-----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, ELB+NSMA2ACYBdzqeJN9TtdljGD3slrbswLaLdzGabENMiFlSy0TDROh53wRTBFH SLDhbmkMaaCM8HxcqyZO3A== 0001009526-98-000019.txt : 19990521 0001009526-98-000019.hdr.sgml : 19990521 ACCESSION NUMBER: 0001009526-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY HOLDINGS CO CENTRAL INDEX KEY: 0001009526 STANDARD INDUSTRIAL CLASSIFICATION: 4900 IRS NUMBER: 421451822 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12459 FILM NUMBER: 98685670 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY CO CENTRAL INDEX KEY: 0000928576 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 421425214 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11505 FILM NUMBER: 98685671 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: P O BOX 657 CITY: DES MOINES STATE: IA ZIP: 50306-9244 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE POST OFFICE BOX 9244 STREET 2: 666 GRAND AVENUE POST OFFICE BOX 9244 CITY: DES MOINES STATE: IA ZIP: 50306-9244 10-Q 1 MIDAMERICAN ENERGY HOLDINGS - JOINT 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 -------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ------------------------- Commission Registrant, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. 1-12459 MIDAMERICAN ENERGY HOLDINGS COMPANY 42-1451822 (An Iowa Corporation) 666 Grand Ave. PO Box 657 Des Moines, Iowa 50303 515-242-4300 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (An Iowa Corporation) 666 Grand Ave. PO Box 657 Des Moines, Iowa 50303 515-242-4300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuers' classes of common stock as of the latest practicable date. Registrant Class Shares Outstanding at July 31, 1998 - - ------------------ ------------------- ------------------------------------- MidAmerican Energy Common Stock 94,104,682 * Holdings Company without par value MidAmerican Energy Common Stock 70,980,203 (all of which were held by Company without par value MidAmerican Energy Holdings Company) * MidAmerican Energy Holdings Company common shares outstanding at July 31, 1998, exclude 437,131 shares which are held by a subsidiary. MIDAMERICAN ENERGY HOLDINGS COMPANY AND MIDAMERICAN ENERGY COMPANY This combined Form 10-Q is separately filed by MidAmerican Energy Holdings Company (Company or Holdings) and MidAmerican Energy Company (MidAmerican). Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, MidAmerican makes no representation as to information relating to any other subsidiary of Holdings. TABLE OF CONTENTS Part I. Financial Information Page No. ITEM 1. Financial Statements MidAmerican Energy Holdings Company Consolidated Statements of Income....................... 3 Consolidated Statements of Comprehensive Income......... 4 Consolidated Balance Sheets............................. 5 Consolidated Statements of Cash Flows................... 6 Notes to Consolidated Financial Statements.............. 7 MidAmerican Energy Company Consolidated Statements of Income....................... 12 Consolidated Balance Sheets............................. 13 Consolidated Statements of Cash Flows................... 14 Notes to Consolidated Financial Statements.............. 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 16 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 41 Part II. Other Information ITEM 1. Legal Proceedings ........................................... 41 ITEM 4. Submission of Matters to a Vote of Security Holders.......... 42 ITEM 6. Exhibits and Reports on Form 8-K............................. 42 Signatures ............................................................. 43 -2- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands, except per share amounts)
Three Months Six Months Twelve Months Ended June 30 Ended June 30 Ended June 30 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING REVENUES Electric utility .............................. $ 287,094 $ 261,801 $ 543,448 $ 516,117 $1,153,631 $1,086,271 Gas utility ................................... 67,288 80,913 240,488 292,478 484,316 547,627 Nonregulated .................................. 39,041 42,549 81,015 156,827 183,863 305,074 ---------- ---------- ---------- ---------- ---------- ---------- 393,423 385,263 864,951 965,422 1,821,810 1,938,972 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity .......... 57,085 52,141 102,284 111,424 226,620 229,243 Cost of gas sold ........................... 32,648 45,099 137,969 186,932 297,053 360,521 Other operating expenses ................... 111,746 98,691 218,523 192,298 456,019 364,703 Maintenance ................................ 30,740 22,349 53,323 46,098 105,315 90,844 Depreciation and amortization .............. 44,191 42,060 88,382 84,068 174,854 166,654 Property and other taxes ................... 24,295 24,853 49,765 50,343 100,739 93,871 ---------- ---------- ---------- ---------- ---------- ---------- 300,705 285,193 650,246 671,163 1,360,600 1,305,836 ---------- ---------- ---------- ---------- ---------- ---------- Nonregulated: Cost of sales .............................. 24,197 37,243 63,233 146,213 157,202 287,219 Other ...................................... 14,180 7,432 20,489 15,418 35,147 34,796 ---------- ---------- ---------- ---------- ---------- ---------- 38,377 44,675 83,722 161,631 192,349 322,015 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses ................... 339,082 329,868 733,968 832,794 1,552,949 1,627,851 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME .............................. 54,341 55,395 130,983 132,628 268,861 311,121 ---------- ---------- ---------- ---------- ---------- ---------- NON-OPERATING INCOME Interest income ............................... 2,178 1,562 4,630 3,115 6,833 4,603 Dividend income ............................... 2,738 3,707 5,452 7,255 11,989 15,338 Realized gains and losses on securities, net .. 954 98 2,019 616 9,201 (723) Other, net .................................... 778 3,279 6,435 7,264 21,282 (1,484) ---------- ---------- ---------- ---------- ---------- ---------- 6,648 8,646 18,536 18,250 49,305 17,734 ---------- ---------- ---------- ---------- ---------- ---------- FIXED CHARGES Interest on long-term debt .................... 20,324 22,829 40,608 46,292 84,214 97,496 Other interest expense ........................ 3,416 4,119 6,628 5,448 11,214 10,666 Preferred dividends of subsidiaries ........... 3,233 3,231 6,465 8,000 12,933 14,028 Allowance for borrowed funds .................. (921) (603) (1,675) (1,312) (2,960) (3,068) ---------- ---------- ---------- ---------- ---------- ---------- 26,052 29,576 52,026 58,428 105,401 119,122 ---------- ---------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ........................ 34,937 34,465 97,493 92,450 212,765 209,733 INCOME TAXES .................................. 13,937 10,289 37,760 34,100 72,050 81,126 ---------- ---------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS ............. 21,000 24,176 59,733 58,350 140,715 128,607 ---------- ---------- ---------- ---------- ---------- ---------- DISCONTINUED OPERATIONS Income (loss) from operations (net of income taxes) ....................... - 408 - 698 (816) (3,723) Loss on disposal (net of income taxes) ........ - - - (524) (3,586) (15,356) ---------- ---------- ---------- ---------- ---------- ---------- - 408 - 174 (4,402) (19,079) ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME .................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524 $ 136,313 $ 109,528 ========== ========== ========== ========== ========== ========== AVERAGE COMMON SHARES OUTSTANDING ............. 94,473 98,621 94,675 99,534 95,619 100,096 EARNINGS PER COMMON SHARE -BASIC AND DILUTED: Continuing operations ......................... $ 0.22 $ 0.24 $ 0.63 $ 0.59 $ 1.47 $ 1.28 Discontinued operations ....................... - 0.01 - - (0.04) (0.19) ---------- ---------- ---------- ---------- ---------- ---------- Earnings per average common share.............. $ 0.22 $ 0.25 $ 0.63 $ 0.59 $ 1.43 $ 1.09 ========== ========== ========== ========== ========== ========== DIVIDENDS DECLARED PER SHARE .................. $ 0.30 $ 0.30 $ 0.60 $ 0.60 $ 1.20 $ 1.20 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -3- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In Thousands)
Three Months Six Months Twelve Months Ended June 30 Ended June 30 Ended June 30 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME ..................................... $ 21,000 $ 24,584 $ 59,733 $ 58,524 $ 136,313 $ 109,528 ---------- ---------- ---------- ---------- ---------- ---------- OTHER COMPREHENSIVE INCOME Unrealized (losses) gains on securities: Unrealized holding gains (losses) during period. (29,603) (1,104) 53,253 3,022 274,158 5,810 Less reclassification adjustment for realized gains (losses) reflected in net income during period ............... 954 95 2,019 613 9,193 (729) ---------- ---------- ---------- ---------- ---------- ---------- (30,557) (1,199) 51,234 2,409 264,965 6,539 Income tax (benefit) expense ................... (10,535) (429) 18,014 789 92,792 2,234 ---------- ---------- ---------- ---------- ---------- ---------- Other comprehensive income, net .............. (20,022) (770) 33,220 1,620 172,173 4,305 ---------- ---------- ---------- ---------- ---------- ---------- COMPREHENSIVE INCOME ........................... $ 978 $ 23,814 $ 92,953 $ 60,144 $ 308,486 $ 113,833 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -4- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands)
As of --------------------------------------- June 30 December 31 ------------------------ ----------- 1998 1997 1997 ---------- ---------- ---------- (Unaudited) ASSETS UTILITY PLANT Electric ....................................................... $4,106,986 $4,050,767 $4,084,920 Gas ............................................................ 766,127 731,978 756,874 ---------- ---------- ---------- 4,873,113 4,782,745 4,841,794 Less accumulated depreciation and amortization ................. 2,350,265 2,215,077 2,275,099 ---------- ---------- ---------- 2,522,848 2,567,668 2,566,695 Construction work in progress .................................. 82,671 37,880 55,418 ---------- ---------- ---------- 2,605,519 2,605,548 2,622,113 ---------- ---------- ---------- POWER PURCHASE CONTRACT ........................................ 168,430 190,504 173,107 ---------- ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS .......................... - 6,610 - ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents ...................................... 121,720 57,297 10,468 Receivables .................................................... 160,212 203,511 207,471 Inventories .................................................... 64,471 69,796 86,091 Other .......................................................... 14,970 10,227 18,452 ---------- ---------- ---------- 361,373 340,831 322,482 ---------- ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET ..................... 883,797 605,669 799,524 ---------- ---------- ---------- OTHER ASSETS ................................................... 388,378 386,543 360,865 ---------- ---------- ---------- TOTAL ASSETS ................................................... $4,407,497 $4,135,705 $4,278,091 ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity .................................... $1,311,583 $1,186,313 $1,301,286 MidAmerican preferred securities, not subject to mandatory redemption ......................................... 31,760 31,765 31,763 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities ............................. 50,000 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures .. 100,000 100,000 100,000 Long-term debt (excluding current portion) ..................... 1,043,909 1,109,531 1,034,211 ---------- ---------- ---------- 2,537,252 2,477,609 2,517,260 ---------- ---------- ---------- CURRENT LIABILITIES Notes payable .................................................. 167,429 146,185 138,054 Current portion of long-term debt .............................. 219,260 129,756 144,558 Current portion of power purchase contract ..................... 14,361 13,717 14,361 Accounts payable ............................................... 90,593 87,515 145,855 Taxes accrued .................................................. 108,916 81,795 92,629 Interest accrued ............................................... 21,637 26,457 22,355 Other .......................................................... 69,475 48,969 38,766 ---------- ---------- ---------- 691,671 534,394 596,578 ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract ........................................ 83,143 97,504 83,143 Deferred income taxes .......................................... 772,609 710,431 761,795 Investment tax credit .......................................... 80,274 85,985 83,127 Other .......................................................... 242,548 229,782 236,188 ---------- ---------- ---------- 1,178,574 1,123,702 1,164,253 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ........................... $4,407,497 $4,135,705 $4,278,091 ========== ========== ==========
The accompanying notes are an integral part of these statements. -5- MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................. $ 21,000 $ 24,584 $ 59,733 $ 58,524 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ............................ 49,624 47,573 98,060 95,982 Net decrease in deferred income taxes and investment tax credit, net ............................. (4,748) (6,795) (10,121) (11,948) Amortization of other assets ............................. 10,133 5,596 19,345 12,474 Capitalized cost of real estate sold ..................... 308 506 458 796 Loss from discontinued operations ........................ - (408) - (174) Gain on sale of securities, assets and other investments.. (1,063) (362) (8,595) (1,827) Other-than-temporary decline in value of investments ..... 72 92 110 252 Impact of changes in working capital, net of effects from discontinued operations ........................... (31,556) (77,780) 63,377 71,709 Other .................................................... 13,826 3,584 15,902 (751) --------- --------- --------- --------- Net cash provided (used) ............................... 57,596 (3,410) 238,269 225,037 --------- --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures .......................... (43,906) (37,426) (68,592) (64,029) Quad Cities Nuclear Power Station decommissioning trust fund ............................... (2,844) (2,140) (5,658) (4,280) Deferred energy efficiency expenditures .................... - (2,626) - (6,349) Nonregulated capital expenditures .......................... (17,485) (4,377) (38,683) (7,002) Purchase of real estate brokerage company................... (78,985) - (78,985) - Purchase of securities ..................................... (45,125) (53,064) (98,354) (116,407) Proceeds from sale of securities ........................... 52,772 53,397 104,817 132,049 Proceeds from sale of assets and other investments ......... 20,145 526 28,344 13,670 Investment in discontinued operations ...................... - (1,822) - 145,193 Other investing activities, net ............................ 2,765 (289) (13) 52 --------- --------- --------- --------- Net cash (used) provided ................................ (112,663) (47,821) (157,124) 92,897 --------- --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid ...................................... (28,310) (29,544) (56,686) (59,723) Issuance of long-term debt, net of issuance cost ........... 158,440 - 158,440 - Retirement of long-term debt, including reacquisition cost . (391) (34,672) (75,422) (61,790) Reacquisition of preferred shares .......................... (1) (1) (3) (4) Reacquisition of common shares ............................. (10,754) (26,235) (25,597) (46,564) Decrease in MidAmerican Capital Company unsecured revolving credit facility ...................... (3,200) - - (174,500) Net increase(decrease) in notes payable .................... 26,366 105,975 29,375 (15,805) --------- --------- --------- --------- Net cash provided (used) ................................. 142,150 15,523 30,107 (358,386) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 87,083 (35,708) 111,252 (40,452) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 34,637 93,005 10,468 97,749 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 121,720 $ 57,297 $ 121,720 $ 57,297 ========= ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized .................. $ 18,865 $ 19,708 $ 43,999 $ 49,978 ========= ========= ========= ========= Income taxes paid .......................................... $ 33,927 $ 76,690 $ 34,651 $ 76,753 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. -6- MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A) GENERAL: The consolidated financial statements included herein have been prepared by Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, all adjustments have been made to present fairly the financial position, the results of operations, comprehensive income and the changes in cash flows for the periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. B) ENVIRONMENTAL MATTERS: 1) Manufactured Gas Plant Facilities: The United States Environmental Protection Agency (EPA) and the state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant (MGP) facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. MidAmerican is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether MidAmerican has any responsibility for remedial action. MidAmerican is currently conducting field investigations at 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 its responsibility, 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 June 30, 1998 is $25 million. This estimate has been recorded as a liability and a regulatory asset for future recovery. The Illinois Commerce Commission (ICC) has approved the use of a tariff rider which permits recovery of the actual costs of litigation, investigation and remediation relating to former MGP sites. MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue recovery of the remediation costs from other PRPs and its insurance carriers. The estimate of probable remediation costs is established on a site specific basis. The costs are accumulated in a three-step process. First, a determination is made as to whether MidAmerican has potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at the site. Second, if potential legal liability exists, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. Finally, 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 -7- derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. In addition, insurance recoveries for some or all of the costs may be possible, but the liabilities recorded have not been reduced by any estimate of such recoveries. Although the timing of potential incurred costs and recovery of such costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican's financial position or results of operations. 2) Clean Air Act: On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards (NAAQS) for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. 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. The attainment status of areas in the state of Iowa will not be known for two to three years. However, if MidAmerican's operations are determined to contribute to nonattainment, the installation of additional control equipment, such as scrubbers and/or selective catalytic reduction, on MidAmerican's units could be required. The cost to install such equipment could be significant. MidAmerican will continue to follow the attainment status of the areas in which it operates and evaluate the potential impact of the status of these areas on MidAmerican under 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. C) 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 approved a March 1997 settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties in a consolidated rate proceeding involving MidAmerican's electric pricing proposal and a filing by the OCA. The agreement includes a number of components of MidAmerican's pricing proposal. Six major components of the settlement and their status are as follows: 1) On an annualized basis, prices for residential customers were reduced $8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July 11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5 million. -8- 2) Rates for industrial customers will be reduced by $6 million annually and rates for commercial customers will be reduced by $4 million annually. MidAmerican has been given permission to implement these reductions through a retail access pilot project and through negotiated individual contracts. In the event that these contracts in the aggregate do not reduce rates by $6 million and $4 million, respectively, MidAmerican is required to apply any remaining amount to across-the-board rate reductions to customers who do not enter into contracts. The effective date for these rate reductions was set for June 1, 1998 in the IUB Order approving the settlement. However, MidAmerican has pending before the IUB a request to extend the deadlines until September 1, 1998 for industrial customers, and December 31, 1998 for commercial customers. That request would involve an obligation to increase the amount of the reduction on a one-time basis to reflect the time value of money between June 1, 1998 and the new requested deadlines. MidAmerican estimates it will not have any interest obligation with respect to the industrial contracts, and will not incur any material interest obligation with respect to its commercial contracts. The negotiated contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $125 million. The IUB is currently considering the contracting process in two proceedings. The outcome of those proceedings could impact further contracting efforts, as well as determine whether any of the contracts will need to be renegotiated, and the extent to which the annualized rate reduction will take the form of negotiated contracts versus across-the-board rate reductions. 3) A tracking mechanism (Coooper Tracker) is being used to currently recover costs for capital improvements required by the Cooper Nuclear Station Power Purchase Contract which will offset approximately $6 million of the rate reductions in 1998. Other operating expenses will correspondingly increase due to currently expensing the related costs. 4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current basis through the EAC, and thus, fuel costs had little impact on net income. Since then, base rates for Iowa customers 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 are 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. 5) 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%. 6) 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 -9- 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 by the fourth quarter of 1998. D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: Statement of Financial Accounting Standards (SFAS) No. 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A possible consequence of the changes in the utility industry is the discontinued applicability of SFAS 71. The majority of MidAmerican's electric and gas utility operations currently meet the criteria of SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of 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-offs 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. As of June 30, 1998, MidAmerican had approximately $312 million of regulatory assets in its Consolidated Balance Sheet because these costs are expected to be recovered in future charges to utility customers. E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES: The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures included in the Consolidated Balance Sheets were issued by MidAmerican Energy Financing I (the Trust), a wholly-owned statutory business trust of MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican 7.98% Series A Debentures due 2045. F) COMMON SHAREHOLDERS' EQUITY: 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. As of June 30, 1998, the Company had repurchased approximately 6.2 million shares for $114.8 million under the plan. In addition, a subsidiary has acquired 437,131 shares of Holdings common stock which are also excluded from shares outstanding. G) DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES For fiscal years beginning after December 15, 1997, full sets of general-purpose financial statements are required to display comprehensive income and its components in a financial statement that is displayed with the same prominence as the other financial statements. Comprehensive income refers, in general, to changes in the Company's equity, except those resulting from transactions with shareholders. "Unrealized holding gains (losses)" reflects the overall increase (decrease) in the market value of marketable securities held by the Company as available-for-sale. The "reclassification adjustment" removes any gains (losses) that have been realized from sales of those securities and reflected in the Company's Net Income. -10- The following table shows the income tax expense or benefit related to each component (in thousands):
Three Months Six Months Twelve Months Ended June 30 Ended June 30 Ended June 30 -------------------- --------------------- -------------------- 1998 1997 1998 1997 1998 1997 -------- -------- -------- --------- --------- ------- Unrealized holding (losses)/gains during period Before income taxes $(29,603) $ (1,104) $ 53,253 $ 3,022 $ 274,158 $ 5,810 Income tax benefit/(expense) 10,195 392 (18,697) (949) (95,903) (1,954) -------- -------- -------- --------- --------- ------- (19,408) (712) 34,556 2,073 178,255 3,856 -------- -------- -------- --------- --------- ------- Less reclassification adjustment for realized gains/(losses) reflected in net income during period Before income taxes 954 95 2,019 613 9,193 (729) Income tax (expense)/benefit (340) (37) (683) (160) (3,111) 280 -------- -------- -------- --------- --------- ------- 614 58 1,336 453 6,082 (449) -------- -------- -------- --------- --------- ------- Other Comprehensive Income, Net $(20,022) $ (770) $ 33,220 $ 1,620 $ 172,173 $ 4,305 ======== ======== ======== ========= ========= =======
H) MCLEODUSA INCORPORATED INVESTMENT: 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 June 30, 1998, the cost and fair value of the McLeodUSA investment were $45.2 million and $313.3 million, respectively. The unrealized gain is recorded, net of income taxes, as accumulated comprehensive income in common shareholders' equity. At June 30, 1998, the unrealized gain and deferred income taxes for this investment were $268.1 million and $93.8 million, respectively. I) SUBSEQUENT EVENT: On August 11, 1998, a definitive merger agreement was entered into between the Company and CalEnergy, a global provider of energy services. Under the terms of the agreement, the shareholders of the Company will receive $27.15 cash for each share of their common stock reflecting a 36 percent premium over the August 11, 1998 closing price. The merger will need to be approved by the shareholders of both companies, the Federal Energy Regulatory Commission, and the Nuclear Energy Regulatory Commission. Filings will also be made with the Iowa Utilities Board, which has the right to review the merger and to disapprove it only if found not in the public interest, the Federal Trade Commission and the Department of Justice. State regulators in Illinois will be notified of the merger. Management believes completion of the merger could occur by the first quarter of 1999. -11- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands)
Three Months Six Months Twelve Months Ended June 30 Ended June 30 Ended June 30 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING REVENUES Electric utility .............................. $ 287,094 $ 261,801 $ 543,448 $ 516,117 $1,153,631 $1,086,271 Gas utility ................................... 67,288 80,913 240,488 292,478 484,316 547,627 ---------- ---------- ---------- ---------- ---------- ---------- 354,382 342,714 783,936 808,595 1,637,947 1,633,898 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES Cost of fuel, energy and capacity ............. 57,643 52,141 103,400 111,424 227,736 229,243 Cost of gas sold .............................. 32,648 45,099 137,969 186,932 297,053 360,521 Other operating expenses ...................... 111,746 98,691 218,523 192,298 456,019 364,703 Maintenance ................................... 30,740 22,349 53,323 46,098 105,315 90,844 Depreciation and amortization ................. 44,191 42,060 88,382 84,068 174,854 166,654 Property and other taxes ...................... 24,295 24,853 49,765 50,343 100,739 93,871 Income taxes .................................. 9,673 12,917 38,626 36,421 76,767 94,263 ---------- ---------- ---------- ---------- ---------- ---------- 310,936 298,110 689,988 707,584 1,438,483 1,400,099 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING INCOME .............................. 43,446 44,604 93,948 101,011 199,464 233,799 ---------- ---------- ---------- ---------- ---------- ---------- NON-OPERATING INCOME Interest and dividend income .................. 1,447 421 3,394 1,327 4,399 2,107 Non-operating income taxes .................... (3,436) (1,374) 1,490 (2,293) 2,028 (3,580) Other, net .................................... (882) 3,008 (3,116) 4,339 4,912 6,335 ---------- ---------- ---------- ---------- ---------- ---------- (2,871) 2,055 1,768 3,373 11,339 4,862 ---------- ---------- ---------- ---------- ---------- ---------- FIXED CHARGES Interest on long-term debt .................... 17,592 19,332 35,145 39,218 74,047 78,884 Other interest expense ........................ 3,529 4,113 6,697 5,442 11,282 10,654 Preferred dividends of subsidiary trust ....... 1,995 1,995 3,990 3,990 7,980 4,278 Allowance for borrowed funds .................. (921) (603) (1,675) (1,312) (2,960) (3,068) ---------- ---------- ---------- ---------- ---------- ---------- 22,195 24,837 44,157 47,338 90,349 90,748 ---------- ---------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS ............. 18,380 21,822 51,559 57,046 120,454 147,913 LOSS FROM DISCONTINUED OPERATIONS ............. - - - - - (20,599) ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME .................................... 18,380 21,822 51,559 57,046 120,454 127,314 PREFERRED DIVIDENDS ........................... 1,238 1,236 2,475 4,010 4,953 9,750 ---------- ---------- ---------- ---------- ---------- ---------- EARNINGS ON COMMON STOCK ...................... $ 17,142 $ 20,586 $ 49,084 $ 53,036 $ 115,501 $ 117,564 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -12- MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands)
As of ------------------------------------- June 30 December 31 ----------------------- ----------- 1998 1997 1997 ---------- ---------- ---------- (Unaudited) ASSETS Utility Plant Electric ....................................................... $4,109,989 $4,053,770 $4,087,924 Gas ............................................................ 766,127 731,978 756,874 ---------- ---------- ---------- 4,876,116 4,785,748 4,844,798 Less accumulated depreciation and amortization ................. 2,352,465 2,216,806 2,277,110 ---------- ---------- ---------- 2,523,651 2,568,942 2,567,688 Construction work in progress .................................. 82,671 37,880 55,418 ---------- ---------- ---------- 2,606,322 2,606,822 2,623,106 ---------- ---------- ---------- POWER PURCHASE CONTRACT ........................................ 168,430 190,504 173,107 ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents ...................................... 113,655 15,515 9,318 Receivables .................................................... 109,376 180,386 184,153 Inventories .................................................... 62,641 68,158 84,298 Other .......................................................... 1,799 4,243 6,174 ---------- ---------- ---------- 287,471 268,302 283,943 ---------- ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET ..................... 126,195 98,808 115,029 ---------- ---------- ---------- OTHER ASSETS ................................................... 319,570 371,253 347,122 ---------- ---------- ---------- TOTAL ASSETS ................................................... $3,507,988 $3,535,689 $3,542,307 ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity .................................... $ 977,627 $ 968,569 $ 985,744 MidAmerican preferred securities, not subject to mandatory redemption ......................................... 31,760 31,765 31,763 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities ............................. 50,000 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures .. 100,000 100,000 100,000 Long-term debt (excluding current portion) ..................... 929,327 975,047 920,203 ---------- ---------- ---------- 2,088,714 2,125,381 2,087,710 ---------- ---------- ---------- CURRENT LIABILITIES Notes payable .................................................. 41,500 144,300 122,500 Current portion of long-term debt .............................. 199,351 99,900 124,460 Current portion of power purchase contract ..................... 14,361 13,717 14,361 Accounts payable ............................................... 85,542 73,677 128,390 Taxes accrued .................................................. 103,801 62,435 91,449 Interest accrued ............................................... 18,977 22,424 20,616 Other .......................................................... 26,942 24,153 22,598 ---------- ---------- ---------- 490,474 440,606 524,374 ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract ........................................ 83,143 97,504 83,143 Deferred income taxes .......................................... 589,808 615,846 592,840 Investment tax credit .......................................... 80,274 85,985 83,127 Other .......................................................... 175,575 170,367 171,113 ---------- ---------- ---------- 928,800 969,702 930,223 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ........................... $3,507,988 $3,535,689 $3,542,307 ========== ========== ==========
The accompanying notes are an integral part of these statements. -13- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Three Months Six Months Ended June 30 Ended June 30 --------------------- ---------------------- 1998 1997 1998 1997 --------- --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................. $ 18,380 $ 21,822 $ 51,559 $ 57,046 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ............................ 48,642 46,784 96,415 94,428 Net decrease in deferred income taxes and investment tax credit, net ............................. (2,960) (1,789) (5,885) (3,578) Amortization of other assets ............................. 9,868 5,472 19,033 12,092 Impact of changes in working capital ..................... (20,212) (59,177) 73,018 28,477 Other .................................................... 2,487 (7,694) 1,559 (25,162) -------- --------- -------- -------- Net cash provided ...................................... 56,205 5,418 235,699 163,303 -------- --------- -------- -------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures .......................... (43,906) (37,426) (68,592) (64,029) Quad Cities Nuclear Power Station decommissioning trust fund ............................... (2,844) (2,140) (5,658) (4,280) Deferred energy efficiency expenditures .................... - (2,626) - (6,349) Nonregulated capital expenditures .......................... (188) (1,602) (20,154) (3,306) Proceeds from sale of assets and other investments ......... 19,854 - 19,854 - Other investing activities, net ............................ 371 829 1,038 927 -------- --------- -------- -------- Net cash used ............................................ (26,713) (42,965) (73,512) (77,037) -------- --------- -------- -------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ............................................. (29,838) (41,236) (59,676) (75,510) Issuance of long-term debt, net of issuance cost ........... 158,440 - 158,440 - Retirement of long-term debt, including reacquisition cost . (486) (32,896) (75,611) (62,052) Reacquisition of preferred shares .......................... (1) (1) (3) (4) Net (decrease) increase in notes payable ................... (73,602) 104,275 (81,000) (17,400) -------- --------- -------- -------- Net cash provided (used) ................................ 54,513 30,142 (57,850) (154,966) -------- --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 84,005 (7,405) 104,337 (68,700) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 29,650 22,920 9,318 84,215 -------- --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $113,655 $ 15,515 $113,655 $ 15,515 ======== ========= ======== ======== ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized .................. $ 12,223 $ 12,215 $ 39,526 $ 42,663 ======== ========= ======== ======== Income taxes paid .......................................... $ 33,352 $ 54,247 $ 33,436 $ 67,465 ======== ========= ======== ========
The accompanying notes are an integral part of these statements. -14- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A) GENERAL: The consolidated financial statements included herein have been prepared by MidAmerican, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican, all adjustments have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Although MidAmerican believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican's latest Annual Report on Form 10-K. B) ENVIRONMENTAL MATTERS: Refer to Note B of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's environmental matters. C) RATE MATTERS: Refer to Note C of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's rate matters. D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: Refer to Note D of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's accounting for the effects of certain types of regulation. E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES: Refer to Note E of Holdings' Notes to Consolidated Financial Statements for information regarding the MidAmerican-Obligated Mandatorily Redeemable Preferred Securities. F) STATEMENT OF COMPREHENSIVE INCOME: MidAmerican did not have other comprehensive income for the periods presented, and accordingly, a statement of comprehensive income has been omitted. MidAmerican's total comprehensive income is equal to its earnings on common stock for each period presented. G) SUBSEQUENT EVENT: Refer to Note I of Holdings' Notes to Consolidated Financial Statements for information regarding subsequent events. -15- ITEM 2. 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 is a public utility with electric and natural gas operations and is the principal subsidiary of Holdings. MidAmerican Capital, Midwest Capital and MidAmerican Realty Services Company (MidAmerican Realty) are Holdings' nonregulated subsidiaries. MidAmerican Capital manages marketable securities and passive investment activities, nonregulated retail and wholesale natural gas businesses, security services and other energy-related, nonregulated activities. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. MidAmerican Realty includes the Company's recently acquired real estate operations. On May 27, 1998, the Company completed its purchase of AmerUs Home Services Inc. The companies acquired in that transaction are now subsidiaries of MidAmerican Realty and include real estate operations in five states: Iowa Realty, the state's largest, and First Realty/Better Homes and Gardens in Iowa; Edina Realty in Minnesota, North Dakota and Wisconsin; and Carol Jones, Realtors, in Missouri. On a consolidated basis, the new MidAmerican real estate companies have more than 800 employees and 3,400 sales agents and comprise the nation's third largest residential real estate brokerage organization based on over 46,000 buyer/seller transactions in 1997. In addition to residential brokerage, the MidAmerican Realty companies offer relocation, title and abstract services. DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis (MD&A) addresses the financial statements of Holdings and MidAmerican as presented in this joint filing. Discussions related to MidAmerican also relate 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. 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. 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 -16- 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, fuel transportation, competitive factors, general economic conditions in the Company's service territory, interest rates, inflation and federal and state regulatory actions. MERGER ANNOUNCEMENT On August 11, 1998, a definitive merger agreement was entered into between the Company and CalEnergy, a global provider of energy services. Under the terms of the agreement, the shareholders of the Company will receive $27.15 cash for each share of their common stock reflecting a 36 percent premium over the August 11, 1998 closing price. The merger will need to be approved by the shareholders of both companies, the Federal Energy Regulatory Commission, and the Nuclear Energy Regulatory Commission. Filings will also be made with the Iowa Utilities Board, which has the right to review the merger and to disapprove it only if found not in the public interest, the Federal Trade Commission and the Department of Justice. State regulators in Illinois will be notified of the merger. Management believes completion of the merger could occur by the first quarter of 1999. RESULTS OF OPERATION -------------------- Holdings: - - --------- The following tables provide a summary of the earnings contributions of the Company's operations for each of the periods presented:
Periods Ended June 30 ------------------------------------------------------------ Three Months Six Months Twelve Months ------------------ ---------------- ---------------- 1998 1997 1998 1997 1998 1997 ------ ------- ------ ------ ------ ------ Net Income (in millions) Continuing operations Utility $ 17.1 $ 20.6 $ 49.1 $ 53.0 $115.5 $138.2 Nonregulated operations 3.9 3.6 10.6 5.3 25.2 (9.6) Discontinued operations - 0.4 - 0.2 (4.4) (19.1) ------ ------ ------ ------ ------ ------ Consolidated earnings $ 21.0 $ 24.6 $ 59.7 $ 58.5 $136.3 $109.5 ====== ====== ====== ====== ====== ====== Earnings Per Common Share - Basic and Diluted Continuing operations Utility $ 0.18 $ 0.21 $ 0.52 $ 0.53 $ 1.21 $ 1.38 Nonregulated operations 0.04 0.03 0.11 0.06 0.26 (0.10) Discontinued operations - 0.01 - - (0.04) (0.19) ------ ------ ------ ------ ------ ------ Consolidated earnings $ 0.22 $ 0.25 $ 0.63 $ 0.59 $ 1.43 $ 1.09 ====== ====== ====== ====== ====== ======
-17- MidAmerican: - - ------------ The following table provides a summary of the earnings contributions of MidAmerican's operations for each of the periods presented:
Periods Ended June 30 ---------------------------------------------------------- Three Months Six Months Twelve Months ---------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 ------- ------ ------- ------- -------- -------- (in millions) Earnings on Common Stock Continuing operations $ 17.1 $ 20.6 $ 49.1 $ 53.0 $ 115.5 $ 138.2 Discontinued operations* - - - - - (20.6) ------- ------ ------- ------- -------- -------- Consolidated earnings $ 17.1 $ 20.6 $ 49.1 $ 53.0 $ 115.5 $ 117.6 ======= ======= ======= ======= ======== ========
* Discontinued operations for twelve months ended June 30, 1997, includes the loss of MidAmerican Capital and Midwest Capital prior to their transfer to Holdings on December 1, 1996. EARNINGS DISCUSSION Below is a list of some of the significant factors resulting in the variances in earnings. The amounts represent the variance between the 1998 and 1997 periods. Therefore, a factor that had a negative impact on earnings in both periods, but which had less of a negative impact in the 1998 period than in the 1997 period, would be displayed as a positive factor for comparison purposes. The discussion that follows addresses these factors as well as other items affecting the Company's results of operations. In the second half of 1997, MidAmerican began charging to expense additional amortization of deferred energy efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear Station costs consistent with ratemaking treatment. These items have had a significant impact on other operating expenses. In conjunction with expensing these items, MidAmerican began recovery of these costs from its customers, which is reflected in revenues. In order to present more appropriately the effect of gross margin and O&M expenses on the comparison of earnings shown below, the expenses related to these items are netted against the related revenues. -18-
Approximate Net Income Variances: 1998 vs 1997 ----------------------------------------------- For Periods Ended June 30 --------------------------------------- Three Months Six Months Twelve Months ------------ ---------- ------------- ($ In Millions) MidAmerican: - - ------------ Net reduction in electric and gas gross margin due to - Variation in the effect of weather $ - $(6.5) $(3.5) Customer growth 1.3 2.9 7.7 Electric retail rates and accruals (1.2) (2.4) (6.4) Off-system sales 2.7 2.1 5.1 Improvements due to other factors 3.0 11.7 18.1 Nuclear O&M expenses (1.6) 1.3 0.7 1996 inventory adjustment - - (3.7) Other O&M expenses (5.6) (9.0) (38.9) Property taxes - - (4.0) Recognition of deferred energy efficiency income (0.8) (1.9) (1.9) 1996 gain on sale of storage gas - - (2.4) 1996 merger proposal costs - - 5.1 Nonregulated subsidiaries: Write-downs of certain assets - - 7.4 Realized gain on sale of McLeodUSA Incorporated common stock - - 5.2 Donation of appreciated stock (2.4) (2.4) (2.4) Gains on sales of certain assets - 3.2 8.0 Income from a venture capital investment - 1.2 1.2 Realty operations 1.7 1.7 1.7 Reduction of interest on long-term debt - 0.7 5.0 Discontinued operations (0.4) (0.2) 14.7 Average shares outstanding for 1997 period 98,621 99,534 100,096
During the second quarter of 1998, one of MidAmerican's coal-fired generating stations was shut down when a generation step-up transformer failed and two intense storms struck MidAmerican's service territory. Also, the Quad Cities Nuclear Power Station (Quad Cities Station) remained out of service until June 1. These events reduced utility earnings for the second quarter of 1998. Third quarter earnings will reflect most of the expenses for the storms since much of the repair work occurred in July. The impact on third quarter earnings is not expected to be material. Expenses for continued efforts in preparation for a competitive utility environment also reduced earnings. Improved margins helped to offset some of the increases in expenses. In the past two years, the Company's strategic realignment of operations has significantly affected earnings of nonregulated subsidiaries. During 1997 and the first quarter of 1998, 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 the twelve months ended June 30, 1998, include 6 cents per share from the sale of assets of railcar leasing and repair businesses in the fourth quarter of 1997. Earnings for the first six months of 1998 reflect 3 cents per share for the sale of the -19- Company's interest in a financial management company and the liquidation of a partnership that owned commercial office buildings. Losses from discontinued operations reduced earnings in each twelve-month period shown above, though to a lesser degree in the 1997 period. Cash proceeds from the sale of discontinued operations in early 1997 allowed the Company to pay off long-term debt, significantly reducing its interest expense compared to the twelve months ended June 30, 1997. Although utility earnings for the current twelve-month period 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 its strategic realignment which included strengthening its marketing and customer service capabilities and adding to its information technology resources. The Company's evaluation of its nonregulated investments has resulted in write-downs of certain assets, primarily investments in alternative energy projects, in the past two years. 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, and $9.4 million, or 9 cents per share, in the twelve months ended June 30, 1998 and 1997, respectively. Discontinued Operations - Holdings: - - --------- During 1996, the Company discontinued some of its nonregulated operations. The Consolidated Statements of Income reflect the income or loss from those operations and the losses on disposal in each of the periods presented. Net assets of the discontinued operations are presented separately in the Consolidated Balance Sheets as Investment in Discontinued Operations. In the fourth quarter of 1996, the Company and KCS Energy, Inc. (KCS) signed a definitive agreement to sell a portion of the Company's nonregulated operations to KCS for $210 million in cash plus 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 twelve months ended June 30, 1997, reflects a $7.6 million after-tax loss for the transaction. An additional $0.4 million after-tax loss is included in the twelve months ended June 30, 1998. 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. 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. -20- UTILITY GROSS MARGIN Electric Gross Margin: ----------------------
Periods Ended June 30 ------------------------------------------------ Three Months Six Months Twelve Months ------------ ---------- ------------- 1998 1997 1998 1997 1998 1997 ------ ------ ------ ------ ------ ------ (In millions) Operating revenues $287 $262 $543 $ 516 $1,154 $1,086 Cost of fuel, energy and capacity 58 52 103 111 228 229 ---- ---- ---- ----- ------ ------ Electric gross margin $229 $210 $440 $ 405 $ 926 $ 857 ==== ==== ==== ===== ====== ======
A variety of factors contributed to the increase in MidAmerican's electric gross margin for the 1998 periods compared to the 1997 periods. An increase in revenues from energy efficiency cost recovery accounted for $9.1 million, $18.0 million and $26.9 million of the increase in margin for the three-, six- and twelve-month comparisons, respectively. Revenues from the Cooper Tracker (discussed below) contributed $1.6 million, $3.2 million and $7.3 million to the increases for the three, six and twelve months ended June 30, 1998, respectively. Revenues from these factors are substantially offset by increases in other operating expenses. Regarding the increase in energy efficiency revenues, on September 29, 1997, MidAmerican began collection of its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs. Including an allowed return on the 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 annually for currently incurred electric energy efficiency costs and amortization of previously incurred costs. The Cooper Tracker allows MidAmerican to collect on a current basis, the Iowa portion of expenses for Cooper capital improvement advances. The effect of temperatures contributed $4 million to the increase in margin for the second quarter of 1998 compared to 1997. Compared to normal, 1998 second quarter temperatures resulted in an increase in gross margin of $2 million, while the 1997 second quarter was cooler than normal, resulting in a decrease in margin of $2 million. An increase in sales not dependent on weather improved electric margin for the quarter. Moderate customer growth resulted in a $1.9 million increase in electric gross margin compared to the 1997 second quarter. Total retail sales of electricity increased 4.7%. Energy costs per unit in the second quarter of 1998 were above the per-unit amount recovered in rates under the new Iowa pricing plan and resulted in a decrease to gross margin compared to the second quarter of 1997. 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 energy costs did not affect gross margin or net income due to corresponding changes in revenues collected through the EACs. With the elimination of the Iowa EAC, fluctuations in energy costs now have an impact on gross margin and net income. Reductions of electric retail rates, including the effect of related accruals, resulted in a $2.0 million decrease in revenues and gross margin compared to the second quarter of 1997. -21- Sales for resale increased 16.7% for the quarter comparison. Margins on those sales contributed $4.6 million more to gross margin in the 1998 quarter than the sales in the second quarter of 1997. Refer to the discussion of the energy market under "Competition" in the Operating Activities and Other Matters section of MD&A. For the comparison of the six-month periods ended June 30, the variance in temperatures resulted in a $1 million decrease in electric gross margin. Compared to normal, the 1998 temperatures resulted in a decrease in gross margin of $6 million, while the 1997 period reflects a $5 million decrease in margin. An increase in sales not dependent on weather more than offset the decrease in margin due to weather for the 1998 period compared to 1997. Moderate but steady customer growth improved gross margin by $4.0 million compared to the 1997 six-month period. Total retail sales of electricity increased 2.3% compared to six months ended June 30, 1997. Reductions of electric retail rates, including the effect of related accruals, resulted in a $4.1 million decrease in revenues and gross margin compared to the first six months of 1997. Year-to-date sales for resale decreased 10.0% compared to the six months ended June 30, 1997. However, margins on those sales contributed $3.6 million more to gross margin in the 1998 period than the sales in the same period of 1997. For the twelve months ended June 30 comparison, temperatures reduced revenues and gross margin less in the 1998 period than in the 1997 period. When compared to normal, the impact of temperatures resulted in a $14 million reduction in electric gross margin for the 1998 twelve-month period compared to a $23 million reduction in gross margin for the twelve months ended June 30, 1997. Moderate but steady growth in the number of customers increased gross margin $10.5 million compared to the 1997 period. An increase in sales that are not dependent on weather also contributed to the increase in gross margin. Electric retail sales increased 2.7% for the 1998 twelve-month period compared to the twelve months ended June 30, 1997. Retail rate reductions, including the effect of related accruals, reduced electric gross margin by approximately $10.9 million compared to the twelve months ended June 30, 1997. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information regarding the Iowa proceeding. Sales for resale increased 1% for the twelve months ended June 30 comparison, while margins on those sales increased approximately $8.6 million. Transmission revenues increased $3.1 million compared to the 1997 twelve-month period. Energy costs per unit in the twelve months ended June 30, 1998 were below the per-unit amount recovered in rates under the new Iowa pricing plan and resulted in an increase to gross margin. -22- Gas Gross Margin: - - ----------------- Periods Ended June 30 ------------------------------------------------ Three Months Six Months Twelve Months ------------- -------------- -------------- 1998 1997 1998 1997 1998 1997 ----- ----- ----- ----- ----- ------ (In millions) Operating revenues $67 $81 $240 $292 $484 $548 Cost of gas sold 33 45 138 187 297 361 --- --- ---- ---- ---- ---- Gas gross margin $34 $36 $102 $105 $187 $187 === === ==== ==== ==== ==== Revenues include purchase gas adjustment clauses (PGAs) through which MidAmerican has been allowed to recover the cost of gas sold from most of its gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations in revenues from PGAs. Temperatures in the second quarter of 1998 were warmer than normal, resulting in a $2 million decrease in gas gross margin for the period, while temperatures in the second quarter of 1997 were colder than normal, resulting in a $2 million increase in margin. Total retail sales of natural gas decreased 25.0% compared to the second quarter of 1997. Increased recovery of gas energy efficiency costs resulted in a $3.2 million positive impact on the comparison of revenues and gross margin for the quarter. As discussed in the electric gross margin section, on September 29, 1997, MidAmerican began recovery of its energy efficiency costs which had not previously been 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 is partially offset by a corresponding increase in other operating expenses of approximately $11.1 million annually for deferred and ongoing gas energy efficiency costs. For the six months ended June 30, 1998, temperatures were 14.4% warmer than normal resulting in a $10 million decrease in gas gross margin. Colder-than-normal temperatures in the comparable 1997 period increased margin by approximately $1 million. Retail sales decreased 15.6% compared to the 1997 six-month period. Customer growth contributed $0.9 million to gas margin, and the mix of sales helped to offset the effect of a small decrease in usage not related to weather. Energy efficiency revenues increased $6.2 million for the six months ended June 30, 1998, compared to the same period in 1997. Mild temperatures resulted in a $15 million decrease in gas gross margin for the twelve months ended June 30, 1998, compared to the twelve months ended June 30, 1997. When compared to normal, the impact of temperatures resulted in an $11 million reduction in gas gross margin in the 1998 twelve-month period compared to a $4 million increase in gas gross margin for the twelve months ended June 30, 1997. The increase in recovery of gas energy efficiency costs for the twelve-month period recovered approximately $9.4 million of the loss in revenues and margin resulting from milder temperatures. Moderate customer growth, contributing $2.6 million to gross margin, and an increase from other usage factors also helped offset decreases in gross margin for the 1998 period. -23- UTILITY OPERATING EXPENSES Other Operating Expenses - Utility other operating expenses increased $13.1 million, $26.2 million and $91.3 million for the three, six and twelve months ended June 30, 1998, respectively, compared to the same periods in 1997. As mentioned in the gross margin discussions, on September 29, 1997, MidAmerican began additional recovery of deferred energy efficiency costs and current recovery of ongoing costs. As the deferred costs are recovered in revenues, they are amortized to expense. In addition, ongoing energy efficiency costs, which historically were deferred until future periods, are now charged to expense currently. The increase in energy efficiency costs accounted for $10.7 million, $21.5 million and $32.8 million of the increase in other operating expenses for the three, six and twelve months ended June 30, 1998, respectively, compared to the same periods in 1997. In addition to the energy efficiency expense increase, operating expenses related to Cooper increased due in part 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 in the Electric Gross Margin section, MidAmerican is recovering on a current basis the Iowa portion of these costs from its Iowa electric customers through the Cooper Tracker. Recovery in Illinois is included in base rates. This change accounted for increases of $0.7 million and $4.7 million for the six-month and twelve-month comparisons, respectively, and a decrease of $0.5 million for the three-month period due to an adjustment for a prior estimate. Excluding these Cooper costs, nuclear operations expenses decreased $2.9 million and $5.9 million, respectively, for the three-month and six-month comparisons and were unchanged for the twelve-month periods. Continued restructuring of the Company in preparation for a competitive industry has required additional expenses. MidAmerican has increased its emphasis on marketing-related efforts, as well as customer service operations, resulting in increases in consulting costs, advertising, employee incentive compensation and other related expenses. Increases in such expenses accounted for the remainder of the increases for the quarter and six-month period comparisons. In addition, the 1998 twelve-month period reflects increases in certain employee benefits expenses, customer assistance and energy efficiency administrative costs, manufactured gas plant site clean-up costs and transmission wheeling expense due in part to changes required by FERC Order Nos. 888 and 889. Maintenance - Maintenance expenses increased $8.4 million and $7.2 million for the 1998 three-month and six-month periods ended June 30 compared to the same periods ended June 30, 1997. Increased maintenance costs at the Quad Cities Station accounted for $5.6 million and $3.7 million of the three-month and six-month increases, respectively. Additionally, generating plant maintenance and distribution system maintenance increased due in part to the outage at Louisa Energy Center (Louisa) and storms in June 1998. Refer to Liquidity and Capital Resources for a discussion of the shutdown at Louisa. Maintenance expenses for the twelve months ended June 30, 1998, were $14.5 million greater than in the comparable 1997 period. In the fourth quarter of 1996, MidAmerican made an adjustment to align power plant inventory accounting of predecessor companies. That adjustment reduced expenses by $6.2 million for the twelve-month period ended June 30, 1997. In addition, the Company incurred $2.0 million in maintenance expenses for restoration following a snowstorm in October 1997. Costs related to the June 1998 storms, increased tree-trimming costs and costs of the shutdown at Louisa also contributed to the increase. -24- Maintenance expenses at the Quad Cities Station decreased $1.3 million in the twelve-month period ended June 30, 1998, compared to the twelve months ended June 30, 1997. 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 Quad Cities Station. Property and Other Taxes - Property taxes increased for the twelve months ended June 30, 1998, relative to the comparable 1997 period due primarily to an increase in the assessed value for Iowa property taxes. NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Holdings: - - --------- Revenues of nonregulated subsidiaries decreased a total of $3.5 million, $75.8 million and $121.2 million for the three-month, six-month and twelve-month periods ended June 30, 1998, compared to their respective 1997 periods. Revenues from the natural gas marketing subsidiaries decreased $20.0 million, $89.1 million and $134.6 million for the 1998 three-month, six-month and twelve-month periods, respectively. Related sales volumes decreased 9 million MMBtu's (58%), 27 million MMBtu's (53%) and 53 million MMBtu's (49%) compared to the sales volumes in the 1997 periods. The decrease in sales volumes is due primarily to the expiration of contracts which have not been replaced. A decrease in the average price per unit, reflective of a decrease in the cost of gas sold, also reduced revenues in the six months ended June 30, 1998, for the natural gas marketing subsidiaries. Cost of sales includes expenses directly related to sales of natural gas. The decrease in cost of sales related to natural gas marketing for the first six months of 1998 reflects a 20% decrease in the average cost of gas per unit. Total gross margin (total price less cost of gas) on nonregulated natural gas sales decreased $1.3 million, $1.4 million and $0.4 million for the 1998 three, six, and twelve months ended June 30, respectively, compared to the 1997 periods. Nonregulated revenues for each of the 1998 periods reflect $18.3 million from the real estate brokerage operations acquired in May 1998. Nonregulated cost of sales and nonregulated other operating expenses for each 1998 period presented include $6.5 million and $8.4 million, respectively, related to the real estate brokerage companies. Nonregulated other operating expenses for the 1998 twelve-month period include a decrease of approximately $8.1 million due primarily to administrative costs in the 1997 period which are no longer incurred because of the absence of operations the Company sold in early 1997. NON-OPERATING INCOME AND INTEREST EXPENSE MidAmerican: - - ------------ Interest and Dividend Income - Interest income increased in each 1998 comparative period due to an increase in temporary cash investments. -25- Other, Net - In the fourth quarter of 1997, MidAmerican sold a portion of its accounts receivable. Other, Net for the 1998 quarter, six months and twelve months ended June 30 includes deductions for discounts on receivables sold totaling $1.8 million, $4.0 million and $4.0 million, respectively. Refer to the Financing Activities section of Liquidity and Capital Resources later in MD&A for a discussion of the receivables sale. Recognition of deferred income from energy efficiency programs totaled zero, $0.1 million and $1.8 million for the 1998 three-month, six-month and twelve-month periods ended June 30, respectively. The comparable 1997 periods reflect income of $1.3 million, $3.3 million and $5.0 million, respectively. Other, Net for the six-month and twelve-month periods ended June 30, 1997, includes a reduction for net losses on reacquired long-term debt of $0.9 million and $0.2 million, respectively. 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 the 1998 twelve-month period reflects $2.2 million of pre-tax income for recovery of litigation costs incurred in pre-1997 years. MidAmerican was awarded pre-tax income in each of the periods presented for performance under its incentive gas procurement program. In the second quarter of 1998 and 1997, MidAmerican received $2.0 million and $1.7 million, respectively. Twelve months ended June 30, 1998 and 1997, reflect amounts of $5.3 million and $4.4 million, respectively. Other, Net for the 1997 twelve-month period includes approximately $8.7 million of expenses for costs incurred by MidAmerican for its merger proposal to IES Industries Inc. in 1996. In the fourth quarter of 1996, MidAmerican recorded an initial pre-tax gain of $3.2 million on its sale of certain storage gas supplies which is reflected in the twelve months ended June 30, 1997. MidAmerican recorded an additional $0.8 million gain in the second quarter of 1997, which is also reflected in the twelve months ended June 30, 1997, after receiving favorable treatment on the transaction from the Iowa Utilities Board (IUB). The twelve months ended June 30, 1997, also includes $2.2 million of income from the reversal of a reserve after successful resolution of a dispute with a vendor. Fixed Charges - Interest on long-term debt decreased due to long-term debt reduction and refinancing activities in 1996 and 1997. Preferred securities of a subsidiary trust were issued in December 1996 resulting in the twelve months ended June 30, 1997, including only a partial year of dividends. MidAmerican preferred shares were reacquired at the same time, resulting in a decrease in preferred dividends deducted after net income in MidAmerican's Consolidated Statements of Income. -26- Holdings: - - --------- Dividend Income - Dividend income decreased for each of the periods ended June 30, 1998, compared to the respective 1997 periods due to MidAmerican Capital's reduced holdings of preferred stock portfolios, a portion of which MidAmerican Capital liquidated in 1996. Realized Gains and Losses on Securities, Net - Net realized gains on securities for twelve months ended June 30, 1998, includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common stock. Other, Net - The first six months of 1998 includes $4.7 million from the divestment of nonregulated assets in the first quarter, including the sale of the Company's interest in a financial management company, the sale of a commercial office building and liquidation of a partnership interest concurrent with the sale of its commercial property. In addition, the Company recorded $2.1 million of income from an equity investment in a venture capital fund. In addition to the above items, the twelve months ended June 30 periods were also affected by the factors discussed in the next paragraph. During the twelve months ended June 30, 1998, 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 and $15.6 million for the 1998 and 1997 twelve months ended June 30, respectively. Excluding the investment mentioned above, income from equity investments decreased for the 1998 twelve-month period due to the liquidation of such investments during 1996 and early 1997. Interest Charges - Interest on long-term debt of nonregulated subsidiaries decreased $8.5 million for the twelve-month comparison due primarily to the reduction in MidAmerican Capital's 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. -27- 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 June 30, 1998, common equity represented 51.7% of the Company's total capitalization compared to 51.7% and 47.9% as of December 31, 1997, and June 30, 1997, respectively. Several factors other than earnings, dividends and scheduled maturities of debt affected the change in the percent of common equity. Recording accumulated comprehensive income for an investment in McLeodUSA to reflect its market value, and repurchases and retirement of debt prior to its scheduled maturity were major contributors to the move to a higher percentage of common equity since June 30, 1997. The Company's common stock repurchase program has reduced common equity during that period. MidAmerican's common equity as of June 30, 1998, represented 46.8% of its capitalization compared to 45.6% as of June 30, 1997. 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 $238 million for the first six months of 1998 compared to $225 million for the same period in 1997. MidAmerican's net cash provided from operating activities was $236 million for the first six months of 1998 and $163 million for the first six months of 1997. INVESTING ACTIVITIES AND PLANS MidAmerican: - - ------------ Utility Construction Expenditures - MidAmerican's primary need for capital is utility construction expenditures. For the first six months of 1998, utility construction expenditures totaled $69 million, including allowance for funds used during construction (AFUDC) and Quad Cities Station nuclear fuel purchases. In addition, MidAmerican's nonregulated railway subsidiary had $20 million of construction expenditures in the same period. All such expenditures were met with cash generated from utility operations, net of dividends. Beginning with July 1997 expenditures, advances for Cooper capital improvements are no longer included in utility construction expenditures but are expensed when incurred in other operating expenses. Previously, MidAmerican capitalized these expenses in accordance with then applicable rate regulation. As part of the 1997 settlement of MidAmerican's electric pricing proposal, MidAmerican is recovering on a current basis the Iowa portion of expenses for Cooper capital improvements advances from its Iowa electric customers through a tracking mechanism. Forecasted utility construction expenditures, including AFUDC, for 1998 are $201 million and $609 million for 1999 through 2002. 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. -28- Deferred Energy Efficiency Expenditures - The Company stopped reflecting costs of its energy efficiency programs as an investing activity on its Consolidated Statement of Cash Flows following the IUB's approval in September 1997 of current recovery of ongoing energy efficiency program costs. Under prior energy efficiency regulations, program costs were deferred for several years prior to beginning their recovery over a four-year period, and accordingly, the Company reflected them as an investing activity. 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 $50 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 50% 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 predominately in U.S. Treasury Bonds. MidAmerican's obligation for Cooper decommissioning may be effected 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, Midwest Capital and MidAmerican Realty totaled $19 million for the first six months of 1998. 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 future. External financing may also be used to provide for nonregulated capital expenditures. As discussed in the Introduction section of MD&A, the Company purchased AmerUs Home Services Inc. in May 1998 for approximately $80 million. The acquired companies are now the subsidiaries of MidAmerican Realty. Total assets of MidAmerican Realty as of June 30, 1998, were $120 million. The line items significantly affected on the Company's Consolidated Balance Sheet as of June 30, 1998, are as follows ($ in millions): Receivables ($40.4); Other Assets ($56.1); Notes Payable ($50.5); and Other Current Liabilities ($30.6). -29- During the second quarter of 1998, the Company also acquired the assets of two security services companies in the Midwest. 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 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. As of June 30, 1998, the cost and fair value of the McLeodUSA investment were $45.2 million and $313.3 million, respectively. The unrealized gain is recorded, net of income taxes, as accumulated comprehensive income in common shareholders' equity. As of June 30, 1998, the unrealized gain and deferred income taxes for this investment were $268.1 million and $93.8 million, respectively. MidAmerican Capital received approximately $302 million in cash, before income taxes, during 1997 from sales of investments primarily as part of its efforts to align them with the Company's strategy. A portion of the after-tax proceeds from these sales was used for retirement of $174 million of MidAmerican Capital long-term debt in the first quarter of 1997, additional retirement of long-term debt in 1997 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 June 30, 1998, MidAmerican had a $250 million revolving credit facility agreement and a $5 million line of credit to provide short-term financing for utility operations. MidAmerican's commercial paper borrowings, which totaled $41.5 million at June 30, 1998, 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, as determined by Statement of Financial Accounting Standards (SFAS) No. 125, under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors. -30- Therefore, the accounts receivable sold are not reflected on Holdings' or MidAmerican's Consolidated Balance Sheets. As of June 30, 1998, $106.3 million, net of reserves, was sold under the agreement. On June 16, 1998, MidAmerican issued $160 million of 8-year Medium Term Notes (MTN's) at a 6.38% coupon rate. Proceeds from the sale were used to refund $50 million of the 8% Series General Mortgage Bonds due February 15, 2022, and $100 million of the 8.125% Series General Mortgage Bonds due February 1, 2023. The refund occurred on the July 15, 1998 redemption date. Consequently, the Consolidated Balance Sheets as of June 30, 1998, reflect these series in current maturities and the proceeds in cash, to the extent they were not used to temporarily reduce short-term borrowings. As of July 31, 1998, MidAmerican had $325 million of long-term debt maturities and sinking fund requirements for 1998 through 2002. 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 July 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 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 $2.8 million for the six-month and twelve-month periods ended June 30, 1997, respectively. Holdings: As of June 30, 1998, Holdings had lines of credit totaling $130 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. -31- 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. As of June 30, 1998, the Company had repurchased approximately 6.2 million shares for $114.8 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 July 28, 1998, Holdings' board of directors declared a quarterly dividend on common shares of $0.30 per share payable August 1, 1998. The dividend represents an annual rate of $1.20 per share. Nonregulated Subsidiaries - As of June 30, 1998, MidAmerican Capital had unsecured revolving credit facilities in the amount of $114 million, under which no debt was outstanding. MidAmerican Capital has $135 million of long-term debt maturities and sinking fund requirements, including $20 million of current maturities, for 1998 through 2002 related to debt outstanding at June 30, 1998. Midwest Capital currently has a $25 million line of credit with MidAmerican, of which $5 million was outstanding at June 30, 1998. 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. Additionally, increased volatility in the energy marketplace can be expected. As evidence of this, in late June 1998, utility energy markets in the Midwest experienced substantial price volatility due to a number of factors. The market volatility did not have a material impact on MidAmerican's energy costs. As the industry moves into a competitive utility environment, the Company expects such volatility to continue. MidAmerican cannot predict the effect of that volatility on its future revenues, energy costs or net income. 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 -32- 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 traditional services. As part of an electric pricing settlement approved by the IUB in 1997, MidAmerican reduced its prices for most of its Iowa electric retail customers. In the IUB order approving the settlement, MidAmerican was also authorized to enter into long-term contracts with industrial and commercial electric customers. Refer to "Rate Matters" later in this discussion for further information. 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. The Company anticipates its recently purchased real estate brokerage organization to benefit its utility operations through the additional contact with customers and potential customers at times when the Company can meet a variety of their needs. 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 Southern District of Iowa (the Court) alleging various violations of federal antitrust laws. The lawsuit stemmed from a claim that because the customer is not free to choose its retail energy supplier, MidAmerican is engaging in illegal monopolistic behavior. In addition to damages, the customer sought 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. The Court issued a judgment in favor of MidAmerican. An Appeal filed by the customer is currently pending. A ruling in favor of the plaintiff could have the effect of accelerating retail competition in MidAmerican's Iowa service territory. Legislative and Regulatory Evolution - On December 16, 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market beginning October 1, 1999. MidAmerican is presently participating in proceedings which detail the new competitive environment and 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. -33- 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 Bond rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the resulting average Treasury Bond rate approximated rates which existed in 1997, the ROE level above which sharing must occur would be approximately 12%. The law allows for methods to mitigate the sharing of earnings above the threshold ROE which would reduce MidAmerican's earnings. MidAmerican continues to evaluate its strategy regarding the sharing mechanism. 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. Customer choice will create opportunities for MidAmerican to add customers who are currently served by other utilities. At the same time, it will introduce the risk of losing current MidAmerican customers to other energy providers. 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. MidAmerican's Iowa legislative priority for 1998 has been utility property tax reform, a condition it considers precedent to utility industry restructuring. A bill to replace the current utility property tax system, which was supported by MidAmerican, was approved by the Iowa legislature and signed into law by the Governor. The legislation becomes effective on January 1, 1999. Because energy costs are relatively low in Iowa, industry restructuring has not been an issue aggressively pursued in the state to date. During the 1998 Iowa legislative session, a group of industrial customers introduced legislation to allow retail service competition, but it did not develop further. With resolution of the utility property tax issue, MidAmerican intends to pursue the adoption of restructuring legislation in the 1999 Iowa legislative session. 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. On May 4, 1998, MidAmerican filed a proposal with the IUB to allow at least 15,000 Iowa families and 2,000 small businesses to have the opportunity to select among competing electricity providers. If approved, the two-year program would allow participating retail customers in a selected test area to choose among several electricity providers, including MidAmerican, and to have that energy delivered by MidAmerican. MidAmerican would select a test market later this year, and customers would begin choosing among electricity providers in December 1998. Businesses in the test area would be eligible for the program if their annual peak demand is less than four megawatts. New suppliers participating in the program would have to be certified by the IUB and meet specified requirements. Under the proposal, lost revenues during the program would be recorded as a regulatory asset for future recovery. -34- Accounting Effects of Industry Restructuring - A possible consequence of competition in the utility industry is that SFAS 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A majority of MidAmerican's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of 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 June 30, 1998, MidAmerican had $312 million of regulatory assets in its Consolidated Balance Sheet. Energy Efficiency - MidAmerican's regulatory assets as of June 30, 1998, included $87.5 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 for recovery. Based on the current level of recovery, MidAmerican expects to recover approximately $35 million of the deferred energy efficiency costs in 1998. MidAmerican also received approval to recover ongoing energy efficiency costs. Recovery of these costs is currently being collected from customers based on projected annual costs of $16.8 million. Amortization of deferred energy efficiency costs and current expenditures for energy efficiency costs will be reflected in other operating expenses over the related periods of recovery. The total of such costs for the years 1998, 1999, 2000 and 2001, is estimated to be $52 million, $43 million, $41 million and $35 million, respectively. 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 approved a March 1997 settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties in a consolidated rate proceeding involving MidAmerican's electric pricing proposal and a filing by the OCA. The agreement includes a number of components of MidAmerican's pricing proposal. Six major components of the settlement and their status are as follows: 1) On an annualized basis, prices for residential customers were reduced $8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July 11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5 million. 2) Rates for industrial customers will be reduced by $6 million annually and rates for commercial customers will be reduced by $4 million annually. MidAmerican has been given permission to implement these reductions through a retail access pilot project and through negotiated individual contracts. In the event that these contracts in the aggregate do not reduce rates by $6 million and $4 million, respectively, MidAmerican is required to apply any remaining amount to across-the-board rate reductions to customers who do not enter into contracts. -35- The effective date for these rate reductions was set for June 1, 1998 in the IUB Order approving the settlement. However, MidAmerican has pending before the IUB a request to extend the deadlines until September 1, 1998 for industrial customers, and December 31, 1998 for commercial customers. That request would involve an obligation to increase the amount of the reduction on a one-time basis to reflect the time value of money between June 1, 1998 and the new requested deadlines. MidAmerican estimates it will not have any interest obligation with respect to the industrial contracts, and will not incur any material interest obligation with respect to its commercial contracts. The negotiated contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $125 million. The IUB is currently considering the contracting process in two proceedings. The outcome of those proceedings could impact further contracting efforts, as well as determine whether any of the contracts will need to be renegotiated, and the extent to which the annualized rate reduction will take the form of negotiated contracts versus across-the-board rate reductions. 3) A tracking mechanism (Cooper Tracker) is being used to currently recover costs for capital improvements required by the Cooper Nuclear Station Power Purchase Contract which will offset approximately $6 million of the rate reductions in 1998. Other operating expenses will correspondingly increase due to currently expensing the related costs. 4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current basis through the EAC, and thus, fuel costs had little impact on net income. Since then, base rates for Iowa customers 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 are 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. 5) 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%. 6) 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 by the fourth quarter of 1998. -36- Environmental Matters - The United States Environmental Protection Agency (EPA) and state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. The Company is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether the Company has any responsibility for remedial action. The Company's present estimate of probable remediation costs for these sites is $25 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note B of Notes for further discussion of the Company's environmental activities related to manufactured gas plant sites and cost recovery. Although the timing of potential incurred costs and recovery of such cost in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on the Company's financial position or results of operations. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards (NAAQS) for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout 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. The attainment status of areas in the state of Iowa will not be known for two to three years. However, if MidAmerican's operations are determined to contribute to nonattainment, the installation of additional control equipment, such as scrubbers and/or selective catalytic reduction, on MidAmerican's units could be required. The cost to install such equipment could be significant. MidAmerican will continue to follow the attainment status of the areas in which it operates and evaluate the potential impact of the status of these areas on MidAmerican under 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. In December 1997, negotiators from more than 150 nations met in Kyoto, Japan to negotiate an international agreement designed to address global climate change impacts by attempting to reduce so-called greenhouse gas emissions. Some scientists contend that these gases build up in the Earth's atmosphere and cause global temperatures to rise. The primary target of these emissions is carbon dioxide (CO2) which is formed by, among other things, the combustion of fossil fuels. The agreement currently calls for the United States to reduce its emissions of CO2 and other greenhouse gases to 7 percent below 1990 levels in the 2008- -37- 2012 time frame. In order for the agreement to become binding upon the United States, ratification by the U.S. Senate is necessary. The cost to the utility industry in general, and to MidAmerican, of reducing its CO2 emissions levels by 7 percent below 1990 levels would depend on available technology at the time, but could be material. Coal Inventories - Coal inventory levels at MidAmerican's coal-fired generating stations declined approximately 40% (in terms of tons of coal) in the twelve months ended June 30, 1998. A major factor contributing to the decrease was nationwide operational problems experienced by a rail transportation provider of MidAmerican. Inadequate delivery service to MidAmerican's Neal Energy Center (Neal Center) in the fourth quarter of 1997 resulted in reduced coal inventory at that site. Inventory levels at other MidAmerican coal-fired generating stations also decreased in part due to higher-than-expected generation levels at those stations caused in part by the effort to conserve coal at the Neal Center. An extended outage at the Quad Cities Nuclear Station also affected the need for additional generation at MidAmerican's coal-fired generating stations. Deliveries to the Neal Center have improved in 1998. Also, during the second quarter, MidAmerican made progress in rebuilding its coal inventories with the use of an additional train set and deliveries from other carriers. Although MidAmerican's total coal inventory remains below the desired level, the situation has been stabilized and is being managed. Coal delivery is affected by factors MidAmerican does not control in its ability to manage coal inventories, including but not limited to, weather, derailments and operational problems of rail transportation providers. MidAmerican will be working throughout the year to build its coal inventory to higher than the current level. Quad Cities Nuclear Power Station Outage - Quad Cities Station, which is operated by and 75% owned by Commonwealth Edison Company (ComEd), began 1998 with Unit 1 and Unit 2 out of service under a Confirmatory Action Letter (CAL) addressing safety system concerns in the event of certain postulated fires. Also, in January, ComEd was informed by the Nuclear Regulatory Commission (NRC) that the performance of Quad Cities Station is trending adversely. The NRC lifted the CAL in May, and Unit 2 returned to service on May 26, 1998. On June 1, 1998, Unit 1 returned to service. During discussions with the NRC, ComEd made numerous commitments to the NRC with respect to additional long-term analysis and improvements related to those safety systems. ComEd has made significant changes in senior management positions in its nuclear program and at the Quad Cities Station since November 1997 in an effort to improve its nuclear operations. A refueling outage is scheduled for Quad Cities Unit 1 in November 1998. No refueling outage is scheduled for either unit in 1999. Louisa Energy Center - On May 27, 1998, MidAmerican shut down its Louisa Energy Center (Louisa), a 700 MW coal-fired electric generating plant, when a generator step-up transformer failed. In June, MidAmerican installed an interim replacement transformer and restarted the Louisa plant on June 26. A repaired or new transformer will be installed in the spring of 1999. The interim replacement transformer, which can be recalled by the owner, is smaller than the original transformer resulting in a slightly lower maximum output. MidAmerican does not expect the lower maximum output to affect electric service to its customers. -38- Generating Capability - In July, 1998, customer usage of electricity caused an hourly peak demand of over 3,600 megawatts (MW) on MidAmerican's energy system. MidAmerican's previous record peak demand was 3,553 MW set in 1995. MidAmerican is interconnected with certain Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool (MAPP). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. MidAmerican's accredited net generating capability under the MAPP rules is 4,425 MW. Accordingly, its maximum peak demand would be 3,798 MW in order to maintain the required reserve. If MidAmerican fails to maintain the appropriate reserve, significant penalties would be contractually imposed by MAPP. MidAmerican believes it has an adequate reserve; however, significantly higher-than-normal temperatures could cause MidAmerican's reserve to fall below the 15% minimum. YEAR 2000 The Company has undertaken an extensive ongoing project to identify and assess its information technology (IT) and non-IT systems potentially affected by the year 2000 date change and to repair or replace those systems which are not year 2000 compliant. Currently, the Company is conducting an inventory of its non-IT systems and equipment to identify potential year 2000 problems, including components of its generation and delivery infrastructure. The Company's operations utilize systems and equipment provided by other organizations. As a result, year 2000 efforts of suppliers, vendors or service providers could impact the Company's operations. The Company is assessing the efforts of such constituent entities and the impacts on those entities that rely upon the Company's services, including utilities interconnected with the Company's electrical system. However, there is no assurance that the Company will not be affected by year 2000 problems of those organizations or their failure to repair or replace systems or equipment which is incompatible with year 2000 dates. In support of its year 2000 effort, a project team has designed and developed a database that allows the year 2000 readiness status of each item, component, system and project to be monitored throughout the course of the project. In addition, the database provides a repository for all information obtained about vendors and their products, business partners' services, customer inquiries, test results, and MidAmerican project contacts. The Company classifies all systems ranging from low- to high-priority based on its importance to carrying out the business mission. For most high- and medium-priority system components or items that must be replaced or upgraded in order to achieve year 2000 readiness, the project schedule calls for completion of all work by June 30, 1999. In the case of low-priority systems, implementation dates may be delayed until as late as September 30, 1999. To date, approximately $4 million in operating expenses have been incurred to carry out year 2000 activities that include assessment of system readiness and bringing IT systems into compliance. An additional $2.25 million in operating expenses will need to be incurred to complete the assessment and IT system compliance efforts, although additional unforeseen costs may be incurred. By year-end the Company will have replaced two major IT systems with ones that are year 2000 compliant. The Company expects to complete the inventory of its non-IT systems and equipment, and the systems and equipment of third parties with which the Company has a material relationship, with regard to potential year 2000 exposure by the end of the third quarter. By that time, an estimate of the actions required to be undertaken, the schedule of when those actions must be completed, and the cost of resolving the year 2000 problems, including possible replacement of such systems and equipment, will be determined. At this stage -39- of the assessment, the Company has not become aware of any material costs needed to be incurred to bring non-IT systems into compliance, although future assessments could change this outlook. Despite testing and remedial work preparing for the advent of year 2000, the Company may experience random, widespread and simultaneous failures in its generation, distribution and information systems during January 2000. Contingency plans for any known or reasonably anticipated risk of interruption to the generation or distribution of energy are being developed to either eliminate the risk or plan for resources needed to be put in place to reduce the potential outage period to a minimum. Although the impact on future operations and revenues is unknown, failure of the Company's IT and non-IT systems to perform because of year 2000 implications could result in operating problems and costs material to the Company. Although management believes the project will be completed sufficiently in advance of January 1, 2000, unforeseen and other factors, including failure of contractors to perform, could cause delays in the project, the results of which could likely have a material effect on the Company's results of operations, liquidity and financial condition. ACCOUNTING ISSUES In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. SFAS 133 requires an entity to recognize all of its derivatives as either assets or liabilities in its statement of financial position and measure those instruments at fair value. If certain conditions are met, such instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use in assessing the effectiveness of the derivative. If the pronouncement was currently in effect, the Company believes it would not have a material impact on its results of operations or financial condition. The Company continues to analyze the pronouncement. -40- PART I. (continued) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - - ------ ---------------------------------------------------------- As of June 30, 1998, the Company's and MidAmerican's financial positions related to financial instruments and assets that are sensitive to changes in interest rates or commodity price changes have not changed materially since December 31, 1997. Refer to the Company's 1997 Annual Report on Form 10-K under Item 7A for the applicable information as of December 31, 1997. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - - ------- ----------------- The Company and its subsidiaries have no material legal proceedings except for the following: Environmental Matters - - --------------------- For information relating to the Company's Environmental Matters, reference is made to Part I, Note (B) of Holdings' Notes to Consolidated Financial Statements. Cooper Litigation - - ----------------- On July 23, 1997, NPPD filed a Complaint, in the United States District Court for the District of Nebraska, naming MidAmerican as the defendant and seeking declaratory judgment as to three issues under the parties' long-term power purchase agreement for Cooper capacity and energy. More specifically, NPPD seeks a declaratory judgment in the following respects: (1) that MidAmerican is obligated to pay 50% of all costs and expenses associated with decommissioning Cooper, and that in the event NPPD continues to operate Cooper after expiration of the power purchase agreement (September 2004), MidAmerican is not entitled to reimbursement of any decommissioning funds it has paid to date or will pay in the future; (2) that the current method of allocating transition costs as a part of the decommissioning cost is proper under the power purchase agreement; and (3) that the current method of investing decommissioning funds is proper under the power purchase agreement. MidAmerican filed its answer and contingent counterclaims. The contingent counterclaims filed by MidAmerican are generally as follows: (1) that MidAmerican has no duty under the contract to reimburse or pay 50% of the decommissioning costs unless certain conditions occur; (2) that NPPD has the equitable duty to repay all amounts that MidAmerican has prefunded for decommissioning in the event NPPD operates the plant after the term of the contract; (3) that NPPD is equitably estopped from continuing to operate the plant after the term of the contract; (4) that NPPD has granted MidAmerican an option to continue taking 50% of the power from the plant; (5) that the term "monthly power costs" as defined in the contract does not include costs and expenses associated with decommissioning the plant; (6) that MidAmerican has no duty to pay for nuclear fuel, O&M projects or capital improvements that have useful lives after the term of the contract; (7) that transition costs are not included in any decommissioning costs and expenses; (8) that NPPD has breached its duty to MidAmerican in making investments of certain funds; (9) that reserves in certain accounts are excessive and should be refunded to MidAmerican; and (10) that NPPD must credit MidAmerican for certain payments by MidAmerican for low-level radioactive waste disposal. MidAmerican and NPPD are currently involved in discovery. The trial in this case is presently scheduled for March 1999. MidAmerican is vigorously defending and pursuing its interest in this proceeding. -41- North Star Steel Company - - ------------------------ On December 8, 1997, North Star Steel Company (NSS), a retail MidAmerican electric customer, filed a Complaint in the United States District Court for the Southern District of Iowa naming Holdings and MidAmerican as defendants. The Complaint alleges that MidAmerican's refusal to allow NSS to obtain retail electric service from an unspecified alternative energy company amounts to a violation of federal antitrust laws. NSS sought to recover an unspecified level of damages, and to require MidAmerican to provide retail wheeling service so that NSS could obtain electricity from an unnamed supplier. On June 23, 1998, the District Court issued an Order Granting Summary Judgment in favor of MidAmerican. On July 20, 1998, NSS appealed that decision to the United States Court of Appeals for the Eighth Circuit. That appeal is currently pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------- --------------------------------------------------- The Company held its 1998 Annual Meeting of Shareholders on April 29, 1998. At the annual meeting, shareholders elected the thirteen persons nominated. The results of the votes are as follows: Election of Directors: Name For Against ------------------- ---------- --------- J. W. Aalfs 76,832,303 1,319,294 S. J. Bright 76,852,902 1,298,695 R. D. Christensen 76,811,208 1,340,389 R. E. Christiansen 76,296,769 1,854,828 J. W. Colloton 76,681,295 1,470,302 F. S. Cottrell 76,875,238 1,276,359 J. W. Eugster 76,845,938 1,305,659 N. Gentry 76,882,315 1,269,282 R. L. Lawson 76,789,137 1,362,460 R. L. Peterson 76,689,607 1,461,990 N. L. Seifert 76,754,895 1,396,702 W. S. Tinsman 76,875,213 1,276,384 L. L. Woodruff 76,788,312 1,363,285 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - - ------- -------------------------------- (A) EXHIBITS Exhibits Filed Herewith - - ----------------------- The exhibits filed herewith are attached to this combined Form 10-Q in numerical order. They are listed below under the heading of the registrant or registrants to whom they apply. Holdings Exhibit 12.1 - Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. -42- MidAmerican Exhibit 12.2 - Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. Holdings and MidAmerican Exhibit 27 - Financial Data Schedules (for electronic filing only). (B) REPORTS ON FORM 8-K On May 29, 1998, Holdings and MidAmerican filed a joint report on Form 8-K, dated May 28, 1998. The report included an announcement of Holdings' acquisition of AmerUs Home Services Inc. on May 27, 1998, and a copy of the related press release. On June 1, 1998, Holdings and MidAmerican filed a joint report on Form 8-K, dated May 29, 1998, stating MidAmerican shut down its Louisa Energy Center on May 27, 1998, due to the failure of a generator step-up transformer. The report included a copy of the related press release. On June 9, 1998, Holdings & MidAmerican filed a joint report on Form 8-K, dated June 9, 1998. The report updated the Louisa Energy Center status stating arrangements for an interim replacement transformer were made with an expected return to service in early July. A copy of the related press release was attached. On June 17, 1998, Holdings & MidAmerican filed a joint report on Form 8-K, dated June 17, 1998, to include exhibits in MidAmerican's previously filed and effective registration statement on Form S-3, Registration No. 333-15387. The report included the opinion of legal counsel related to the stated registration statement. On June 18, 1998, MidAmerican filed a report on Form 8-K/A, dated June 16, 1998. The report included the opinion of legal counsel relating to tax matters concerning Medium-Term Notes, dated June 16, 1998, and the consent of independent accountants of their report dated January 23, 1998, in their audits of the financial statements and financial statement schedule of MidAmerican and its subsidiaries. -43- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN ENERGY HOLDINGS COMPANY MIDAMERICAN ENERGY COMPANY ----------------------------------- (Registrants) Date August 13, 1998 /s/ A. L. Wells - - ----------------------- ------------------------------------------------- A. L. Wells Senior Vice President and Chief Financial Officer -44- 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 JUNE 30, 1998 DECEMBER 31,1997 ---------------------------- ---------------------------- Supplemental (a) Supplemental (a) -------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $140,715 $ - $140,715 $139,332 $ - $139,332 Pre-tax (gain) loss of less than 50% owned persons .......... (785) - (785) 2,234 - 2,234 -------- ------ -------- -------- ------ -------- 139,930 - 139,930 141,566 - 141,566 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 72,050 - 72,050 68,390 - 68,390 Interest on long-term debt .................................. 84,214 3,370 87,584 89,898 3,760 93,658 Other interest charges ...................................... 11,214 - 11,214 10,034 - 10,034 Preferred stock dividends of subsidiary...................... 4,953 - 4,953 6,488 - 6,488 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 7,980 - 7,980 Interest on leases .......................................... 235 - 235 268 - 268 -------- ------ -------- -------- ------ -------- 180,646 3,370 184,016 183,058 3,760 186,818 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 320,576 3,370 323,946 324,624 3,760 328,384 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 84,214 3,370 87,584 89,898 3,760 93,658 Other interest charges ...................................... 11,214 - 11,214 10,034 - 10,034 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 7,980 - 7,980 Interest on leases .......................................... 235 - 235 268 - 268 -------- ------ -------- -------- ------ -------- Total fixed charges ....................................... 103,643 3,370 107,013 108,180 3,760 111,940 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.09 - 3.03 3.00 - 2.93 ======== ====== ======== ======== ====== ======== Preferred stock dividends of subsidiary ..................... $ 4,953 $ - $ 4,953 $ 6,488 $ - $ 6,488 Ratio of net income before income taxes to net income ....... 1.4946 - 1.4946 1.4690 - 1.4690 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 7,403 - 7,403 9,531 - 9,531 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 111,046 3,370 114,416 117,711 3,760 121,471 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.89 - 2.83 2.76 - 2.70 ======== ====== ======== ======== ====== ========
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 31,1996 DECEMBER 31,1995 ------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $143,761 $ - $143,761 $119,705 $ - $119,705 Pre-tax (gain) loss of less than 50% owned persons .......... (698) - (698) 9,079 - 9,079 -------- ------ -------- -------- ------ -------- 143,063 - 143,063 128,784 - 128,784 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 98,422 - 98,422 66,803 - 66,803 Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 - 10,941 9,449 - 9,449 Preferred stock dividends of subsidiary...................... 10,401 - 10,401 8,059 - 8,059 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ -------- 223,336 3,615 226,951 190,949 4,595 195,544 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 366,399 3,615 370,014 319,733 4,595 324,328 -------- ------ --------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 - 10,941 9,449 - 9,449 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ --------- -------- ------ -------- Total fixed charges ....................................... 114,513 3,615 118,128 116,087 4,595 120,682 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.20 - 3.13 2.75 - 2.69 ======== ====== ========= ======== ====== ======== Preferred stock dividends of subsidiary ..................... $ 10,401 $ - $ 10,401 $ 8,059 $ - $ 8,059 Ratio of net income before income taxes to net income ....... 1.6384 - 1.6384 1.5229 - 1.5229 -------- ------ --------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 17,041 - 17,041 12,273 - 12,273 -------- ------ --------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 131,554 3,615 135,169 128,360 4,595 132,955 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.79 - 2.74 2.49 - 2.44 ======== ====== ========= ======== ====== ========
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 31,1994 DECEMBER 31,1993 ------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- --------- ---------- -------- Income from continuing operations .......................... $123,098 $ - $123,098 $134,325 $ - $134,325 Pre-tax (gain) loss of less than 50% owned persons ......... (270) - (270) (597) - (597) -------- ------ -------- -------- ------ -------- 122,828 - 122,828 133,728 - 133,728 -------- ------ --------- -------- ------ -------- Add (Deduct): Total income taxes ......................................... 60,457 - 60,457 67,485 - 67,485 Interest on long-term debt ................................. 101,267 5,428 106,695 107,044 5,678 112,722 Other interest charges ..................................... 6,446 - 6,446 5,066 - 5,066 Preferred stock dividends of subsidiary..................... 10,551 - 10,551 8,367 - 8,367 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ -------- 179,932 5,428 185,360 189,838 5,678 195,516 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ..................... 302,760 5,428 308,188 323,566 5,678 329,244 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt ................................. 101,267 5,428 106,695 107,044 5,678 112,722 Other interest charges ..................................... 6,446 - 6,446 5,066 - 5,066 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ --------- -------- ------ -------- Total fixed charges ...................................... 108,924 5,428 114,352 113,986 5,678 119,664 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges ......................... 2.78 - 2.70 2.84 - 2.75 ======== ====== ========= ======== ====== ======== Preferred stock dividends of subsidiary .................... $ 10,551 $ - $ 10,551 $ 8,367 $ - $ 8,367 Ratio of net income before income taxes to net income ...... 1.4524 - 1.4524 1.4729 - 1.4729 -------- ------ --------- -------- ------ -------- Preferred stock dividend requirements before income tax .... 15,324 - 15,324 12,324 - 12,324 -------- ------ --------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements ... 124,248 5,428 129,676 126,310 5,678 131,988 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............. 2.44 - 2.38 2.56 - 2.49 ======== ====== ========= ======== ====== ========
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 JUNE 30,1998 DECEMBER 31,1997 -------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ......................... $120,454 $ - $120,454 $125,941 $ - $125,941 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes ........................................ 74,739 - 74,739 76,317 - 76,317 Interest on long-term debt ................................ 74,047 3,370 77,417 78,120 3,760 81,880 Other interest charges .................................... 11,282 - 11,282 10,027 - 10,027 Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980 Interest on leases ........................................ 235 - 235 268 - 268 -------- ------ -------- -------- ------ -------- 168,283 3,370 171,653 172,712 3,760 176,472 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges .................... 288,737 3,370 292,107 298,653 3,760 302,413 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt ................................ 74,047 3,370 77,417 78,120 3,760 81,880 Other interest charges .................................... 11,282 - 11,282 10,027 - 10,027 Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980 Interest on leases ........................................ 235 - 235 268 - 268 -------- ------ -------- -------- ------ -------- Total fixed charges...................................... 93,544 3,370 96,914 96,395 3,760 100,155 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges ........................ 3.09 - 3.01 3.10 - 3.02 ======== ====== ======== ======== ====== ======== Preferred stock dividends ................................. $ 4,953 $ - $ 4,953 $ 6,488 $ - $ 6,488 Ratio of net income before income taxes to net income ..... 1.6205 - 1.6205 1.6060 - 1.6060 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ... 8,026 - 8,026 10,420 - 10,420 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .. 101,570 3,370 104,940 106,815 3,760 110,575 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............ 2.84 - 2.78 2.80 - 2.73 ======== ====== ======== ======== ====== ========
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 31,1996 DECEMBER 31,1995 ------------------------------ -------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $165,132 $ - $165,132 $132,489 $ - $132,489 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 112,927 - 112,927 84,098 - 84,098 Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ ------- 203,866 3,615 207,481 174,715 4,595 179,310 -------- ------ -------- -------- ------ ------- Earnings available for fixed charges ...................... 368,998 3,615 372,613 307,204 4,595 311,799 -------- ------ -------- -------- ------ ------- Fixed Charges: Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ ------- Total fixed charges 90,939 3,615 94,554 90,617 4,595 95,212 -------- ------ ------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 4.06 - 3.94 3.39 - 3.27 ======== ====== ======== ======== ====== ======= Preferred stock dividends ................................... $ 10,401 $ - $ 10,401 $ 8,059 $ - $ 8,059 Ratio of net income before income taxes to net income ....... 1.6839 - 1.6839 1.6348 - 1.6348 -------- ------ -------- -------- ------ ------- Preferred stock dividend requirements before income tax ..... 17,514 - 17,514 13,175 - 13,175 -------- ------ -------- -------- ------ ------- Fixed charges plus preferred stock dividend requirements .... 108,453 3,615 112,068 103,792 4,595 108,387 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 3.40 - 3.32 2.96 - 2.88 ======== ====== ======== ======== ====== =======
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 31,1994 DECEMBER 31,1993 ------------------------------ -------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations .......................... $121,145 $ - $121,145 $133,888 $ - $133,888 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes ......................................... 66,759 - 66,759 75,917 - 75,917 Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320 Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ ------- 148,531 5,428 153,959 163,503 5,678 169,181 -------- ------ -------- -------- ------ ------- Earnings available for fixed charges ..................... 269,676 5,428 275,104 297,391 5,678 303,069 -------- ------ -------- -------- ------ ------- Fixed Charges: Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320 Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ ------- Total fixed charges 81,772 5,428 87,200 87,586 5,678 93,264 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges ......................... 3.30 - 3.15 3.40 - 3.25 ======== ====== ======== ======== ====== ======= Preferred stock dividends .................................. $ 10,551 $ - $ 10,551 $ 8,367 $ - $ 8,367 Ratio of net income before income taxes to net income ...... 1.5511 - 1.5511 1.5670 - 1.5670 -------- ------ -------- -------- ------ ------- Preferred stock dividend requirements before income tax .... 16,366 - 16,366 13,111 - 13,111 -------- ------ -------- -------- ------ ------- Fixed charges plus preferred stock dividend requirements ... 98,138 5,428 103,566 100,697 5,678 106,375 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............. 2.75 - 2.66 2.95 - 2.85 ======== ====== ======== ======== ====== =======
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-27.1 4 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 June 30, 1998, and the related consolidated statements of income and cash flows for the six months ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0001009526 MIDAMERICAN ENERGY HOLDINGS COMPANY 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 2,605,519 883,797 361,373 388,378 168,430 4,407,497 742,684 0 396,341 1,311,583 150,000 31,760 1,043,909 0 0 167,429 219,260 0 0 0 1,483,556 4,407,497 864,951 37,760 733,968 733,968 130,983 18,536 149,519 52,026 59,733 0 59,733 56,686 35,145 238,269 0.63 0.63 Tag 37, Income Tax Expense, includes operating and nonoperating income taxes and is excluded from total operating expenses in Tag 39 and on the Consolidated Statement of Income.
EX-27.2 5 FDS -- MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of June 30, 1998, and the related consolidated statements of income and cash flows for the six months ended June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000928576 MIDAMERICAN ENERGY COMPANY 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 2,606,322 126,195 287,471 319,570 168,430 3,507,988 560,562 0 417,065 977,627 150,000 31,760 929,327 0 0 41,500 199,351 0 0 0 1,178,423 3,507,988 783,936 38,626 651,362 689,988 93,948 1,768 95,716 44,157 51,559 2,475 49,084 57,200 35,145 235,699 0 0
EX-27.3 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 June 30, 1997, and the related consolidated statements of income and cash flows for the six months ended June 30, 1997, and is qualified in its entirety by reference to such financial statements. 0001009526 MIDAMERICAN ENERGY HOLDINGS COMPANY 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 PER-BOOK 2,605,548 612,279 340,831 386,543 190,504 4,135,705 772,484 0 414,665 1,186,313 150,000 31,765 1,109,531 0 0 146,185 129,756 0 0 0 1,382,155 4,135,705 965,422 34,100 832,794 832,794 132,628 18,424 151,052 58,428 58,524 0 58,524 59,839 39,218 225,037 0.59 0.59 Tag 37, Income Tax Expense, includes operating and nonoperating income taxes and is excluded from total operating expenses in Tag 39 and on the Consolidated Statement of Income. Tag 41 includes $174,000 of income from Discontinued Operations, net of income taxes.
-----END PRIVACY-ENHANCED MESSAGE-----