-----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, VrM7AxS86ZARaLGZDRU4MR8esV/DbFyXikqmpO3CVLhTtmP+Dysjp5AtHeC25Pgd QLh+ptCCzKxZmf2JTBhFFQ== 0001009526-98-000002.txt : 19990521 0001009526-98-000002.hdr.sgml : 19990521 ACCESSION NUMBER: 0001009526-98-000002 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 ITEM INFORMATION: FILED AS OF DATE: 19980206 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: 8-K SEC ACT: SEC FILE NUMBER: 001-12459 FILM NUMBER: 98524499 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: 8-K SEC ACT: SEC FILE NUMBER: 001-11505 FILM NUMBER: 98524500 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 8-K 1 YEAREND FINANCIAL STATEMENTS SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): February 5, 1998 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 515-242-4300 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. --------------------------------- (c) Exhibits. -------- Exhibit Number 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 dividend requirements. 12.2 MidAmerican Energy Company computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. 23.1 Consent of Coopers & Lybrand L.L.P. (for Holdings). 23.2 Consent of Coopers & Lybrand L.L.P. (for MidAmerican). 27 Financial Data Schedules (for electronic filing only). 99.1 Financial information of MidAmerican Energy Holdings Company and MidAmerican Energy Company including selected financial data for the years ended and as of December 31, 1997, 1996, 1995, 1994 and 1993; management's discussion and analysis of financial condition and results of operations; consolidated statements of income, cash flows and retained earnings for the years ended December 31, 1997 1996 and 1995; consolidated balance sheets and consolidated statements of capitalization as of December 31, 1997 and 1996; notes to the consolidated financial statements; report of the independent public accountant; report of management; and supplemental financial and statistical data. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MidAmerican Energy Holdings Company MidAmerican Energy Company ----------------------------------- Registrants February 6, 1998 s/s Paul J. Leighton - - ----------------- -------------------------------------- Date Paul J. Leighton Vice President and Corporate Secretary EXHIBIT INDEX Exhibit No. Description - - ----------- ----------- 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 dividend requirements. 12.2 MidAmerican Energy Company computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. 23.1 Consent of Coopers & Lybrand L.L.P. (for Holdings). 23.2 Consent of Coopers & Lybrand L.L.P. (for MidAmerican). 27 Financial Data Schedules (for electronic filing only). 99.1 Financial information of MidAmerican Energy Holdings Company and MidAmerican Energy Company including selected financial data for the years ended and as of December 31, 1997, 1996, 1995, 1994 and 1993; management's discussion and analysis of financial condition and results of operations; consolidated statements of income, cash flows and retained earnings for the years ended December 31, 1997, 1996 and 1995; consolidated balance sheets and consolidated statements of capitalization as of December 31, 1997 and 1996; notes to the consolidated financial statements; report of the independent public accountant; report of management; and supplemental financial and statistical data. EX-12.1 2 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 31,1997 DECEMBER 31,1996 ---------------------------- ------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $139,332 $ - $139,332 $143,761 $ - $143,761 Pre-tax (gain) loss of less than 50% owned persons .......... 2,234 - 2,234 (698) - (698) -------- ------ -------- -------- ------ -------- 141,566 - 141,566 143,063 - 143,063 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 68,390 - 68,390 98,422 - 98,422 Interest on long-term debt .................................. 89,898 3,760 93,658 102,909 3,615 106,524 Other interest charges ...................................... 10,034 - 10,034 10,941 - 10,941 Preferred stock dividends of subsidiary...................... 6,488 - 6,488 10,401 - 10,401 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 288 - 288 Interest on leases .......................................... 268 - 268 375 - 375 -------- ------ -------- -------- ------ -------- 183,058 3,760 186,818 223,336 3,615 226,951 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 324,624 3,760 328,384 366,399 3,615 370,014 -------- ------ -------- -------- ------ --------- Fixed Charges: Interest on long-term debt .................................. 89,898 3,760 93,658 102,909 3,615 106,524 Other interest charges ...................................... 10,034 - 10,034 10,941 - 10,941 Preferred stock dividends of subsidiary ..................... 7,980 - 7,980 288 - 288 Interest on leases .......................................... 268 - 268 375 - 375 -------- ------ -------- -------- ------ --------- Total fixed charges ....................................... 108,180 3,760 111,940 114,513 3,615 118,128 -------- ------ -------- -------- ------ --------- Ratio of earnings to fixed charges .......................... 3.00 - 2.93 3.20 - 3.13 ======== ====== ======== ======== ====== ========= Preferred stock dividends of subsidiary ..................... $ 6,488 $ - $ 6,488 $ 10,401 $ - $ 10,401 Ratio of net income before income taxes to net income ....... 1.4690 - 1.4690 1.6384 - 1.6384 -------- ------ -------- -------- ------ --------- Preferred stock dividend requirements before income tax ..... 9,531 - 9,531 17,041 - 17,041 -------- ------ -------- -------- ------ --------- Fixed charges plus preferred stock dividend requirements .... 117,711 3,760 121,471 131,554 3,615 135,169 -------- ------ -------- -------- ------ --------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.76 - 2.70 2.79 - 2.74 ======== ====== ======== ======== ====== =========
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 DECEMBER 31,1995 DECEMBER 31,1994 -------------------------------- ------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- --------- Income from continuing operations ........................... $119,705 $ - $119,705 $123,098 $ - $123,098 Pre-tax (gain) loss of less than 50% owned persons .......... 9,079 - 9,079 (270) - (270) -------- ------ -------- -------- ------ -------- 128,784 - 128,784 122,828 - 122,828 -------- ------ -------- -------- ------ --------- Add (Deduct): Total income taxes .......................................... 66,803 - 66,803 60,457 - 60,457 Interest on long-term debt .................................. 105,550 4,595 110,145 101,267 5,428 106,695 Other interest charges ...................................... 9,449 - 9,449 6,446 - 6,446 Preferred stock dividends of subsidiary...................... 8,059 - 8,059 10,551 - 10,551 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,088 - 1,088 1,211 - 1,211 -------- ------ -------- -------- ------ -------- 190,949 4,595 195,544 179,932 5,428 185,360 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 319,733 4,595 324,328 302,760 5,428 308,188 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 105,550 4,595 110,145 101,267 5,428 106,695 Other interest charges ...................................... 9,449 - 9,449 6,446 - 6,446 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,088 - 1,088 1,211 - 1,211 -------- ------ -------- -------- ------ --------- Total fixed charges ....................................... 116,087 4,595 120,682 108,924 5,428 114,352 -------- ------ -------- -------- ------ --------- Ratio of earnings to fixed charges .......................... 2.75 - 2.69 2.78 - 2.70 ======== ====== ======== ======== ====== ========= Preferred stock dividends of subsidiary ..................... $ 8,059 $ - $ 8,059 $ 10,551 $ - $ 10,551 Ratio of net income before income taxes to net income ....... 1.5229 - 1.5229 1.4524 - 1.4524 -------- ------ -------- -------- ------ --------- Preferred stock dividend requirements before income tax ..... 12,273 - 12,273 15,324 - 15,324 -------- ------ -------- -------- ------ --------- Fixed charges plus preferred stock dividend requirements .... 128,360 4,595 132,955 124,248 5,428 129,676 -------- ------ -------- -------- ------ --------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.49 - 2.44 2.44 - 2.38 ======== ====== ======== ======== ====== =========
Note:(a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -2- EXHIBIT 12.1
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 31,1993 DECEMBER 31,1992 -------------------------------- ------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- --------- Income from continuing operations ........................... $134,325 $ - $134,325 $ 75,045 $ - $ 75,045 Pre-tax (gain) loss of less than 50% owned persons .......... (597) - (597) (1,297) - (1,297) -------- ------ -------- -------- ------ -------- 133,728 - 133,728 73,748 - 73,748 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 67,485 - 67,485 24,566 - 24,566 Interest on long-term debt .................................. 107,044 5,678 112,722 114,732 7,391 122,123 Other interest charges ...................................... 5,066 - 5,066 5,899 - 5,899 Preferred stock dividends of subsidiary...................... 8,367 - 8,367 8,735 - 8,735 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,876 - 1,876 2,386 - 2,386 -------- ------ -------- -------- ------ ------- 189,838 5,678 195,516 156,318 7,391 163,709 -------- ------ -------- -------- ------ ------- Earnings available for fixed charges ...................... 323,566 5,678 329,244 230,066 7,391 237,457 -------- ------ -------- -------- ------ ------- Fixed Charges: Interest on long-term debt .................................. 107,044 5,678 112,722 114,732 7,391 122,123 Other interest charges ...................................... 5,066 - 5,066 5,899 - 5,899 Preferred stock dividends of subsidiary ..................... - - - - - - Interest on leases .......................................... 1,876 - 1,876 2,386 - 2,386 -------- ------ -------- -------- ------ -------- Total fixed charges ....................................... 113,986 5,678 119,664 123,017 7,391 130,408 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 2.84 - 2.75 1.87 - 1.82 ======== ====== ======== ======== ====== ======== Preferred stock dividends of subsidiary ..................... $ 8,367 $ - $ 8,367 $ 8,735 $ - $ 8,735 Ratio of net income before income taxes to net income ....... 1.4729 - 1.4729 1.2932 - 1.2932 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 12,324 - 12,324 11,296 - 11,296 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 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) .............. 2.56 - 2.49 1.71 - 1.68 ======== ====== ======== ======== ====== ========
Note:(a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -3- EX-12.2 3 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 31,1997 DECEMBER 31,1996 -------------------------------- ------------------------------ Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $125,941 $ - $125,941 $165,132 $ - $165,132 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 76,317 - 76,317 112,927 - 112,927 Interest on long-term debt .................................. 78,120 3,760 81,880 79,434 3,615 83,049 Other interest charges ...................................... 10,027 - 10,027 10,842 - 10,842 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 288 - 288 Interest on leases .......................................... 268 - 268 375 - 375 -------- ------ -------- -------- ------ -------- 172,712 3,760 176,472 203,866 3,615 207,481 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 298,653 3,760 302,413 368,998 3,615 372,613 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 78,120 3,760 81,880 79,434 3,615 83,049 Other interest charges ...................................... 10,027 - 10,027 10,842 - 10,842 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 288 - 288 Interest on leases .......................................... 268 - 268 375 - 375 -------- ------ -------- -------- ------ -------- Total fixed charges........................................ 96,395 3,760 100,155 90,939 3,615 94,554 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.10 - 3.02 4.06 - 3.94 ======== ====== ======== ======== ====== ======== Preferred stock dividends of subsidiary...................... $ 6,488 $ - $ 6,488 $ 10,401 $ - $ 10,401 Ratio of net income before income taxes to net income ....... 1.6060 - 1.6060 1.6839 - 1.6839 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 10,420 - 10,420 17,514 - 17,514 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 106,815 3,760 110,575 108,453 3,615 112,068 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.80 - 2.73 3.40 - 3.32 ======== ====== ======== ======== ====== ========
Note:(a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -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 DECEMBER 31,1995 DECEMBER 31,1994 -------------------------------- ------------------------------ Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $132,489 $ - $132,489 $121,145 $ - $121,145 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 84,098 - 84,098 66,759 - 66,759 Interest on long-term debt .................................. 80,133 4,595 84,728 73,922 5,428 79,350 Other interest charges ...................................... 9,396 - 9,396 6,639 - 6,639 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,088 - 1,088 1,211 - 1,211 -------- ------ ------- -------- ------ -------- 174,715 4,595 179,310 148,531 5,428 153,959 -------- ------ ------- -------- ------ -------- Earnings available for fixed charges ...................... 307,204 4,595 311,799 269,676 5,428 275,104 -------- ------ ------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 80,133 4,595 84,728 73,922 5,428 79,350 Other interest charges ...................................... 9,396 - 9,396 6,639 - 6,639 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,088 - 1,088 1,211 - 1,211 -------- ------ ------- -------- ------ -------- Total fixed charges 90,617 4,595 95,212 81,772 5,428 87,200 -------- ------ ------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.39 - 3.27 3.30 - 3.15 ======== ====== ======= ======== ====== ======== Preferred stock dividends of subsidiary...................... $ 8,059 $ - $ 8,059 $ 10,551 $ - $ 10,551 Ratio of net income before income taxes to net income ....... 1.6348 - 1.6348 1.5511 - 1.5511 -------- ------ ------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 13,175 - 13,175 16,366 - 16,366 -------- ------ ------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 103,792 4,595 108,387 98,138 5,428 103,566 -------- ------ ------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.96 - 2.88 2.75 - 2.66 ======== ====== ======= ======== ====== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station -2- 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 31,1993 DECEMBER 31,1992 -------------------------------- ------------------------------ Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $133,888 $ - $133,888 $ 86,713 $ - $ 86,713 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 75,917 - 75,917 39,144 - 39,144 Interest on long-term debt .................................. 80,642 5,678 86,320 87,233 7,391 94,624 Other interest charges ...................................... 5,068 - 5,068 4,373 - 4,373 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,876 - 1,876 2,386 - 2,386 -------- ------ ------- -------- ----- -------- 163,503 5,678 169,181 133,136 7,391 140,527 -------- ------ ------- -------- ----- -------- Earnings available for fixed charges ...................... 297,391 5,678 303,069 219,849 7,391 227,240 -------- ------ ------- -------- ----- -------- Fixed Charges: Interest on long-term debt .................................. 80,642 5,678 86,320 87,233 7,391 94,624 Other interest charges ...................................... 5,068 - 5,068 4,373 - 4,373 Preferred stock dividends of subsidiary trust................ - - - - - - Interest on leases .......................................... 1,876 - 1,876 2,386 - 2,386 -------- ------ ------- -------- ----- -------- Total fixed charges 87,586 5,678 93,264 93,992 7,391 101,383 -------- ------ ------- -------- ----- -------- Ratio of earnings to fixed charges .......................... 3.40 - 3.25 2.34 - 2.24 ======== ====== ======= ======== ===== ======== Preferred stock dividends of subsidiary...................... $ 8,367 $ - $ 8,367 $ 8,735 $ - $ 8,735 Ratio of net income before income taxes to net income ....... 1.5670 - 1.5670 1.4514 - 1.4514 -------- ------ ------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 13,111 - 13,111 12,678 - 12,678 -------- ------ ------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 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) .............. 2.95 - 2.85 2.06 - 1.99 ======== ====== ======= ======== ===== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station -3- EX-23.1 4 COOPERS & LYBRAND CONSENT - MEC HOLDINGS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of MidAmerican Energy Holdings Company on Form S-3 (File No. 33-60549) and Form S-8 (File Nos. 33-60849, 33-60851 and 333-02803) of our report dated January 23, 1998, on our audits of the consolidated financial statements of MidAmerican Energy Holdings Company as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which report is included in this Form 8-K. /s/ Coopers & Lybrand L.L.P. ---------------------------- COOPERS & LYBRAND L.L.P. Kansas City, Missouri February 5, 1998 EX-23.2 5 COOPERS & LYBRAND CONSENT - MEC EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of MidAmerican Energy Company on Form S-3 (File No. 333-15387) and Form S-8 (File No. 2-85102) of our report dated January 23, 1998, on our audits of the consolidated financial statements of MidAmerican Energy Company as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996, and 1995, which report is included in this Form 8-K. /s/ Coopers & Lybrand L.L.P. ---------------------------- COOPERS & LYBRAND L.L.P. Kansas City, Missouri February 5, 1998 EX-27 6 FDS MIDAMERICAN ENERGY HOLDINGS COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Holdings Company as of December 31, 1997, and the related consolidated statements of income and cash flows for the twelve months ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 0001009526 MidAmerican Energy Holdings Company 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 2,622,113 799,524 322,482 360,865 173,107 4,278,091 753,873 0 409,296 1,301,286 150,000 31,763 1,034,211 0 0 138,054 144,558 0 0 0 1,478,219 4,278,091 1,922,281 68,390 1,651,775 1,651,775 270,506 44,791 315,297 111,803 135,104 0 135,104 117,605 78,120 392,245 1.38 1.38 Tag 37 includes operating and nonoperating income taxes and is excluded from operating expenses in Tag 39 and on the Consolidated Statement of Income. Tag 41 includes a $(4,228,000) loss from Discontinued Operations, net of income taxes.
EX-27.1AMENDED 7 FDS - MIDAMERICAN ENERGY HOLDINGS COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Holdings Company as of December 31, 1996, and the related consolidated statements of income and cash flows for the twelve months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 0001009526 MidAmerican Energy Holdings Company 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 2,630,585 789,292 511,659 399,415 190,897 4,521,848 801,431 0 440,971 1,239,946 150,000 31,769 1,395,103 0 0 161,990 79,598 0 0 0 1,463,442 4,521,848 1,872,612 98,422 1,528,974 1,528,974 343,638 6,157 349,795 120,327 131,046 0 131,046 120,770 79,434 321,387 1.30 1.30 Tag 37 includes operating and nonoperating income taxes and is excluded from operating expenses in Tag 39 and on the Consolidated Statement of Income. Tag 41 includes a $(12,715,000) loss from Discontinued Operations, net of income taxes.
EX-27.2 8 FDS - MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of December 31, 1997, and the related consolidated statements of income and cash flows for the twelve months ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 0000928576 MidAmerican Energy Company 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 PER-BOOK 2,623,106 115,029 283,943 347,122 173,107 3,542,307 560,563 0 425,181 985,744 150,000 31,763 920,203 0 0 122,500 124,460 0 0 0 1,207,637 3,542,307 1,662,606 74,562 1,381,517 1,456,079 206,527 12,944 219,471 93,530 125,941 6,488 119,453 120,500 78,120 379,538 0 0
EX-27.3AMENDED 9 FDS - MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of December 31, 1996, and the related consolidated statements of income and cash flows for the twelve months ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 0000928576 MidAmerican Energy Company 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 PER-BOOK 2,632,142 118,344 436,799 396,471 190,897 3,774,653 560,597 0 426,228 986,825 150,000 31,769 1,086,955 0 0 161,700 49,560 0 0 0 1,307,844 3,774,653 1,635,761 111,206 1,275,348 1,386,554 249,207 (7,884) 241,323 86,352 154,971 10,401 144,570 120,770 79,434 327,433 0 0 Tag 41 includes a $(10,161,000) loss from Discontinued Operations, net of income taxes.
EX-99.1 10 FINANCIAL STMTS - MIDAMERICAN ENERGY HOLDINGS EXHIBIT 99.1 SELECTED FINANCIAL DATA
DECEMBER 31 --------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ----------- MidAmerican Energy Holdings Company - - ----------------------------------- INCOME STATEMENT DATA: (g) Revenues........................................... $1,922,281 $1,872,612 $1,649,341 $1,631,225 $1,627,956 Operating income (a)............................... 270,506 343,638 292,354 264,492 267,938 Income from continuing operations (b).............. 139,332 143,761 119,705 123,098 134,325 Average common shares outstanding.................. 98,058 100,752 100,401 98,531 97,762 Earnings per average common share from continuing operations..................... $ 1.42 $ 1.43 $ 1.19 $ 1.25 $ 1.38 Cash dividends declared per share.................. $ 1.20 $ 1.20 $ 1.18 $ 1.17 $ 1.17 BALANCE SHEET DATA: Total assets....................................... $4,278,091 $4,521,848 $4,470,097 $4,388,894 $4,352,073 Long-term debt (c)................................. 1,178,769 1,474,701 1,468,617 1,471,127 1,407,374 Power purchase obligation (c)...................... 97,504 111,222 125,729 137,809 151,485 Short-term borrowings.............................. 138,054 161,990 184,800 124,500 173,035 Preferred stock: Not subject to mandatory redemption............ 31,763 31,769 89,945 89,955 109,871 Subject to mandatory redemption (d)............ 150,000 150,000 50,000 50,000 50,000 Common stock equity (f)............................ 1,301,286 1,239,946 1,225,715 1,204,112 1,180,510 Book value per common share (f).................... $ 13.65 $ 12.31 $ 12.17 $ 12.08 $ 12.07 MidAmerican Energy Company - - -------------------------- INCOME STATEMENT DATA: (g) Revenues.......................................... $1,662,606 $1,635,761 $1,554,235 $1,513,675 $1,541,959 Operating income (a).............................. 206,527 249,207 219,238 198,491 203,780 Net income from continuing operations (b)......... 125,941 165,132 132,489 121,145 133,888 Earnings on common from continuing operations..... 119,453 154,731 124,430 110,594 125,521 BALANCE SHEET DATA: Total assets...................................... $3,542,307 $3,774,653 $3,976,201 $3,879,847 $3,832,569 Long-term debt (c)................................ 1,044,663 1,136,515 1,110,525 1,109,617 1,051,144 Power purchase obligation (c)..................... 97,504 111,222 125,729 137,809 151,485 Short-term borrowings............................. 122,500 161,700 184,800 124,500 160,800 Preferred stock: Not subject to mandatory redemption........... 31,763 31,769 89,945 89,955 109,871 Subject to mandatory redemption (d)........... 150,000 150,000 50,000 50,000 50,000 Common stock equity (e)........................... 985,744 986,825 1,225,715 1,204,112 1,180,510
(a) MidAmerican Energy Holdings Company (Holdings) 1995 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) In 1997, Holdings recorded after-tax gains totalling $11.2 million for sales of assets of certain railcar businesses and a portion of a common stock investment that has appreciated significantly. 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 amounts due within one year. (d) Post-1995 years include MidAmerican-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures. (e) 1996 reflects distribution of the capital stock of MidAmerican Capital Company and Midwest Capital Group, Inc. to Holdings. (f) Holdings' common equity increased in 1997 due to recording at market value an investment in McLeodUSA, Inc. common stock. Refer to Note (14) for further discussion. (g) Refer to Operating Activities and Other Matters in MD&A for discussion of industry restructuring, and rate matters. -1- 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 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 and Midwest Capital are Holdings' nonregulated subsidiaries. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. MidAmerican Capital manages marketable securities and passive investment activities, nonregulated wholesale and retail natural gas businesses, security services and other energy-related, nonregulated activities. DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS The MidAmerican merger was accounted for as a pooling-of-interests, and consolidated financial statements are presented as if the merger occurred as of the beginning of the earliest period presented. The consolidated financial statements of MidAmerican present amounts related to MidAmerican Capital and Midwest Capital as discontinued operations for all periods that include months prior to December 1, 1996, in order 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. Management's Discussion and Analysis (MD&A) 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. -2- 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, fuel prices, competitive factors, general economic conditions in the Company's service territory, interest rates, inflation and federal and state regulatory actions. RESULTS OF OPERATIONS --------------------- Holdings: - - --------- The following tables provide a summary of the earnings contributions of the Company's operations for each of the periods presented:
1997 1996 1995 ------ ------ ------ Net Income (in millions) Continuing operations Electric utility $100.9 $122.7 $111.9 Gas utility 18.6 32.0 12.6 ------ ------ ------ Total 119.5 154.7 124.5 Nonregulated operations 19.9 (11.0) (4.8) Discontinued operations (4.2) (12.7) 3.1 ------ ------ ------ Consolidated earnings $135.1 $131.0 $122.8 ====== ====== ====== Earnings Per Common Share Continuing operations Electric utility $ 1.03 $ 1.22 $ 1.11 Gas utility 0.19 0.32 0.13 ------ ------ ------ Total 1.22 1.54 1.24 Nonregulated operations 0.20 (0.11) (0.05) Discontinued operations (0.04) (0.13) 0.03 ------ ------ ------ Consolidated earnings $ 1.38 $ 1.30 $ 1.22 ====== ====== ======
-3- MidAmerican: - - ------------ The following table provides a summary of the earnings contributions of MidAmerican's operations for each of the periods presented:
1997 1996 1995 ------ ------ ------ (in millions) Earnings on Common Stock Continuing operations Electric utility $100.9 $122.7 $111.9 Gas utility 18.6 32.0 12.6 ------ ------ ------ Total 119.5 154.7 124.5 Discontinued operations * - (10.1) (1.7) ------ ------ ------ Consolidated earnings $119.5 $144.6 $122.8 ====== ====== ======
*1996 and 1995 include the income (loss) of MidAmerican Capital and Midwest Capital prior to their transfer to Holdings on December 1, 1996. EARNINGS DISCUSSION Earnings per share for 1997 and 1996 each increased 8 cents compared to their prior year. Some of the significant factors resulting in the increases are listed below, on a Holdings per-share basis. The discussion that follows addresses these factors as well as other items affecting the Company's results of operations.
1997 vs 1996 1996 vs 1995 ------------ ------------ MidAmerican Net reduction in electric and gas gross margin due to - Variation in the effect of weather $ (0.03) $ (0.09) Customer growth 0.08 0.09 Electric retail rate changes (0.07) (0.01) Improvements due to other factors 0.10 0.05 Nuclear O&M expenses (0.07) 0.02 1995 merger and restructuring costs - 0.24 Other O&M expenses (0.40) 0.09 1996 merger proposal costs 0.05 (0.05) Gas procurement program awards and 1996 storage gas sale - 0.03 Nonregulated subsidiaries Write-downs of certain assets (primarily alternative energy projects) 0.07 0.01 Realized gain on sale of McLeodUSA Incorporated common stock 0.05 - Gains on sales of certain assets 0.06 (0.05) Interest on long-term debt 0.07 0.02 Other continuing operations 0.07 (0.04) Discontinued operations 0.09 (0.16)
-4- The Company continued its strategic realignment of utility and nonregulated operations which began in 1996. Earnings of nonregulated subsidiaries have been significantly affected by such realignment. During 1997, the Company divested a number of its interests in nonregulated assets which did not align with the corporate vision of becoming the leading regional provider of energy and complementary services. Earnings for 1997 include 6 cents per share from the sale of assets of its railcar leasing and repair businesses. Losses from discontinued operations reduced earnings in 1996 and 1997, though to a lesser degree in 1997. Cash proceeds from the sale of discontinued operations allowed the Company to pay off long-term debt, significantly reducing its interest expense compared to 1996. In addition, 1997 earnings include 5 cents per share from the sale of a portion of the Company's interest in McLeodUSA Incorporated (McLeodUSA). Although utility earnings for 1997 were lower than in the prior year, a reduction was anticipated because of the electric pricing settlements achieved in 1996 and 1997 in Iowa and Illinois. Additionally, utility operating expenses increased as the Company continued strategic realignment which included strengthening its marketing and customer service capabilities and adding to its information technology resources. In the past three years, the Company's evaluation of its nonregulated investments has resulted in write-downs of certain assets, primarily investments in alternative energy projects. The write-downs, which reflect declines in the value of those nonregulated investments, reduced earnings by approximately $2.0 million, or 2 cents per share, $9.4 million, or 9 cents per share, and $10.2 million, or 10 cents per share, in 1997, 1996 and 1995, respectively. Discontinued Operations - Holdings: - - --------- During 1996, the Company discontinued some of its nonregulated operations. The income or loss from those operations and the losses on disposal are reflected as discontinued operations in each of the periods presented in the Consolidated Statements of Income. 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 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 and an additional $0.9 million in 1997. In October 1997, the Company also divested a subsidiary that developed and operated a computerized information system which facilitated real-time exchange of power in the electric industry. The Company recorded a $4.0 million anticipated after-tax loss on disposal of those operations in September 1996 and an additional $3.2 million after-tax loss on disposal in September 1997. -5- 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 includes the net earnings/loss of MidAmerican Capital and Midwest Capital for periods prior to their December 1, 1996, transfer to Holdings. UTILITY GROSS MARGIN
Electric Gross Margin: ---------------------- 1997 1996 1995 ------ ------ ------ (in millions) Operating revenues $1,126 $1,099 $1,095 Cost of fuel, energy and capacity 236 234 230 ------ ------ ------ Electric gross margin $ 890 $ 865 $ 865 ====== ====== ======
A variety of factors contributed to the increase in MidAmerican's electric gross margin for 1997 compared to 1996. An increase in electric retail sales volumes, additional recovery of energy efficiency costs and an increase in transmission revenues all contributed to the improvement in gross margin. Rate reductions partially offset the increases. Retail sales of electricity increased 2.6% compared to 1996 sales due primarily to a moderate but steady growth in the number of customers. The increase in sales resulting from customer growth contributed $11 million to the increase in electric gross margin. Also, compared to 1996, sales and gross margin improved due to the impact of temperatures in the Company's service territory. Although temperatures were milder than normal in both years, comparatively, margin for 1997 increased $2 million over 1996 margin due to the effect of weather. When compared to normal, the impact of temperatures resulted in a $13 million reduction in electric gross margin in 1997 compared to a $15 million reduction in the 1996 margin. Prior to July 11, 1997, MidAmerican was allowed to recover its energy costs from most of its electric utility customers through energy adjustment clauses (EACs) included in revenues. Effective July 11, 1997, the EAC was eliminated for Iowa customers as part of a new Iowa pricing plan. Previously, variations in revenues collected through the EACs did not affect gross margin or net income due to corresponding increases in energy costs. With the elimination of the Iowa EAC, fluctuations in energy costs now have an impact on gross margin and net income. Energy costs per unit since July 11, 1997, were below the amount recovered in rates under the new Iowa pricing plan and resulted in an increase to gross margin. In October 1996, the Illinois Commerce Commission (ICC) ordered MidAmerican to reduce electric retail rates for its Illinois customers by 10%, or $13.1 million in annual revenues, effective November 3, 1996. A 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 effective on June 1, 1997. In Iowa, MidAmerican reduced its electric retail rates by $8.7 million effective November 1, 1996. The reduction lowered rates to levels proposed by MidAmerican in its pricing plan filed in June 1996. With implementation -6- of the approved settlement in July 1997, rates for Iowa residential customers were reduced an additional $10.0 million annually. The Iowa rate reductions are partially offset by a new tracking mechanism (Cooper Tracker) for capital improvement costs at the Cooper Nuclear Station (Cooper). Net of the effect of the Cooper Tracker, rate reductions reduced electric gross margin by $17.3 million compared to 1996. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information regarding the Iowa proceeding. Beginning September 29, 1997, MidAmerican began collection of its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs. Including an allowed return on deferred costs, the annual increase in electric revenues is $36.1 million. The effect on earnings of this increase in revenues and gross margin is partially offset by a corresponding increase in other operating expenses of $31.1 million for deferred and current energy efficiency costs. Refer to "Energy Efficiency" in Liquidity and Capital Resources later in this discussion for further information. Revenues and margin increased $6.2 million due to an increase in transmission revenues. In addition, a 3.9% increase in non-retail sales resulted in a $3.3 million increase in revenues. 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. The net impact of increases and decreases in retail rates resulted in an overall decrease of $2.1 million in revenues and gross margin for 1996 compared to 1995. Rate decreases implemented in Iowa and Illinois in November 1996 were partially offset by an increase resulting from a filing made by one of MidAmerican's predecessor companies. Electric revenues in the first half of 1995 reflect a $13.6 million annual increase for interim rates in connection with that 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. In August 1995, MidAmerican began collection of $5.7 million over a four-year period related to an energy efficiency cost recovery filing. At the same time, MidAmerican began amortization of the related energy efficiency costs that had previously been deferred and included on the Company's balance sheet. The amortization is included in other operating expenses.
Gas Gross Margin: ----------------- 1997 1996 1995 ---- ---- ---- (in millions) Operating revenues $536 $537 $460 Cost of gas sold 346 345 279 ---- ---- ---- Gas gross margin $190 $192 $181 ==== ==== ====
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 -7- 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. Gas gross margin for 1997 decreased $2 million compared to 1996 due to warmer temperatures during the 1997 heating seasons. Temperatures in 1997 were close to normal while temperatures in 1996 were colder than normal, contributing $8 million to the 1996 gas gross margin. The decrease in sales and gross margin due to weather was partially offset by the effect of a modest increase in natural gas retail customers. In total, retail sales of natural gas in 1997 decreased 7.1% compared to 1996 sales. As discussed in the electric margin discussion, beginning September 29, 1997, MidAmerican began recovery of its energy efficiency costs not previously approved for recovery. Including an allowed return on deferred costs, the annual increase in gas revenues is $12.8 million. The effect on earnings of this increase in revenues and gross margin is partially offset by a corresponding increase in other operating expenses of approximately $11.1 million for deferred and current energy efficiency costs. The average cost of gas per unit increased in 1997 compared to 1996 and is reflected in revenues and cost of gas sold. Gas gross margin increased in 1996 compared to 1995. The increase was 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. 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 MidAmerican's 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 August 1995, MidAmerican began collection of $12.9 million over a four-year period related to an energy efficiency cost recovery filing. At the same time, MidAmerican began amortization of the related energy efficiency costs that had previously been deferred and included on the Company's balance sheet. The amortization is included in other operating expenses. Revenues and cost of gas sold each increased significantly in 1996 compared to 1995 due to an increase in the average cost of gas per unit in 1996. UTILITY OPERATING EXPENSES Utility other operating expenses increased for 1997 compared to 1996 due in part to an increase of $14.0 million in nuclear operating costs. Operating expenses related to Cooper increased in part due to the ratemaking treatment for Cooper capital improvements. As a result of 1996 and 1997 rate settlements, Cooper capital improvements are now expensed when incurred, instead of being capitalized. As mentioned previously in the Electric Gross Margin section, MidAmerican is now recovering on a current basis the Iowa portion of these costs from its Iowa electric customers. Recovery in Illinois is included in base rates. This change accounted for $4.5 million of the nuclear operating expense increase. -8- As mentioned in the gross margin discussions, 1997 reflects an increase in expense related to the increased recovery of certain energy efficiency costs beginning September 29, 1997. The increase in energy efficiency costs, including amortization of historical costs and charging expense for current costs, accounted for $13.1 million of the increase in other operating expenses. Continued restructuring of the Company in preparation for a competitive industry has required additional expenses. MidAmerican has increased its emphasis in marketing-related efforts, as well as customer service operations, resulting in increases in consulting costs, advertising and other related expenses. In addition, 1997 reflects increases in uncollectible accounts expense, employee incentive compensation and certain employee benefits expenses. Other operating expenses for 1997 reflect an increase in transmission wheeling expense due in part to changes required by FERC Order Nos. 888 and 889. For 1996, utility other operating expenses decreased compared to 1995 due primarily to $31.9 million of costs in 1995 for the Company's restructuring plan implemented as part of the merging of its predecessors. In addition, 1996 reflects cost savings resulting from the merger. Nuclear operations costs decreased $4.5 million in 1996 compared to 1995. 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. Maintenance expenses increased for 1997 compared to 1996. The main cause of the increase was an adjustment in 1996 to align power plant inventory accounting of predecessor companies which reduced 1996 expense by $6.2 million. In addition, the Company incurred $2.0 million in maintenance expenses for restoration following a snow storm in October 1997. Maintenance expenses at the Quad Cities Station decreased $2.5 million in 1997 compared to 1996. Refer to the discussion of Quad Cities Nuclear Station in the Liquidity and Capital Resources section of MD&A for information regarding the status of the plant. Maintenance expenses increased for 1996 compared to 1995. 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 the inventory adjustment mentioned above. Maintenance expense for the Quad Cities Station increased $1.8 million for 1996 compared to 1995. Property taxes increased $8.8 million in 1997 compared to 1996 due primarily to an increase in the assessed value for Iowa property tax purposes. NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Holdings: - - --------- Revenues of MidAmerican Capital and Midwest Capital increased a total of $22.8 million in 1997 compared to 1996. Revenues from the natural gas marketing subsidiaries increased $22.6 million due to an increase in the average price per unit, reflective of an increase in the cost of gas sold. Sales of natural gas decreased 3 million MMBtu's (4%) compared to 1996 sales. Cost of sales includes expenses directly related to sales of natural gas. The increase in cost of sales for 1997 reflects a 15% increase in the average cost of gas per unit. Compared to 1996, total gross margin (total price less cost of gas) on nonregulated natural gas sales increased $1.0 million. -9- 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 (153%) for 1996 compared to 1995. In addition, the average price of natural gas increased in 1996. Cost of sales for 1996 reflects the increases in gas sales volumes and cost per unit compared to 1995. Average margins 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. NON-OPERATING INCOME AND INTEREST EXPENSE MidAmerican: - - ------------ Other, Net - In September 1997, MidAmerican received a $15 million cash payment from Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by MidAmerican against NPPD. Approximately $12 million was refunded to MidAmerican's customers. The remaining amount was retained by MidAmerican for recovery of litigation costs in the lawsuit. Other, Net for 1997 reflects $2.2 million of pre-tax income for recovery of litigation costs incurred in prior years. Other, Net for 1996 includes approximately $8.7 million of expenses for costs incurred by MidAmerican for its merger proposal to IES Industries Inc. in 1996. MidAmerican was awarded $4.9 million of pre-tax income in 1997 for its performance under its incentive gas procurement program during the May 1996 to April 1997 period. In the fourth quarter of 1996, MidAmerican recorded an award of $2.7 million of pre-tax income as a result of successful performance under its incentive gas procurement program during the 1995-1996 heating season. In 1996, MidAmerican recorded an initial pre-tax gain of $3.2 million on its sale of the certain storage gas supplies. MidAmerican recorded an additional $0.8 million gain in the second quarter of 1997 after receiving favorable treatment on the transaction from the Iowa Utilities Board (IUB). In addition, Other, Net includes the recognition of deferred income from energy efficiency programs totaling $5.0 million and $3.3 million for 1997 and 1996, respectively. Other, Net for 1997 reflects a net loss on reacquired long-term debt of $0.9 million compared to a $1.1 million net gain in 1996. Other, Net for 1995 includes $4.6 million of merger transaction costs related to the Company's 1995 merger and $3.1 million for recognition of deferred income from energy efficiency programs. -10- Interest Charges - A decrease in the average amount of commercial paper outstanding compared to 1996 resulted in a decrease in other interest expense for 1997. The decrease was partially offset by interest expense related to IRS settlements in 1997. Holdings: - - --------- Dividend Income - Dividend income decreased for 1997 periods due MidAmerican Capital's reduced holdings of preferred stock portfolios as discussed below. Realized Gains and Losses on Securities, Net - Net realized gains on securities for 1997 includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common stock. Excluding that gain, net realized gains decreased in 1997 compared to 1996 primarily from realized gains on the sales of certain common equity fund holdings which MidAmerican Capital began liquidating in 1996. Net realized gains on securities increased for 1996 compared to 1995 due to an increase in gains on the disposition of equity fund holdings and managed preferred stock portfolios. Other, Net - During 1997, the Company sold all of the assets of its railcar repair services subsidiary and most of the assets of its railcar leasing subsidiary and recorded pre-tax gains totaling $10.0 million. Write-downs of nonregulated investments, as discussed in the Earnings Discussion section at the beginning of Results of Operations, decreased Other, Net by $3.4 million, $15.6 million and $18.0 million for 1997, 1996 and 1995, respectively. Income from equity investments decreased in 1997 due to the liquidation activity discussed above. Other, Net for 1996 reflects an increase in income from equity investments and special purpose funds compared to 1995. In 1995, the Company had pre-tax gains totaling $8.5 million on the sales of a partnership interest in a gas marketing organization and a telecommunication subsidiary. Interest Charges - MidAmerican Capital's interest on long-term debt decreased $10.1 million compared to 1996 expense due to the reduction of its long-term debt in early 1997. INCOME TAXES Holdings: - - --------- During the second quarter of 1997, the Company contributed part of an appreciated common stock investment to its tax exempt foundation and realized $2.9 million of tax benefit. -11- 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. As of December 31, 1997, common equity represented 51.7% of the Company's total capitalization compared to 44.0% and 44.3% as of December 31, 1996 and 1995, respectively. Several factors other than earnings, dividends and scheduled maturities of debt affected the change. Recording an investment in McLeodUSA at market value and repurchases and retirement of debt prior to its scheduled maturity were major contributors to the move to a higher percentage of equity. The Company's common stock repurchase program reduced common equity during 1997. Each of these items is included in the discussion that follows. MidAmerican's common equity as of December 31,1997, represented 47.2% of its capitalization compared to 43.8% as of December 31, 1996. A reduction of long-term debt was the primary cause of the change. As reflected on the Consolidated Statements of Cash Flows, Holdings had net cash provided from operating activities of $392 million for 1997 compared to $321 million and $337 million in 1996 and 1995, respectively. MidAmerican's net cash provided from operating activities was $380 million for 1997 and $327 million and $333 million for 1996 and 1995, respectively. INVESTING ACTIVITIES AND PLANS MidAmerican: - - ------------ Utility Construction Expenditures - MidAmerican's primary need for capital is utility construction expenditures. For 1997, utility construction expenditures totaled $167 million, including allowance for funds used during construction (AFUDC), Quad Cities Station nuclear fuel purchases and Cooper capital improvements. In addition, MidAmerican's nonregulated railway subsidiary had $6 million of construction expenditures in 1997. All such expenditures were met with cash generated from utility operations, net of dividends. Beginning with July 1997 expenditures, Cooper capital improvements are no longer included in utility construction expenditures but are expensed when incurred in Other Operating Expenses. As part of the 1997 settlement of MidAmerican's pricing proposal, MidAmerican is recovering on a current basis the Iowa portion of Cooper capital improvements from its Iowa electric customers through a tracking mechanism. Forecasted utility construction expenditures for 1998 are $201 million including AFUDC. Capital expenditure needs are reviewed regularly by MidAmerican's management and may change significantly as a result of such reviews. MidAmerican presently expects that all utility construction expenditures for the next five years will be met with cash generated from utility operations, net of dividends. The actual level of cash generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions. -12- Nuclear Decommissioning - 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 $51 million during the period 1998 through 2002 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Historically, the funds were invested in investment grade municipal and U.S. Treasury bonds; however, in 1997 MidAmerican directed the trust to begin investing a portion of the funds in domestic corporate debt and common equity securities. Approximately 40% of the trust's funds are now invested in domestic corporate debt and common equity securities. In addition, MidAmerican makes payments to NPPD related to decommissioning Cooper. These payments are reflected in Other Operating Expenses in the Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay approximately $57 million to NPPD for Cooper decommissioning during the period 1998 through 2002. 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. In July 1997, NPPD filed a lawsuit in United States District Court for the District of Nebraska naming MidAmerican as the defendant and seeking a declaration of MidAmerican's rights and obligations in connection with Cooper nuclear decommissioning funding. 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 recovery of increases in those amounts must be sought through the normal ratemaking process. Holdings: - - --------- Nonregulated Capital Expenditures - Capital expenditures of MidAmerican Capital and Midwest Capital totaled $8 million in 1997. Capital expenditures of these subsidiaries depend primarily upon the availability of suitable investment opportunities which meet the Company's objectives. The Company continues to evaluate nonregulated investments and may redeploy certain assets in the next year. External financing may also be used to provide for nonregulated capital expenditures. Investments - MidAmerican Capital invests in a variety of marketable securities which it holds for indefinite periods of time. 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. Included in investments on the Consolidated Balance Sheets is the Company's investment in common stock of McLeodUSA. McLeodUSA common stock has been publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's initial public offering and subsequent merger with Consolidated Communications Inc. prohibit the Company from selling or otherwise disposing of any of the common stock of McLeodUSA prior to September 24, 1998, without the approval of McLeodUSA's board of directors. As -13- a result of the agreements, the Company's investment was considered restricted stock and, as such, was recorded at cost in all periods prior to September 1997. Beginning in September 1997, the investment is no longer considered restricted for accounting purposes and is recorded at fair value. At December 31, 1997, the cost and fair value of the McLeodUSA investment were $45.2 million and $257.9 million, respectively. The unrealized gain is recorded, net of income taxes, as a valuation allowance in common shareholders' equity. At December 31, 1997, the unrealized gain and deferred income taxes for this investment were $212.7 million and $74.4 million, respectively. MidAmerican Capital received approximately $302 million in cash during 1997 from sales of investments primarily as part of its efforts to align them with the Company's strategy. A significant portion of the proceeds from these sales was used for retirement of MidAmerican Capital long-term debt and for dividends to Holdings for use in the repurchase of the Company's common stock. FINANCING ACTIVITIES, PLANS AND AVAILABILITY 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, 1997, 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 $123 million at December 31, 1997, 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. In 1997, MidAmerican entered into a revolving agreement, which expires in 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a special purpose entity established to purchase accounts receivable from MidAmerican. Funding Corp. in turn sold receivable interests to outside investors. In consideration for the sale, MidAmerican received $70 million in cash and the remaining balance in the form of a subordinated note from Funding Corp. The agreement is structured as a true sale under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors and, as such, the accounts receivable sold are not reflected on Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997, $130.0 million, net of reserves, was sold under the agreement. During 1997, MidAmerican repurchased $42.4 million of first mortgage bonds with annual interest rates from 6.95% to 7.70%, excluding bonds which matured in 1997. As of December 31, 1997, MidAmerican had $401 million of long-term debt maturities and sinking fund requirements for 1998 through 2002. MidAmerican currently has regulatory authority to issue an additional $300 million of preferred securities and long-term debt, including issues under 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. -14- 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 31, 1998, 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 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 AA- 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 "AA" has a very strong capacity to meet its financial commitment and differs from the highest rated obligations only in small degree. 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 -15- 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. Net losses on reacquisitions totaled $1.4 million and $1.6 million for 1997 and 1996, respectively. Excluding these losses, preferred dividends increased for 1997 compared to 1996 due to the increase in preferred stock outstanding. Holdings: - - --------- As of December 31, 1997, Holdings had lines of credit totaling $120 million available to provide for short-term financing needs. In addition, Holdings has the necessary authority to issue shares of its 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. In March 1997, Holdings announced its plan to repurchase up to $200 million of the Company's common stock. The Company plans to purchase the shares from time to time as market conditions warrant, with the intent of completing the entire repurchase program by December 31, 1998. As of December 31, 1997, the Company had repurchased approximately 5.0 million shares for $89.2 million. The Company believes repurchasing Holding's common stock is the best investment of Company funds at this time. Repurchasing the common stock will reduce total common dividend requirements and aid in improving the Company's dividend payout ratio. In addition, a subsidiary of the Company holds approximately 437,000 shares of Holdings common stock which are also excluded from shares outstanding. On January 28, 1998, Holdings' board of directors declared a quarterly dividend on common shares of $0.30 per share payable March 1, 1998. The dividend represents an annual rate of $1.20 per share. Nonregulated Subsidiaries - As of December 31, 1997, MidAmerican Capital had unsecured revolving credit facilities in the amount of $114 million with a zero balance outstanding under these facilities. 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 repaid. 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. MidAmerican Capital has $135 million of long-term debt maturities and sinking fund requirements for 1998 through 2002. Midwest Capital currently has a $25 million line of credit with MidAmerican, of which $5 million was outstanding at December 31, 1997. -16- OPERATING ACTIVITIES AND OTHER MATTERS Throughout the country, the utility industry continues to move towards a competitive environment. Although the extent of deregulation varies between states, increased competition is becoming a reality in virtually every region of the country. Numerous states have passed restructuring legislation, some of which initiated a phase-in of customer choice in 1998. Legislators and regulators in many other states are addressing the issue. As part of many restructuring legislation packages, electric utilities are required to unbundle traditional services previously provided as a "packaged product" under their rate tariffs. Unbundling allows customers to choose their energy supplier and the level of energy delivery and retail services they desire. Gas utilities are also experiencing separation of the merchant and delivery functions for all classes of customers. The generation segment of the electric industry will be significantly impacted by competition. The introduction of competition in the wholesale market has resulted in a proliferation of power marketers and a substantial increase in market activity. As retail competition evolves, margins will be pressured by competition from other utilities, power marketers, and self-generation. MidAmerican has been active in promoting and monitoring legislative and regulatory changes that affect the jurisdictions in which it operates. In order to successfully compete in the new environment, the Company believes it must become the leading regional provider of energy and complementary services. The Company is evaluating all aspects of its business to determine what adjustments are necessary to align them with this strategy. Aligning nonregulated businesses with the Company's strategy has resulted, and may continue to result in the next year, in negative impacts on Holdings' earnings in the form of write-downs for the sale, revaluation or discontinuance of nonregulated operations and investments. (Refer to the Results of Operations section of MD&A for comments on the earnings impact of such actions.) The following discussion further addresses changes affecting the industry and actions the Company is taking to implement its strategy. Competition - MidAmerican is subject to regulation by several utility regulatory agencies which significantly influences the operating environment and the recoverability of costs from utility customers. That regulatory environment has, in general, given MidAmerican an exclusive right to serve customers within its service territory and, in turn, the obligation to provide electric service to those customers. Although the anticipated changes in the electric utility industry may create opportunities, they will also create additional challenges and risks for utilities. Competition will put pressure on margins for traditional electric services. In order to lessen the impact of reduced margins, MidAmerican will continue to focus on controlling the cost of such services. In addition, MidAmerican is positioning itself to offer complementary products and services as expected opportunities become available in a competitive utility retail market. Additional products and services may provide avenues to replace margins lost on traditional electric services. MidAmerican has been authorized in an order from the IUB approving the electric pricing settlement to enter into long-term electric contracts with industrial and commercial customers. MidAmerican is negotiating long-term contracts with various industrial and commercial customers. The Company believes these contracts will help stabilize margins in the future. -17- Legislative and Regulatory Evolution - On December 16, 1997, the Governor of Illinois signed into law a bill to restructure the Illinois' electric utility industry and transition it to a competitive market beginning October 1, 1999. The law is very complex, and MidAmerican continues to evaluate the impact of the law on its operations. The law requires a 15% electric rate reduction for all Illinois residential customers in 1998. To satisfy its obligation, the law specifically permitted MidAmerican to receive credit for the $15.5 million, or approximately 13%, rate reductions implemented in Illinois in 1996 and 1997. MidAmerican is also exempted from the requirement to join an independent system operator (ISO) or to form an in-state ISO. In addition, the law provides for Illinois earnings above a certain level of return on equity (ROE) to be shared equally between customers and MidAmerican beginning in April 2000. The ROE level at which MidAmerican will be required to share earnings is a multi-step calculation of average 30-year Treasury Bill rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the resulting average Treasury Bill rate approximated rates which existed in 1997, the ROE level above which sharing must occur would be approximately 12%. Beginning October 1, 1999, larger non-residential customers and 33% of the remaining non-residential customers will be allowed to select their provider of electric supply services. All other non-residential customers will have supplier choice starting December 31, 2000. Residential customers all receive the opportunity to select their electric supplier on May 1, 2002. The law also addresses charges to customers for transition costs based on a lost-revenue approach. These transition fees, designed to help utilities address stranded costs, will end December 31, 2006, subject to possible extension. In Iowa, no legislation has yet been introduced to allow generation or retail service competition. Because energy costs are low in Iowa, industry restructuring has not been an issue aggressively pursued in the state to date. However, a group of industrial customers formed in the fall of 1997 has indicated that it may introduce retail competition legislation during the 1998 Iowa legislative session. MidAmerican's Iowa legislative priority for 1998 is property tax reform, a condition it considers precedent to industry restructuring. In April 1996, the FERC issued Order Nos. 888 and 889 which 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 May 1997, MidAmerican filed revisions to the tariff in accordance with Order No. 888-A which was issued in March 1997. 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 is a long-time member of the Mid-Continent Area Power Pool (MAPP) and has elected to participate in the MAPP OASIS. In October 1997, the IUB adopted rules to encourage gas transportation service for small volume customers starting in 1999. MidAmerican has until November 15, 1998, to file its own plan to unbundle service for its small volume customers. MidAmerican presently believes that these rules will not have a material impact on its results of operations. -18- Accounting Effects of Industry Restructuring - A possible consequence of competition in the utility industry is that Statement of Financial Accounting Standards (SFAS) No. 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A majority of MidAmerican's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of restructuring legislation in Illinois. Thus, MidAmerican was required to write off those amounts of regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. These write-offs were not material. If other portions of its utility operations no longer meet the criteria of SFAS 71, MidAmerican would be required to write off the related regulatory assets and liabilities from its balance sheet and thus, a material adjustment to earnings in that period could result. As of December 31, 1997, MidAmerican had $339 million of regulatory assets in its Consolidated Balance Sheet. Refer to Note 1(c) for a list of the regulatory assets as of December 31, 1997. Energy Efficiency - MidAmerican's regulatory assets as of December 31, 1997, included $111.5 million of deferred energy efficiency costs. On September 29, 1997, MidAmerican received approval from the IUB, effective immediately, to begin recovery of deferred energy efficiency costs not previously approved. Accordingly, $95.1 million of such costs will be collected over a four-year period, along with a return of $26.6 million on those costs. MidAmerican also received approval to recover current energy efficiency costs, which are expected to be $18.5 million for the period May 1997 through April 1998. The projected $18.5 million of current costs, $5.3 million of which were deferred from May through September 1997, will be collected in the twelve-month period ending in September 1998. The filing is subject to periodic prudence reviews by the IUB. Deferred and current energy efficiency costs will be reflected in operating expenses over the related periods of recovery. Rate Matters - As a result of a negotiated settlement in Illinois, MidAmerican reduced its Illinois electric service rates by annual amounts of $13.1 million and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively. On June 27, 1997, the IUB issued an order in a consolidated rate proceeding involving MidAmerican's pricing proposal and a filing by the Iowa Office of Consumer Advocate (OCA). The order approved a March 1997 settlement agreement between MidAmerican, the OCA and other parties to the proceeding. The agreement includes a number of characteristics of MidAmerican's pricing proposal. Prices for residential customers were reduced $8.5 million annually and $10.0 million annually, effective November 1, 1996, and July 11, 1997, respectively, and will be reduced an additional $5.0 million annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates for commercial and industrial customers will 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. The agreement includes a tracking mechanism to currently recover the cost of capital improvements required by the Cooper Nuclear Station Power Purchase Contract. The tracking mechanism will offset approximately $9 million of these reductions. -19- In addition, the agreement accepted MidAmerican's proposal to eliminate the energy adjustment clause (EAC) which was the mechanism through which fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC flowed the cost of fuel to customers on a current basis, and thus, fuel costs had little impact on net income. Beginning July 11, 1997, base rates for Iowa customers include a factor for recovery of a representative level of fuel costs. Earnings are now affected by variances in actual fuel costs from the factor included in rates. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary 15% above or below the factor included in base rates. Under the agreement, if MidAmerican's annual return on common equity exceeds 12%, then an equal sharing between customers and shareholders of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of MidAmerican's share of those earnings will 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%. The agreement also provides that MidAmerican will develop a pilot program for a market access service which allows customers with at least 4 MW of load to choose energy suppliers. The pilot program, which is subject to approval by the IUB and the FERC, is limited to 60 MW of participation the first year and can be expanded by 15 MW annually until the conclusion of the program. Any loss of revenues associated with the pilot program will be considered part of the $10 million annual reduction for commercial and industrial customers but may not be recovered from other customer classes. MidAmerican filed its proposed program with the IUB and the FERC in September 1997. MidAmerican anticipates that the necessary approvals will be received before the end of the second quarter of 1998. In December 1997, an Iowa industrial customer located within MidAmerican's IUB-approved exclusive electric service territory, filed a lawsuit against Holdings and MidAmerican in the United States District Court for the District of Iowa alleging various violations of federal antitrust laws. The lawsuit stems from a claim that because the customer is not free to choose its retail energy, MidAmerican is engaging in illegal monopolistic behavior. In addition to damages, the customer is seeking the right to choose its electric retail supplier. MidAmerican maintains that its provision of retail electric service is in accordance with Iowa laws and regulations governing electric service territories, and all other applicable legal requirements. A ruling in favor of the plaintiff could have the effect of accelerating retail competition in MidAmerican's Iowa service territory. 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 26 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. -20- 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. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout the states, the EPA will make a determination of whether the states have any areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. The impact of the new standards on MidAmerican will depend on the attainment status of the areas surrounding MidAmerican's operations and MidAmerican's relative contribution to the nonattainment status. If MidAmerican's operations contribute to nonattainment and modifications to MidAmerican's operations or facilities are necessary, the cost of making emissions reductions to meet the air quality standards will be dependent upon the level of emissions reductions required and the available technology. MidAmerican will continue to evaluate the potential impact of the new regulations. Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking (NOPR) which identified 22 states and the District of Columbia as making significant contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these emissions reduction requirements as EPA's rule is currently drafted, and, as such, MidAmerican does not anticipate that its facilities will be subject to additional emissions reductions as a result of this initiative. The EPA anticipates issuing its final rules in September 1998. MidAmerican will continue to closely monitor this rulemaking proceeding. Coal Deliveries - A coal transportation provider of MidAmerican has been experiencing nationwide operational problems. Consequently, coal deliveries to MidAmerican's Neal station in the fourth quarter of 1997 were delayed resulting in reduced coal inventory at that site. The Neal Station represents approximately 37% of MidAmerican's coal-fired generating capacity. Following discussions between MidAmerican and the transportation provider, increased deliveries have been made to the four Neal units. In order to preserve coal inventories, MidAmerican reduced its sales of energy to other utilities, which reduced electric margins in the fourth quarter. Quad Cities Nuclear Station Outage - In September 1997, Commonwealth Edison Company (ComEd), operator and 75% owner of Quad Cities Station Units 1 and 2, shut down Unit 2 and entered early a scheduled outage to address safety system concerns. In December 1997, Unit 1 was also taken off-line for the same reason. ComEd has indicated that the units may be unavailable until the first half of May 1998. During this time, it may be necessary for MidAmerican to forego off-system sales opportunities, operate more expensive units, and/or purchase more off-system energy. In January 1998, ComEd received a Confirmatory Action Letter (CAL) from the Nuclear Regulatory Commission (NRC). The CAL details actions that must be taken to correct the problems described above. Also in January, ComEd was informed by the NRC that the performance of Quad Cities Station is trending adversely. The Company cannot at this time predict the cost of these actions nor the impact on results of operations of the plant's outage. -21- YEAR 2000 The Company has undertaken an extensive project to ensure the ability of its information technology systems, including hardware, software and applications programs, to perform correctly on January 1, 2000. The Company, in addition to its internal resources, has engaged independent contractors to assist with the conversion project. The project timetable specifies completion of all conversion work and testing sufficiently in advance of January 1, 2000, to identify any residual concerns. The Company estimates the remaining cost to remediate year 2000 flaws in its principal business systems to be approximately $5 million. Potential concerns regarding other systems used throughout the Company's operations continues to be evaluated. Although management believes that the project will be completed within the required time frame, unforeseen and other factors, including failure of the contractors to perform, could cause delays in the project, the results of which could be material to the Company. 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 the current level, 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. The Financial Accounting Standards Board has issued SFAS No. 130 addressing the issue of comprehensive income. SFAS 130 requires that all items required to be recognized as changes in equity during a period, except those resulting from investments by owners and distributions to owners, (i.e., comprehensive income), be reported in a financial statement that is displayed with the same prominence as the other financial statements. The display can be a separate statement or an addition to an existing statement. The material components of the Company's comprehensive income will include net income and the after-tax effect of changes in the fair value of investments classified as available for resale. SFAS 130 is effective for fiscal years beginning after December 15, 1997. -22-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- OPERATING REVENUES Electric utility ............................................... $ 1,126,300 $ 1,099,008 $ 1,094,647 Gas utility .................................................... 536,306 536,753 459,588 Nonregulated ................................................... 259,675 236,851 95,106 ----------- ----------- ----------- 1,922,281 1,872,612 1,649,341 ----------- ----------- ----------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity ............................ 235,760 234,317 230,261 Cost of gas sold ............................................. 346,016 345,014 279,025 Other operating expenses ..................................... 429,794 350,174 399,648 Maintenance .................................................. 98,090 88,621 85,363 Depreciation and amortization ................................ 170,540 164,592 158,950 Property and other taxes ..................................... 101,317 92,630 96,350 ----------- ----------- ----------- 1,381,517 1,275,348 1,249,597 ----------- ----------- ----------- Nonregulated: Cost of sales ................................................ 240,182 218,256 70,209 Other ........................................................ 30,076 35,370 37,181 ----------- ----------- ----------- 270,258 253,626 107,390 ----------- ----------- ----------- Total operating expenses ..................................... 1,651,775 1,528,974 1,356,987 ----------- ----------- ----------- OPERATING INCOME ............................................... 270,506 343,638 292,354 ----------- ----------- ----------- NON-OPERATING INCOME Interest income ................................................ 5,318 4,012 4,485 Dividend income ................................................ 13,792 16,985 16,954 Realized gains and losses on securities, net ................... 7,798 1,895 688 Other, net ..................................................... 22,111 (4,020) (10,467) ----------- ----------- ----------- 49,019 18,872 11,660 ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt ..................................... 89,898 102,909 105,550 Other interest expense ......................................... 10,034 10,941 9,449 Preferred dividends of subsidiaries ............................ 14,468 10,689 8,059 Allowance for borrowed funds ................................... (2,597) (4,212) (5,552) ----------- ----------- ----------- 111,803 120,327 117,506 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .......... 207,722 242,183 186,508 INCOME TAXES ................................................... 68,390 98,422 66,803 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS .............................. 139,332 143,761 119,705 ----------- ----------- ----------- DISCONTINUED OPERATIONS Income (Loss) from operations (net of income taxes) ............ (118) 2,117 3,059 Loss on disposal (net of income taxes) ......................... (4,110) (14,832) - ----------- ----------- ----------- (4,228) (12,715) 3,059 ----------- ----------- ----------- NET INCOME ..................................................... $ 135,104 $ 131,046 $ 122,764 =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING .............................. 98,058 100,752 100,401 EARNINGS PER COMMON SHARE Continuing operations .......................................... $ 1.42 $ 1.43 $ 1.19 Discontinued operations ........................................ (0.04) (0.13) 0.03 ----------- ----------- ----------- Earnings per average common share .............................. $ 1.38 $ 1.30 $ 1.22 =========== =========== =========== DIVIDENDS DECLARED PER SHARE ................................... $ 1.20 $ 1.20 $ 1.18 =========== =========== ===========
The accompanying notes are an integral part of these statements -23-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 ----------------------- 1997 1996 ----------- ---------- ASSETS UTILITY PLANT Electric ......................................................... $4,084,920 $4,010,847 Gas .............................................................. 756,874 723,491 ---------- ---------- 4,841,794 4,734,338 Less accumulated depreciation and amortization ................... 2,275,099 2,153,058 ---------- ---------- 2,566,695 2,581,280 Construction work in progress .................................... 55,418 49,305 ---------- ---------- 2,622,113 2,630,585 ---------- ---------- POWER PURCHASE CONTRACT .......................................... 173,107 190,897 ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS ............................ - 166,320 ---------- ---------- CURRENT ASSETS Cash and cash equivalents ........................................ 10,468 97,749 Receivables, less reserves of $347 and $2,093, respectively ...... 207,471 312,015 Inventories ...................................................... 86,091 90,864 Other ............................................................ 18,452 11,031 ---------- ---------- 322,482 511,659 ---------- ---------- INVESTMENTS ...................................................... 799,524 622,972 ---------- ---------- OTHER ASSETS ..................................................... 360,865 399,415 ---------- ---------- TOTAL ASSETS ..................................................... $4,278,091 $4,521,848 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity ...................................... $1,301,286 $1,239,946 MidAmerican preferred securities, not subject to mandatory redemption .......................................... 31,763 31,769 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 ... 100,000 100,000 Long-term debt (excluding current portion) ....................... 1,034,211 1,395,103 ---------- ---------- 2,517,260 2,816,818 ---------- ---------- CURRENT LIABILITIES Notes payable .................................................... 138,054 161,990 Current portion of long-term debt ................................ 144,558 79,598 Current portion of power purchase contract ....................... 14,361 13,718 Accounts payable ................................................. 145,855 169,806 Taxes accrued .................................................... 92,629 82,254 Interest accrued ................................................. 22,355 28,513 Other ............................................................ 38,766 22,830 ---------- ---------- 596,578 558,709 ---------- ---------- OTHER LIABILITIES Power purchase contract .......................................... 83,143 97,504 Deferred income taxes ............................................ 761,795 722,300 Investment tax credit ............................................ 83,127 88,842 Other ............................................................ 236,188 237,675 ---------- ---------- 1,164,253 1,146,321 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ............................. $4,278,091 $4,521,848 ========== ==========
The accompanying notes are an integral part of these statements -24-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................................... $ 135,104 $ 131,046 $ 122,764 Adjustments to reconcile net income to net cash provided: Depreciation and amortization............................... 197,454 190,511 181,636 Net decrease in deferred income taxes and investment tax credit, net................................ (71,191) (7,894) (961) Amortization of other assets................................ 33,761 20,541 19,630 Cash proceeds form accounts receivable sale................. 70,000 - - Capitalized cost of real estate sold........................ 1,859 3,568 1,744 Loss (income) from discontinued operations.................. 4,228 12,715 (3,059) Gain on sale of securities, assets and other investments.... (9,996) (10,132) (1,050) Other-than-temporary decline in value of investments........ 3,795 15,566 17,971 Impact of changes in working capital, net of effects from discontinued operations.............................. 28,098 (53,752) (21,024) Other....................................................... (867) 19,218 19,369 --------- --------- --------- Net cash provided......................................... 392,245 321,387 337,020 --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures.............................. (166,932) (154,198) (190,771) Quad Cities Nuclear Power Station decommissioning trust fund... (9,819) (8,607) (8,636) Deferred energy efficiency expenditures........................ (12,258) (20,390) (35,841) Nonregulated capital expenditures.............................. (14,066) (55,788) (12,881) Purchase of securities......................................... (159,770) (198,947) (164,521) Proceeds from sale of securities............................... 180,890 243,290 94,493 Proceeds from sale of assets and other investments............. 57,433 33,285 34,263 Investment in discontinued operations.......................... 181,321 (5,984) (9,752) Other investing activities, net................................ (1,360) 8,308 6,946 --------- --------- --------- Net cash provided (used).................................... 55,439 (159,031) (286,700) --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid.......................................... (117,605) (120,770) (118,828) Issuance of long-term debt, net of issuance cost............... - 99,500 12,750 Retirement of long-term debt, including reacquisition cost..... (122,300) (136,616) (110,351) Reacquisition of preferred shares.............................. (6) (58,176) (10) Reacquisition of common shares................................. (96,618) - - Issuance of preferred shares, net of issuance cost............. - 96,850 - Increase (decrease) in MidAmerican Capital Company unsecured revolving credit facility......................... (174,500) 44,500 95,000 Issuance of common shares...................................... - - 15,083 Net increase (decrease) in notes payable....................... (23,936) (22,810) 60,300 --------- --------- --------- Net cash used............................................... (534,965) (97,522) (46,056) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (87,281) 64,834 4,264 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 97,749 32,915 28,651 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 10,468 $ 97,749 $ 32,915 ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized...................... $ 96,805 $ 107,179 $ 116,843 ========= ========= ========= Income taxes paid.............................................. $ 130,521 $ 85,894 $ 69,319 ========= ========= =========
The accompanying notes are an integral part of these statements. -25-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (IN THOUSANDS, EXCEPT SHARE AMOUNTS) AS OF DECEMBER 31 ------------------------------------ 1997 1996 ----------- ---------- COMMON SHAREHOLDERS' EQUITY Common shares, no par; 350,000,000 shares authorized; 95,300,882 and 100,751,713 shares outstanding, respectively.......... $ 753,873 $ 801,431 Retained earnings...................................................... 409,296 440,971 Valuation allowance, net of income taxes............................... 138,117 (2,456) ---------- ---------- 1,301,286 51.7% 1,239,946 44.0% ---------- ------ ---------- ------ MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative shares outstanding not subject to mandatory redemption: $3.30 Series, 49,481 and 49,523 shares, respectively............... 4,948 4,952 $3.75 Series, 38,310 and 38,320 shares, respectively............... 3,831 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, 49,945 and 49,950 shares, respectively............... 4,994 4,995 $4.40 Series, 50,000 shares........................................ 5,000 5,000 $4.80 Series, 49,898 shares........................................ 4,990 4,990 ---------- ---------- 31,763 1.2% 31,769 1.1% ---------- ------ ---------- ------ 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 2.0% 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 shares.................................... 100,000 4.0% 100,000 3.6% ---------- ------ ---------- ------ LONG-TERM DEBT MidAmerican mortgage bonds: 5.05% Series, due 1998............................................ - 49,100 6.25% Series, due 1998............................................ - 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 7.125% Series, due 2003........................................... 100,000 100,000 7.70% Series, due 2004............................................ 55,630 60,000 7% Series, due 2005............................................... 90,500 100,000 7.375% Series, due 2008........................................... 75,000 75,000 8% Series, due 2022............................................... 50,000 50,000 7.45% Series, due 2023............................................ 6,940 26,500 8.125% Series, due 2023........................................... 100,000 100,000 6.95% Series, due 2025............................................ 12,500 21,500 MidAmerican pollution control revenue obligations: 5.15% to 5.75% Series, due periodically through 2003.............. 8,064 8,424 5.95% Series, due 2023 (secured by general mortgage bonds)........ 29,030 29,030
The accompanying notes are an integral part of these statements. -26-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (IN THOUSANDS, EXCEPT SHARE AMOUNTS) AS OF DECEMBER 31 ---------------------------------- 1997 1996 ---------- ----------- LONG-TERM DEBT (CONTINUED) Variable rate series - Due 2016 and 2017 (3.7% and 3.5%, respectively)................ $ 37,600 $ 37,600 Due 2023 (secured by general mortgage bonds, 3.7% and 3.5%, respectively)....................... 28,295 28,295 Due 2023 (3.7% and 3.5%, respectively)......................... 6,850 6,850 Due 2024 (3.7% and 3.6%, respectively)......................... 34,900 34,900 Due 2025 (3.7% and 3.5%, respectively)......................... 12,750 12,750 MidAmerican notes: 8.75% Series, due 2002............................................ 240 240 6.5% Series, due 2001............................................. 100,000 100,000 6.4% Series, due 2003 through 2007................................ 2,000 2,000 Obligation under capital lease.................................... 2,104 2,218 Unamortized debt premium and discount, net........................ (3,192) (4,009) ---------- ---------- Total utility.................................................. 919,211 1,085,398 ---------- ---------- Nonregulated Subsidiaries Notes: 7.34% Series, due 1998............................................ - 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 Borrowings under unsecured revolving credit facility (6.2%)....... - 64,000 Borrowings under unsecured revolving credit facility (6.1%)....... - 26,000 Borrowings under unsecured revolving credit facility (6.1%)....... - 84,500 ---------- ---------- Total nonregulated subsidiaries................................ 115,000 309,705 ---------- ---------- 1,034,211 41.1% 1,395,103 49.5% ---------- ------ ---------- ------ TOTAL CAPITALIZATION.................................................. $2,517,260 100.0% $2,816,818 100.0% ========== ====== ========== ======
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 ------------------------------------- 1997 1996 1995 --------- --------- --------- BEGINNING OF YEAR.................................................... $ 440,971 $ 430,589 $ 426,683 --------- --------- --------- NET INCOME........................................................... 135,104 131,046 122,764 --------- --------- --------- DEDUCT (ADD): Loss on repurchase of common shares.................................. 49,174 - - Dividends declared on common shares of $1.20, $1.20 and $1.18 per share, respectively...................................... 117,605 120,770 118,828 Other................................................................ - (106) 30 --------- --------- ---------- 166,779 120,664 118,858 --------- --------- --------- END OF YEAR.......................................................... $ 409,296 $ 440,971 $ 430,589 ========= ========= =========
The accompanying notes are an integral part of these statements. -27- 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). Prior to December 1, 1996, MidAmerican held the capital stock of 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. The majority of MidAmerican's electric and gas utility operations currently meet the criteria of SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois -28- were no longer subject to the provisions of SFAS 71 due to passage of restructuring legislation in Illinois. Thus, MidAmerican was required to write off regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. The net amount of such write-off's were immaterial. If other utility operations no longer meet the criteria of SFAS 71, MidAmerican would be required to write off the related regulatory assets and liabilities from its balance sheet and thus, a material adjustment to earnings in that period could result. 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):
1997 1996 -------- -------- Deferred income taxes................ $143,851 $140,649 Energy efficiency costs.............. 111,471 112,244 Debt refinancing costs............... 34,923 40,230 FERC Order 636 transition costs....... 9,279 25,033 Environmental costs................... 20,417 22,577 Retirement benefit costs.............. 595 11,025 Enrichment facilities decommissioning. 8,781 11,089 Unamortized costs of retired plant ... 5,771 8,953 Other................................. 4,201 2,655 -------- -------- Total............................... $339,289 $374,455 ======== ========
(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 were $80.2 million and $70.1 million at December 31, 1997 and 1996, respectively, and are included in Receivables on the Consolidated Balance Sheets. MidAmerican's Illinois and South Dakota jurisdictional sales, or approximately 11% of total retail electric sales, and the majority of its total retail 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. (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:
1997 1996 1995 ---- ---- ---- Electric.................... 3.8% 3.8% 3.9% Gas......................... 3.4% 3.7% 3.7%
-29- 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. 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(e) 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):
1997 1996 -------- -------- Investments: Marketable securities.................. $467,207 $219,890 Equipment leases....................... 73,928 89,791 Nuclear decommissioning trust fund..... 93,251 76,304 Energy projects........................ 21,180 24,467 Special-purpose funds.................. 10,057 44,863 Real estate............................ 42,424 45,457 Corporate owned life insurance......... 33,471 27,395 Coal transportation.................... 14,516 18,623 Communications......................... 10,000 56,333 Security .............................. 8,551 5,367 Other.................................. 24,939 14,482 -------- -------- Total................................. $799,524 $622,972 ======== ========
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. -30- Net cash provided (used) from changes in working capital, net of effects from discontinued operations was as follows (in thousands):
1997 1996 1995 -------- -------- -------- Receivables....................... $ 34,544 $(84,802) $(31,314) Inventories....................... 4,773 (5,629) 7,013 Other current assets ............. (7,421) 6,732 (4,140) Accounts payable.................. (23,950) 47,751 15,903 Taxes accrued..................... 10,375 356 (9,755) Interest accrued.................. (6,158) (2,122) (24) Other current liabilities......... 15,935 (16,038) 1,293 -------- --------- -------- Total........................... $ 28,098 $ (53,752) $(21,024) ======== ========= ========
(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 prior to July 11, 1997, including carrying costs, were deferred, and are being amortized and recovered in rates over either a five-year period or the term of the NPPD contract. Beginning July 11, 1997, capital improvement costs are recovered currently from customers and are expensed as incurred. 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(d), 4(e) and 4(f) for additional information regarding the power purchase contract. (I) ACCOUNTING FOR DERIVATIVES: 1) Preferred Stock Hedge Instruments: The Company is exposed to market value risk from changes in interest rates for certain fixed rate sinking fund preferred and perpetual preferred stocks (fixed rate preferred stocks) included in Investments on the Consolidated Balance Sheets. The Company reviews the interest rate sensitivity of these securities and purchases put options on U.S. Treasury securities (put options) to reduce interest rate risk on preferred stocks. The Company does not purchase or sell put options for speculative purposes. The Company's intent is to substantially offset any change in market value of the fixed rate preferred stocks due to a change in interest rates with a change in market value of the put options. -31- The preferred stocks are publicly traded securities and, as such, changes in their fair value are reported, net of income taxes, as a valuation allowance in shareholders' equity. Unrealized gains and losses on the associated put options are included in the determination of the fair value of the preferred stocks. The fair value of the put options, including unrealized gains and losses, included in the determination of the fair value of the preferred securities as of December 31, 1997 and 1996 was $1.9 million and $5.1 million, respectively. Realized gains and losses on the put options are included in Realized Gains and Losses on Securities, Net in the Consolidated Statements Income in the period the underlying hedged fixed rate preferred stocks are sold. At December 31, 1997, the Company held put options with a notional value of $3.2 million. 2) Gas Futures Contracts and Swaps: The Company uses gas futures contracts and swap contracts to reduce its exposure to changes in the price of natural gas purchased to meet the needs of its customers and to manage margins on natural gas storage opportunities. Investments in natural gas futures contracts, which total $1.6 million and $0.8 million as of December 31, 1997 and 1996, are included in Receivables on the Consolidated Balance Sheets. Gains and losses on gas futures contracts that qualify for hedge accounting are deferred and reflected as adjustments to the carrying value of the hedged item or included in Other Assets on the Consolidated Balance Sheets until the underlying physical transaction is recorded if the instrument is used to hedge an anticipated future transaction. The net gain or loss on gas futures contracts is included in the determination of income in the same period as the expense for the physical delivery of the natural gas. Realized gains and losses on gas futures contracts and the net amounts exchanged or accrued under the natural gas swap contracts are included in Cost of Gas Sold, Other Net or Nonregulated-Costs of Sales consistent with the expense for the physical commodity. Deferred net gains (losses) related to the Company's gas futures contracts are $(0.4) million and $0.8 million as of December 31, 1997 and 1996, respectively. The Company periodically evaluates the effectiveness of its natural gas hedging programs. If a high degree of correlation between prices for the hedging instruments and prices for the physical delivery is not achieved, the contracts are recorded at fair value and the gains or losses are included in the determination of income. At December 31, 1997 the Company held the following hedging instruments:
Weighted average Notional volume Market Value (MMBtu) (Per MMBtu) --------------- ---------------- Natural Gas Futures (Long) 3,670,000 $2.277 Natural Gas Futures (Short) 1,670,000 $2.305 Natural Gas Swaps (Fixed to Variable) 2,497,400 Weighted average variable price $2.558 Weighted average fixed price $3.114 Natural Gas Swaps (Variable to Fixed) 6,806,952 Weighted average variable price $2.536 Weighted average fixed price $2.473
-32- (2) LONG-TERM DEBT: The Company's sinking fund requirements and maturities of long-term debt for 1998 through 2002 are $145 million, $106 million, $134 million, $125 million and $25 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 1997. 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, 1997 and 1996. 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. All subsidiary long-term borrowings outstanding at December 31, 1997, 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, 1997, 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 $ 240 $ 128 $ 298 $ 159 $ 210 $ 531 Accumulated depreciation $ 87 $ 78 $ 164 $ 87 $ 103 $ 235 Unit capacity-MW 1,529 515 675 624 716 700 Percent ownership 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
-33- (4) COMMITMENTS AND CONTINGENCIES: (A) CAPITAL EXPENDITURES: Utility construction expenditures for 1998 are estimated to be $201 million, including $13 million for Quad Cities nuclear fuel. Nonregulated capital expenditures depend upon the availability of investment opportunities and other factors. During 1998, such expenditures are estimated to be approximately $10 million. (B) MANUFACTURED GAS PLANT FACILITIES: The United States Environmental Protection Agency (EPA) and the state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant 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 26 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 seventeen of the sites and has completed investigations at one of the sites. In addition, MidAmerican has completed removals at three 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 as of December 31, 1997 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 and the costs of removing known contaminated soil are accrued. As the investigation is performed and if it is determined remedial action is required, the best estimate of remediation costs is accrued. If necessary, the estimate is revised when a consent order is issued. The estimated recorded liabilities for these properties include incremental direct costs of the remediation effort, costs for future monitoring at sites and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. In addition, insurance recoveries for some or all of the costs may be possible, but the liabilities recorded have not been reduced by any estimate of such recoveries. -34- 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) CLEAN AIR ACT: On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout the states, the EPA will make a determination of whether the states have any areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. The impact of the new standards on MidAmerican will depend on the attainment status of the areas surrounding MidAmerican's operations and MidAmerican's relative contribution to the nonattainment status. If MidAmerican's operations contribute to nonattainment and modifications to MidAmerican's operations or facilities are necessary, the cost of making emissions reductions to meet the air quality standards will be dependent upon the level of emissions reductions required and the available technology. MidAmerican will continue to evaluate the potential impact of the new regulations. Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making significant contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these emissions reduction requirements as EPA's rule is currently drafted, and, as such, MidAmerican does not anticipate that its facilities will be subject to additional emissions reductions as a result of this initiative. The EPA anticipates issuing its final rules in September 1998. MidAmerican will continue to closely monitor this rulemaking proceeding. (D) 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 1998 and is not contingent upon the plant being in service. In addition, MidAmerican pays one-half of NPPD's decommissioning funding related to Cooper. The debt amortization and Department of Energy (DOE) enrichment plant decontamination and decommissioning component of MidAmerican's payments to NPPD were $13.8 million, $14.5 million and $12.0 million and the net interest component was $3.8 million, $3.6 million and $4.6 million each for the years 1997, 1996 and 1995, 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 $14.4 million, $15.0 million, $15.8 million, $16.6 million, $17.4 million and $18.3 million for 1998 through 2003, respectively. -35- (E) 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 1997 dollars, is $247 million and $230 million, respectively. 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 anticipated plant shutdown date. As of December 31, 1997, MidAmerican's share of funds set aside by NPPD in internal and external accounts for decommissioning was $78.2 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 6.75% 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 life of the power sales contract. MidAmerican makes payments to NPPD related to decommissioning Cooper. These payments are included in MidAmerican's power purchase costs. The Cooper decommissioning component of MidAmerican's payments to NPPD was $11.3 million, $9.9 million and $8.9 million for the years 1997, 1996, and 1995, respectively, and is 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. External trusts have been established for the investment of funds for decommissioning the Quad Cities units. The total accrued balance as of December 31, 1997, was $93.3 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 trusts. MidAmerican's provision for depreciation included costs for Quad Cities nuclear decommissioning of $9.8 million, $8.6 million and $8.6 million for 1997, 1996 and 1995, 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 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 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 $5.0 million, $3.5 million and $2.5 million for 1997, 1996 and 1995, respectively. (F) 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 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. -36- 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 $11.6 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. (G) 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 1998 to 2003, require minimum payments of $132.2 million, $88.8 million, $57.8 million, $26.3 million and $3.1 million and $3.1 million for the years 1998 through 2003, respectively. 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 $88 million, $63 million, $37 million, $32 million and $16 million for the years 1998 through 2002, respectively, and $76 million for the total of the years thereafter. During 1993 FERC Order 636 became effective, requiring interstate pipelines to restructure their services. The pipeline 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, 1997, was $9.3 million. -37- (5) COMMON SHAREHOLDERS' EQUITY: Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands): 1997 1996 1995 --------------------- -------------------- -------------------- Amount Shares Amount Shares Amount Shares --------- ------- --------- ------- --------- -------- Balance, beginning of year ............... $ 801,431 100,752 $ 801,227 100,752 $ 786,420 99,687 Changes due to: Repurchase of common shares ............ (47,444) (5,451) - - - - Issuance of common shares .............. - - - - 15,083 1,065 Stock options .......................... 210 - 623 - - - Capital stock expense .................. (289) - (419) - (276) - Other .................................. (35) - - - - - --------- -------- --------- ------- --------- ------- Balance, end of year ................... $ 753,873 95,301 $ 801,431 100,752 $ 801,227 100,752 ========= ======== ========= ======= ========= =======
(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):
1997 1996 1995 --------- --------- --------- Service cost-benefit earned during the period . $ 10,092 $ 12,323 $ 9,817 Interest cost on projected benefit obligation . 29,623 31,109 27,934 Decrease in pension costs from actual return on assets ............................. (79,580) (58,460) (63,593) Net amortization and deferral ................. 39,446 26,223 32,126 One-time charge ............................... - - 15,683 Regulatory deferral of incurred cost .......... 5,423 568 (10,470) -------- -------- -------- Net periodic pension cost ..................... $ 5,004 $ 11,763 $ 11,497 ======== ======== ========
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 $21.5 million and $17.3 million at December 31, 1997 and 1996, -38- respectively. The following table presents the funding status of the plans and amounts recognized in the Consolidated Balance Sheets as of December 31 (dollars in thousands):
Plans in Which: ---------------------------------------------- Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets ---------------------- -------------------- 1997 1996 1997 1996 --------- --------- -------- -------- Actuarial present value of benefit obligations: Vested benefit obligation .................. $(325,770) $(298,237) $(40,080) $(36,574) Nonvested benefit obligation ............... (3,623) (3,454) (242) (1,925) --------- --------- -------- -------- Accumulated benefit obligation ............. (329,393) (301,691) (40,322) (38,499) Provision for future pay increases ......... (52,027) (79,790) (8,301) (8,733) --------- --------- -------- -------- Projected benefit obligation ............... (381,420) (381,481) (48,623) (47,232) Plan assets at fair value ..................... 483,668 427,828 - - --------- --------- -------- -------- Projected benefit obligation (greater) less than plan assets ........................... 102,248 46,347 (48,623) (47,232) Unrecognized prior service cost ............... 592 18,636 21,147 21,544 Unrecognized net loss (gain) .................. (93,770) (63,173) (1,281) -- Unrecognized net transition asset ............. (16,339) (18,929) -- -- Other ...................................... -- -- (11,565) (12,811) --------- --------- -------- -------- Pension liability recognized in the Consolidated Balance Sheets ................ $ (7,269) $ (17,119) $(40,322) $(38,499) ========= ========= ======== ========
1997 1996 ----- ----- Assumptions used were: Discount rate................................ 7.0% 7.5% Rate of increase in compensation levels...... 5.0% 5.0% Weighted average expected long-term rate of return on assets................. 9.0% 9.0%
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. -39- Net periodic postretirement benefit cost includes the following components for the year ended December 31 (in thousands):
1997 1996 1995 -------- -------- -------- Service cost-benefit earned during the period ...... $ 2,680 $ 2,118 $ 1,583 Interest cost ...................................... 8,822 8,341 7,185 Increase (decrease) in benefit cost from actual return on assets .......................... (2,285) (1,598) (2,090) Amortization of unrecognized transition obligation . 5,291 5,291 5,291 Amortization of unrecognized service cost .......... 650 - - Amortization of unrecognized prior year (loss) ..... (298) - - Other .............................................. (288) (297) (262) One-time charge for early retirement ............... - - 4,353 Regulatory recognition of incurred cost ............ 4,888 5,112 5,140 -------- -------- -------- Net periodic postretirement benefit cost ........... $ 19,460 $ 18,967 $ 21,200 ======== ======== ========
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):
1997 1996 --------- --------- Accumulated present value of benefit obligations: Retiree benefit obligation ............................. $ (74,534) $ (78,935) Active employees fully eligible for benefits ........... (6,466) (2,798) Other active employees ................................. (46,347) (34,772) --------- --------- Accumulated benefit obligation ......................... (127,347) (116,505) Plan assets at fair value ................................ 52,174 36,783 --------- --------- Accumulated benefit obligation greater than plan assets .. (75,173) (79,722) Unrecognized net gain .................................... (11,248) (8,810) Prior service cost ....................................... 8,277 - Unrecognized transition obligation ....................... 79,370 84,662 --------- --------- Postretirement benefit liability recognized in the Consolidated Balance Sheets ............................ $ 1,226 $ (3,870) ========= ========= Assumptions used were: Discount rate .......................................... 7.0% 7.5% Weighted average expected long-term rate of return on assets (after taxes) ............................. 6.5% 6.7%
For purposes of calculating the postretirement benefit obligation, it is assumed health care costs for covered individuals prior to age 65 will increase by 10.0% in 1998, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2003. For covered individuals age 65 and older, it is assumed health care costs will increase by 7.0% in 1998, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2000. -40- 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 $1.8 million and the accumulated postretirement benefit obligation would increase by $15.4 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 $4.6 million, $4.4 million and $3.7 million for 1997, 1996 and 1995, respectively. (7) STOCK-BASED COMPENSATION PLANS: The company has stock-based compensation arrangements as described below. The company accounts for these plans under Accounting Principles Board Opinion No. 25 and the related interpretations. The total compensation cost recognized in income for stock-based compensation awards was $1.3 million, $0.6 million, and $1.8 million for 1997, 1996, and 1995 respectively. Had the company used Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), pro-forma net income for common stock would be $135.3 million, $130.9 million, and $122.6 million, while earnings per share would be $1.38, $1.30, and $1.22 for the years ended 1997, 1996, and 1995 respectively. Stock options and performance share awards have been granted pursuant to the MidAmerican Energy Company 1995 Long-Term Incentive Plan (the "Plan"). Up to four million shares are authorized to be granted under the Plan. STOCK OPTIONS - Under the Plan, the Board of Directors have granted options to purchase shares of MidAmerican Holdings common stock (the "Options") at the fair market value of the shares on the date of the grant. The options vest over a 4-year period at a rate of 25% per year and expire ten years after the date of grant. Stock option activity for 1997, 1996, and 1995 is summarized as follows:
1997 1996 1995 ---------------------- ----------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Number Price Number Price Number Price ------- -------- ------- -------- ------- ------- Outstanding, beginning of year 800,000 $14.66 700,000 $14.50 - - Granted 46,666 $17.36 100,000 $15.75 700,000 $14.50 Exercised 165,000 $14.58 - - - - Forfeited 115,000 $14.93 - - - - Expired - - - - - Outstanding, end of year 566,666 $15.12 800,000 $14.66 700,000 $14.50 Exercisable, end of year 315,000 $14.54 175,000 $14.50 - - Weighted average fair value of options granted during year $1.66 $1.48 $1.58
-41- The fair value of the options granted were estimated as of the date of the grant using the Black-Scholes option pricing model. The model assumed:
1997 1996 1995 --------- ---------- ---------- Dividend rate per share $ 1.20 $ 1.20 $ 1.20 Expected volatility 16.55% 17.62% 23% Expected life 10 Years 10 Years 10 Years Risk free interest rate 6.14% 6.53% 6.28%
The options outstanding at December 31, 1997 have an exercise price range of $14.50 to $17.785, with a weighted average contractual life of 8.25 years. PERFORMANCE SHARES - Under the Plan, participants are granted contingent shares of common stock. The shares are contingent upon the attainment of specified performance measures within a 3-year performance period. During the performance period, the participant is entitled to receive dividends and vote the stock. The stock is vested upon achievement of the performance measures. If the specified criteria is not met within the 3-year performance period, the shares are forfeited. The following table provides certain information regarding contingent performance incentive shares granted under the Plan:
1997 1996 1995 --------- --------- --------- Number of performance shares granted 77,105 68,189 86,277 Fair value at date of grant (in thousands) $ 1,335 $ 1,176 $ 1,251 Weighted average per share amounts $ 17.3125 $ 17.2500 $ 14.5000 End of performance period 6/30/2000 6/30/99 6/30/98
In addition, the company has granted 800 restricted shares to each non-employee director in 1997, 1996 and 1995. Non-employee directors are restricted from disposing of granted shares until such time as they cease to be a director of the company. The following table provides certain information regarding the directors restricted shares granted under the Plan.
1997 1996 1995 -------- -------- -------- Number of shares granted 11,200 12,000 13,600 Fair value at date of grant (in thousands) $ 194 $ 207 $ 197 Weighted average price per share amounts $17.3125 $17.2500 $14.5000
EMPLOYEE STOCK OWNERSHIP PLAN - Employees of the Company are allowed to purchase company stock up to the lesser of 15% or $25,000 of their annual compensation at a 15% discount. The number of shares acquired by employees under the plan were 140,943, 150,899, and 182,707 in 1997, 1996 and 1995, respectively. The Company currently acquires shares in the open market for this plan. Participants who purchase shares under the Plan are required to hold purchased shares for 180 days. -42- (8) 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):
1997 1996 1995 --------- --------- ---------- Balance at year-end $138,054 $161,990 $184,800 Weighted average interest rate on year-end balance 5.9% 5.4% 5.7% Average daily amount outstanding during the year $117,482 $151,318 $114,036 Weighted average interest rate on average daily amount outstanding during the year 5.7% 5.5% 6.0%
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, 1997, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit and Holdings had lines of credit totaling $120 million. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit. (9) RATE MATTERS: As a result of a negotiated settlement in Illinois, MidAmerican reduced its Illinois electric service rates by annual amounts of $13.1 million and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively. On June 27, 1997, the Iowa Utilities Board (IUB) issued an order in a consolidated rate proceeding involving MidAmerican's pricing proposal and a filing by the Iowa Office of Consumer Advocate (OCA). The order approved a March 1997 settlement agreement between MidAmerican, the OCA and other parties to the proceeding. The agreement includes a number of characteristics of MidAmerican's pricing proposal. Prices for residential customers were reduced $8.5 million annually and $10.0 million annually, effective November 1, 1996, and July 11, 1997, respectively, and will be reduced an additional $5.0 million annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates for commercial and industrial customers will 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. The agreement includes a tracking mechanism to currently recover the cost of capital improvements required by the Cooper Nuclear Station Power Purchase Contract. The tracking mechanism will offset approximately $9 million of these reductions. In addition, the agreement accepted MidAmerican's proposal to eliminate the Iowa energy adjustment clause (EAC) which was the mechanism through which fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC flows the cost of fuel to customers on a current basis, and thus, fuel costs had little impact on net income. Prospectively, base rates for Iowa customers will 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 will be impacted. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary 15% above or below the factor included in base rates. -43- Under the agreement, if MidAmerican's annual Iowa electric jurisdictional return on common equity exceeds 12%, then an equal sharing between customers and shareholders of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of MidAmerican's share of those earnings will 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%. The agreement also provides that MidAmerican will develop a pilot program for a market access service which allows customers with at least 4 MW of load to choose energy suppliers. The pilot program, which is subject to approval by the IUB and the Federal Energy Regulatory Commission (FERC), is limited to 60 MW of participation the first year and can be expanded by 15 MW annually until the conclusion of the program. Any loss of revenues associated with the pilot program will be considered part of the $10 million annual reduction for commercial and industrial customers as described above, but may not be recovered from other customer classes. The program was filed with the IUB and the FERC in September 1997. The Company anticipates that the necessary approvals will be received before the end of the second quarter of 1998. (10) DISCONTINUED OPERATIONS: In the third quarter of 1996, the Company announced the discontinuation of certain nonstrategic businesses in support of its strategy of becoming the 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 and an additional $0.9 million in 1997. In October 1997, the company sold its subsidiary that developed and continues to operate a computerized information system facilitating the real-time exchange of power in the electric industry. The Company recorded a $4.0 million estimated after-tax loss on disposal in the third quarter of 1996 and an additional $3.2 million in September 1997. 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. Proceeds received from the disposition of the oil and gas subsidiary included $210 million in cash and 870,000 warrants, after a stock split in 1997, to purchase KCS common stock. The warrants were valued at $6 million. Proceeds received from the disposition of the subsidiary that operates a computerized information system for the exchange of power in the electric industry included an unsecured note receivable for $0.7 million and warrants to purchase twenty percent of the acquirer which have been valued at zero. Proceeds received from the disposition of the coal mining subsidiary settlement were $15 million. 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): -44-
1997 1996 1995 -------- --------- -------- OPERATING REVENUES ................. $ - $ 233,952 $ 81,637 ======== ========= ======== INCOME FROM OPERATIONS Income (loss) before income taxes .. $ (200) $ 1,638 $ 4,704 Income tax benefit (expense) ....... 82 479 (1,645) -------- --------- -------- Income (loss) from Operations ...... $ (118) $ 2,117 $ 3,059 ======== ========= ======== LOSS ON DISPOSAL Income (loss) before income taxes .. $(10,106) $ 9,047 $ - Income tax benefit (expense) ....... 5,996 (23,879) - -------- --------- -------- Loss on Disposal ................... $ (4,110) $ (14,832 $ - ======== ========= ========
(11) CONCENTRATION OF CREDIT RISK: The Company's electric utility operations serve 560,000 customers in Iowa, 85,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. The Company's gas utility operations serve 486,000 customers in Iowa, 65,000 customers in western Illinois, 63,000 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, 1997, billed receivables from the Company's utility customers totalled $14.8 million. As described in Note 18, billed receivables related to utility services have been sold to a wholly owned unconsolidated subsidiary. MidAmerican Capital has investments in preferred stocks of companies in the utility industry. As of December 31, 1997, the total cost of these investments was $96 million. MidAmerican Capital has entered into leveraged lease agreements with companies in the airline industry. As of December 31, 1997, the receivables under these agreements totalled $35 million. (12) 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. 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. The total outstanding cumulative preferred stock of MidAmerican 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, 1997, are entitled to upon involuntary bankruptcy is $181.8 million plus accrued dividends. Annual dividend requirements for all preferred stock outstanding at December 31, 1997, total $12.9 million. -45- (13) SEGMENT INFORMATION: Information related to segments of the Company's business is as follows for the years ended December 31 (in thousands):
1997 1996 1995 ---------- ---------- ----------- UTILITY Electric: Operating revenues ........................ $1,126,300 $1,099,008 $ 1,094,647 Cost of fuel, energy and capacity ......... 235,760 234,317 230,261 Depreciation and amortization expense ..... 145,931 140,939 136,324 Other operating expenses .................. 502,109 424,594 459,344 ---------- ---------- ----------- Operating income .......................... $ 242,500 $ 299,158 $ 268,718 ========== ========== =========== Gas: Operating revenues ........................ $ 536,306 $ 536,753 $ 459,588 Cost of gas sold .......................... 346,016 345,014 279,025 Depreciation and amortization expense ..... 24,609 23,653 22,626 Other operating expenses .................. 127,092 106,831 122,017 ---------- ---------- ----------- Operating income .......................... $ 38,589 $ 61,255 $ 35,920 ========== ========== =========== Operating income ............................ $ 281,089 $ 360,413 $ 304,638 Other income (expense) ...................... 14,699 3,998 (4,074) Fixed charges ............................... 100,018 96,753 92,036 ---------- ---------- ----------- Income from continuing operations before income taxes ........................ 195,770 267,658 208,528 Income taxes ................................ 76,317 112,927 84,098 ---------- ---------- ----------- Income from continuing operations ........... $ 119,453 $ 154,731 $ 124,430 ========== ========== =========== Capital Expenditures- Electric ................................... $ 128,544 $ 116,243 $ 133,490 Gas ........................................ $ 38,388 $ 37,955 $ 57,281 1997 1996 1995 ---------- ---------- ----------- NONREGULATED Revenues ................................... $ 259,675 $ 236,851 $ 95,106 Cost of sales .............................. 240,182 218,256 70,351 Depreciation and amortization .............. 3,436 4,854 6,010 Other operating expenses ................... 26,640 30,516 31,029 ---------- ---------- ----------- Operating income (loss) .................... (10,583) (16,775) (12,284) Other income ............................... 34,320 14,874 15,734 Fixed charges .............................. 11,785 23,574 25,470 ---------- ---------- ----------- Income (loss) from continuing operations before income taxes ...................... 11,952 (25,475) (22,020) Income taxes ............................... (7,927) (14,505) (17,295) ---------- ---------- ----------- Income (loss) from continuing operations ... $ 19,879 $ (10,970) $ (4,725) ========== ========== =========== Capital expenditures ....................... $ 14,066 $ 55,788 $ 12,881
-46-
1997 1996 1995 ---------- ---------- ----------- ASSET INFORMATION Identifiable utility assets: Electric (a) .............................. $2,825,573 $2,954,324 $ 2,947,832 Gas (a) ................................... 677,991 692,993 699,539 Used in overall utility operations .......... 11,341 114,545 30,084 Nonregulated ................................ 763,186 593,666 615,342 Investment in discontinued operations ....... - 166,320 177,300 ---------- ---------- ----------- Total assets ............................. $4,278,091 $4,521,848 $ 4,470,097 ========== ========== ===========
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets. (14) 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. 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. -47- The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
1997 1996 ----------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial Instruments Owned by the Company: Equity investments carried at cost ............. $ 33,979 $ 36,491 $ 95,339 $ 273,311 Financial Instruments Issued by the Company: MidAmerican preferred securities; subject to mandatory redemption ..................... $ 50,000 $ 53,650 $ 50,000 $ 52,920 MidAmerican-obligated preferred securities; subject to mandatory redemption ............. $ 100,000 $ 104,250 $ 100,000 $ 100,490 Long-term debt, including current portion ...... $1,178,769 $1,214,951 $1,474,701 $1,522,500
Included in investments on the Consolidated Balance Sheets is the Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA). McLeodUSA common stock has been publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's initial public offering and subsequent merger with Consolidated Communications Inc. prohibit the Company from selling or otherwise disposing of any of the common stock of McLeodUSA prior to September 24, 1998, without approval of McLeodUSA's board of directors. As a result of the agreements, the Company's investment was considered restricted stock and as such, was recorded at cost in all periods prior to September 1997. Beginning in September 1997, the investment is no longer considered restricted for accounting purposes and is recorded at fair value. At December 31, 1997 the cost and fair value of the McLeodUSA investment were $45.2 million and $257.9 million, respectively. The unrealized gain is recorded, net of income taxes, as a valuation allowance in common shareholders' equity. At December 31, 1997, the net unrealized gain and deferred income taxes for this investment were $212.7 million and $74.4 million, respectively. 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):
1997 Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Equity securities ............. $257,316 $ 226,747 $ (10,522) $473,541 Municipal bonds ............... 35,217 2,116 (1) 37,332 U. S. Government securities ... 18,753 800 (4) 19,549 Corporate securities .......... 13,579 222 (3) 13,798 Cash equivalents .............. 9,862 - - 9,862 -------- --------- --------- -------- $334,727 $ 229,885 $ (10,530) $554,082 ======== ========= ========= ======== Held-to-maturity: Equity securities ............. $ 6,376 $ - $ - $ 6,376 Debt securities ............... 4,567 345 - 4,912 -------- --------- --------- -------- $ 10,943 $ 345 $ - $ 11,288 ======== ========= ========= ========
-48-
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 ======== ========= ========= ========
At December 31, 1997, 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 $ 2,971 $ 2,987 $1,718 $2,014 1 through 5 years 14,057 14,377 2,137 2,143 5 through 10 years 26,821 28,119 139 147 Over 10 years 23,700 25,196 573 608
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. 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):
1997 1996 1995 -------- -------- -------- Proceeds from sales............... $211,691 $250,772 $106,910 Gross realized gains.............. 14,320 9,920 3,923 Gross realized losses............. (6,480) (7,950) (3,082)
-49- (15) INCOME TAX EXPENSE: Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
1997 1996 1995 --------- --------- -------- Current Federal ..................... $ 91,627 $ 80,165 $ 54,430 State ....................... 21,619 22,100 13,330 --------- --------- -------- 113,246 102,265 67,760 --------- --------- -------- Deferred Federal ..................... (29,257) 2,627 5,750 State ....................... (8,242) (264) 1,470 --------- --------- -------- (37,499) 2,363 7,220 Investment tax credit, net ... (7,357) (6,206) (8,177) --------- --------- -------- Total ...................... $ 68,390 $ 98,422 $ 66,803 ========= ========= ========
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):
1997 1996 -------- -------- Deferred tax assets Related to: Investment tax credits ................ $ 55,998 $ 61,349 Unrealized losses ..................... 7,880 12,034 Pensions .............................. 17,339 17,648 AMT credit carry forward .............. - 10,188 Nuclear reserves and decommissioning .. 15,287 8,233 Other ................................. 1,589 5,839 -------- -------- Total .............................. $ 98,093 $115,291 ======== ========
1997 1996 -------- -------- Deferred tax liabilities Related to: Depreciable property .................. $504,594 $545,459 Income taxes recoverable through future rates ............... 197,877 201,998 Unrealized gains ...................... 81,501 - Energy efficiency ..................... 40,902 44,734 Reacquired debt ....................... 15,346 14,265 FERC Order 636 ........................ 2,857 9,023 Other ................................. 16,811 22,112 -------- -------- Total ............................... $859,888 $837,591 ======== ========
-50- 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:
1997 1996 1995 ---- ---- ---- Effective federal and state income tax rate .......................... 31% 39% 34% Amortization of investment tax credit ..... 3 2 4 State income tax, net of federal income tax benefit .............................. (4) (6) (5) Dividends received deduction .............. 2 2 2 Other ..................................... 3 (2) - ---- ---- ---- Statutory federal income tax rate ......... 35% 35% 35% ==== ==== ====
(16) INVENTORIES: Inventories include the following amounts as of December 31 (in thousands):
1997 1996 ------- ------- Materials and supplies, at average cost.. $31,425 $32,222 Coal stocks, at average cost............. 14,225 32,293 Gas in storage, at LIFO cost............. 35,430 23,915 Fuel oil, at average cost................ 2,344 1,264 Other.................................... 2,667 1,170 ------- -------- Total................................... $86,091 $90,864 ======= =======
At December 31, 1997 prices, the current cost of gas in storage was $50.3 million. (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 -51- 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. (18) SALE OF ACCOUNTS RECEIVABLE: In 1997 MidAmerican entered into a revolving agreement, which expires in 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a special purpose entity established to purchase accounts receivable from MidAmerican. Funding Corp. in turn has sold receivable interests to outside investors. In consideration of the sale, MidAmerican received $70 million in cash and the remaining balance in the form of a subordinated note from Funding Corp. The agreement is structured as a true sale under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors and, as such, the accounts receivable sold are not reflected on Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997, $130.0 million, net of reserves, was sold under the agreement. (19) EARNINGS PER SHARE Reconciliation for the Income and Shares of the Basic and Diluted per share computations for income from continuing operations for the years ended December 31 are as follows (in thousands, except per share amounts):
1997 1996 --------------------------- ---------------------------- Per Per Share Share Income Shares Amount Income Shares Amount -------- ------ ------ -------- ------- ------ INCOME FROM CONTINUING OPERATIONS.................... $139,332 $143,761 BASIC EPS Income available to Common Shareholders.................. $139,332 98,058 $1.42 $143,761 100,752 $1.43 ===== ===== EFFECT OF DILUTIVE SECURITIES Stock Options................... - 107 - 89 -------- ------ -------- ------- DILUTED EPS Income Available to Common Shareholders.................. $139,332 98,165 $1.42 $143,761 100,841 $1.43 ======== ====== ===== ======== ======= =====
-52-
1995 ----------------------------- Per Share Income Shares Amount -------- ------- ------ INCOME FROM CONTINUING OPERATIONS..... $119,705 BASIC EPS Income available to Common Shareholders...................... $119,705 100,401 $1.19 ===== EFFECT OF DILUTIVE SECURITIES........ Stock Options........................ - 20 -------- ------- DILUTED EPS Income Available to Common Shareholders........................ $119,705 100,421 $1.19 ======== ======= =====
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands, except per share amounts) Operating revenues .......................... $ 584,395 $ 390,615 $ 440,698 $ 506,573 Operating income ............................ 77,233 55,395 97,948 39,930 Income from continuing operations ........... 34,174 24,176 49,705 31,277 Income (loss) from discontinued operations .. (234) 408 (2,793) (1,609) Earnings on common stock .................... 33,940 24,584 46,912 29,668 Earnings per average common share and Earnings per average common share assuming dilution: Income from continuing operations ........... $ 0.34 $ 0.24 $ 0.51 $ 0.33 Income (loss) from discontinued operations .. - 0.01 (0.03) (0.02) --------- --------- --------- --------- $ 0.34 $ 0.25 $ 0.48 $ 0.31 ========= ========= ========= =========
-53-
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 and Earnings per average common share assuming dilution: 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) --------- --------- --------- --------- $ 0.51 $ 0.29 $ 0.22 $ 0.28 ========= ========= ========= =========
The quarterly data reflect seasonal variations common in the utility industry. (21) 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):
1997 1996 1995 -------- -------- -------- Other-than-temporary declines in value of investments and other assets ............... $ (3,443) $(15,566) $(17,971) IES merger costs ............................... - (8,689) - Special purpose fund income .................... 1,989 3,301 1,863 Energy efficiency carrying charges ............. 4,993 3,255 3,092 Gain on sale of cushion gas .................... 855 3,182 - Incentive gas purchase plan award .............. 4,914 2,677 - Agency gas sales, net .......................... 1,184 1,840 228 Gain (loss) on reacquisition of long-term debt . (556) 1,105 - Gain on sale of assets, net .................... 10,213 974 8,570 MidAmerican merger costs ....................... - - (4,624) Allowance for equity funds used during construction ........................... - - 481 Income (loss) from equity method investments ... 1,273 2,510 (312) NPPD settlement ................................ 2,248 - - Other .......................................... (1,559) 1,391 (1,794) -------- -------- -------- Total ......................................... $ 22,111 $ (4,020) $(10,467) ======== ======== ========
-54- 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, Coopers & Lybrand L.L.P. 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 Coopers & Lybrand L.L.P. 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 Coopers & Lybrand L.L.P. each have full access to the Audit Committee, without management representatives present. Stanley J. Bright Chairman, President and Chief Executive Officer Alan L. Wells Senior Vice President and Chief Financial Officer -55- REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of MidAmerican Energy Holdings Company and Subsidiaries: We have audited the accompanying consolidated balance sheets and statements of capitalization of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of MidAmerican Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Kansas City, Missouri January 23, 1998 -56-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS) YEARS ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 ----------- ----------- ----------- OPERATING REVENUES Electric utility ................................. $ 1,126,300 $ 1,099,008 $ 1,094,647 Gas utility ...................................... 536,306 536,753 459,588 ----------- ----------- ----------- 1,662,606 1,635,761 1,554,235 ----------- ----------- ----------- OPERATING EXPENSES Cost of fuel, energy and capacity ................ 235,760 234,317 230,261 Cost of gas sold ................................. 346,016 345,014 279,025 Other operating expenses ......................... 429,794 350,174 399,648 Maintenance ...................................... 98,090 88,621 85,363 Depreciation and amortization .................... 170,540 164,592 158,950 Property and other taxes ......................... 101,317 92,630 96,350 Income taxes ..................................... 74,562 111,206 85,400 ----------- ----------- ----------- 1,456,079 1,386,554 1,334,997 ----------- ----------- ----------- OPERATING INCOME ................................. 206,527 249,207 219,238 ----------- ----------- ----------- NON-OPERATING INCOME Interest and dividend income ..................... 2,332 1,598 1,354 Non-operating income taxes ....................... (1,755) (1,721) 1,302 Other, net ....................................... 12,367 2,400 (5,428) ----------- ----------- ----------- 12,944 2,277 (2,772) ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt ....................... 78,120 79,434 80,133 Other interest expense ........................... 10,027 10,842 9,396 Preferred dividends of subsidiary trust .......... 7,980 288 -- Allowance for borrowed funds ..................... (2,597) (4,212) (5,552) ----------- ----------- ----------- 93,530 86,352 83,977 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS ................ 125,941 165,132 132,489 INCOME (LOSS) FROM DISCONTINUED OPERATIONS ....... - (10,161) (1,666) ----------- ----------- ----------- NET INCOME ....................................... 125,941 154,971 130,823 PREFERRED DIVIDENDS .............................. 6,488 10,401 8,059 ----------- ----------- ----------- EARNINGS ON COMMON STOCK ......................... $ 119,453 $ 144,570 $ 122,764 =========== =========== ===========
The accompanying notes are an integral part of these statements. -57-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 ----------------------- 1997 1996 ---------- ---------- ASSETS UTILITY PLANT Electric ......................................................... $4,087,924 $4,013,851 Gas .............................................................. 756,874 723,491 ---------- ---------- 4,844,798 4,737,342 Less accumulated depreciation and amortization ................... 2,277,110 2,154,505 ---------- ---------- 2,567,688 2,582,837 Construction work in progress .................................... 55,418 49,305 ---------- ---------- 2,623,106 2,632,142 ---------- ---------- POWER PURCHASE CONTRACT .......................................... 173,107 190,897 ---------- ---------- CURRENT ASSETS Cash and cash equivalents ........................................ 9,318 84,215 Receivables, less reserves of $0 and $1,845, respectively ........ 184,153 253,944 Inventories ...................................................... 84,298 90,864 Other ............................................................ 6,174 7,776 ---------- ---------- 283,943 436,799 ---------- ---------- INVESTMENTS ...................................................... 115,029 118,344 ---------- ---------- OTHER ASSETS ..................................................... 347,122 396,471 ---------- ---------- TOTAL ASSETS ..................................................... $3,542,307 $3,774,653 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity ...................................... $ 985,744 $ 986,825 MidAmerican preferred securities, not subject to mandatory redemption ................................................... 31,763 31,769 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 .... 100,000 100,000 Long-term debt (excluding current portion) ....................... 920,203 1,086,955 ---------- ---------- 2,087,710 2,255,549 ---------- ---------- CURRENT LIABILITIES Notes payable .................................................... 122,500 161,700 Current portion of long-term debt ................................ 124,460 49,560 Current portion of power purchase contract ....................... 14,361 13,718 Accounts payable ................................................. 128,390 122,974 Taxes accrued .................................................... 91,449 82,338 Interest accrued ................................................. 20,616 24,245 Other ............................................................ 22,598 24,452 ---------- ---------- 524,374 478,987 ---------- ---------- OTHER LIABILITIES Power purchase contract .......................................... 83,143 97,504 Deferred income taxes ............................................ 592,840 616,567 Investment tax credit ............................................ 83,127 88,842 Other ............................................................ 171,113 237,204 ---------- ---------- 930,223 1,040,117 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ............................. $3,542,307 $3,774,653 ========== ==========
The accompanying notes are an integral part of these statements. -58-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................. $ 125,941 $ 154,971 $ 130,823 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ........................... 194,287 185,657 175,969 Net increase (decrease) in deferred income taxes and investment tax credit, net ............................ (32,645) (3,111) 6,835 Amortization of other assets ............................ 33,112 20,541 19,630 Cash proceeds from sale of accounts receivable........... 70,000 - - Loss from discontinued operations ....................... - 10,161 1,666 Gain on sale of assets and long-term investments......... - (6,104) - Impact of changes in working capital, net of effects of discontinued operations........... .................... 17,003 (58,371) (5,595) Other ................................................... (28,160) 23,689 3,856 --------- --------- --------- Net cash provided ..................................... 379,538 327,433 333,184 --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures .......................... (166,932) (154,198) (192,625) Quad Cities Nuclear Power Station decommissioning trust fund (9,819) (8,607) (8,636) Deferred energy efficiency expenditures .................... (12,258) (20,390) (35,841) Nonregulated capital expenditures .......................... (5,920) (2,970) -- Proceeds from sale of assets and other investments ......... -- 11,620 -- Investment in discontinued operations ...................... -- 10,100 (47,968) Other investing activities, net ............................ (788) 734 203 --------- --------- --------- Net cash used ........................................... (195,717) (163,711) (284,867) --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ............................................. (126,988) (131,171) (126,887) Issuance of long-term debt, net of issuance cost ........... -- 99,500 14,604 Retirement of long-term debt, including reacquisition cost . (92,524) (72,111) (14,277) Reacquisition of preferred shares .......................... (6) (58,176) (10) Issuance of preferred securities, net of issuance cost ..... -- 96,850 -- Issuance of common shares .................................. -- -- 15,083 Net increase (decrease) in notes payable ................... (39,200) (23,100) 60,300 --------- --------- --------- Net cash used ........................................... (258,718) (88,208) (51,187) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (74,897) 75,514 (2,870) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 84,215 8,701 11,571 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 9,318 $ 84,215 $ 8,701 ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized .................. $ 90,718 $ 80,881 $ 89,055 ========= ========= ========= Income taxes paid .......................................... $ 112,492 $ 103,627 $ 90,102 ========= ========= =========
The accompanying notes are an integral part of these statements. -59-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (IN THOUSANDS, EXCEPT SHARE AMOUNTS) AS OF DECEMBER 31 ----------------------------------------------- 1997 1996 --------------------- -------------------- COMMON SHAREHOLDER'S EQUITY Common shares, no par; 350,000,000 shares authorized; 70,980,203 and 100,751,713 shares outstanding, respectively.......... $ 560,563 $ 560,597 Retained earnings...................................................... 425,181 426,228 ------------ ----------- 985,744 47.2% 986,825 43.8% ------------ ------ ----------- ------ PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative shares outstanding not subject to mandatory redemption: $3.30 Series, 49,481 and 49,523 shares, respectively................. 4,948 4,952 $3.75 Series, 38,310 and 38,320 shares, respectively................. 3,831 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, 49,945 and 49,950 shares, respectively................. 4,994 4,995 $4.40 Series, 50,000 shares.......................................... 5,000 5,000 $4.80 Series, 49,898 shares.......................................... 4,990 4,990 ------------ ----------- 31,763 1.5% 31,769 1.4% ------------ ------ ----------- ------ 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 2.4% 50,000 2.2% ------------ ------ ----------- ------- 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 shares..................................... 100,000 4.8% 100,000 4.4% ------------ ------ ----------- ------- LONG-TERM DEBT Mortgage bonds: 5.05% Series, due 1998............................................... - 49,100 6.25% Series, due 1998............................................... - 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 7.125% Series, due 2003.............................................. 100,000 100,000 7.70% Series, due 2004............................................... 55,630 60,000 7% Series, due 2005.................................................. 90,500 100,000 7.375% Series, due 2008.............................................. 75,000 75,000 8% Series, due 2022.................................................. 50,000 50,000 7.45% Series, due 2023............................................... 6,940 26,500 8.125% Series, due 2023.............................................. 100,000 100,000 6.95% Series, due 2025............................................... 12,500 21,500 Pollution control revenue obligations: 5.15% to 5.75% Series, due periodically through 2003................. 8,064 8,424 5.95% Series, due 2023 (secured by general mortgage bonds)........... 29,030 29,030
The accompanying notes are an integral part of these statements. -60-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (IN THOUSANDS, EXCEPT SHARE AMOUNTS) AS OF DECEMBER 31 ----------------------------------------------- 1997 1996 --------------------- -------------------- LONG-TERM DEBT (CONTINUED) Variable rate series - Due 2016 and 2017 (3.7% and 3.5%, respectively)............. $ 37,600 $ 37,600 Due 2023 (secured by general mortgage bonds, 3.7% and 3.5%, respectively)............................. 28,295 28,295 Due 2023 (3.7% and 3.5%, respectively)...................... 6,850 6,850 Due 2024 (3.7% and 3.6%, respectively)...................... 34,900 34,900 Due 2025 (3.7% and 3.5%, respectively)...................... 12,750 12,750 Notes: 8.75% Series, due 2002......................................... 240 240 6.5% Series, due 2001.......................................... 100,000 100,000 6.4% Series, due 2003 through 2007............................. 2,000 2,000 Obligation under capital lease................................. 3,096 3,775 Unamortized debt premium and discount, net..................... (3,192) (4,009) ------------ ----------- Total....................................................... 920,203 44.1% 1,086,955 48.2% ------------ ------ ----------- ------ TOTAL CAPITALIZATION.............................................. $ 2,087,710 100.0% $ 2,255,549 100.0% ============ ====== =========== ======
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 --------------------------------------- 1997 1996 1995 --------- --------- --------- BEGINNING OF YEAR................................................. $ 426,228 $ 430,589 $ 426,683 --------- --------- --------- NET INCOME........................................................ 125,941 154,971 130,823 --------- --------- --------- DEDUCT (ADD): (Gain) loss on reacquisition of preferred shares.................. 1,433 1,572 (5) Dividends declared on preferred shares............................ 5,055 8,829 8,064 Dividends declared on common shares............................... 120,500 120,770 118,828 Dividend of Investment in Subsidiaries............................ - 28,161 - Other............................................................. - - 30 --------- ---------- --------- 126,988 159,332 126,917 --------- ---------- --------- END OF YEAR....................................................... $ 425,181 $ 426,228 $ 430,589 ========= ========== ==========
The accompanying notes are an integral part of these statements. -61- 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) 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. Prior to December 1, 1996, MidAmerican held the capital stock of 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 MidAmerican Energy Holdings Company (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 MidAmerican 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. -62- (F) INVESTMENTS: Investments include the following amounts as of December 31 (in thousands):
1997 1996 -------- -------- Investments: Nuclear decommissioning trust fund..... $ 93,251 $ 76,304 Corporate owned life insurance......... - 27,395 Coal transportation.................... 11,626 6,219 Other.................................. 10,152 8,426 -------- -------- Total.............................. $115,029 $118,344 ======== ========
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: MidAmerican 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 was as follows (in thousands):
1997 1996 1995 -------- --------- --------- Receivables............... $ (209) $(55,014) $(19,044) Inventories............... 6,566 (7,311) 5,777 Other current assets ..... 1,602 9,118 (4,358) Accounts payable.......... 5,416 6,543 21,475 Taxes accrued............. 9,111 3,345 (8,586) Interest accrued.......... (3,629) 603 (289) Other current liabilities. (1,854) (15,655) (570) ------- -------- -------- Total.................. $17,003 $(58,371) $ (5,595) ======= ======== ========
MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. See Note (10) 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 . -63- (I) ACCOUNTING FOR DERIVATIVES: 1) Gas Futures Contracts and Swaps: MidAmerican uses gas futures contracts and swap contracts to reduce its exposure to changes in the price of natural gas purchased to meet the needs of its customers and to manage margins on natural gas storage opportunities. Investments in natural gas futures contracts, which total $1.5 million and $0.1 million as of December 31, 1997 and 1996, are included in Receivables on the Consolidated Balance Sheets. Gains and losses on gas futures contracts that qualify for hedge accounting are deferred and reflected as adjustments to the carrying value of the hedged item or included in Other Assets on the Consolidated Balance Sheets until the underlying physical transaction is recorded if the instrument is used to hedge an anticipated future transaction. The net gain or loss on gas futures contracts is included in the determination of income in the same period as the expense for the physical delivery of the natural gas. Realized gains and losses on gas futures contracts and the net amounts exchanged or accrued under the natural gas swap contracts are included in Cost of Gas Sold, Other Net consistent with the expense for the physical commodity. Deferred net gains (losses) related to the Company's gas futures contracts are $(0.4) million and $0.1 million as of December 31, 1997 and 1996, respectively. MidAmerican periodically evaluates the effectiveness of its natural gas hedging programs. If a high degree of correlation between prices for the hedging instruments and prices for the physical delivery is not achieved, the contracts are recorded at fair value and the gains or losses are included in the determination of income. At December 31, 1997, MidAmerican held the following hedging instruments:
Weighted average Notional volume Market Value (MMBtu) (Per MMBtu) --------------- ---------------- Natural Gas Futures (Long) 3,500,000 $2.278 Natural Gas Futures (Short) 1,500,000 $2.309 Natural Gas Swaps (Fixed to Variable) 1,150,000 Weighted average variable price $2.144 Weighted average fixed price $2.136 Natural Gas Swaps (Variable to Fixed) 5,425,707 Weighted average variable price $2.211 Weighted average fixed price $2.376
(2) LONG-TERM DEBT: MidAmerican's sinking fund requirements and maturities of long-term debt for 1998 through 2002 are $125 million, $61 million, $111 million, $102 million and $2 million, respectively. The interest rate on MidAmerican'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 1997. MidAmerican'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. MidAmerican, 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, 1997 and 1996. MidAmerican maintains dedicated revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues. -64- 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 1998 are estimated to be $201 million, including $13 million for Quad Cities nuclear fuel. (B) MANUFACTURED GAS PLANT FACILITIES: Refer to Note 4(b) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's Environmental Matters. (C) CLEAN AIR ACT: Refer to Note 4(c) of Holdings' Notes to Consolidated Financial Statements for information regarding the impact of the revisions to the clean air act on MidAmerican. (D) LONG-TERM POWER PURCHASE CONTRACT: Refer to Note 4(d) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under the Cooper long-term power purchase contract. (E) DECOMMISSIONING COSTS: Refer to Note 4(e) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment for decommissioning of nuclear facilities. (F) NUCLEAR INSURANCE: Refer to Note 4(f) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's nuclear insurance coverage and the potential assessments under such coverage. (G) COAL AND NATURAL GAS CONTRACT COMMITMENTS: Refer to Note 4(g) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under various coal and natural gas supply and transportation contracts. -65- (5) COMMON SHAREHOLDER'S EQUITY: Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands):
1997 1996 1995 ------------------ ------------------- ------------------- Amount Shares Amount Shares Amount Shares Balance, beginning of year....... $560,597 100,752 $801,227 100,752 $786,420 99,687 Changes due to: Issuance of common shares........ - - - - 15,083 1,065 Cancellation of common shares.... - (29,772) - - - - Stock options.................... - - 623 - - - Capital stock expense .......... (391) - (276) - Distribution of investment in subsidiaries to Holdings..... - - (240,862) - - - Other............................ (34) - - - - - -------- ------- -------- -------- -------- ------- Balance, end of year............. $560,563 70,980 $560,597 100,752 $801,227 100,752 ======== ======= ======== ======== ======== =======
(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 was $4.5 million, $7.0 million and $11.4 million for 1997, 1996 and 1995, 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 was $19.5 million, $18.7 million and $21.1 million for 1997, 1996 and 1995, respectively. (7) STOCK-BASED COMPENSATION PLANS: Refer to Note 7 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's stock-based compensation plans. -66- (8) 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):
1997 1996 1995 -------- -------- -------- Balance at year-end ....................... $122,500 $161,700 $184,800 Weighted average interest rate on year-end balance...................... 5.9% 5.4% 5.7% Average daily amount outstanding during the year.......................... 110,472 $151,162 $114,036 Weighted average interest rate on average daily amount outstanding during the year. 5.7% 5.5% 6.0%
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, 1997, 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. (9) RATE MATTERS: Refer to Note 9 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's rate matters. (10) 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. Revenues from discontinued activities, as well as the results of discontinued operations for the years ended December 31 are as follows (in thousands): -67-
1997 1996 1995 -------- -------- ------- OPERATING REVENUES.................... $ - $215,631 $176,743 ======== ======== ======== INCOME (LOSS) FROM OPERATIONS Income (loss) before income taxes.. $ - $ 12,588 $(17,317) Income tax benefit (expense)....... - (19,457) 15,651 -------- -------- -------- Income (loss) from Operations...... $ - $ (6,869) $ (1,666) ======== ======== ======== LOSS ON DISPOSAL Loss before income taxes........... $ - $ (5,579) $ - Income tax benefit ................ - 2,287 - -------- -------- -------- Loss on Disposal................... $ - $ (3,292) $ - ======== ======== ========
(11) CONCENTRATION OF CREDIT RISK: MidAmerican's electric utility operations serve 560,000 customers in Iowa, 85,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. MidAmerican's gas utility operations serve 486,000 customers in Iowa, 65,000 customers in western Illinois, 63,000 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, 1997, billed receivables from MidAmerican's utility customers totalled $14.8 million. As described in Note 18, billed receivables related to utility services have been sold to a wholly owned unconsolidated subsidiary. (12) PREFERRED SHARES: Refer to Note 12 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's preferred shares. -68- (13) SEGMENT INFORMATION: Information related to segments of the MidAmerican's business is as follows for the years ended December 31 (in thousands):
1997 1996 1995 ---------- ---------- ---------- UTILITY Electric- Operating revenues..................... $1,126,300 $1,099,008 $1,094,647 Cost of fuel, energy and capacity...... 235,760 234,317 230,261 Depreciation and amortization expense.. 145,931 140,939 136,324 Other operating expenses............... 502,109 424,594 459,344 Income taxes........................... 65,445 92,365 76,955 ---------- ---------- ---------- Operating income....................... $ 177,055 $ 206,793 $ 191,763 ========== ========== ========== Gas- Operating revenues..................... $ 536,306 $ 536,753 $ 459,588 Cost of gas sold....................... 346,016 345,014 279,025 Depreciation and amortization expense.. 24,609 23,653 22,626 Other operating expenses............... 127,092 106,831 122,017 Income taxes........................... 9,117 18,841 8,445 ---------- ---------- ---------- Operating income....................... $ 29,472 $ 42,414 $ 27,475 ========== ========== ========== Operating income.......................... $ 206,527 $ 249,207 $ 219,238 Other income (expense).................... 14,699 3,998 (4,074) Income taxes - other (benefit)............ 1,755 1,721 (1,302) Fixed charges............................. 93,530 86,352 83,977 ---------- ---------- ---------- Income from continuing operations......... $ 125,941 $ 165,132 $ 132,489 ========== ========== ========== Capital Expenditures- Electric............................... $ 128,544 $ 116,243 $ 135,344 Gas.................................... 38,388 37,955 57,281 ASSET INFORMATION Identifiable assets- Electric (a)........................... $2,832,803 $2,955,881 $2,950,285 Gas (a)................................ 680,961 692,993 699,702 Used in overall utility operations........ 16,358 119,557 38,067 Nonregulated.............................. 12,185 6,222 - Investment in discontinued operations..... - - 288,147 ---------- ---------- ---------- Total assets.............................. $3,542,307 $3,774,653 $3,976,201 ========== ========== ==========
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets. -69- (14) 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):
1997 1996 --------------------- ----------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- ---------- ---------- ---------- Financial Instruments Issued by MidAmerican: MidAmerican preferred securities; subject to mandatory redemption................... $ 50,000 $ 53,650 $ 50,000 $ 52,920 MidAmerican-obligated preferred securities; subject to mandatory redemption........... $ 100,000 $ 104,250 $ 100,000 $ 100,000 Long-term debt, including current portion.... $1,044,663 $1,076,167 $1,136,515 $1,177,792
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):
1997 -------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Equity Securities.......... $ 24,336 $ 3,848 $ (122) $ 28,062 Municipal Bonds............ 35,217 2,116 (1) 37,332 U.S. Government Securities. 18,753 800 (4) 19,549 Corporate Securities....... 6,353 77 (3) 6,427 Cash equivalents........... 1,881 - - 1,881 -------- -------- ------- -------- $ 86,540 $ 6,841 $ (130) $ 93,251 ======== ======== ======= ========
-70-
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 ======= ======= ===== =======
At December 31, 1997, 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................... $ 2,971 $ 2,987 1 through 5 years............... 14,057 14,377 5 through 10 years.............. 26,821 28,119 Over 10 years................... 16,474 17,825
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):
1997 1996 1995 ------- ------- ------- Proceeds from sales..... $30,801 $ 4,106 $21,266 Gross realized gains.... 713 92 165 Gross realized losses... (659) (17) (448)
(15) INCOME TAX EXPENSE: Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
1997 1996 1995 ---------- ---------- -------- Income taxes Current Federal ................... $ 83,466 $ 92,240 $ 60,312 State ..................... 25,495 23,798 16,950 --------- --------- -------- 108,961 116,038 77,262 --------- --------- -------- Deferred Federal ................... (23,143) 2,504 11,571 State ..................... (3,786) 583 1,094 --------- --------- -------- (26,929) 3,087 12,665 Investment tax credit, net .. (5,715) (6,198) (5,829) --------- --------- -------- Total income tax expense .. $ 76,317 $ 112,927 $ 84,098 ========= ========= ========
-71- 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):
1997 1996 ------- -------- Deferred tax assets Related to: Investment tax credits ......................, $55,998 $61,349 Pensions ..................................... 17,339 17,648 Nuclear reserves and decommissioning ......... 15,287 8,233 Other ........................................ 799 5,839 ------- ------- Total ...................................... $89,423 $93,069 ======= =======
1997 1996 -------- -------- Deferred tax liabilities Related to: Depreciable property.......................... $417,333 $422,770 Income taxes recoverable through future rates. 197,877 201,998 Energy efficiency............................. 40,902 44,733 Reacquired debt............................... 15,346 14,265 FERC Order 636................................ 2,858 9,023 Other......................................... 7,947 16,847 -------- -------- Total...................................... $682,263 $709,636 ======== ========
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:
1997 1996 1995 ---- ---- ---- Effective federal and state income tax rate..... 36% 41% 39% Amortization of investment tax credit........... 3 2 3 State income tax, net of federal income tax benefit................................... (7) (6) (5) Other........................................... 3 (2) (2) --- --- --- Statutory federal income tax rate............... 35% 35% 35% === === ===
-72- (16) INVENTORIES: Inventories include the following amounts as of December 31 (in thousands):
1997 1996 -------- ------- Materials and supplies, at average cost.... $ 31,425 $ 32,222 Coal stocks, at average cost............... 14,225 32,293 Gas in storage, at LIFO cost............... 35,430 23,915 Fuel oil, at average cost.................. 2,344 1,264 Other...................................... 874 1,170 -------- --------- Total...................................... $ 84,298 $ 90,864 ======== ========
At December 31, 1997 prices, the current cost of gas in storage was $50.3 million. (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. (18) SALE OF ACCOUNTS RECEIVABLE: Refer to Note 18 of Holdings' Notes to Consolidated Financial Statements for information regarding the sale of MidAmerican's accounts receivable to MidAmerican Energy Funding Corporation. (19) 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. During 1997, Holdings incurred charges which are of general benefit to all of its subsidiaries. These costs were for administrative and general salaries and expenses, outside services, director fees, pension, deferred compensation, and retirement costs, some of which originated at MidAmerican. MidAmerican was reimbursed for such charges in the amount of $4.1 million for 1997. MidAmerican's allocated share of such costs and their allocated share of costs which originated at Holdings were $13.8 million. During 1997, MidAmerican was also reimbursed for charges incurred on behalf of its affiliates, MidAmerican Capital and Midwest Capital. The majority of these reimbursed expenses were for employee wages and benefits, insurance, building rental, computer costs, administrative services, travel expense, and general and administrative expense; including treasury, legal, shareholder relations and accounting functions. The amount of such expenses was $6.6 million. Prior to 1997, MidAmerican, as the parent company, incurred costs of general benefit to itself and its subsidiaries. In addition, it incurred costs for employee wages and benefits, insurance, building rent, computer costs, administrative services, travel expense, and general and administrative expense; including treasury, legal, shareholder relations and accounting functions, on behalf of MidAmerican Capital and Midwest Capital. The total -73- of such costs charged to MidAmerican Capital and Midwest Capital were $9.3 million and $4.6 million for 1996 and 1995, respectively MidAmerican leases office facilities and other properties from affiliates. Total lease payments were approximately $0.3 million, $0.3 million and $0.6 million for 1997, 1996 and 1995, 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 $2.8 million, $3.0 million and $3.0 million for 1997, 1996 and 1995, respectively. MidAmerican purchased natural gas from Amgas, an affiliate. MidAmerican's costs of gas related to these transactions was $0.5 million, $0.2 million and $0.3 million for 1997, 1996 and 1995, respectively. In 1997, MidAmerican purchased natural gas from InterCoast Trade and Resources, an affiliate, in the amount of $11.4 million and sold natural gas to InterCoast Trade and Resources in the amount of $6.1 million. (20) UNAUDITED QUARTERLY OPERATING RESULTS:
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands) Operating revenues ........................ $465,881 $342,714 $394,544 $459,467 Operating income .......................... 56,407 44,604 69,777 35,739 Income from continuing operations.......... 35,224 21,822 50,255 18,640 Earnings on common stock .................. 32,450 20,586 49,016 17,401
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
The quarterly data reflect seasonal variations common in the utility industry. -74- (21) OTHER INFORMATION: MidAmerican 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):
1997 1996 1995 ------ ------- -------- IES merger costs................................ $ - $(8,689) $ - Energy efficiency carrying charges.............. 4,993 3,225 3,092 Gain on sale of cushion gas..................... 855 3,182 - Incentive gas procurement plan award............ 4,914 2,677 - Agency gas sales, net........................... 1,184 1,840 228 Donations....................................... (556) (1,271) (1,612) Gain (loss) on reacquisition of long-term debt.. (923) 1,105 - MidAmerican merger costs........................ - - (4,624) Allowance for equity funds used during construction........................... - - 481 NPPD settlement................................. 2,248 - - Other........................................... (348) 331 (2,993) ------- ------- -------- Total......................................... $12,367 $ 2,400 $ (5,428) ======= ======= ========
-75- 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 the MidAmerican's independent public accountants, Coopers & Lybrand L.L.P. 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 Coopers & Lybrand L.L.P. 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 Coopers & Lybrand L.L.P. each have full access to the Audit Committee, without management representatives present. Stanley J. Bright Chairman, President and Chief Executive Officer Alan L. Wells Senior Vice President and Chief Financial Officer -76- REPORT OF INDEPENDENT ACCOUNTANTS To MidAmerican Energy Company and Subsidiaries: We have audited the accompanying consolidated balance sheets and statements of capitalization of MidAmerican Energy Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of MidAmerican Energy Company and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Kansas City, Missouri January 23, 1998 -77-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED FIVE-YEAR FINANCIAL STATISTICS 1997 1996 1995 1994 1993 -------- ------- -------- ------- ------- Earnings per average common share -- Continuing operations: Utility operations..................................... $ 1.22 $ 1.54 $ 1.24 $ 1.12 $ 1.29 Nonregulated activities................................ 0.20 (0.11) (0.05) 0.13 0.09 Discontinued operations................................... (0.04) (0.13) 0.03 (0.03) 0.01 -------- -------- -------- -------- -------- Earnings per average common share......................... $ 1.38 $ 1.30 $ 1.22 $ 1.22 $ 1.39 ======== ======== ======== ======== ======== Average shares of common stock outstanding (in thousands)............................. 98,058 100,752 100,401 98,531 97,762 Return on average common equity (%)....................... 10.8 10.6 10.1 10.1 11.6 Cash dividends declared per common share.................. $ 1.20 $ 1.20 $ 1.18 $ 1.17 $ 1.17 Common dividend payout ratio (%).......................... 87 92 97 96 84 Ratio of earnings to fixed charges-- Holdings............................................... 3.0 3.2 2.8 2.8 2.8 MidAmerican............................................ 3.1 4.1 3.4 3.3 3.4 Ratio of earnings to fixed charges and Cooper Nuclear Station debt service-- Holdings............................................ 2.9 3.1 2.7 2.7 2.8 MidAmerican......................................... 3.0 4.0 3.3 3.2 3.3 Quarterly earnings per average common share outstanding -- 1st quarter......................................... $ 0.34 $ 0.51 $ 0.35 $ 0.45 $ 0.44 2nd quarter......................................... 0.25 0.29 0.25 0.22 0.22 3rd quarter......................................... 0.48 0.22 0.36 0.36 0.52 4th quarter ........................................ 0.31 0.28 0.27 0.19 0.20 Total assets (in millions)................................ $ 4,278 $ 4,522 $ 4,470 $ 4,389 $ 4,352 Capitalization (in millions) -- Common shareholders' equity............................ $ 1,301 $ 1,240 $ 1,226 $ 1,204 $ 1,181 Preferred shares, not subject to mandatory redemption.. 32 32 90 90 110 Preferred shares, subject to mandatory redemption...... 150 150 50 50 50 Long-term debt (excluding current portion)............. 1,034 1,395 1,403 1,398 1,341 Capitalization ratios % -- Common shareholders' equity............................ 51.7 44.0 44.3 43.9 44.0 Preferred shares, not subject to mandatory redemption.. 1.2 1.1 3.2 3.3 4.1 Preferred shares, subject to mandatory redemption...... 6.0 5.4 1.8 1.8 1.9 Long-term debt (excluding current portion)............. 41.1 49.5 50.7 51.0 50.0 Book value per common share at year-end................... $ 13.65 $ 12.31 $ 12.17 $ 12.08 $ 12.07 Utility construction expenditures (in thousands).......... $166,932 $154,198 $190,771 $211,669 $215,081 Net cash from utility operations less dividends as a % of construction....................... 153 127 108 99 86 Number of full-time employees -- Utility................................................ 3,467 3,370 3,331 4,077 4,196 Nonregulated........................................... 163 236 271 274 347
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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 ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- OPERATING REVENUES Electric utility ...................................... $ 1,126,300 $ 1,099,008 $ 1,094,647 $ 1,021,660 $ 1,002,970 Gas utility ........................................... 536,306 536,753 459,588 492,015 538,989 Nonregulated .......................................... 259,675 236,851 95,106 117,550 85,997 ----------- ----------- ----------- ----------- ----------- 1,922,281 1,872,612 1,649,341 1,631,225 1,627,956 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity ................... 235,760 234,317 230,261 213,987 217,385 Cost of gas sold .................................... 346,016 345,014 279,025 326,782 366,049 Other operating expenses ............................ 429,794 350,174 399,648 354,190 340,720 Maintenance ......................................... 98,090 88,621 85,363 101,275 101,601 Depreciation and amortization ....................... 170,540 164,592 158,950 154,229 150,822 Property and other taxes ............................ 101,317 92,630 96,350 94,990 93,238 ---------- ----------- ----------- ----------- ---------- 1,381,517 1,275,348 1,249,597 1,245,453 1,269,815 ---------- ----------- ----------- ----------- ---------- Nonregulated: Cost of sales ....................................... 240,182 218,256 70,209 84,515 57,907 Other ............................................... 30,076 35,370 37,181 36,765 32,296 ---------- ---------- ---------- ----------- ----------- 270,258 253,626 107,390 121,280 90,203 ---------- ---------- ---------- ----------- ----------- Total operating expenses .............................. 1,651,775 1,528,974 1,356,987 1,366,733 1,360,018 ---------- ---------- ---------- ----------- ----------- OPERATING INCOME ...................................... 270,506 343,638 292,354 264,492 267,938 ---------- ----------- ----------- ----------- ---------- NON-OPERATING INCOME Interest income ....................................... 5,318 4,012 4,485 4,334 5,805 Dividend income ....................................... 13,792 16,985 16,954 17,087 17,601 Realized gains and losses on securities, net .......... 7,798 1,895 688 7,635 7,915 Other, net ............................................ 22,111 (4,020) (10,467) 4,316 20,842 ---------- ---------- ---------- ----------- ----------- 49,019 18,872 11,660 33,372 52,163 ---------- ---------- ---------- ----------- ----------- FIXED CHARGES Interest on long-term debt ............................ 89,898 102,909 105,550 101,267 107,044 Other interest expense ................................ 10,034 10,941 9,449 6,446 5,066 Preferred dividends of subsidiaries ................... 14,468 10,689 8,059 10,551 8,367 Allowance for borrowed funds .......................... (2,597) (4,212) (5,552) (3,955) (2,186) ----------- ----------- ----------- ----------- ----------- 111,803 120,327 117,506 114,309 118,291 ----------- ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES . 207,722 242,183 186,508 183,555 201,810 INCOME TAXES .......................................... 68,390 98,422 66,803 60,457 67,485 ----------- ----------- ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS ..................... 139,332 143,761 119,705 123,098 134,325 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS ............ (4,228) (12,715) 3,059 (2,909) 1,159 ----------- ----------- ----------- ----------- ----------- NET INCOME ............................................ $ 135,104 $ 131,046 $ 122,764 $ 120,189 $ 135,484 =========== =========== =========== =========== =========== AVERAGE COMMON SHARES OUTSTANDING ..................... 98,058 100,752 100,401 98,531 97,762 EARNINGS PER COMMON SHARE Continuing operations ................................. $ 1.42 $ 1.43 $ 1.19 $ 1.25 $ 1.38 Discontinued operations ............................... (0.04) (0.13) 0.03 (0.03) 0.01 ----------- ----------- ----------- ---------- ----------- Earnings per average common share ..................... $ 1.38 $ 1.30 $ 1.22 $ 1.22 $ 1.39 =========== =========== =========== ========== =========== DIVIDENDS DECLARED PER SHARE .......................... $ 1.20 $ 1.20 $ 1.18 $ 1.17 $ 1.17 =========== =========== =========== ========== ===========
-79-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED FIVE-YEAR CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF DECEMBER 31 -------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ASSETS UTILITY PLANT Electric................................................ $4,084,920 $4,010,847 $3,881,699 $3,765,004 $3,642,415 Gas..................................................... 756,874 723,491 695,741 663,792 639,276 ---------- ---------- ---------- ---------- ---------- 4,841,794 4,734,338 4,577,440 4,428,796 4,281,691 Less accumulated depreciation and amortization.......... 2,275,099 2,153,058 2,027,055 1,885,870 1,801,668 ---------- ---------- ---------- ---------- ---------- 2,566,695 2,581,280 2,550,385 2,542,926 2,480,023 Construction work in progress........................... 55,418 49,305 104,164 101,252 111,726 ---------- ---------- ---------- ---------- ---------- 2,622,113 2,630,585 2,654,549 2,644,178 2,591,749 ---------- ---------- ---------- ---------- ---------- POWER PURCHASE CONTRACT................................. 173,107 190,897 212,148 221,998 248,643 ---------- ---------- ---------- ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS................... - 166,320 177,300 186,246 168,907 ---------- ---------- ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents............................... 10,468 97,749 32,915 28,651 20,657 Receivables less reserves............................... 207,471 312,015 228,128 196,814 216,157 Inventories............................................. 86,091 90,864 85,235 92,248 100,675 Other................................................... 18,452 11,031 18,428 14,288 21,195 ---------- ---------- ---------- ---------- ---------- 322,482 511,659 364,706 332,001 358,684 ---------- ---------- ---------- ---------- ---------- INVESTMENTS............................................. 799,524 622,972 646,456 595,510 614,153 ---------- ---------- ---------- ---------- ---------- OTHER ASSETS............................................ 360,865 399,415 414,938 408,961 369,937 ---------- ---------- ---------- ---------- ---------- TOTAL ASSETS............................................ $4,278,091 $4,521,848 $4,470,097 $4,388,894 $4,352,073 ========== ========== ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity............................. $1,301,286 $1,239,946 $1,225,715 $1,204,112 $1,180,510 Preferred shares, not subject to mandatory redemption... 31,763 31,769 89,945 89,955 109,871 Preferred shares, subject to mandatory redemption....... 150,000 150,000 50,000 50,000 50,000 Long-term debt (excluding current portion).............. 1,034,211 1,395,103 1,403,322 1,398,255 1,341,003 ---------- ---------- ---------- ---------- ---------- 2,517,260 2,816,818 2,768,982 2,742,322 2,681,384 ---------- ---------- ---------- ---------- ---------- CURRENT LIABILITIES Notes payable........................................... 138,054 161,990 184,800 124,500 173,035 Current portion of long-term debt....................... 144,558 79,598 65,295 72,872 66,371 Current portion of power purchase contract.............. 14,361 13,718 13,029 12,080 10,830 Accounts payable........................................ 145,855 169,806 122,055 106,152 123,618 Taxes accrued........................................... 92,629 82,254 81,898 91,653 110,923 Interest accrued........................................ 22,355 28,513 30,635 30,659 31,021 Other................................................... 38,766 22,830 46,267 44,974 49,470 ---------- ---------- ---------- ---------- ---------- 596,578 558,709 543,979 482,890 565,268 ---------- ---------- ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract................................. 83,143 97,504 112,700 125,729 140,655 Deferred income taxes................................... 761,795 722,300 724,587 712,307 659,753 Investment tax credit................................... 83,127 88,842 95,041 100,871 106,729 Other .................................................. 236,188 237,675 224,808 224,775 198,284 ---------- ---------- ---------- ---------- ---------- 1,164,253 1,146,321 1,157,136 1,163,682 1,105,421 ---------- ---------- ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES.................... $4,278,091 $4,521,848 $4,470,097 $4,388,894 $4,352,073 ========== ========== ========== ========== ==========
-80-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED UTILITY FIVE-YEAR ELECTRIC STATISTICS YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993 ---------- ----------- ---------- ---------- ----------- REVENUES (in thousands) Residential.................................... $ 417,845 $ 415,954 $ 434,105 $ 400,346 $ 386,047 Small general service.......................... 246,927 237,466 252,427 253,703 242,205 Large general service.......................... 249,444 241,172 219,075 204,481 193,616 Other sales.................................... 62,261 60,476 60,160 57,731 56,198 Sales for resale............................... 124,741 121,452 105,472 84,260 104,461 ---------- ----------- ---------- ---------- ----------- Total from electric sales.................. 1,101,218 1,076,520 1,071,239 1,000,521 982,527 Other electric revenue......................... 25,082 22,488 23,408 21,139 20,443 ---------- ----------- ---------- ---------- ----------- Total...................................... $1,126,300 $ 1,099,008 $1,094,647 $1,021,660 $ 1,002,970 ========== =========== ========== ========== =========== KWH SALES (in thousands) Residential.................................... 4,740,688 4,652,031 4,767,608 4,500,265 4,475,883 Small general service.......................... 3,725,873 3,565,459 3,920,792 4,062,993 3,937,360 Large general service.......................... 6,204,087 6,067,325 5,351,933 5,091,685 4,851,493 Other.......................................... 995,295 988,022 957,463 938,620 930,117 Sales for resale............................... 6,987,268 6,727,326 5,509,161 3,605,092 5,566,208 ---------- ----------- ----------- ----------- ----------- Total...................................... 22,653,211 22,000,163 20,506,957 18,198,655 19,761,061 ========== =========== =========== =========== =========== REVENUES FROM SALES AS A % OF TOTAL Residential.................................... 37.9 38.6 40.5 40.0 39.3 Small general service.......................... 22.4 22.1 23.6 25.4 24.7 Large general service.......................... 22.7 22.4 20.5 20.4 19.7 Other.......................................... 5.7 5.6 5.6 5.8 5.7 Sales for resale............................... 11.3 11.3 9.8 8.4 10.6 ---------- ----------- ---------- ---------- ------------ Total...................................... 100.0 100.0 100.0 100.0 100.0 ========== =========== ========== ========== ============ SALES AS A % OF TOTAL Residential.................................... 20.9 21.1 23.2 24.7 22.7 Small general service.......................... 16.5 16.2 19.1 22.3 19.9 Large general service.......................... 27.4 27.6 26.1 28.0 24.5 Other.......................................... 4.4 4.5 4.7 5.2 4.7 Sales for resale............................... 30.8 30.6 26.9 19.8 28.2 ---------- ----------- ---------- ---------- ------------ Total...................................... 100.0 100.0 100.0 100.0 100.0 ========== =========== ========== ========== ============ RETAIL ELECTRIC SALES BY JURISDICTION (%) Iowa........................................... 88.6 88.7 88.4 88.6 88.7 Illinois....................................... 10.7 10.6 11.0 10.9 10.9 South Dakota................................... 0.7 0.7 0.6 0.5 0.4 ---------- ----------- ---------- ---------- ------------ Total ..................................... 100.0 100.0 100.0 100.0 100.0 ========== =========== ========== ========== ============ CUSTOMERS (end of year) Residential.................................... 563,189 557,637 551,384 548,106 541,220 Small general service.......................... 73,488 73,022 72,616 69,905 68,829 Large general service.......................... 1,000 982 945 743 744 Other.......................................... 10,047 9,937 9,744 9,518 9,572 Sales for resale............................... 47 55 55 59 63 ---------- ----------- ---------- ---------- ------------ Total...................................... 647,771 641,633 634,744 628,331 620,428 ========== =========== ========== ========== ============ ANNUAL AVERAGE PER RESIDENTIAL CUSTOMER Revenue per Kwh (cents)........................ 8.81 8.94 9.11 8.90 8.62 KWh sales...................................... 8,463 8,392 8,670 8,265 8,310 COOLING DEGREE DAYS Actual......................................... 883 788 1,112 912 813 Percent warmer (colder) than normal............ (7.5) (17.5) 14.1 (6.5) (16.4) ELECTRIC PEAK DEMAND (net MW).................. 3,548 3,537 3,553 3,226 3,284 SUMMER NET ACCREDITED CAPABILITY (MW).......... 4,293 4,301 4,311 4,145 4,072
-81-
MIDAMERICAN ENERGY HOLDINGS COMPANY UNAUDITED UTILITY FIVE-YEAR GAS STATISTICS YEARS ENDED DECEMBER 31 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- REVENUES (in thousands) Residential....................................... $ 339,924 $ 338,605 $ 279,819 $ 287,171 $ 319,359 Small general service............................. 152,661 153,616 128,501 142,894 150,913 Large general service............................. 15,201 17,670 23,280 36,729 37,761 Sales for resale and other........................ 2,914 2,050 5,303 5,514 10,376 --------- --------- --------- --------- --------- Total revenue from gas sales .................. 510,700 511,941 436,903 472,308 518,409 Gas transported................................... 20.443 20,155 16,677 12,842 13,457 Other gas revenues................................ 5,163 4,657 6,008 6,865 7,123 --------- --------- --------- --------- --------- Total.......................................... $ 536,306 $ 536,753 $ 459,588 $ 492,015 $ 538,989 ========= ========= ========= ========= ========= THROUGHPUT (MMBtu in thousands) Sales Residential.................................... 57,039 61,732 57,153 54,732 60,612 Small general service.......................... 31,066 33,642 32,786 32,677 34,504 Large general service.......................... 3,920 4,634 6,222 8,253 9,681 Sales for resale and other..................... 1,800 977 3,582 3,231 4,305 --------- --------- --------- --------- -------- Total sales.................................. 93,825 100,985 99,743 98,893 109,102 Gas transported................................... 58,804 54,618 50,695 43,293 39,570 --------- --------- --------- --------- -------- Total.......................................... 152,629 155,603 150,438 142,186 148,672 ========= ========= ========= ========= ======== REVENUES FROM THROUGHPUT AS A % OF TOTAL Residential....................................... 64.0 63.6 61.7 59.2 60.0 Small general service............................. 28.7 28.9 28.3 29.4 28.4 Large general service............................. 2.9 3.3 5.1 7.6 7.1 Sales for resale and other........................ 0.5 0.4 1.2 1.1 2.0 Gas transported................................... 3.9 3.8 3.7 2.7 2.5 --------- --------- --------- --------- -------- Total.......................................... 100.0 100.0 100.0 100.0 100.0 ========= ========= ========= ========= ======== SALES AS A % OF TOTAL (excludes gas transported) Residential....................................... 60.8 61.1 57.3 55.3 55.6 Small general service............................. 33.1 33.3 32.9 33.0 31.6 Large general service............................. 4.2 4.6 6.2 8.4 8.9 Sales for resale and other........................ 1.9 1.0 3.6 3.3 3.9 --------- --------- --------- --------- -------- Total.......................................... 100.0 100.0 100.0 100.0 100.0 ========= ========= ========= ========= ======== RETAIL GAS SALES BY JURISDICTION (%) Iowa.............................................. 79.1 78.0 77.1 76.6 74.5 Illinois.......................................... 10.4 11.0 11.6 11.9 11.4 South Dakota...................................... 9.8 10.3 10.6 10.8 5.4 Other............................................. 0.7 0.7 0.7 0.7 8.7 --------- --------- --------- --------- -------- Total ......................................... 100.0 100.0 100.0 100.0 100.0 ========= ========= ========= ========= ======== CUSTOMERS (end of year) Residential....................................... 558,501 550,786 541,732 535,301 526,863 Small general service............................. 58,739 58,059 57,207 55,855 54,972 Large general service............................. 767 821 830 876 868 Gas transported and other......................... 569 504 1,128 171 128 --------- --------- --------- --------- -------- Total.......................................... 618,576 610,170 600,897 592,203 582,831 ========= ========= ========= ========= ======== ANNUAL AVERAGES PER RESIDENTIAL CUSTOMER Revenue per MMBtu................................. $ 5.96 $ 5.49 $ 4.90 $ 5.25 $ 5.27 MMBtu sales....................................... 103 113 106 103 111 HEATING DEGREE DAYS Actual............................................ 6,872 7,445 6,841 6,565 7,097 Percent colder (warmer) than normal............... 1.6 10.1 0.9 (3.5) 3.2 COST PER MMBTU.................................... $ 3.69 $ 3.42 $ 2.80 $ 3.30 3.36
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