 435,000 warrants to purchase KCS common stock. The sale, which included the Company's oil and gas exploration and development operations, was completed in January 1997. The Company recorded an after-tax loss of $7.1 million for the transaction in 1996. The Company also intends to divest a subsidiary that developed and continues to operate a computerized information system facilitating real-time exchange of power in the electric industry. The Company expects the disposition to occur during the first half of 1997 and, accordingly, recorded a $4.0 million anticipated after-tax loss on disposal of those operations in September 1996. MidAmerican: - - ----------- MidAmerican received $15.3 million in cash in 1996 as final settlement for the sale of a former coal mining subsidiary which was reflected as discontinued operations in 1982 by one of MidAmerican's predecessors. The final settlement included reacquisition by the buyer of preferred equity issued to MidAmerican and the settlement of reclamation reserves. MidAmerican recorded an after-tax loss on disposal of $3.3 million for the transaction in September 1996. This transaction is included in discontinued operations in the consolidated financial statements of MidAmerican as well as Holdings. Discontinued operations of MidAmerican for 1996 also includes the net loss of MidAmerican Capital and Midwest Capital for the 1996 period prior to the December 1, 1996, transfer to Holdings. FORWARD-LOOKING STATEMENTS From time to time, the Company or one of its subsidiaries individually may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of the Company or any of its subsidiaries individually. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of the Company'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 the Company 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, competitive factors, general economic conditions in the Company's service territory and federal and state regulatory actions. -32- RESULTS OF OPERATIONS --------------------- EARNINGS The following tables provide a summary of the earnings contributions of the Company's and MidAmerican's operations for each of the periods presented:
Holdings: - - -------- 1996 1995 1994 ---------- --------- ---------- Earnings (in millions) Continuing operations Electric utility .............. $ 122.7 $ 111.9 $ 96.1 Gas utility ................... 32.0 12.6 14.5 ---------- --------- ---------- Utility .................. 154.7 124.5 110.6 Nonregulated operations ....... (11.0) (4.8) 12.5 Discontinued operations ......... (12.7) 3.1 (2.9) ---------- --------- ---------- Consolidated earnings ........ $ 131.0 $ 122.8 $ 120.2 ========== ========= ========== Earnings Per Common Share Continuing operations Electric utility .............. $ 1.22 $ 1.11 $ 0.97 Gas utility ................... 0.32 0.13 0.15 ---------- --------- ---------- Utility .................. 1.54 1.24 1.12 Nonregulated operations ....... (0.11) (0.05) 0.13 Discontinued operations ......... (0.13) 0.03 (0.03) ---------- --------- ---------- Consolidated earnings ......... $ 1.30 $ 1.22 $ 1.22 ========== ========= ========== MidAmerican: - - ----------- 1996 1995 1994 ---------- --------- ---------- (in millions) Earnings on Common Stock Continuing operations Electric utility .............. $ 122.7 $ 111.9 $ 96.1 Gas utility ................... 32.0 12.6 14.5 ---------- --------- ---------- Total .................... 154.7 124.5 110.6 Discontinued operations ......... (10.1) (1.7) 9.6 ---------- --------- ---------- Consolidated earnings ........ $ 144.6 $ 122.8 $ 120.2 ========== ========= ==========
The Company's earnings per share for 1996 increased 8 cents compared to 1995. The effect of merger-related costs on 1995 earnings and realization in 1996 of cost savings resulting from the merger had a favorable effect on the Company's and MidAmerican's 1996 earnings compared to 1995. In addition, an after-tax gain from the sale of certain MidAmerican storage gas supplies in 1996 and income from MidAmerican's incentive gas procurement program contributed 3 cents per share to 1996 earnings. A reduction in utility property taxes also contributed to the improvement in earnings. The cost of a merger proposal, discussed below, reduced utility earnings by approximately 5 cents per share in 1996. A cooler than normal summer and a favorable heating season compared to normal resulted in an estimated decrease of 4 cents per share in 1996. For the Company's nonregulated businesses, earnings from continuing operations decreased 6 cents per share in 1996 compared to 1995 due primarily to 1995 gains on the sales of a telecommunications subsidiary and a partnership interest in a gas marketing organization. As discussed below, 1996 and 1995 earnings of nonregulated subsidiaries include write-downs of certain assets. Losses on disposal of discontinued operations reduced 1996 earnings per share by approximately 15 cents. -33- On August 5, 1996, the Company announced a proposal to merge with IES Industries Inc. (IES), a holding company headquartered in Cedar Rapids, Iowa. The IES board of directors rejected the Company's proposal in favor of a pending merger with WPL Holdings and Interstate Power Co. (the Wisconsin Transaction). The Company solicited proxies against the Wisconsin Transaction for use at the IES annual meeting of shareholders which was held on September 5, 1996. At that meeting, the holders of a majority of the IES common stock voted in favor of the Wisconsin Transaction, and the Company discontinued its attempt to merge with IES. In the effort, MidAmerican incurred tax deductible costs of $8.7 million in 1996 which are included in Other, Net in the Consolidated Statements of Income. The Company's and MidAmerican's 1995 earnings were reduced by merger-related costs. As part of the process of combining the operations of MidAmerican's predecessors, the Company developed a restructuring plan which included employee incentive early retirement, relocation and separation programs. The Company recorded $33.4 million of restructuring costs during 1995, of which $31.9 million is included in utility operations. These costs are reflected in Other Operating Expenses in the Consolidated Statements of Income. In addition, the Company incurred transaction costs to complete the merger. The Company expensed $4.6 million and $4.5 million of merger transaction costs in 1995 and 1994, respectively. Of the total, $0.2 million of the 1994 costs relates to nonregulated subsidiaries of the Company. These costs are included in Other, Net in the Consolidated Statements of Income. In total, restructuring and transaction costs reduced the Company's earnings for 1995 by 24 cents per share. Transaction costs reduced 1994 earnings by 5 cents per share. Write-downs of certain assets, primarily alternative energy projects, of the Company's nonregulated subsidiaries reduced earnings by approximately $9.4 million, or 9 cents per share, and $10.2 million, or 10 cents per share, in 1996 and 1995, respectively. The write-downs reflect declines in the value of those nonregulated investments. The pre-tax amounts of the write-downs, which are included in Other, Net in the Consolidated Statements of Income, totaled $15.6 million and $18.0 million for 1996 and 1995, respectively. The Company's earnings per share for 1995 were unchanged compared to 1994. Increases in the gross margins of utility electric and natural gas operations favorably affected earnings in 1995. Gross margin is the amount of revenues remaining after deducting electric fuel costs or the cost of gas sold, as appropriate. Decreases in nuclear operations and maintenance costs also favorably affected earnings. As discussed above, merger-related costs and write-downs of certain nonregulated assets had a significant adverse affect on 1995 earnings. -34-
UTILITY GROSS MARGIN Electric Gross Margin: --------------------- 1996 1995 1994 ---------- --------- ---------- (In millions) Operating revenues ................ $ 1,099 $ 1,095 $ 1,022 Cost of fuel, energy and capacity . 234 230 214 ---------- --------- ---------- Electric gross margin ......... $ 865 $ 865 $ 808 ========== ========= ==========
Variations in gross margin are the result of changes in revenues due to price and sales volume variances. Changes in the cost of electric fuel, energy and capacity (collectively, Energy Costs) reflect fluctuations in generation levels and mix, fuel cost, and energy and capacity purchases. MidAmerican has been allowed to recover Energy Costs from most of its electric utility customers through energy adjustment clauses (EACs) in revenues. Variations in revenues collected through the EACs, reflecting changes in Energy Costs per unit sold and volumes sold, do not affect gross margin or net income. Refer to "Rate Matters" under the Operating Activities and Other Matters section of Liquidity and Capital Resources. Electric gross margin for 1996 was unchanged compared to 1995. Electric retail sales for 1996 increased nearly 2% compared to 1995 due to modest customer growth and an improvement in sales not dependent upon weather. Cooler weather conditions in the 1996 third quarter compared to the 1995 third quarter caused a significant decrease in weather-related sales. Colder weather during the 1996 heating seasons compared to the 1995 heating seasons helped to mitigate the impact of the mild cooling season in 1996. Sales to the more weather-sensitive customers have a higher margin per unit than sales to other customers. As a result, the decrease in sales to those customers had a greater impact on margin than increases in sales to other customers. For the year, the impact of weather reduced electric gross margin by an estimated $15 million compared to normal. Increases in electric retail rates due to filings made by MidAmerican's predecessors increased revenues and gross margin for 1996 compared to 1995. Electric revenues in the first half of 1995 reflect a $13.6 million annual increase for interim rates in connection with an Iowa electric rate filing. Revenues for 1996 reflect the full-year effect of the final $20.3 million annual rate increase in the proceeding, which was effective in August 1995. Approximately $8 million of this increase relates to increased expenses for other postretirement employee benefit (OPEB) costs. Additionally, in August 1995, MidAmerican began collection of $18.6 million over a four-year period related to an energy efficiency cost recovery filing. At the same time, MidAmerican began expensing a similar amount for the amortization of previously deferred energy efficiency costs. The amortization is included in other operating expenses. Refer to "Energy Efficiency" in the Liquidity and Capital Resources section for a discussion of changes in energy efficiency legislation and potential acceleration of cost recovery. In November 1996, MidAmerican implemented rate reductions representing approximately $21.8 million in annual revenues related to proceedings begun in 1996. In addition, electric revenues and gross margin were reduced by $3.7 million in 1996 for a rate refund reserve for revenues prior to November 1 in connection with one of the proceedings. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information. Electric gross margin for 1995 improved compared to 1994 due to the increases in electric retail rates and a 3% increase in electric retail sales. The increase in retail sales was due primarily to warmer temperatures in the 1995 third quarter compared to the third quarter of 1994. In addition to the electric rate increases discussed above, in October 1994 and January 1995, MidAmerican implemented rate increases for Iowa energy efficiency cost recovery filings which allow a total increase in electric revenues of $31.7 million over a four-year period together with a corresponding amortization of deferred energy efficiency costs. -35- Revenues from sales for resale increased $16 million for 1996 compared to 1995 and $21.2 million for 1995 compared to 1994. Variations in the amount of available generation affected sales volumes, especially for 1995 compared to 1994. During 1994 and the first quarter of 1995, nuclear generating facilities were out of service for an extended period. Coal delivery uncertainties also limited MidAmerican's sales for resale in 1994. In addition, the MidAmerican merger and the reorganization of utility functions increased MidAmerican's ability to participate in these types of transactions. Effective November 1995, the margin on most electric energy sales for resale is flowed through to retail customers and has a minimal effect on gross margin and net income.
Gas Gross Margin: ---------------- 1996 1995 1994 ---------- --------- ---------- (In millions) Operating revenues ................ $ 537 $ 460 $ 492 Cost of gas sold .................. 345 279 327 ---------- --------- ---------- Gas gross margin .............. $ 192 $ 181 $ 165 ========== ========= ==========
Variations in gas gross margin are the result of changes in revenues due to price and sales volume variances. MidAmerican has been allowed to recover in revenues the cost of gas sold from most of its gas utility customers through purchase gas adjustment clauses (PGAs). Variations in revenues collected through the PGAs, reflecting changes in the cost of gas per unit and volumes sold, do not affect gross margin or net income. Gross margin from gas sales increased in 1996 and 1995 compared to their respective prior years. The increases were due both to price and sales volumes increases. Retail sales of natural gas increased 3.1% in 1996 compared to 1995 due in part to colder weather conditions in the first quarter of 1996 than during the first quarter of 1995. For 1996, the impact of colder than normal weather increased gross margin by an estimated $8 million. Retail sales of natural gas increased slightly in 1995 compared to 1994 due mainly to colder temperatures in the fourth quarter of 1995 than in the 1994 fourth quarter. Continued growth in the number of natural gas customers contributed to increases in sales volumes. Another cause of the increases in gas revenues and gross margin was an increase in gas retail service rates. Retail revenues in the first half of 1995 reflect interim rates from an $8.2 million increase in annual gas revenues in connection with an Iowa gas rate filing by one of its predecessor companies. MidAmerican began collecting the interim rates in October 1994. Gas revenues for 1996 reflect the full-year effect of the final rate increase of $10.6 million annually which was effective in August 1995. Approximately $2.5 million of the $10.6 million increase relates to increased expense for OPEB costs. In January 1995, MidAmerican implemented a rate increase for an Iowa energy efficiency cost recovery filing which allows an increase in gas revenues of $6.7 million over a four-year period together with a corresponding amortization of deferred energy efficiency costs. The amortization is included in other operating expenses. Refer to "Energy Efficiency" in the Liquidity and Capital Resources section for a discussion of changes in energy efficiency legislation and potential acceleration of cost recovery. UTILITY OPERATING EXPENSES For 1996, utility other operating expenses decreased $49.5 million compared to 1995 due primarily to costs in 1995 of the restructuring plan discussed under "Earnings" in the Results of Operations section and from cost savings in 1996 resulting from the merger. Utility restructuring costs in 1995 totaled $31.9 million. In addition, 1996 reflects a $4.4 million reduction in nuclear operations costs. Partially offsetting these decreases was a $4.2 million increase from the amortization of deferred energy efficiency costs. There were also increases in consulting services expenses and some general administrative costs for 1996 compared to 1995. -36- In addition to costs of the restructuring plan, 1995 other operating expenses increased compared to 1994 due to increased amortization of deferred energy efficiency costs and OPEB costs and the effect of a reduction of 1994 energy efficiency expenses to comply with the IUB regulation of these costs. Nuclear operations costs decreased $8.6 million in 1995 compared to 1994. Maintenance expenses increased for 1996 compared to 1995 and decreased for 1995 compared to 1994. The timing of power plant maintenance accounted for much of the variation between the periods. The increase in power plant maintenance for 1996 was partially offset by a $6.2 million adjustment to align inventory accounting of predecessor companies. Maintenance expense for the Quad Cities Nuclear Station (Quad Cities Station) increased $1.8 million for 1996 and decreased $5.5 million for 1995 compared to the respective prior years. Property and other taxes decreased in 1996 compared to 1995 due to a reduction in property and payroll taxes. Lower than expected assessed property values and tax rates reduced property tax expense for 1996. A decrease in the number of employees as a result of the merger caused the reduction in payroll tax expense. NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Holdings: - - -------- Revenues of MidAmerican Capital and Midwest Capital increased a total of $141.7 million for 1996 compared to 1995. The increase was due primarily to a $136.1 million increase in revenues from natural gas marketing subsidiaries, some of which did not exist in 1995. Sales volumes for the natural gas marketing firms increased 51 million MMBtu's, or 153%, for 1996 compared to 1995. In addition, the average price of natural gas increased in 1996. Cost of sales includes expenses directly related to sales of natural gas. Increases in gas sales volumes and cost per unit resulted in the increase in the cost of sales for 1996 compared to 1995. Average margins (total price less cost of gas) on sales of natural gas decreased in 1996 compared to 1995 due in part to increased competition in the nonregulated natural gas industry. As a result, total 1996 gross margin on nonregulated natural gas sales decreased $2.5 million compared to 1995. Revenues for 1995 decreased from 1994 primarily due to a 16% reduction in sales volumes of a nonregulated retail natural gas marketing subsidiary. A decrease in real estate revenues and reduced revenues due to the sale of a telecommunications subsidiary in early 1995 also contributed to the decrease. NON-OPERATING INCOME AND INTEREST EXPENSE MidAmerican: - - ----------- Other, Net - Other, Net for 1996 was reduced by $8.7 million for costs incurred by MidAmerican for its merger proposal to IES Industries Inc. During 1996, MidAmerican recorded a pre-tax gain of $3.2 million on the sale of certain storage gas supplies. In addition, MidAmerican recorded $2.7 million of income as a result of successful performance under its incentive gas procurement program and a net pre-tax gain of $1.1 million from the reacquisition of long-term debt. As discussed in the "Earnings" section of Results of Operations, merger transaction costs related to the Company's 1995 merger reduced Other, Net in 1995 and 1994. Interest Charges - Utility interest on long-term debt decreased for 1996 compared to 1995 due to the reacquisition of debt in 1996 and increased for 1995 compared to 1994 due primarily to the issuance of $60 million of 7.875% Series -37- of mortgage bonds in November 1994. An increase in the average amount of commercial paper outstanding during 1996 was the cause of the increase in other interest expense compared to 1995. Holdings: - - -------- Realized Gains and Losses on Securities, Net - Net realized gains on securities increased for 1996 due to an increase in gains on the disposition of equity fund holdings and managed preferred stock portfolios. Net realized gains on securities decreased for 1995 compared to 1994 primarily from the sale of a single holding in 1994 which generated a $5.9 million pre-tax gain. Other, Net - Other, Net reflects $2.8 million more income from equity investments in 1996 than in 1995. In addition, Midwest Capital recorded a $1.8 million pre-tax gain on the sale of the Hub Tower, a Des Moines office building, in the third quarter of 1996, Midwest Capital had written down the carrying value of the property by $5.8 million and $3.0 million in 1992 and in December 1995, respectively, to reflect anticipated market values. As discussed in the "Earnings" section at the beginning of Results of Operations, write-downs of nonregulated investments decreased Other, Net by $15.6 million and $18.0 million for 1996 and 1995, respectively. The $18.0 million for 1995 includes the Hub Tower write-down. In 1995, the Company also had pre-tax gains totaling $8.5 million on the sales of a partnership interest in a gas marketing organization and a telecommunication subsidiary. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements. For 1996, Holdings had net cash provided from operating activities of $351 million compared to $337 million for 1995. MidAmerican had net cash provided from operating activities of $327 million and $333 million for 1996 and 1995, respectively. INVESTING ACTIVITIES AND PLANS MidAmerican: - - ----------- MidAmerican's primary need for capital is utility construction expenditures. Utility construction expenditures, including allowance for funds used during construction (AFUDC), Quad Cities Station nuclear fuel purchases and Cooper Nuclear Station (Cooper) capital improvements, were $154 million for 1996. All such expenditures were met with cash generated from utility operations, net of dividends. Utility construction expenditures for 1996 and 1995 included $11 million and $2 million, respectively, for replacement of a certain type of plastic pipe installed in prior years in a portion of MidAmerican's natural gas distribution system. MidAmerican decided to replace all such pipe due to concerns about its long-term performance. MidAmerican has filed an action seeking recovery of replacement costs and damages from the manufacturer of the resin used in the pipe. Forecasted utility construction expenditures for 1997 are $200 million including AFUDC. Capital expenditures needs are reviewed regularly by MidAmerican's management and may change significantly as a result of such reviews. For the years 1997 through 2001, MidAmerican forecasts $840 million for utility construction expenditures. MidAmerican presently expects that all utility construction expenditures for 1997 through 2001 will be met with cash generated from utility operations, net of dividends. The actual level of cash -38- generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions. Operators of a nuclear facility are required to set aside funds to provide for costs of future decommissioning of their 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 $47 million during the period 1997 through 2001 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Currently, the funds are invested predominately in investment grade municipal and U.S. Treasury bonds. Beginning in 1997, MidAmerican plans to invest a portion of the funds in domestic corporate debt and common equity securities. In addition, a portion of the payments made under a power purchase contract with Nebraska Public Power District (NPPD) are for decommissioning funding related to Cooper. The Cooper costs are reflected in Other Operating Expenses in the Consolidated Statements of Income. Based on NPPD estimates, MidAmerican expects to pay approximately $59 million to NPPD for Cooper decommissioning during the period 1997 through 2001. NPPD invests the funds predominantly in U.S. Treasury Bonds. 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. MidAmerican currently recovers Quad Cities Station decommissioning costs charged to Illinois customers through a rate rider on customer billings. Cooper and Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and increases in those amounts must be sought through the normal ratemaking process. Holdings: - - -------- Capital expenditures of nonregulated subsidiaries were $56 million for 1996. Capital expenditures of nonregulated subsidiaries depend primarily upon the availability of suitable investment opportunities which meet the Company's objectives. The Company continues to evaluate nonstrategic, nonregulated investments and may redeploy certain assets in 1997. External financing may also be used to provide for nonregulated capital expenditures. The Company, through one of its nonregulated subsidiaries, has an investment in Class A and Class B Common Stock of McLeod, Inc. (McLeod), a telecommunications company. The Class B stock is convertible to Class A stock on a one-for-one basis at the Company's option. On June 14, 1996, McLeod made an initial public offering (IPO) of its Class A Common Stock. As part of an investor agreement, the Company is prohibited from selling or otherwise disposing of any of the common stock of McLeod for a period of two years from the date of the IPO, and accordingly, no market value adjustments have been reflected in the Company's financial statements. In the fourth quarter of 1996, the Company made an additional investment of $10 million in McLeod Class A Common Stock. At December 31, 1996, the carrying amount and fair value of the Company's investment were $46.3 million and $218.3 million, respectively. During the third quarter of 1996, a nonregulated subsidiary of the Company made a $10 million investment in convertible preferred stock of RACOM, which is a provider of digital wireless communications in MidAmerican's utility service territory and surrounding areas. MidAmerican Capital invests in a variety of marketable securities which it holds for indefinite periods of time. In 1996, MidAmerican Capital had net cash inflows of $55 million from its marketable securities investment activities. In the Consolidated Statements of Cash Flows, the lines Purchase of Securities and Proceeds from Sale of Securities consist primarily of the gross amounts of these activities, including realized gains and losses on investments in marketable securities. -39- FINANCING ACTIVITIES, PLANS AND AVAILABILITY Holdings: - - -------- As of December 31, 1996, Holdings had a $20 million line of credit available to provide for short-term financing needs. In addition, Holdings has the necessary authority to issue up to 6,000,000 shares of common stock through its Shareholder Options Plan (a dividend reinvestment and stock purchase plan). Since July 1, 1995, the Company has used open market purchases of its common stock rather than original issue shares to meet share obligations under its Employee Stock Purchase Plan and the Shareholder Options Plan. Holdings currently plans to continue using open market purchases to meet share obligations under these plans. On January 29, 1997, Holding's board of directors declared a quarterly dividend on common shares of $0.30 per share payable March 1, 1997. The dividend represents an annual rate of $1.20 per share. MidAmerican: - - ----------- MidAmerican currently has authority from the Federal Energy Regulatory Commission (FERC) to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of December 31, 1996, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit to provide short-term financing for utility operations. MidAmerican's commercial paper borrowings, which totaled $162 million at December 31, 1996, are supported by the revolving credit facility and the line of credit. MidAmerican also has a revolving credit facility which is dedicated to provide liquidity for its obligations under outstanding pollution control revenue bonds that are periodically remarketed. During 1996, MidAmerican redeemed all shares of its $1.7375 Series of preferred securities. In October, MidAmerican reacquired $28 million of its 6.95% Series first mortgage bonds due 2025 and $3.5 million of its 7.45% Series first mortgage bonds due 2023. In December 1996, MidAmerican issued $100 million of 6 1/2% Medium-Term Notes due 2001 and $103 million of 7.98% Series subordinated debt debentures to a subsidiary statutory business trust which in turn issued $100 million of 7.98% Series A redeemable preferred securities. Proceeds from these financings were used to redeem all $40 million of MidAmerican's 8.15% Series first mortgage bonds due 2001 and the remaining $45.8 million of $1.7375 Series preferred securities mentioned above. The balance of the proceeds was used to reduce commercial paper outstanding. Refer to Note (17) for more discussion on Series A preferred securities. MidAmerican currently has regulatory authority to issue an additional $300 million of preferred securities and long-term debt, including its medium-term note program. It is management's intent to refinance certain MidAmerican debt securities with additional issuances of unsecured debt and preferred securities of a subsidiary trust as market conditions allow. As of December 31, 1996, MidAmerican had $449 million of long-term debt maturities and sinking fund requirements for 1997 through 2001. Credit Ratings - MidAmerican's access to external capital and its cost of capital are influenced by the credit ratings of its securities. MidAmerican's credit ratings as of January 24, 1997, are shown in the table below. The ratings reflect only the views of such rating agencies, and each rating should be evaluated independently of any other rating. Generally, rating agencies base their ratings on information furnished to them by the issuing company and on investigation, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if in the -40- judgment of the rating agency circumstances so warrant. Such ratings are not a recommendation to buy, sell or hold securities.
Moody's Investors Standard Service & Poor's --------- -------- Mortgage Bonds ............ A2 A+ Unsecured Medium-Term Notes A3 A Preferred Stocks .......... a3 A Commercial Paper .......... P-1 A-1
The following is a summary of the meanings of the ratings shown above and the relative rank of MidAmerican's rating within each agency's classification system. Moody's top four bond ratings (Aaa, Aa, A and Baa) are generally considered "investment grade." Obligations which are rated "A" possess many favorable investment attributes and are considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. A numerical modifier ranks the security within the category with a "1" indicating the high end, a "2" indicating the mid-range and a "3" indicating the low end of the category. Standard & Poor's top four bond ratings (AAA, AA, A and BBB) are considered "investment grade". Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in economic conditions than debt in higher rated categories. Standard & Poor's may use a plus (+) or minus (-) sign after ratings to designate the relative position of a credit within the rating category. Ratings of preferred stocks are an indication of a company's ability to pay the preferred dividend and any sinking fund obligations on a timely basis. Moody's top four preferred stock ratings (aaa, aa, a and baa) are generally considered "investment grade". Moody's "a" rating is considered to be an upper medium grade preferred stock. Earnings and asset protection are expected to be maintained at adequate levels in the foreseeable future. Standard & Poor's top four preferred stock ratings (AAA, AA, A and BBB) are considered "investment grade". Standard & Poor's "A" rating indicates adequate earnings and asset protection. Moody's top three commercial paper ratings (P-1, P-2 and P-3) are generally considered "investment grade". Issuers rated "P-1" have a superior ability for repayment of senior short-term debt obligations and repayment ability is often evidenced by a conservative structure, broad margins in earnings coverage of fixed financial charges and well established access to a range of financial markets and assured sources of alternate liquidity. Standard & Poor's commercial paper ratings are a current assessment of the likelihood of timely payment of debt having an original maturity less than 365 days. The top three Standard & Poor's commercial paper ratings (A-1, A-2 and A-3) are considered "investment grade". Issues rated "A-1" indicate that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety are denoted with a plus (+) sign designation. Preferred Dividends - Preferred dividends include net gains or losses on the reacquisition of MidAmerican preferred shares. For 1996 and 1994, preferred dividends include losses on reacquisition totaling $1.6 million and $0.3 million, respectively. Preferred dividends, excluding the losses on reacquisition, decreased from the 1994 amount due to the redemption of three series of preferred securities in December 1994. A change in the preferred dividend payment date following the merger compared to that of a predecessor company resulted in a one-time reduction in 1995 of the preferred dividend amount. -41- Holdings: - - -------- Continuing operations of MidAmerican Capital currently have unsecured revolving credit facilities in the amount of $114 million. In January 1997, MidAmerican Capital paid off the $90 million outstanding under the revolving credit facilities with proceeds from the sale transaction with KCS. Another $100 million revolving credit facility related to discontinued operations was terminated in January 1997, and the $84 million outstanding was paid off. In addition, MidAmerican Capital terminated two $32 million floating-rate-to-fixed-interest-rate swaps related to amounts outstanding under one of the revolving credit facilities. Excluding the above January 1997 payments, MidAmerican Capital has $142 million of long-term debt maturities and sinking fund requirements for 1997 through 2001, of which $30 million is in 1997. During the third quarter of 1996, Midwest Capital sold the Hub Tower, a Des Moines office building, and retired approximately $25 million of long-term debt which was supported by a guarantee from MidAmerican. Proceeds from the sale provided most of the funds necessary to retire the debt. The deficiency was funded by a $4.5 million capital contribution in extinguishment of the guarantee. Midwest Capital currently has a $25 million line of credit with MidAmerican. OPERATING ACTIVITIES AND OTHER MATTERS The Company continues to adjust to its strategies and operations for the changes it expects in the electric utility industry. The merger that resulted in MidAmerican and the reorganization of utility operations were some of the first steps taken to better position the Company for competition. In June 1996, MidAmerican filed an electric pricing proposal in Iowa and Illinois that it believes benefits customers and is designed to allow MidAmerican to function more effectively in a competitive environment. Refer to the following discussion under the heading "Rate Matters" for the current status of those filings. As mentioned under "Discontinued Operations" in the Results of Operations section, the Company has been evaluating its nonregulated investments to determine the best use of those assets to support the Company's objective of being a leading regional provider of energy and complementary services. The Company continues to seek opportunities to better position itself as the industry evolves. Holdings: - - -------- During 1996, the Company began to reevaluate its nonregulated investments. Through the evaluation process, management will determine which investments fit the Company's objectives and which should be divested. The method of divestiture could include alternatives from finding an immediate buyer to holding the investment until maturity. The Company holds approximately 70 different investments within its MidAmerican Capital and Midwest Capital subsidiaries which it is evaluating. In 1996, the evaluation of nonregulated investments resulted in a $20.9 million reduction in earnings because of asset impairments or a decision to pursue the sale of an investment at below its carrying value. The process will continue for the next 18 to 24 months and could result in additional losses if the Company decides to divest of investments for less than carrying value. MidAmerican: - - ----------- Regulatory Evolution and Competition - MidAmerican is subject to regulation by several utility regulatory agencies. The operating environment and the recoverability of costs from utility customers are significantly influenced by the regulation of those agencies. MidAmerican supports changes in the electric utility industry that will create a more competitive environment for the entire electric industry, as long as appropriate transitional steps are in place to accommodate moving from a regulated cost-of-service industry to a competitive industry. Although these anticipated changes may create opportunities, they will also create additional challenges and risks for utilities. -42- In December 1996, MidAmerican was selected from among 20 potential suppliers to provide electric service for the Resale Power Group of Iowa (RPGI). The RPGI includes 27 municipal utilities, a rural electric cooperative and an investor-owned utility. Members of the RPGI serve nearly 27,000 retail customers and purchase approximately 500,000 megawatt hours annually. Under the five-year contract beginning January 1, 1999, MidAmerican will also offer electric system maintenance services, energy efficiency services and economic development assistance. Electricity to RPGI utilities presently is supplied by IES Utilities. This opportunity provided MidAmerican valuable experience in the evolving competitive electric market. MidAmerican is a member of the Illinois Coalition for Responsible Electricity Choice (the Coalition). The Coalition has produced draft legislation (the Proposal) that would restructure Illinois' electric industry and allow Illinois customers to choose their electric service provider. The Proposal is designed to, among other things, balance tax and regulatory burdens; transition the industry to a competitive electric marketplace in phases between the years 2000 and 2005; stabilize or reduce tariffed electric rates; provide for recovery of prior mandated investments of the utilities; and increase flexibility for utilities while providing for oversight of reliability and safety by the ICC. MidAmerican expects the Proposal to be addressed by the Illinois legislature in 1997. The Illinois legislature previously passed laws allowing the filing of alternative pricing plans by utilities and increased flexibility for agreements with industrial customers. In Iowa, the Iowa Utilities Board (IUB) initiated a formal inquiry proceeding (Notice of Inquiry, Docket No. NOI-95-1) in 1995, titled "Emerging Competition in the Electric Utility Industry," primarily as an information gathering device. Since early in 1995, meetings have been held with a variety of interested parties, and the IUB established an advisory panel of which MidAmerican was a member. The IUB staff authored a report on the findings and potential options for restructuring in December 1996. The IUB accepted the report of its staff, as well as other information submitted in the case and closed the docket. The IUB has not determined its future course of action. No legislation has yet been introduced in Iowa to allow generation or retail service competition. The Energy Policy Act (EPAct) was enacted in 1992 to promote competition in the wholesale electric market. In April 1996, the FERC issued final rules (Orders 888 and 889) to direct the implementation of EPAct. In general, Orders 888 and 889, require public utilities and other transmission providers and users to provide other companies the same transmission access, service and pricing that they provide themselves. In compliance with Order 888, which was effective July 9, 1996, MidAmerican has filed a pro forma open access transmission tariff and is currently operating under it. In accordance with Order 889, which was effective January 3, 1997, MidAmerican has separated its electric wholesale marketing and transmission operation functions. Order 889 establishes standards of conduct for this functional separation and further requires transmission providers such as MidAmerican to either create or participate in an Open Access Same Time Information System (OASIS). MidAmerican has elected to participate in the Mid-Continent Area Power Pool OASIS. These developments assure that all transmission customers of MidAmerican, including MidAmerican's own wholesale marketing function, can obtain transmission information at the same time and can request service on the same basis. A possible consequence of competition in the utility industry is the discontinued applicability of Statement of Financial Accounting Standards (SFAS) No. 71. 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. MidAmerican's electric and gas utility operations are currently subject to the provisions of SFAS 71, but its applicability is periodically reexamined. If a portion of MidAmerican's utility operations no longer meets the criteria of SFAS 71, MidAmerican would be required to eliminate from its balance sheet the assets and liabilities related to those operations that resulted from actions of its regulators. Although the amount of such an elimination would depend on the specific circumstances, a material adjustment to earnings in the appropriate period could result from the discontinuance of SFAS 71. As of December 31, 1996, MidAmerican had $374 million of regulatory assets in its Consolidated Balance Sheet. Refer to Note (1)(c) for more detail related to regulatory assets. -43- Energy Efficiency - In May 1996, the Iowa legislature approved a bill enhancing energy efficiency program flexibility, eliminating mandatory spending levels for energy efficiency programs and allowing more timely recovery of energy efficiency expenditures as determined by the IUB. The new legislation became effective July 1, 1996. Previously, electric and gas utilities in Iowa were required to spend approximately 2% and 1.5%, respectively, of their annual Iowa jurisdictional revenues on energy efficiency activities. MidAmerican expects final rules on the implementation of the new legislation in the first half of 1997, following which MidAmerican will seek approval to accelerate recovery of deferred and current energy efficiency costs. MidAmerican received approval to collect and is collecting a total of $14.3 million annually for previously deferred energy efficiency costs. The Consolidated Balance Sheet as of December 31, 1996, included approximately $24 million of such approved costs yet to be collected from customers. In addition, MidAmerican had approximately $88 million of energy efficiency costs deferred and included as regulatory assets in its December 31, 1996, Consolidated Balance Sheet for which recovery will be sought in future energy efficiency filings. Rate Matters - On June 4, 1996, MidAmerican filed an electric pricing proposal in Iowa and Illinois. The proposal would provide MidAmerican more flexibility to negotiate with customers who have service options and to mitigate strandable costs. The proposal would also reduce regulatory lag in implementing new tariff services and prices. As part of the proposal, MidAmerican would reduce electric revenues, on a graduated basis, to the level of approximately $25 million annually within five years and eliminate automatic fuel adjustment clauses. The price reductions, possible due to merger and restructuring related cost savings, reduce price disparity within customer classes and would move MidAmerican closer to prices that it believes can be sustained in a competitive market. On October 15, 1996, the ICC ordered MidAmerican to reduce rates for its Illinois customers by 10%, or $13.1 million annually, effective November 3, 1996, and commenced an investigation into the reasonableness of MidAmerican's rates. MidAmerican negotiated termination of the proceeding to reduce its rates and withdrew its electric pricing proposal. The negotiated termination of the rate reduction proceeding left in place the initial $13.1 million annual reduction and included a second price reduction of $2.4 million annually to be effective on June 1, 1997. On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the IUB to order MidAmerican to reduce its Iowa electric rates by 10.7%, or approximately $101 million annually, in electric revenues. On September 6, 1996, the IUB docketed the OCA request and initiated an investigation into MidAmerican's rates. The IUB also consolidated the investigation with MidAmerican's alternative regulation and pricing proposal for purposes of the hearings scheduled to begin in January 1997. Effective November 1, 1996, MidAmerican reduced its electric rates in Iowa $8.7 million annually to the levels in its pricing proposal filed on June 4, 1996. In January 1997, a settlement agreement between MidAmerican, the OCA and other parties to the proceeding was negotiated. The agreement, which includes a number of characteristics of MidAmerican's pricing proposal, is subject to approval by the IUB. The agreement includes a tracking mechanism to currently recover the cost of Cooper capital improvements. After reflecting the effect of the Cooper tracking mechanism, prices for residential customers would be reduced approximately $20 million annually by June 1, 1998, including the November 1, 1996, reduction. Rates for commercial and industrial customers would be reduced a total of $10 million annually by June 1, 1998, through pilot projects, negotiated rates with individual customers and, if needed, a base rate reduction effective June 1, 1998. In addition, the agreement accepts MidAmerican's proposal to eliminate the energy adjustment clause (EAC) which currently is the mechanism through which fuel costs are collected from Iowa customers. The EAC flows the cost of fuel to customers on a current basis, and thus, fuel costs have little impact on net income. Prospectively, base rates for Iowa customers would include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings would be impacted. The fuel cost -44- factor would be reviewed in February 1999 and adjusted prospectively if actual fuel costs vary 15% above or below the agreed factor. Under the agreement, if MidAmerican's return on common equity exceeds 12%, then a sharing between customers and shareholders begins, and if it exceeds 14%, then a portion of MidAmerican's share would be used for accelerated recovery of certain regulatory assets. The agreement permits MidAmerican to file for increased rates if the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%. As of December 31, 1996, MidAmerican had a $2.6 million liability recorded for the portion of its Iowa electric revenues between August 1, 1996, and October 31, 1996, that were in excess of those included in the pricing proposal. Environmental Matters - The United States Environmental Protection Agency (EPA) and state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. The Company 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 the Company has any responsibility for remedial action. The Company's present estimate of probable remediation costs for these sites is $21 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note (4)(b) of Notes for further discussion of the Company's environmental activities related to manufactured gas plant sites and cost recovery. Although the timing of potential incurred costs and recovery of such cost in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on the Company's financial position or results of operations. The Clean Air Act Amendments of 1990 (CAA) were signed into law in November 1990. MidAmerican has six wholly owned and five jointly owned coal-fired generating stations, which represent approximately 65% of MidAmerican's electric generating capability. Essentially all utility generating units are subject to CAA provisions which address continuous emission monitoring, permit requirements and fees, and emission of certain substances. By the year 2000, some Company coal-fired generating units will be required to install emissions monitoring system replacements or upgrades. Under current regulations, MidAmerican does not anticipate its construction costs for the installation of emissions monitoring system upgrades to exceed $8 million for 1997 through 2000. ACCOUNTING ISSUES The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry regarding the recognition, measurement and classification of nuclear decommissioning costs in the financial statements. In response to these questions, the FASB has issued an Exposure Draft, "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which addresses the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric utility industry accounting practices for such decommissioning are changed, the annual provision for decommissioning could increase relative to 1996, and the total estimated cost for decommissioning could be recorded as a liability with recognition of an increase in the cost of related nuclear power plant. Due to the continuing evolution of the exposure draft, the Company is uncertain as to the impact on its results of operations and financial position. -45-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 1996 1995 1994 ----------- ----------- ----------- OPERATING REVENUES Electric utility .................................... $ 1,099,008 $ 1,094,647 $ 1,021,660 Gas utility ......................................... 536,753 459,588 492,015 Nonregulated ........................................ 236,851 95,106 117,550 ----------- ----------- ----------- 1,872,612 1,649,341 1,631,225 ----------- ----------- ----------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity ............... 234,317 230,261 213,987 Cost of gas sold ................................ 345,014 279,025 326,782 Other operating expenses ........................ 350,174 399,648 354,190 Maintenance ..................................... 88,621 85,363 101,275 Depreciation and amortization ................... 164,592 158,950 154,229 Property and other taxes ........................ 92,630 96,350 94,990 ----------- ----------- ----------- 1,275,348 1,249,597 1,245,453 ----------- ----------- ----------- Nonregulated: Cost of sales ................................... 218,256 70,209 84,515 Other ........................................... 35,370 37,181 36,765 ----------- ----------- ----------- 253,626 107,390 121,280 ----------- ----------- ----------- Total operating expenses ........................ 1,528,974 1,356,987 1,366,733 ----------- ----------- ----------- OPERATING INCOME .................................... 343,638 292,354 264,492 ----------- ----------- ----------- NON-OPERATING INCOME Interest income ..................................... 4,012 4,485 4,334 Dividend income ..................................... 16,985 16,954 17,087 Realized gains and losses on securities, net ........ 1,895 688 7,635 Other, net .......................................... (4,020) (10,467) 4,316 ----------- ----------- ----------- 18,872 11,660 33,372 ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt .......................... 102,909 105,550 101,267 Other interest expense .............................. 10,941 9,449 6,446 Allowance for borrowed funds ........................ (4,212) (5,552) (3,955) Preferred dividends of subsidiaries ................. 10,689 8,059 10,551 ----------- ----------- ----------- 120,327 117,506 114,309 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 242,183 186,508 183,555 INCOME TAXES ........................................ 98,422 66,803 60,457 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS ................... 143,761 119,705 123,098 DISCONTINUED OPERATIONS Income from operations (net of income taxes)......... 2,117 3,059 856 Loss on disposal (net of income taxes) .............. (14,832) -- (3,765) ----------- ----------- ----------- (12,715) 3,059 (2,909) ----------- ----------- ----------- NET INCOME .......................................... $ 131,046 $ 122,764 $ 120,189 =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING ................... 100,752 100,401 98,531 EARNINGS PER COMMON SHARE Continuing operations ............................... $ 1.43 $ 1.19 $ 1.25 Discontinued operations ............................. (0.13) 0.03 (0.03) ----------- ----------- ----------- Earnings per average common share ................... $ 1.30 $ 1.22 $ 1.22 =========== =========== =========== DIVIDENDS DECLARED PER SHARE ........................ $ 1.20 $ 1.18 $ 1.17 =========== =========== ===========
The accompanying notes are an integral part of these statements. -46-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31 1996 1995 1994 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net Income .................................................. $ 131,046 $ 122,764 $ 120,189 Adjustments to reconcile net income to net cash provided: Depreciation, depletion and amortization .................. 190,511 181,636 179,918 Net increase (decrease) in deferred income taxes and investment tax credit, net .............................. 22,142 (961) 34,103 Amortization of other assets .............................. 20,541 19,630 9,731 Capitalized cost of real estate sold ...................... 3,568 1,744 3,723 Loss (income) from discontinued operations ................ 12,715 (3,059) 2,909 Gain on sale of securities, assets and other investments .. (10,132) (1,050) (6,409) Other-than-temporary decline in value of investments ...... 15,566 17,971 1,791 Impact of changes in working capital, net of effects from discontinued operations ............................ (53,752) (21,024) (6,917) Other ..................................................... 19,218 19,369 10,831 --------- --------- --------- Net cash provided ....................................... 351,423 337,020 349,869 --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ........................... (154,198) (190,771) (211,669) Quad Cities Nuclear Power Station decommissioning trust fund (8,607) (8,636) (9,044) Deferred energy efficiency expenditures ..................... (20,390) (35,841) (28,221) Nonregulated capital expenditures ........................... (55,788) (12,881) (9,095) Purchase of securities ...................................... (198,947) (164,521) (113,757) Proceeds from sale of securities ............................ 243,290 94,493 142,307 Proceeds from sale of assets and other investments .......... 33,285 34,263 6,433 Investment in discontinued operations ....................... (36,020) (9,752) (23,695) Other investing activities, net ............................. 8,308 6,946 (7,957) --------- --------- --------- Net cash used ............................................. (189,067) (286,700) (254,698) --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid ....................................... (120,770) (118,828) (114,924) Issuance of long-term debt, net of issuance cost ............ 99,500 12,750 180,410 Retirement of long-term debt, including reacquisition cost .. (136,616) (110,351) (102,472) Reacquisition of preferred shares ........................... (58,176) (10) (19,916) Issuance of preferred shares, net of issuance cost........... 96,850 -- -- Increase (decrease) in MidAmerican Capital Company unsecured revolving credit facility ....................... 44,500 95,000 (9,500) Issuance of common shares ................................... -- 15,083 27,760 Net increase (decrease) in notes payable .................... (22,810) 60,300 (48,535) --------- --------- --------- Net cash used ............................................. (97,522) (46,056) (87,177) --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ................... 64,834 4,264 7,994 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............. 32,915 28,651 20,657 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR .................... $ 97,749 $ 32,915 $ 28,651 ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized ................... $ 107,179 $ 116,843 $ 105,004 ========= ========= ========= Income taxes paid ........................................... $ 85,894 $ 69,319 $ 50,713 ========= ========= =========
The accompanying notes are an integral part of these statements. -47-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 1996 1995 ---------- ----------- ASSETS UTILITY PLANT Electric .............................................................. $4,010,847 $3,881,699 Gas ................................................................... 723,491 695,741 ---------- ---------- 4,734,338 4,577,440 Less accumulated depreciation and amortization ........................ 2,153,058 2,027,055 ---------- ---------- 2,581,280 2,550,385 Construction work in progress ......................................... 49,305 104,164 ---------- ---------- 2,630,585 2,654,549 ---------- ---------- POWER PURCHASE CONTRACT ............................................... 190,897 212,148 ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS ................................. 196,356 177,300 ---------- ---------- CURRENT ASSETS Cash and cash equivalents ............................................. 97,749 32,915 Receivables, less reserves of $2,093 and $2,296, respectively.......... 312,930 228,128 Inventories ........................................................... 90,864 85,235 Other ................................................................. 11,696 18,428 ---------- ---------- 513,239 364,706 ---------- ---------- INVESTMENTS ........................................................... 628,791 646,456 ---------- ---------- OTHER ASSETS .......................................................... 399,415 414,938 ---------- ---------- TOTAL ASSETS .......................................................... $4,559,283 $4,470,097 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity ........................................... $1,239,946 $1,225,715 MidAmerican preferred securities, not subject to mandatory redemption . 31,769 89,945 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities ................................... 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust ..... holding solely MidAmerican junior subordinated debentures ........ 100,000 -- Long-term debt (excluding current portion) ............................ 1,395,103 1,403,322 ---------- ---------- 2,816,818 2,768,982 ---------- ---------- CURRENT LIABILITIES Notes Payable ......................................................... 161,990 184,800 Current portion of long-term debt...................................... 79,598 65,295 Current portion of power purchase contract ............................ 13,718 13,029 Accounts payable ...................................................... 169,806 122,055 Taxes accrued ......................................................... 82,254 81,898 Interest accrued ...................................................... 28,513 30,635 Other ................................................................. 30,229 46,267 ---------- ---------- 566,108 543,979 ---------- ---------- OTHER LIABILITIES Power purchase contract ............................................... 97,504 112,700 Deferred income taxes ................................................. 752,336 724,587 Investment tax credit ................................................. 88,842 95,041 Other ................................................................. 237,675 224,808 ---------- ---------- 1,176,357 1,157,136 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES .................................. $4,559,283 $4,470,097 ========== ==========
The accompanying notes are an integral part of these statements. -48-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AS OF DECEMBER 31 1996 1995 -------------------- -------------------- (In thousands, except share amounts) COMMON SHAREHOLDERS' EQUITY Common shares, no par; 350,000,000 shares authorized; 100,751,713 and 100,751,713 shares outstanding, respectively.......... $ 801,431 $ 801,227 Retained earnings...................................................... 440,971 430,589 Valuation allowance, net of income taxes............................... (2,456) (6,101) ---------- ---------- 1,239,946 44.0% 1,225,715 44.3% ---------- ------ ---------- ------ MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative shares outstanding not subject to mandatory redemption: $3.30 Series, 49,523 shares........................................ 4,952 4,952 $3.75 Series, 38,320 shares........................................ 3,832 3,832 $3.90 Series, 32,630 shares ....................................... 3,263 3,263 $4.20 Series, 47,369 shares........................................ 4,737 4,737 $4.35 Series, 49,950 shares........................................ 4,995 4,995 $4.40 Series, 50,000 shares........................................ 5,000 5,000 $4.80 Series, 49,898 shares........................................ 4,990 4,990 $1.7375 Series, zero and 2,400,000 shares, respectively............ -- 58,176 ---------- ---------- 31,769 1.1% 89,945 3.2% ---------- ------ ---------- ------ Cumulative shares outstanding; subject to mandatory redemption: $5.25 Series, 100,000 shares....................................... 10,000 10,000 $7.80 Series, 400,000 shares....................................... 40,000 40,000 ---------- ---------- 50,000 1.8% 50,000 1.8% ---------- ------ ---------- ------ MIDAMERICAN-OBLIGATED PREFERRED SECURITIES MidAmerican-obligated mandatorily redeemable cumulative preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures: 7.98% Series, 4,000,000 and zero shares, respectively............. 100,000 3.6% -- 0.0% ---------- ------ ---------- ------ LONG-TERM DEBT MidAmerican Mortgage bonds: 5.875% Series, due 1997............................................ -- 22,000 Adjustable Rate Series (8.8%), due 1997............................ -- 25,000 5.05% Series, due 1998............................................. 49,100 50,000 6.25% Series, due 1998............................................. 75,000 75,000 7.875% Series, due 1999............................................ 60,000 60,000 6% Series, due 2000................................................ 35,000 35,000 6.75% Series, due 2000............................................. 75,000 75,000 8.15% Series, due 2001............................................. -- 40,000 7.125% Series, due 2003............................................ 100,000 100,000 7.70% Series, due 2004............................................. 60,000 60,000 7% Series, due 2005................................................ 100,000 100,000 7.375% Series, due 2008............................................ 75,000 75,000 8% Series, due 2022................................................ 50,000 50,000 7.45% Series, due 2023............................................. 26,500 30,000 8.125% Series, due 2023............................................ 100,000 100,000 6.95% Series, due 2025............................................. 21,500 50,000 MidAmerican Pollution control revenue obligations: 5.15% to 5.75% Series, due periodically through 2003............... 8,424 10,984 5.95% Series, due 2023 (secured by general mortgage bonds)......... 29,030 29,030
The accompanying notes are an integral part of these statements. -49-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AS OF DECEMBER 31 1996 1995 -------------------- -------------------- (In thousands) LONG-TERM DEBT (CONTINUED) Variable Rate Series: Due 2016 and 2017 (3.5% and 5.0%, respectively)................ $ 37,600 $ 37,600 Due 2023 (secured by general mortgage bonds, 3.5% and 5.05%, respectively)...................... 28,295 28,295 Due 2023 (3.5% and 5.1%, respectively)......................... 6,850 6,850 Due 2024 (3.6% and 5.25%, respectively)........................ 34,900 34,900 Due 2025 (3.5% and 5.1%, respectively)......................... 12,750 12,750 MidAmerican Notes: 8.75% Series, due 2002............................................ 240 240 6.5% Series, due 2001............................................. 100,000 -- 6.4% Series, due 2003 through 2007................................ 2,000 2,000 Obligation under capital lease.................................... 2,218 2,218 Unamortized debt premium and discount, net........................ (4,009) (4,126) ---------- ---------- Total utility.................................................. 1,085,398 1,107,741 ---------- ---------- Nonregulated Subsidiaries Notes: 10.20% Series, due 1996 and 1997.................................. -- 30,000 7.34% Series, due 1998............................................ 20,000 20,000 7.76% Series, due 1999............................................ 45,000 45,000 8.52% Series, due 2000 through 2002............................... 70,000 70,000 8% Series, due annually through 2004.............................. 205 581 Borrowings under unsecured revolving credit facility (6.2% and 6.3% respectively)............................................. 64,000 64,000 Borrowings under unsecured revolving credit facility (6.1% and 6.4%, respectively).................................. 26,000 66,000 Borrowings under unsecured revolving credit facility (6.1%)....... 84,500 -- ---------- ---------- Total Nonregulated Subsidiaries................................ 309,705 295,581 ---------- ---------- 1,395,103 49.5% 1,403,322 50.7% ----------- ------ ---------- ------ TOTAL CAPITALIZATION.................................................. $2,816,818 100.0% $2,768,982 100.0% ========== ====== ========== ======
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS YEARS ENDED DECEMBER 31 1996 1995 1994 -------- -------- -------- (In thousands, except per share amounts) BEGINNING OF YEAR.................................................... $430,589 $426,683 $421,358 -------- -------- -------- NET INCOME........................................................... 131,046 122,764 120,189 -------- -------- -------- DEDUCT (ADD): Dividends declared on common shares of $1.20, $1.18 and $1.17 per share, respectively...................................... 120,770 118,828 114,924 Other................................................................ (106) 30 (60) -------- -------- -------- 120,664 118,858 114,864 -------- -------- -------- END OF YEAR.......................................................... $440,971 $430,589 $426,683 ======== ======== ========
The accompanying notes are an integral part of these statements. -50- MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (A) MERGER AND FORMATION OF THE COMPANY: MidAmerican Energy Holdings Company (Company or Holdings) is a holding company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). On April 24, 1996, MidAmerican shareholders approved a proposal to form Holdings as a holding company for MidAmerican and its subsidiaries, MidAmerican Capital and Midwest Capital. Effective December 1, 1996, each share of MidAmerican common stock was exchanged for one share of Holdings common stock. As part of the transaction, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. MidAmerican was formed on July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc. (Midwest Resources) and its utility subsidiary, Midwest Power Systems Inc. (Midwest Power). Each outstanding share of preferred and preference stock of the predecessor companies was converted into one share of a similarly designated series of MidAmerican preferred stock, no par value. Each outstanding share of common stock of Midwest Resources and Iowa-Illinois was converted into one share and 1.47 shares, respectively, of MidAmerican common stock, no par value. The merger was accounted for as a pooling-of-interest and the financial statements included herein are presented as if the merger and the formation of the holding company had occurred as of the earliest period shown. (B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS: The accompanying Consolidated Financial Statements include the Company and its wholly owned subsidiaries, MidAmerican, MidAmerican Capital and Midwest Capital. All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. (C) REGULATION: MidAmerican's utility operations are subject to the regulation of the Iowa Utilities Board (IUB), the Illinois Commerce Commission (ICC), the South Dakota Public Utilities Commission, 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. 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. MidAmerican's electric and gas utility operations are currently subject to the provisions of SFAS 71, but its applicability is periodically reexamined. If a portion of MidAmerican's utility operations no longer meets the criteria of SFAS 71, MidAmerican would be required to eliminate from its balance sheet -51- the regulatory assets and liabilities related to those operations that resulted from actions of its regulators. Although the amount of such an elimination would depend on the specific circumstances, a material adjustment to earnings in the appropriate period could result from the discontinuance of SFAS 71. The following regulatory assets, primarily included in Other Assets in the Consolidated Balance Sheets, represent probable future revenue to MidAmerican because these costs are expected to be recovered in charges to utility customers (in thousands):
1996 1995 -------- -------- Deferred income taxes ............................ $140,649 $144,257 Energy efficiency costs .......................... 112,244 101,541 Debt refinancing costs ........................... 40,230 44,370 FERC Order 636 transition costs .................. 25,033 40,824 Environmental costs .............................. 22,577 23,076 Retirement benefit costs ......................... 11,025 15,354 Enrichment facilities decommissioning ............ 11,089 8,970 Unamortized costs of retired plant ............... 8,953 11,618 Other ............................................ 2,655 7,396 -------- -------- Total ....................................... $374,455 $397,406 ======== ========
(D) REVENUE RECOGNITION: Revenues are recorded as services are rendered to customers. MidAmerican records unbilled revenues, and related energy costs, representing the estimated amount customers will be billed for services rendered between the meter-reading dates in a particular month and the end of such month. Accrued unbilled revenues are $70.1 million and $61.0 million at December 31, 1996 and 1995, respectively, and are included in Receivables on the Consolidated Balance Sheets. The majority of MidAmerican's electric and gas sales are subject to adjustment clauses. These clauses allow MidAmerican to adjust the amounts charged for electric and gas service as the costs of gas, fuel for generation or purchased power change. The costs recovered in revenues through use of the adjustment clauses are charged to expense in the same period. See Note 8 for a discussion of a proposed Iowa rate settlement that would impact the electric adjustment clause. (E) DEPRECIATION AND AMORTIZATION: MidAmerican's provisions for depreciation and amortization for its utility operations are based on straight-line composite rates. The average depreciation and amortization rates for the years ended December 31 were as follows:
1996 1995 1994 ---- ---- ---- Electric.......... 3.8% 3.9% 3.8% Gas............... 3.7% 3.7% 3.6%
Utility plant is stated at original cost which includes overhead costs, administrative costs and an allowance for funds used during construction. The cost of repairs and minor replacements is charged to maintenance expense. Property additions and major property replacements are charged to plant accounts. The cost of depreciable units of utility plant retired or disposed of in the normal course of business is eliminated from the utility plant accounts and such cost, plus net removal cost, is charged to accumulated depreciation. -52- An allowance for the estimated annual decommissioning costs of the Quad Cities Nuclear Power Station (Quad Cities) equal to the level of funding is included in depreciation expense. See Note 4(d) for additional information regarding decommissioning costs. (F) INVESTMENTS: Investments, managed primarily through the Company's nonregulated subsidiaries, include the following amounts as of December 31 (in thousands):
1996 1995 -------- -------- Investments: Marketable securities ....................... $219,890 $270,162 Equipment Leases ............................ 89,791 90,729 Nuclear decommissioning trust fund .......... 76,304 64,781 Energy projects ............................. 30,217 36,978 Special-purpose funds ....................... 44,932 47,046 Real estate ................................. 45,457 68,126 Corporate owned life insurance .............. 27,395 22,743 Coal transportation ......................... 18,623 12,703 Communications .............................. 56,333 16,332 Other ....................................... 19,849 16,856 -------- -------- Total ................................... $628,791 $646,456 ======== ========
Marketable securities generally consist of preferred stocks, common stocks and mutual funds held by MidAmerican Capital. Investments in marketable securities classified as available-for-sale are reported at fair value with net unrealized gains and losses reported as a net of tax amount in Common Shareholders' Equity until realized. Investments in marketable securities that are classified as held-to-maturity are reported at amortized cost. An other-than-temporary decline in the value of a marketable security is recognized through a write-down of the investment to earnings. Investments held by the nuclear decommissioning trust fund for the Quad Cities units are classified as available-for-sale and are reported at fair value with net unrealized gains and losses reported as adjustments to the accumulated provision for nuclear decommissioning. (G) CONSOLIDATED STATEMENTS OF CASH FLOWS: The Company considers all cash and highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. -53- Net cash provided (used) from changes in working capital, net of effects from discontinued operations and exchange of assets was as follows (in thousands):
1996 1995 1994 -------- -------- -------- Receivables ................. $(84,802) $(31,314) $ 19,343 Inventories ................. (5,629) 7,013 8,427 Other current assets ........ 6,732 (4,140) 6,907 Accounts payable ............ 47,751 15,903 (17,466) Taxes accrued ............... 356 (9,755) (19,270) Interest accrued ............ (2,122) (24) (362) Other current liabilities ... (16,038) 1,293 (4,496) -------- -------- -------- Total ..................... $(53,752) $(21,024) $ (6,917) ======== ======== ========
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT: Under a long-term power purchase contract with Nebraska Public Power District (NPPD), expiring in 2004, MidAmerican purchases one-half of the output of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance Sheets include a liability for MidAmerican's fixed obligation to pay 50% of NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like amount representing MidAmerican's right to purchase power is shown as an asset. Capital improvement costs for new property, including carrying costs, are being deferred, amortized and recovered in rates over the term of the NPPD contract. Capital improvement costs for property replacements, including carrying costs, are being deferred, amortized and recovered in rates over a five-year period. The fuel cost portion of the power purchase contract is included in Cost of Fuel, Energy and Capacity on the Consolidated Statements of Income. All other costs MidAmerican incurs in relation to its long-term power purchase contract with NPPD are included in Other Operating Expenses on the Consolidated Statements of Income. See Notes 4(c), 4(d) and 4(e) for additional information regarding the power purchase contract. (I) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121: On January 1, 1996, the Company adopted SFAS No. 121 regarding accounting for asset impairments. This statement requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 121 also requires rate-regulated companies to recognize an impairment for regulatory assets for which future recovery is not probable. Adoption of SFAS No. 121 did not have a material impact on the Company's results of operations or financial position. (2) LONG-TERM DEBT: The Company's sinking fund requirements and maturities of long-term debt for 1997 through 2001 are $80 million, $235 million, $190 million, $134 million and $125 million, respectively. The interest rate on the Company's Adjustable Rate Series Mortgage Bonds is reset every two years at 160 basis points over the average yield to maturity of 10-year Treasury securities. The rate was reset in 1995. -54- The Company's Variable Rate Pollution Control Revenue Obligations bear interest at rates that are periodically established through remarketing of the bonds in the short-term tax-exempt market. The Company, at its option, may change the mode of interest calculation for these bonds by selecting from among several alternative floating or fixed rate modes. The interest rates shown in the Consolidated Statements of Capitalization are the weighted average interest rates as of December 31, 1996 and 1995. The Company maintains dedicated revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues. Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest Power electric utility property in Iowa, or approximately 82% of gross utility plant, is pledged to secure mortgage bonds. MidAmerican Capital has $64 million and $50 million unsecured revolving credit facility agreements which mature in 1998. Borrowings under these agreements may be on a fixed rate, floating rate or competitive bid rate basis. In addition, MidAmerican had a $100 million unsecured revolving credit facility agreement which was retired in January of 1997. All subsidiary long-term borrowings outstanding at December 31, 1996, are without recourse to Holdings. (3) JOINTLY OWNED UTILITY PLANT: Under joint plant ownership agreements with other utilities, MidAmerican had undivided interests at December 31, 1996, in jointly owned generating plants as shown in the table below. The dollar amounts below represent MidAmerican's share in each jointly owned unit. Each participant has provided financing for its share of each unit. Operating Expenses on the Consolidated Statements of Income include MidAmerican's share of the expenses of these units (dollars in millions).
Nuclear Coal fired ----------- --------------------------------------------------- Council Quad Cities Neal Bluffs Neal Ottumwa Louisa Units Unit Unit Unit Unit Unit No. 1 & 2 No. 3 No. 3 No.4 No. 1 No. 1 ----------- ------ ------- ------ ------- ------ In service date 1972 1975 1978 1979 1981 1983 Utility plant in service $ 229 $ 126 $ 297 $ 160 $ 207 $ 530 Accumulated depreciation $ 79 $ 72 $ 154 $ 82 $ 96 $ 216 Unit capacity-MW 1,539 515 675 624 716 700 Percent ownership 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
(4) COMMITMENTS AND CONTINGENCIES: (A) CAPITAL EXPENDITURES: Utility construction expenditures for 1997 are estimated to be $200 million, including $10 million for Quad Cities nuclear fuel and $9 million for Cooper capital improvements. Nonregulated capital expenditures depend upon the availability of investment opportunities and other factors. During 1997, such expenditures are estimated to be approximately $39 million. -55- (B) ENVIRONMENTAL MATTERS: 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 fifteen of the sites and has completed investigations at three of the sites. In addition, MidAmerican is currently removing contaminated soil at four of the sites, and has completed removals at two of the 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 present estimate of probable remediation costs for the sites discussed above is $21 million. This estimate has been recorded as a liability and a regulatory asset for future recovery. The 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 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 are accrued. Once the investigation is completed 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, which 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, 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. (C) LONG-TERM POWER PURCHASE CONTRACT: Payments to NPPD cover one-half of the fixed and operating costs of Cooper (excluding depreciation but including debt service) and MidAmerican's share of nuclear fuel cost (including nuclear fuel disposal) based on energy delivered. The debt service portion is approximately $1.5 million per month for 1997 and is not contingent upon the plant being in service. In addition, MidAmerican pays one-half of NPPD's decommissioning funding related to Cooper. -56- The debt amortization and Department of Energy (DOE) enrichment plant decontamination and decommissioning component of MidAmerican's payments to NPPD were $14.5 million, $12.0 million and $10.8 million and the net interest component was $3.6 million, $4.6 million and $5.4 million each for the years 1996, 1995 and 1994, respectively. MidAmerican's payments for the debt principal portion of the power purchase contract obligation and the DOE enrichment plant decontamination and decommissioning payments are $13.7 million, $14.4 million, $15.0 million, $15.8 million and $16.6 million for 1997 through 2001, respectively, and $35.7 million for 2002 through 2004. (D) DECOMMISSIONING COSTS: Based on site-specific decommissioning studies that include decontamination, dismantling, site restoration and dry fuel storage cost, MidAmerican's share of expected decommissioning costs for Cooper and Quad Cities, in 1996 dollars, is $440 million. In Illinois, nuclear decommissioning costs are included in customer billings through a mechanism that permits annual adjustments. Such costs are reflected as base rates in Iowa tariffs. For purposes of developing a decommissioning funding plan for Cooper, NPPD assumes that decommissioning costs will escalate at an annual rate of 4.0%. Although Cooper's operating license expires in 2014, the funding plan assumes decommissioning will start in 2004, the currently anticipated plant shutdown date. As of December 31, 1996, MidAmerican's share of funds set aside by NPPD in internal and external accounts for decommissioning was $62.9 million. In addition, the funding plan also assumes various funds and reserves currently held to satisfy NPPD Bond Resolution requirements will be available for plant decommissioning costs after the bonds are retired in early 2004. The funding schedule assumes a long-term return on funds in the trust of 6.3% annually. Certain funds will be required to be invested on a short-term basis when decommissioning begins and are assumed to earn at a rate of 4.0% annually. NPPD is recognizing decommissioning costs over the expected service life of the plant, and 50% of the costs are included as a component of MidAmerican's power purchased costs. The Cooper decommissioning component of MidAmerican's payments to NPPD were $9.9 million, $8.9 million and $8.9 million for the years 1996, 1995, and 1994, respectively, and are included in Other Operating Expenses in the Consolidated Statements of Income. Earnings from the internal and external trust funds, which are recognized by NPPD as the owner of the plant, are tax exempt and serve to reduce future funding requirements. An external trust has been established for the investment of funds for decommissioning the Quad Cities units. The total accrued balance as of December 31, 1996, was $76.3 million and is included in Other Liabilities and a like amount is reflected in Investments and represents the value of the assets held in the trust. MidAmerican's provision for depreciation includes costs for Quad Cities nuclear decommissioning of $8.6 million, $8.6 million and $9.1 million for 1996, 1995 and 1994, respectively. The provision charged to expense is equal to the funding that is being collected in rates. The decommissioning funding component of MidAmerican's Illinois tariffs assumes that decommissioning costs, related to the Quad Cities unit, will escalate at an annual rate of 5.3% and the assumed annual return on funds in the trust is 6.5%. The Quad Cities decommissioning funding component of MidAmerican's Iowa tariffs assumes that decommissioning costs will escalate at an annual rate of 6.3% and the assumed annual return on funds in the trust is 6.5%. Earnings on the assets in the trust fund were $3.5 million, $2.5 million and $2.2 million for 1996, 1995 and 1994, respectively. (E) NUCLEAR INSURANCE: MidAmerican maintains financial protection against catastrophic loss associated with its interest in Quad Cites and Cooper through a combination of insurance purchased by NPPD (the owner and operator of Cooper) and -57- Commonwealth Edison (the joint owner and operator of Quad Cities), insurance purchased directly by MidAmerican, and the mandatory industry-wide loss funding mechanism afforded under the Price-Anderson Amendments Act of 1988. The coverage falls into three categories: nuclear liability, property coverage and nuclear worker liability. NPPD and Commonwealth Edison each purchase nuclear liability insurance in the maximum available amount of $200 million. In accordance with the Price-Anderson Amendments Act of 1988, excess liability protection above that amount is provided by a mandatory industry-wide program under which the owners of nuclear generating facilities could be assessed for liability incurred due to a serious nuclear incident at any commercial nuclear reactor in the United States. Currently, MidAmerican's maximum potential share of such an assessment is $79.3 million per incident, payable in installments not to exceed $10 million annually. The property coverage provides for property damage, stabilization and decontamination of the facility, disposal of the decontaminated material and premature decommissioning. For Quad Cities, Commonwealth Edison purchases primary and excess property insurance protection for the combined interest in Quad Cities totalling $2.1 billion. For Cooper, NPPD purchases primary property insurance in the amount of $500 million. Additionally, MidAmerican and NPPD separately purchase coverage for their respective obligation of $1.125 billion each in excess of the $500 million primary layer purchased by NPPD. This structure provides that both MidAmerican and NPPD are covered for their respective 50% obligation in the event of a loss totalling $2.75 billion. MidAmerican also directly purchases extra expense/business interruption coverage to cover the cost of replacement power and/or other continuing costs in the event of a covered accidental outage at Cooper or Quad Cities. The coverages purchased directly by MidAmerican, and the primary and excess property coverages purchased by Commonwealth Edison, contain provisions for retrospective premium assessments should two or more full policy-limit losses occur in one policy year. Currently, the maximum retrospective amounts that could be assessed against MidAmerican from industry mutual insurance companies for its obligations associated with Cooper and Quad Cities combined total $13.8 million. The master nuclear worker liability coverage is an industry-wide policy with an aggregate limit of $200 million for the nuclear industry as a whole, which is in effect to cover tort claims of workers as a result of radiation exposure on or after January 1, 1988. MidAmerican's share, based on its interest in Cooper and Quad Cities, of a maximum potential share of a retrospective assessment under this program is $3.0 million. (F) COAL AND NATURAL GAS CONTRACT COMMITMENTS: MidAmerican has entered into supply and related transportation contracts for its fossil-fueled generating stations. The contracts, with expiration dates ranging from 1997 to 2003, require minimum payments of $68 million, $36 million, $26 million, $19 million and $20 million for the years 1997 through 2001, respectively, and $12 million for the total of the two years thereafter. The Company expects to supplement these coal contracts with spot market purchases to fulfill its future fossil fuel needs. The Company has entered into various natural gas supply and transportation contracts for its utility operations. The minimum commitments under these contracts are $91 million, $78 million, $43 million, $22 million and $19 million for the years 1997 through 2001, respectively, and $82 million for the total of the years thereafter. During 1993 FERC Order 636 became effective, requiring interstate pipelines to restructure their services. The pipelines will recover the transition costs related to Order 636 from the local distribution companies. The Company has recorded a liability and regulatory asset for the transition costs which are being recovered by the Company through the purchased gas adjustment clause. The unrecovered balance recorded by the Company as of December 31, 1996, was $25 million. -58- (5) COMMON SHAREHOLDERS' EQUITY: Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands):
1996 1995 1994 ------------------- -------------------- -------------------- Amount Shares Amount Shares Amount Shares -------- ------- --------- -------- --------- ------- Balance, beginning of year ... $801,227 100,752 $786,420 99,687 $759,120 97,782 Changes due to: Issuance of common shares .. -- -- 15,083 1,065 27,760 1,911 Accrued stock options ...... 623 -- -- -- -- -- Capital stock expense ...... (419) -- (276) -- (377) -- Other ...................... -- -- -- -- (83) (6) -------- ------- -------- ------- -------- ------ Balance, end of year ......... $801,431 100,752 $801,227 100,752 $786,420 99,687 ======== ======= ======== ======= ======== ======
(6) RETIREMENT PLANS: The Company has noncontributory defined benefit pension plans covering substantially all employees. Benefits under the plans are based on participants' compensation, years of service and age at retirement. Funding is based upon the actuarially determined costs of the plans and the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act. MidAmerican has been allowed to recover funding contributions in rates. Net periodic pension cost includes the following components for the years ended December 31 (in thousands):
1996 1995 1994 -------- -------- -------- Service cost-benefit earned during the period . $ 12,323 $ 9,817 $ 13,241 Interest cost on projected benefit obligation . 31,109 27,934 26,822 Decrease in pension costs from actual return on assets ............................ (58,460) (63,593) (7,835) Net amortization and deferral ................. 26,223 32,126 (21,030) One-time charge ............................... -- 15,683 -- Regulatory deferral of incurred cost .......... 568 (10,470) (2,871) -------- -------- -------- Net periodic pension cost ..................... $ 11,763 $ 11,497 $ 8,327 ======== ======== ========
During 1995, the Company incurred a one-time charge of $15.7 million related to the early retirement portion of its restructuring plan. Of such cost, $3.0 million was charged to expense and the remaining amount was deferred for future recovery through the regulatory process. The plan assets are stated at fair market value and are primarily comprised of insurance contracts, United States government debt and corporate equity securities. The plans in which accumulated benefits exceed assets consist entirely of nonqualified defined benefit plans. Although the plans have no assets, the Company purchases corporate owned life insurance to provide funding for the future cash requirements. The cash value of such insurance was $17.3 million and $14.5 million at December 31, 1996 and 1995, respectively. The following table presents the funding status of the plans -59- and amounts recognized in the Consolidated Balance Sheets as of December 31 (dollars in thousands):
Plans in Which: -------------------------------------------------------- Assets Exceed Accumulated Accumulated Benefits Exceed Benefits Assets ------------------------- --------------------------- 1996 1995 1996 1995 --------- --------- -------- --------- Actuarial present value of benefit obligations: Vested benefit obligation ................... $(298,237) $(293,985) $(36,574) $(32,429) Nonvested benefit obligation ................ (3,454) (7,516) (1,925) (816) --------- --------- -------- -------- Accumulated benefit obligation .............. (301,691) (301,501) (38,499) (33,245) Provision for future pay increases .......... (79,790) (94,633) (8,733) (5,455) --------- --------- -------- -------- Projected benefit obligation ................ (381,481) (396,134) (47,232) (38,700) Plan assets at fair value ..................... 427,828 385,598 -- -- --------- -------- -------- -------- Projected benefit obligation (greater) less than plan assets ......................... 46,347 (10,536) (47,232) (38,700) Unrecognized prior service cost ............... 18,636 (15,866) 21,544 2,884 Unrecognized net loss (gain) .................. (63,173) 29,541 -- 9,431 Unrecognized net transition asset ............. (18,929) (21,521) -- -- Other ......................................... -- -- (12,811) (6,860) --------- --------- -------- -------- Pension liability recognized in the Consolidated Balance Sheets ................. $ (17,119) $ (18,382) $(38,499) $(33,245) ========= ========= ======== ========
1996 1995 ---- -------- Assumptions used were: Discount rate............................... 7.5% 7.0% Rate of increase in compensation levels..... 5.0% 5.0% Weighted average expected long-term rate of return on assets....................... 9.0% 8.9%
The Company currently provides certain health care and life insurance benefits for retired employees. Under the plans, substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while working for the Company. However, the Company retains the right to change these benefits anytime at its discretion. In January 1993, the Company adopted SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The Company began expensing these costs on an accrual basis for its Illinois customers and certain of its Iowa customers in 1993 and including provisions for such costs in rates for these customers. For its remaining Iowa customers, the Company deferred the portion of these costs above the "pay-as-you-go" amount already included in rates until recovery on an accrual basis was established in 1995. The Company is currently amortizing the deferral, expensing the SFAS No. 106 accrual and including provisions for these costs in rates. -60- Net periodic postretirement benefit cost includes the following components for the year ended December 31 (in thousands):
1996 1995 1994 -------- -------- ------ Service cost-benefit earned during the period .................... $ 2,118 $ 1,583 $ 2,147 Interest cost .................................................... 8,341 7,185 7,221 Increase (decrease) in benefit cost from actual return on assets . (1,598) (2,090) 894 Amortization of unrecognized transition obligation ............... 5,291 5,291 5,442 Other ............................................................ (297) (262) (1,991) One-time charge for early retirement ............................. -- 4,353 -- Regulatory recognition of incurred cost .......................... 5,112 5,140 (6,218) -------- -------- ------- Net periodic postretirement benefit cost ......................... $ 18,967 $ 21,200 $ 7,495 ======== ======== =======
During 1995, the Company recorded a one-time expense of $4.4 million related to the early retirement portion of its restructuring plan. The Company has established external trust funds to meet its expected postretirement benefit obligations. The trust funds are comprised primarily of guaranteed rate investment accounts and money market investment accounts. A reconciliation of the funded status of the plan to the amounts realized as of December 31 is presented below (dollars in thousands):
1996 1995 --------- --------- Accumulated present value of benefit obligations: Retiree benefit obligation ............................... $ (78,935) $ (67,488) Active employees fully eligible for benefits ............. (2,798) (5,904) Other active employees ................................... (34,772) (33,949) --------- --------- Accumulated benefit obligation ........................... (116,505) (107,341) Plan assets at fair value .................................. 36,783 26,916 --------- --------- Accumulated benefit obligation greater than plan assets .... (79,722) (80,425) Unrecognized net gain ...................................... (8,810) (13,880) Unrecognized transition obligation ......................... 84,662 89,952 --------- --------- Postretirement benefit liability recognized in the Consolidated Balance Sheets .............................. $ (3,870) $ (4,353) --------- ========= Assumptions used were: Discount rate ............................................ 7.5% 7.0% Weighted average expected long-term rate of return on assets (after taxes)................................. 6.7% 6.4%
For purposes of calculating the postretirement benefit obligation, it is assumed that health care costs for covered individuals prior to age 65 will increase by 11.0% in 1997, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2002. For covered individuals age 65 and older, it is assumed that health care costs will increase by 8.0% in 1997, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2000. -61- If the assumed health care trend rates used to measure the expected cost of benefits covered by the plans were increased by 1%, the total service and interest cost would increase by $1.3 million and the accumulated postretirement benefit obligation would increase by $11.9 million. The Company sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. The Company's contributions to the plans, which are based on the participants level of contribution and cannot exceed four percent of the participants salaries or wages, were $4.4 million, $3.7 million and $3.6 million for 1996, 1995 and 1994, respectively. (7) SHORT-TERM BORROWING: Interim financing of working capital needs and the construction program may be obtained from the sale of commercial paper or short-term borrowing from banks. Information regarding short-term debt follows (dollars in thousands):
1996 1995 1994 -------- -------- ------- Balance at year-end .............................. $161,990 $184,800 $124,500 Weighted average interest rate on year-end balance............................... 5.4% 5.7% 6.1 % Average daily amount outstanding during the year................................... $151,318 $114,036 $105,728 Weighted average interest rate on average daily amount outstanding during the year................ 5.5% 6.0% 4.4 %
MidAmerican has authority from FERC to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of December 31, 1996, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit and Holdings had a $20 million line of credit. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit. (8) RATE MATTERS: On June 4, 1996, MidAmerican filed an electric pricing proposal in Iowa and Illinois. The proposal would provide MidAmerican more flexibility to negotiate with customers who have service options and mitigate strandable costs. The proposal would also reduce regulatory lag in implementing new tariff services and prices. As part of the proposal, MidAmerican would reduce electric revenues, on a graduated basis, to the level of approximately $25 million annually within five years and eliminate automatic fuel adjustment clauses. The price reductions, possible due to merger and restructuring related cost savings, reduce price disparity within customer classes and would move MidAmerican closer to prices that it believes can be sustained in a competitive market. On October 15, 1996, the ICC ordered MidAmerican to reduce rates for its Illinois customers by 10%, or $13.1 million annually, effective November 3, 1996, and commenced an investigation into the reasonableness of MidAmerican's rates. MidAmerican negotiated termination of the proceeding to reduce rates and withdraw its electric pricing proposal. The negotiated termination of the rate proceeding left in place the initial $13.1 million annual reduction and included a second price reduction of $2.4 million to be effective on June 1, 1997. On August 1, 1996, the Iowa Office of Consumer Advocate (OCA) requested the IUB to order MidAmerican to reduce its Iowa electric rates by 10.7%, or approximately $101 million annually, in electric revenues. On September 6, -62- 1996, the IUB docketed the OCA request and initiated an investigation into MidAmerican's rates. The IUB also consolidated the investigation with MidAmerican's alternative regulation and pricing proposal for purposes of the hearings scheduled to begin in January 1997. Effective November 1, 1996, MidAmerican reduced its electric rates in Iowa $8.7 million annually to the levels in its pricing proposal filed on June 4, 1996. In January 1997, a settlement agreement between MidAmerican, the OCA and other parties to the proceeding was negotiated. The agreement, which includes a number of characteristics of MidAmerican's pricing proposal, is subject to approval by the IUB. The agreement includes a tracking mechanism to currently recover the cost of Cooper capital improvements. After reflecting the effect of the Cooper tracking mechanism, prices for residential customers would be reduced $20 million annually by June 1, 1998, including the November 1, 1996, reduction. Rates for commercial and industrial customers would be reduced a total of $10 million annually by June 1, 1998, through pilot projects, negotiated rates with individual customers and, if needed, a base rate reduction effective June 1, 1998. In addition, the agreement accepts MidAmerican's proposal to eliminate the energy adjustment clause (EAC) which currently is the mechanism through which fuel costs are collected from Iowa customers. The EAC flows the cost of fuel to customers on a current basis, and thus, fuel costs have little impact on net income. Prospectively, base rates for Iowa customers would include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings would be impacted. The fuel cost factor would be reviewed in February 1999 and adjusted prospectively if actual fuel costs vary 15% above or below the agreed factor. Under the agreement, if MidAmerican's return on common equity exceeds 12%, then a sharing between customers and shareholders begins, and if it exceeds 14%, then a portion of MidAmerican's share would be used for accelerated recovery of certain regulatory assets. The agreement permits MidAmerican to file for increased rates if the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%. As of December 31, 1996, MidAmerican had a $2.6 million liability recorded for the portion of its Iowa electric revenues between August 1, 1996, and October 31, 1996, that were in excess of those included in the pricing proposal. (9) DISCONTINUED OPERATIONS: In the third quarter of 1996, the Company announced the discontinuation of certain nonstrategic businesses in support of its strategy of becoming a leading regional energy and complementary services provider. In November of 1996, the Company signed a definitive agreement with KCS Energy, Inc. (KCS) to sell an oil and gas exploration and development subsidiary and completed the sale on January 3, 1997. The Company recorded an after-tax loss of $7.1 million for the disposition in 1996. The Company has also announced its plan to divest a subsidiary that developed and continues to operate a computerized information system facilitating the real-time exchange of power in the electric industry. The Company expects the disposition to occur during the first half of 1997 and has recorded a $4.0 million estimated after-tax loss on disposal in the third quarter of 1996. The Company reflected as discontinued operations at September 30, 1994, all activities of a subsidiary that constructed generating facilities and a subsidiary that constructed electric distribution and transmission systems. Essentially all of the assets of the construction subsidiaries have been sold but some remaining activity has been recorded in the periods reported. In addition, in the third quarter of 1996 the Company received a final settlement from the sale of a coal mining subsidiary which was reflected as a discontinued operation by a predecessor company in 1982. The final settlement, which resulted in an after-tax loss of $3.3 million, included the reacquisition of preferred equity by the buyer and the settlement of reclamation reserves. -63- Proceeds received from the disposition of the oil and gas subsidiary included $210 million in cash and 435,000 warrants to purchase KCS common stock. The warrants were valued at $6 million. Proceeds received from the disposition of the construction subsidiaries and the coal mining subsidiary settlement were $4 million and $15 million, respectively. Net assets of the discontinued operations are separately presented on the Consolidated Balance Sheets as Investment in Discontinued Operations. Revenues from discontinued activities, as well as the results of operations and the estimated loss on the disposal of discontinued operations for the years ended December 31 are as follows (in thousands):
1996 1995 1994 -------- -------- -------- OPERATING REVENUES ................... $233,952 $81,637 $129,643 ======== ======= ======== INCOME FROM OPERATIONS Income before income taxes ......... $ 1,638 $ 4,704 $ 1,841 Income tax benefit (expense) ....... 479 (1,645) (985) -------- ------- -------- Income from Operations ............. $ 2,117 $ 3,059 $ 856 ======== ======= ======== LOSS ON DISPOSAL Income (loss) before income taxes .. $ 9,047 $ -- $(11,576) Income tax benefit (expense) ....... (23,879) -- 7,811 -------- ------- -------- Loss on Disposal ................... $(14,832) $ -- $ (3,765) ======== ======= ========
(10) CONCENTRATION OF CREDIT RISK: The Company's electric utility operations serve 555,000 customers in Iowa, 84,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. The Company's gas utility operations serve 480,000 customers in Iowa, 65,000 customers in western Illinois, 61,000 customers in southeastern South Dakota and 4,000 customers in northeastern Nebraska. The largest communities served by the Company are the Iowa and Illinois Quad-Cities; Des Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux Falls, South Dakota. The Company's utility operations grant unsecured credit to customers, substantially all of whom are local businesses and residents. As of December 31, 1996, billed receivables from the Company's utility customers totalled $146 million. MidAmerican Capital has investments in preferred stocks of companies in the utility industry. As of December 31, 1996, the total cost of these investments was $132 million. MidAmerican Capital has entered into leveraged lease agreements with companies in the airline industry. As of December 31, 1996, the receivables under these agreements totalled $37 million. (11) PREFERRED SHARES: During 1996, MidAmerican redeemed all shares of the $1.7375 Series of preferred stock. The redemptions were made at a premium, which resulted in a charge to net income of $1.6 million. During 1994, MidAmerican redeemed all of its outstanding $4.36 Series, $4.22 Series and $7.50 Series preferred shares. The redemptions were made at a premium, which resulted in a charge to net income of $0.3 million. The $5.25 Series Preferred Shares, which are not redeemable prior to November 1, 1998 for any purpose, are subject to mandatory redemption on November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have sinking fund requirements under which 66,600 shares will be redeemed at $100 per share each May 1, beginning in 2001 through May 1, 2006. -64 The total outstanding cumulative preferred stock of MidAmerican that is not subject to mandatory redemption requirements may be redeemed at the option of the Company at prices which, in the aggregate, total $31.8 million. The aggregate total the holders of all preferred stock outstanding at December 31, 1996, are entitled to upon involuntary bankruptcy is $181.8 million plus accrued dividends. Annual dividend requirements for all preferred stock outstanding at December 31, 1996, total $12.3 million. (12) SEGMENT INFORMATION: Information related to segments of the Company's business is as follows for the years ended December 31 (in thousands):
1996 1995 1994 ----------- ----------- ----------- UTILITY Electric: Operating revenues ........................ $ 1,099,008 $ 1,094,647 $ 1,021,660 Cost of fuel, energy and capacity ......... 234,317 230,261 213,987 Depreciation and amortization expense ..... 140,939 136,324 132,886 Other operating expenses .................. 424,594 459,344 438,811 ----------- ----------- ----------- Operating income .......................... $ 299,158 $ 268,718 $ 235,976 =========== =========== =========== Gas: Operating revenues ........................ $ 536,753 $ 459,588 $ 492,015 Cost of gas sold .......................... 345,014 279,025 326,782 Depreciation and amortization expense ..... 23,653 22,626 21,343 Other operating expenses .................. 106,831 122,017 111,644 ----------- ----------- ----------- Operating income .......................... $ 61,255 $ 35,920 $ 32,246 =========== =========== =========== Operating income ............................ $ 360,413 $ 304,638 $ 268,222 Other income (expense) ...................... 3,998 (4,074) (3,712) Fixed charges ............................... 96,753 92,036 87,157 ----------- ----------- ----------- Income from continuing operations before income taxes .................... 267,658 208,528 177,353 Income taxes ................................ 112,927 84,098 66,759 ----------- ----------- ----------- Income from continuing operations ........... $ 154,731 $ 124,430 $ 110,594 =========== =========== =========== Capital Expenditures- Electric .................................. $ 116,243 $ 133,490 $ 164,870 Gas ....................................... 37,955 57,281 46,799
-65-
1996 1995 1994 ----------- ----------- ----------- NONREGULATED Revenues .................................. $ 236,851 $ 95,106 $ 117,550 Cost of sales ............................. 218,256 70,351 84,515 Depreciation and amortization ....................... 4,854 6,010 6,935 Other operating expenses .................. 30,516 31,029 29,830 ----------- ----------- ----------- Operating income (loss) ................... (16,775) (12,284) (3,730) Other income .............................. 14,874 15,734 37,084 Fixed charges ............................. 23,574 25,470 27,152 ----------- ----------- ----------- Income (loss) from continuing operations before income taxes .................... (25,475) (22,020) 6,202 Income taxes .............................. (14,505) (17,295) (6,302) ----------- ----------- ----------- Income (loss) from continuing operations .. $ (10,970) $ (4,725) $ 12,504 =========== =========== =========== Capital expenditures ...................... $ 55,788 $ 12,881 $ 9,095 ASSET INFORMATION Identifiable assets: Electric (a) ............................ $ 2,954,324 $ 2,947,832 $ 2,915,749 Gas (a) ................................. 692,993 699,539 683,704 Used in overall utility operations ........................... 114,545 30,084 46,143 Nonregulated ............................ 601,065 615,342 557,052 Investment in discontinued operations ... 196,356 177,300 186,246 ----------- ----------- ----------- Total assets .......................... $ 4,559,283 $ 4,470,097 $ 4,388,894 =========== =========== ===========
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Tariffs for the Company's utility services are established based on historical cost ratemaking. Therefore, the impact of any realized gains or losses related to financial instruments applicable to the Company's utility operations is dependent on the treatment authorized under future ratemaking proceedings. Cash and cash equivalents - The carrying amount approximates fair value due to the short maturity of these instruments. Quad Cities nuclear decommissioning trust fund - Fair value is based on quoted market prices of the investments held by the fund. Marketable securities - Fair value is based on quoted market prices. Debt securities - Fair value is based on the discounted value of the future cash flows expected to be received from such investments. -66- Equity investments carried at cost - Fair value is based on an estimate of the Company's share of partnership equity, offers from unrelated third parties or the discounted value of the future cash flows expected to be received from such investments. Notes payable - Fair value is estimated to be the carrying amount due to the short maturity of these issues. Preferred shares - Fair value of preferred shares with mandatory redemption provisions is estimated based on the quoted market prices for similar issues. Long-term debt - Fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
1996 1995 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial Instruments Owned by the Company: Equity investments carried at cost ............ $ 95,339 $ 273,311 $ 58,972 $ 61,316 Financial Instruments Issued by the Company: MidAmerican preferred securities; subject to mandatory redemption .................... $ 50,000 $ 52,920 $ 50,000 $ 52,800 MidAmerican-obligated preferred securities; subject to mandatory redemption ............ $ 100,000 $ 100,490 $ -- $ -- Long-term debt, including current portion ..... $1,474,701 $1,522,500 $1,468,617 $1,528,504
Included in Equity Investments Carried at Cost is the Company's investment in Class A and Class B Common Stock of McLeod, Inc. (McLeod). The Class B Common Stock is convertible into Class A Common Stock. On June 14, 1996, McLeod made an initial public offering (the IPO) of its Class A Common Stock. As part of an investor agreement, the Company is prohibited from selling or otherwise disposing of any of the common stock of McLeod for a period of two years from the date of the IPO. The Company's investment in McLeod is considered restricted stock and, as such, is recorded at cost. At December 31, 1996, the carrying amount and fair value of this investment were $46.3 million and $218.3 million, respectively. -67- The amortized cost, gross unrealized gain and losses and estimated fair value of investments in debt and equity securities at December 31 are as follows (in thousands): 1996
1996 Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- --------- -------- Available-for-sale: Equity securities ........... $208,226 $ 4,883 $ (8,325) $204,784 Municipal bonds ............. 41,800 3,041 (356) 44,485 U.S. Government securities .. 26,814 137 (157) 26,794 Cash equivalents ............ 11,152 -- -- 11,152 -------- -------- -------- -------- $287,992 $ 8,061 $ (8,838) $287,215 ======== ======== ======== ======== Held-to-maturity: Equity securities ........... $ 6,435 $ -- $ (196) $ 6,239 Debt securities ............. 15,445 252 -- 15,697 -------- -------- -------- -------- $ 21,880 $ 252 $ (196) $ 21,936 ======== ======== ======== ========
1995 Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- Available-for-sale: Equity securities ........... $254,066 $ 7,132 $ (9,278) $251,920 Municipal Bonds ............. 38,098 3,228 (210) 41,116 U. S. Government securities . 18,402 355 -- 18,757 Cash equivalents ............ 13,000 -- -- 13,000 -------- -------- -------- -------- $323,566 $ 10,715 $ (9,488) $324,793 Held-to-maturity: Equity securities ........... $ 11,389 $ -- $ (786) $ 10,603 Debt securities ............. 19,440 31 (921) 18,550 -------- -------- -------- -------- $ 30,829 $ 31 $ (1,707) $ 29,153 ======== ======== ======== ========
At December 31, 1996, the debt securities held by the Company had the following maturities (in thousands):
Available for Sale Held to Maturity -------------------- -------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- -------- -------- Within 1 year ................. $ 1,361 $ 1,313 $ 72 $ 76 1 through 5 years ............. 23,847 23,765 10,262 10,420 5 through 10 years ............ 28,564 30,100 2,812 2,828 Over 10 years ................. 14,842 16,101 2,299 2,373
During 1996, the Company sold a portion of its held-to-maturity securities due to a significant deterioration in the issuer's credit worthiness. Such securities had a carrying value of $4.8 million and proceeds from the sale were $4.3 million. During 1995, the Company reevaluated the classification of its classified as held-to-maturity and available-for-sale securities in accordance with the Financial Accounting Standards Board's Guide to Implementation of Statement 115 on -68- Accounting for Certain Investments in Debt and Equity Securities. As a result, certain securities, with a total amortized cost of $33.1 million and a market value of $33.8 million, were transferred from securities classified as held-to-maturity to available-for-sale securities. The proceeds and the gross realized gains and losses on the disposition of investments held by the Company for the years ended December 31, are as follows (in thousands):
1996 1995 1994 --------- --------- -------- Proceeds from sales ........ $ 250,772 $ 106,910 $ 135,769 Gross realized gains ....... 9,920 3,923 10,338 Gross realized losses ...... (7,950) (3,082) (5,234)
(14) INCOME TAX EXPENSE: Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
1996 1995 1994 --------- -------- -------- Current Federal ................... $ 80,165 $ 54,430 $ 20,874 State ..................... 22,100 13,330 5,500 --------- -------- -------- 102,265 67,760 26,374 Deferred Federal ................... 2,627 5,750 35,242 State ..................... (264) 1,470 5,796 --------- -------- -------- 2,363 7,220 41,038 Investment tax credit, net ... (6,206) (8,177) (6,955) --------- -------- -------- Total ..................... $ 98,422 $ 66,803 $ 60,457 ========= ======== ========
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of December 31 are deferred tax assets and deferred tax liabilities as follows (in thousands):
1996 1995 -------- -------- Deferred tax assets Related to: Investment tax credits .................. $ 61,349 $ 63,374 Unrealized losses ....................... 12,034 7,548 Pensions ................................ 17,648 17,938 AMT credit carry forward ................ 10,188 18,738 Nuclear reserves and decommissioning .... 8,233 8,367 Other ................................... 5,839 7,186 -------- -------- Total ................................ $115,291 $123,151 ======== ========
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1996 1995 -------- -------- Deferred tax liabilities Related to: Depreciable property .................... $575,495 $546,827 Income taxes recoverable through future rates ................. 201,998 207,631 Energy efficiency ....................... 44,734 28,616 Reacquired debt ......................... 14,265 17,595 FERC Order 636 .......................... 9,023 16,073 Other ................................... 22,112 30,996 -------- -------- Total ................................. $867,627 $847,738 ======== ========
The following table is a reconciliation between the effective income tax rate, before preferred stock dividends of subsidiary, indicated by the Consolidated Statements of Income and the statutory federal income tax rate for the years ended December 31:
1996 1995 1994 ---- ---- ---- Effective federal and state income tax rate ........................... 39% 34% 31% Amortization of investment tax credit ....... 2 4 4 Resolution of prior year tax issue .......... -- -- 2 State income tax, net of federal income tax benefit ............................... (6) (5) (4) Dividends received deduction ................ 2 2 2 Other ....................................... (2) -- -- --- --- --- Statutory federal income tax rate ........... 35% 35% 35% === === ===
(15) INVENTORIES: Inventories include the following amounts as of December 31 (in thousands):
1996 1995 ------- ------- Materials and supplies, at average cost ... $32,222 $27,442 Coal stocks, at average cost .............. 32,293 32,163 Gas in storage, at LIFO cost .............. 23,915 21,883 Fuel oil, at average cost ................. 1,264 1,523 Other ..................................... 1,170 2,224 ------- ------- Total ................................... $90,864 $85,235 ======= =======
At December 31, 1996 prices, the current cost of gas in storage was $61.3 million. -70- (16) OTHER INFORMATION: The Company completed a merger-related restructuring plan during 1995. Other operating expenses in the Consolidated Statements of Income for 1995 includes $33.4 million related to the restructuring plan. Non-Operating - Other, Net, as shown on the Consolidated Statements of Income includes the following for the years ended December 31 (in thousands):
1996 1995 1994 -------- -------- ------- Other-than-temporary declines in value of investments and other assets ........... $(15,566) $(17,971) $(1,791) IES merger costs ............................ (8,689) -- -- Special purpose fund income ................. 3,301 1,863 1,845 Energy efficiency carrying charges .......... 3,255 3,092 1,681 Gain on sale of cushion gas ................. 3,182 -- -- Incentive gas purchase plan award ........... 2,677 -- -- Agency gas sales, net ....................... 1,840 228 (2) Gain on reacquisition of long-term debt ..... 1,105 -- -- Gain on sale of assets, net ................. 974 8,570 4,468 MidAmerican merger costs .................... -- (4,624) (4,510) Allowance for equity funds used during construction ....................... -- 481 452 Income (loss) from equity method investments. 2,510 (312) 2,712 Other ....................................... 1,391 (1,794) (539) -------- -------- ------- Total ..................................... $ (4,020) $(10,467) $ 4,316 ======== ======== =======
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MIDAMERICAN ENERGY FINANCING I: In December 1996, MidAmerican Energy Financing I (the Trust), a wholly-owned statutory business trust of MidAmerican, issued 4,000,000 shares of 7.98% Series MidAmerican-obligated mandatorily redeemable preferred securities (the Preferred Securities). The sole assets of the Trust are $103.1 million of MidAmerican 7.98% Series A Debentures due 2045 (the Debentures). There is a full and unconditional guarantee by MidAmerican of the Trust's obligations under the Preferred Securities. MidAmerican has the right to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarters. If interest payments on the Debentures are deferred, distributions on the Preferred Securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon and MidAmerican may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. The Debentures may be redeemed by MidAmerican on or after December 18, 2001, or at an earlier time if there is more than an insubstantial risk that interest paid on the Debentures will not be deductible for federal income tax purposes. If the Debentures, or a portion thereof, are redeemed, the Trust must redeem a like amount of the Preferred Securities. If a termination of the Trust occurs, the Trust will distribute to the holders of the Preferred Securities a like amount of the Debentures unless such a distribution is determined not to be practicable. If such determination is made, the holders of the Preferred Securities will be entitled to receive, out of the assets of the trust after satisfaction of its liabilities, a liquidation amount of $25 for each Preferred Security held plus accrued and unpaid distributions. -71- (18) UNAUDITED QUARTERLY OPERATING RESULTS:
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands, except per share amounts) Operating revenues .......................... $507,596 $391,466 $434,678 $538,872 Operating income ............................ 100,141 65,004 97,919 80,574 Income from continuing operations ........... 48,405 25,099 40,548 29,709 Income (loss) from discontinued operations .. 2,642 3,896 (17,992) (1,261) Earnings on common stock .................... 51,047 28,995 22,556 28,448 Earnings per average common share: Income from continuing operations ........... $ 0.48 $ 0.25 $ 0.40 $ 0.29 Income (loss) from discontinued operations .. 0.03 0.04 (0.18) (0.01) -------- -------- -------- -------- Earnings per average common share ........... $ 0.51 $ 0.29 $ 0.22 $ 0.28 ======== ======== ======== ========
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands, except per share amounts) Operating revenues .......................... $447,985 $356,990 $420,002 $424,364 Operating income ............................ 77,069 53,925 98,225 63,135 Income from continuing operations ........... 34,947 23,634 35,458 25,666 Income from discontinued operations ......... 349 1,274 322 1,114 Earnings on common stock .................... 35,296 24,908 35,780 26,780 Earnings per average common share: Income from continuing operations ........... $ 0.35 $ 0.24 $ 0.35 $ 0.26 Income from discontinued operations ......... -- 0.01 0.01 0.01 -------- -------- -------- -------- Earnings per average common share ........... $ 0.35 $ 0.25 $ 0.36 $ 0.27 ======== ======== ======== ========
The quarterly data reflect seasonal variations common in the utility industry. -72- REPORT OF MANAGEMENT Management is responsible for the preparation of the accompanying financial statements which have been prepared in conformity with generally accepted accounting principles. In the opinion of management, the financial position, results of operation and cash flows of the Company are reflected fairly in the statements. The statements have been audited by the Company's independent public accountants, Arthur Andersen LLP. The Company maintains a system of internal controls which is designed to provide reasonable assurance, on a cost effective basis, that transactions are executed in accordance with management's authorization, the financial statements are reliable and the Company's assets are properly accounted for and safeguarded. The Company's internal auditors continually evaluate and test the system of internal controls and actions are taken when opportunities for improvement are identified. Management believes that the system of internal controls is effective. The Audit Committee of the Board of Directors, the members of which are directors who are not employees of the Company, meets regularly with management, the internal auditors and Arthur Andersen LLP to discuss accounting, auditing, internal control and financial reporting matters. The Company's independent public accountants are appointed annually by the Board of Directors on recommendation of the Audit Committee. The internal auditors and Arthur Andersen LLP each have full access to the Audit Committee, without management representatives present. Stanley J. Bright President and Chief Executive Officer Philip G. Lindner Senior Vice President and Chief Financial Officer -73- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MidAmerican Energy Holdings Company and Subsidiaries: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of MidAmerican Energy Holdings Company (an Iowa corporation) and subsidiaries, as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the supplemental schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and supplemental schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in Item 14(a)2., are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois January 24, 1997 -74-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) YEARS ENDED DECEMBER 31 1996 1995 1994 ---------- ---------- ---------- OPERATING REVENUES Electric utility.............................................. $1,099,008 $1,094,647 $1,021,660 Gas utility................................................... 536,753 459,588 492,015 ---------- ---------- ---------- 1,635,761 1,554,235 1,513,675 ---------- ---------- ---------- OPERATING EXPENSES Cost of fuel, energy and capacity............................. 234,317 230,261 213,987 Cost of gas sold.............................................. 345,014 279,025 326,782 Other operating expenses...................................... 350,174 399,648 354,190 Maintenance................................................... 88,621 85,363 101,275 Depreciation and amortization................................. 164,592 158,950 154,229 Property and other taxes...................................... 92,630 96,350 94,990 Income taxes.................................................. 111,206 85,400 69,731 ---------- ---------- ---------- 1,386,554 1,334,997 1,315,184 ---------- ---------- ---------- OPERATING INCOME.............................................. 249,207 219,238 198,491 ---------- ---------- ---------- NON-OPERATING INCOME Interest and dividend income.................................. 1,598 1,354 1,672 Non-operating income taxes.................................... (1,721) 1,302 2,972 Other, net.................................................... 2,400 (5,428) (5,384) ---------- ---------- ---------- 2,277 (2,772) (740) ---------- ---------- ---------- FIXED CHARGES Interest on long-term debt.................................... 79,434 80,133 73,922 Other interest expense........................................ 10,842 9,396 6,639 Preferred dividends of subsidiary trust....................... 288 -- -- Allowance for borrowed funds.................................. (4,212) (5,552) (3,955) ---------- ---------- ---------- 86,352 83,977 76,606 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS............................. 165,132 132,489 121,145 INCOME (LOSS) FROM DISCONTINUED OPERATIONS.................... (10,161) (1,666) 9,595 ---------- ---------- ---------- NET INCOME.................................................... 154,971 130,823 130,740 PREFERRED DIVIDENDS........................................... 10,401 8,059 10,551 ---------- ---------- ---------- EARNINGS ON COMMON STOCK...................................... $ 144,570 $ 122,764 $ 120,189 ========== ========== ==========
The accompanying notes are an integral part of these statements. -75-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31 1996 1995 1994 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net Income..................................................... $ 154,971 $ 130,823 $ 130,740 Adjustments to reconcile net income to net cash provided: Depreciation, depletion and amortization.................... 185,657 175,969 173,164 Net increase (decrease) in deferred income taxes and investment tax credit, net................................ (3,111) 6,835 34,090 Amortization of other assets................................ 20,541 19,630 6,595 Loss (income) from discontinued operations.................. 10,161 1,666 (9,595) (Gain) Loss on sale of assets and long term investments..... (6,104) -- -- Other-than-temporary decline in value of investments........ -- -- 2,872 Impact of changes in working capital........................ (58,371) (5,595) (9,220) Other....................................................... 23,689 3,856 5,489 --------- --------- --------- Net cash provided......................................... 327,433 333,184 334,135 --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures.............................. (154,198) (192,625) (211,669) Quad Cities Nuclear Power Station decommissioning trust fund... (8,607) (8,636) (9,144) Deferred energy efficiency expenditures........................ (20,390) (35,841) (28,174) Nonregulated capital expenditures.............................. (2,970) -- (1,578) Proceeds from sale of assets and other investments............. 11,620 -- -- Investment in discontinued operations.......................... 10,100 (47,968) 11,126 Other investing activities, net................................ 734 203 (1,284) --------- --------- --------- Net cash used............................................... (163,711) (284,867) (240,723) --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid................................................. (131,171) (126,887) (125,475) Issuance of long-term debt, net of issuance cost............... 99,500 14,604 152,792 Retirement of long-term debt, including reacquisition cost..... (72,111) (14,277) (95,639) Reacquisition of preferred shares.............................. (58,176) (10) (19,916) Issuance of preferred securities, net of issuance cost......... 96,850 -- -- Issuance of common shares...................................... -- 15,083 27,760 Net increase (decrease) in notes payable....................... (23,100) 60,300 (36,300) --------- --------- --------- Net cash used............................................... (88,208) (51,187) (96,778) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 75,514 (2,870) (3,366) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 8,701 11,571 14,937 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 84,215 $ 8,701 $ 11,571 ========= ========= ========== ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized...................... $ 80,881 $ 89,055 $ 72,835 ========= ======== ========= Income taxes paid.............................................. $ 103,627 $ 90,102 $ 85,316 ========= ======== =========
The accompanying notes are an integral part of these statements. -76-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 1996 1995 ---------- ---------- ASSETS UTILITY PLANT Electric.......................................................... $4,013,851 $3,884,702 Gas............................................................... 723,491 695,741 ---------- ---------- 4,737,342 4,580,443 Less accumulated depreciation and amortization.................... 2,154,505 2,027,994 ---------- ---------- 2,582,837 2,552,449 Construction work in progress..................................... 49,305 104,164 ---------- ---------- 2,632,142 2,656,613 ---------- ---------- POWER PURCHASE CONTRACT........................................... 190,897 212,148 ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS............................. -- 288,147 ---------- ---------- CURRENT ASSETS Cash and cash equivalents......................................... 84,215 8,701 Receivables, less reserves of $1,845 and $2,214, respectively..... 253,944 198,930 Inventories....................................................... 90,864 83,553 Other............................................................. 7,776 16,894 ---------- ---------- 436,799 308,078 ---------- ---------- INVESTMENTS....................................................... 118,344 99,326 ---------- ---------- OTHER ASSETS...................................................... 396,471 411,889 ---------- ---------- TOTAL ASSETS...................................................... $3,774,653 $3,976,201 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity....................................... $ 986,825 $1,225,715 MidAmerican preferred securities, not subject to mandatory redemption.................................................... 31,769 89,945 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities............................... 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures.. 100,000 -- Long-term debt (excluding current portion)........................ 1,086,955 1,109,298 ---------- ---------- 2,255,549 2,474,958 ---------- ---------- CURRENT LIABILITIES Notes Payable..................................................... 161,700 184,800 Current portion of long-term debt................................. 49,560 1,227 Current portion of power purchase contract........................ 13,718 13,029 Accounts payable.................................................. 122,974 116,431 Taxes accrued..................................................... 82,338 78,993 Interest accrued.................................................. 24,245 23,642 Other............................................................. 24,452 40,107 ---------- ---------- 478,987 458,229 ---------- ---------- OTHER LIABILITIES Power purchase contract........................................... 97,504 112,700 Deferred income taxes............................................. 616,567 617,168 Investment tax credit............................................. 88,842 95,041 Other............................................................. 237,204 218,105 ---------- ---------- 1,040,117 1,043,014 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES $3,774,653 $3,976,201 ========== ==========
The accompanying notes are an integral part of these statements. -77-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AS OF DECEMBER 31 1996 1995 ------------------ ------------------- (In thousands, except share amounts) COMMON SHAREHOLDERS'EQUITY Common shares, no par; 350,000,000 shares authorized; 100,751,713 and 100,751,713 shares outstanding, respectively....... $ 563,579 $ 801,227 Retained earnings...................................................... 423,246 430,589 Valuation allowance, net of income taxes............................... -- (6,101) ----------- ---------- 986,825 43.8% 1,225,715 49.5% ----------- ------ ---------- ------ PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative shares outstanding not subject to mandatory redemption: $3.30 Series, 49,523 shares........................................ 4,952 4,952 $3.75 Series, 38,320 shares........................................ 3,832 3,832 $3.90 Series, 32,630 shares ....................................... 3,263 3,263 $4.20 Series, 47,369 shares........................................ 4,737 4,737 $4.35 Series, 49,950 shares........................................ 4,995 4,995 $4.40 Series, 50,000 shares........................................ 5,000 5,000 $4.80 Series, 49,898 shares........................................ 4,990 4,990 $1.7375 Series, zero and 2,400,000 shares, respectively............ -- 58,176 ----------- ----------- 31,769 1.4% 89,945 3.7% ----------- ------- ----------- ------ Cumulative shares outstanding; subject to mandatory redemption: $5.25 Series, 100,000 shares....................................... 10,000 10,000 $7.80 Series, 400,000 shares....................................... 40,000 40,000 ----------- ---------- 50,000 2.2% 50,000 2.0% ----------- ------- ----------- ------ MIDAMERICAN-OBLIGATED PREFERRED SECURITIES MidAmerican-obligated mandatorily redeemable cumulative preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures: 7.98% series, 4,000,000 and zero shares, respectively............ 100,000 4.4% -- 0.0% ----------- ------- ----------- ------ LONG-TERM DEBT Mortgage bonds: 5.875% Series, due 1997........................................... -- 22,000 Adjustable Rate Series (8.8%), due 1997........................... -- 25,000 5.05% Series, due 1998............................................ 49,100 50,000 6.25% Series, due 1998............................................ 75,000 75,000 7.875% Series, due 1999........................................... 60,000 60,000 6% Series, due 2000............................................... 35,000 35,000 6.75% Series, due 2000............................................ 75,000 75,000 8.15% Series, due 2001............................................ -- 40,000 7.125% Series, due 2003........................................... 100,000 100,000 7.70% Series, due 2004............................................ 60,000 60,000 7% Series, due 2005............................................... 100,000 100,000 7.375% Series, due 2008........................................... 75,000 75,000 8% Series, due 2022............................................... 50,000 50,000 7.45% Series, due 2023............................................ 26,500 30,000 8.125% Series, due 2023........................................... 100,000 100,000 6.95% Series, due 2025............................................ 21,500 50,000 Pollution control revenue obligations: 5.15% to 5.75% Series, due periodically through 2003.............. 8,424 10,984 5.95% Series, due 2023 (secured by general mortgage bonds)........ 29,030 29,030
The accompanying notes are an integral part of these statements. -78-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION AS OF DECEMBER 31 1996 1995 ------------------ ------------------ (In thousands) LONG-TERM DEBT (CONTINUED) Variable Rate Series: Due 2016 and 2017 (3.5% and 5.0%, respectively)............. $ 37,600 $ 37,600 Due 2023 (secured by general mortgage bonds, 3.5% and 5.05%, respectively)............................ 28,295 28,295 Due 2023 (3.5% and 5.1%, respectively)...................... 6,850 6,850 Due 2024 (3.6% and 5.25%, respectively)..................... 34,900 34,900 Due 2025 (3.5% and 5.1%, respectively)...................... 12,750 12,750 Notes: 8.75% Series, due 2002......................................... 240 240 6.5% Series, due 2001.......................................... 100,000 -- 6.4% Series, due 2003 through 2007............................. 2,000 2,000 Obligation under capital lease................................. 3,775 3,775 Unamortized debt premium and discount, net..................... (4,009) (4,126) ---------- ---------- Total ............................................................ 1,086,955 48.2% 1,109,298 44.8% ---------- ------ ---------- ------ TOTAL CAPITALIZATION ............................................. $2,255,549 100.0% $2,474,958 100.0% ========== ====== ========== ======
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS YEARS ENDED DECEMBER 31 1996 1995 1994 --------- --------- --------- (In thousands, except per share amounts) BEGINNING OF YEAR................................................. $ 430,589 $ 426,683 $ 421,358 --------- --------- --------- NET INCOME........................................................ 154,971 130,823 130,740 --------- --------- --------- DEDUCT (ADD): (Gain) loss on reacquisition of preferred shares.................. 1,572 (5) 312 Dividends declared on preferred shares............................ 8,829 8,064 10,141 Dividends declared on common shares of $1.20, $1.18 and $1.17 per share, respectively................................... 120,770 118,828 114,924 Dividend of Investment in Subsidiaries............................ 31,143 -- -- Other............................................................. -- 30 38 --------- --------- --------- 162,314 126,917 125,415 --------- --------- --------- END OF YEAR....................................................... $ 423,246 $ 430,589 $ 426,683 ========= ========= ==========
The accompanying notes are an integral part of these statements. -79- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (A) MERGER AND FORMATION OF HOLDING COMPANY: MidAmerican Energy Company (MidAmerican or Company) was formed on July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc. (Resources) and its utility subsidiary, Midwest Power Systems Inc. (Midwest Power). Each outstanding share of preferred and preference stock of the predecessor companies was converted into one share of a similarly designated series of MidAmerican preferred stock, no par value. Each outstanding share of common stock of Resources and Iowa-Illinois was converted into one share and 1.47 shares, respectively, of MidAmerican common stock, no par value. The merger was accounted for as a pooling-of-interests and the financial statements included herein are presented as if the companies were merged as of the earliest period shown. On April 24, 1996, MidAmerican shareholders approved a proposal to form a holding company, MidAmerican Energy Holdings Company (Holdings) for MidAmerican and its subsidiaries, MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). Effective December 1, 1996, each share of MidAmerican common stock was exchanged for one share of Holdings common stock. As part of the transaction, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. See Note (9) for additional information regarding the formation of the holding company. (B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS: The accompanying Consolidated Financial Statements include the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. (C) REGULATION: Refer to Note 1(c) of Holdings' Notes to Consolidated Financial Statements for information regarding the effects of regulation on the MidAmerican's accounting policy. (D) REVENUE RECOGNITION: Refer to Note 1(d) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's revenue recognition accounting policy. (E) DEPRECIATION AND AMORTIZATION: Refer to Note 1(e) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's depreciation and amortization accounting policy. -80- (F) INVESTMENTS: Investments include the following amounts as of December 31 (in thousands):
1996 1995 -------- ------- Investments: Nuclear decommissioning trust fund.. $ 76,304 $ 64,781 Corporate owned life insurance...... 27,395 22,743 Other............................... 14,645 11,802 -------- --------- Total........................... $118,344 $ 99,326 ======== ========
Investments held by the nuclear decommissioning trust fund for the Quad Cities units are classified as available-for-sale and are reported at fair value with net unrealized gains and losses reported as adjustments to the accumulated provision for nuclear decommissioning. (G) CONSOLIDATED STATEMENTS OF CASH FLOWS: The Company considers all cash and highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. Net cash provided (used) from changes in working capital, net of effects from discontinued operations and exchange of assets was as follows (in thousands):
1996 1995 1994 -------- -------- -------- Receivables.................. $(55,014) $(19,044) $ 19,111 Inventories.................. (7,311) 5,777 9,957 Other current assets ........ 9,118 (4,358) 5,536 Accounts payable............. 6,543 21,475 (19,452) Taxes accrued................ 3,345 (8,586) (20,547) Interest accrued............. 603 (289) 217 Other current liabilities.... (15,655) (570) (4,042) -------- -------- -------- Total..................... $(58,371) $ (5,595) $ (9,220) ======== ======== ========
MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. See Note (9) for additional information. (H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT: Refer to Note 1(h) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's accounting for the Cooper Nuclear Station (Cooper) long-term power purchase contract. (I) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121: Refer to Note 1(I) of Holdings' Notes to Consolidated Financial Statements for information regarding the adoption of Statement of Financial Accounting Standards No. 121. -81- (2) LONG-TERM DEBT: The Company's sinking fund requirements and maturities of long-term debt for 1997 through 2001 are $50 million, $126 million, $61 million, $111 million and $101 million, respectively. The interest rate on the Company's Adjustable Rate Series Mortgage Bonds is reset every two years at 160 basis points over the average yield to maturity of 10-year Treasury securities. The rate was reset in 1995. The Company's Variable Rate Pollution Control Revenue Obligations bear interest at rates that are periodically established through remarketing of the bonds in the short-term tax-exempt market. The Company, at its option, may change the mode of interest calculation for these bonds by selecting from among several alternative floating or fixed rate modes. The interest rates shown in the Consolidated Statements of Capitalization are the weighted average interest rates as of December 31, 1996 and 1995. The Company maintains dedicated revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues. Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest Power electric utility property in Iowa, or approximately 82% of gross utility property, is pledged to secure mortgage bonds. (3) JOINTLY OWNED UTILITY PLANT: Refer to Note 3 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's jointly owned utility plant. (4) COMMITMENTS AND CONTINGENCIES: (A) CAPITAL EXPENDITURES: Utility construction expenditures for 1997 are estimated to be $200 million, including $10 million for Quad Cities nuclear fuel and $9 million for Cooper capital improvements. (B) ENVIRONMENTAL MATTERS: Refer to Note 4(b) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's Environmental Matters. (C) LONG-TERM POWER PURCHASE CONTRACT: Refer to Note 4(c) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under the Cooper long-term power purchase contract. (D) DECOMMISSIONING COSTS: Refer to Note 4(d) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment for decommissioning of nuclear facilities. -82- (E) NUCLEAR INSURANCE: Refer to Note 4(e) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's nuclear insurance coverage and the potential assessments under such coverage. (F) COAL AND NATURAL GAS CONTRACT COMMITMENTS: Refer to Note 4(f) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under various coal and natural gas supply and transportation contracts. (5) COMMON SHAREHOLDERS' EQUITY: Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands):
1996 1995 1994 ------------------ ------------------- ------------------- Amount Shares Amount Shares Amount Shares Balance, beginning of year....... $801,227 100,752 $786,420 99,687 $759,120 97,782 Changes due to: Issuance of common shares........ -- -- 15,083 1,065 27,760 1,911 Accrued stock options............ 623 -- -- -- -- -- Capital stock expense .......... (391) -- (276) -- (377) -- Distribution of investment in subsidiaries to Holdings..... (237,880) -- -- -- -- -- Other............................ -- -- -- -- (83) (6) -------- ------- -------- ------- -------- ------ Balance, end of year............. $563,579 100,752 $801,227 100,752 $786,420 99,687 ======== ======= ======== ======= ======== ======
(6) RETIREMENT PLANS: MidAmerican Energy has noncontributory defined benefit pension plans covering employees of MidAmerican and its affiliates, MidAmerican Capital and Midwest Capital. No detailed segregation of the data is available by subsidiary. Employees of MidAmerican represent approximately 95% of the payroll covered under these plans. Refer to Note 6 of Holdings' Notes to Consolidated Financial Statements for detailed information regarding net periodic pension cost and a schedule reconciling the funded status of the plan with the amount recorded on the consolidated financial statements of Holdings. MidAmerican's net periodic pension costs under the plans for its continuing operations the was $7.0 million, $11.4 million and $7.7 million for 1996, 1995 and 1994, respectively. MidAmerican provides certain health care and life insurance benefits for retired employees of MidAmerican and its affiliates, MidAmerican Capital and Midwest Capital. No detailed segregation of the data is available by subsidiary. Employees of MidAmerican represent approximately 99% of the participants covered under these plans. Refer to Note 6 of Holdings' Notes to Consolidated Financial Statements for detailed information regarding net periodic postretirement benefit cost and a schedule reconciling the funded status of the plan with the amount recorded on the consolidated financial statements of Holdings. MidAmerican Energy's net periodic postretirement benefit costs under the plans for its continuing operations the was $18.7 million, $21.1 million and $7.2 million for 1996, 1995 and 1994, respectively. -83- (7) SHORT-TERM BORROWING: Interim financing of working capital needs and the construction program may be obtained from the sale of commercial paper or short-term borrowing from banks. Information regarding short-term debt follows (dollars in thousands):
1996 1995 1994 -------- -------- -------- Balance at year-end ................................... $161,700 $184,800 $124,500 Weighted average interest rate on year-end balance.................................... 5.4% 5.7% 6.1% Average daily amount outstanding during the year........................................ $151,162 $114,036 $105,728 Weighted average interest rate on average daily amount outstanding during the year.. 5.5% 6.0% 4.4 %
MidAmerican has authority from FERC to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of December 31, 1996, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit. (8) RATE MATTERS: Refer to Note 8 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's rate matters. (9) DISCONTINUED OPERATIONS: On April 24, 1996, MidAmerican shareholders approved a proposal to form Holdings as a holding company for MidAmerican and its subsidiaries. Effective December 1, 1996, each share of MidAmerican common stock was exchanged for one share of Holdings common stock. As part of the transaction, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. The subsidiaries that were distributed to Holdings have been reflected as discontinued operations. In the third quarter of 1996 MidAmerican received a final settlement from the sale of a coal mining subsidiary which was reflected as a discontinued operation by a predecessor company in 1982. The final settlement, which resulted in an after-tax loss of $3.3 million, includes the reacquisition of preferred equity by the buyer and the settlement of reclamation reserves. Proceeds received from the settlement were $15 million. -84- Net assets of the discontinued operations are separately presented on the Consolidated Balance Sheets as Investment in Discontinued Operations. Revenues from discontinued activities, as well as the results of discontinued operations for the years ended December 31 are as follows (in thousands):
1996 1995 1994 -------- -------- -------- OPERATING REVENUES.......................... $215,631 $176,743 $247,193 ======== ======== ======== INCOME (LOSS) FROM OPERATIONS Income (loss) before income taxes........ $ 12,588 $(17,317) $ (3,534) Income tax benefit (expense)............. (19,457) 15,651 13,129 -------- -------- -------- Income (loss) from Operations............ $ (6,869) $ (1,666) $ 9,595 ======== ======== ======== LOSS ON DISPOSAL Loss before income taxes................. $ (5,579) $ -- $ -- Income tax benefit ...................... 2,287 -- -- -------- -------- -------- Loss on Disposal......................... $ (3,292) $ -- $ -- ========= ======== ========
(10) CONCENTRATION OF CREDIT RISK: MidAmerican's electric utility operations serve 550,000 customers in Iowa, 84,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. MidAmerican's gas utility operations serve 480,000 customers in Iowa, 65,000 customers in western Illinois, 61,000 customers in southeastern South Dakota and 4,000 customers in northeastern Nebraska. The largest communities served by MidAmerican are the Iowa and Illinois Quad-Cities; Des Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux Falls, South Dakota. MidAmerican's utility operations grant unsecured credit to customers, substantially all of whom are local businesses and residents. As of December 31, 1996, billed receivables from the MidAmerican's utility customers totalled $146 million. (11) PREFERRED SHARES: Refer to Note 11 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's preferred shares. -85- (12) SEGMENT INFORMATION: Information related to segments of the MidAmerican's business is as follows for the years ended December 31 (in thousands):
1996 1995 1994 ----------- ----------- ----------- UTILITY Electric- Operating revenues .................... $ 1,099,008 $ 1,094,647 $ 1,021,660 Cost of fuel, energy and capacity ..... 234,317 230,261 213,987 Depreciation and amortization expense . 140,939 136,324 132,886 Other operating expenses .............. 424,594 459,344 438,811 Income taxes .......................... 92,365 76,955 63,428 ----------- ----------- ----------- Operating income ...................... $ 206,793 $ 191,763 $ 172,548 =========== =========== =========== Gas- Operating revenues .................... $ 536,753 $ 459,588 $ 492,015 Cost of gas sold ...................... 345,014 279,025 326,782 Depreciation and amortization expense . 23,653 22,626 21,343 Other operating expenses .............. 106,831 122,017 111,644 Income taxes .......................... 18,841 8,445 6,303 ----------- ----------- ----------- Operating income ...................... $ 42,414 $ 27,475 $ 25,943 =========== =========== =========== Operating income .......................... $ 249,207 $ 219,238 $ 198,491 Other income (expense) .................... 3,998 (4,074) (3,712) Income taxes - other (benefit) ............ 1,721 (1,302) (2,972) Fixed charges ............................. 86,352 83,977 76,606 ----------- ----------- ----------- Income from continuing operations ......... $ 165,132 $ 132,489 $ 121,145 =========== =========== =========== Capital Expenditures- Electric .............................. $ 116,243 $ 135,344 $ 164,870 Gas ................................... 37,955 57,281 46,799 ASSET INFORMATION Identifiable assets- Electric (a) .......................... $ 2,955,881 $ 2,950,285 $ 2,917,444 Gas (a) ............................... 692,993 699,702 684,004 Used in overall utility operations .... 125,779 38,067 45,950 Investment in discontinued operations ..... -- 288,147 232,449 ----------- ----------- ----------- Total assets .............................. $ 3,774,653 $ 3,976,201 $ 3,879,847 =========== =========== ===========
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets. -86- (13) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Tariffs for MidAmerican's utility services are established based on historical cost ratemaking. Therefore, the impact of any realized gains or losses related to financial instruments applicable to MidAmerican's utility operations is dependent on the treatment authorized under future ratemaking proceedings. Cash and cash equivalents - The carrying amount approximates fair value due to the short maturity of these instruments. Quad-Cities nuclear decommissioning trust fund - Fair value is based on quoted market prices of the investments held by the fund. Notes payable - Fair value is estimated to be the carrying amount due to the short maturity of these issues. Preferred shares - Fair value of preferred shares with mandatory redemption provisions is estimated based on the quoted market prices for similar issues. Long-term debt - Fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates available to MidAmerican for debt of the same remaining maturities. The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
1996 1995 ----------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ----------- Financial Instruments Issued by MidAmerican: MidAmerican preferred securities; subject to mandatory redemption.................... $ 50,000 $ 52,920 $ 50,000 $ 52,800 MidAmerican-obligated preferred securities; subject to mandatory redemption............ $ 100,000 $ 100,000 $ -- $ -- Long-term debt, including current portion..... $1,136,515 $1,177,792 $1,110,525 $1,158,900
The amortized cost, gross unrealized gain and losses and estimated fair value of investments held in the Quad Cities nuclear decommissioning trust fund at December 31 are as follows (in thousands):
1996 --------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Municipal bonds...................... $ 41,800 $ 3,041 $ (356) $ 44,485 U.S. Government Securities........... 26,814 137 (157) 26,794 Cash equivalents..................... 5,025 -- -- 5,025 -------- ------- ------- -------- $ 73,639 $ 3,178 $ (513) $ 76,304 ======== ======= ======= ========
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1995 ---------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Municipal Bonds...................... $ 38,098 $ 3,228 $ (210) $ 41,116 U.S. Government Securities........... 4,908 -- -- 4,908 Cash equivalents..................... 18,402 355 -- 18,757 -------- ------- ------- -------- $ 61,408 $ 3,583 $ (210) $ 64,781 ======== ======= ======= ========
At December 31, 1996, the debt securities held in the Quad Cities nuclear decommissioning trust fund had the following maturities (in thousands):
Available for Sale -------------------- Amortized Fair Cost Value --------- ------- Within 1 year............... $ 1,361 $ 1,313 1 through 5 years........... 23,847 23,765 5 through 10 years.......... 28,564 30,100 Over 10 years............... 14,842 16,101
The proceeds and the gross realized gains and losses on the disposition of investments held in the Quad Cities nuclear decommissioning trust fund for the years ended December 31, are as follows (in thousands):
1996 1995 1994 ------ ------- ------ Proceeds from sales......... $4,106 $21,266 $2,214 Gross realized gains........ 92 165 2 Gross realized losses....... (17) (448) (85)
(14) INCOME TAX EXPENSE: Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
1996 1995 1994 ------- ------- ------- Income taxes Current Federal................ $ 92,240 $60,312 $25,701 State.................. 23,798 16,950 5,870 ------- ------- ------- 116,038 77,262 31,571 Deferred Federal................ 2,504 11,571 33,378 State.................. 583 1,094 7,668 -------- ------- ------- 3,087 12,665 41,046 Investment tax credit, net.. (6,198) (5,829) (5,858) -------- ------- ------- Total income tax expense.... $112,927 $84,098 $66,759 ======== ======= =======
-88- Included in Deferred Income Taxes in the Consolidated Balance Sheets as of December 31 are deferred tax assets and deferred tax liabilities as follows (in thousands):
1996 1995 --------- -------- Deferred tax assets Related to: Investment tax credits........................ $ 61,349 $ 63,374 Pensions...................................... 17,648 17,938 Nuclear reserves and decommissioning.......... 8,233 8,367 Other......................................... 5,839 7,322 -------- -------- Total...................................... $ 93,069 $ 97,001 ======== ======== 1996 1995 -------- -------- Deferred tax liabilities Related to: Depreciable property.......................... $422,770 $421,363 Income taxes recoverable through future rates. 201,998 207,631 Energy efficiency............................. 44,733 28,616 Reacquired debt............................... 14,265 17,595 FERC Order 636................................ 9,023 16,073 Other......................................... 16,847 22,891 -------- -------- Total...................................... $709,636 $714,169 ======== ========
The following table is a reconciliation between the effective income tax rate, before preferred stock dividends of subsidiary, indicated by the Consolidated Statements of Income and the statutory federal income tax rate for the years ended December 31:
1996 1995 1994 ----- ---- ---- Effective federal and state income tax rate..... 41% 39% 36% Amortization of investment tax credit........... 2 3 3 Resolution of prior year tax issue.............. -- -- 2 State income tax, net of federal income tax benefit................................... (6) (5) (4) Other........................................... (2) (2) (2) ---- ---- ---- Statutory federal income tax rate............... 35% 35% 35% ==== ==== ====
-89- (15) INVENTORIES: Inventories include the following amounts as of December 31 (in thousands):
1996 1995 ------- ------- Materials and supplies, at average cost.. $32,222 $26,586 Coal stocks, at average cost............. 32,293 32,163 Gas in storage, at LIFO cost............. 23,915 21,883 Fuel oil, at average cost................ 1,264 1,523 Other.................................... 1,170 1,398 ------- ------- Total.................................... $90,864 $83,553 ======= =======
At December 31, 1996 prices, the current cost of gas in storage was $61.3 million. (16) OTHER INFORMATION: The Company completed a merger-related restructuring plan during 1995. Other operating expenses in the Consolidated Statements of Income for 1995 includes $31.9 million related to the restructuring plan. Non-Operating - Other, Net, as shown on the Consolidated Statements of Income includes the following for the years ended December 31 (in thousands):
1996 1995 1994 ------- ------- ------- IES merger costs......................... $(8,689) $ $ - Energy efficiency carrying charges....... 3,225 3,092 1,681 Gain on sale of cushion gas.............. 3,182 -- -- Incentive gas procurement plan award..... 2,677 -- -- Agency gas sales, net.................... 1,840 228 (2) Donations................................ (1,271) (1,612) (1,336) Gain on reacquisition of long-term debt.. 1,105 -- -- MidAmerican merger costs................. -- (4,624) (4,279) Allowance for equity funds used during construction.................... -- 481 452 Other.................................... 331 (2,993) (1,900) ------- ------- ------- Total.............................. $ 2,400 $(5,428) $(5,384) ======= ======= =======
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MIDAMERICAN ENERGY FINANCING I: Refer to Note 17 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican-Obligated Mandatorily Redeemable Preferred Securities Of MidAmerican Energy Financing I. -90- (18) AFFILIATED COMPANY TRANSACTIONS: The companies identified as affiliates are wholly owned subsidiaries of Holdings. The basis for these charges is provided for in service agreements between MidAmerican and its affiliates. In the opinion of management, the expenses between entities are fair and reasonable. MidAmerican incurred charges for employee wages and benefits, insurance, building rent, computer costs, administrative services, travel expense and general and administrative expenses; including treasury, legal, shareholder relations and accounting functions, on behalf of MidAmerican Capital and Midwest Capital. Such charges were $9.3 million, $4.6 million and $3.4 million for 1996, 1995 and 1994, respectively. MidAmerican leases office facilities and other properties from affiliates. Total lease payments were approximately $0.3 million, $0.6 million and $0.6 million for 1996, 1995 and 1994, respectively. MidAmerican leases unit trains from an affiliate for the transportation of coal to MidAmerican's generating stations. Unit train costs, including maintenance, were approximately $3.0 million, $3.0 million and $2.9 million for 1996, 1995 and 1994, respectively. MidAmerican purchased natural gas from an affiliate. MidAmerican's costs of gas related to these transactions was $0.2 million, $0.3 million and $1.9 million for 1996, 1995 and 1994, respectively. (19) UNAUDITED QUARTERLY OPERATING RESULTS:
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands) Operating revenues ................................ $458,260 $352,198 $ 384,071 $ 441,232 Operating income .................................. 69,361 47,058 70,100 62,688 Income from continuing operations ................. 47,419 26,846 43,658 47,209 Income (loss) from discontinued operations ........ 6,105 4,333 (19,015) (1,584) Earnings on common stock .......................... 51,047 28,995 22,556 41,972 1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- --------- (In thousands) Operating revenues ................................ $418,583 $338,607 $ 403,235 $ 393,810 Operating income .................................. 56,563 44,517 70,572 47,586 Income from continuing operations ................. 36,532 21,880 46,078 27,999 Income from discontinued operations ............... 1,045 5,310 (8,621) 600 Earnings on common stock .......................... 35,296 24,908 35,780 26,780
The quarterly data reflect seasonal variations common in the utility industry. -91- REPORT OF MANAGEMENT Management is responsible for the preparation of the accompanying financial statements which have been prepared in conformity with generally accepted accounting principles. In the opinion of management, the financial position, results of operation and cash flows of MidAmerican are reflected fairly in the statements. The statements have been audited by MidAmerican's independent public accountants, Arthur Andersen LLP. MidAmerican maintains a system of internal controls which is designed to provide reasonable assurance, on a cost effective basis, that transactions are executed in accordance with management's authorization, the financial statements are reliable and MidAmerican's assets are properly accounted for and safeguarded. MidAmerican's internal auditors continually evaluate and test the system of internal controls and actions are taken when opportunities for improvement are identified. Management believes that the system of internal controls is effective. The MidAmerican Energy Holdings Company Board of Directors, through its Audit Committee comprised entirely of outside directors, meets regularly with management, the internal auditors and Arthur Andersen LLP to discuss accounting, auditing, internal control and financial reporting matters. MidAmerican's independent public accountants are appointed annually by the Board of Directors on recommendation of the Audit Committee. The internal auditors and Arthur Andersen LLP each have full access to the Audit Committee, without management representatives present. Stanley J. Bright President and Chief Executive Officer Philip G. Lindner Senior Vice President and Chief Financial Officer -92- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MidAmerican Energy Company and Subsidiaries: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of MidAmerican Energy Company (an Iowa corporation) and subsidiaries, as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the supplemental schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and supplemental schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MidAmerican Energy Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules listed in Item 14(a)2., are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois January 24, 1997 -93-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED FIVE-YEAR FINANCIAL STATISTICS 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Earnings per average common share -- Continuing operations: Utility operations ................................... $ 1.54 $ 1.24 $ 1.12 $ 1.29 $ 0.82 Nonregulated activities .............................. (0.11) (0.05) 0.13 0.09 (0.03) Discontinued operations ................................ (0.13) 0.03 (0.03) 0.01 0.05 --------- --------- --------- --------- --------- Earnings per average common share ...................... $ 1.30 $ 1.22 $ 1.22 $ 1.39 $ 0.84 ========= ========= ========= ========= ========= Average shares of common stock outstanding (in thousands) ........................... 100,752 100,401 98,531 97,762 95,430 Return on average common equity (%) .................... 10.6 10.1 10.1 11.6 7.1 Cash dividends declared per common share ............... $ 1.20 $ 1.18 $ 1.17 $ 1.17 $ 1.28 Common dividend payout ratio (%) ....................... 92 97 96 84 152 Ratio of earnings to fixed charges -- Holdings ............................................. 3.3 2.8 2.8 2.8 1.9 MidAmerican........................................... 4.1 3.4 3.3 3.4 2.3 Ratio of earnings to fixed charges and Cooper Nuclear Station debt service -- Holdings.............................................. 3.1 2.7 2.7 2.8 1.8 MidAmerican .......................................... 4.0 3.3 3.2 3.3 2.2 Quarterly earnings per average common share outstanding -- 1st quarter .......................................... $ 0.51 $ 0.35 $ 0.45 $ 0.44 $ 0.28 2nd quarter .......................................... 0.29 0.25 0.22 0.22 0.13 3rd quarter .......................................... 0.22 0.36 0.36 0.52 0.26 4th quarter .......................................... 0.28 0.27 0.19 0.20 0.17 Total assets (in millions) ............................. $ 4,559 $ 4,470 $ 4,389 $ 4,352 $ 4,103 Capitalization (in millions) -- Common shareholders' equity .......................... $ 1,240 $ 1,226 $ 1,204 $ 1,181 $ 1,160 Preferred shares, not subject to mandatory redemption 32 90 90 110 74 Preferred shares, subject to mandatory redemption .... 150 50 50 50 49 Long-term debt (excluding current portion) ........... 1,395 1,403 1,398 1,341 1,369 Capitalization ratios % -- Common shareholders' equity .......................... 44.0 44.3 43.9 44.0 43.8 Preferred shares, not subject to mandatory redemption 1.1 3.2 3.3 4.1 2.8 Preferred shares, subject to mandatory redemption .... 5.4 1.8 1.8 1.9 1.8 Long-term debt (excluding current portion) ........... 49.5 50.7 51.0 50.0 51.6 Book value per common share at year-end ................ $ 12.31 $ 12.17 $ 12.08 $ 12.07 $ 11.86 Utility construction expenditures (in thousands) ....... $ 154,198 $ 190,771 $ 211,669 $ 215,081 $ 188,344 Net cash from utility operations less dividends as a % of construction ..................... 127 108 99 86 85 Number of fulltime employees -- Utility .............................................. 3,370 3,331 4,077 4,196 4,305 Nonregulated ......................................... 236 271 274 347 200
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MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED FIVE-YEAR CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- OPERATING REVENUES Electric utility ............................ $ 1,099,008 $ 1,094,647 $ 1,021,660 $ 1,002,970 $ 936,027 Gas utility ................................. 536,753 459,588 492,015 538,989 484,687 Nonregulated ................................ 236,851 95,106 117,550 85,997 41,866 ----------- ----------- ----------- ----------- ----------- 1,872,612 1,649,341 1,631,225 1,627,956 1,462,580 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity ........... 234,317 230,261 213,987 217,385 211,924 Cost of gas sold ............................ 345,014 279,025 326,782 366,049 326,097 Other operating expenses .................... 350,174 399,648 354,190 340,720 329,911 Maintenance ................................. 88,621 85,363 101,275 101,601 93,769 Depreciation and amortization ............... 164,592 158,950 154,229 150,822 144,646 Property and other taxes .................... 92,630 96,350 94,990 93,238 97,479 ----------- ----------- ----------- ----------- ----------- 1,275,348 1,249,597 1,245,453 1,269,815 1,203,826 ----------- ----------- ----------- ----------- ----------- Nonregulated: Cost of sales ............................... 218,256 70,209 84,515 57,907 14,411 Other ....................................... 35,370 37,181 36,765 32,296 33,184 ----------- ----------- ----------- ----------- ----------- 253,626 107,390 121,280 90,203 47,595 ----------- ----------- ----------- ----------- ----------- Total operating expenses .................... 1,528,974 1,356,987 1,366,733 1,360,018 1,251,421 ----------- ----------- ----------- ----------- ----------- OPERATING INCOME ............................ 343,638 292,354 264,492 267,938 211,159 ----------- ----------- ----------- ----------- ----------- NON-OPERATING INCOME Interest income ............................. 4,012 4,485 4,334 5,805 4,457 Dividend income ............................. 16,985 16,954 17,087 17,601 17,353 Realized gains and losses on securities, net 1,895 688 7,635 7,915 4,233 Other, net .................................. (4,020) (10,467) 4,316 20,842 (10,387) ----------- ----------- ----------- ----------- ----------- 18,872 11,660 33,372 52,163 15,656 ----------- ----------- ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt .................. 102,909 105,550 101,267 107,044 114,732 Other interest expense ...................... 10,941 9,449 6,446 5,066 5,899 Allowance for borrowed funds ................ (4,212) (5,552) (3,955) (2,186) (2,162) Preferred dividends of subsidiaries ......... 10,689 8,059 10,551 8,367 8,735 ----------- ----------- ----------- ----------- ----------- 120,327 117,506 114,309 118,291 127,204 ----------- ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME 242,183 186,508 183,555 201,810 99,611 INCOME TAXES ................................ 98,422 66,803 60,457 67,485 24,566 ----------- ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS ........... 143,761 119,705 123,098 134,325 75,045 INCOME (LOSS) FROM DISCONTINUED OPERATIONS .. (12,715) 3,059 (2,909) 1,159 5,099 ----------- ----------- ----------- ----------- ----------- NET INCOME .................................. $ 131,046 $ 122,764 $ 120,189 $ 135,484 $ 80,144 =========== =========== =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING ........... 100,752 100,401 98,531 97,762 95,430 EARNINGS PER COMMON SHARE Continuing operations ....................... $ 1.43 $ 1.19 $ 1.25 $ 1.38 $ 0.79 Discontinued operations ..................... (0.13) 0.03 (0.03) 0.01 0.05 ----------- ----------- ----------- ----------- ----------- Earnings per average common share ........... $ 1.30 $ 1.22 $ 1.22 $ 1.39 $ 0.84 =========== =========== =========== =========== =========== DIVIDENDS DECLARED PER SHARE ................ $ 1.20 $ 1.18 $ 1.17 $ 1.17 $ 1.28 =========== =========== =========== =========== ===========
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MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED FIVE-YEAR CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- ASSETS UTILITY PLANT Electric ................................................... $ 4,010,847 $ 3,881,699 $ 3,765,004 $ 3,642,415 $ 3,534,703 Gas ........................................................ 723,491 695,741 663,792 639,276 628,856 ----------- ----------- ----------- ----------- ----------- 4,734,338 4,577,440 4,428,796 4,281,691 4,163,559 Less accumulated depreciation and amortization ............. 2,153,058 2,027,055 1,885,870 1,801,668 1,680,033 ----------- ----------- ----------- ----------- ----------- 2,581,280 2,550,385 2,542,926 2,480,023 2,483,526 Construction work in progress .............................. 49,305 104,164 101,252 111,726 67,664 ----------- ----------- ----------- ----------- ----------- 2,630,585 2,654,549 2,644,178 2,591,749 2,551,190 ----------- ----------- ----------- ----------- ----------- POWER PURCHASE CONTRACT .................................... 190,897 212,148 221,998 248,643 243,146 ----------- ----------- ----------- ----------- ----------- INVESTMENT IN DISCONTINUED OPERATIONS ...................... 196,356 177,300 186,246 168,907 118,163 ----------- ----------- ----------- ----------- ----------- CURRENT ASSETS Cash and cash equivalents .................................. 97,749 32,915 28,651 20,657 23,723 Receivables less reserves................................... 312,930 228,128 196,814 216,157 218,258 Inventories ................................................ 90,864 85,235 92,248 100,675 98,608 Other ...................................................... 11,696 18,428 14,288 21,195 24,811 ----------- ----------- ----------- ----------- ------------ 513,239 364,706 332,001 358,684 365,400 ----------- ----------- ----------- ----------- ----------- INVESTMENTS ................................................ 628,791 646,456 595,510 614,153 635,315 ----------- ----------- ----------- ----------- ----------- OTHER ASSETS ............................................... 399,415 414,938 408,961 369,937 190,206 ----------- ----------- ----------- ----------- ----------- TOTAL ASSETS ............................................... $ 4,559,283 $ 4,470,097 $ 4,388,894 $ 4,352,073 $ 4,103,420 =========== =========== =========== =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity ................................ $ 1,239,946 $ 1,225,715 $ 1,204,112 $ 1,180,510 $ 1,159,676 Preferred shares, not subject to mandatory redemption ...... 31,769 89,945 89,955 109,871 74,242 Preferred shares, subject to mandatory redemption .......... 150,000 50,000 50,000 50,000 48,625 Long-term debt (excluding current portion) ................. 1,395,103 1,403,322 1,398,255 1,341,003 1,368,784 ----------- ----------- ----------- ----------- ----------- 2,816,818 2,768,982 2,742,322 2,681,384 2,651,327 ----------- ----------- ----------- ----------- ----------- CURRENT LIABILITIES Notes payable .............................................. 161,990 184,800 124,500 173,035 120,244 Current portion of long-term debt........................... 79,598 65,295 72,872 66,371 32,952 Current portion of power purchase contract ................. 13,718 13,029 12,080 10,830 8,065 Accounts payable ........................................... 169,806 122,055 106,152 123,618 112,198 Taxes accrued .............................................. 82,254 81,898 91,653 110,923 101,585 Interest accrued ........................................... 28,513 30,635 30,659 31,021 31,395 Other ...................................................... 30,229 46,267 44,974 49,470 53,050 ----------- ----------- ----------- ----------- ----------- 566,108 543,979 482,890 565,268 459,489 ----------- ----------- ----------- ----------- ----------- OTHER LIABILITIES Power purchase contract .................................... 97,504 112,700 125,729 140,655 138,085 Deferred income taxes ...................................... 752,336 724,587 712,307 659,753 589,626 Investment tax credit ...................................... 88,842 95,041 100,871 106,729 113,846 Other ...................................................... 237,675 224,808 224,775 198,284 151,047 ----------- ----------- ----------- ----------- ----------- 1,176,357 1,157,136 1,163,682 1,105,421 992,604 ----------- ----------- ----------- ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES ....................... $ 4,559,283 $ 4,470,097 $ 4,388,894 $ 4,352,073 $ 4,103,420 =========== =========== =========== =========== ===========
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MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED UTILITY FIVE-YEAR ELECTRIC STATISTICS FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- REVENUES (in thousands) Residential ................................. $ 415,954 $ 434,105 $ 400,346 $ 386,047 $ 343,842 Small general service ....................... 237,466 252,427 253,703 242,205 236,292 Large general service ....................... 241,172 219,075 204,481 193,616 199,256 Other sales ................................. 60,476 60,160 57,731 56,198 30,878 Sales for resale ............................ 121,452 105,472 84,260 104,461 106,982 ----------- ----------- ----------- ----------- ----------- Total from electric sales ................... 1,076,520 1,071,239 1,000,521 982,527 917,250 Other electric revenue ...................... 22,488 23,408 21,139 20,443 18,777 ----------- ----------- ----------- ----------- ----------- Total ....................................... $ 1,099,008 $ 1,094,647 $ 1,021,660 $ 1,002,970 $ 936,027 =========== =========== =========== =========== =========== KWH SALES (in thousands) Residential ................................. 4,652,031 4,767,608 4,500,265 4,475,883 4,098,567 Small general service ....................... 3,565,459 3,920,792 4,062,993 3,937,360 3,885,898 Large general service ....................... 6,067,325 5,351,933 5,091,685 4,851,493 4,993,213 Other ....................................... 988,022 957,463 938,620 930,117 470,444 Sales for resale ............................ 6,727,326 5,509,161 3,605,092 5,566,208 6,386,957 ----------- ----------- ----------- ----------- ----------- Total ....................................... 22,000,163 20,506,957 18,198,655 19,761,061 19,835,079 =========== =========== =========== =========== =========== REVENUES AS A % OF TOTAL Residential ................................. 38.6 40.5 40.0 39.3 37.5 Small general service ....................... 22.1 23.6 25.4 24.7 25.7 Large general service ....................... 22.4 20.5 20.4 19.7 21.7 Other ....................................... 5.6 5.6 5.8 5.7 3.4 Sales for resale ............................ 11.3 9.8 8.4 10.6 11.7 ----------- ----------- ----------- ----------- ----------- Total ....................................... 100.0 100.0 100.0 100.0 100.0 =========== =========== =========== =========== =========== SALES AS A % OF TOTAL Residential ................................. 21.1 23.2 24.7 22.7 20.6 Small general service ....................... 16.2 19.1 22.3 19.9 19.6 Large general service ....................... 27.6 26.1 28.0 24.5 25.2 Other ....................................... 4.5 4.7 5.2 4.7 2.4 Sales for resale ............................ 30.6 26.9 19.8 28.2 32.2 ----------- ----------- ----------- ----------- ----------- Total ....................................... 100.0 100.0 100.0 100.0 100.0 =========== =========== =========== =========== =========== RETAIL ELECTRIC SALES BY JURISDICTION (%) Iowa ........................................ 88.7 88.4 88.6 88.7 87.8 Illinois .................................... 10.6 11.0 10.9 10.9 11.8 South Dakota ................................ 0.7 0.6 0.5 0.4 0.4 ----------- ----------- ----------- ----------- ----------- Total ....................................... 100.0 100.0 100.0 100.0 100.0 =========== =========== =========== =========== =========== CUSTOMERS (end of year) Residential ................................. 557,637 551,384 548,106 541,220 536,767 Small general service ....................... 73,022 72,616 69,905 68,829 71,843 Large general service ....................... 982 945 743 744 833 Other ....................................... 9,937 9,744 9,518 9,572 5,156 Sales for resale ............................ 55 55 59 63 61 ----------- ----------- ----------- ----------- ----------- Total ....................................... 641,633 634,744 628,331 620,428 614,660 =========== =========== =========== =========== =========== ANNUAL AVERAGE PER RESIDENTIAL CUSTOMER Revenue per Kwh (cents) ..................... 8.94 9.11 8.90 8.62 8.39 KWh sales ................................... 8,392 8,670 8,265 8,310 7,681 COOLING DEGREE DAYS Actual ...................................... 788 1,112 912 813 603 Percent warmer (colder) than normal ......... (17.5) 14.1 (6.5) (16.4) (38.5) ELECTRIC PEAK DEMAND (net MW) ............... 3,537 3,553 3,226 3,284 2,902 SUMMER NET ACCREDITED CAPABILITY (MW) ....... 4,301 4,311 4,145 4,072 4,116
-97-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED UTILITY FIVE-YEAR GAS STATISTICS FOR THE YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- REVENUES (in thousands) Residential ............................................... $338,605 $279,819 $287,171 $319,359 $282,688 Small general service ..................................... 153,616 128,501 142,894 150,913 133,384 Large general service ..................................... 17,670 23,280 36,729 37,761 43,919 Sales for resale and other ................................ 2,050 5,303 5,514 10,376 2,648 -------- -------- -------- -------- -------- Total revenue from gas sales ............................ 511,941 436,903 472,308 518,409 462,639 Gas transported ........................................... 20,155 16,677 12,842 13,457 17,473 Other gas revenues ........................................ 4,657 6,008 6,865 7,123 4,575 -------- -------- -------- -------- -------- Total ..................................................... $536,753 $459,588 $492,015 $538,989 $484,687 ======== ======== ======== ======== ======== THROUGHPUT (MMBtu in thousands) Sales Residential ............................................. 61,732 57,153 54,732 60,612 56,072 Small general service ................................... 33,642 32,786 32,677 34,504 31,894 Large general service ................................... 4,634 6,222 8,253 9,681 12,357 Sales for resale and other .............................. 977 3,582 3,231 4,305 837 -------- -------- -------- -------- -------- Total sales ........................................... 100,985 99,743 98,893 109,102 101,160 Gas transported ........................................... 54,618 50,695 43,293 39,570 34,686 -------- -------- -------- -------- -------- Total ................................................... 155,603 150,438 142,186 148,672 135,846 ======== ======== ======== ======== ======== REVENUES AS A % OF TOTAL Residential ............................................... 63.6 61.7 59.2 60.0 58.9 Small general service ..................................... 28.9 28.3 29.4 28.4 27.8 Large general service ..................................... 3.3 5.1 7.6 7.1 9.1 Sales for resale and other ................................ 0.4 1.2 1.1 2.0 0.6 Gas Transported ........................................... 3.8 3.7 2.7 2.5 3.6 -------- -------- -------- -------- -------- Total ................................................... 100.0 100.0 100.0 100.0 100.0 ======== ======== ======== ======== ======== SALES AS A % OF TOTAL (excluding gas transported) Residential ............................................... 61.1 57.3 55.3 55.6 55.5 Small general service ..................................... 33.3 32.9 33.0 31.6 31.5 Large general service ..................................... 4.6 6.2 8.4 8.9 12.2 Sales for resale and other ................................ 1.0 3.6 3.3 3.9 0.8 -------- -------- -------- -------- -------- Total ................................................... 100.0 100.0 100.0 100.0 100.0 ======== ======== ======== ======== ======== RETAIL GAS SALES BY JURISDICTION (%) Iowa ...................................................... 78.0 77.1 76.6 74.5 73.4 Illinois .................................................. 11.0 11.6 11.9 11.4 11.6 South Dakota .............................................. 10.3 10.6 10.8 5.4 2.2 Other ..................................................... 0.7 0.7 0.7 8.7 12.8 -------- -------- -------- -------- -------- Total ................................................... 100.0 100.0 100.0 100.0 100.0 ======== ======== ======== ======== ======== CUSTOMERS (end of year) Residential ............................................... 550,786 541,732 535,301 526,863 552,660 Small general service ..................................... 58,059 57,207 55,855 54,972 54,918 Large general service ..................................... 821 830 876 868 1,020 Gas transported and other ................................. 504 1,128 171 128 123 -------- -------- -------- -------- -------- Total ................................................... 610,170 600,897 592,203 582,831 608,721 ======== ======== ======== ======== ======== ANNUAL AVERAGES PER RESIDENTIAL CUSTOMER Revenue per MMBtu ......................................... $5.49 $4.90 $5.25 $5.27 $5.04 MMBtu sales ............................................... 113 106 103 111 103 HEATING DEGREE DAYS Actual .................................................... 7,445 6,841 6,565 7,097 6,302 Percent colder (warmer) than normal ....................... 10.1 0.9 (3.5) 3.2 (8.7) COST PER MMBTU ............................................ $3.42 $2.80 $3.30 $3.36 $3.22
-98- SCHEDULE II MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (In Thousands)
Column A Column B Column C Column D Column E Balance at Additions Balance at Beginning Charged End Description of Year to Income Deductions of Year - - ----------- ---------- --------- ---------- ---------- Reserves Deducted From Assets To Which They Apply: Reserve for uncollectible accounts: Year ended 1996..................... $2,296 $6,145 $(6,348) $2,093 ====== ====== ======= ====== Year ended 1995..................... $2,099 $4,934 $(4,737) $2,296 ====== ====== ======= ====== Year ended 1994..................... $3,697 $3,920 $(5,518) $2,099 ====== ====== ======= ====== Reserves Not Deducted From Assets: Property insurance Year ended 1996.................... $2,098 $ (70) $ - $2,028 ====== ====== ======= ====== Year ended 1995.................... $2,224 $ 17 $ (143) $2,098 ====== ====== ======= ====== Year ended 1994.................... $2,561 $ 200 $ (537) $2,224 ====== ====== ======= ====== Injuries and damages Year ended 1996.................... $1,079 $2,753 $(1,593) $2,239 ====== ====== ======= ====== Year ended 1995.................... $2,350 $2,645 $(3,916) $1,079 ====== ====== ======= ====== Year ended 1994.................... $1,801 $3,452 $(2,903) $2,350 ====== ====== ======= ======
-99- SCHEDULE II MIDAMERICAN ENERGY COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996 (In Thousands)
Column A Column B Column C Column D Column E Balance at Additions Balance at Beginning Charged End Description of Year to Income Deductions of Year - - ----------- ---------- --------- ---------- ---------- Reserves Deducted From Assets To Which They Apply: Reserve for uncollectible accounts: Year ended 1996.................... $2,214 $5,854 $(6,223) $1,845 ====== ====== ======= ====== Year ended 1995.................... $2,008 $4,680 $(4,474) $2,214 ====== ====== ======= ====== Year ended 1994.................... $2,040 $3,466 $(3,498) $2,008 ====== ====== ======= ====== Reserves Not Deducted From Assets: Property insurance Year ended 1996.................... $2,098 $ (70) $ - $2,028 ====== ====== ======= ====== Year ended 1995.................... $2,224 $ 17 $ (143) $2,098 ====== ====== ======= ====== Year ended 1994.................... $2,561 $ 200 $ (537) $2,224 ====== ====== ======= ====== Injuries and damages Year ended 1996.................... $1,079 $2,753 $(1,593) $2,239 ====== ====== ======= ====== Year ended 1995.................... $2,350 $2,645 $(3,916) $1,079 ====== ====== ======= ====== Year ended 1994.................... $1,801 $3,452 $(2,903) $2,350 ====== ====== ======= ======
-100- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN ENERGY HOLDINGS COMPANY MIDAMERICAN ENERGY COMPANY ----------------------------------- Registrants Date: By /s/ S. J. Bright ----------------------------------- (S. J. Bright) President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated: Signature Title --------- ----- MidAmerican Energy Holdings Company /s/ R. E. Christiansen Chairman of the Board of Directors ------------------------ (R. E. Christiansen) /s/ P.G. Lindner Senior Vice President and Chief ------------------------- (P.G. Lindner) Financial Officer /s/ J. W. Aalfs Director ------------------------- (J. W. Aalfs) /s/ Robert A. Burnett Director ------------------------- (R. A. Burnett) /s/ Ross D. Christensen Director ------------------------- (R. D. Christensen) -101- /s/ John W. Colloton Director ------------------------- (J. W. Colloton) /s/ Frank S. Cottrell Director ------------------------- (F. S. Cottrell) /s/ Jack W. Eugster Director ------------------------- (J. W. Eugster) /s/ Mel Foster, Jr. Director ------------------------- (M. Foster, Jr.) /s/ Nolden Gentry Director ------------------------- (N. Gentry) /s/ J. M. Hoak, Jr. Director ------------------------- (J. M. Hoak, Jr.) /s/ R. L. Lawson Director ------------------------- (R. L. Lawson) /s/ R. L. Peterson Director ------------------------- (R. L. Peterson) /s/ N. L. Seifert Director ------------------------ (N. L. Seifert) /s/ W. Scott Tinsman Director ------------------------- (W. S. Tinsman) /s/ L. L. Woodruff Director ------------------------- (L. L. Woodruff) -102- MidAmerican Energy Company /s/ S. J. Bright Chairman of the Board of Directors -------------------------- (S. J. Bright) Director -------------------------- (R. E. Christiansen) /s/ P.G. Lindner Director, Senior Vice President -------------------------- (P.G. Lindner) and Chief Financial Officer Director -------------------------- (D. J. Levy) /s/ J. A. Rasmussen, Jr. Director -------------------------- (J. A. Rasmussen, Jr.) /s/ S. E. Shelton Director -------------------------- (S. E. Shelton) /s/ R. W. Stepien Director -------------------------- (R. W. Stepien) /s/ B. A. Wharton Director ------------------------- (B. A. Wharton) -103- EXHIBIT INDEX Exhibits Filed Herewith - - ----------------------- Holdings 3.1 Restated Articles of Incorporation of MidAmerican Energy Holdings Company, as amended December 19, 1996. 3.2 Bylaws of MidAmerican Energy Holdings Company, as amended July 24, 1996. MidAmerican Energy 3.3 Restated Articles of Incorporation of MidAmerican Energy Company, as amended January 22, 1997. Holdings and MidAmerican 10.1 MidAmerican Energy Company Severance Plan For Specified Officers dated November 1, 1996. Holdings 10.2 Form of Indemnity Agreement between MidAmerican Energy Holdings Company and its directors and officers. 10.3 Employment Agreement between Stanley J. Bright and MidAmerican Energy Holdings Company dated January 24, 1996. 10.4 Employment Agreement between Russell E. Christiansen and MidAmerican Energy Holdings Company dated January 24, 1996, as amended January 29, 1997. 12.1 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. MidAmerican 12.2 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. Holdings 21.1 Subsidiaries of the Registrant. MidAmerican 21.2 Subsidiaries of the Registrant. -104- Holdings 23.1 Consent of Arthur Andersen LLP. MidAmerican 23.3 Consent of Arthur Andersen LLP. 27 Financial Data Schedules (for electronic filings only). Holdings 99.1 MidAmerican Energy Company Employee Stock Purchase Plan Annual Report of Form 11-K. Exhibits Incorporated by Reference - - ---------------------------------- MidAmerican Energy 3.4 Restated Bylaws of MidAmerican Energy Company, as amended July 24, 1996. (Filed as Exhibit 3.1 to MidAmerican's Quarterly Report on Form 10-Q for the period ended June 30, 1996, Commission File No. 1-11505.) Holdings 4.1 Shareholder Rights Agreement dated as of December 18, 1996 between Holding's and Continental Stock Transfer and Trust Company. (Filed as Exhibit 4 to Holdings' Current Report on Form 8-K dated December 18, 1996, Commission File No. 1-12459.) Holdings and MidAmerican Energy 4.2 General Mortgage Indenture and Deed of Trust dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.3 First Supplemental Indenture dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-2 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.4 Second Supplemental Indenture dated as of January 15, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.5 Third Supplemental Indenture dated as of May 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4.4 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.) -105- 4.6 Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 4.7 Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.6 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 4.8 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947. (Filed by Iowa-Illinois as Exhibit 7B to Commission File No. 2-6922.) 4.9 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by Iowa-Illinois as Exhibit 2.08 to Commission File No. 2-28806.) 4.10 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the period ended June 30, 1982, Commission File No. 1-3573.) 4.11 Resignation and Appointment of successor Individual Trustee. (Filed by Iowa-Illinois as Exhibit 4.B.30 to Commission File No. 33-39211.) 4.13 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed as Exhibit 4.31.B to Iowa- Illinois' Current Report on Form 8-K dated May 21, 1992, Commission File No. 1-3573.) 4.14 Twenty-Ninth Supplemental Indenture dated as of March 15, 1993. (Filed as Exhibit 4.32.A to Iowa- Illinois' Current Report on Form 8-K dated March 24, 1993, Commission File No. 1-3573.) 4.15 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed as Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated October 7, 1993, Commission File No. 1-3573.) 4.16 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.15 to MidAmerican's Annual Report on Form 10- K dated December 31, 1995, Commission File No. 1-11505.) 4.17 Thirty-First Supplemental Indenture dated as of July 1, 1995, between Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.16 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.2 MidAmerican Energy Company Deferred Compensation Plan for Directors. (Filed as Exhibit 10.1 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.3 MidAmerican Energy Company Deferred Compensation Plan for Executives. (Filed as Exhibit 10.2 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) -106- 10.4 MidAmerican Energy Company Supplemental Retirement Plan for Designated Officers. (Filed as Exhibit 10.3 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.5 MidAmerican Energy Company Key Employee Short-Term Incentive Plan. (Filed as Exhibit 10.4 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1- 11505.) 10.6 Deferred Compensation Plan for Executives of Midwest Resources Inc. and Subsidiaries. (Filed as Exhibit 10.1 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654). 10.7 Deferred Compensation Plan for Board of Directors of Midwest Resources Inc. and Subsidiaries. (Filed as Exhibit 10.2 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654). 10.8 Midwest Resources Inc. Directors Retirement Plan. (Filed as Exhibit 10.3 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654.) 10.9 Non-Cash Bonus Award Plan for Executives of Midwest Resources Inc. (Filed as Exhibit 10.4 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654). 10.10 Midwest Resources Inc. revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.5 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.) 10.11 Midwest Resources Inc. revised and amended Board of Directors Deferred Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.6 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.) 10.12 Midwest Resources Inc. revised and amended Executive Incentive Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.7 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.) 10.13 Midwest Resources Inc. and Participating Subsidiaries Long-Term Incentive Compensation Plan. (Filed as Exhibit 10.8 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.) 10.14 Midwest Power Group 1992 Key Executive Incentive Compensation Plan. (Filed as Exhibit 10.9 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.) 10.15 Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest Energy Company Supplemental Retirement Plan). (Filed as Exhibit 10.10 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.) -107- 10.16 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 4-C-2 to Iowa Power Inc.'s (IPR) Registration Statement, Registration No. 2-27681.) 10.17 Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District. (Filed as Exhibit 4-C-2a to IPR's Registration Statement, Registration No. 2-35624.) 10.18 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 5-C-2-b to IPR's Registration Statement, Registration No. 2-42191.) 10.19 Amendment No. 4 dated March 28, 1974, to the Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 5-C-2-c to IPR's Registration Statement, Registration No. 2-51540.) 10.20 Revised and amended Executive Compensation Plan for Iowa Resources Inc. and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.21 to Iowa Resources Inc.'s (IOR) Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.) 10.21 Revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22 to IOR's Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.) 10.22 Revised and amended Deferred Compensation Plan for Board of Directors of IOR and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22 to IOR's Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.) 10.23 Revised and amended Executive Compensation Plan for IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.14 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.) 10.24 Revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.15 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.) 10.25 Revised and amended Deferred Compensation Plan for Board of Directors of IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.16 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.) 10.27 Change in control agreement between Russell E. Christiansen and Midwest Energy Company dated as of May 5, 1989. (Filed as Exhibit 10(e) in MWE's Form 10-K for the year ended December 31, 1989, Commission File No. 1-8708.) 10.29 Amendments to Midwest Resources Executive Deferred Compensation Plans, dated October 30, 1992. (Filed as Exhibit 10(h) to Midwest Resource's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) -108- 10.30 Midwest Power Systems 1993 Key Executive Incentive Compensation Plan. (Filed as Exhibit 10.30 in Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.) 10.31 Supplemental Retirement Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.) 10.32 Compensation Deferral Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.) 10.33 Board of Directors' Compensation Deferral Plan. (Filed as Exhibit 10.K.4 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-3573.) 10.34 Revised and amended Supplemental Retirement Income Plan for Iowa Resources Inc. and Subsidiaries dated October 24, 1984. (Filed as Exhibit 10.15 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 10.35 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 10.36 Deferred Compensation Plan of Midwest Energy Company and Subsidiary Corporations. (Filed as Exhibit 10.25 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 10.37 Form of Indemnity Agreement between MidAmerican Energy Company and its directors and officers. (Filed as Exhibit 10.37 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.38 MidAmerican Energy Company 1995 Long-Term Incentive Plan. (Filed as Exhibit 10(a) to Holdings' Registration Statement on Form S-4, File No. 333-01645.) Note: Pursuant to (b) (4) (iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt not being registered if the total amount of securities authorized thereunder does not exceed 10% of total assets of the Company but hereby agrees to furnish to the Commission on request any such instruments. -109- EX-3.(I) 2 ARTICLES OF INCORPORATION EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY HOLDINGS COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.1007 of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Restated Articles of Incorporation ("Articles of Incorporation"): ARTICLE I The name of the corporation is "MidAmerican Energy Holdings Company" (hereinafter sometimes called the "Corporation") and its registered office shall be located at 666 Grand Avenue, Des Moines, Iowa 50303 with the right to establish and maintain branch offices at such other points within and without the State of Iowa as the Board of Directors of the Corporation may, from time to time, determine. The name of the Corporation's registered agent at such registered office is Paul J. Leighton, Corporate Secretary. ARTICLE II The nature of the business or purposes to be conducted or promoted is to engage in any or all lawful act or activity for which a corporation may be incorporated under the Iowa Business Corporation Act. ARTICLE III A. The aggregate number of shares which the Corporation shall have authority to issue is 350,000,000 shares of Common Stock, no par value ("Common Stock"), and 100,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). B. The shares of authorized Common Stock shall be identical in all respects and shall have equal rights and privileges. For all purposes, each registered holder of Common Stock shall, at each meeting of shareholders, be entitled to one vote for each share of Common Stock held, either in person or by proxy duly authorized in writing. Except to the extent required by law or as permitted by these Articles of 1 Incorporation, as amended from time to time, the registered holders of the shares of Common Stock shall have unlimited and exclusive voting rights. C. The Board of Directors, at any time or from time to time, may, and is hereby authorized to, issue and dispose of any of the authorized and unissued shares of Common Stock and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. The holders of Common Stock shall have no preemptive rights to acquire or subscribe to any shares, or securities convertible into shares, of Common Stock. D. The Board of Directors, at any time or from time to time may, and is hereby authorized to, divide the authorized and unissued shares of Preferred Stock into one or more classes or series and in connection with the creation of any class or series to determine, in whole or in part, to the full extent now or hereafter permitted by law, by adopting one or more articles of amendment to the Articles of Incorporation providing for the creation thereof, the designation, preferences, limitations and relative rights of such class or series, which may provide for special, conditional or limited voting rights, or no rights to vote at all, and to issue and dispose of any of such shares and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. E. The Board of Directors, at any time or from time to time may, and is hereby authorized to, create and issue, whether or not in connection with the issuance and sale of any shares of Common Stock, Preferred Stock or other securities of the Corporation, warrants, rights and/or options entitling the holders thereof to purchase from the Corporation any shares of Common Stock, Preferred Stock or other securities of the Corporation. Such warrants, rights or options shall be evidenced by such instrument or instruments as shall be approved by the Board of Directors of the Corporation. The terms upon which, the time or times (which may be limited or unlimited in duration) at or within which, and the price or prices (which shall be not less than the minimum amount prescribed by law, if any) at which any such shares or other securities may be purchased from the Corporation upon the exercise of any such warrant, right or option shall be fixed and stated in the resolution or resolutions of the Board of Directors providing for the creation and issuance of such warrants, rights or options. The Board of Directors is hereby authorized to create and issue any such warrants, rights or options from time to time for such consideration, if any, and to such persons, firms or corporations, as the Board of Directors may determine. F. The Corporation may authorize the issuance of some or all of the shares of any or all of the classes of its capital stock without certificates. 2 G. The Corporation shall not be required to issue certificates representing any fraction or fractions of a share of stock of any class but may issue in lieu thereof one or more non-dividend bearing and non-voting scrip certificates in such form or forms as shall be approved by the Board of Directors, each scrip certificate representing a fractional interest in one share of stock of any class. Such scrip certificates upon presentation together with similar scrip certificates representing in the aggregate an interest in one or more full shares of stock of any class shall entitle the holders thereof to receive one or more full shares of stock of such class. Such scrip certificates may contain such terms and conditions as shall be fixed by the Board of Directors and may become void and of no effect after a period to be determined by the Board of Directors and to be specified in such scrip certificates. H. The Corporation shall be entitled to treat the person in whose name any share of Common Stock or Preferred Stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any person, whether or not the Corporation shall have notice thereof except as may be expressly provided otherwise by the laws of the State of Iowa. ARTICLE IV The term of corporate existence of the Corporation shall be perpetual. ARTICLE V A. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors. The number of directors of the Corporation shall be fixed by the Bylaws but shall be no less than ten (10) and no greater than twenty-two (22), and such number may be increased or decreased from time to time in accordance with the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors shall be elected by the shareholders at each annual meeting of the Corporation as specified herein and in the Bylaws. Directors need not be shareholders. B. Each director shall serve until his or her successor is elected and qualified or until his or her prior death, retirement, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a director or through an increase in the number of directors, such vacancy shall be filled solely by a majority vote of the remaining directors though less than a quorum of the Board of Directors. A director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the Board of Directors. 3 C. Any director or the entire Board of Directors may be removed for cause as set forth in this paragraph C. Removal of a director for cause must be approved by the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, only at a meeting called for the purpose of removing the director and after notice stating that the purpose, or one of the purposes, of the meeting is removal of the director. Any action for removal of a director must be taken within one year of such cause. D. The Board of Directors, by a vote of a majority of the entire Board of Directors, may appoint from the directors an executive committee and such other committees as they may deem judicious; and to such extent as shall be provided in the resolution of the Board of Directors or in the Bylaws, may delegate to such committees all or any of the powers of the Board of Directors which may be lawfully delegated, and such committees shall have and thereupon may exercise all or any of the powers so delegated to them. The Board of Directors or the Bylaws may provide the number of members necessary to constitute a quorum of any committee and the number of affirmative votes necessary for action by any committee. E. The Board of Directors shall elect such officers of the Corporation as specified in the Bylaws. All vacancies in the offices of the Corporation shall be filled by the Board of Directors. The Board of Directors shall also have authority to appoint such other managing officers as they may from time to time determine. ARTICLE VI Special meetings of shareholders of the Corporation may be called at any time by the Chairman of the Board of Directors or by the President on at least ten days' notice to each shareholder entitled to vote at the special meeting, by mail at such shareholder's last known post office address, specifying the time, place and purpose or purposes of the special meeting. ARTICLE VII The private property of the shareholders of the Corporation shall be exempt from all corporate debts. 4 ARTICLE VIII A. In addition to any affirmative vote required by law or under any other provision of these Articles of Incorporation: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into any Other Entity (as hereinafter defined); or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Other Entity of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $25,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Other Entity in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $25,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation; or (v) any reclassification of securities (including any reverse stock split), recapitalization, reorganization, merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving any Other Entity) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Other Entity; or (vi) any direct or indirect purchase or other acquisition by the Corporation of any equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995) of any class from an Interested Securityholder (as hereinafter defined) who has beneficially owned such securities for less than two years prior to the date of such purchase or any agreement in respect thereof, shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% (excluding, in the case of (i) through (v) above, shares 5 beneficially owned by a 25% Shareholder (as hereinafter defined), and, in the case of (vi) above, shares beneficially owned by such Interested Securityholder) of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article VIII as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of paragraph A of this Article VIII shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of the following subparagraphs 1 and 2 shall have been satisfied. 1. A majority of the Continuing Directors (as hereinafter defined) shall have approved the Business Combination (but only if a majority of the Board of Directors are Continuing Directors); or 2. All of the following conditions shall have been met: a. The ratio of: (i) the aggregate amount of the cash and the Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of a particular class or series of Voting Shares in such Business Combination to (ii) the Fair Market Value per share of such class or series of Voting Shares on the date of the first public announcement of such Business Combination or the date on which any 25% Shareholder became a 25% Shareholder, whichever is higher is at least as great as the ratio (which ratio shall equal the number one in the event that such 25% Shareholder has never beneficially owned any shares of such class or series of Voting Shares) of 6 (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such 25% Shareholder has theretofore paid for any share of such class or series of Voting Shares acquired by it to (y) the Fair Market Value per share of such class or series of Voting Shares on the date of the initial acquisition by such 25% Shareholder of any share of such class or series of Voting Shares; b. The aggregate amount of the cash and Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of each class or series of Preferred Stock in such Business Combination is not less than the highest preferential amount per share to which holders of shares of such class or series of Preferred Stock would, respectively, be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event; c. The consideration to be received by holders of a particular class or series of Voting Shares in such Business Combination shall be in cash or in the same form and of the same kind as the consideration paid by the 25% Shareholder in acquiring the shares of such class or series of Voting Shares already owned by it; d. After such 25% Shareholder has acquired ownership of not less than 25% of the then outstanding Voting Shares (a "25% Interest") and prior to the consummation of such Business Combination: (i) the 25% Shareholder shall have taken steps to ensure that the Corporation's Board of Directors includes at all times representation by Continuing Director(s) proportionate to the ratio that the Voting Shares which from time to time are owned by persons who are not 25% Shareholders ("Public Holders") bear to all Voting Shares outstanding at such respective times (with a Continuing Director to occupy any resulting fractional board position); (ii) there shall have been no reduction in the rate of distributions ("Dividends") payable on the Common Stock except 7 as may have been approved by a majority vote of the Continuing Directors; (iii) such 25% Shareholder shall not have acquired any newly issued shares of stock, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to obtaining a 25% Interest or as a result of a pro rata stock Dividend or stock split); and (iv) such 25% Shareholder shall not have acquired any additional Voting Shares or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such 25% Shareholder acquiring its 25% Interest; e. Prior to or upon the consummation of such Business Combination, such 25% Shareholder shall not have (i) received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation, or (ii) made any major change in the Corporation's business or equity capital structure without the unanimous approval of the entire Board of Directors; and f. A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 and the General Rules and Regulations promulgated thereunder shall have been mailed to all holders of Voting Shares for the purpose of soliciting shareholders' approval of such Business Combination. Such proxy statement shall contain at the front thereof in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from a financial point of view, to the holders of Voting Shares other than any 25% Shareholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). C. For the purposes of this Article VIII: 8 1. The term "Business Combination" shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Article VIII; 2. The term "Other Entity" shall include (a) any 25% Shareholder and (b) any other person (whether or not itself a 25% Shareholder) which after any Business Combination, would be an Affiliate (as hereinafter defined) of any 25% Shareholder; 3. The term "person" shall mean any individual, firm, trust, partnership, association, corporation or other entity; 4. The term "25% Shareholder" shall mean, in respect to any Business Combination, any person (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such transactions, (a) is the beneficial owner, directly or indirectly, of not less than 25% of the Voting Shares, or (b) is an Affiliate of the Corporation and at any time within five years prior thereto was the beneficial owner, directly or indirectly, of not less than 25% of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of capital stock of the Corporation which were at any time within five years prior thereto beneficially owned by any 25% Shareholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; 5. A person shall be the beneficial owner of any Voting Shares (a) which such person or any of its Affiliates and Associates (as hereinafter defined) beneficially own, directly or indirectly, or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or 9 (c) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; 6. The outstanding Voting Shares shall include shares deemed owned through application of subparagraph 5 of this paragraph C above but shall not include any other Voting Shares which may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise; 7. The term "Continuing Director" shall mean (a) a person who was a member of the Board of Directors elected by the Public Holders prior to the date as of which any 25% Shareholder acquired in excess of 10% of the then outstanding Voting Shares or (b) a person designated (before his or her initial election as a director) as a Continuing Director by a majority of the then Continuing Directors; 8. The term "other consideration to be received" shall include, without limitation, Voting Shares retained by Public Holders in the event of a Business Combination in which the Corporation is the surviving corporation; 9. The terms "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995; 10. The term "Subsidiary" shall mean any corporation or other entity of which a majority of the outstanding voting securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors or otherwise to direct the management and policies, of such corporation or other entity, is owned, directly or indirectly, by the Corporation; 11. The term "Interested Securityholder" shall mean, with respect to any transaction which is referred to in Clause (vi) of paragraph A of this Article VIII, any person (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such transaction, or immediately prior to the consummation of any such transaction, (a) is the beneficial owner, directly or indirectly, of not less than five percent of the Voting Shares, or 10 (b) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than five percent of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of the class of securities to be acquired which were at any time within two years prior thereto beneficially owned by an Interested Securityholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; and 12. The term "Fair Market Value" shall mean (i) in the case of capital stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such capital stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such capital stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such capital stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such capital stock is listed, or, if such capital stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such capital stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available the fair market value on the date in question of a share of such capital stock as determined by a majority of the Continuing Directors in good faith; and (ii) in the case of property other than cash or capital stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors; provided that any such determination by the Continuing Directors shall only be effective if made at a meeting at which a majority of Continuing Directors is present. D. A majority of the Continuing Directors shall have the power and duty to determine for purposes of this Article VIII, on the basis of information known to them, (i) the number of Voting Shares beneficially owned by any person, (ii) whether a person is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in subparagraph 4 of paragraph C, (iv) whether the assets subject to any Business Combination have an aggregate Fair Market Value of $25,000,000 or more, and (v) such other matters with respect to which a determination is required under this Article VIII. E. Nothing contained in this Article VIII shall be construed to relieve any 25% Shareholder from any fiduciary obligation imposed by law. 11 ARTICLE IX Any amendment, alteration, change or repeal of Article VA, VB and VC, Article VIII or this Article IX of these Articles of Incorporation shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding Voting Shares (as defined in Article VIII), excluding from such affirmative vote shares beneficially owned by any 25% Shareholder or by any Interested Securityholder in the case of an amendment of the provisions of paragraph A of Article VIII that exclude from an affirmative vote required pursuant to such paragraph A shares beneficially owned by 25% Shareholders or shares beneficially owned by Interested Securityholders, as the case may be. ARTICLE X The Board of Directors may make Bylaws and from time to time may alter, amend or repeal any Bylaws; but any Bylaws made by the Board of Directors may be altered or repealed by the shareholders entitled to vote generally at any annual meeting or at any special meeting provided notice of such proposed alteration or repeal be included in the notice of meeting. ARTICLE XI A. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; or (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) for any transaction from which the director derives an improper personal benefit; or (iv) under Section 490.833, or a successor provision, of the Iowa Business Corporation Act. B. If, after the date these Articles of Incorporation are filed with the Secretary of State of the State of Iowa, the Iowa Business Corporation Act is amended to authorize corporate action further eliminating or limiting the personal liability of 12 directors, then the liability of a director of the Corporation shall be deemed eliminated or limited to the fullest extent permitted by the Iowa Business Corporation Act, as so amended. Any repeal or modification of Section A or Section B of this Article XI, by the shareholders of the Corporation shall be prospective only and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XII A. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative, investigative, or arbitration and whether formal or informal ("proceeding"), by reasons of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Iowa Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Iowa Business Corporation Act permitted the Corporation to provide prior to such amendment), against all reasonable expenses, liability and loss (including, without limitation, attorneys' fees, all costs, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director, officer or employee in his or her capacity as a director, officer or employee (and not in any other capacity in which service was or is rendered by such person while a director, officer or employee including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of (i) a written undertaking, by or on behalf of such director, officer or employee, to repay all amounts so advanced if it should be determined ultimately that such director, officer or employee is not entitled to be indemnified under this Article XII or otherwise, or (ii) a written affirmation by or on behalf of such director, officer or employee that, in such person's good faith belief, such person has met the standards of conduct set forth in the Iowa Business Corporation Act. 13 B. If a claim under Section A is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to also be paid the expenses of prosecuting such claim. It shall be a defense to any such action that the claimant has not met the standards of conduct which make it permissible under the Iowa Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. The failure of the Corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Iowa Business Corporation Act, shall not be a defense to the action or create a presumption that the claimant had not met the applicable standard of conduct. C. Indemnification provided hereunder shall, in the case of the death of the person entitled to indemnification, inure to the benefit of such person's heirs, executors or other lawful representatives. The invalidity or unenforceability of any provision of this Article XII shall not affect the validity or enforceability of any other provision of this Article XII. D. Any action taken or omitted to be taken by (i) any director, officer or employee in good faith and in compliance with or pursuant to any order, determination, approval or permission made or given by a commission, board, official or other agency of the United States or of any state or other governmental authority with respect to the property or affairs of the Corporation or any such business corporation, not-for-profit corporation, joint venture, trade association or other entity over which such commission, board, official or agency has jurisdiction or authority or purports to have jurisdiction or authority or (ii) by any director of the Corporation pursuant to Section D of Article VIII shall be presumed to be in compliance with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act whether or not, in the case of clause (i), it may thereafter be determined that such order, determination, approval or permission was unauthorized, erroneous, unlawful or otherwise improper. E. Unless finally determined, the termination of any litigation, whether by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the action taken or omitted to be taken by the person seeking indemnification did not comply with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act. 14 F. The rights conferred on any person by this Article XII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. G. The Corporation may maintain insurance, at its expense, to protect itself and any such director, officer or employee of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Iowa Business Corporation Act. RESTATED 01/31/96 15 The duly adopted Restated Articles of Incorporation supersede the original Articles of Incorporation and all amendments thereto. The Restated Articles of Incorporation amend the Articles of Incorporation requiring shareholder approval. The Restated Articles of Incorporation were approved by the shareholders. The designation, number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the Restated Articles of Incorporation, and the number of votes of each voting group indisputably represented are as follows: Votes Entitled Designation Shares To Be Cast On Of Group Outstanding Restated Articles Votes Represented - - ----------- ----------- ----------------- ----------------- Common Stock 1,000 1,000 1,000 The total number of undisputed votes cast for and against the Restated Articles of Incorporation by each voting group entitled to vote separately on the Restated Articles of Incorporation are as follows: Voting Group Votes For Votes Against - - ------------ --------- ------------- Common Stock 1,000 0 The number of votes cast for the Restated Articles of Incorporation by each voting group was sufficient for approval by that voting group. These Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ PAUL J. LEIGHTON ------------------------------------- Paul J. Leighton, Corporate Secretary RESTATED 01/31/96 16 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY HOLDINGS COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Sections 490.1001 and 490.1003, and in accordance with Section 490.1006, of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Holdings Company 2. Paragraph C of Article V of the Restated Articles of Incorporation is hereby amended by deleting the first sentence thereof in its entirety and substituting the following sentence therefor: Any director or the entire Board of Directors may be removed only for cause as set forth in this paragraph C. 3. The date of adoption of the amendment was November 8, 1996. 4A. The amendment was approved by the shareholders. The designation, number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the amendment, and the number of votes of each voting group indisputably represented is as follows: Votes Entitled Designation Shares To Be Cast Votes of Group Outstanding On Amendment Represented ------------ ----------- ------------- ----------- Common Stock 1,000 1,000 1,000 4B. The total number of undisputed votes cast for and against the amendment by each voting group entitled to vote separately on the amendment are as follows: Voting Group Votes For Votes Against ------------ --------- ------------- Common Stock 1,000 0 The number of votes cast for the amendment by each voting group was sufficient for approval by that voting group. 5. These Articles of Amendment are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY HOLDINGS COMPANY /s/ P. J. LEIGHTON ----------------------------------- P. J. Leighton, Corporate Secretary MEC\HOLDING\AMEND1.ART 11/08/96 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY HOLDINGS COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Sections 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Holdings Company 2. On December 18, 1996, the Board of Directors of MidAmerican Energy Holdings Company adopted the following resolution designating the preferences and rights of the Series A Junior Participating Preferred Stock: RESOLVED, that, pursuant to the authority conferred upon the Board of Directors of the Corporation (the "Board") by the provisions of the Restated Articles of Incorporation, as amended, of the Corporation, there is hereby created a series of Preferred Stock, without par value, of the Corporation, which series shall have the following designation and number of shares, and fixes the relative rights, preferences, and limitations as follows thereof: Section 1. Designation of Series; Number of Shares. The series of Preferred Stock established hereby shall be designated the "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the authorized number of shares constituting the Series A Preferred Stock shall be 3,500,000. Such number of authorized shares may be increased or decreased, from time to time, by resolution of the Board; provided, however, that no such decrease shall reduce the number of authorized shares of the Series A Preferred Stock to a number less than the number of shares of the Series A Preferred Stock then outstanding, plus the number of shares of the Series A Preferred Stock then reserved for issuance upon the exercise of any outstanding options, warrants or rights or the exercise of any conversion or exchange privilege contained in any outstanding security issued by the Corporation. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of shares of any other series of the Preferred Stock (or shares of any other class of capital stock of the Corporation) ranking prior and superior 1 to the Series A Preferred Stock with respect to dividends, the holders of shares of the Series A Preferred Stock, in preference to the holders of shares of Common Stock and of any other class of capital stock of the Corporation ranking junior to the Series A Preferred Stock with respect to dividends, shall be entitled to receive, when, as and if declared by the Board out of funds legally available therefor, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being a "Dividend Payment Date"), commencing on the first Dividend Payment Date after the initial issuance of a share or fractional share of the Series A Preferred Stock, in an amount per share (rounded to the nearest whole cent) equal to the greater of (a) $.01 and (b) 100 times the aggregate per share amount of all cash dividends, plus 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock or a distribution in connection with the subdivision of the outstanding shares of Common Stock, by reclassification or otherwise), declared on the Common Stock since the immediately preceding Dividend Payment Date or, with respect to the first Dividend Payment Date, since the initial issuance of a share or fractional share of the Series A Preferred Stock. The multiple of 100 (the "Dividend Multiple") set forth in the preceding sentence shall be adjusted from time to time as hereinafter provided in this paragraph (A). In the event that the Corporation shall at any time after the effective date of this Articles of Amendment (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the Dividend Multiple thereafter applicable to the determination of the amount of dividends per share which the holders of shares of the Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple in effect immediately prior to such event multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Board shall declare, out of funds legally available therefor, a dividend or distribution on the Series A Preferred Stock, as provided in paragraph (A) of this Section 2, immediately after it has declared a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event that no dividend or distribution shall have been declared on the Common Stock during the period between any Dividend Payment Date and the next subsequent Dividend Payment Date, a dividend of $.01 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Dividend Payment Date. 2 (C) Dividends shall begin to accrue and be cumulative on the outstanding shares of the Series A Preferred Stock from the Dividend Payment Date next preceding the date of issuance of such shares, unless such date of issuance shall be prior to the record date for the first Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issuance of such shares, or unless such date of issuance shall be after the close of business on the record date with respect to any Dividend Payment Date and on or prior to such Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from such Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on shares of the Series A Preferred Stock in an amount less than the total amount of dividends then accrued shall be allocated pro rata among such shares. The Board may fix a record date for the determination of the holders of shares of the Series A Preferred Stock entitled to receive payment of any dividend or distribution declared thereon, which record date shall be not more than the number of days prior to the date fixed for such payment permitted by applicable law. Section 3. Voting Rights. In addition to any other voting rights required by applicable law, the holders of shares of the Series A Preferred Stock shall have the following voting rights: (A) Each share of the Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. The multiple of 100 (the "Voting Multiple") set forth in the preceding sentence shall be adjusted from time to time as hereinafter provided in this paragraph (A). In the event that the Corporation shall at any time after the effective date of this Articles of Amendment (i) declare or pay any dividend on the Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the Voting Multiple thereafter applicable to the determination of the number of votes per share to which the holders of shares of the Series A Preferred Stock shall be entitled shall be the Voting Multiple in effect immediately prior to such event multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided in this Articles of Amendment, in any other Articles of Amendment establishing another series of the Preferred 3 Stock (or any series of any other class of capital stock of the Corporation) or by applicable law, the holders of the Series A Preferred Stock, the holders of the Common Stock and the holders of any other class of capital stock of the Corporation having general voting rights shall vote together as a single class on all matters submitted to a vote of the shareholders of the Corporation. (C) Except as otherwise provided in this Articles of Amendment or by applicable law, the holders of the Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent provided in paragraph (B) of this Section 3) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever dividends or other distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding shares of the Series A Preferred Stock shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of any class of capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of any class of capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are accrued and unpaid in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem, purchase or otherwise acquire for consideration any shares of any class of capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) to the Series A Preferred Stock, except that the Corporation may at any time redeem, purchase or otherwise acquire any shares of such junior stock in exchange for other shares of any class of capital 4 stock of the Corporation ranking junior (both as to dividends and upon dissolution, liquidation or winding up of the Corporation) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of the Series A Preferred Stock or any shares of any class of capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) with the Series A Preferred Stock, or redeem any shares of such parity stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board) to the holders of all such shares upon such terms and conditions as the Board, after taking into consideration the respective annual dividend rates and the other relative powers, preferences and rights of the respective series and classes of such shares, shall determine in good faith will result in fair and equitable treatment among the respective holders of shares of all such series and classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of any class of capital stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of the Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such purchase or acquisition. All such cancelled shares shall thereupon become authorized and unissued shares of Preferred Stock and may be reissued as part of any new series of the Preferred Stock, subject to the conditions and restrictions on issuance set forth in the Restated Articles of Incorporation of the Corporation, as amended from time to time, in any other Articles of Amendment establishing another series of the Preferred Stock (or any series of any other class of capital stock of the Corporation) or in any applicable law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation (whether voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made (a) to the holders of shares of any class of capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) to the Series A Preferred Stock unless, prior thereto, the holder of each outstanding share of the Series A Preferred Stock shall have received an amount equal to the accrued 5 and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to an aggregate amount, subject to adjustment as hereinafter provided in this Section 6, equal to the greater of (i) $1.00 and (ii) 100 times the aggregate per share amount to be distributed to the holders of the Common Stock or (b) to the holders of shares of any class of capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up of the Corporation) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event that the Corporation shall at any time after the effective date of this Articles of Amendment (a) declare or pay any dividend on the Common Stock payable in shares of Common Stock or (b) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the aggregate amount per share which the holders of shares of the Series A Preferred Stock shall thereafter be entitled to receive pursuant to clause (a)(ii) of the preceding sentence shall be the aggregate amount per share in effect pursuant to such clause immediately prior to such event multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In the event that the Corporation shall be a party to any consolidation, merger, combination or other transaction in which the outstanding shares of Common Stock are converted or changed into or exchanged for other capital stock, securities, cash or other property, or any combination thereof, then, in each such case, each share of the Series A Preferred Stock shall at the same time be similarly converted or changed into or exchanged for an aggregate amount, subject to adjustment as hereinafter provided in this Section 7, equal to 100 times the aggregate amount of capital stock, securities, cash and/or other property (payable in kind), as the case may be, into which or for which each share of Common Stock is being converted or changed or exchanged. In the event that the Corporation shall at any time after the effective date of this Articles of Amendment (a) declare or pay any dividend on the Common Stock payable in shares of Common Stock or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then, in each such case, the aggregate amount per share which the holders of shares of the Series A Preferred Stock shall thereafter be entitled 6 to receive pursuant to the preceding sentence shall be the aggregate amount per share in effect pursuant to such sentence immediately prior to such event multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of the Series A Preferred Stock shall not be redeemable at any time. Section 9. Rank. Unless otherwise provided in the Articles of Amendment establishing another series of the Preferred Stock after the effective date of this Articles of Amendment, the Series A Preferred Stock shall rank, as to the payment of dividends and the making of any other distribution of assets of the Corporation, senior to the Common Stock, but junior to all other series of the Preferred Stock. Section 10. Amendments. The Restated Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences and rights of the Series A Preferred Stock so as to adversely affect any thereof without the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series A Preferred Stock, voting separately as a single class. Section 11. Fractional Shares. Fractional shares of the Series A Preferred Stock may be issued, but, unless the Board shall otherwise determine, only in multiples of one one-hundredth of a share. The holder of any fractional share of the Series A Preferred Stock shall be entitled to receive dividends, participate in distributions, exercise voting rights and have the benefit of all other powers, preferences and rights relating to the Series A Preferred Stock in the same proportion as such fractional share bears to a whole share. 7 These Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY HOLDINGS COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MEC\HOLDING\AMEND2.ART 12.19.96 8 EX-3.(II) 3 BYLAWS OF MIDAMERICAN ENERGY HOLDINGS COMPANY EXHIBIT 3.2 BYLAWS OF MIDAMERICAN ENERGY HOLDINGS COMPANY (an Iowa Corporation) ARTICLE I. Offices. Section 1. PRINCIPAL OFFICE. The principal office of the Corporation shall be in the City of Des Moines, Polk County, Iowa. The Corporation may also have an office or offices at such other place or places either within or without the State of Iowa as the Board of Directors from time to time may determine or the business of the Corporation may require. Section 2. REGISTERED OFFICE. The registered office of the Corporation required by the Iowa Business Corporation Act to be maintained in the State of Iowa may be, but need not be, the same as the principal office of the Corporation in the State of Iowa, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II. Shareholders' Meetings. Section 1. PLACE. All meetings of the shareholders shall be held in such place as may be ordered by the Board of Directors. Section 2. ANNUAL MEETINGS. The annual meeting of shareholders shall be held on the Wednesday next preceding the last Thursday of April in each year, at ten o'clock in the morning, when they shall elect the Board of Directors and transact such other business as may properly be brought before the meeting. The Board of Directors may, in its discretion, change the date or time, or both, of the annual meeting of shareholders. Section 3. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called by the President, or by a Vice President (under such conditions as are prescribed in these bylaws), or by the Chairman of the Board of Directors (if there be one), or by the Vice Chairman of the Board of Directors (if there be one), or by the Board of Directors. Section 4. NOTICE. Notice, in accordance with the Iowa Business Corporation Act, stating the place, day and hour of the annual meeting and of any special meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given so that it is effective not less than ten (10) nor more than sixty (60) days before the date of the meeting, by or at the direction of the President, or the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. Section 5. RIGHT TO VOTE. Except as provided in Sections 8 and 9 of this Article II, only shareholders owning shares of stock of a class entitled to vote as required by the Iowa Business Corporation Act or as provided in the Articles of Incorporation of record on the books of the Corporation on the day fixed by the Board of Directors for the closing of the stock transfer books of the Corporation prior to any meeting of the shareholders, or, if the stock transfer books be not closed, of record on the books of the Corporation at the close of business on the day fixed by the Board of Directors as the record date for the determination of the shareholders entitled to vote at such meeting, shall be entitled to notice of and shall have the right to vote (either in person or by proxy) at such meeting. Section 6. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATe. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, seventy (70) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy (70) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. Except as provided in the Articles of Amendment to the Articles of Incorporation establishing one or more classes or series of Preferred Stock, if the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date immediately preceding the date on which notice of the meeting is mailed, or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 6, such determination shall apply to any adjournment thereof, except that the Board of Directors must fix a new record date if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. 2 Section 7. VOTING LISTS. The officer having charge of the stock transfer books for shares of stock of the Corporation shall make a complete list of the shareholders entitled to vote at a meeting of shareholders or any adjournment thereof, arranged in alphabetical order, with the registered address of and the number of shares held by each, which list shall be kept on file at the office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours beginning two business days after notice of such meeting is given for which such list was prepared. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirement of this Section 7 shall not affect the validity of any action taken at any such meeting. Section 8. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by a person who is an administrator, executor, guardian or conservator may be voted by such person, either in person or by proxy, without the transfer of such shares into the name of such person. Shares standing in the name of a trustee may be voted by such trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the name of such trustee. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the name of such receiver if authority so to do is contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. On and after the date on which written notice of redemption of redeemable shares has been given to the holders thereof and a sum sufficient to redeem such shares has been deposited with a bank or trust company with irrevocable instruction and authority to pay the redemption price to the holders thereof upon surrender of certificates therefor, such shares shall not be entitled to vote on any matter and shall not be deemed to be outstanding shares. 3 Shares of the Corporation are not entitled to be voted if they are owned, directly or indirectly, by a second corporation, and the Corporation owns, directly or indirectly, a majority of the shares entitled to vote for the election of directors of such second corporation, nor shall any such shares be counted in determining the total number of outstanding shares at any given time. At all meetings of shareholders, a shareholder may vote either in person or by proxy appointment form executed in writing by the shareholder or by the duly authorized attorney-in-fact of such shareholder. Such proxy appointment and any revocation thereof shall be filed with the Secretary of the Corporation. No proxy appointment shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. Section 9. PROXIES. When a valid proxy appointment form is filed with the Secretary of the Corporation, the proxy named therein (or the duly appointed substitute of such proxy, if the proxy appointment permits the appointment of a substitute) shall be entitled to enter and be present at the shareholders' meeting designated in the proxy appointment, and to exercise the power granted to such proxy under such proxy appointment, notwithstanding that the shareholder who gave the proxy appointment is personally present at the meeting, unless and until such proxy appointment is revoked by a written instrument of revocation, stating the time and date of revocation of the proxy appointment, duly signed by the shareholder who executed the proxy appointment, and filed with the Secretary of the Corporation at or prior to the meeting. Subject to any express limitation or restriction in any such proxy appointment contained, a vote, consent or action taken by a proxy prior to revocation thereof, as hereinbefore provided, shall be valid and binding on the shareholder who gave the proxy appointment. Each proxy appointment, and also each instrument of revocation thereof, shall be retained by the Secretary of the Corporation as required by regulatory authorities. Section 10. Quorum. The holders of a majority of the votes of the shares entitled to vote thereat, represented in person or by proxy, shall constitute a quorum for the transaction of business at all meetings of the shareholders except as otherwise provided by the Iowa Business Corporation Act, the Articles of Incorporation or these bylaws. The holders of a majority of the votes of the shares present in person or by proxy at any meeting and entitled to vote thereat shall have power successively to adjourn the meeting to a specified date whether or not a quorum be present. The time and place to which any such adjournment is taken shall be publicly announced at the meeting, and no further notice thereof shall be necessary. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. Section 11. Manner of Voting. Upon demand of any shareholder entitled to vote thereon, the vote on any question before the meeting shall be by ballot. If a quorum is present, the affirmative vote of the holders of a majority of the 4 votes of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Iowa Business Corporation Act or the Articles of Incorporation. Section 12. OFFICERS OF THE MEETING-POWERS. The Chairman of the Board of Directors (if there be one), or in the absence of the Chairman of the Board, the Vice Chairman of the Board (if there be one), or the President of the Corporation shall call meetings of the shareholders to order and shall act as chairman thereof. The Board of Directors may appoint any shareholder to act as chairman of any meeting in the absence of the Chairman of the Board of Directors and the President, and in the case of the failure of the Board to appoint a chairman, the shareholders present at the meeting shall elect a chairman who shall be either a shareholder or a proxy of a shareholder. The Secretary of the Corporation shall act as secretary at all meetings of shareholders. In the absence of the Secretary at any meeting of shareholders, the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 13. POWER OF CHAIRMAN. The chairman of any shareholders' meeting shall have power to determine the eligibility of votes, and may reject votes, whether cast in person or by proxy, as irregular, unauthorized, or not cast in accordance with the Articles of Incorporation or these bylaws. The decisions of such chairman as to such matters shall be final unless challenged from the floor, immediately after being announced and overruled by the vote of the holders of a majority of the votes of the shares represented at the meeting. Such chairman may appoint tellers to count ballots, whenever voting is by ballot. Such chairman shall have power to order any unauthorized persons to leave the meeting and to enforce such orders, and shall have and exercise all power and authority, and perform all duties customarily possessed and performed by the presiding officer of such a meeting. ARTICLE III. Board of Directors. Section 1. POWERS. The business and affairs of the Corporation shall be managed by the Board of Directors. Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors may be increased or decreased from time to time by resolution of the Board of Directors within the range established in the Articles of Incorporation provided no decrease shall have the effect of shortening the term of any incumbent director. A director may but need not be a shareholder or a resident of the State of Iowa. Each director shall be elected to serve until the next 5 annual meeting of the shareholders and until the successor of such director shall be elected or appointed as provided in Section 4 of this Article III, and shall have qualified. Section 3. NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (a) with respect to an election to be held at an annual meeting of shareholders, 90 days in advance of such meeting, and (b) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 4. VACANCIES. In accordance with Article VI of the Articles of Incorporation, if a vacancy in the Board of Directors shall occur, a majority of the remaining directors, though less than a quorum, may appoint a director to fill such vacancy, who shall hold office for the unexpired term of the directorship in respect of which such vacancy occurred or for the full term of any new directorship caused by any increase in the number of members. Section 5. PLACE OF MEETINGS. The Board of Directors may hold its meetings, regular or special, within or without the State of Iowa at such place or places as it may from time to time determine, or as may be specified in the notice of the meeting. Section 6. Time and Place of Meeting. Regular meetings of the Board of Directors shall be held, without notice other than this bylaw, quarterly on the 6 Wednesday next preceding the last Thursday of each January, April, July and October at the principal office of the Corporation in Des Moines at ten o'clock in the morning. The Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President may direct a different date, time or place for the holding of a regular meeting and the Secretary shall advise the directors of any such change at least three days in advance of the meeting date in the manner provided in Section 8 of this Article III. The Chairman of the Board of Directors (if there be one) or the President shall have power to cancel not more than two successive regular meetings of the Board of Directors by causing not less than one day's notice of such cancellation to be given to the directors. Section 7. Special Meetings. Special meetings of the Board of Directors for any purpose or purposes may be called by the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), by the President or a majority of the members of the Board, and shall be held at such place as may be fixed by the person or persons calling such meeting and as shall be specified in the notice of such meeting. The Secretary or an assistant secretary shall give not less than two days' notice of the date, time and place of each such meeting to each director in the manner provided in Section 8 of this Article III. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice given, or waiver of notice obtained, of such meeting as provided in Section 8 or 9, as the case may be, of Article III. Section 8. Manner of Giving Notice of Meetings. Notice of any special meeting of the Board of Directors may be given to any director by telephone, facsimile or by telegram addressed to such director at such address as last appears in the records of the Secretary of the Corporation or by mail by depositing the same in the post office or letter box in a postpaid, sealed envelope addressed to such director at such address. It shall be the duty of every director to furnish the Secretary of the Corporation with the post office address of such director and to notify the Secretary of any change therein. Section 9. WAIVER OF NOTICE. Whenever any notice is required to be given to directors under the provisions of the Iowa Business Corporation Act or of the Articles of Incorporation or these bylaws, a waiver thereof in writing signed by the director entitled to such notice, whether before, at or after the time stated therein, shall be deemed equivalent thereto. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. 7 Section 10. QUORUM. At all meetings of the Board of Directors, a majority of the number of directors fixed by these bylaws shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by the Iowa Business Corporation Act or by the Articles of Incorporation or by these bylaws. If a quorum shall not be present at any meeting of directors, the director or directors present may adjourn the meeting to a specified time, without notice other than announcement at the meeting. Section 11. Conduct of Meetings. The Chairman of the Board of Directors (if there be one) or, in the absence of the Chairman of the Board, the Vice Chairman of the Board (if there be one), or the President of the Corporation shall act as the presiding officer at Board of Director meetings, and the Secretary or an assistant secretary of the Corporation shall act as the secretary of the meeting. In the absence of the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), and the President, the Board of Directors may appoint a director to act as the presiding officer. The presiding officer at Board of Director meetings shall be entitled to vote as a director on all questions. Minutes of all meetings of the Board of Directors shall be permanently kept by the Secretary, and all minutes shall be signed by the secretary of the meeting. The Board of Directors shall have power to formulate rules and regulations governing the conduct of Board of Director meetings and the procedure thereat. Section 12. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the number of directors fixed in accordance with Article III, Section 2 of these bylaws, designate from among its members an executive committee, and one or more other committees each of which, to the extent provided in such resolution and permitted by the Iowa Business Corporation Act, shall have and may exercise all the authority of the Board of Directors. Unless otherwise provided by resolution of the Board of Directors, a quorum of each such committee shall consist of a majority of its members, and if a quorum is present when a vote is taken, the affirmative vote of a majority of the members present shall be the act of such committee. Section 13. COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix the compensation of directors. Any director may serve the Corporation in any other capacity and receive compensation therefor. Section 14. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. (a) Right to Indemnification. Each person who was or is a party or is 8 threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative or arbitration and whether formal or informal ("proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Iowa Business Corporation Act, as the same exists or may hereafter be amended, (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Iowa Business Corporation Act permitted the Corporation to provide prior to such amendment), against all reasonable expenses, liability and loss(including, without limitation, attorneys' fees, all costs, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, the payment of such expenses incurred by a director, officer or employee in his or her capacity as a director, officer or employee (and not in any other capacity in which service was or is rendered by such person while a director, officer or employee including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of (i) a written undertaking, by or on behalf of such director, officer or employee to repay all amounts so advanced if it should be determined ultimately that such director, officer or employee is not entitled to be indemnified under this Section or otherwise, or (ii) a written affirmation by or on behalf of such director, officer or employee that, in such person's good faith belief, such person has met the standards of conduct set forth in the Iowa Business Corporation Act. (b) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expenses of prosecuting such claim. It shall be a defense to any such action that the claimant has not met the standards of conduct which make it permissible under the Iowa Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. The failure of the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he 9 or she has met the applicable standard of conduct set forth in the Iowa Business Corporation Act, shall not be a defense to the action or create a presumption that claimant had not met the applicable standard of conduct. (c) BENEFIT. Indemnification provided hereunder shall, in the case of the death of the person entitled to indemnification, inure to the benefit of such person's heirs, executors or other lawful representatives. The invalidity or unenforceability of any provision of this Section 14 shall not affect the validity or enforceability of any other provision of this Section 14. (d) CERTAIN ACTIONS; PRESUMPTION OF STANDARD OF CONDUCT. Any action taken or omitted to be taken by (i) any director, officer or employee in good faith and in compliance with or pursuant to any order, determination, approval or permission made or given by a commission, board, official or other agency of the United States or of any state or other governmental authority with respect to the property or affairs of the Corporation or any such business corporation, not-for-profit corporation, joint venture, trade association or other entity over which such commission, board, official or agency has jurisdiction or authority or purports to have jurisdiction or authority or (ii) by any director of the Corporation pursuant to Section D of Article VIII of the Restated Articles of Incorporation, as amended, shall be presumed to be in compliance with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act whether or not, in the case of clause (i), it may thereafter be determined that such order, determination, approval or permission was unauthorized, erroneous, unlawful or otherwise improper. (e) LITIGATION; PRESUMPTION OF STANDARD OF CONDUCT. Unless finally determined, the termination of any litigation, whether by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the action taken or omitted to be taken by the person seeking indemnification did not comply with the standard of conduct set forth in Section 490.851 (or successor provision) of the Iowa Business Corporation Act. (f) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by this Section 14 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restated Articles of Incorporation, as amended, bylaws, agreement, vote of shareholders or disinterested directors or otherwise. (g) INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any such director, officer or employee of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Iowa Business Corporation Act. 10 Section 15. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required to be taken at a meeting of the Board of Directors or a committee of directors and any other action which may be taken at a meeting of the Board of Directors or a committee of directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors or all of the members of the committee of directors, as the case may be, entitled to vote with respect to the subject matter thereof. ARTICLE IV. Officers. At the first regular meeting of the Board of Directors following each annual meeting of the shareholders, the Board shall elect a President, one or more Vice Presidents as prescribed by these bylaws, a Secretary and a Treasurer; and the Board may at any meeting elect or appoint a Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, additional vice presidents and other officers or assistants to officers. The Chairman of the Board of Directors (if there be one) and the Vice Chairman of the Board of Directors (if there be one) shall be selected from among the members of the Board. The officers of the Corporation may be, but are not required to be, directors. An officer may, but need not be, a shareholder of the Corporation. Subject to the power of the Board of Directors to remove any officer from office at any time when in its judgment the best interests of the Corporation will be served thereby, each officer shall serve until the successor of such officer is elected or appointed, unless the tenure of such officer is otherwise fixed by the Board of Directors by resolution, contract or agreement for a different period of time. The Board of Directors shall have power to fix the compensation of each officer, to prescribe the duties of such officer, to decrease or increase such compensation, change the nature of such duties, or remove such officer from office and elect or appoint the successor of such officer, in each case subject to the terms of any agreement between such officer and the Corporation. Section 1. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors (if there be one) shall preside at all meetings of the shareholders and of the directors, at which the Chairman is present. The Chairman shall perform all duties incident to the office of Chairman of the Board of Directors and such other duties as, from time to time, may be assigned to the Chairman by the Board of Directors, and, if so designated by an appropriate resolution of the Board of Directors or an agreement between the Chairman and the Corporation, shall be the chief executive officer of the Corporation, subject, however, to the right of the Board of Directors to delegate 11 any specific power to any other officer or officers of the Corporation; and the Chairman shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 2. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of Directors may elect or appoint a Vice Chairman of the Board of Directors who shall, in the absence or disability of the Chairman or in case of vacancy in the office, assume all duties of the Chairman and such other duties as, from time to time, may be assigned to the Vice Chairman by the Board of Directors. Section 3. PRESIDENT. The President of the Corporation shall have general and active management of and exercise general supervision of the business and affairs of the Corporation and, if so designated by an appropriate resolution of the Board of Directors, or an agreement between the President and the Corporation, shall be the chief executive officer of the Corporation, subject, however, to the right of the Board of Directors to delegate any specific power to any other officer or officers of the Corporation; and the President shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have concurrent power with the Chairman of the Board of Directors to sign bonds, mortgages, certificates for shares, and other contracts and documents, except in cases where the signing and execution thereof shall be expressly delegated by law, by the Board of Directors, or by these bylaws to some other officer of the Corporation. In the absence of the Chairman of the Board of Directors or in the event of the disability or refusal of the Chairman to act, and in the absence of the Vice Chairman of the Board of Directors or in the event of the disability or refusal of the Vice Chairman to act, the President shall have such other powers as are vested in the Chairman of the Board of Directors. In general, the President shall perform the duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. Section 4. EXECUTIVE VICE PRESIDENT. The Board of Directors may designate an Executive Vice President who shall, in the absence or disability of the President, or in case of a vacancy in that office, assume all duties of the President. Section 5. VICE PRESIDENTS. The Vice Presidents, including the Executive Vice President and Vice Presidents designated by the Board of Directors as Senior Vice Presidents or Group Vice Presidents, shall perform such of the duties and exercise such of the powers of the President as shall be assigned to them from time to time by the Board of Directors or the President, and shall perform such other duties as the Board of Directors or the President shall from time to time prescribe. Any Vice President may sign certificates for shares of the Corporation and any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, which authorizations may be either specific or general. In case of the death, disability or absence of the Chairman of the Board of Directors (if there be one) and the 12 President and the Executive Vice President, the Senior Vice President or the Group Vice President (or, if there be more than one, the Senior Vice President or the Group Vice President designated by the Board of Directors) shall perform the duties of the President, including interim duties, and when so acting shall have all the powers of and be subject to all restrictions upon the President. Section 6. SECRETARY. The Secretary shall attend all meetings of the shareholders and of the Board of Directors and shall keep the minutes of such meetings. The Secretary shall perform like duties for the standing committees of the Board of Directors when required. Except as otherwise provided by these bylaws or by the Iowa Business Corporation Act, the Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President. The Secretary shall have custody of the minute books, containing the minutes of shareholders' and directors' meetings, of the stock books of the Corporation, and of all corporate records. The Secretary shall have the duty to see that the books, reports, statements, certificates and all other documents and reports of the Corporation required by law are properly prepared, kept and filed. The Secretary shall, in general, perform all duties incident to the office of Secretary. Section 7. ASSISTANT SECRETARIES. The assistant secretaries shall perform such of the duties and exercise such of the powers of the Secretary as shall be assigned to them from time to time by the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President or the Secretary, and shall perform such other duties as the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President shall from time to time prescribe. Section 8. TREASURER. The Treasurer shall have the custody of all moneys, stocks, bonds and other securities of the Corporation, and of all other papers on which moneys are to be received and of all papers which relate to the receipt or delivery of the stocks, bonds, notes and other securities of the Corporation in the possession of the Treasurer. The Treasurer is authorized to receive and receipt for stocks, bonds, notes and other securities belonging to the Corporation or which are received for its account, and to place and keep the same in safety deposit vaults rented for the purpose, or in safes or vaults belonging to the Corporation. The Treasurer is authorized to collect and receive all moneys due the Corporation and to receipt therefor, and to endorse all checks, drafts, vouchers or other instruments for the payment of money payable to the Corporation when necessary or proper and to deposit the same to the credit of the Corporation in such depositaries as the Treasurer may designate for the purpose, and the Treasurer may endorse all commercial documents for or on behalf of the Corporation. The Treasurer is authorized to pay interest on 13 obligations when due and dividends on stock when duly declared and payable. The Treasurer shall, when necessary or proper, disburse the funds of the Corporation, taking proper vouchers for such disbursements. The Treasurer shall cause to be kept in the office of the Treasurer true and full accounts of all receipts and disbursements, and shall render to the Board of Directors and the Chairman of the Board of Directors (if there be one) or the President, whenever they may require it, an account of all the transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall also perform such other duties as may be prescribed by the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President. The Treasurer shall, in general, perform all duties usually incident to the office of Treasurer. Section 9. ASSISTANT TREASURERS. The assistant treasurers shall perform such of the duties and exercise such of the powers of the Treasurer as shall be assigned to them from time to time by the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President or the Treasurer, and shall perform such other duties as the Board of Directors or the Chairman of the Board of Directors (if there be one) or the President shall from time to time prescribe. ARTICLE V. Stock Certificates. Section 1. REGISTRARS AND TRANSFER AGENTS. The Board of Directors shall determine the form of and provide for the issue, registration and transfer of the stock certificates representing stock of the Corporation, and may appoint registrars and transfer agents, who may be natural persons or corporations. The office of any transfer agent or registrar may be maintained within or without the State of Iowa. Section 2. SIGNATURES. Any stock certificates issued by the Corporation shall bear the signatures of the Chairman of the Board of Directors (if there be one), or the Vice Chairman of the Board of Directors (if there be one), or the President or any Vice President and of the Secretary or any Assistant Secretary and such officers are hereby authorized and empowered to sign such certificates when the issuance thereof has been duly authorized by the Board of Directors; provided, however, that if certificates representing shares of any class or series of stock issued by the Corporation are countersigned by manual signature by a transfer agent, other than the Corporation or its employee, or registered by manual signature by a registrar, other than the Corporation or its employee, any other signature on such certificate may be a facsimile, engraved, stamped or printed. In case any person who is an officer who has signed or whose facsimile signature has been placed upon such certificate representing stock of the Corporation shall cease to be such officer of the Corporation before such certificate is issued, such certificate may be issued by the Corporation with the 14 same effect as if such person was such officer at the date of its issue. Section 3. TRANSFERS. Transfers of shares shall be made on the books of the Corporation only by the registered owner thereof (or the legal representative of such owner, upon satisfactory proof of authority therefor), or by the attorney of such owner lawfully constituted in writing by documents filed with the Secretary or transfer agent of the Corporation, and only upon surrender of the certificate to be transferred, or delivery of an order of such owner if such shares are not represented by a certificate, and payment of applicable taxes with respect to such transfer, unless otherwise ordered by the Board of Directors. Section 4. LOST OR DESTROYED CERTIFICATES. New certificates may be issued to replace lost, stolen or destroyed certificates, upon such terms and conditions as the Board of Directors may prescribe. Section 5. RIGHTS OF REGISTERED OWNERS. The Corporation shall be entitled to recognize the exclusive right of a person registered or shown on its books as the owner of shares of its stock to receive dividends or any other distribution thereon, or to vote such shares, and to treat such person as the owner of such shares for all purposes and the Corporation shall not be bound to recognize any equitable or other claim to or interest in its shares on the part of any person other than the registered or record owner thereof, whether or not it shall have notice thereof. ARTICLE VI. General Provisions. Section 1. INSTRUMENTS AFFECTING REAL ESTATE. Deeds, mortgages and other instruments affecting real estate owned by the Corporation, the execution of which has been duly authorized by the Board of Directors, shall be signed on behalf of the Corporation by the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President or any Vice President and by the Secretary or any Assistant Secretary. Leases, contracts to purchase and other instruments whereby the Corporation acquires, in the ordinary course of business, an interest in real estate owned by others may be executed on behalf of the Corporation by the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), the President or by any Vice President so authorized. Section 2. OTHER INSTRUMENTS. Bonds, notes and other secured or unsecured obligations of the Corporation, when duly authorized by the Board of Directors, may be executed on behalf of the Corporation by the Chairman of the Board of Directors (if there be one) the Vice Chairman of the Board of Directors (if there be one), or the President or any Vice President, or by any 15 other officer or officers thereunto duly authorized by the Board of Directors and the signature of any such officer may, if the Board of Directors shall so determine, be a facsimile. Contracts and other instruments entered into executed in the ordinary course of business may be signed on behalf of the Corporation by the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President or by any officer or employee of the Corporation thereunto authorized by the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President, without obtaining specific authorization therefor from the Board of Directors. Section 3. DESTRUCTION OF RECORDS. The Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President or any Vice President appointed by the President to serve in place of the President, the Secretary and the Treasurer shall constitute a committee for the destruction of records and shall meet from time to time at the call of the Secretary who shall be chairman of such committee. It shall have power to order and cause the destruction of any corporate records, the preservation of which has been found by it to be no longer necessary or desirable. Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year. Section 5. ANNUAL REPORT. As soon as practicable after the close of each fiscal year, the Board of Directors shall cause an annual report of the business and affairs of the Corporation to be made to the shareholders. Section 6. NO CORPORATE SEAL. The Corporation shall have no corporate seal. Section 7. STOCK IN OTHER CORPORATIONS. Unless otherwise ordered by the Board of Directors, the Chairman of the Board of Directors (if there be one), the Vice Chairman of the Board of Directors (if there be one), or the President or any Vice President of the Corporation (1) shall have full power and authority to act and vote, in the name and on behalf of the Corporation, at any meeting of shareholders of any corporation in which this Corporation may hold stock, and at any such meeting shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock, and (2) shall have full power and authority to execute, in the name and on behalf of the Corporation, proxies appointing any suitable person or persons to act and to vote at any meeting of shareholders of any corporation in which the Corporation may hold stock, and at any such meeting the person or persons so designated shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock. 16 ARTICLE VII. Amendments. These bylaws may be altered, amended or repealed and new bylaws may be adopted by vote of a majority of the number of directors fixed by these bylaws at any regular or special meeting of the Board of Directors. MEC-1.revbyl 06/22/95 17 AMENDMENT TO THE BYLAWS OF MIDAMERICAN ENERGY HOLDINGS COMPANY DULY ADOPTED BY THE BOARD OF DIRECTORS ON July 24, 1996 RESOLVED, that, effective July 24, 1996, the Bylaws of MidAmerican Energy Holdings Company are hereby amended by adding the following as a second paragraph to Article II, Section 2: Only such business shall be conducted at an annual meeting of shareholders as shall have been properly brought before the meeting. For business to be properly brought before the meeting, it must be: (i) authorized by the Board of Directors and specified in the notice, or a supplemental notice, of the meeting, (ii) otherwise brought before the meeting by or at the direction of the Board of Directors or the Chairman of the meeting or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before the meeting by a shareholder, the shareholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid to the Secretary of the Corporation (a) not later than 120 days in advance of such meeting or (b) if less than 120 days' notice of the meeting or prior public disclosure of the date of the meeting is given or made to shareholders, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth as to each item of business the shareholder proposes to bring before the meeting (1) a brief description of such item and the reasons for conducting such business at the meeting, (2) the name and address, as they appear on the Corporation's records, of the shareholder proposing such business, (3) the class and number of shares of stock of the Corporation which are beneficially owned by the shareholder (for purposes of the regulations under Sections 13 and 14 of the Securities Exchange Act of 1934, as amended) and (4) any material interest of the shareholder in such business. No business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph. The Chairman of the meeting at which any business is proposed by a shareholder shall, if the facts warrant, determine and declare to the meeting that such business was not properly brought before the meeting in accordance with the provisions of this paragraph and, in such event, the business not properly before the meeting shall not be transacted. MEC\HOLDING\BYLAW2.REV EX-3.(I).3 4 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.3 RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 409.1007 of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Restated Articles of Incorporation ("Articles of Incorporation"): ARTICLE I The name of the corporation is "MidAmerican Energy Company" (hereinafter sometimes called the "Corporation") and its registered office shall be located at 666 Grand Avenue, Des Moines, Iowa 50306 with the right to establish and maintain branch offices at such other points within and without the State of Iowa as the Board of Directors of the Corporation may, from time to time, determine. The name of the Corporation's registered agent at such registered office is Paul J. Leighton, Vice President and Corporate Secretary. ARTICLE II The nature of the business or purposes to be conducted or promoted is to engage in any or all lawful act or activity for which a corporation may be incorporated under the Iowa Business Corporation Act. ARTICLE III A. The aggregate number of shares which the Corporation shall have authority to issue is 350,000,000 shares of Common Stock, no par value ("Common Stock"), and 100,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). B. The shares of authorized Common Stock shall be identical in all respects and shall have equal rights and privileges. For all purposes, each registered holder of Common Stock shall, at each meeting of shareholders, be entitled to one vote for each share of Common Stock held, either in person or by proxy duly authorized in writing. Except to the extent required by law or as permitted by these Articles of Incorporation, as amended from time to time, the registered holders of the shares of Common Stock shall have unlimited and exclusive voting rights. C. The Board of Directors, at any time or from time to time, may, and is hereby authorized to, issue and dispose of any of the authorized and unissued shares of Common Stock and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. The holders of Common Stock shall have no preemptive rights to acquire or subscribe to any shares, or securities convertible into shares, of Common Stock. D. The Board of Directors, at any time or from time to time may, and is hereby authorized to, divide the authorized and unissued shares of Preferred Stock into one or more classes or series and in connection with the creation of any class or series to determine, in whole or in part, to the full extent now or hereafter permitted by law, by adopting one or more articles of amendment to the Articles of Incorporation providing for the creation thereof, the designation, preferences, limitations and relative rights of such class or series, which may provide for special, conditional or limited voting rights, or no rights to vote at all, and to issue and dispose of any of such shares and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. E. The Board of Directors, at any time or from time to time may, and is hereby authorized to, create and issue, whether or not in connection with the issuance and sale of any shares of Common Stock, Preferred Stock or other securities of the Corporation, warrants, rights and/or options entitling the holders thereof to purchase from the Corporation any shares of Common Stock, Preferred Stock or other securities of the Corporation. Such warrants, rights or options shall be evidenced by such instrument or instruments as shall be approved by the Board of Directors of the Corporation. The terms upon which, the time or times (which may be limited or unlimited in duration) at or within which, and the price or prices (which shall be not less than the minimum amount prescribed by law, if any) at which any such shares or other securities may be purchased from the Corporation upon the exercise of any such warrant, right or option shall be fixed and stated in the resolution or resolutions of the Board of Directors providing for the creation and issuance of such warrants, rights or options. The Board of Directors is hereby authorized to create and issue any such warrants, rights or options from time to time for such consideration, if any, and to such persons, firms or corporations, as the Board of Directors may determine. F. The Corporation may authorize the issuance of some or all of the shares of any or all of the classes of its capital stock without certificates. G. The Corporation shall not be required to issue certificates representing any fraction or fractions of a share of stock of any class but may issue in lieu thereof one or more non-dividend bearing and non-voting scrip certificates in such form or forms as shall be approved by the Board of Directors, each scrip certificate representing a fractional interest in one share of stock of any class. Such scrip certificates upon presentation together with similar scrip certificates representing in the aggregate an interest in one or more full shares of stock of any class shall entitle the holders thereof to receive one or more full shares of stock of such class. Such scrip certificates may contain such 2 terms and conditions as shall be fixed by the Board of Directors and may become void and of no effect after a period to be determined by the Board of Directors and to be specified in such scrip certificates. H. The Corporation shall be entitled to treat the person in whose name any share of Common Stock or Preferred Stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any person, whether or not the Corporation shall have notice thereof except as may be expressly provided otherwise by the laws of the State of Iowa. ARTICLE IV The term of corporate existence of the Corporation shall be perpetual. ARTICLE V A. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors. The number of directors of the Corporation shall be fixed by the Bylaws but shall be no less than ten (10) and no greater than twenty-two (22), and such number may be increased or decreased from time to time in accordance with the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors shall be elected by the shareholders at each annual meeting of the Corporation as specified herein and in the Bylaws. Directors need not be shareholders. B. Each director shall serve until his or her successor is elected and qualified or until his or her prior death, retirement, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a director or through an increase in the number of directors, such vacancy shall be filled solely by a majority vote of the remaining directors though less than a quorum of the Board of Directors. A director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the Board of Directors. C. Any director or the entire Board of Directors may be removed for cause as set forth in this paragraph C. Removal of a director for cause must be approved by the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, only at a meeting called for the purpose of removing the director and after notice stating that the purpose, or one of the purposes, of the meeting is removal of the director. Any action for removal of a director must be taken within one year of such cause. 3 D. The Board of Directors, by a vote of a majority of the entire Board of Directors, may appoint from the directors an executive committee and such other committees as they may deem judicious; and to such extent as shall be provided in the resolution of the Board of Directors or in the Bylaws, may delegate to such committees all or any of the powers of the Board of Directors which may be lawfully delegated, and such committees shall have and thereupon may exercise all or any of the powers so delegated to them. The Board of Directors or the Bylaws may provide the number of members necessary to constitute a quorum of any committee and the number of affirmative votes necessary for action by any committee. E. The Board of Directors shall elect such officers of the Corporation as specified in the Bylaws. All vacancies in the offices of the Corporation shall be filled by the Board of Directors. The Board of Directors shall also have authority to appoint such other managing officers as they may from time to time determine. ARTICLE VI Special meetings of shareholders of the Corporation may be called at any time by the Chairman of the Board of Directors or by the President on at least ten days' notice to each shareholder entitled to vote at the special meeting, by mail at such shareholder's last known post office address, specifying the time, place and purpose or purposes of the special meeting. ARTICLE VII The private property of the shareholders of the Corporation shall be exempt from all corporate debts. ARTICLE VIII A. In addition to any affirmative vote required by law or under any other provision of these Articles of Incorporation: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into any Other Entity (as hereinafter defined); or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Other Entity of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $25,000,000 or more; or 4 (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Other Entity in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $25,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation; or (v) any reclassification of securities (including any reverse stock split), recapitalization, reorganization, merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving any Other Entity) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Other Entity; or (vi) any direct or indirect purchase or other acquisition by the Corporation of any equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995) of any class from an Interested Securityholder (as hereinafter defined) who has beneficially owned such securities for less than two years prior to the date of such purchase or any agreement in respect thereof, shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% (excluding, in the case of (i) through (v) above, shares beneficially owned by a 25% Shareholder (as hereinafter defined), and, in the case of (vi) above, shares beneficially owned by such Interested Securityholder) of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article VIII as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of paragraph A of this Article VIII shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of the following subparagraphs 1 and 2 shall have been satisfied. 1. A majority of the Continuing Directors (as hereinafter defined) shall have approved the Business Combination (but only if a majority of the Board of Directors are Continuing Directors); or 5 2. All of the following conditions shall have been met: a. The ratio of: (i) the aggregate amount of the cash and the Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of a particular class or series of Voting Shares in such Business Combination to (ii) the Fair Market Value per share of such class or series of Voting Shares on the date of the first public announcement of such Business Combination or the date on which any 25% Shareholder became a 25% Shareholder, whichever is higher is at least as great as the ratio (which ratio shall equal the number one in the event that such 25% Shareholder has never beneficially owned any shares of such class or series of Voting Shares) of (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such 25% Shareholder has theretofore paid for any share of such class or series of Voting Shares acquired by it to (y) the Fair Market Value per share of such class or series of Voting Shares on the date of the initial acquisition by such 25% Shareholder of any share of such class or series of Voting Shares; b. The aggregate amount of the cash and Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of each class or series of Preferred Stock in such Business Combination is not less than the highest preferential amount per share to which holders of shares of such class or series of Preferred Stock would, respectively, be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event; 6 c. The consideration to be received by holders of a particular class or series of Voting Shares in such Business Combination shall be in cash or in the same form and of the same kind as the consideration paid by the 25% Shareholder in acquiring the shares of such class or series of Voting Shares already owned by it; d. After such 25% Shareholder has acquired ownership of not less than 25% of the then outstanding Voting Shares (a "25% Interest") and prior to the consummation of such Business Combination: (i) the 25% Shareholder shall have taken steps to ensure that the Corporation's Board of Directors includes at all times representation by Continuing Director(s) proportionate to the ratio that the Voting Shares which from time to time are owned by persons who are not 25% Shareholders ("Public Holders") bear to all Voting Shares outstanding at such respective times (with a Continuing Director to occupy any resulting fractional board position); (ii) there shall have been no reduction in the rate of distributions ("Dividends") payable on the Common Stock except as may have been approved by a majority vote of the Continuing Directors; (iii) such 25% Shareholder shall not have acquired any newly issued shares of stock, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to obtaining a 25% Interest or as a result of a pro rata stock Dividend or stock split); and (iv) such 25% Shareholder shall not have acquired any additional Voting Shares or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such 25% Shareholder acquiring its 25% Interest; e. Prior to or upon the consummation of such Business Combination, such 25% Shareholder shall not have (i) received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation, or (ii) made any major change in the Corporation's business or equity capital structure without the unanimous approval of the entire Board of Directors; and f. A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 and the General Rules and Regulations promulgated thereunder shall have been mailed to all holders of Voting Shares for the purpose of soliciting shareholders' approval of such Business Combination. Such proxy statement shall contain at the front thereof in a prominent place, any recommendations 7 as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from a financial point of view, to the holders of Voting Shares other than any 25% Shareholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). C. For the purposes of this Article VIII: 1. The term "Business Combination" shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Article VIII; 2. The term "Other Entity" shall include (a) any 25% Shareholder and (b) any other person (whether or not itself a 25% Shareholder) which after any Business Combination, would be an Affiliate (as hereinafter defined) of any 25% Shareholder; 3. The term "person" shall mean any individual, firm, trust, partnership, association, corporation or other entity; 4. The term "25% Shareholder" shall mean, in respect to any Business Combination, any person (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such transactions, (a) is the beneficial owner, directly or indirectly, of not less than 25% of the Voting Shares, or (b) is an Affiliate of the Corporation and at any time within five years prior thereto was the beneficial owner, directly or indirectly, of not less than 25% of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of capital stock of the Corporation which were at any time within five years prior thereto beneficially owned by any 25% Shareholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; 8 5. A person shall be the beneficial owner of any Voting Shares (a) which such person or any of its Affiliates and Associates (as hereinafter defined) beneficially own, directly or indirectly, or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (c) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; 6. The outstanding Voting Shares shall include shares deemed owned through application of subparagraph 5 of this paragraph C above but shall not include any other Voting Shares which may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise; 7. The term "Continuing Director" shall mean (a) a person who was a member of the Board of Directors elected by the Public Holders prior to the date as of which any 25% Shareholder acquired in excess of 10% of the then outstanding Voting Shares or (b) a person designated (before his or her initial election as a director) as a Continuing Director by a majority of the then Continuing Directors; 8. The term "other consideration to be received" shall include, without limitation, Voting Shares retained by Public Holders in the event of a Business Combination in which the Corporation is the surviving corporation; 9. The terms "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995; 10. The term "Subsidiary" shall mean any corporation or other entity of which a majority of the outstanding voting securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors or otherwise to direct the management and policies, of such corporation or other entity, is owned, directly or indirectly, by the Corporation; 11. The term "Interested Securityholder" shall mean, with respect to any transaction which is referred to in Clause (vi) of paragraph A of this Article VIII, any person 9 (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such transaction, or immediately prior to the consummation of any such transaction, (a) is the beneficial owner, directly or indirectly, of not less than five percent of the Voting Shares, or (b) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than five percent of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of the class of securities to be acquired which were at any time within two years prior thereto beneficially owned by an Interested Securityholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; and 12. The term "Fair Market Value" shall mean (i) in the case of capital stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such capital stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such capital stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such capital stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such capital stock is listed, or, if such capital stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such capital stock during the 30- day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available the fair market value on the date in question of a share of such capital stock as determined by a majority of the Continuing Directors in good faith; and (ii) in the case of property other than cash or capital stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors; provided that any such determination by the Continuing Directors shall only be effective if made at a meeting at which a majority of Continuing Directors is present. D. A majority of the Continuing Directors shall have the power and duty to determine for purposes of this Article VIII, on the basis of information known to them, (i) the number of Voting Shares beneficially owned by any person, (ii) whether a person is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in subparagraph 4 of paragraph C, (iv) whether the assets subject to any Business Combination have an aggregate Fair Market Value of $25,000,000 or more, and (v) such other matters with respect to which a determination is required under this Article VIII. 10 E. Nothing contained in this Article VIII shall be construed to relieve any 25% Shareholder from any fiduciary obligation imposed by law. ARTICLE IX Any amendment, alteration, change or repeal of Article VA, VB and VC, Article VIII or this Article IX of these Articles of Incorporation shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding Voting Shares (as defined in Article VIII), excluding from such affirmative vote shares beneficially owned by any 25% Shareholder or by any Interested Securityholder in the case of an amendment of the provisions of paragraph A of Article VIII that exclude from an affirmative vote required pursuant to such paragraph A shares beneficially owned by 25% Shareholders or shares beneficially owned by Interested Securityholders, as the case may be. ARTICLE X The Board of Directors may make Bylaws and from time to time may alter, amend or repeal any Bylaws; but any Bylaws made by the Board of Directors may be altered or repealed by the shareholders entitled to vote generally at any annual meeting or at any special meeting provided notice of such proposed alteration or repeal be included in the notice of meeting. ARTICLE XI A. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; or (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) for any transaction from which the director derives an improper personal benefit; or (iv) under Section 490.833, or a successor provision, of the Iowa Business Corporation Act. B. If, after the date these Articles of Incorporation are filed with the Secretary of State of the State of Iowa, the Iowa Business Corporation Act is amended to authorize corporate action 11 further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be deemed eliminated or limited to the fullest extent permitted by the Iowa Business Corporation Act, as so amended. Any repeal or modification of Section A or Section B of this Article XI, by the shareholders of the Corporation shall be prospective only and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XII A. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative, investigative, or arbitration and whether formal or informal ("proceeding"), by reasons of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Iowa Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Iowa Business Corporation Act permitted the Corporation to provide prior to such amendment), against all reasonable expenses, liability and loss (including, without limitation, attorneys' fees, all costs, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director, officer or employee in his or her capacity as a director, officer or employee (and not in any other capacity in which service was or is rendered by such person while a director, officer or employee including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of (i) a written undertaking, by or on behalf of such director, officer or employee, to repay all amounts so advanced if it should be determined ultimately that such director, officer or employee is not entitled to be indemnified under this Article XII or otherwise, or (ii) a written affirmation by or on behalf of such director, officer or employee that, in such person's good faith belief, such person has met the standards of conduct set forth in the Iowa Business Corporation Act. B. If a claim under Section A is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to also be paid the expenses of prosecuting such claim. It shall be a defense to any such action that the claimant has not met the standards of conduct which 12 make it permissible under the Iowa Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. The failure of the Corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Iowa Business Corporation Act, shall not be a defense to the action or create a presumption that the claimant had not met the applicable standard of conduct. C. Indemnification provided hereunder shall, in the case of the death of the person entitled to indemnification, inure to the benefit of such person's heirs, executors or other lawful representatives. The invalidity or unenforceability of any provision of this Article XII shall not affect the validity or enforceability of any other provision of this Article XII. D. Any action taken or omitted to be taken by (i) any director, officer or employee in good faith and in compliance with or pursuant to any order, determination, approval or permission made or given by a commission, board, official or other agency of the United States or of any state or other governmental authority with respect to the property or affairs of the Corporation or any such business corporation, not-for-profit corporation, joint venture, trade association or other entity over which such commission, board, official or agency has jurisdiction or authority or purports to have jurisdiction or authority or (ii) by any director of the Corporation pursuant to Section D of Article VIII shall be presumed to be in compliance with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act whether or not, in the case of clause (i), it may thereafter be determined that such order, determination, approval or permission was unauthorized, erroneous, unlawful or otherwise improper. E. Unless finally determined, the termination of any litigation, whether by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the action taken or omitted to be taken by the person seeking indemnification did not comply with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act. F. The rights conferred on any person by this Article XII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. G. The Corporation may maintain insurance, at its expense, to protect itself and any such director, officer or employee of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Iowa Business Corporation Act. 13 The duly adopted Restated Articles of Incorporation supersede the original Articles of Incorporation and all amendments thereto. The Restated Articles of Incorporation amend the Articles of Incorporation requiring shareholder approval. The Restated Articles of Incorporation were approved by the shareholders. The designation, number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the Restated Articles of Incorporation, and the number of votes of each voting group indisputably represented are as follows: Votes Entitled Designation Shares To Be Cast On Votes Represented Of Group Outstanding Restated Articles at Meeting - - ----------- ----------- ----------------- ----------------- Common Stock 1,000 1,000 1,000 The total number of undisputed votes cast for and against the Restated Articles of Incorporation by each voting group entitled to vote separately on the Restated Articles of Incorporation are as follows: Voting Group Votes For Votes Against - - ------------ --------- ------------- Common Stock 1,000 0 The number of votes cast for the Restated Articles of Incorporation by each voting group was sufficient for approval by that voting group. These Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ PAUL J. LEIGHTON ---------------------------------- Paul J. Leighton, Vice President and Secretary MER-141.rev 06/22/95 14 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of June 30, 1995, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation ("Articles of Incorporation") of the Corporation, determining certain terms of its class of shares designated in Article III of its Articles of Incorporation as Preferred Stock, no par value ("Preferred Stock"), and creating and determining the terms of the ten series of Preferred Stock (collectively, the "Merger Series") to be issued on the date on which the merger ("Merger") of Midwest Resources Inc., an Iowa corporation ("Midwest Resources"), Midwest Power Systems Inc., an Iowa corporation ("Midwest Power"), and Iowa-Illinois Gas and Electric Company, an Illinois corporation ("Iowa-Illinois"), with and into the Corporation becomes effective ("Effective Date of the Merger"), upon the conversion of (i) all shares of each series of Midwest Power Preferred Stock, no par value ("Midwest Power Preferred Stock"), into shares of a particular series of Preferred Stock, and (ii) all shares of each series of Iowa-Illinois Preference Shares, without par value ("Iowa-Illinois Preference Stock"), into shares of a particular series of Preferred Stock, including the certain preferences, limitations and relative rights of holders of shares of Preferred Stock, and the designation, preferences, limitations and relative rights of each Merger Series. 3. The text of the Amendment determining the terms of the Preferred Stock and the terms of each Merger Series, is as follows: A. Designations. Each Merger Series is given one of the following distinguishing designations: $1.7375 Series $3.30 Series $3.75 Series $3.90 Series $4.20 Series $4.35 Series $4.40 Series $4.80 Series $5.25 Series $7.80 Series B. Number of Shares. Each Merger Series shall consist of the following number of shares of Preferred Stock: Series Number of Shares -------------- ---------------- $1.7375 Series 2,400,000 $3.30 Series 49,622 $3.75 Series 38,320 $3.90 Series 32,630 $4.20 Series 47,369 $4.35 Series 49,950 $4.40 Series 50,000 $4.80 Series 49,898 $5.25 Series 100,000 $7.80 Series 400,000 C. Distributions ("Dividends"). (1) The holders of the shares of each Merger Series in preference to the holders of Common Stock and the holders of any other shares of the Corporation which rank junior to the Preferred Stock, shall be entitled to receive, but only when and as declared by the Board of Directors, out of any assets legally available therefor, Dividends in lawful money of the United States of America, in the amount per annum set forth in the designation of such Merger Series in these Articles of Amendment creating such Merger Series, and no more. (2) Dividends on the Merger Series shares shall be payable quarterly on the first day of each of the months of March, June, September and December ("Dividend Payment Date") with respect to the quarterly Dividend period ending on the date preceding each such Dividend Payment Date, to shareholders of record as of a date to be fixed by the Board of Directors, not exceeding thirty (30) 2 days and not less than ten (10) days preceding such Dividend Payment Dates; provided, however, that the first Dividend payable on the $5.25 Series and the $7.80 Series shall be paid as follows: (a) if a regular Dividend Payment Date for the shares of Iowa-Illinois Preference Stock which were converted into shares of such Merger Series in the merger of Midwest Resources, Midwest Power and Iowa-Illinois with and into the Corporation ("Iowa-Illinois Payment Date"), occurs after the Effective Date of the Merger but before the first Dividend Payment Date after the Effective Date of the Merger ("First Dividend Payment Date"), then (i) a Dividend shall be paid on the shares of such Merger Series on the Iowa-Illinois Payment Date in the regular quarterly amount, and (ii) a Dividend shall be paid on the shares of such Merger Series on the First Dividend Payment Date, but only in the amount obtained by multiplying the regular quarterly amount of such Dividend by a fraction (A) the numerator of which is the number of days in the period commencing on the Iowa-Illinois Payment Date and ending on and including the day prior to the First Dividend Payment Date, and (B) the denominator of which is the number of days in the period commencing on the Dividend Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date; or (b) if the First Dividend Payment Date occurs before an Iowa-Illinois Payment Date, a Dividend shall be paid on the shares of such Merger Series on the First Dividend Payment Date, but only in the amount obtained by multiplying the regular quarterly amount of such Dividend by a fraction (i) the numerator of which is the number of days in the period commencing on the Iowa-Illinois Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date, and (ii) the denominator of which is the number of days in the period commencing on the Dividend Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date. 3 (3) Except as provided in Section C (2), Dividends on each Merger Series share shall be cumulative from the Dividend Payment Date preceding the Effective Date of the Merger. Accumulations of Dividends shall not bear interest. (4) Except as provided in Section C (2), no Dividend shall be paid upon, or declared and set apart for, any Merger Series share for any quarterly period or portion thereof unless (i) at the same time a like proportionate Dividend for the same quarterly period or portion thereof shall be paid upon, or declared and set aside, for all Merger Series shares and all other shares of Preferred Stock on which Dividends are payable on a Dividend Payment Date and (ii) no Dividends on any other shares of Preferred Stock are accrued and unpaid. (5) So long as any Merger Series shares are outstanding, the Corporation shall not (i) pay or declare or set aside any Dividend or other distribution on any shares of Common Stock or on any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, Dividends or other distributions or upon Liquidation or (ii) purchase, redeem or otherwise acquire for value any shares of Common Stock or such junior shares, in each case unless and until full Dividends have been declared and paid upon or set apart for payment on all shares of Preferred Stock, with respect to all Dividend periods and the Dividend period which includes the date of such Dividend or distribution on Common Stock or such junior shares; provided, however, that the foregoing terms of this Section C (5) shall not apply to the declaration and payment of Dividends or other distributions on any shares of Common Stock or such junior shares if payable solely in shares of Common Stock or such junior shares, nor to the acquisition of shares of Common Stock or such junior shares in exchange for, or through the application of the proceeds of the sale of, any shares of Common Stock or such junior shares. D. Redemption. (1) Subject to the limitations set forth in Section F, the outstanding shares of each Merger Series may be redeemed by the Corporation, at its option, by action of its Board of Directors, as a whole at any time or in part from time to time, by paying in cash on a redemption date specified by the Board of Directors, the following redemption prices, in each case plus an amount equal to accrued and unpaid Dividends thereon to such redemption date: 4 $1.7375 Series: $26.3900 per share on December 1, 1994 through November 30, 1995 $26.0425 per share on December 1, 1995 through November 30, 1996 $25.6950 per share on December 1, 1996 through November 30, 1997 $25.3475 per share on December 1, 1997 through November 30, 1998 $25.000 per share on or after December 1, 1998 $3.30 Series: $101.50 per share $3.75 Series: $102.75 per share $3.90 Series: $105.00 per share $4.20 Series: $103.439 per share $4.35 Series: $102.00 per share $4.40 Series: $101.50 per share $4.80 Series: $102.70 per share $5.25 Series: $101.97 per share on November 1, 1998 through October 31, 1999 $101.31 per share on November 1, 1999 through October 31, 2000 $100.66 per share on November 1, 2000 through October 31, 2001 $100.00 per share on or after November 1, 2001 $7.80 Series: $107.80 per share on May 1, 1996 through April 30, 2001 $103.90 per share on May 1, 2001 through April 30, 2002 $101.95 per share on or after May 1, 2002 provided, however, that (i) prior to December 1, 1998, no shares of the $1.7375 Series may be redeemed through a refunding, directly or indirectly, by or in anticipation of the incurring of any debt which has an interest cost, or the issuance of stock ranking equally with or prior to the $1.7375 Series as to Dividends or assets which has a Dividend cost to the Corporation (computed in accordance with generally accepted financial practice), of less that 7.15% per annum, (ii) prior 5 to November 1, 1998, no shares of the $5.25 Series may be redeemed at the option of the Corporation, and (iii) prior to May 1, 1996, no shares of the $7.80 Series may be redeemed at the option of the Corporation. (2) Subject to the limitations set forth in Section F, the Corporation shall on November 1, 2003 redeem all shares of the $5.25 Series then outstanding at $100.00 per share, plus accrued and unpaid Dividends thereon through October 31, 2003. (3) "Accrued and unpaid Dividends" as used in this Amendment with respect to any Merger Series share means the amount, if any, by which the applicable amount of Dividend per annum from the date after which Dividends on such share become cumulative to the date in question, exceeds the Dividends actually paid or declared and set aside for payment thereon. (4) Notice of any proposed redemption of any Merger Series shares shall be given by the Corporation by mailing a copy of such notice not more than sixty (60) nor less than thirty (30) days prior to the date fixed for such redemption to the holders of record of such shares to be redeemed, at their respective addresses then appearing on the books of the Corporation; but no failure to mail such notice or any defect therein, or in the mailing thereof, shall affect the validity of the proceedings for the redemption of any Merger Series shares so to be redeemed. (5) In case of redemption of only a part of the shares of any Merger Series at the time outstanding, the shares of such Merger Series to be redeemed shall be selected by lot in such manner as the Board of Directors may determine. (6) On the redemption date specified in the notice of such redemption the Corporation shall, and at any time within sixty (60) days prior to such redemption date may, deposit in trust, for the account of the holders of the Merger Series shares to be redeemed, funds necessary for such redemption with a bank or trust company in good standing, organized under the laws of the United State of America or of the State of Iowa, doing business in the City of Des Moines, Iowa, having combined capital, surplus and undivided profits of at least $2,500,000 and designated in such notice of redemption. (7) Notice having been given and funds necessary for such redemption having been deposited, all as provided in this Section D, all Merger Series shares with respect to the redemption of which such notice shall be given and deposit made, shall thenceforth, whether or not the date fixed for such redemption shall have yet occurred, or the certificates for such shares shall have been 6 surrendered for cancellation, be deemed no longer to be outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate except only the right of the holders of the certificates for such shares to receive, out of the funds so deposited in trust, upon or after the redemption date (unless an earlier date is fixed by the Board of Directors), the redemption funds, without interest, to which they are entitled upon endorsement, if required, and surrender of their certificates for such shares. (8) At the expiration of six (6) years after the redemption date such trust shall terminate and any such moneys then remaining on deposit with such bank or trust company which are unclaimed by the holders of the certificates for the Merger Series shares which have been so redeemed, plus interest thereon, if any, shall be paid by such bank or trust company to the Corporation, free of trust, and thereafter the holders of the certificates for such shares shall have no claim against such bank or trust company but only claims as unsecured creditors against the Corporation for the amount payable upon the redemption thereof, without interest. (9) Any interest on or other accretions to funds deposited with such bank or trust company pursuant to this Section D shall belong to the Corporation. E. Sinking Fund. Subject to the limitations set forth in Section F, while any shares of the $7.80 Series shall remain outstanding, the Corporation shall on or before May 1, 2001, and on or before May 1 of each year thereafter to and including May 1, 2005 (each such May 1 being hereinafter in this Section E called a "Sinking Fund Redemption Date"), set aside, separate and apart from its other funds, an amount equal to $6,660,000 (or such lesser amount as may be sufficient to redeem all of the shares of the $7.80 Series then outstanding) as a mandatory sinking fund payment for the exclusive benefit of shares of the $7.80 Series, plus such further amount as shall equal the accrued and unpaid Dividends on the shares of the $7.80 Series to be redeemed out of such payment (as hereinafter in this Section E provided) through the day preceding the applicable Sinking Fund Redemption Date. The obligation of the Corporation to make such payments shall be cumulative, so that if for any reason the full amount thereof shall not be set aside for any year, the amount of the deficiency from time to time shall be added to the amount due from the Corporation on subsequent Sinking Fund Redemption Dates until the deficiency shall have been fully satisfied. The Corporation shall be entitled to credit against any such mandatory sinking fund payment shares of the $7.80 Series redeemed, purchased or otherwise acquired by the Corporation, except through application of any sinking fund payment (whether mandatory or optional), and not theretofore so credited, at the sinking fund redemption price hereinafter specified in this Section E. 7 In addition to the mandatory sinking fund payments required by the immediately preceding paragraph, the Corporation may at its option, in respect of any Sinking Fund Redemption Date, set aside, separate and apart from its other funds, an amount not in excess of $6,660,000 as an optional sinking fund payment for the exclusive benefit of shares of the $7.80 Series, plus such further amount as shall equal the accrued and unpaid Dividends on the shares of the $7.80 Series to be redeemed out of such payment (as hereinafter in this Section E provided) through the day preceding the applicable Sinking Fund Redemption Date. The privilege of making such payments shall not be cumulative, and no such payment shall relieve the Corporation to any extent from its obligation to make any subsequent mandatory sinking fund payment. Any amounts set aside by the Corporation pursuant to this Section E shall be applied on the date of such setting aside if a Sinking Fund Redemption Date or otherwise on the first Sinking Fund Redemption Date occurring thereafter to the redemption of shares of the $7.80 Series at $100.00 per share, plus accrued and unpaid Dividends through the day preceding the applicable Sinking Fund Redemption Date, in the manner and upon the notice provided in Section D. If any Sinking Fund Redemption Date shall be a Saturday, Sunday or other day on which banking institutions in Chicago, Illinois or New York, New York are authorized or obligated to remain closed, such term shall be construed to refer to the next preceding business day. Subject to the limitations stated in Section F, the Corporation shall on May 1, 2006 redeem any shares of the $7.80 Series then outstanding at $100.00 per share, plus accrued and unpaid Dividends through April 30, 2006. F. Repurchase. (1) The Corporation may from time to time purchase or otherwise acquire Merger Series shares at a price not exceeding the amount at the time payable in the event of redemption thereof otherwise than through the operation of the applicable sinking fund, if any. (2) If and so long as the Corporation shall be in default in the payment of any quarterly Dividend on any Merger Series shares, or shall be in default in the payment of funds into or the setting aside of funds for any sinking fund created for any Merger Series shares, the Corporation shall not (other than by the use of unapplied funds, if any, paid into or set aside for a sinking fund or funds prior to such default): (a) redeem any Merger Series shares, unless all Merger Series shares are redeemed, or 8 (b) purchase or otherwise acquire for a valuable consideration any Merger Series shares, except pursuant to offers of sale made by the holders of Merger Series shares in response to an invitation for tenders given by mail by the Corporation simultaneously to the holders of record of all Merger Series shares then outstanding, at their respective addresses then appearing on the books of the Corporation. G. Preference on Liquidation. (1) Before any distribution of any assets of the Corporation shall be made to the holders of any Common Stock or any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, Dividends or other distributions: (a) in the event of any liquidation, dissolution or winding up ("Liquidation") of the Corporation which is voluntary: (i) the holders of the shares of the $1.7375 Series, $3.30,Series, $3.75 Series, $4.35 Series, $4.40 Series, $4.80 Series, $5.25 Series and $7.80 Series shall b entitled to receive an amount per share equal to the amount which would then be payable upon such share in the event of redemption thereof in accordance with Section D(1), except that prior to November 1, 1998, the holders of the shares of the $5.25 Series shall be entitled to receive $105.25 per share and prior to May 1, 2001, the holders of the shares of the $7.80 Series shall be entitled to receive $107.80 per share, and no more; and (ii) the holders of the shares of the $3.90 Series and $4.20 Series shall be entitled to receive the amount of one hundred dollars ($100) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more. (b) in the event of any Liquidation of the Corporation which is involuntary: (i) the holders of the shares of the $3.30 Series, $3.75 Series, $3.90 Series, $4.20 Series, $4.35 Series, $4.40 Series, $4.80 Series, $5.25 Series and $7.80 Series shall be entitled to receive the amount of one hundred dollars ($100) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more; and 9 (ii) the holders of the shares of the $1.7375 Series shall be entitled to receive the amount of twenty-five dollars ($25.00) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more. (2) If upon any Liquidation the assets distributable among the holders of the shares of Preferred Stock shall be insufficient to permit the payment of the full preferential amounts to which they shall be entitled, then the entire assets of the Corporation to be distributed shall be distributed among the holders of the shares of Preferred Stock then outstanding ratably in proportion to the amounts to which such holders are respectively entitled. (3) If upon any Liquidation the holders of the shares of Preferred Stock shall receive the full preferential amounts to which they shall be entitled, the remaining assets and funds of the Corporation shall be distributed among the holders of the shares of Common Stock and of any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, or Dividends or other distributions, according to their respective rights and preferences and according to their respective shares. (4) Neither a consolidation nor a merger of the Corporation, nor a sale or transfer of substantially all its assets as an entirety, nor a redemption or a purchase or other acquisition by the Corporation of less than all of its shares of any class at the time outstanding, shall be regarded as a Liquidation within the meaning of this Section G. H. Voting Rights. (1) Except to the extent required by law or as permitted by this Section H, the holders of Merger Series shares shall have no voting rights. (2) If at any time Dividends on any Preferred Stock shall be accrued and unpaid in an amount equivalent to six or more full quarterly Dividends, the holders of all shares of Preferred Stock, voting together as a single class for such purpose, shall be entitled until, but only until, all Dividends accrued and unpaid on all shares of Preferred Stock shall have been paid (or deposited in trust for payment on or before the next succeeding Dividend Payment Date with respect to Merger Series shares, and on or before the next succeeding date or dates upon which Dividends are payable on other series of Preferred Stock), to elect two (2) Directors of the Corporation. 10 (3) While the holders of the shares of Preferred Stock remain entitled to elect two (2) Directors of the Corporation, the payment of Dividends on Preferred Stock, including accrued an unpaid Dividends, shall not be unreasonably withheld if the financial condition of the Corporation permits payment thereof. (4) The right of the holders of the shares of Preferred Stock under this Section H to elect two (2) Directors of the Corporation may be exercised at any annual meeting of shareholders or, within the limitations of this Section H, at a special meeting of shareholders held for such purpose; whenever such right shall have become vested, upon request signed by any holder of record of shares of Preferred Stock and delivered to the Corporation at its principal office not less than ninety (90) days prior to the date for the annual meeting next following the date of such vesting, the President of the Corporation shall call a special meeting of shareholders, to be held within sixty (60) days after the receipt of such request, for the purpose of electing a new Board of Directors, of which two (2) shall, subject to the provisions of this Section H, be elected by a vote of the holders of the Preferred Stock to serve until the next annual meeting or until their successors shall be elected and shall qualify. (5) No such special meeting shall be required to be held within 120 days after such a prior special meeting, and the term of office of each Director of the Corporation shall terminate at the time of any such special meeting or adjournment thereof, notwithstanding that the term for which such Director had been elected shall not then have expired, and provided that the successor of such Director is duly elected and qualified. (6) In the event that at any special meeting at which the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors of the Corporation, a quorum of the holders of the shares of Preferred Stock shall not be present in person or by proxy, the holders of Common Stock, if a quorum thereof be present in person or by proxy, shall temporarily elect the Directors of the Corporation, which holders of the shares of Preferred Stock were entitled but failed to elect, such Directors to be designated as having been so elected and their respective terms of office to expire at such times thereafter as their successors shall be elected by holders of the shares of Preferred Stock as provided in this Section H. 11 (7) Whenever the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, any holder of record of a share of Preferred Stock shall have the right, during regular business hours, in person or by a duly authorized representative, to examine the Corporation stock records of the Preferred Stock for the purpose of communicating with other holders of Preferred Stock with respect to the exercise of such right of election, and to make a list of such holders. (8) Whenever, under the terms of this Section H, the holders of the shares of Preferred Stock shall be divested of the right to elect two (2) Directors, upon request signed by any holder of record of Common Stock and delivered to the Corporation at its principal office not less than ninety (90) days prior to the date for the annual meeting next following the date of such divesting, the President of the Corporation shall call a special meeting of the holders of Common Stock to be held within sixty (60) days after the receipt of such request for the purpose of electing a new Board of Directors to serve until the next annual meeting or until their respective successors shall be elected and shall qualify. (9) The term of office of each Director of the Corporation shall terminate at the time of any such special meeting or adjournment thereof at which a quorum of holders of Common Stock shall be present in person or by proxy, notwithstanding that the term for which such Director had been elected shall not then have expired, and provided that the successor to such Director is duly elected and qualified. (10) If, during any interval between annual meetings of shareholders for the election of Directors and while the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, a Director in office who has been elected by the holders of the shares of Preferred Stock, shall, by reason of resignation, death or removal, cease to be a Director, (a) the vacancy or vacancies shall be filled by vote of the remaining Director then in office who was elected by the holders of the shares of Preferred Stock or who succeeded to a Director so elected, and (b) if any vacancy which occurred more than six months prior to the date of the next ensuing annual meeting is not so filled within forty (40) days after the occurrence thereof, the President of the Corporation shall call a special meeting of the holders of the shares of Preferred Stock and such vacancy shall be filled at such special meeting. (11) A Director elected by holders of the shares of Preferred Stock may be removed from office only by vote of the holders of a majority of the votes of the outstanding shares of Preferred Stock. 12 (12) At any annual or special meeting of the shareholders held for any purpose, including the purpose of electing Directors when the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, the presence in person or by proxy of holders of a majority of the votes of the outstanding shares of Preferred Stock shall be required to constitute a quorum of the holders of the shares of Preferred Stock. (13) At any meeting of shareholders at which the holders of the shares of Preferred Stock are required to vote by law or are permitted to vote by any articles of amendment to the Articles of Incorporation, each holder of Merger Series shares shall have one vote for each such Merger Series share except the holders of $1.7375 Series shares, which shall have 1/4 vote for each such $1.7375 Series share, and each holder of shares of each other series of Preferred Stock shall have the number or fraction of votes set forth for each such share in the articles of amendment to the Articles of Incorporation in which the terms of such series are determined, in each case standing in the name of such holder on the books of the Corporation on the record date fixed for such purpose, or, if no record date is fixed, on the date on which such vote is taken. (14) The holders of shares of Preferred Stock shall not be entitled to receive notice of any meeting at which they are not entitled to vote. I. No Preemptive Rights. No holder of Merger Series shares as such shall have any preemptive or preferential right to purchase or subscribe for any shares of stock or rights or options to purchase stock or any other securities of the Corporation of any kind whatsoever whether now or hereafter authorized. 13 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-142 06/22/95 14 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of December 13, 1995, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, cancelling the following Preferred Stock: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 7 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,615 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-145 12/21/1995 ARTICLES OF CORRECTION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to section 124 of the Iowa Business Corporation Act, the undersigned corporation adopts the following articles of correction. 1. The name of the corporation is MidAmerican Energy Company. 2. The document to be corrected is the Articles of Amendment to the Restated Articles of Incorporation of MidAmerican Energy Company. 3. The document to be corrected was filed by the secretary of state on December 28, 1995. 4. The incorrect statements in the document to be corrected are as follows: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 7 Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,615 5. The reason that the document is incorrect is due to the fact that the 7 should have been 99 and the 49,615 should have been 49,523. 6. The corrected statement is as follows: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 99 Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,523 MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-145a 01/18/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of April 23, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, cancelling the following Preferred Stock: Series Number of Shares Cancelled ------ -------------------------- $1.7375 Series 350,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 2,050,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-146.wpd 04/23/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of July 24, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following Preferred Stock: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 119,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 1,931,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-147.wpd 07/18/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of October 30, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following Preferred Stock: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 43,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 1,888,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-148.wpd 10/11/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On January 22, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 1,888,0000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 0 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-149.wpd 01.30.97 EX-10.1 5 SEVERANCE PLAN FOR SPECIFIED OFFICERS EXHIBIT 10.1 12/18/96 MIDAMERICAN ENERGY COMPANY SEVERANCE PLAN FOR SPECIFIED OFFICERS DATED NOVEMBER 1, 1996 1. Purpose The purpose of this Severance Plan adopted this first day of November, 1996 by MidAmerican Energy Company (the "Company") is to encourage the continued attention and dedication of the Specified Officers to their assigned duties, without distraction, in the face of the potentially disruptive forces present in an industry undergoing fundamental marketplace changes. 2. Qualification for Severance Benefits A Specified Officer shall be entitled to receive Severance Benefits if such Specified Officer incurs a Qualifying Termination under Section 4(a). Further, in the event of a section 4(b) Qualifying Termination, the Specified Officer must resign within the twenty-four (24) month period referred to in that section in order to be entitled to receive Severance Benefits. No Severance Benefits shall become due or payable unless and until the conditions of this section occur. 3. Specified Officers The persons who are potentially eligible to receive benefits under this Severance Plan are set forth on Appendix I, attached hereto and incorporated herein. Those persons are herein referred as "Specified Officers." A Specified Officer becomes enrolled in this Severance Plan only upon the execution of a release and waiver ("Release and Wavier") in the form set forth in Appendix II, attached hereto and incorporated herein. 4. Qualifying Termination For the purpose of this Severance Plan, a "Qualifying Termination" shall mean (a) the involuntary termination of employment of a Specified Officer for any reason, except for a felony situation as provided in this Section; or (b) a voluntary termination of employment within twenty-four (24) full calendar months after a Change of Control, should a Specified Officer's (i) job reporting location be changed by more than thirty (30) miles, (ii) total cash compensation opportunity be reduced or (iii) duties and responsibilities be substantially reduced. "Change in Control" shall mean either (a) the closing date of the restructuring of the Company as a result of mergers, consolidations, takeover or reorganization unless at least sixty 1 12/18/96 percent (60%) of the members of the Board of Directors of the corporation or other entity resulting from such merger, consolidation, takeover or reorganization were members of the Incumbent Board or (b) any occurrence or any other event that is designated as being a "Change in Control" by a majority vote of the directors of the Incumbent Board who are not also employees of the Company. "Incumbent Board" shall mean the members of the Board of Directors of the Company on November 1, 1996. For this purpose, an individual who becomes a member of the Board subsequent to November 1, 1996 and who has been nominated for election by the Company's shareholders by resolution adopted by a vote of at least two-thirds (66-2/3%) of the directors then comprising the Incumbent Board at a duly convened meeting thereof shall be deemed to be a member of the Incumbent Board. Termination of employment due, in whole or in part, to the commission and conviction of a felony by a Specified Officer shall not constitute a Qualifying Termination under this Severance Plan. All Severance Benefits for a Specified Officer charged with a felony shall be suspended until such time as the felony charge is finally disposed. Conviction of a felony shall be sufficient to disqualify the Specified Officer for Severance Benefits. A plea of no contest to a felony charge shall not be sufficient to disqualify the Specified Officer for Severance Benefits. 5. Severance Benefits For the purpose of this Severance Plan, "Severance Benefits" shall mean: a. an amount equal to two (2) times the Specified Officer's highest Total Cash Compensation, said amount to be paid in a lump sum on the effective date of his/her Qualifying Termination (except in the circumstance of a felony situation as provided above); and b. the Specified Officer's accrued vacation pay through the effective date of his/her Qualifying Termination, said amount to be paid in a lump sum on the effective date of such Qualifying Termination; and c. continuation of health and term life for twenty-four (24) full calendar months after the effective date of the Specified Officer's Qualifying Termination at the same cost and at the same or substantially similar coverage levels as are in effect under the Company's group plans on such effective date; provided, however, in the event the cost and/or coverage level shall change under the Company's group plans at any time during the twenty-four (24) month period the level likewise shall change for such Specified Officer in a corresponding manner; and 2 12/18/96 d. standard outplacement services from a nationally recognized firm of the Specified Officer's selection for a period up to twenty-four (24) full calendar months after the effective date of the Qualifying Termination or until such Specified Officer obtains employment, whichever is less. The cost of such services shall not exceed twenty percent (20%) of the Specified Officer's Total Cash Compensation. 6. Term This Severance Plan shall be effective as of November 1, 1996 and continue thereafter through December 31, 2001. The Plan may be terminated or amended at any time; provided, however, that such a termination or amendment shall not affect the Severance Benefits to be provided under the Plan for any Specified Officer listed on Appendix I without the express written consent of such Specified Officer. 7. Total Cash Compensation The term "Total Cash Compensation" shall mean the amount payable to a Specified Officer by the Company or its predecessors as annual salary and Bonus, without regard to deferrals. For the purpose of this Plan, "Bonus" shall mean the larger of (i) the three-year average of bonuses actually paid to the Specified Officer or (ii) the three-year average of accruals to the account of the Specified Officer under any Key Employee Annual Incentive Plan. In the event that less than three years of payments or accruals have occurred, then the average of any payments or accruals, respectively, shall be used. 8. Taxes A. The corporation paying the Severance Benefits shall be entitled to withhold all federal, state, local, or other taxes legally imposed, subject to subparagraphs B, C and D hereof. B. In the event any of the Severance Benefits payable to a Specified Officer are subject to the tax ("Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986 (or any similar tax that may hereafter be imposed) ("Code"), the corporation paying such Severance Benefits shall pay to the Specified Officer in cash an additional amount ("Gross-Up Payment") such that the net amount retained by the Specified Officer after deduction of any Excise Tax payable on the Severance Benefits and any federal, state, and local income tax and Excise Tax payable upon the Gross-Up Payment shall be equal to the Severance Benefits. Such Gross-Up Payment shall be made by the corporation to the Specified Officer on the effective date of his/her Qualifying Termination. 3 12/18/96 C. For the purpose of determining whether any of the Severance Benefits will be subject to the Excise Tax and the amount of such Excise Tax: (a) any other payments of benefits received or to be received by a Specified Officer in connection with his/her termination of employment (whether pursuant to the terms of this Plan or any other plan, arrangement, or agreement) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280(G)(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel, selected by such Specified Officer, such other payments or benefits (in whole or in part) do not constitute parachute payments, or that such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) in excess of the base amount within the meaning of Section 280G(b)(3), or are otherwise not subject to the Excise Tax; and (b) the amount of Severance Benefits which shall be treated as subject to the Excise Tax shall be equal to the lesser of: (i) the total amount of Severance Benefits; or (ii) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (a) above); and (c) the value of any noncash benefits or any deferred payment or benefit shall be determined by the independent auditors of the corporation paying such Severance Benefits in accordance with the principles of Sections 280G(d) of the Code and applicable regulations. For the purpose of determining the amount of the Gross-Up Payment, the Specified Officer shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which such Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Specified Officer's residence on the effective date of his/her Qualifying Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. D. In the event the Internal Revenue Service adjusts the computations under paragraph C hereof such that the Specified Officer does not receive the maximum Severance Benefits (including Gross-Up Payment) permitted by this Plan, the corporation paying such Severance Benefits shall reimburse the Specified Officer 4 12/18/96 for the full amount necessary to make him/her whole, plus interest from the date such additional Severance Benefits became due to the date of such payment at the prime rate as may be established by The First National Bank of Chicago from time-to-time. 9. Employment Status In no event shall any Specified Officer be obligated to seek other employment or to take other action by way of mitigation of the amounts payable to such Officer under the provisions of this Severance Plan, nor shall the amount of any payment hereunder be reduced by any compensation earned by such Specified Officer as a result of employment by another employer. Nothing herein contained shall be deemed to create an employment agreement with the Specified Officer providing for the employment of such Specified Officer for any fixed period of time. 10. Other Benefits Except to the extent provided in the Release and Waiver, neither the provisions of this Severance Plan nor the right to receive Severance Benefits shall reduce any amounts otherwise payable to any Specified Officer or in any way diminish his/her rights under any benefit, bonus, incentive, stock option, stock bonus or other stock purchase plan, or any employee agreement, or any other plan, program policy or practice for which the Specified Officer may qualify. Except to the extent provided in the Release and Waiver, vested benefits and other amounts which the Specified Officer is otherwise entitled to receive under any plan, program, policy or practice at or subsequent to the effective date of such Specified Officer's Qualifying Termination shall be payable in accordance with such plan, program, policy or practice. 11. Contractual Rights This Plan establishes in each Specified Officer a right to the benefits to which he or she is entitled hereunder. This Plan shall inure to the benefit of, and be enforceable by, each Specified Officer's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If a Specified Officer dies while any Severance Benefits would still be payable to him/her under this Severance Plan, all such unpaid amounts shall be paid to such Specified Officer's designated beneficiaries or, in the absence thereof, to such Specified Officer's estate. 5 12/18/96 12. No Separate Fund Required Nothing herein contained shall require or be deemed to require, or prohibit or be deemed to prohibit, that the Company segregate or otherwise set aside any funds or other assets, in trust or otherwise, to provide for the payment of Severance Benefits. 13. Legal Remedies A. To the extent permitted by law, the corporation obligated to pay any Severance Benefits shall pay all legal fees, cost of litigation, prejudgment interest, and other expenses incurred in good faith by each Specified Officer as a result of such corporation's refusal to provide the Severance Benefits to which the Specified Officer becomes entitled under this Plan, or as a result of such corporation's contesting the validity, enforceability, or interpretation of this Plan, or as a result of any conflict pertaining to this Plan, regardless of whether the Specified Officer prevails. B. Each Specified Officer shall have the right and option to elect (in lieu of litigation) to have any dispute or controversy arising under or in connection with this Plan settled by arbitration conducted by an arbitrator in accordance with the rules of the American Arbitration Association then in effect. A Specified Officer's election to arbitrate and the decision of the arbitrator in that proceeding shall be binding on the parties to such arbitration. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Specified Officer, shall be borne by the corporation which is the party to the arbitration. 14. Severability In the event any provision of this Severance Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not effect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 15. Successors and Assigns This Severance Plan for all enrolled Specified Officers shall be binding upon the Company, its successors and assigns in accordance with its terms. 6 12/18/96 16. Captions The captions of this Severance Plan are not a part of the provisions hereof and shall have no force and effect. 17. Applicable Law This Severance Plan shall be interpreted in accordance with the laws of the State of Iowa. 7 12/18/96 APPENDIX I LIST OF SPECIFIED OFFICERS B. E. Gale S. E. Hollonbeck D. J. Levy P. G. Lindner J. A. Rasmussen S. E. Shelton R. W. Stepien B. A. Wharton 8 12/18/96 APPENDIX II FORM OF RELEASE AND WAIVER In consideration of the undersigned Specified Officer's voluntary execution and delivery of this Release and Waiver, the undersigned Specified Officer relinquishes all right, interest and claim under the Severance Plan for Specified Officers associated with the merger of Midwest Resources Inc., Midwest Power Systems Inc. and Iowa-Illinois Gas and Electric Company with and into MidAmerican Energy Company and the Severance Plan in the event of a Change In Control of Iowa-Illinois Gas and Electric Company (the "Predecessor Plans"), and hereby becomes a participant in the MidAmerican Energy Company Severance Plan for Specified Officers, dated November 1, 1996 and is hereby granted (i) three years of additional credit under the MidAmerican Energy Company Supplemental Retirement Plan for Designated Officers and any other similar plan of a predecessor to MidAmerican Energy Company under which a Specified Officer is entitled to participate and (ii) a retention bonus, both (i) and (ii) are more fully described on Exhibit A attached hereto and made a part hereof by this reference. By execution of this Release and Waiver, (x) the undersigned Specified Officer specifically, voluntarily and irrevocably waives all right, interest, and claim to benefits by, through, or under the Predecessor Plans and releases Iowa-Illinois Gas and Electric Company, Midwest Resources, Inc., Midwest Power Systems Inc., MidAmerican Energy Company, their respective directors, officers and employees and such parties' respective successors and assigns with respect to any right, interest or claim in and to benefits by, through or under the Predecessor Plans and (y) MidAmerican Energy Company, its successors and assigns, becomes obligated to the undersigned Specified Officer in accordance with the terms of the MidAmerican Energy Company Severance Plan for Specified Officers, dated November 1, 1996 and for three years of additional credit and for a retention bonus as described in (i) and (ii) of the preceding paragraph and Exhibit A. Dated this ___________ day of _______________________, 1996 MidAmerican Energy Company by _______________________________________ __________________________________________ Specified Officer 9 12/18/96 EXHIBIT A Supplemental Executive Retirement Plan Enhancement Each Specified Officer is hereby granted three years of additional credit under the Supplemental Retirement Plan For Designated Officers of MidAmerican Energy Company and any other similar plan of a predecessor to MidAmerican Energy Company under which a Specified Officer is entitled to participate, which credit may be used, at the election of the Specified Officer, to reflect additional covered service or increase assumed age at retirement. Retention Bonus MidAmerican Energy Company hereby grants each Specified Officer a retention bonus, conditioned upon being in the employment of MidAmerican Energy Company or one of its corporate affiliates on the dates specified below, and in the amounts specified below: ANNUAL BASE SALARY AS OF DATE NOVEMBER 1, 1996 ------ ------------------------ 1-1-98 33 1/3% 1-1-99 33 1/3% 1-1-00 33 1/3% The Retention Bonus will be provided to the Specified Officer as deferred compensation. This deferred compensation will become a part of and will be administered under the guidelines set forth in the MidAmerican Energy Company Deferred Compensation Plan for Executives. 10 EX-10.2 6 INDEMNITY AGREEMENT EXHIBIT 10.2 MIDAMERICAN ENERGY HOLDINGS COMPANY INDEMNITY AGREEMENT THIS INDEMNITY AGREEMENT, effective as of December 1, 1996, between MidAmerican Energy Holdings Company, an Iowa corporation ("Corporation"), and ("Indemnitee"). WITNESSETH: WHEREAS, Indemnitee either is, or will become, a member of the board of directors of the Corporation ("Board of Directors") or an officer of the Corporation, or both, and in such capacity or capacities (as hereinafter defined), is performing or will perform valuable services for or on behalf of the Corporation; WHEREAS, Indemnitee is willing to perform or to continue to perform such services and to perform additional services for or on behalf of the Corporation on the condition that Indemnitee is indemnified as provided in this Agreement; WHEREAS, it is intended that Indemnitee shall be paid promptly by the Corporation all amounts necessary to effectuate in full the indemnity provided herein; and WHEREAS, all capitalized terms used in this Agreement have the respective meanings set forth in Section 15. NOW THEREFORE, in consideration of the premises and the covenants in this Agreement, and of Indemnitee agreeing to perform and performing services for or on behalf of the Corporation as a member of its Board of Directors or one of its officers, and intending to be legally bound hereby, the Corporation and Indemnitee agree as follows: 1. SERVICES BY INDEMNITEE. Indemnitee agrees to serve as a director or as an officer of the Corporation, or both, so long as Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the Restated Articles of Incorporation, as amended ("Articles of Incorporation"), and Bylaws, as amended ("Bylaws"), of the Corporation, and until such time as Indemnitee resigns or otherwise ceases to be such director or officer. Indemnitee may from time to time also perform other services at the request or for the convenience of, or otherwise benefiting, the Corporation. Indemnitee may at any time and for any reason resign or be removed (subject to any obligation) as such director or officer, and, in such event, the Company shall continue to be obligated to indemnify Indemnitee for acts occurring while Indemnitee served as a director or officer as set forth in this Agreement, however, the Company shall not be 1 obligated to indemnify Indemnitee for acts occurring after such event. 2. INDEMNIFICATION. Subject to the limitations set forth in this Section 2 and in Section 6, the Corporation hereby agrees to indemnify Indemnitee as follows: The Corporation shall indemnify Indemnitee from and against any and all Expenses and Liabilities with respect to any Proceeding associated with Indemnitee being or having been a director or officer of the Corporation, to the fullest extent permitted by applicable laws and the Articles of Incorporation in effect on the date hereof or as such laws or Articles of Incorporation may from time to time be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than applicable laws and the Articles of Incorporation permitted the Corporation to provide before such amendment). The right to indemnification conferred in this Agreement and the Articles of Incorporation shall be presumed to have been relied upon by Indemnitee in agreeing to serve, serving or continuing to serve the Corporation as a director or officer of the Corporation, and shall be enforceable as a contract right. Without in any way diminishing the scope of the indemnification provided by this Section 2, the Corporation shall indemnify Indemnitee if and whenever Indemnitee is or was a party or is threatened to be made a party to any Proceeding, including without limitation to the fullest extent permitted by applicable laws any such Proceeding brought by or in the right of the Corporation, because Indemnitee is or was a director or officer of the Corporation, or because of anything done or not done by Indemnitee in such capacity, against all Expenses and Liabilities actually and reasonably incurred by or on behalf of Indemnitee in connection with the investigation, defense, settlement or appeal of such Proceeding. In addition to, and not as a limitation of, the foregoing, the rights of Indemnitee to indemnification provided in this Agreement shall include those rights set forth in Sections 3 and 8. 3. ADVANCEMENT OF EXPENSES: LETTER OF CREDIT. (a) ADVANCEMENT OF EXPENSES. All reasonable Expenses incurred by or on behalf of Indemnitee shall be advanced from time to time by the Corporation to Indemnitee within 20 days after the receipt by the Corporation of a written request for the advancement of such Expenses, whether prior to or after final disposition of a Proceeding (except to the extent that there has been a Final Adverse Determination that Indemnitee is not entitled to be indemnified for such Expenses), including without limitation to the fullest extent permitted by applicable laws any Proceeding brought by or in the right of the Corporation. The written request for an advancement of any and all Expenses under this Section 3(a) shall contain reasonable details of the Expenses incurred by or on behalf of Indemnitee for which advancement is thereby requested, and by execution of such request, Indemnitee shall be deemed to have made whatever (i) written affirmation concerning the good faith of Indemnitee about 2 the standard of conduct of Indemnitee or any other matter, which may be required by applicable law or the Articles of Incorporation, as from time to time amended, to give Indemnitee the right to be indemnified under this Agreement or otherwise, and (ii) written undertaking may be required with respect to repayment to the Corporation of such Expenses under applicable provisions of any law, or the Articles of Incorporation, as from time to time amended; provided, however; that in no circumstances shall Indemnitee be deemed to have undertaken to repay to the Corporation Expenses for which Indemnitee has the right to be indemnified under this Agreement or otherwise. (b) LETTER OF CREDIT. In order to secure the obligations of the Corporation to indemnify and advance Expenses to Indemnitee pursuant to this Agreement, the Corporation shall obtain at its expense at the time of any Change in Control an irrevocable standby letter of credit naming Indemnitee as the sole beneficiary ("Letter of Credit"). The Letter of Credit shall be in an appropriate amount not less than $1,000,000, issued by a financial institution having assets in excess of $100,000,000 and containing terms and conditions reasonably acceptable to Indemnitee. The Letter of Credit shall provide that Indemnitee may from time to time draw certain amounts thereunder, upon written certification by Indemnitee to the issuer of the Letter of Credit that (i) Indemnitee has made written request upon the Corporation for an amount not less than the amount Indemnitee is drawing under the Letter of Credit and that the Corporation has failed or refused to provide Indemnitee with such amount in full within 20 days after receipt of such request, and (ii) Indemnitee believes that Indemnitee is entitled under the terms of this Agreement to the amount which Indemnitee is drawing under the Letter of Credit. The issuance of the Letter of Credit shall not, in any way, diminish the obligation of the Corporation to indemnify Indemnitee against Expenses and Liabilities to the full extent required by this Agreement or otherwise. (c) TERM OF LETTER OF CREDIT. Once the Corporation has obtained the Letter of Credit, the Corporation shall at its expense maintain and renew the Letter of Credit or a substitute letter of credit meeting the criteria of Section 3(b) during the term of this Agreement so that the Letter of Credit shall have an initial term of five years, be renewed for successive five-year terms, and always have at least one year of its term remaining after the termination of this Agreement. 4. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) Upon making a request for indemnification, Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Corporation shall have the burden of proof to overcome such presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or upon a plea of nolo contendere or its equivalent, shall not affect such presumption or, except as may be provided in Section 6, of itself be determinative that the Indemnitee failed to meet any requisite standard of conduct 3 or establish a presumption with regard to any other factual matter relevant to determining the right of Indemnitee to indemnification under this Agreement or otherwise. (b) If the person or persons so empowered to make a determination pursuant to Section 5 shall have failed to make the requested determination within 30 days after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or other disposition or partial disposition of any Proceeding or any other event which could enable the Corporation to determine the right of Indemnitee to be indemnified under this Agreement or otherwise, the requisite determination that Indemnitee has the right to indemnification shall be deemed to have been made; provided, however, that such 30 day period may be extended for a reasonable time, not to exceed an additional 30 days, if the person or persons so empowered to make a determination pursuant to Section 5 in good faith requires such additional time to obtain or evaluate documentation or information relating thereto; and provided further, that the foregoing provisions of this Section 4(b) shall not apply if the determination of entitlement to indemnification is to be made by the shareholders pursuant to Section 5(b) of this Agreement and if (i) within 15 days after receipt by the Corporation of the request for such determination the Board of Directors has resolved to submit such determination to the shareholders for their consideration at an annual meeting to be held within 75 days after such receipt and such determination is made thereat, or (ii) a special meeting of shareholders is called within 15 days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 days after having been so called and such determination is made thereat. 5. PROCEDURE FOR DETERMINATION OF RIGHT OF INDEMNITEE TO BE INDEMNIFIED. (a) Whenever Indemnitee believes that Indemnitee has a right to indemnification pursuant to this Agreement, Indemnitee shall submit a written request for indemnification to the Corporation. Any request for indemnification shall include sufficient documentation or information reasonably available to Indemnitee for the determination of the right of Indemnitee to be indemnified pursuant to this Agreement. In any event, Indemnitee shall submit such request for indemnification within a reasonable time, not to exceed five years after any judgment, order, settlement, dismissal, arbitration award, conviction, acceptance of a plea of nolo contendere or its equivalent, or final disposition of such Proceeding, whichever is the later date for which Indemnitee requests indemnification. The Secretary, General Counsel or other appropriate officer of the Corporation shall, promptly upon receipt of such request for indemnification, advise the Board of Directors in writing that Indemnitee has made such request. Determination of the right of Indemnitee to indemnification shall be made not later than 30 days after the receipt by the 4 Corporation of such written request for indemnification, provided that any request for indemnification for Liabilities with respect to a particular Proceeding, other than amounts paid in settlement, shall be made after a determination thereof in such Proceeding. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination. (b) The Corporation shall be entitled to select the forum in which the right of Indemnitee to indemnification will be heard; provided, however, that if such forum is selected after a Change in Control of the Corporation, Independent Legal Counsel shall determine whether Indemnitee has the right to indemnification. The forum shall be any one of the following: (i) The shareholders of the Corporation, other than shareholders who are parties to the Proceeding with respect to which the Indemnitee has claimed indemnification; (ii) A majority of a quorum of the Board of Directors consisting of Disinterested Directors; (iii) Independent Legal Counsel, who shall make the determination in a written opinion; or (iv) A panel of three arbitrators, one selected by the Corporation, another by Indemnitee and the third by the first two arbitrators selected; or if for any reason three arbitrators are not selected within 30 days after the appointment of the first arbitrator, then selection of additional arbitrators shall be made by the American Arbitration Association. If any arbitrator resigns or is unable to serve in such capacity for any reason, the American Arbitration Association shall select a replacement. The arbitration shall be conducted pursuant to the commercial arbitration rules of the American Arbitration Association in effect on the date of this Agreement. 6. SPECIFIC LIMITATIONS ON INDEMNIFICATION. Notwithstanding anything in this Agreement to the contrary, the Corporation shall not be obligated under this Agreement to make any payment to Indemnitee for indemnification with respect to any Proceeding: (a) To the extent that payment is actually made to Indemnitee under any insurance policy, or is made to Indemnitee by the Corporation or an affiliate otherwise than pursuant to this Agreement. Notwithstanding the availability of such insurance, Indemnitee also may claim indemnification from the Corporation pursuant to this Agreement by assigning to the Corporation any claims under such insurance to the 5 extent Indemnitee is paid by the Corporation; (b) If a court in such Proceeding has entered a judgment or other adjudication which is final and has become nonappealable and establishes that the claim of Indemnitee for such indemnification arose from: (i) a breach by Indemnitee of his or her duty of loyalty to the Corporation or its shareholders; (ii) acts or omissions of Indemnitee not in good faith or which involve intentional misconduct or knowing violations of the law; (iii) a transaction in which Indemnitee derived an improper personal benefit; or (iv) liability of Indemnitee to the Corporation pursuant to Section 490.833 of the Iowa Business Corporation Act (or any successor provision); (c) If there has been no Change in Control, for Liabilities in connection with Proceedings settled without the consent of the Corporation, which consent, however, shall not be unreasonably withheld; or (d) For an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any state statutory or common law. 7. FEES AND EXPENSES OF INDEPENDENT LEGAL COUNSEL. The Corporation agrees to pay the reasonable fees and expenses of Independent Legal Counsel or a panel of three arbitrators if such Counsel or panel of arbitrators is retained to make a determination of the right of Indemnitee to indemnification pursuant to Section 5(b), and to fully indemnify such Counsel or arbitrators against any and all expenses and losses incurred by any of them arising out of or relating to this Agreement or their engagement pursuant hereto. 8. REMEDIES OF INDEMNITEE. (a) If (i) a determination is made pursuant to Section 5 that Indemnitee is not entitled to indemnification, (ii) advances of Expenses are not made to Indemnitee pursuant to this Agreement, (iii) payment has not been timely made following a determination that Indemnitee has a right to indemnification pursuant to this Agreement, or (iv) Indemnitee otherwise seeks enforcement of this Agreement, Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Iowa of the remedy sought. Alternatively, unless the determination was made by a panel of arbitrators pursuant to Section 5(b)(iv), Indemnitee may elect to seek an award in arbitration to be conducted by a single arbitrator pursuant to the commercial arbitration rules of the American Arbitration Association in effect on the date of this Agreement, which award is to be made within 90 days following the filing of the demand for arbitration. The Corporation shall not oppose the right of Indemnitee to seek any such adjudication or arbitration award. In any such proceeding or arbitration Indemnitee shall be presumed to be entitled to indemnification under this Agreement 6 and the Corporation shall have the burden of proof to overcome such presumption. (b) If a determination that Indemnitee is not entitled to indemnification, in whole or in part, has been made pursuant to Section 5, the decision in the judicial proceeding or arbitration provided in Section 8(a) shall be made de novo and Indemnitee shall not be prejudiced by reason of a determination that Indemnitee is not entitled to indemnification. (c) If a determination that Indemnitee is entitled to indemnification has been made pursuant to Section 5 or is deemed to have been made pursuant to Section 4 or otherwise pursuant to this Agreement, the Corporation shall be bound by such determination in the absence of a misrepresentation of a material fact by Indemnitee. (d) The Corporation shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid, binding and enforceable. The Corporation shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. (e) Expenses reasonably incurred by Indemnitee in connection with the request of Indemnitee for indemnification under, seeking enforcement of, or to recover damages for breach of, this Agreement shall be borne by the Corporation when and as incurred by Indemnitee irrespective of any Final Adverse Determination that Indemnitee is not entitled to indemnification. 9. INSURANCE. (a) MAINTENANCE OF INSURANCE. The Corporation represents that it presently maintains certain policies of directors' and officers' liability insurance. Subject only to the provisions within this Section 9, the Corporation agrees that during the Indemnification Period, the Corporation shall use its best efforts to purchase and maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of directors' and officers' liability insurance providing, in all respects, coverage both in scope and amount which is no less favorable than that presently provided. Notwithstanding the foregoing, the Corporation shall not be required to maintain such policies of directors' and officers' liability insurance if such insurance is not reasonably available or if it is in good faith determined by the then Board of Directors either that: (i) the premium cost of maintaining such insurance is substantially disproportionate to the amount of coverage provided thereunder; or (ii) the protection provided by such insurance is so limited by exclusions, deductions or otherwise that there is insufficient benefit to 7 warrant the cost of maintaining such insurance. Anything in this Agreement to the contrary notwithstanding, to the extent that and for so long as the Corporation shall choose to continue to maintain any policies of directors' and officers' liability insurance during the Indemnification Period, the Corporation shall maintain similar and equivalent insurance for the benefit of Indemnitee during the Indemnification Period (whether more or less favorable to Indemnitee than the existing policies of such insurance maintained by the Corporation). (b) ADDITIONAL INDEMNIFICATION IN LIEU OF INSURANCE. If the Corporation discontinues any policy or policies of directors' and officers' liability insurance referred to in Section 9(a) or limits in any way the coverages provided thereunder either in scope or amount, or such policies or coverages provided thereunder become unavailable in whole or in part for any reason, the Corporation agrees to hold harmless and indemnify Indemnitee for the remainder of the Indemnification Period to the full extent of the coverage which would otherwise have been provided for the benefit of Indemnitee if such insurance policies specified in Section 9(a) had been maintained. 10. MODIFICATION, WAIVER, TERMINATION AND CANCELLATION. No supplement, modification, termination, cancellation or amendment of this Agreement shall be binding unless executed in writing by both Indemnitee and the Corporation. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions of this Agreement (whether or not similar), nor shall any such waiver constitute a continuing waiver. 11. SUBROGATION. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything which may be necessary to secure such rights, including the execution of such documents necessary to enable the Corporation effectively to bring suit to enforce such rights. 12. NOTICE BY INDEMNITEE AND DEFENSE OF CLAIM. Indemnitee shall promptly notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter, whether civil, criminal, administrative or investigative, but the omission so to notify the Corporation shall not relieve it from any liability which it may have to Indemnitee if such omission does not materially prejudice the rights of the Corporation. If such omission does materially prejudice the rights of the Corporation, the Corporation shall be relieved from liability under this 8 Agreement only to the extent of such prejudice; nor will such omission relieve the Corporation from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation will be entitled to participate therein at its own expense; and (b) The Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense of Indemnitee therein, with counsel reasonably satisfactory to Indemnitee; provided, however, that the Corporation shall not be entitled to assume the defense of Indemnitee in any Proceeding if there has been a Change in Control or if Indemnitee has reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee with respect to such Proceeding. After notice to Indemnitee from the Corporation of its election to assume the defense of Indemnitee therein, the Corporation will not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his or her own counsel in such Proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless: (i) The employment of counsel by Indemnitee has been authorized by the Corporation; (ii) Indemnitee has reasonably concluded that counsel employed by the Corporation may not adequately represent Indemnitee; or (iii) The Corporation has not in fact employed counsel to assume the defense of Indemnitee in such Proceeding or has not in fact assumed such defense or is not acting in connection therewith with reasonable diligence; in each of which cases the fees and expenses of such counsel shall be at the expense of the Corporation. (c) The Corporation shall not settle any Proceeding in any manner which would impose any liability, penalty or limitation on Indemnitee without the written consent of Indemnitee; provided, however, that Indemnitee will not unreasonably withhold consent to any proposed settlement. 13. NOTICES. All notices, requests, demands and other communications hereunder shall 9 be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom such notice or other communication shall have been directed, or (b) mailed by registered mail with postage prepaid, on the third business day after the date on which it is so mailed. (a) If to Indemnitee, to: (b) If to the Corporation, to: MidAmerican Energy Holdings Company 666 Grand Avenue P. O. Box 657 Des Moines, Iowa 50303-0657 Attention: Corporate Secretary or to such other address as may have been furnished to Indemnitee by the Corporation or to the Corporation by Indemnitee, as the case may be. 14. NONEXCLUSIVITY. The rights of Indemnitee under this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Business Corporation Act of the State of Iowa, the Articles of Incorporation or Bylaws of the Corporation, or any agreements, vote of shareholders, resolution of the Board of Directors or otherwise, and to the extent that during the Indemnification Period the rights of the then existing directors and officers are more favorable to such directors or officers than the rights currently provided to Indemnitee thereunder or under this Agreement, Indemnitee shall be entitled to the full benefits of such more favorable rights. 15. CERTAIN DEFINITIONS. (a) "CHANGE IN CONTROL" shall be deemed to have occurred if: (1) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or a corporation owned directly or indirectly by the shareholders of the Corporation in substantially the same proportions 10 as their ownership of stock of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Corporation representing 15% or more of the total voting power represented by the then outstanding voting securities of the Corporation; or (2) The Corporation is a party to a Business Combination (as defined in Section C(1) of Article VIII of the Articles of Incorporation, as in effect on the date hereof) except for any such Business Combination which meets the conditions specified in paragraph 1 of Section B of such Article VIII. (b) "DISINTERESTED DIRECTOR" means a director of the Corporation who is not or was not a party to the Proceeding with respect to which indemnification is being sought by Indemnitee. (c) "EXPENSES" shall include all direct and indirect costs (including without limitation attorneys' fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, all other disbursements or out-of-pocket expenses and reasonable compensation for time spent by Indemnitee for which Indemnitee is otherwise not compensated by the Corporation or any third party) actually and reasonably incurred in connection with either the investigation, defense, settlement or appeal of a Proceeding or establishing or enforcing a right to indemnification under this Agreement, applicable law or otherwise: provided, however, that "Expenses" shall not include any liabilities. (d) "FINAL ADVERSE DETERMINATION" means a determination that Indemnitee is not entitled to indemnification pursuant to Section 5 and either (i) a final adjudication in an Iowa court or decision of an arbitrator pursuant to Section 8(a) shall have denied the right of Indemnitee to indemnification under this Agreement, and is no longer appealable, or (ii) Indemnitee shall have failed to file a complaint in an Iowa court or seek an arbitration award pursuant to Section 8(a) for a period of 120 days after the determination made pursuant to Section 5. (e) "INDEMNIFICATION PERIOD" means the period of time for so long as Indemnitee shall continue to serve as a director or officer of the Corporation, or both, and thereafter so long as Indemnitee shall be subject to any possible Proceeding. (f) "INDEPENDENT LEGAL COUNSEL" means special legal counsel (i) selected by the Board of Directors by vote of a majority of a quorum consisting of Disinterested Directors or, if such quorum cannot be obtained, by vote of a majority of the full Board of Directors, including directors who are not Disinterested Directors, and (ii) approved by Indemnitee (which approval shall not be unreasonably withheld) or, if there has 11 been a Change in Control, selected by Indemnitee and approved by the Board of Directors (which approval shall not be unreasonably withheld), and that neither is presently nor in the five years preceding such selection has been retained to represent (y) the Corporation or any of its subsidiaries or affiliates, or Indemnitee or any corporation or entity as to which Indemnitee is or was a director, officer or employee, or any subsidiary or affiliate of such a corporation or entity, in any material matter, or (z) any other party to the Proceeding giving rise to the claim for indemnification with respect to which such counsel is being selected. Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or Indemnitee in an action to determine the right of Indemnitee to indemnification under this Agreement. (g) "LIABILITIES" means liabilities of any type whatsoever including, but not limited to, any judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid in settlement (including all interest assessments and other charges paid or payable in connection with or in respect of such judgments, fines, penalties or amounts paid in settlement) of any Proceeding. (h) "PROCEEDING" means any threatened, pending or completed action, claim, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative and whether formal or informal that is associated with Indemnitee being or having been a director or officer of the Corporation. 17. BINDING EFFECT; Duration and Scope of Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by Indemnitee and the Corporation and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Corporation), spouses, heirs, executors, personal representatives and administrators and other legal representatives. This Agreement shall continue in effect during the Indemnification Period, regardless of whether Indemnitee continues to serve as a director or officer of the Corporation. 18. SEVERABILITY. If any provision or provisions of this Agreement (or any portion thereof) shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) The validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby; and 12 (b) To the fullest extent legally possible, the provisions of this Agreement shall be construed so as to give effect to the intent of any provisions held invalid, illegal or unenforceable. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Iowa. 20. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the Corporation and Indemnitee, and there are no other agreements, contracts or understandings between them, with respect to the subject matter of this Agreement, except as specifically referred to herein or as provided in Section 14. IN WITNESS WHEREOF, this Indemnity Agreement is executed by MidAmerican Energy Holdings Company and the Indemnitee as of the date first written above. MIDAMERICAN ENERGY HOLDINGS COMPANY By ------------------------------------- S. J. Bright President and Chief Executive Officer INDEMNITEE ------------------------------------- (Signature) ------------------------------------- MEC\Policy\Indem\Holding\Indem.form 12.01.96 13 EX-10.3 7 EMPLOYMENT AGREEMENT EXHIBIT 10.3 MIDAMERICAN ENERGY HOLDINGS COMPANY P.O. BOX 657 DES MOINES, IA 50303-0657 January 24, 1996 Mr. Stanley J. Bright 666 Grand Avenue P.O. Box 657 Des Moines, IA 50303-0657 Dear Mr. Bright: Pursuant to the Agreement and Plan of Exchange ("Exchange Agreement") dated as of January 24, 1996, by and between MidAmerican Energy Company ("MidAmerican"), and MidAmerican Energy Holdings Company ("Holdings"), MidAmerican will become a subsidiary of Holdings. In recognition of the value of your past services to MidAmerican and its subsidiaries, and in anticipation of your contribution to the future growth and success of Holdings and its subsidiaries, Holdings wishes to provide itself and its subsidiaries the continuing benefits of your service as a senior executive officer of Holdings and its subsidiaries on the terms and conditions set forth below. This letter sets forth our agreement with respect to your employment with Holdings and its subsidiaries during the period commencing on the Effective Time (as defined in the Exchange Agreement) and ending on July 1, 2000 (such period herein referred to as the "Employment Period"). 1.(a) Between the Effective Time and May 31, 1997, you shall serve as President and Chief Executive Officer of Holdings performing those responsibilities set forth on Exhibit A attached hereto. Commencing June 1, 1997 and ending on July 1, 2000, you shall serve as Chairman of the Board of Directors of Holdings ("Chairman") and Chief Executive Officer of Holdings. Any service required to be performed by you hereunder shall be of the type usually performed by the officer holding such title at a major public company. Your duties and services generally shall be performed by you on regular business days during normal business hours, and you agree to be present in Des Moines, Iowa, as required and for as much time as is necessary to perform your duties and services for the business of Holdings and its subsidiaries. You shall be entitled to vacation in accordance with the policy from time to time in effect for senior executive officers of the Holdings and its subsidiaries with credit for past service with MidAmerican Energy Company and its subsidiaries and Iowa-Illinois Gas and Electric Company. During the Employment Period you shall be reimbursed by Holdings in accordance with Holdings's policy from time to time in effect for any expenses commensurate with your position which you may reasonably incur in the performance of your duties and services hereunder and which are properly substantiated. (b) In consideration of and as compensation for your services hereunder and your agreement not to compete with Holdings as set forth herein, during the Employment Period Holdings will pay to you, in equal installments with the same frequency as for other executives of Holdings, but at least monthly, a base salary not less than the base salary paid the Chairman, such base salary to be subject to adjustment during the Employment Period in accordance with Holdings's policy for executives. In addition to such salary, you shall be eligible to receive, as additional compensation, appropriate management bonuses, long-term incentive awards and such other compensation elements as are applicable, in amounts not less than those paid or accrued for the Chairman of Holdings, in relation to the achievement by Holdings and its subsidiaries of corporate goals and objectives and Holdings will provide to you all other benefits accorded to full-time senior executive employees of Holdings from time to time, provided that such benefits shall be not less in the aggregate than those in effect at MidAmerican Energy Company as of the Effective Time. Holdings's obligations to make the salary payments and to provide the other benefits provided for by this paragraph 1(b) shall be expressly contingent upon, and subject to, your observance of, and substantial compliance with, all of the terms and provisions thereof. 2. You agree that during the Employment Period, and any additional period during which you are employed by or act as a consultant to Holdings or any subsidiary or affiliate, except with the prior written consent of Holdings, you will not in any way, directly or indirectly, own, manage, operate, control, accept employment or a consulting position with or otherwise advise or assist or be actively connected with, or have any financial interest in, directly or indirectly, any enterprise which engages in, or otherwise carries on, any business activity in competition with the business of Holdings and its subsidiaries in any geographic area in which they engage in such business. You further agree that during the Employment Period, and any additional period during which you are employed by Holdings or any subsidiary or an affiliate and, in any event, until the sixth anniversary of the Effective Time, subject to the foregoing, you will not take any action which might divert from Holdings or any of its subsidiaries or affiliates, successors or assigns any opportunity which would be within the scope of its or their respective present or future operations or business. It is understood that ownership of not more than one percent (1%) of the equity securities of a public company shall in no way be prohibited pursuant to the foregoing provisions. 3. Notwithstanding any of the foregoing provisions of this Agreement, Holdings may terminate your duties and services hereunder during the term hereof 2 and discharge you (i) in the event of a breach of this Agreement by you in any material respect as determined by the affirmative vote of two-thirds of the membership of Holdings's Board of Directors ("Board"), provided that the Board shall have given you written notice of such breach, and you shall have failed to remedy such breach within thirty (30) days of receipt of such notice, (ii) for cause, upon the affirmative vote of two-thirds of the membership of the Board (cause, for purposes of this Agreement, shall mean persistent incompetence, willful misconduct, dishonesty or conviction of a felony), or (iii) upon the affirmative vote of two-thirds of the membership of the Board, provided, in the case of (iii), Holdings shall be obligated to make the salary payments to and provide the other benefits provided for by paragraph 1(b) through the remainder of the Employment Period notwithstanding such termination. Your duties and services hereunder shall terminate in the event of your death or your physical inability to perform the services required to be performed by you hereunder, provided such inability shall have persisted for a continuous period of 270 days. Should your services be terminated by reason of your breach of this Agreement, or for cause, Holdings shall pay to you your salary only through the end of the calendar month in which such termination occurs, and if your services are terminated by reason of your death or your physical inability to perform the services required to be performed by you hereunder prior to the Retirement Date, your salary hereunder shall terminate on the date benefits in respect of your death or physical disability are made available to your estate or personal representative under Holdings's benefit plans. In the event of a breach of this Agreement by Holdings in any material respect, such breach shall be deemed to constitute a constructive termination of your employment in contravention of this Agreement, qualifying you for payment pursuant to paragraph 3(iii) above and such other remedies as are available in law or in equity; provided, however, that you shall have given the Board of Holdings written notice of such breach, and the Board shall have failed to cause Holdings to remedy such breach within thirty (30) days of receipt of such notice. 4. It is understood and agreed that the services to be rendered under this Agreement by you are special, unique and of an extraordinary character, and, more particularly, that in the event of any breach or threatened breach by you of the provisions of paragraph 2 hereof, Holdings shall have no adequate remedy in law. Consequently, in the event of a breach or threatened breach by you of the provisions of paragraph 2 hereof, in addition to Holdings's right to terminate this Agreement pursuant to paragraph 3 hereof, Holdings shall be entitled to an injunction restraining you from any such breach or threatened breach. 5. Any paragraphs sentence, phrase or other provision of this Agreement which is in conflict with any applicable statute, rule or other law shall be deemed, if possible, to be modified or altered to conform thereto or, if not possible, to be 3 omitted herefrom. The invalidity of any portion hereof shall not affect the force and effect of the remaining valid portions hereof. 6. This Agreement is governed by and is to be construed in accordance with the substantive law (and not the choice of law rules) of the State of Iowa. This Agreement (and the Exchange Agreement at Article V) constitutes the entire understanding between you and Holdings with respect to the subject matter contained herein and, except as otherwise set forth in this paragraph 6, as at the Effective Time supersedes and cancels any and all prior written or oral understandings and agreements with respect to such matters. 7. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by registered or certified mail, postage prepaid, or sent by an overnight delivery service, addressed as follows: If to Holdings: MidAmerican Energy Holdings Company 666 Grand Avenue P.O. Box 657 Des Moines, Iowa 50303-0657 If to you: Mr. Stanley J. Bright 666 Grand Avenue P.O. Box 657 Des Moines, Iowa 50303-0657 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 8. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 9. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal 4 representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by Holdings or by you. 10. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same installment. 11. This Agreement shall have no force and effect unless and until the Effective Time. Sincerely, MIDAMERICAN ENERGY HOLDINGS COMPANY By: /s/ RUSSELL E. CHRISTIANSEN --------------------------- Russell E. Christiansen Chairman Accepted and agreed to as of the date first written above /s/ STANLEY J. BRIGHT --------------------------- Stanley J. Bright 5 EXHIBIT A RESPONSIBILITIES OF PRESIDENT AND CEO: * Development of Strategic Options * All Operating Functions * Financial Management * Budgeting, Financial Planning and Financial Analysis * Treasury Functions * Finance, including relationships with Institutional Investors, Analysts and other shareholders; Investment Banking Relationships and Dealing with Credit Rating Agencies * Dealings with External Auditors * Accounting, Financial Reporting, and Taxation * Legal Affairs * Corporate Development * Rates and Regulatory Matters * Governmental Affairs * Marketing and Economic Development * Human Resources * Other Administrative Functions (e.g., Purchasing and Management Information Services) EX-10.4 8 EMPLOYMENT AGREEMENT EXHIBIT 10.4 MIDAMERICAN ENERGY HOLDINGS COMPANY P.O. BOX 657 DES MOINES, IA 50303-0657 January 24, 1996 Mr. Russell E. Christiansen 666 Grand Avenue P.O. Box 657 Des Moines, IA 50303-0657 Dear Mr. Christiansen: Pursuant to the Agreement and Plan of Exchange ("Exchange Agreement") dated as of January 24, 1996, by and between MidAmerican Energy Company ("MidAmerican"), and MidAmerican Energy Holdings Company ("Holdings"), MidAmerican will become a subsidiary of Holdings. In recognition of the value of your past services to MidAmerican and its subsidiaries, and in anticipation of your contribution to the future growth and success of Holdings and its subsidiaries, Holdings wishes to provide itself and its subsidiaries the continuing benefits of your service as a senior executive officer of Holdings and its subsidiaries on the terms and conditions set forth below. This letter sets forth our agreement with respect to your employment with Holdings and its subsidiaries during the period commencing on the Effective Time (as defined in the Exchange Agreement) and ending on the date your employment with Holdings and its subsidiaries terminates (as defined herein, "Employment Period") and beyond the Employment Period, with respect to your acting as a consultant and advisor to Holdings during the period commencing at the end of the Employment Period and ending on the third anniversary of the retirement date ("Consulting Period") or until such earlier date as otherwise may be determined hereunder. 1.(a) Between the Effective Time and May 31, 1997 (the "Employment Period"), you shall serve as Chairman of the Board of the Directors of Holdings ("Chairman"), performing those responsibilities set forth on Exhibit A attached hereto. Your retirement date shall be May 31, 1997 ("Retirement Date") and the Consulting Period shall commence on June 1, 1997. During the Employment Period your duties and services generally shall be performed by you on regular business days during normal business hours, and you agree to be present as required and for as much time as is necessary to perform your duties and services for the business of Holdings and its subsidiaries. You shall be entitled to vacation in accordance with the policy from time to time in effect for senior executive officers of Holdings and its subsidiaries with credit for past service with MidAmerican and its subsidiaries and predecessors of each. During the Employment Period you shall be reimbursed by Holdings in accordance with the Holdings's policy from time to time in effect for any expenses commensurate with your position which you may reasonably incur in the performance of your duties and services hereunder and which are properly substantiated. (b) In consideration of and as compensation for your services hereunder and your agreement not to compete with Holdings as set forth herein, during the Employment Period, Holdings will pay to you, in equal installments with the same frequency as for other executives of Holdings, but at least monthly, a base salary at the annual rate of not less than $400,000, such base salary to be subject to adjustment during the Employment Period in accordance with Holdings's policy for executives, and shall never be less than the base salary of the Chief Executive Officer of Holdings. In addition to such salary, you shall be eligible to receive, as additional compensation, appropriate management bonuses, long-term incentive awards and such other compensation elements as are applicable, in amounts not less than those paid or accrued for the Chief Executive Officer of Holdings, in relation to the achievement by Holdings and its subsidiaries of corporate goals and objectives and Holdings will provide to you all other benefits accorded to full-time senior executive employees of Holdings from time to time, provided that such benefits shall be not less in the aggregate than those in effect at MidAmerican as of the Effective Time. Holdings's obligations to make the salary payments and to provide the other benefits provided for by this paragraph 1(b) shall be expressly contingent upon, and subject to, your observance of, and substantial compliance with, all of the terms and provisions hereof. 2.(a) During the Consulting Period, you shall serve as consultant and advisor to Holdings. You agree, in your capacity as consultant and advisor, to hold yourself ready to and to render such advice and counsel to Holdings and any of its subsidiaries and affiliates as may be requested from time to time with reasonable advance notice by the Board of Directors or Chief Executive Officer of Holdings; provided, that you shall not be required to devote in excess of sixty (60) days in any twelve-month period to your duties as a consultant hereunder, and provided further that telephonic consultation shall not require advance notice. It is understood and agreed that such requests for consultation shall not unreasonably interfere with your employment with any other employer. You shall report during the Consulting Period directly to the Chief Executive Officer of Holdings, who shall represent Holdings in all matters relating to the performance of this Agreement. During the Consulting Period, you shall be reimbursed for any expenses which you may reasonably incur in the performance of your duties hereunder and which are properly substantiated. 2 (b) In consideration of and as compensation for your services as a consultant and advisor to Holdings hereunder, and your agreement not to compete with Holdings as set forth herein, during the Consulting Period Holdings will pay to you in equal monthly installments a consulting fee at a rate of $50,000 per annum. Holdings shall not be obligated to make such payments in respect of any period following the Employment Period if you continue to be actively employed by Holdings or any subsidiary or affiliate after the Employment Period. During the Consulting Period Holdings shall provide to you the benefits described in paragraph 1 (other than the base salary, bonus, long-term incentive and other cash compensation elements referred to therein), including office space, equipment and furnishings and a full-time secretary, selected by you, at the expense of Holdings in quarters agreed upon by you and Holdings. Holdings's obligations to pay the consulting fee and benefits provided for by this paragraph 2(b) shall be expressly contingent upon, and subject to, your observance of, and substantial compliance with, all of the terms and provisions hereof. 3. You agree that during the Employment Period and the Consulting Period, and any additional period during which you are employed by or act as a consultant to Holdings or any subsidiary or affiliate, except with the prior written consent of Holdings, you will not in any way, directly or indirectly, own, manage, operate, control, accept employment or a consulting position with, or otherwise advise or assist or be actively connected with or have any financial interest in, directly or indirectly, any enterprise which engages in, or otherwise carries on, any business activity in competition with the business of Holdings and its subsidiaries in any geographic area in which they engages in such business. You further agree that during the Employment Period, the Consulting Period, and any additional period during which you are employed by Holdings or any subsidiary or an affiliate and, in any event, until the sixth anniversary of the Effective Time, subject to the foregoing, you will not take any action which might divert from Holdings or any of its subsidiaries or affiliates, successors or assigns any opportunity which would be within the scope of its or their respective present or future operations or business. It is understood that ownership of not more than one percent (1%) of the equity securities of a public company shall in no way be prohibited pursuant to the foregoing provisions. 4. Notwithstanding any of the foregoing provisions of this Agreement, Holdings may terminate your duties and services hereunder during the term hereof and discharge you (i) in the event of a breach of this Agreement by you in any material respect as determined by the affirmative vote of two-thirds of the membership of Holdings's Board of Directors ("Board"), provided that the Board shall have given you written notice of such breach, and you shall have failed to remedy such breach within thirty (30) days of receipt of such notice, (ii) for cause, upon the affirmative vote of two-thirds of the membership of the Board (cause, for 3 purposes of this Agreement, shall mean persistent incompetence, willful misconduct, dishonesty or conviction of a felony), or (iii) upon the affirmative vote of two-thirds of the membership of the Board, provided, in the case of (iii), Holdings shall be obligated to make the salary payments to and provide the other benefits provided for by paragraph 1(b) through the remainder of the Employment Period and the salary payments and other benefits provided for by paragraph 2(b) through the remainder of the Consulting Period notwithstanding such termination. Your duties and services hereunder shall terminate in the event of your death or your physical inability to perform the services required to be performed by you hereunder, provided such inability shall have persisted for a continuous period of 270 days. Should your services be terminated by reason of your breach of this Agreement, or for cause, Holdings shall pay to you your salary or consulting fee, as the case may be, only through the end of the calendar month in which such termination occurs, and if your services are terminated by reason of your death prior to the Retirement Date or your physical inability to perform the services required to be performed by you hereunder, your salary hereunder shall terminate on the date benefits in respect of your death or physical disability are made available to your estate or personal representative under Holdings's benefit plans. In the event of a breach of the Agreement by Holdings in any material respect, such breach shall be deemed to constitute a constructive termination of your employment in contravention of this Agreement, qualifying you for payment pursuant to paragraph 4(iii) above and such other remedies as are available in law or in equity; provided, however, that you shall have given the Board of Holdings written notice of such breach, and the Board shall have failed to cause Holdings to remedy such breach within thirty (30) days of receipt of such notice. 5. It is understood and agreed that the services to be rendered under this Agreement by you are special, unique and of an extraordinary character, and, more particularly, that in the event of any breach or threatened breach by you of the provisions of paragraph 3 hereof, Holdings shall have no adequate remedy in law. Consequently, in the event of a breach or threatened breach by you of the provisions of paragraph 3 hereof, in addition to Holdings's right to terminate this Agreement pursuant to paragraph 4 hereof, Holdings shall be entitled to an injunction restraining you from any such breach or threatened breach. 6. Any paragraph, sentence, phrase or other provision of this Agreement which is in conflict with any applicable statute, rule or other law shall be deemed, if possible, to be modified or altered to conform thereto or, if not possible, to be omitted herefrom. The invalidity of any portion hereof shall not affect the force and effect of the remaining valid portions hereof. 7. This Agreement is governed by and is to be construed in accordance with the substantive law (and not the choice of law rules) of the State of Iowa. This Agreement (and the Exchange Agreement at Article V) constitutes the entire 4 understanding between you and Holdings with respect to the subject matter contained herein and, except as otherwise set forth in this paragraph 7, at the Effective Time of the Share Exchange supersedes and cancels any and all prior written or oral understandings and agreements with respect to such matters, including the employment agreement dated July 26, 1994. It is understood and agreed that the share exchange as contemplated in the Exchange Agreement shall not constitute a Change in Control for purposes of the Agreement between you and MidAmerican, as successor to Midwest Energy Company, dated April 19, 1989 ("MWE Agreement") only, and that notwithstanding the foregoing, the MWE Agreement shall remain in full force and effect in accordance with the terms thereof with respect to any event, transaction or circumstance other than the share exchange. 8. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and delivered personally or sent by registered or certified mail, postage prepaid, or sent by an overnight delivery service, addressed as follows: If to Holdings: MidAmerican Energy Holdings Company 666 Grand Avenue P.O. Box 657 Des Moines, IA 50303-0657 If to you: Mr. Russell E. Christiansen 666 Grand Avenue P.O. Box 657 Des Moines, IA 50303-0657 or to such other address as either party may designate by notice to the other, and shall be deemed to have been given upon receipt. 9. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of either party hereto at any time to require the performance by the other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party hereto of a breach of any provision hereof be taken or held to be a waiver of any succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. 5 10. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by Holdings or by you. 11. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 12. This Agreement shall have no force and effect unless and until the Effective Time. Sincerely, MIDAMERICAN ENERGY HOLDINGS COMPANY By: /s/ STANLEY J. BRIGHT --------------------- Stanley J. Bright President and Chief Executive Officer Accepted and agreed to as of the date first written above. /s/ RUSSELL E. CHRISTIANSEN --------------------------- Russell E. Christiansen 6 EXHIBIT A RESPONSIBILITIES OF CHAIRMAN * Shareholder Meetings * Meetings of the Board of Directors and Committees of the Board. (The Chairman would preside and the President and CEO would have a principal presentation role.) * Agenda setting for board and board committee meetings to be done by the Chairman with concurrence of the President and CEO. * Committees of the Board * Executive (President and CEO to serve as chairman; Chairman to serve as vice chairman.) * Nominating * Finance (Chairman and President and CEO to be members.) * Audit * Compensation * Strategy (President and CEO to serve as chairman) * Corporate Charter and Bylaw Revisions * Major Economic Development Initiatives * Major Governmental or Regulatory Initiatives and programs undertaken by Holdings at the federal, state or local level. * Major Industry Initiatives MIDAMERICAN ENERGY HOLDINGS COMPANY P.O. BOX 657 DES MOINES, IA 50303-0657 January 29, 1997 Mr. Russell E. Christiansen P.O. Box 657 Des Moines, IA 50303-0657 Dear Mr. Christiansen: By letter dated as of January 24, 1996 ("Letter"), you and MidAmerican Energy Holdings Company agreed to the terms and conditions of your continuing employment as an employee of Holdings during the Employment Period and as a consultant to Holdings during the Consulting Period. This letter sets forth our agreement as to certain amendments to the Letter which will allow the deferral by you of the annual fee ("Consulting Fee") to be paid to you by Holdings during the Consulting Period. Terms contained herein and not otherwise defined shall have the meaning ascribed to them in the Letter. 1. Paragraph 2 is amended by adding a new subparagraph (c) as follows: 2.(c). During the Consulting Period you shall be entitled to defer one hundred percent (100%) of your Consulting Fee pursuant to a Deferred Compensation Agreement and in accordance with the terms and conditions of such Deferred Compensation Agreement. A form of the Deferred Compensation Agreement is attached hereto and by this reference incorporated herein. 2. All other terms and conditions of the Letter shall remain in full effect and are not amended hereby. MIDAMERICAN ENERGY HOLDINGS COMPANY By: /s/ STANLEY J. BRIGHT -------------------------------- Stanley J. Bright, President and Chief Executive Officer Accepted and agreed to as of the date first written above. /s/ RUSSELL E. CHRISTIANSEN - - ----------------------------- Russell E. Christiansen MIDAMERICAN ENERGY HOLDINGS COMPANY DEFERRED COMPENSATION AGREEMENT WITH RUSSELL E. CHRISTIANSEN SECTION 1. PURPOSE. The purpose of this Agreement is to enable MidAmerican Energy Holdings Company to retain in its employment the Executive by providing such Executive the opportunity to defer his cash compensation. SECTION 2. DEFINITIONS. (a) "Cash Compensation" means one hundred percent (100%) of the Executive's annual base salary attributable to his services for the Company between February 1, 1997 and December 31, 1997, and the cash portion of any incentive compensation received by the Executive attributable to 1997 which is eligible for deferral under the terms of the applicable incentive compensation plan of the Company. (b) "Common Stock" means shares of common stock of MidAmerican Energy Holdings Company. (c) "Company" means MidAmerican Energy Holdings Company. (d) "Compensation Committee" means the Compensation Committee established by the Board of Directors of the Company. (e) "Deferred Compensation" means 100% of the Cash Compensation as defined in (a) above. (f) "Executive" means Russell E. Christiansen. (g) "Plan Year" shall mean each January 1 through December 31. SECTION 3. ADMINISTRATION. (a) Compensation Committee. The Compensation Committee shall have the responsibility of making such determinations as may be necessary or advisable to administer the Agreement. No member of the Compensation Committee shall be liable for any act done or determination made in good faith. (b) Delegation. The Compensation Committee may, in its discretion, delegate its routine administrative duties to an officer or employee of the Company, or to a committee composed of such officers or employees. The Corporate Secretary of the Company shall maintain the records and accounts of the Agreement. 1 SECTION 4. BENEFICIARY DESIGNATION. Executive shall designate one or more beneficiaries in writing to the Committee. Such designation may be revoked or modified at any time by designating a new beneficiary in writing to the Committee. Executive's beneficiary designation shall be deemed automatically revoked in the event all designated beneficiaries predecease the Executive or, if the sole beneficiary is the Executive's spouse, in the event of dissolution of marriage. In such event, or in the event the Executive does not designate a beneficiary, the benefits hereunder shall be paid to the Executive's estate. Section 5. Book Value Deferral Method. (a) Deferred Compensation Units. The Book Value Deferral Method credits Deferred Compensation units ("Units") to the Executive's account determined by dividing the cash amount of Deferred Compensation by the Book Value of the Common Stock at December 31, 1996. The Executive's account shall be credited with amounts equal to dividends paid in cash from time to time on the Common Stock. "Book Value" of Common Stock shall be the total Common Stock equity on a consolidated basis divided by total shares outstanding, as shown in the applicable annual report certified by the independent certified public accountants retained as auditors of the Company. (b) Special Ledger. The Company shall keep an appropriate record, hereinafter called the Special Ledger, of (i) the amount of Cash Compensation deferred by the Executive, (ii) the number of Units credited under paragraph (c) of this Section 5, and (iii) the amount of dividends and Units credited with respect thereto under paragraph (d) of this Section 5. (c) Credit of Units to Account. The number of Units to be credited to the Executive's account shall be determined by dividing the cash amount of Deferred Compensation by the Book Value of the Common Stock at December 31, 1996. (d) Credit for Dividends. The Company shall credit to the Executive's account in the Special Ledger amounts equal to dividends paid in cash from time to time on the account, so that the amount of each such credit will be the equivalent of the dividends which the Participant would have received had the Executive been the owner of the number of shares of Common Stock equal to the number of Units in the Participant's account. Such amounts credited to each Participant's account shall be converted into additional Units in the manner provided in paragraph (c) of this Section 5 (using Book Value as of the previous December 31), and thereafter such additional Units shall be included in the base for determining future credits. (e) Adjustment in Number of Units. In the event of any stock dividend on the Common Stock or any stock split, reverse stock split or combination of shares of 2 Common Stock, appropriate adjustment shall be made in the number of Units credited to the account of the Executive in the Special Ledger. SECTION 6. PAYMENT. (a) Conditions on Right to Receive Payment. The Executive shall not be entitled to payment of any Deferred Compensation until he is entitled to payment of deferred compensation under the MidAmerican Energy Company Deferred Compensation Plan-- Executives. Upon approval by the Committee, payment may be made to the Executive earlier than the date specified above. (b) Form and Timing of Payment. (i) Under the Book Value Deferral Method, the value of Units at the time of payout shall be based on (w) the closing market price of Common Stock on the last trading date of the preceding Plan Year of the Common Stock on the New York Stock Exchange, (x) the average of the daily closing market price for the Common Stock for the twelve month period ending on the date of termination of services as an employee of the Company or (y) the Book Value of Common Stock as of the most recent December 31 prior to date of payment. The Executive (or beneficiary in the event of death prior to any payout to the Executive) shall make a selection between the foregoing methods of valuation prior to the time for payment of a lump sum or prior to the first payment in the case of annual installments. Such selection cannot be changed with respect to any subsequent payments in the case of annual installments. The per Unit value as selected by the Participant shall be referred to as the "Payout Value". (ii) At the election of the Compensation Committee, upon consultation with the Executive, payments of deferred compensation shall be made on the date selected by the Committee and shall be made in a lump sum or in approximately equal annual installments, and if annual installments are elected, the Compensation Committee shall determine, upon consultation with the Executive, the period over which payments are to be made. (iii) If annual installments are elected, each annual installment shall be not less that an amount equal to the value of the account at the beginning of the Plan Year in which distribution is to be made divided by the life expectancy of the Executive at the beginning of such Plan Year (or the joint life expectancy of the Executive and spouse if the Executive is married). Each annual installment payment shall be made within fifteen (15) days following the first day of each Plan Year. (iv) If an election is made to receive annual installments, then Units remaining in the account at any time shall continue to be credited with dividends (which shall purchase additional Units), until full payment has been made with respect to all Units. Units shall continue to fluctuate in value based on the Payout Value until full payment 3 has been made with respect to the Units. In the alternative, instead of having the account fluctuate in value, the Executive may elect to have the value of his account fixed as of the December 31 prior to the first payment, based on the selection of Payout Value under paragraph (b)(i) of this Section 6. If such an election is made, the account shall be credited each December 31 with interest at the then current Fixed Rate of Interest credited under the Fixed Rate of Interest Deferral Option in the Company's "Deferred Compensation Plan--Executives". (v) If an election is made to receive a lump sum payment, payment shall be made within fifteen (15) days following the first day of the Plan Year in which payment is to be made (or as soon thereafter as reasonably possible if the value is based on Book Value), and the amount of the lump sum payment shall be equal to the value of the account as of December 31 of the preceding Plan Year (based on the Payout Value selected under paragraph (b)(i) of this Section 6). (vi) Payment of a lump sum amount or any annual installment shall be made in cash. (vii) In the event of the death of an Executive occurring either before the commencement of payment or before the full balance of the Executive's account has been paid, the unpaid balance of Deferred Compensation shall be paid in a lump sum to the Executive's designated beneficiary or estate. Payment shall be made within thirty (30) days following the date of death. Dividends to which owners of Common Stock would be entitled through date of death shall be credited to the account. The value of Units shall be based on the closing market price of Common Stock on the date of death (or on the preceding business day if date of death is not business day) or as otherwise selected by the beneficiary in accordance with paragraph (b)(i) of this Section 6 if no payments had yet begun to the Executive. SECTION 7. GENERAL PROVISIONS. (a) The obligations hereunder shall at all times be unsecured and payments with respect to any benefits hereunder shall be paid out of the general operating revenue of the Company. A trust may be established to provide for the payment of benefits to the Executive hereunder as long as the assets of such trust are subject to the claims of general creditors of the Company with respect to the value of the Executive's account. (b) Withholding. The Committee shall have the right to require Executive to remit to the Company an amount sufficient to satisfy Federal, state and local tax withholding requirements, or to deduct from any or all payments made pursuant to the Agreement amounts sufficient to satisfy such withholding tax requirements. 4 (c) Costs of the Agreement. All costs of implementing and administering the Agreement shall be borne by the Company. (d) Non-Alienation of Benefits. No right or benefit under this Agreement shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or claims of the person entitled to such benefit. If the Executive or designated beneficiary hereunder should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit hereunder, then such right or benefit shall, in the discretion of the Compensation Committee, cease, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Executive or the designated beneficiary, his or her spouse, children, or other dependents, or any of them, in such manner and in such proportion as the Compensation Committee may deem proper. (e) Successors. All obligations of the Company under the Agreement shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the direct or indirect result of a merger or reorganization involving the Company or the purchase or other acquisition, of all or substantially all of the business or assets of the Company. (f) Amendment or Termination of Agreement. Any amendment or termination of this Agreement shall only be accomplished and permitted by written agreement between the Executive and Company. (g) Separability. If any term or provision of this Agreement as presently in effect or as amended from time to time, or the application thereof to any payments or circumstances, shall to any extent be invalid or unenforceable, the remainder of the Agreement, and the application of such term or provision to payments or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term or provision of the Agreement shall be valid and enforced to the fullest extent permitted by law. (h) Construction. The provisions of this Agreement shall be construed, administered and enforced according to the laws of the State of Iowa. (i) Titles. The titles of the Articles and Sections herein are included for convenience of reference only and shall not be construed as part of this Agreement, or have any effect upon the meaning of the provisions hereof. 5 (j) Authorized Officers. Whenever the Company under the terms of the Agreement is permitted and required to perform any act or matter or thing, it shall be done and performed by a duly authorized officer of the Company. Executed by the parties this 29th day of January, 1997. MIDAMERICAN ENERGY HOLDINGS COMPANY By: ____________________________ - - -------------------------------- Russell E. Christiansen 6 MIDAMERICAN ENERGY HOLDINGS COMPANY DEFERRED COMPENSATION AGREEMENT WITH RUSSELL E. CHRISTIANSEN SECTION 1. PURPOSE. The purpose of this Agreement is to enable MidAmerican Energy Holdings Company to retain the Executive as a consultant to the Company by providing such Executive the opportunity to defer his cash compensation. SECTION 2. DEFINITIONS. (a) "Cash Compensation" means one hundred percent (100%) of the Executive's annual consulting fees attributable to his services as a consultant for the Company between June 1, 1997 and May 31, 2000. (b) "Common Stock" means shares of common stock of MidAmerican Energy Holdings Company. (c) "Company" means MidAmerican Energy Holdings Company. (d) "Compensation Committee" means the Compensation Committee established by the Board of Directors of the Company. (e) "Deferred Compensation" means 100% of the Cash Compensation as defined in (a) above. (f) "Executive" means Russell E. Christiansen. (g) "Plan Year" shall mean each January 1 through December 31. SECTION 3. ADMINISTRATION. (a) Compensation Committee. The Compensation Committee shall have the responsibility of making such determinations as may be necessary or advisable to administer the Agreement. No member of the Compensation Committee shall be liable for any act done or determination made in good faith. (b) Delegation. The Compensation Committee may, in its discretion, delegate its routine administrative duties to an officer or employee of the Company, or to a committee composed of such officers or employees. The Corporate Secretary of the Company shall maintain the records and accounts of the Agreement. SECTION 4. BENEFICIARY DESIGNATION. Executive shall designate one or more beneficiaries in writing to the Committee. Such designation may be revoked or modified at any time by designating a new beneficiary in writing to the Committee. Executive's beneficiary designation shall be deemed automatically revoked in the event all designated beneficiaries predecease the Executive or, if the sole beneficiary is the Executive's spouse, in the event of dissolution of marriage. In such event, or in the event the Executive does not designate a beneficiary, the benefits hereunder shall be paid to the Executive's estate. SECTION 5. BOOK VALUE DEFERRAL METHOD. (a) Deferred Compensation Units. The Book Value Deferral Method credits Deferred Compensation units ("Units") to the Executive's account determined by dividing the cash amount of Deferred Compensation by the Book Value of the Common Stock at December 31 of the previous calendar year. The Executive's account shall be credited with amounts equal to dividends paid in cash from time to time on the Common Stock. "Book Value" of Common Stock shall be the total Common Stock equity on a consolidated basis divided by total shares outstanding, as shown in the applicable annual report certified by the independent certified public accountants retained as auditors of the Company. (b) Special Ledger. The Company shall keep an appropriate record, hereinafter called the Special Ledger, of (i) the amount of Cash Compensation deferred by the Executive, (ii) the number of Units credited under paragraph (c) of this Section 5, and (iii) the amount of dividends and Units credited with respect thereto under paragraph (d) of this Section 5. (c) Credit of Units to Account. The number of Units to be credited to the Executive's account shall be determined by dividing the cash amount of Deferred Compensation by the Book Value of the Common Stock at December 31 of the previous calendar year. (d) Credit for Dividends. The Company shall credit to the Executive's account in the Special Ledger amounts equal to dividends paid in cash from time to time on the account, so that the amount of each such credit will be the equivalent of the dividends which the Participant would have received had the Executive been the owner of the number of shares of Common Stock equal to the number of Units in the Participant's account. Such amounts credited to each Participant's account shall be converted into additional Units in the manner provided in paragraph (c) of this Section 5 (using Book Value as of the previous December 31), and thereafter such additional Units shall be included in the base for determining future credits. 2 (e) Adjustment in Number of Units. In the event of any stock dividend on the Common Stock or any stock split, reverse stock split or combination of shares of Common Stock, appropriate adjustment shall be made in the number of Units credited to the account of the Executive in the Special Ledger. SECTION 6. PAYMENT. (a) Conditions on Right to Receive Payment. The Executive shall not be entitled to payment of any Deferred Compensation until he is entitled to payment of deferred compensation under the MidAmerican Energy Company Deferred Compensation Plan-- Executives. Upon approval by the Committee, payment may be made to the Executive earlier than the date specified above. (b) Form and Timing of Payment. (i) Under the Book Value Deferral Method, the value of Units at the time of payout shall be based on (w) the closing market price of Common Stock on the last trading date of the preceding Plan Year of the Common Stock on the New York Stock Exchange, (x) the average of the daily closing market price for the Common Stock for the twelve month period ending on the date of termination of services as an employee of the Company or (y) the Book Value of Common Stock as of the most recent December 31 prior to date of payment. The Executive (or beneficiary in the event of death prior to any payout to the Executive) shall make a selection between the foregoing methods of valuation prior to the time for payment of a lump sum or prior to the first payment in the case of annual installments. Such selection cannot be changed with respect to any subsequent payments in the case of annual installments. The per Unit value as selected by the Participant shall be referred to as the "Payout Value". (ii) At the election of the Compensation Committee, upon consultation with the Executive, payments of deferred compensation shall be made on the date selected by the Committee and shall be made in a lump sum or in approximately equal annual installments, and if annual installments are elected, the Compensation Committee shall determine, upon consultation with the Executive, the period over which payments are to be made. (iii) If annual installments are elected, each annual installment shall be not less that an amount equal to the value of the account at the beginning of the Plan Year in which distribution is to be made divided by the life expectancy of the Executive at the beginning of such Plan Year (or the joint life expectancy of the Executive and spouse if the Executive is married). Each annual installment payment shall be made within fifteen (15) days following the first day of each Plan Year. (iv) If an election is made to receive annual installments, then Units remaining in the account at any time shall continue to be credited with dividends (which shall 3 purchase additional Units), until full payment has been made with respect to all Units. Units shall continue to fluctuate in value based on the Payout Value until full payment has been made with respect to the Units. In the alternative, instead of having the account fluctuate in value, the Executive may elect to have the value of his account fixed as of the December 31 prior to the first payment, based on the selection of Payout Value under paragraph (b)(i) of this Section 6. If such an election is made, the account shall be credited each December 31 with interest at the then current Fixed Rate of Interest credited under the Fixed Rate of Interest Deferral Option in the Company's "Deferred Compensation Plan--Executives". (v) If an election is made to receive a lump sum payment, payment shall be made within fifteen (15) days following the first day of the Plan Year in which payment is to be made (or as soon thereafter as reasonably possible if the value is based on Book Value), and the amount of the lump sum payment shall be equal to the value of the account as of December 31 of the preceding Plan Year (based on the Payout Value selected under paragraph (b)(i) of this Section 6). (vi) Payment of a lump sum amount or any annual installment shall be made in cash. (vii) In the event of the death of an Executive occurring either before the commencement of payment or before the full balance of the Executive's account has been paid, the unpaid balance of Deferred Compensation shall be paid in a lump sum to the Executive's designated beneficiary or estate. Payment shall be made within thirty (30) days following the date of death. Dividends to which owners of Common Stock would be entitled through date of death shall be credited to the account. The value of Units shall be based on the closing market price of Common Stock on the date of death (or on the preceding business day if date of death is not business day) or as otherwise selected by the beneficiary in accordance with paragraph (b)(i) of this Section 6 if no payments had yet begun to the Executive. SECTION 7. GENERAL PROVISIONS. (a) The obligations hereunder shall at all times be unsecured and payments with respect to any benefits hereunder shall be paid out of the general operating revenue of the Company. A trust may be established to provide for the payment of benefits to the Executive hereunder as long as the assets of such trust are subject to the claims of general creditors of the Company with respect to the value of the Executive's account. (b) Withholding. The Committee shall have the right to require Executive to remit to the Company an amount sufficient to satisfy Federal, state and local tax withholding 4 requirements, or to deduct from any or all payments made pursuant to the Agreement amounts sufficient to satisfy such withholding tax requirements. (c) Costs of the Agreement. All costs of implementing and administering the Agreement shall be borne by the Company. (d) Non-Alienation of Benefits. No right or benefit under this Agreement shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or claims of the person entitled to such benefit. If the Executive or designated beneficiary hereunder should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit hereunder, then such right or benefit shall, in the discretion of the Compensation Committee, cease, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Executive or the designated beneficiary, his or her spouse, children, or other dependents, or any of them, in such manner and in such proportion as the Compensation Committee may deem proper. (e) Successors. All obligations of the Company under the Agreement shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the direct or indirect result of a merger or reorganization involving the Company or the purchase or other acquisition, of all or substantially all of the business or assets of the Company. (f) Amendment or Termination of Agreement. Any amendment or termination of this Agreement shall only be accomplished and permitted by written agreement between the Executive and Company. (g) Separability. If any term or provision of this Agreement as presently in effect or as amended from time to time, or the application thereof to any payments or circumstances, shall to any extent be invalid or unenforceable, the remainder of the Agreement, and the application of such term or provision to payments or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term or provision of the Agreement shall be valid and enforced to the fullest extent permitted by law. (h) Construction. The provisions of this Agreement shall be construed, administered and enforced according to the laws of the State of Iowa. (i) Titles. The titles of the Articles and Sections herein are included for convenience of reference only and shall not be construed as part of this Agreement, or have any effect upon the meaning of the provisions hereof. 5 (j) Authorized Officers. Whenever the Company under the terms of the Agreement is permitted and required to perform any act or matter or thing, it shall be done and performed by a duly authorized officer of the Company. Executed by the parties this 29th day of January, 1997. MIDAMERICAN ENERGY HOLDINGS COMPANY By: ____________________________ - - -------------------------------- Russell E. Christiansen 6 EX-12 9 EXH. 12.1 - COMPUTATION OF RATIOS - MEC HOLDINGS
EXHIBIT 12.1 MIDAMERICAN ENERGY HOLDINGS 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 31,1996 DECEMBER 31,1995 -------------------------------- ------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- --------- Income from continuing operations ........................... $143,761 -- $143,761 $119,705 $119,705 Preferred stock dividends of subsidiary ..................... 10,689 -- -- 8,059 -- 8,059 Pre-tax (gain) loss of less than 50% owned persons .......... 10,938 -- 10,938 16,482 -- 16,482 -------- ----- -------- -------- ----- -------- 165,388 -- 154,699 144,246 -- 144,246 Add (Deduct): Total income taxes .......................................... 98,422 -- 98,422 66,803 -- 66,803 Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 -- 10,941 9,449 -- 9,449 Interest on leases .......................................... 375 -- 375 1,088 -- 1,088 -------- ----- -------- -------- ----- ------- 212,647 3,615 216,262 182,890 4,595 187,485 -------- ----- -------- ------- ----- ------- Earnings available for fixed charges ...................... 378,035 3,615 370,961 327,136 4,595 331,731 -------- ----- -------- -------- ----- -------- Fixed Charges: Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 -- 10,941 9,449 -- 9,449 Interest on leases .......................................... 375 -- 375 1,088 -- 1,088 -------- ----- -------- -------- ----- -------- Total fixed charges ....................................... 114,225 3,615 117,840 116,087 4,595 120,682 -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges .......................... 3.310 -- 3.148 2.818 -- 2.749 ======== ===== ======== ======== ===== ======== Preferred stock dividend requirements ....................... $ 10,689 -- $ 10,689 $ 8,059 -- $ 8,059 Ratio of net income before income taxes to net income ....... 1.6372 -- 1.6846 1.5229 -- 1.5229 -------- ----- -------- -------- ----- -------- Preferred stock dividend requirements before income tax ..... 17,500 -- 18,007 12,273 -- 12,273 -------- ----- -------- -------- ----- -------- Fixed charges plus preferred stock dividend requirements .... 131,725 3,615 135,847 128,360 4,595 132,955 -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.870 -- 2.731 2.549 -- 2.495 ======== ===== ======== ======== ===== ========
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 12.1 MIDAMERICAN ENERGY HOLDINGS 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 Twelve Months Ended December 31, 1994 December 31, 1993 December 31, 1992 --------------------------- -------------------------- -------------------------- Supplemental (a) Supplemental (a) Supplemental (a) ------------------- ------------------- ------------------- As As As Adjustment Adjusted Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- ---------- -------- Income from continuing operations ........... $123,098 -- $123,098 $134,325 -- $134,325 $ 75,045 -- $ 75,045 Preferred stock dividends of subsidiary ..... 10,551 -- 10,551 8,367 -- 8,367 8,735 -- 8,735 Pre-tax (gain) loss of less than 50% owned persons ............................. (270) -- (270) (597) -- (597) (1,297) -- (1,297) -------- ----- -------- -------- ----- -------- -------- ----- -------- 133,379 -- 133,379 142,095 -- $142,095 82,483 -- 82,483 Add (Deduct): Total income taxes .......................... 60,457 -- 60,457 67,485 -- 67,485 24,566 -- 24,566 Interest on long-term debt .................. 101,267 5,428 106,695 107,044 5,678 112,722 114,732 7,391 122,123 Other interest charges ...................... 6,446 -- 6,446 5,066 -- 5,066 5,899 -- 5,899 Interest on leases .......................... 1,211 -- 1,211 1,876 -- 1,876 2,386 -- 2,386 --------- ----- -------- -------- ----- -------- -------- ----- -------- 169,381 5,428 174,809 181,471 5,678 187,149 147,583 7,391 154,974 --------- ----- -------- -------- ----- -------- -------- ----- -------- Earnings available for fixed charges ...... 302,760 5,428 308,188 323,566 5,678 329,244 230,066 7,391 237,457 --------- ----- -------- -------- ----- -------- -------- ----- -------- Fixed Charges: Interest on long-term debt .................. 101,267 5,428 106,695 107,044 5,678 112,722 114,732 7,391 122,123 Other interest charges ...................... 6,446 -- 6,446 5,066 -- 5,066 5,899 -- 5,899 Interest on leases .......................... 1,211 -- 1,211 1,876 -- 1,876 2,386 -- 2,386 -------- ----- -------- -------- ----- -------- -------- ----- -------- Total fixed charges ....................... 108,924 5,428 114,352 113,986 5,678 119,664 123,017 7,391 130,408 -------- ----- -------- -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges .......... 2.780 -- 2.695 2.839 -- 2.751 1.870 -- 1.821 ======== ===== ======== ======== ===== ======== ======== ===== ======== Preferred stock dividend requirements ....... $ 10,551 -- $ 10,551 $ 8,367 -- $ 8,367 $ 8,735 -- $ 8,735 Ratio of net income before income taxes to net income................. 1.4524 -- 1.4524 1.4729 -- 1.4729 1.2932 -- 1.2932 -------- ----- -------- -------- ----- -------- -------- ----- -------- Preferred stock dividend requirements before income tax ......................... 15,324 -- 15,324 12,324 -- 12,324 11,296 -- 11,296 -------- ----- -------- -------- ----- -------- -------- ----- -------- Fixed charges plus preferred stock dividend requirements ..................... 124,248 5,428 129,676 126,310 5,678 131,988 134,313 7,391 141,704 -------- ----- -------- -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .................... 2.437 -- 2.377 2.562 -- 2.494 1.713 -- 1.676 ======== ===== ======== ======== ===== ======== ======== ===== =======
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- EX-12 10 EXH 12.2 - COMPUTATION OF RATIOS - MEC EXHIBIT 12.2
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 31,1996 DECEMBER 31,1995 -------------------------------- ------------------------------ Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $165,132 $165,132 $132,489 -- $132,489 Preferred stock dividends of subsidiary ..................... 288 -- 288 -- -- -- -------- ----- -------- -------- ----- -------- 165,420 -- 165,420 132,489 132,489 Add (Deduct): Total income taxes .......................................... 112,927 -- 112,927 84,098 -- 84,098 Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 -- 10,842 9,396 -- 9,396 Interest on leases .......................................... 375 -- 375 1,088 -- 1,088 -------- ----- -------- -------- ----- -------- 203,578 3,615 207,193 174,715 4,595 179,310 -------- ----- -------- -------- ----- -------- Earnings available for fixed charges ........................ 368,998 3,615 372,613 307,204 4,595 311,799 -------- ----- -------- -------- ----- -------- Fixed Charges: Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 -- 10,842 9,396 ----- 9,396 Interest on leases .......................................... 375 -- 375 1,088 -- 1,088 -------- ----- -------- -------- ----- -------- Total fixed charges ......................................... 90,651 3,615 94,266 90,617 4,595 95,212 -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges .......................... 4.071 -- 3.953 3.390 -- 3.275 ======== ===== ======== ======== ===== ======== Preferred stock dividend requirements ....................... $ 10,689 -- $ 10,689 $ 8,059 -- $ 8,059 Ratio of net income before income taxes to net income ....... 1.6827 -- 1.6827 1.6348 -- 1.6348 -------- ----- -------- -------- ----- -------- Preferred stock dividend requirements before income tax ..... 17,986 -- 17,986 13,175 -- 13,175 -------- ----- -------- -------- ----- -------- Fixed charges plus preferred stock dividend requirements .... 108,637 3,615 112,252 103,792 4,595 108,387 -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 3.397 -- 3.319 2.960 -- 2.877 ======== ===== ======== ======== ===== ========
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 12.2 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 Twelve Months Ended December 31, 1994 December 31, 1993 December 31, 1992 --------------------------- -------------------------- -------------------------- Supplemental (a) Supplemental (a) Supplemental (a) ------------------- ------------------- ------------------- As As As Adjustment Adjusted Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........... $121,145 -- $121,145 $133,888 -- $133,888 $ 86,713 -- $ 86,713 Preferred stock dividends of subsidiary ..... -- -- -- -- -- -- -------- ----- -------- -------- ----- -------- -------- ----- -------- 121,145 -- 121,145 133,888 -- $133,888 86,713 -- 86,713 Add (Deduct): Total income taxes .......................... 66,759 -- 66,759 75,917 -- 75,917 39,144 -- 39,144 Interest on long-term debt .................. 73,922 5,428 79,350 80,642 5,678 86,320 87,233 7,391 94,624 Other interest charges ...................... 6,639 -- 6,639 5,068 -- 5,068 4,373 -- 4,373 Interest on leases .......................... 1,211 -- 1,211 1,876 -- 1,876 2,386 -- 2,386 --------- ----- -------- -------- ----- -------- -------- ----- -------- 148,531 5,428 153,959 163,503 5,678 169,181 133,136 7,391 140,527 --------- ----- -------- -------- ----- -------- -------- ----- -------- Earnings available for fixed charges ...... 269,676 5,428 275,104 297,391 5,678 303,069 219,849 7,391 227,240 --------- ----- -------- -------- ----- -------- -------- ----- -------- Fixed Charges: Interest on long-term debt .................. 73,922 5,428 79,350 80,642 5,678 86,320 87,233 7,391 94,624 Other interest charges ...................... 6,639 -- 6,639 5,068 -- 5,068 4,373 -- 4,373 Interest on leases .......................... 1,211 -- 1,211 1,876 -- 1,876 2,386 -- 2,386 -------- ----- -------- -------- ----- -------- -------- ----- -------- Total fixed charges ....................... 81,772 5,428 87,200 87,586 5,678 93,264 93,992 7,391 101,383 -------- ----- -------- -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges .......... 3.298 -- 3.155 3.395 -- 3.250 2.339 -- 2.241 ======== ===== ======== ======== ===== ======== ======== ===== ======== Preferred stock dividend requirements ....... $ 10,551 -- $ 10,551 $ 8,367 -- $ 8,367 $ 8,735 -- $ 8,735 Ratio of net income before income taxes to net income................. 1.5511 -- 1.5511 1.5670 -- 1.5670 1.4514 -- 1.4514 -------- ----- -------- -------- ----- -------- -------- ----- -------- Preferred stock dividend requirements before income tax ......................... 16,366 -- 16,366 13,111 -- 13,111 12,678 -- 12,678 -------- ----- -------- -------- ----- -------- -------- ----- -------- Fixed charges plus preferred stock dividend requirements ..................... 98,138 5,428 103,566 100,697 5,678 106,375 106,670 7,391 114,061 -------- ----- -------- -------- ----- -------- -------- ----- -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .................... 2.748 -- 2.656 2.953 -- 2.849 2.061 -- 1.992 ======== ===== ======== ======== ===== ======== ======== ====== =======
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- EX-21.1 11 SUBSIDIARIES - MIDAMERICAN ENERGY HOLDINGS COMPANY EXHIBIT 21.1 SUBSIDIARIES OF MIDAMERICAN ENERGY HOLDINGS COMPANY AS OF DECEMBER 31, 1996 Jurisdiction Subsidiary of Incorporation - - ---------- ---------------- MidAmerican Energy Company Iowa MidAmerican Capital Company Delaware Midwest Capital Group, Inc. Iowa AmGas, Inc. Iowa Continental Power Exchange, Inc. Delaware InterCoast Capital Company Delaware InterCoast Energy Company Delaware InterCoast Oil and Gas Company (1) Delaware InterCoast Power Company Delaware IWG Co. 3 Delaware IWG Co. 9 Delaware MWR Investments, Inc. Iowa As of the end of the year covered by this report, MidAmerican Energy Holdings Company's remaining subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X. (1) Sold in January of 1997. EX-21.2 12 SUBSIDIARIES OF MIDAMERICAN ENERGY COMPANY EXHIBIT 21.2 SUBSIDIARIES OF MIDAMERICAN ENERGY COMPANY AS OF DECEMBER 31, 1996 Jurisdiction Subsidiary of Incorporation - - ---------- ---------------- CBEC Railway Inc. Iowa MidAmerican Energy Financing I Delaware As of the end of the year covered by this report, MidAmerican Energy Company's remaining subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X. EX-23.1 13 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into MidAmerican Energy Holdings Company's previously filed Registration Statements, File No.'s 33-60549, 33-60849, 33-60851, and 333-02803. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois March 28, 1997 EX-23.3 14 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into MidAmerican Energy Company's previously filed Registration Statements, File No.'s 2-85102 and 333-15387. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois March 28, 1997 EX-27.1 15 AMENDED FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of September 30, 1996, and the related consolidated statements of income and cash flows for the nine months ended September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000928576 MidAmerican Energy Company 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 PER-BOOK 2,626,456 385,709 288,108 397,582 207,725 3,905,580 801,442 0 442,593 1,238,615 50,000 77,534 1,062,350 0 0 160,063 47,713 0 0 0 1,269,305 3,905,580 1,194,529 86,967 921,043 1,008,010 186,519 (12,632) 173,887 64,541 109,346 6,748 102,598 90,594 59,646 249,873 0 0 Tag 41 includes a $8,577,000 Loss from Discontinued Operations, net of income taxes.
EX-27.2 16 AMENDED FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of June 30, 1996, and the related consolidated statements of income and cash flows for the six months ended June 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000928576 MidAmerican Energy Company 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 PER-BOOK 2,633,316 398,124 238,956 404,677 209,178 3,884,251 801,439 0 450,191 1,242,588 50,000 78,577 1,109,683 0 0 166,317 392 0 0 0 1,236,694 3,884,251 810,458 53,364 640,675 694,039 116,419 11,226 127,645 42,942 84,703 4,661 80,042 60,440 39,768 181,258 0 0 Tag 41 includes a $10,438,000 of Income from Discontinued Operations, net of income taxes.
EX-27.3 17 AMENDED FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of March 31, 1996, and the related consolidated statements of income and cash flows for the three months ended March 31, 1996, and is qualified in its entirety by reference to such financial statements. 0000928576 MidAmerican Energy Company 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 PER-BOOK 2,636,139 395,412 254,371 404,908 210,651 3,901,481 797,675 0 451,414 1,244,250 50,000 81,461 1,109,563 0 0 99,800 917 0 0 0 1,315,490 3,901,481 458,260 32,330 356,569 388,899 69,361 5,876 75,237 21,713 53,524 2,477 51,047 30,221 19,826 157,635 0 0 Tag 41 includes a $6,105,000 income from Discontinued Operations, net of income taxes.
EX-99.1 18 FORM 11K - MEC EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 99.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 ------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ----------- ----------- Commission file number 1-12459 ------------------ MIDAMERICAN ENERGY COMPANY EMPLOYEE STOCK PURCHASE PLAN - - ------------------------------------------------------------------------------- (Full title of the plan) MIDAMERICAN ENERGY HOLDINGS COMPANY - - ------------------------------------------------------------------------------- (Name of Issuer of the securities held pursuant to the plan) 666 Grand Ave. P.O. Box 657, Des Moines, Iowa 50303 - - --------------------------------------------- --------- (Address of principal executive offices) (Zip Code) MIDAMERICAN ENERGY COMPANY EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF FINANCIAL CONDITION
ASSETS ------ As of December 31 ------------------------ 1996 1995 ---------- ---------- INVESTMENTS MidAmerican Energy Holdings Company common stock held by nominee - 558,323 and 486,319 shares, respectively Cost at date of purchase $8,508,522 $7,189,938 Unrealized appreciation in market value 354,859 955,908 ---------- ---------- Market value 8,863,381 8,145,846 CONTRIBUTIONS RECEIVABLE 2,857 2,854 ---------- ---------- Total $8,866,238 $8,148,700 ========== ========== LIABILITIES AND OWNERSHIP INTEREST ---------------------------------- OWNERSHIP INTEREST $8,866,238 $8,148,700 ========== ==========
The accompanying notes to financial statements are an integral part of these statements. -2- MIDAMERICAN ENERGY COMPANY EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN OWNERSHIP INTEREST
Year Ended Period From Inception December 31, (July 3, 1995) to 1996 December 31, 1995 ------------- -------------------- BALANCE, beginning of period $8,148,700 $ - ---------- --------- TRANSFER OF OWNERSHIP INTEREST FROM OTHER PLANS - 6,302,994 ---------- ---------- CONTRIBUTIONS Participants 2,129,815 1,192,809 Company 375,850 210,495 ---------- ------------ 2,505,665 1,403,304 ---------- ---------- PLAN INCOME Dividends on shares held by the Plan 612,650 275,721 Realized gain on distributed shares 137,597 41,459 Unrealized appreciation (depreciation) in market value of investments (601,049) 955,908 ---------- ---------- 149,198 1,273,088 ---------- ---------- DISTRIBUTIONS TO PLAN PARTICIPANTS Shares distributed 1,324,675 554,965 Dividends paid 612,650 275,721 ---------- ---------- 1,937,325 830,686 ---------- ---------- BALANCE, end of period $8,866,238 $8,148,700 ========== ==========
The accompanying notes to financial statements are an integral part of these statements. -3- MIDAMERICAN ENERGY COMPANY EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS (1) THE PLAN The following brief description of the MidAmerican Energy Company Employee Stock Purchase Plan (the Plan) is provided for general information purposes only. Participants should refer to the Plan document for more complete information. (a) General and Plan Participants On July 1, 1995, Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc. (Resources) and its wholly owned subsidiary Midwest Power Systems Inc. merged with and into MidAmerican Energy Company (MidAmerican). The Plan became effective on July 3, 1995, at which time the ownership interest and shares of the Resources and Iowa-Illinois employee stock purchase plans were transferred to the Plan. The Resources and Iowa-Illinois plans ceased at that time. On April 24, 1996, MidAmerican shareholders approved a proposal to form MidAmerican Energy Holdings Company (Holdings or the Company) as a holding company for MidAmerican and its subsidiaries. Effective December 1, 1996, each share of MidAmerican common stock was exchanged for one share of Holdings common stock. Under the Plan, eligible employees, as defined by the Plan, of the Company and its subsidiaries who are enrolled in the Plan may purchase shares of the common stock of the Company (Common Stock) at 85% of their fair market value. Purchases are made on the last business day of each monthly investment period with fair market value being the average of the high and low prices per share of Common Stock on the New York Stock Exchange - Composite Transactions on such day or, if there is no sale of Common Stock on that day, then on the next preceding day on which there was a sale. The Company contributes the remaining 15% of the fair market value. The Plan will terminate when the maximum number of shares of Common Stock to be sold under the Plan has been purchased or by action of the board of directors of the Company. The maximum number of shares of Common Stock which is currently authorized to be purchased pursuant to the Plan is 1,000,000 subject to adjustment as the result of a stock dividend, split-up or combination. During 1996, the Company purchased shares of Common Stock in the open market to meet share obligations under the Plan. Such share purchases do not proportionately reduce the shares available for issuance. At December 31, 1996 and 1995, there were 2,020 and 2,022 participants, respectively in the Plan. (b) Administration The Plan is administered by the Company at the Company's expense. (c) Contributions Participants' contributions to the Plan are made through payroll deductions which are credited to a purchase account established for each participant. Participants may authorize contributions up to the lesser of -4- 15% of base pay, as defined in the Plan, or $21,250 annually. (d) Ownership Interest Shares of Common Stock purchased for all participants each monthly investment period are issued on the last day of that period to a nominee for the benefit of the participants. A separate account is maintained to reflect the Common Stock balance of each participant. The Company is the nominee for the Plan. (e) Dividends Cash dividends on shares of Common Stock earned on each participant's account are paid to the participant by the Company or, at the participant's election, reinvested in Common Stock. Such Common Stock is held in, and under the terms of, the Company's Shareholder Options Plan. (f) Vesting and Withdrawal of Shares Participants have a vested right to all shares of Common Stock credited to their accounts. Shares of Common Stock held in the Plan cannot be withdrawn from the Plan until the shares have been held under the Plan for at least six months except that, in the event of a participant's death or termination of employment or eligibility, a participant's account will be totally distributed. Upon withdrawal from the Plan, all whole shares in a participant's account will be deposited in safekeeping under the Company's Shareholder Options Plan unless the participant requests that a certificate be issued, and a cash payment will be made for fractional shares. (g) Legal and Income Tax Status The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company believes that the Plan qualifies under Section 423 of the Internal Revenue Code (the Code) as an employee stock purchase plan. An employee's federal income tax status with respect to the Plan would be determined by such section of the Code. The Plan is not subject to federal income tax. (2) ACCOUNTING POLICIES (a) Basis of Accounting The statements are presented on the accrual basis of accounting, and accordingly, contributions of participants and the Company are reflected in the year in which the participants earned the related wages. The Plan's obligation to purchase Common Stock with the accrued contributions is reflected in Ownership Interest. The cost of Common Stock distributed by the Plan is determined on an average cost basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes in ownership interest. Actual results could differ from those estimates. (b) Valuation of Investments Common Stock held under the Plan is reported at market value as determined by the closing price at year-end on the New York Stock Exchange - Composite Transaction listing. The market value as of December 31, 1996 and 1995 was $15.875 and $16.75, respectively. -5- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MidAmerican Energy Holdings Company: We have audited the accompanying statements of financial condition of the MidAmerican Energy Company Employee Stock Purchase Plan as of December 31, 1996 and 1995, and the related statements of changes in ownership interest for the twelve month period ended December 31, 1996 and from inception (July 3, 1995) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the MidAmerican Energy Company Employee Stock Purchase Plan as of December 31, 1996 and 1995, and the changes in ownership interest for the twelve month period ended December 31, 1996, and from inception (July 3, 1995) to December 31, 1995, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois March 21, 1996 -6- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, MidAmerican Energy Holdings Company has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. MIDAMERICAN ENERGY COMPANY EMPLOYEE STOCK PURCHASE PLAN Date March 28, 1997 By /s/ P. G. Lindner ---------------- -------------------------- P. G. Lindner Senior Vice President and Chief Financial Officer -7- EXHIBITS INDEX The following exhibit is filed herewith: 23 Consent of Independent Public Accountants -8- EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 11-K, into MidAmerican Energy Holdings Company's previously filed Registration Statement, File No. 33-60849. Chicago, Illinois /s/ ARTHUR ANDERSEN LLP March 28, 1997 -----END PRIVACY-ENHANCED MESSAGE-----