-----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, TUlsTXZmrbKyYc1cpQXFdASG0d9hm21DtO8Q1AX6As4qTdB0XVS16mgQD5gBaNX8 QYsjdpLr7LvJErnoerjIBw== 0001098296-03-000007.txt : 20031105 0001098296-03-000007.hdr.sgml : 20031105 20031105151359 ACCESSION NUMBER: 0001098296-03-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY CO CENTRAL INDEX KEY: 0000928576 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 421425214 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-15387 FILM NUMBER: 03979309 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: P O BOX 657 CITY: DES MOINES STATE: IA ZIP: 50306-9244 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 9244 CITY: DES MOINES STATE: IA ZIP: 50306-9244 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN FUNDING LLC CENTRAL INDEX KEY: 0001098296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 470819200 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-90553 FILM NUMBER: 03979308 BUSINESS ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303 BUSINESS PHONE: 515-242-4300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303 10-Q 1 mecq93003.txt MIDAMERICAN FUNDING, LLC/MIDAMERICAN ENERGY 9-03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 Commission Registrant's Name, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. - ----------- ---------------------------- ------------------ 333-90553 MIDAMERICAN FUNDING, LLC 47-0819200 (AN IOWA LIMITED LIABILITY COMPANY) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (AN IOWA CORPORATION) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of October 27, 2003, all of the member's equity of MidAmerican Funding, LLC was held by its parent company, MidAmerican Energy Holdings Company. As of October 27, 2003, all 70,980,203 outstanding shares of MidAmerican Energy Company's voting stock were held by its parent company, MHC Inc., a direct, wholly owned subsidiary of MidAmerican Funding, LLC. This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and MidAmerican Energy Company. Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, MidAmerican Energy Company makes no representation as to information relating to any other subsidiary of MidAmerican Funding, LLC. TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements.............................................. 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 38 Item 4. Controls and Procedures........................................... 38 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................. 39 Item 2. Changes in Securities and Use of Proceeds......................... 39 Item 3. Defaults Upon Senior Securities................................... 39 Item 4. Submission of Matters to a Vote of Security Holders............... 39 Item 5. Other Information................................................. 39 Item 6. Exhibits and Reports on Form 8-K.................................. 39 SIGNATURES................................................................. 40 EXHIBIT INDEX ............................................................. 41 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Page ---- MidAmerican Energy Company Independent Accountants' Report............................................ 4 Consolidated Balance Sheets................................................ 5 Consolidated Statements of Income.......................................... 6 Consolidated Statements of Comprehensive Income............................ 7 Consolidated Statements of Cash Flows...................................... 8 Notes to Consolidated Financial Statements................................. 9 MidAmerican Funding, LLC Independent Accountants' Report............................................ 14 Consolidated Balance Sheets................................................ 15 Consolidated Statements of Income.......................................... 16 Consolidated Statements of Comprehensive Income............................ 17 Consolidated Statements of Cash Flows...................................... 18 Notes to Consolidated Financial Statements................................. 19 -3- INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Shareholder MidAmerican Energy Company Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Company and subsidiaries (the "Company") as of September 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2003 and 2002, and of cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Energy Company and subsidiaries as of December 31, 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa November 3, 2003 -4- MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (In thousands)
AS OF ---------------------------- SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ (UNAUDITED) ASSETS UTILITY PLANT, NET Electric .............................................. $ 5,015,716 $ 4,731,002 Gas ................................................... 909,061 900,209 ----------- ----------- 5,924,777 5,631,211 Accumulated depreciation and amortization ............. (3,185,004) (3,011,123) ----------- ----------- 2,739,773 2,620,088 Construction work in progress ......................... 127,755 205,988 ----------- ----------- 2,867,528 2,826,076 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ............................. 106,665 28,500 Receivables, net ...................................... 245,014 321,321 Inventories ........................................... 85,044 88,492 Other ................................................. 15,870 28,655 ----------- ----------- 452,593 466,968 ----------- ----------- INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 285,878 273,864 REGULATORY ASSETS ..................................... 278,803 192,514 OTHER ASSETS .......................................... 36,966 52,457 ----------- ----------- TOTAL ASSETS .......................................... $ 3,921,768 $ 3,811,879 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity ........................... $ 1,284,011 $ 1,307,067 MidAmerican Energy preferred securities ............... 31,759 31,759 Long-term debt, excluding current portion ............. 1,085,416 947,691 ----------- ----------- 2,401,186 2,286,517 ----------- ----------- CURRENT LIABILITIES Notes payable ......................................... - 55,000 Current portion of long-term debt ..................... 56,771 105,727 Accounts payable ...................................... 154,317 239,531 Taxes accrued ......................................... 111,211 83,063 Interest accrued ...................................... 16,346 9,731 Other ................................................. 72,960 55,464 ----------- ----------- 411,605 548,516 ----------- ----------- OTHER LIABILITIES Deferred income taxes ................................. 425,271 424,153 Investment tax credits ................................ 53,604 56,886 Asset retirement obligations .......................... 287,097 159,757 Regulatory liabilities ................................ 131,054 118,011 Other ................................................. 211,951 218,039 ----------- ----------- 1,108,977 976,846 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES .................. $ 3,921,768 $ 3,811,879 =========== ===========
The accompanying notes are an integral part of these financial statements. -5- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- -------------------------- 2003 2002 2003 2002 --------- --------- ----------- ----------- (UNAUDITED) OPERATING REVENUES Regulated electric .................... $ 422,565 $ 419,542 $ 1,066,794 $ 1,052,130 Regulated gas ......................... 110,882 96,163 679,736 442,290 Nonregulated .......................... 42,554 38,676 180,550 126,933 --------- --------- ----------- ----------- 576,001 554,381 1,927,080 1,621,353 --------- --------- ----------- ----------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity ... 123,261 110,590 294,133 255,907 Cost of gas sold .................... 76,125 61,907 517,399 297,226 Other operating expenses ............ 91,157 93,810 263,026 300,001 Maintenance ......................... 37,947 30,002 103,676 90,698 Depreciation and amortization ....... 56,260 66,451 202,542 207,120 Property and other taxes ............ 19,693 19,640 59,623 56,229 --------- --------- ----------- ----------- 404,443 382,400 1,440,399 1,207,181 --------- --------- ----------- ----------- Nonregulated: Cost of sales ....................... 36,056 31,968 156,805 105,777 Other ............................... 4,311 4,439 12,379 14,665 --------- --------- ----------- ----------- 40,367 36,407 169,184 120,442 --------- --------- ----------- ----------- Total operating expenses ............ 444,810 418,807 1,609,583 1,327,623 --------- --------- ----------- ----------- OPERATING INCOME ...................... 131,191 135,574 317,497 293,730 --------- --------- ----------- ----------- NON-OPERATING INCOME Interest and dividend income .......... 633 2,377 3,142 7,654 Other income .......................... 3,239 3,342 13,138 8,063 Other expense ......................... (1,044) (2,502) (1,916) (7,245) --------- --------- ----------- ----------- 2,828 3,217 14,364 8,472 --------- --------- ----------- ----------- FIXED CHARGES Interest on long-term debt ............ 17,871 18,262 54,441 53,150 Other interest expense ................ 921 886 2,867 2,594 Preferred dividends of subsidiary trust - - - 1,574 Allowance for borrowed funds .......... (838) (895) (3,521) (2,160) --------- --------- ----------- ----------- 17,954 18,253 53,787 55,158 --------- --------- ----------- ----------- INCOME BEFORE INCOME TAXES ............ 116,065 120,538 278,074 247,044 INCOME TAXES .......................... 51,760 50,028 121,945 103,899 --------- --------- ----------- ----------- NET INCOME ............................ 64,305 70,510 156,129 143,145 PREFERRED DIVIDENDS ................... 327 327 1,091 2,605 --------- --------- ----------- ----------- EARNINGS ON COMMON STOCK .............. $ 63,978 $ 70,183 $ 155,038 $ 140,540 ========= ========= =========== ===========
The accompanying notes are an integral part of these financial statements. -6- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- ---------------------- 2003 2002 2003 2002 -------- -------- --------- --------- (UNAUDITED) EARNINGS ON COMMON STOCK ..................... $ 63,978 $ 70,183 $ 155,038 $ 140,540 -------- -------- --------- --------- OTHER COMPREHENSIVE LOSS Unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) during period- Before income taxes ...................... (4,746) (1,665) 6,889 (3,869) Income tax (expense) benefit ............. 1,973 692 (2,864) 1,608 -------- -------- --------- --------- (2,773) (973) 4,025 (2,261) -------- -------- --------- --------- Less realized gains (losses) reflected in earnings on common stock during period- Before income taxes ...................... 3,620 1,197 16,463 817 Income tax (expense) benefit ............. (1,505) (498) (6,844) (340) -------- -------- --------- --------- 2,115 699 9,619 477 -------- -------- --------- --------- Other comprehensive loss ..................... (4,888) (1,672) (5,594) (2,738) -------- -------- --------- --------- COMPREHENSIVE INCOME ......................... $ 59,090 $ 68,511 $ 149,444 $ 137,802 ======== ======== ========= =========
The accompanying notes are an integral part of these financial statements. -7- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2003 2002 --------- --------- (UNAUDITED) NET CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 156,129 $ 143,145 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ..................................... 203,403 207,966 Deferred income taxes and investment tax credit, net .............. 1,816 2,657 Amortization of other assets and liabilities ...................... 17,508 28,209 Power purchase contract restructuring receipt ..................... - 39,100 Cash outflows of accounts receivable securitization ............... - (8,000) Impact of changes in working capital .............................. 70,317 (30,590) Other, net ........................................................ (11,350) 14,953 --------- --------- Net cash provided by operating activities ....................... 437,823 397,440 --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ................................... (226,726) (228,771) Less non-cash and change in accrued utility construction expenditures 5,855 4,146 Quad Cities Station decommissioning trust fund ...................... (6,224) (6,224) Nonregulated capital expenditures ................................... (1,032) (586) Other investing activities, net ..................................... 12,513 3,932 --------- --------- Net cash used in investing activities ............................. (215,614) (227,503) --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ...................................................... (173,591) (80,106) Issuance of long-term debt, net ..................................... 272,550 391,147 Retirement of long-term debt, including reacquisition cost .......... (188,003) (163,845) Reacquisition of preferred securities ............................... - (126,680) Net decrease in notes payable ....................................... (55,000) (89,350) --------- --------- Net cash used in financing activities ............................. (144,044) (68,834) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 78,165 101,103 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,500 20,020 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 106,665 $ 121,123 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net of amounts capitalized ........................... $ 42,777 $ 44,681 ========= ========= Income taxes paid, net .............................................. $ 74,673 $ 67,406 ========= =========
The accompanying notes are an integral part of these financial statements. -8- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The consolidated financial statements included herein have been prepared by MidAmerican Energy Company ("MidAmerican Energy"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Energy, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation. All significant intercompany transactions have been eliminated. Although MidAmerican Energy believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican Energy's latest Annual Report on Form 10-K. MidAmerican Energy is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc ("MHC"). MHC is a direct, wholly owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), whose sole member is MidAmerican Energy Holdings Company. 2. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, MidAmerican Energy adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Concurrent with the recognition of the liability, the estimated cost of an asset retirement obligation is capitalized and depreciated over the remaining life of the asset. On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset retirement obligation ("ARO") liabilities; $12.6 million of associated ARO assets, net of accumulated depreciation; $101.8 million of regulatory assets; and reclassified $1.0 million of accumulated depreciation to the ARO liability in conjunction with the adoption of SFAS No. 143. Adoption of SFAS No. 143 did not impact net income. The initial ARO liability recognized includes $266.5 million that pertains to obligations associated with the decommissioning of the Quad Cities Station. The $266.5 million includes a $159.8 million nuclear decommissioning liability that had been recorded as of December 31, 2002. As of September 30, 2003, $175.2 million of assets reflected in Investments and Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for satisfying the Quad Cities Station obligation. The change in the balance of the ARO liability during the first nine months of 2003 is summarized as follows (in thousands): Balance January 1, 2003.......................... $275,228 Capitalized accretion............................ 11,869 -------- Balance September 30, 2003....................... $287,097 ======== Accretion on the ARO liability is capitalized as a regulatory asset. In addition to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued for the cost of removing other electric and gas assets through its depreciation rates, in accordance with accepted regulatory practices. As of September 30, 2003, the estimated amount of such accruals included in accumulated depreciation was approximately $413 million based on the cost of removal component in current depreciation rates. -9- On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements and requires contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 was effective for MidAmerican Energy and MidAmerican Funding for contracts entered into or modified after June 30, 2003. Adoption of SFAS No. 149 did not have a material effect on the results of operations, financial position or cash flows of MidAmerican Energy or MidAmerican Funding. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 was effective for MidAmerican Funding and MidAmerican Energy for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the third quarter of 2003. MidAmerican Funding and MidAmerican Energy do not currently have financial instruments within the scope of SFAS No. 150. 3. ENVIRONMENTAL MATTERS a. Manufactured Gas Plant Facilities: The United States Environmental Protection Agency ("EPA"), and the state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute a health or environmental risk, and whether MidAmerican Energy has any responsibility for remedial action. MidAmerican Energy is actively working with the regulatory agencies and has received regulatory closure on four sites. MidAmerican Energy is continuing to evaluate several of the sites to determine the future liability, if any, for conducting site investigations or other site activity. MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be approximately $15 million to $54 million. As of September 30, 2003, MidAmerican Energy has recorded a $15.9 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. MidAmerican Energy projects that these amounts will be incurred or paid over the next four years. The estimated liability is determined through a site-specific cost evaluation process. First, a determination is made as to whether MidAmerican Energy has potential legal liability for a site and whether information exists to indicate that contaminated wastes remain at the site. If so, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. If it is determined during the preliminary investigation that remedial action is required, then the best estimate of the costs is accrued. The estimate includes incremental direct costs of remediation, site monitoring costs and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. Insurance recoveries have been received for -10- some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board ("IUB"), and are recorded as a regulatory liability. Although the timing of potential incurred costs and recovery of such costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position, results of operations or cash flows. b. Air Quality: In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). The standards were subjected to legal proceedings, and in February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. As a result of a decision rendered by the United States Circuit Court of Appeals for the District of Columbia, the EPA is moving forward in implementation of the ozone and fine particulate standards and is analyzing existing monitored data to determine attainment status. The impact of the standards on MidAmerican Energy is currently unknown. MidAmerican Energy's generating stations may be subject to emission reductions if the stations are located in nonattainment areas or contribute to nonattainment areas in other states. As part of state implementation plans to achieve attainment of the standards, MidAmerican Energy could be required to install control equipment on its generating stations or decrease the number of hours during which these stations operate. The ozone and fine particulate matter standards could, in whole or in part, be superceded by one of a number of multi-pollutant emission reduction proposals currently under consideration at the federal level. In July 2002, legislation was introduced in Congress to implement the Administration's "Clear Skies Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen oxides and mercury through a cap-and-trade system. Reductions would begin in 2008 with additional emission reductions being phased in through 2018. While legislative action is necessary for the Clear Skies Initiative or other multi-pollutant emission reduction initiatives to become effective, MidAmerican Energy has implemented a planning process that forecasts the site-specific controls and actions required to meet emissions reductions of this nature. On April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy filed with the IUB its first multi-year plan and budget for managing regulated emissions from its generating facilities in a cost-effective manner. An administrative law judge issued a ruling approving MidAmerican Energy's plan but disallowing the proposed recovery of plan costs through a tracker mechanism. MidAmerican Energy and the Iowa Office of Consumer Advocate each appealed the administrative law judge's ruling. On July 17, 2003, the IUB issued an order affirming the administrative law judge's decision. Accordingly, the IUB has rejected the future application of a tracker mechanism to recover emission reduction costs. However, the approved expenditures will not be subject to a subsequent prudence review in a future electric rate case. In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the New Source Review and the New Source Performance Standards of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy received requests from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for a number of its generating plants. MidAmerican Energy has submitted information to the EPA in responses to these requests, and there are currently no outstanding data requests pending from the EPA. MidAmerican Energy cannot predict the outcome of these requests at this time. -11- 4. RATE MATTERS Under two settlement agreements approved by the IUB, MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000, are effectively frozen through December 31, 2010. The settlement agreements specifically allow the filing of electric rate design and/or cost of service rate changes that are intended to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but could result in changes to individual tariffs. The settlement agreements also each provide that portions of revenues associated with Iowa retail electric returns on equity within specified ranges will be recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investment. Under the first settlement agreement, which was approved by the IUB on December 21, 2001, and is effective through December 31, 2005, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year is recorded as a regulatory liability. The second settlement agreement, which was filed as part of MidAmerican Energy's application for ratemaking principles on a wind power project and was approved by the IUB on October 17, 2003, provides that during the period January 1, 2006 through December 31, 2010, an amount equal to 40% of revenues associated with returns on equity between 11.75% and 13%, 50% of revenues associated with returns on equity between 13% and 14%, and 83.3% of revenues associated with returns on equity above 14%, in each year will be recorded as a regulatory liability. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Interest expense is accrued on the portion of the regulatory liability related to prior years. Beginning in 2002, the liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction associated with generating plant additions. As of September 30, 2003 and December 31, 2002, the related regulatory liability reflected on the Consolidated Balance Sheets was $123.6 million and $102.9 million, respectively. In addition, the 2003 settlement agreement provides that if Iowa retail electric returns on equity fall below 10% in any consecutive 12-month period after January 1, 2006, MidAmerican Energy may seek to file for a general increase in rates. However, prior to filing for a general increase in rates, MidAmerican Energy is required by the settlement agreement to conduct 30 days of good faith negotiations with all of the signatories to the settlement agreement to attempt to avoid a general increase in rates. Illinois law provides for Illinois earnings above a computed level of return on common equity to be shared equally between regulated retail electric customers and MidAmerican Energy. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which sharing must occur for 2003 is 13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of electric assets. On November 8, 2002, the IUB approved a settlement agreement previously filed with it by MidAmerican Energy and the Iowa Office of Consumer Advocate. The settlement agreement provided for an increase in rates of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas customers and effectively froze base rates through November 2004. However, MidAmerican Energy will continue collecting fluctuating gas costs through its purchased gas adjustment clause. The new rates were implemented for usage beginning November 25, 2002. 5. SEGMENT INFORMATION MidAmerican Energy has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense, income tax expense and equity in the net income or loss of investees are allocated to each segment. -12- The energy delivery and transmission segments and substantially all of the generation segment are regulated as to rates, and other factors, related to services to external customers. For internal segment reporting purposes, MidAmerican Energy has developed transfer prices for services provided between the segments. MidAmerican Energy's external revenues by product and services are displayed on the Consolidated Statements of Income. The following tables provide MidAmerican Energy's operating revenues, income before income taxes and total assets on an operating segment basis (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, -------------------------- -------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Operating revenues: External revenues - Generation ................. $ 127,730 $ 130,338 $ 393,438 $ 353,262 Energy delivery ............ 400,954 399,572 1,345,689 1,178,692 Transmission ............... 6,178 5,553 18,282 15,689 Marketing & sales .......... 41,139 18,918 169,671 73,710 ----------- ----------- ----------- ----------- Total .................... 576,001 554,381 1,927,080 1,621,353 ----------- ----------- ----------- ----------- Intersegment revenues - Generation ................. 216,625 228,964 495,669 521,291 Transmission ............... 14,487 13,803 43,460 41,404 Marketing & sales .......... 1,100 1,276 1,854 2,052 ----------- ----------- ----------- ----------- Total .................... 232,212 244,043 540,983 564,747 Intersegment eliminations .... (232,212) (244,043) (540,983) (564,747) ----------- ----------- ----------- ----------- Consolidated ............... $ 576,001 $ 554,381 $ 1,927,080 $ 1,621,353 =========== =========== =========== =========== Income before income taxes: Generation ................... $ 97,299 $ 104,454 $ 160,259 $ 145,627 Energy delivery .............. 4,566 3,399 78,113 66,831 Transmission ................. 11,393 10,318 34,440 31,162 Marketing & sales ............ 2,480 2,040 4,171 819 ----------- ----------- ----------- ----------- Total ...................... 115,738 120,211 276,983 244,439 Preferred dividends .......... 327 327 1,091 2,605 ----------- ----------- ----------- ----------- Consolidated ............... $ 116,065 $ 120,538 $ 278,074 $ 247,044 =========== =========== =========== ===========
As of ---------------------------- September 30, December 31, 2003 2002 ------------- ------------ Total assets: Generation ................... $ 1,419,142 $ 1,393,271 Energy delivery .............. 2,306,012 2,224,238 Transmission ................. 228,624 222,051 Marketing & sales ............ 43,395 52,143 ----------- ----------- Total ...................... 3,997,173 3,891,703 Reclassifications and intersegment eliminations(a) (75,405) (79,824) ----------- ----------- Consolidated ................. $ 3,921,768 $ 3,811,879 =========== ===========
(a) Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables. -13- INDEPENDENT ACCOUNTANTS' REPORT Board of Managers and Member MidAmerican Funding, LLC Des Moines, Iowa We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries (the "Company") as of September 30, 2003, and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2003 and 2002, and of cash flows for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Funding, LLC and subsidiaries as of December 31, 2002, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa November 3, 2003 -14- MIDAMERICAN FUNDING, LLC CONSOLIDATED BALANCE SHEETS (In thousands)
AS OF ---------------------------- SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ (UNAUDITED) ASSETS UTILITY PLANT, NET Electric .............................................. $ 5,015,716 $ 4,731,002 Gas ................................................... 909,061 900,209 ----------- ----------- 5,924,777 5,631,211 Accumulated depreciation and amortization ............. (3,185,004) (3,011,123) ----------- ----------- 2,739,773 2,620,088 Construction work in progress ......................... 127,755 205,988 ----------- ----------- 2,867,528 2,826,076 ----------- ----------- CURRENT ASSETS Cash and cash equivalents ............................. 106,705 28,915 Receivables, net ...................................... 246,486 321,698 Inventories ........................................... 85,044 88,492 Other ................................................. 16,955 35,009 ----------- ----------- 455,190 474,114 ----------- ----------- INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 344,386 333,382 GOODWILL .............................................. 1,275,143 1,275,143 REGULATORY ASSETS ..................................... 278,803 192,514 OTHER ASSETS .......................................... 37,253 52,755 ----------- ----------- TOTAL ASSETS .......................................... $ 5,258,303 $ 5,153,984 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Member's equity ....................................... $ 1,823,314 $ 1,867,119 MidAmerican Energy preferred securities ............... 31,759 31,759 Long-term debt, excluding current portion ............. 1,785,417 1,647,691 ----------- ----------- 3,640,490 3,546,569 ----------- ----------- CURRENT LIABILITIES Notes payable ......................................... - 55,000 Note payable to affiliate ............................. 31,200 - Current portion of long-term debt ..................... 56,771 105,727 Accounts payable ...................................... 156,613 242,733 Taxes accrued ......................................... 111,526 85,987 Interest accrued ...................................... 20,370 25,487 Other ................................................. 73,604 56,291 ----------- ----------- 450,084 571,225 ----------- ----------- OTHER LIABILITIES Deferred income taxes ................................. 464,589 461,862 Investment tax credits ................................ 53,605 56,886 Asset retirement obligations .......................... 287,097 159,757 Regulatory liabilities ................................ 131,054 118,011 Other ................................................. 231,384 239,674 ----------- ----------- 1,167,729 1,036,190 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES .................. $ 5,258,303 $ 5,153,984 =========== ===========
The accompanying notes are an integral part of these financial statements. -15- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF INCOME (In thousands)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ -------------------------- 2003 2002 2003 2002 --------- ----------- ----------- ----------- (UNAUDITED) OPERATING REVENUES Regulated electric .......................... $ 422,565 $ 419,542 $ 1,066,794 $ 1,052,130 Regulated gas ............................... 110,882 96,163 679,736 442,290 Nonregulated ................................ 43,834 40,579 183,107 130,755 --------- ----------- ----------- ----------- 577,281 556,284 1,929,637 1,625,175 --------- ----------- ----------- ----------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity ......... 123,261 110,590 294,133 255,907 Cost of gas sold .......................... 76,125 61,907 517,399 297,226 Other operating expenses .................. 91,157 93,810 263,026 300,001 Maintenance ............................... 37,946 30,002 103,675 90,698 Depreciation and amortization ............. 56,260 66,451 202,542 207,120 Property and other taxes .................. 19,693 19,640 59,623 56,229 --------- ----------- ----------- ----------- 404,442 382,400 1,440,398 1,207,181 --------- ----------- ----------- ----------- Nonregulated: Cost of sales ............................. 36,381 32,487 157,277 106,622 Other ..................................... 5,752 7,594 15,909 21,373 --------- ----------- ----------- ----------- 42,133 40,081 173,186 127,995 --------- ----------- ----------- ----------- Total operating expenses .................. 446,575 422,481 1,613,584 1,335,176 --------- ----------- ----------- ----------- OPERATING INCOME ............................ 130,706 133,803 316,053 289,999 --------- ----------- ----------- ----------- NON-OPERATING INCOME Interest and dividend income ................ 667 9,004 3,132 17,761 Marketable securities gains and (losses), net 3 (1,697) 204 (5,221) Other income ................................ 4,294 6,916 16,103 19,758 Other expense ............................... (1,178) (9,229) (4,386) (14,243) --------- ----------- ----------- ----------- 3,786 4,994 15,053 18,055 --------- ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt .................. 29,653 30,230 89,786 89,052 Other interest expense ...................... 993 886 3,031 2,598 Preferred dividends of subsidiaries ......... 327 327 1,091 4,179 Allowance for borrowed funds ................ (838) (895) (3,521) (2,160) --------- ----------- ----------- ----------- 30,135 30,548 90,387 93,669 --------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES .................. 104,357 108,249 240,719 214,385 INCOME TAXES ................................ 46,913 44,702 106,629 89,705 --------- ----------- ----------- ----------- NET INCOME .................................. $ 57,444 $ 63,547 $ 134,090 $ 124,680 ========= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -16- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------- ---------------------- 2003 2002 2003 2002 -------- -------- --------- --------- (UNAUDITED) NET INCOME ................................................ $ 57,444 $ 63,547 $ 134,090 $ 124,680 -------- -------- --------- --------- OTHER COMPREHENSIVE LOSS Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) during period- Before income taxes ................................... 242 (1,009) 378 (9,623) Income tax (expense) benefit .......................... (85) 353 (133) 3,368 -------- -------- --------- --------- 157 (656) 245 (6,255) -------- -------- --------- --------- Less realized gains (losses) reflected in net income during period- Before income taxes ................................... - (1,812) 71 (4,743) Income tax (expense) benefit .......................... - 634 (25) 1,660 -------- -------- --------- --------- - (1,178) 46 (3,083) -------- -------- --------- --------- Net unrealized gains (losses) ....................... 157 522 199 (3,172) -------- -------- --------- --------- Unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) during period- Before income taxes ................................... (4,746) (1,665) 6,889 (3,869) Income tax (expense) benefit .......................... 1,973 692 (2,864) 1,608 -------- -------- --------- --------- (2,773) (973) 4,025 (2,261) -------- -------- --------- --------- Less realized gains (losses) reflected in net income during period- Before income taxes ................................... 3,620 1,197 16,463 817 Income tax (expense) benefit .......................... (1,505) (498) (6,844) (340) -------- -------- --------- --------- 2,115 699 9,619 477 -------- -------- --------- --------- Net unrealized losses ............................... (4,888) (1,672) (5,594) (2,738) -------- -------- --------- --------- Other comprehensive loss .................................. (4,731) (1,150) (5,395) (5,910) -------- -------- --------- --------- COMPREHENSIVE INCOME ...................................... $ 52,713 $ 62,397 $ 128,695 $ 118,770 ======== ======== ========= =========
The accompanying notes are an integral part of these financial statements. -17- MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 --------- --------- (UNAUDITED) NET CASH FLOWS FROM OPERATING ACTIVITIES Net income .......................................................... $ 134,090 $ 124,680 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ..................................... 203,550 208,725 Deferred income taxes and investment tax credit, net .............. 3,134 333 Amortization of other assets and liabilities ...................... 15,930 26,165 Loss from impairment of assets and investments .................... 2,069 4,363 Gain on sale of securities, assets and other investments .......... (151) (3,458) Income on equity investments ...................................... (1,753) (1,916) Power purchase contract restructuring receipt ..................... - 39,100 Cash outflows of accounts receivable securitization ............... - (8,000) Impact of changes in working capital .............................. 59,061 (49,069) Other, net ........................................................ (8,221) 19,129 --------- --------- Net cash provided by operating activities ....................... 407,709 360,052 --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ................................... (226,726) (228,771) Less non-cash and change in accrued utility construction expenditures 5,855 4,146 Quad Cities Station decommissioning trust fund ...................... (6,224) (6,224) Nonregulated capital expenditures ................................... (1,806) (990) Proceeds from sale of assets and other investments .................. 326 11,520 Notes receivable from affiliate ..................................... - 34,164 Other investing activities, net ..................................... 10,409 6,995 --------- --------- Net cash used in investing activities ............................. (218,166) (179,160) --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid ............................................... (172,500) (77,500) Issuance of long-term debt, net ..................................... 272,550 391,147 Retirement of long-term debt, including reacquisition cost .......... (188,003) (163,845) Reacquisition of preferred securities ............................... - (126,680) Note payable to affiliate ........................................... 31,200 - Net decrease in notes payable ....................................... (55,000) (91,780) --------- --------- Net cash used in financing activities ............................. (111,753) (68,658) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 77,790 112,234 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,915 20,270 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 106,705 $ 132,504 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Interest paid, net of amounts capitalized ........................... $ 90,003 $ 92,784 ========= ========= Income taxes paid, net .............................................. $ 60,666 $ 57,384 ========= =========
The accompanying notes are an integral part of these financial statements. -18- MIDAMERICAN FUNDING, LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The consolidated financial statements included herein have been prepared by MidAmerican Funding, LLC ("MidAmerican Funding"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Funding, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation. All significant intercompany transactions have been eliminated. Although MidAmerican Funding believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican Funding's latest Annual Report on Form 10-K. MidAmerican Funding is an Iowa limited liability company with MidAmerican Energy Holdings Company as its sole member. MidAmerican Funding's direct, wholly owned subsidiary is MHC Inc. ("MHC"). MHC, MidAmerican Funding and MidAmerican Energy Holdings Company are exempt public utility holding companies headquartered in Des Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company, a public utility with electric and natural gas operations. Other direct, wholly owned subsidiaries of MHC include InterCoast Capital Company (previously named MidAmerican Capital Company), Midwest Capital Group, Inc., MidAmerican Services Company and MEC Construction Services Co. 2. NEW ACCOUNTING PRONOUNCEMENTS Refer to Note 2 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's new accounting pronouncements. 3. ENVIRONMENTAL MATTERS Refer to Note 3 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's environmental matters. 4. RATE MATTERS Refer to Note 4 of MidAmerican Energy's Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's rate matters. 5. SEGMENT INFORMATION MidAmerican Funding has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense, income tax expense and equity in the net income or loss of investees are allocated to each segment, except for interest in MidAmerican Funding parent debt. -19- The energy delivery and transmission segments and substantially all of the generation segment are regulated as to rates, and other factors, related to services to external customers. For internal segment reporting purposes, MidAmerican Energy has developed transfer prices for services provided between the segments. MidAmerican Funding's external revenues by product and services are displayed on the Consolidated Statements of Income. The following tables provide MidAmerican Funding's operating revenues, income before income taxes and total assets on an operating segment basis (in thousands):
Three Months Nine Months Ended September 30, Ended September 30, ---------------------- -------------------------- 2003 2002 2003 2002 --------- --------- ----------- ----------- Operating revenues: External revenues - Generation .................. $ 127,730 $ 130,338 $ 393,438 $ 353,262 Energy delivery ............. 400,954 399,572 1,345,689 1,178,692 Transmission ................ 6,178 5,553 18,282 15,689 Marketing & sales ........... 41,139 18,918 169,671 73,710 Other ....................... 1,280 1,903 2,557 3,822 --------- --------- ----------- ----------- Total ..................... 577,281 556,284 1,929,637 1,625,175 --------- --------- ----------- ----------- Intersegment revenues - Generation .................. 216,625 228,964 495,669 521,291 Transmission ................ 14,487 13,803 43,460 41,404 Marketing & sales ........... 1,100 1,276 1,854 2,052 --------- --------- ----------- ----------- Total ..................... 232,212 244,043 540,983 564,747 Intersegment eliminations ..... (232,212) (244,043) (540,983) (564,747) --------- --------- ----------- ----------- Consolidated ................ $ 577,281 $ 556,284 $ 1,929,637 $ 1,625,175 ========= ========= =========== =========== Income before income taxes: Generation .................... $ 97,299 $ 104,454 $ 160,259 $ 145,627 Energy delivery ............... 4,566 3,399 78,113 66,831 Transmission .................. 11,393 10,318 34,440 31,162 Marketing & sales ............. 2,480 2,040 4,171 819 Other ......................... (11,381) (11,962) (36,264) (30,054) --------- --------- ----------- ----------- Total ....................... $ 104,357 $ 108,249 $ 240,719 $ 214,385 ========= ========= =========== ===========
As of ---------------------------- September 30, December 31, 2003 2002 ------------- ------------ Total assets (a): Generation .................... $ 2,346,961 $ 2,321,090 Energy delivery ............... 2,569,164 2,487,390 Transmission .................. 312,796 306,223 Marketing & sales ............. 43,395 52,143 Other ......................... 208,554 179,141 ----------- ----------- Total ......................... 5,480,870 5,345,987 Reclassifications and intersegment eliminations(b) (222,567) (192,003) ----------- ----------- Consolidated .................. $ 5,258,303 $ 5,153,984 =========== =========== (a) Total assets by operating segment reflect the assignment of goodwill to applicable reporting units in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." (b) Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables. -20- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary within MidAmerican Funding, LLC ("MidAmerican Funding"). Management's Discussion and Analysis ("MD&A") addresses the financial statements of MidAmerican Funding and MidAmerican Energy as presented in this joint filing. Information in MD&A related to MidAmerican Energy, whether or not segregated, also relates to MidAmerican Funding. Information related to other subsidiaries of MidAmerican Funding pertains only to the discussion of the financial condition and results of operations of MidAmerican Funding. Where necessary, discussions have been segregated and labeled to allow the reader to identify information applicable only to MidAmerican Funding. MD&A should be read in conjunction with the financial statements included in this Form 10-Q and the notes to those statements, together with MD&A in MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K. FORWARD-LOOKING STATEMENTS From time to time, MidAmerican Funding, or one of its subsidiaries individually, including MidAmerican Energy, may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of MidAmerican Funding or any of its subsidiaries individually. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of MidAmerican Funding's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. These type of forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of MidAmerican Funding to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, MidAmerican Funding has identified important factors that could cause actual results to differ materially from those expectations, including weather effects on sales volumes and revenues, fuel prices, fuel transportation and other operating uncertainties, acquisition uncertainty, uncertainties relating to economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, utility industry deregulation and competition. Neither MidAmerican Funding, nor any one of its subsidiaries individually, assumes any responsibility to update forward-looking information contained herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES MidAmerican Energy's and MidAmerican Funding's significant accounting policies are described in their respective Note (1) of Notes to Consolidated Financial Statements in Item 15 of their most recently filed Annual Report on Form 10-K. For a discussion of their critical accounting policies and estimates, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in their most recently filed Annual Report on Form 10-K. NEW ACCOUNTING PRONOUNCEMENT In January 2003, MidAmerican Energy adopted Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Concurrent with the recognition of the liability, the estimated cost of an asset retirement obligation is capitalized and depreciated over the remaining life of the asset. -21- On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset retirement obligation ("ARO") liabilities; $12.6 million of associated ARO assets, net of accumulated depreciation; $101.8 million of regulatory assets; and reclassified $1.0 million of accumulated depreciation to the ARO liability in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not impact net income. The initial ARO liability recognized includes $266.5 million that pertains to obligations associated with the decommissioning of the Quad Cities Station. The $266.5 million includes a $159.8 million nuclear decommissioning liability that had been recorded as of December 31, 2002. As of September 30, 2003, $175.2 million of assets reflected in Investments and Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for satisfying the Quad Cities Station obligation. The change in the balance of the ARO liability during the first nine months of 2003 is summarized as follows (in thousands): Balance January 1, 2003.......................... $275,228 Capitalized accretion............................ 11,869 -------- Balance September 30, 2003....................... $287,097 ======== Accretion on the ARO liability is capitalized as a regulatory asset. In addition to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued for the cost of removing other electric and gas assets through its depreciation rates, in accordance with accepted regulatory practices. As of September 30, 2003, the estimated amount of such accruals included in accumulated depreciation was approximately $413 million based on the cost of removal component in current depreciation rates. On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 also amends certain other existing pronouncements and requires contracts with comparable characteristics to be accounted for similarly. In particular, SFAS No. 149 clarifies when a contract with an initial net investment meets the characteristic of a derivative and when a derivative that contains a financing component will require special reporting in the statement of cash flows. SFAS No. 149 was effective for MidAmerican Energy and MidAmerican Funding for contracts entered into or modified after June 30, 2003. Adoption of SFAS No. 149 did not have a material effect on the results of operations, financial position or cash flows of MidAmerican Energy and MidAmerican Funding. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 was effective for MidAmerican Funding and MidAmerican Energy for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the third quarter of 2003. MidAmerican Funding and MidAmerican Energy do not currently have financial instruments within the scope of SFAS No. 150. -22- RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 Regulated Electric Gross Margin - ------------------------------- Three Months Ended September 30, ------------------- 2003 2002 ------ ------ (In millions) Operating revenues ..................... $422.6 $419.5 Less cost of fuel, energy and capacity.. 123.3 110.6 ------ ------ Electric gross margin ................ $299.3 $308.9 ====== ====== Electric gross margin for the third quarter of 2003 decreased $9.6 million compared to the third quarter of 2002. Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power District ("NPPD") restructured their contract for Cooper Nuclear Station. Accordingly, MidAmerican Energy's costs for energy and capacity purchased from Cooper Nuclear Station are now classified differently on the statement of income. As a result, electric gross margin for the third quarter of 2003 decreased by $3.5 million compared to the third quarter of 2002 due to the change in classification of the related costs. Prior to August 1, 2002, only the fuel costs for energy purchased from Cooper Nuclear Station were classified as a cost of fuel, energy and capacity. Other costs under the contract were classified as other operating expenses. Following the restructuring, all costs for energy and capacity purchased under that contract are included in MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased power costs. Other operating expenses decreased accordingly. Refer to Note (1)(h) of Notes to Consolidated Financial Statements in Item 15 of MidAmerican Energy's most recently filed Annual Report on Form 10-K for a discussion of the contract restructuring. Temperature conditions during the third quarter of 2003 were milder than in the third quarter of 2002, resulting in approximately a $4.2 million decrease in electric margin. Electricity usage and rate factors not dependent on weather decreased electric margin by $3.3 million compared to the third quarter of 2002. In total, retail electric sales volumes decreased 0.7% for the three months ended September 30, 2003. Higher fuel costs related to Iowa retail electric sales, excluding the impact of restructuring the Cooper Nuclear Station contract, decreased electric margin by $6.9 million relative to the third quarter of 2002. MidAmerican Energy sells and purchases electric capacity in the wholesale market. The net margin from those sales and purchases increased $5.1 million compared to the third quarter of 2002. In addition to increased capacity sales margins, the gross margin on electric wholesale energy sales increased $2.8 million for the third quarter of 2003 due to an increase in prices, partially offset by a decrease in sales volumes, compared to the third quarter of 2002. Wholesale sales are the sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system. Regulated Gas Gross Margin - -------------------------- Three Months Ended September 30, ------------------- 2003 2002 ------ ------ (In millions) Operating revenues .......... $110.9 $ 96.2 Less cost of gas sold........ 76.1 61.9 ------ ------ Gas gross margin .......... $ 34.8 $ 34.3 ====== ====== Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas -23- sold do not affect gross margin or net income because revenues reflect comparable fluctuations from purchased gas adjustment clauses. A 51.3% increase in the average per-unit cost of gas for the three-month period ended September 30, 2003, compared to the same period in 2002, increased revenues and cost of gas sold. Gas margin for the three months ended September 30, 2003, increased $0.5 million compared to the three months ended September 30, 2002. Retail sales volumes increased 9.4% compared to the third quarter of 2002. Increases in retail gas rates that took effect subsequent to the third quarter of 2002 improved gas margin by $1.3 million compared to the third quarter of 2002. On November 8, 2002, the Iowa Utilities Board ("IUB") approved a proposed settlement agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer Advocate that provided for a final increase, implemented on November 25, 2002, of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas customers. On September 11, 2002, MidAmerican Energy received a final order from the Illinois Commerce Commission to increase its Illinois natural gas rates by $2.2 million annually and implemented the rates on September 18, 2002. Refer to the "Rate Matters" section of MD&A for comments on the Iowa gas rate settlement. Additionally, gas gross margin decreased compared to the third quarter of 2002 due to a $1.1 million decrease in revenues from the recovery of energy efficiency costs. Changes in these revenues are substantially matched with corresponding changes in other operating expenses. Regulated Operating Expenses - ---------------------------- Regulated other operating expenses for the third quarter of 2003 decreased $2.7 million compared to the third quarter of 2002. Effective August 1, 2002, MidAmerican Energy and NPPD restructured their contract for Cooper Nuclear Station. Prior to August 1, 2002, costs under the contract other than fuel costs for energy purchased were classified as other operating expenses. Following the restructuring, all costs for energy and capacity purchased under that contract are included in MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased power. As a result, other operating expenses for the third quarter of 2003 decreased by $9.6 million compared to the third quarter of 2002. The decrease in other operating expenses due to Cooper Nuclear Station was partially offset by increases totaling $3.6 million related to employee costs for compensation and health care and $2.9 million for electric distribution and transmission operations. Maintenance expenses increased $7.9 million compared to the third quarter of 2002 due primarily to a $4.9 million increase from the timing of fossil fuel generation maintenance compared to the third quarter of 2002, as well as a $1.4 million increase in general plant maintenance and a $1.0 million increase in Quad Cities Station maintenance costs. Depreciation and amortization expense decreased $10.2 million compared to the three months ended September 30, 2003, due principally to decreases in regulatory expense related to revenue sharing arrangements in Iowa and Illinois. Refer to the "Legislative and Utility Regulatory Matters" section for an explanation of these revenue sharing arrangements. Interest and Dividend Income - ---------------------------- MidAmerican Energy - The decrease in interest and dividend income was due principally to a $1.3 million decrease in interest income on a note receivable related to MidAmerican Energy's accounts receivable sales arrangement, which terminated in October 2002. -24- MidAmerican Funding - Interest income for MidAmerican Funding for the third quarter of 2002 includes $5.0 million from the settlement of an investment in a communications company. Interest income related to notes receivable with MidAmerican Funding's parent company decreased $1.3 million compared to the third quarter of 2002. The note receivable balances have been zero throughout 2003. Marketable Securities Gains and Losses, Net - ------------------------------------------- MidAmerican Funding - In the third quarter of 2002, MidAmerican Funding recorded a $1.4 million loss for other-than-temporary declines in its available-for-sale common stock investments. Other Income and Other Expense - ------------------------------ MidAmerican Energy - MidAmerican Energy's other income includes net earnings related to the cash surrender value of corporate-owned life insurance. Related net earnings increased $1.5 million to $0.8 million for the third quarter of 2003 compared to the third quarter of 2002. As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). Other income for the capitalized allowance on equity funds used during construction totaled $2.2 million in each of the third quarters of 2003 and 2002. MidAmerican Energy anticipates recording income for the allowance on equity funds used during construction over the next several years while the announced generating plants are constructed. Additionally, other income for the third quarter of 2002 reflects a $0.9 million gain from the sale of utility property. Other expense includes a discount on MidAmerican Energy's accounts receivable sold to MidAmerican Energy Funding Corporation. The discount was designed to cover the expenses of MidAmerican Energy Funding Corporation, including bad debt expense, subservicer fees, monthly administrative costs and interest. The discount was recorded in other expense because it is not reflected in utility cost of service for regulatory purposes. The discount totaled $2.2 million for the third quarter of 2002. The related arrangement terminated in October 2002. MidAmerican Funding - Other income for the third quarter of 2002 includes a $2.6 million gain on the sale of an investment in a communications company. Other expense for the third quarter of 2002 reflects a $5.1 million loss for the impairment of an equity method investment and losses totaling $1.5 million from impairments on three venture capital fund investments. Fixed Charges and Preferred Dividends - ------------------------------------- The decrease in interest on long-term debt was due to the effect of debt maturities in 2002 and 2003 offset partially by interest on $275 million of MidAmerican Energy notes issued in January 2003. -25- RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 Regulated Electric Gross Margin - ------------------------------- Nine Months Ended September 30, -------------------- 2003 2002 -------- -------- (In millions) Operating revenues ..................... $1,066.8 $1,052.1 Less cost of fuel, energy and capacity.. 294.1 255.9 -------- -------- Electric gross margin ................ $ 772.7 $ 796.2 ======== ======== Electric gross margin for the first nine months of 2003 decreased $23.5 million compared to the first nine months of 2002. Electric gross margin for the first nine months of 2003 decreased by $21.5 million compared to the first nine months of 2002 due to the change in classification of costs related to MidAmerican Energy's contract for Cooper Nuclear Station. Refer to the "Regulated Electric Gross Margin" section in three-month results of operations discussion above for additional information regarding this change. The effect of temperature conditions during the first nine months of 2003 compared to the first nine months of 2002, resulted in approximately a $6.0 million decrease in electric margin. Electricity usage and rate factors not dependent on weather decreased electric margin by $4.1 million compared to the first nine months of 2002. In total, retail electric sales volumes were relatively unchanged for the nine months ended September 30, 2003. Lower fuel costs for Iowa retail electric sales, excluding the impact of restructuring the Cooper Nuclear Station contract, increased electric margin by $3.0 million relative to first nine months of 2002. The decrease in fuel costs for Iowa electric retail sales includes the Iowa portion of $10.9 million of cost recovery recognized in the second quarter of 2003 related to MidAmerican Energy's coal purchase contract with Enron Corp. ("Enron"). In November 2001, MidAmerican Energy received collateral from Enron for costs to MidAmerican Energy related to the coal purchase contract as a result of a downgrade in Enron's credit ratings in 2001. MidAmerican Energy deferred recognition of the value of the collateral at that time, pending resolution of related bankruptcy proceedings. MidAmerican Energy and Enron agreed on a settlement of their bankruptcy claims, including the coal purchase contract, and received the final required approval in June 2003. Accordingly, MidAmerican Energy recognized the reduced costs associated with the collateral for the settlement of the coal purchase contract. The decrease in fuel costs due to the coal purchase contract with Enron was partially offset by the Iowa portion of $5.1 million of expense related to the write-off of the remaining value of failed nuclear fuel assemblies at Quad Cities Station. Electric revenues from the recovery of energy efficiency program costs increased $1.1 million compared to the first nine months of 2002. Changes in these revenues are substantially matched with corresponding changes in other operating expenses. MidAmerican Energy's gross margin on electric wholesale sales increased $3.1 million for the first nine months of 2003 compared to the first nine months of 2002 due to an increase in prices, partially offset by a decrease in sales volumes. -26- Regulated Gas Gross Margin - -------------------------- Nine Months Ended September 30, ------------------- 2003 2002 ------ ------ (In millions) Operating revenues ......... $679.7 $442.3 Less cost of gas sold....... 517.4 297.2 ------ ------ Gas gross margin ......... $162.3 $145.1 ====== ====== Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. An 83.9% increase in the average per-unit cost of gas for the nine-month period ended September 30, 2003, compared to the same period in 2002, increased revenues and cost of gas sold. Gas gross margin for the nine months ended September 30, 2003, increased $17.2 million compared to the nine months ended September 30, 2002. Increases in retail gas rates that largely took effect subsequent to the second quarter of 2002 improved gas margin by $12.6 million compared to the first nine months of 2002. In addition to the rate increases discussed in the three-month "Regulated Gas Gross Margin" section, on June 12, 2002, the IUB issued an order granting an interim rate increase of approximately $13.8 million annually, effective immediately. Also, on February 20, 2002, the South Dakota Public Utilities Commission approved a settlement agreement allowing increased natural gas rates of $3.1 million annually, effective immediately. The effect of colder temperature conditions during the first quarter of 2003 compared to the same quarter in 2002 was partially offset by the effect of milder temperature conditions in the second quarter of 2003 compared to the second quarter of 2002. Accordingly, gas gross margin for the first nine months of 2003 increased approximately $6.8 million compared to the first nine months of 2002. A $2.2 million loss on a weather hedge partially offset the increase due to temperature conditions. Other usage factors not dependent on weather decreased gas margin by $5.2 million compared to the first nine months of 2002. Total natural gas retail sales volumes increased 8.9%. Gas gross margin increased compared to the first nine months of 2002 due to a $2.0 million increase in revenues from the recovery of energy efficiency costs and a $2.7 million increase in revenues from gas transported. Regulated Operating Expenses - ---------------------------- Regulated other operating expenses for the first nine months of 2003 decreased $37.0 million compared to the first nine months of 2002 due to a $57.8 million decrease in costs related to Cooper Nuclear Station. Cooper Nuclear Station costs are now classified differently on the statement of income as a result of the restructuring of the related contract. Refer to the three-month discussion of regulated operating expenses for additional comments on the restructuring of the contract. The decrease in other operating expenses due to Cooper Nuclear Station costs was partially offset by increases totaling $14.3 million related to employee costs for compensation, health care costs, and pension and other postretirement costs; and by a $3.4 million increase in electric distribution costs and a $3.0 million increase in energy efficiency program costs. Maintenance expenses increased $13.0 million compared to the first nine months of 2002 due principally to a $6.1 million increase in fossil fuel generation maintenance and a $3.2 million increase in maintenance costs at Quad Cities Station. Depreciation and amortization expense decreased $4.6 million compared to the first nine months of 2002 due to a $14.0 million decrease in regulatory expense related to the Iowa revenue sharing arrangement. The decrease was -27- partially offset by increases in utility plant depreciation and in amortization related to an Illinois revenue sharing arrangement. Additionally, amortization for the first nine months of 2002 includes a gain related to the restructuring of the Cooper Nuclear Station contract in 2002. Refer to the "Legislative and Utility Regulatory Matters" section for an explanation of these revenue sharing arrangements. Property and other taxes increased $3.4 million due primarily to an increase in property taxes as a result of higher levels of electricity generated and delivered during the measurement period. Iowa law provides for property taxes for electric and gas utilities to be based predominantly on energy consumption. Nonregulated Operating Revenues and Operating Expenses - ------------------------------------------------------ Nine Months Ended September 30, ------------------- 2003 2002 ------ ------ (In millions) MidAmerican Energy - Nonregulated operating revenues .... $180.6 $126.9 Less nonregulated cost of sales .... 156.8 105.8 ------ ------ Nonregulated gross margin .......... $ 23.8 $ 21.1 ====== ====== MidAmerican Funding Consolidated - Nonregulated operating revenues .... $183.1 $130.8 Less nonregulated cost of sales .... 157.3 106.6 ------ ------ Nonregulated gross margin .......... $ 25.8 $ 24.2 ====== ====== MidAmerican Energy - All gains and losses on MidAmerican Energy's energy trading contracts are now reported net on the statement of income in accordance with Emerging Issues Task Force ("EITF") Issue No. 02-3. MidAmerican Energy's nonregulated wholesale gas and electric marketing activities qualify as "energy trading" contracts under the guidance of EITF Issue No. 02-3. MidAmerican Energy's nonregulated gross margin for the first nine months of 2003 increased $2.7 million compared to the first nine months of 2002. Nonregulated revenues and cost of sales consist substantially of nonregulated retail natural gas marketing operations. Gross margin for MidAmerican Energy's nonregulated retail natural gas operations increased $1.6 million for the first nine months of 2003. The improvement in gross margin reflects increases in margin per unit sold and in sales volumes. An increase in related revenues was due principally to an increase in the average price per unit sold, which reflects a 57.5% increase in the average cost of gas and accounts for $43.7 million of the increase in nonregulated retail natural gas revenues. Electric retail customers in Illinois, except for those served by electric cooperatives and municipalities, are allowed to select their electric power supplier. Related revenues increased $4.9 million to $48.4 million for the first nine months of 2003 while cost of sales increased $3.8 million to $39.7 million. Additionally, nonregulated revenues include income from sharing arrangements under regulated natural gas tariffs. Related income totaled $4.4 million for the first nine months of 2003 and $2.6 million for the first nine months of 2002. -28- Interest and Dividend Income - ---------------------------- MidAmerican Energy - The decrease in interest and dividend income was due principally to a $3.5 million decrease in interest income on a note receivable related to MidAmerican Energy's accounts receivable sales arrangement, which terminated in October 2002. MidAmerican Funding - Interest income related to notes receivable with MidAmerican Funding's parent company decreased $4.1 million compared to the first nine months of 2002. The related note receivable balances have been zero throughout 2003. Additionally, the first nine months of 2002 include $5.0 million from the settlement of an investment in a communications company. Marketable Securities Gains and Losses, Net - ------------------------------------------- MidAmerican Funding - Net losses on marketable securities decreased compared to the first nine months of 2002 due primarily to $4.4 million of losses recorded in the 2002 period related to other-than-temporary declines in MidAmerican Funding's available-for-sale common stock investments. Other Income and Other Expense - ------------------------------ MidAmerican Energy - Other income from net earnings related to the cash surrender value of corporate-owned life insurance totaled $3.7 million for the first nine months of 2003 compared to a loss of $0.6 million for the first nine months of 2002. Other income for the capitalized allowance on equity funds used during construction totaled $8.7 million in the first nine months of 2003 compared to $5.4 million in the first nine months of 2002. Other income for the first nine months of 2002 reflects $1.2 million of subservicer fee income related to accounts receivable sold to MidAmerican Energy Funding Company. The related arrangement terminated in October 2002. Additionally, the 2002 nine-month period includes a $0.9 million gain on the sale of utility property. Other expense includes a discount on MidAmerican Energy's accounts receivable sold to MidAmerican Energy Funding Corporation. The discount totaled $5.8 million for the first nine months of 2002. MidAmerican Funding - Other income for the first nine months of 2003 and 2002 includes $1.8 million and $6.5 million, respectively, of income from equity method investments. Equity income for 2002 includes $5.3 million of income for a distribution of common stock held by a venture capital fund investment. Other income for the first nine months of 2002 reflects a $2.6 million gain on the sale of an investment in a communications company. Other expense for the first nine months of 2003 includes a $2.1 million write-down for the impairment of a special purpose fund investment. The first nine months of 2002 includes a $5.1 million loss for the impairment of an equity method investment and losses totaling $1.5 million for impairments on three venture capital investments. -29- Fixed Charges and Preferred Dividends - ------------------------------------- The increase in interest on long-term debt was due to interest on $400 million of MidAmerican Energy notes issued in February 2002 and another $275 million issued in January 2003. The increase was partially offset by the effect of debt maturities in 2002 and 2003. MidAmerican Energy's preferred dividends of its subsidiary trust decreased due to the reacquisition of all of the related preferred securities on March 11, 2002. In addition, preferred dividends decreased due to the reacquisition of preferred securities in May 2002. -30- LIQUIDITY AND CAPITAL RESOURCES MidAmerican Energy and MidAmerican Funding have available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements. As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy's net cash provided by operating activities was $437.8 million and $397.4 million for the nine months ended September 30, 2003 and 2002, respectively. MidAmerican Funding's net cash provided by operating activities was $407.7 million and $360.1 million for the nine months ended September 30, 2003 and 2002, respectively. Investing Activities and Plans - ------------------------------ Utility Construction Expenditures - MidAmerican Energy's primary need for capital is utility construction expenditures. For the first nine months of 2003, utility construction expenditures totaled $226.7 million, including allowance for funds used during construction and Quad Cities Station nuclear fuel purchases. Forecasted utility construction expenditures, including allowance for funds used during construction, are $366 million for 2003. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. Through 2007, MidAmerican Energy plans to develop and construct three electric generating projects in Iowa. The projects would provide service to regulated retail electricity customers and, subject to regulatory approvals, be included in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may also be made from the projects to the extent the power is not needed for regulated retail service. MidAmerican Energy expects to invest approximately $1.44 billion in the three projects. The first project is a natural gas-fired combined cycle unit with an estimated cost of $357 million, plus allowance for funds used during construction. MidAmerican Energy will own 100% of the plant and operate it. Commercial operation of the simple cycle mode began on May 5, 2003. The plant will be operated in simple cycle mode during 2003 and 2004, resulting in 327 megawatts ("MW") of accredited capacity. The combined cycle operation is expected to commence in December 2004, resulting in an expected additional 190 MW of accredited capacity. The second project is currently under construction and will be a 790-MW (based on expected accreditation) super-critical-temperature, low-sulfur coal-fired plant. MidAmerican Energy will operate the plant and own approximately 475 MW of the plant. MidAmerican Energy expects to invest approximately $759 million in the project, plus allowance for funds used during construction. Municipal, cooperative and public power utilities will own the remainder, which is a typical ownership arrangement for large base-load plants in Iowa. On May 29, 2003, the IUB issued an order that approves the ratemaking principles for the plant, and on June 27, 2003, MidAmerican Energy received a certificate from the IUB allowing MidAmerican Energy to construct the plant. On February 12, 2003, MidAmerican Energy executed a contract with Mitsui & Co. Energy Development, Inc. for the engineering, procurement and construction of the plant. On September 9, 2003, MidAmerican Energy began construction of the plant, which it expects to be completed in the summer of 2007. MidAmerican Energy is also seeking an order from the IUB approving construction of the associated transmission facilities. The third project is currently under development and is expected to be wind power facilities totaling 310 MW based on the nameplate rating. Generally speaking, accredited capacity ratings for wind power facilities are considerably less than the nameplate ratings due to the varying nature of wind. The current projected accredited capacity for these wind power facilities is approximately 53 MW. If constructed, MidAmerican Energy will own and operate these facilities, which are expected to cost approximately $323 million. MidAmerican Energy's plan to construct the wind project is in conjunction with a settlement agreement that extends through December 31, -31- 2010, an Iowa retail electric rate freeze that was previously scheduled to expire at the end of 2005. The settlement agreement, which was filed with the IUB as part of MidAmerican Energy's application for ratemaking principles for the wind project, was approved by the IUB on October 17, 2003. The obligation of MidAmerican Energy to construct the wind project may be terminated by MidAmerican Energy if the Federal production tax credit applicable to the wind energy facilities is not available at a rate of 1.8 cents per kWh for a period of at least ten years after the facilities begin generating electricity. MidAmerican Energy has also received authorization from the IUB to construct the wind power project. Refer to the "Rate Matters" section below for more discussion of the rate aspects of the settlement. Nuclear Decommissioning - Each licensee of a nuclear facility is required to provide financial assurance for the cost of decommissioning its licensed nuclear facility. In general, decommissioning of a nuclear facility means to safely remove the facility from service and restore the property to a condition allowing unrestricted use by the operator. MidAmerican Energy currently contributes $8.3 million annually to external trusts established for the investment of funds for decommissioning Quad Cities Station. Approximately 65% of the fair value of the trusts' funds is now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is reflected as depreciation expense in the Consolidated Statements of Income. Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process. Contractual Obligations and Commercial Commitments - MidAmerican Energy and MidAmerican Funding have various contractual obligations and commercial commitments. The following table, which has been updated from December 31, 2002, to reflect issuances and retirements of long-term debt and on-going changes in commitments due to operating lease and fuel transactions, summarizes as of September 30, 2003, the material cash obligations of MidAmerican Energy and MidAmerican Funding (in millions).
Period Payments are Due ---------------------------------------- Oct. 1 to Dec. 31, 2004 - 2006 - After Type of Obligation Total 2003 2005 2007 2007 - ------------------ -------- --------- ------ ------ -------- MidAmerican Energy: Long-term debt, excluding unamortized debt premium and discount, net ........ $1,147.3 $ 1.0 $147.0 $162.0 $ 837.3 Operating leases (1) .................... 26.0 1.9 11.9 7.5 4.7 Coal, electricity and natural gas contract commitments (1) .............. 621.7 47.8 294.9 142.6 136.4 -------- ----- ------ ------ -------- Total ................................. 1,795.0 50.7 453.8 312.1 978.4 MidAmerican Funding parent and other subsidiaries: Long-term debt, excluding unamortized debt premium and discount, net ........ 700.0 - - - 700.0 -------- ----- ------ ------ -------- Total ................................. $2,495.0 $50.7 $453.8 $312.1 $1,678.4 ======== ===== ====== ====== ========
(1) The operating leases and fuel and energy commitments are not reflected on the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes to Consolidated Financial Statements in Item 15 of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K for a discussion of the nature of these commitments. -32- MidAmerican Energy has other types of commitments that are subject to change and relate primarily to the items listed below. For additional information, refer, where applicable, to the respective referenced note in Notes to Consolidated Financial Statements of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K. - Construction expenditures: Refer to the "Utility Construction Expenditures" section above. - Manufactured gas plant facilities (see Note 3a. of this Form 10-Q) - Nuclear decommissioning costs (see Note (4)(d) of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K) - Residual guarantees on operating leases (see Note (1)(j) of MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K) Financing Activities, Plans and Availability - -------------------------------------------- Debt Authorizations and Credit Facilities - MidAmerican Energy has authority from the FERC to issue through April 14, 2005, short-term debt in the form of commercial paper and bank notes aggregating $500 million. MidAmerican Energy currently has in place a $370.4 million revolving credit facility that supports its $250 million commercial paper program and its variable rate pollution control revenue obligations. The facility expires January 15, 2004. On January 14, 2003, MidAmerican Energy issued $275 million of 5.125% medium-term notes due in 2013. The proceeds were used to refinance existing debt and for other corporate purposes. On February 10, 2003, MidAmerican Energy redeemed all $75 million of its 7.375% series of mortgage bonds, and on March 17, 2003, it redeemed all $6.94 million of its 7.45% series of mortgage bonds. Additionally, MidAmerican Energy's 7.125% series of mortgage bonds totaling $100 million matured on February 3, 2003. On October 17, 2003, MidAmerican Energy redeemed all $12.5 million of its 6.95% series of mortgage bonds at 103.48% of the principal amount. MidAmerican Energy has on file with the Securities and Exchange Commission a registration statement providing for the issuance of $425 million in various forms of senior and subordinated, unsecured long-term debt and preferred securities. MidAmerican Energy intends to file a registration statement in the fourth quarter of 2003 providing for the issuance of an additional $455 million of such securities. MidAmerican Energy has authorization from the FERC to issue, through November 30, 2004, $425 million in various forms of long-term debt and has filed a request for authorization to issue an additional $455 million in various forms of long-term debt for the two-year period beginning December 1, 2003. Such funds would be used to refinance maturing debt and to finance a portion of the cost of the generation projects noted above. MidAmerican Energy is required to obtain authorization from the Illinois Commerce Commission ("ICC") prior to issuing any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican Energy need only provide the ICC with an "informational statement" prior to the issuance which sets forth the type, amount and use of the proceeds of the securities to be issued. If less than 90% of the proceeds are used for refinancing, MidAmerican Energy must file a comprehensive application seeking authorization prior to issuance. The ICC is required to hold a hearing before issuing its authorization. In addition to an existing $15 million of ICC long-term debt authority, on October 22, 2003, the ICC issued its order providing authorization for MidAmerican Energy to issue up to $880 million of long-term debt for refinancing purposes and capital expenditures. -33- Other Information - MidAmerican Funding or one of its subsidiaries, including MidAmerican Energy, may from time to time seek to retire its outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. The repurchases or exchanges, if any, will depend on prevailing market conditions, the issuing company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. CREDIT RATINGS RISKS Debt and preferred securities of MidAmerican Funding and MidAmerican Energy are rated by nationally recognized credit rating agencies. Assigned credit ratings are based on each rating agency's assessment of MidAmerican Funding's or MidAmerican Energy's ability to, in general, meet the obligations of the debt or preferred securities issued by the rated company. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time. Other than the energy trading agreements discussed below, neither MidAmerican Funding nor MidAmerican Energy has any credit agreements that require termination or a material change in collateral requirements or payment schedule in the event of a downgrade in the credit ratings of the respective company's securities. MidAmerican Funding's long-term debt agreements provide that no additional debt can be issued by MidAmerican Funding if doing so would cause a downgrade in MidAmerican Funding's credit ratings. In conjunction with its wholesale marketing and trading activities, MidAmerican Energy must meet credit quality standards as required by counterparties. MidAmerican Energy has energy trading agreements that, in accordance with industry practice, either specifically require it to maintain investment grade credit ratings or provide the right for counterparties to demand "adequate assurances" in the event of a material adverse change in MidAmerican Energy's creditworthiness. If one or more of MidAmerican Energy's credit ratings decline below investment grade, MidAmerican Energy may be required to post cash collateral, letters of credit or other similar credit support to facilitate ongoing wholesale marketing and trading activities. As of September 30, 2003, MidAmerican Energy's estimated potential collateral requirements totaled approximately $76 million. MidAmerican Energy's collateral requirements could fluctuate considerably due to seasonality, market price volatility, a loss of key MidAmerican Energy generating facilities or other related factors. LEGISLATIVE AND UTILITY REGULATORY MATTERS Electric Deregulation - --------------------- Under Illinois law, as of December 31, 2000, all non-residential customers in Illinois had been phased in to allow them to select their provider of electric supply services. Residential customers all received the opportunity to select their electric supplier beginning May 1, 2002. In Iowa and elsewhere, the pace of deregulation has slowed considerably as a result of the energy crisis and related events in California beginning in 2000 that have heightened concerns nationally about deregulation of the electric utility industry. Rate Matters - ------------ Under two settlement agreements approved by the IUB, MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000, are effectively frozen through December 31, 2010. The settlement agreements specifically allow the filing of electric rate design and/or cost of service rate changes that are intended to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but could result in changes to individual tariffs. The settlement agreements also each provide that portions of revenues associated with Iowa retail electric returns on equity within specified ranges will be recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investment. -34- Under the first settlement agreement, which was approved by the IUB on December 21, 2001, and is effective through December 31, 2005, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year is recorded as a regulatory liability. The second settlement agreement, which was filed as part of MidAmerican Energy's application for ratemaking principles on a wind power project and was approved by the IUB on October 17, 2003, provides that during the period January 1, 2006 through December 31, 2010, an amount equal to 40% of revenues associated with returns on equity between 11.75% and 13%, 50% of revenues associated with returns on equity between 13% and 14%, and 83.3% of revenues associated with returns on equity above 14%, in each year will be recorded as a regulatory liability. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Interest expense is accrued on the portion of the regulatory liability related to prior years. Beginning in 2002, the liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction associated with generating plant additions. As of September 30, 2003 and December 31, 2002, the related regulatory liability reflected on the Consolidated Balance Sheets was $123.6 million and $102.9 million, respectively. In addition, the 2003 settlement agreement provides that if Iowa retail electric returns on equity fall below 10% in any consecutive 12-month period after January 1, 2006, MidAmerican Energy may seek to file for a general increase in rates. However, prior to filing for a general increase in rates, MidAmerican Energy is required by the settlement agreement to conduct 30 days of good faith negotiations with all of the signatories to the settlement agreement to attempt to avoid a general increase in rates. Illinois law provides for Illinois earnings above a computed level of return on common equity to be shared equally between regulated retail electric customers and MidAmerican Energy. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which sharing must occur for 2003 is 13.73%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of electric assets. TRANSLink - --------- In December 1999, the FERC issued Order No. 2000 establishing, among other things, minimum characteristics and functions for regional transmission organizations. Public utilities that were not a member of an independent system operator at the time of the order were required to submit either a plan by which its transmission facilities would be transferred to a regional transmission organization or an alternate filing providing a detailed explanation of a utility's plans with respect to the future operation of its transmission assets. MidAmerican Energy's filing was an alternative compliance filing indicating that MidAmerican Energy expects to participate in a regional transmission organization and that MidAmerican Energy is actively engaged in developing an independent transmission company that would be a member of a regional transmission organization. In September 2001, MidAmerican Energy and five other electric utilities filed with the FERC a plan to create TRANSLink Transmission Company LLC and to integrate their electric transmission systems into a single, coordinated system operating as a for-profit independent transmission company in conjunction with a FERC-approved regional transmission organization. On April 25, 2002, the FERC issued an order approving the transfer of control of MidAmerican Energy and other utilities' transmission assets to TRANSLink in conjunction with TRANSLink's participation in the Midwest Independent Transmission System Operator, Inc. regional transmission organization. In December 2002, MidAmerican Energy filed an application for state regulatory approval with the IUB. On June 13, 2003, the IUB issued an order disapproving the application based primarily on the uncertainty of related issues at the federal level with respect to requirements for the independent operation of transmission assets on a regional basis. In the Order, the IUB invites MidAmerican Energy to refile its application after some of the questions at the federal level are answered. MidAmerican Energy is currently evaluating its options in light of the IUB's decision. In addition, applications by other TRANSLink participants are either pending before, or will be filed with, the state public utility commissions. The outcomes of these proceedings could impact the future viability of, or MidAmerican Energy's participation in, TRANSLink. -35- Transferring the operations and control of MidAmerican Energy's transmission assets to other entities could increase costs for MidAmerican Energy; however, the actual impact of TRANSLink, or alternate strategies that might be employed to comply with FERC requirements, on MidAmerican Energy's future transmission costs is not yet known. Standard Electricity Market Design - ---------------------------------- On July 31, 2002, the FERC issued a notice of proposed rulemaking with respect to "Standard Market Design" for the electric industry. The FERC initially characterized the proposal as portending "sweeping changes" to the use and expansion of the interstate transmission and wholesale bulk power systems in the United States. The proposal includes numerous proposed changes to the current regulation of transmission and generation facilities designed "to promote economic efficiency" and to replace the "obsolete patchwork we have today," according to the FERC's chairman. On April 28, 2003, the FERC issued a "White Paper" describing how it intends to change the proposed rulemaking. The White Paper, which uses the term "Wholesale Market Platform" in lieu of the term "Standard Market Design," indicates that a final rule may focus on the formation of regional transmission organizations and allow for regional differences. Any final rule may impact the costs of MidAmerican Energy's electricity and transmission products. A final rule is unlikely to be fully implemented until at least 2004. MidAmerican Energy is still evaluating the proposed rule and recognizes there is uncertainty as to the timing and outcome of this rulemaking. Accordingly, the likely impact of the proposed rule on MidAmerican Energy's transmission and generation businesses is unknown. ENVIRONMENTAL MATTERS The U.S. Environmental Protection Agency ("EPA") and state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if these contaminants are in sufficient quantities and at sufficient concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. As of September 30, 2003, MidAmerican Energy has recorded a $15.9 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. Refer to Note 3a of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for further discussion of MidAmerican Energy's environmental activities related to manufactured gas plant sites and cost recovery. Although the timing of potential incurred costs and recovery of costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position or results of operations. In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. In February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. The impact of the new standards on MidAmerican Energy is currently unknown. These standards could be superceded, in whole or in part, by a variety of multi-pollutant emission reduction initiatives. Refer to Note 3b of Notes to Consolidated Financial Statements in Item 1 of this Form 10-Q for further discussion of this issue. In 2001, the state of Iowa passed legislation that, in part, requires rate-regulated utilities to develop a multi-year plan and budget for managing regulated emissions from their generating facilities in a cost-effective manner. MidAmerican Energy's proposed plan, including the associated budget, was filed with the IUB on April 1, 2002, in accordance with state law. An administrative law judge issued a ruling approving MidAmerican Energy's plan -36- but disallowing the proposed recovery of plan costs through a tracker mechanism. MidAmerican Energy and the Iowa Office of Consumer Advocate each appealed the administrative law judge's ruling. On July 17, 2003, the IUB issued an order affirming the administrative law judge's decision. Accordingly, the IUB has rejected the future application of a tracker mechanism to recover emission reduction costs. However, the approved expenditures will not be subject to a subsequent prudence review in a future electric rate case. MidAmerican Energy is required to file updates to the plan at least every two years. The plan provides MidAmerican Energy's projected air emission reductions considering the current proposals that are being debated at the federal level and describes a coordinated long-range plan to achieve these air emission reductions. The plan provides specific actions to be taken at each coal-fired generating facility and the related costs and timing for each action. The plan also identifies expenses that are expected to be incurred at the generating facilities to operate and maintain the environmental equipment. Since the filing of the plan with the IUB, MidAmerican Energy's on-going assessment of the cost of complying with anticipated environmental requirements has resulted in estimated capital costs that are lower than those included in the plan. As discussed in the "Rate Matters" section above, MidAmerican Energy's Iowa retail electric rates are effectively frozen through December 31, 2010. However, pursuant to a rate settlement agreement approved by the IUB on October 17, 2003, if capital and operating expenditures to comply with environmental requirements cumulatively exceed $325 million prior to January 1, 2011, MidAmerican Energy may seek to recover such amounts from customers. At this time, MidAmerican Energy does not expect to exceed such amount. Under the New Source Review ("NSR") provisions of the Clean Air Act ("CAA") a utility is required to obtain a permit from the EPA prior to (1) beginning construction of a new major stationary source of an NSR-regulated pollutant or (2) making a physical or operational change (a "major modification") to an existing facility that potentially increases emissions, unless the changes are exempt under the regulations. In general, projects subject to NSR regulations are subject to pre-construction review and permitting under the Prevention of Significant Deterioration ("PSD") provisions of the CAA. Under the PSD program, a project that emits threshold levels of regulated pollutants must undergo a Best Available Control Technology analysis and evaluate the most effective emissions controls. These controls must be installed in order to receive a permit. Violation of NSR regulations potentially subjects a utility to fines and/or other sanctions. Routine maintenance, repair and replacement are not subject to the NSR provisions; however, these types of activities have historically been subject to changing interpretations under the NSR program. On August 27, 2003, the EPA promulgated final changes to the NSR provisions relating to routine maintenance, repair and replacement. These changes exempt from NSR review equipment replacement projects if the facility replaces any existing component(s) of a process unit with an identical or functionally equivalent component(s), as long as the replacement activity is less than 20% of the value of a new unit, does not affect the unit design parameters, and does not cause the unit to exceed any legally enforceable emission limitation or other operational limitation that effectively limits emissions. To date, twelve states and local air districts have challenged the rule. The resolution of the issue and its impact on MidAmerican Energy cannot be predicted at this time. In recent years, the EPA has requested, from several utilities, information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the NSR and the New Source Performance Standards of the CAA. In December 2002 and April 2003, MidAmerican Energy received requests from the EPA to provide documentation related to its capital projects from January 1, 1980, to the present for a number of its generating plants. MidAmerican Energy has submitted information to the EPA in responses to these requests and there are currently no outstanding data requests pending from the EPA. MidAmerican Energy cannot predict the outcome of these requests at this time. On December 20, 2000, the EPA issued a regulatory finding that it is "necessary and appropriate" to regulate emissions of mercury from coal-fired power plants. As a result, coal-fired plants have been added to the list of source categories for which National Emissions Standards for Hazardous Air Pollutants will be required and, therefore, subject to "maximum achievable control technology" standards. Set to go into effect in December -37- 2007, EPA is under a deadline of December 15, 2003 to propose, and December 2004 to finalize, a regulation limiting mercury emissions from coal-fired power plants. Until the standards are promulgated, the potential cost of these control technologies cannot be estimated and MidAmerican Energy cannot evaluate the potential impact on its facilities. GENERATING CAPABILITY In August 2003, retail customer usage of electricity caused a new record hourly peak demand of 3,935 MW on MidAmerican Energy's electric system, surpassing the previous record of 3,889 MW set in July 2002. MidAmerican Energy is interconnected with Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool ("MAPP"). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. For the 2003 cooling season, MidAmerican Energy's reserve was approximately 22% above its system peak demand. MidAmerican Energy believes it has adequate electric capacity reserve through 2003 and continues to manage its generating resources to ensure an adequate reserve in the future. MidAmerican Energy is in the process of constructing a natural gas-fired combined cycle unit to be completed in two phases. The first phase, totaling 327 MW, began commercial operation on May 5, 2003. MidAmerican Energy expects the second phase to begin commercial operation in December 2004 and to provide approximately 190 MW of additional accredited capacity. MidAmerican Energy is also in the process of constructing a coal-fired generating plant that will provide an additional 475 MW of owned generation that is expected to be operational by the summer of 2007. MidAmerican Energy has also received approval from the IUB to construct wind power facilities. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican Energy's reserve to fall below the 15% minimum. If MidAmerican Energy fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP. MidAmerican Energy is financially exposed to movements in energy prices since it no longer recovers its energy costs through an energy adjustment clause in Iowa. Although MidAmerican Energy believes it has sufficient generation under typical operating conditions for its retail electric needs, a loss of adequate generation by MidAmerican Energy requiring the purchase of replacement power at a time of high market prices could subject MidAmerican Energy to losses on its energy sales. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. MidAmerican Energy's exposure to market risk has not changed materially from its risk as of December 31, 2002. The scope of its use of financial instruments for both hedging and proprietary trading purposes has also not changed materially from December 31, 2002. As of September 30, 2003, the net fair value of its proprietary trading assets totaled $1.4 million, substantially all of which matures within one year. MidAmerican Energy trades financial instruments that are almost entirely exchange-traded or have prices that are actively quoted. Reference is made to MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report on Form 10-K, and in particular, Notes (1)(i), (8) and (9) in Notes to Consolidated Financial Statements in Item 15 of that report. ITEM 4. CONTROLS AND PROCEDURES. With the supervision and participation of MidAmerican Funding's and MidAmerican Energy's management, including the respective persons acting as chief executive officer and chief financial officer, each company performed an evaluation regarding the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2003. Based on that evaluation, MidAmerican Funding's and MidAmerican Energy's management, including the respective persons acting as chief executive officer and chief financial officer, concluded that their respective disclosure controls and procedures were effective. There have been no -38- significant changes in MidAmerican Funding's or MidAmerican Energy's internal controls or in other factors that could significantly affect internal controls. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. MidAmerican Funding and its subsidiaries currently have no material legal proceedings. Information on MidAmerican Energy's environmental matters is included in the "Environmental Matters" section of Management's Discussion and Analysis in Item 2 of this Form 10-Q. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (A) EXHIBITS Reference is made to the accompanying Exhibit Index for a list of exhibits filed as a part of this Quarterly Report. (B) REPORTS ON FORM 8-K None. -39- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN FUNDING, LLC MIDAMERICAN ENERGY COMPANY -------------------------- (Registrants) Date: November 5, 2003 /s/ Patrick J. Goodman -------------------------------------------- Patrick J. Goodman Vice President and Treasurer of MidAmerican Funding, LLC (principal financial and accounting officer) /s/ Thomas B. Specketer -------------------------------------------- Thomas B. Specketer Vice President and Controller of MidAmerican Energy Company (principal financial and accounting officer) -40- EXHIBIT INDEX EXHIBIT NO. - ----------- MidAmerican Energy - ------------------ 10 Stipulation and Agreement in Regard to MidAmerican Energy Company Ratemaking Principles for Wind Energy Investment, approved by the Iowa Utilities Board on October 17, 2003. 15 Awareness Letter of Independent Accountants 31.1 Section 302 Certification for Form 10-Q (co-chief executive officer) 31.2 Section 302 Certification for Form 10-Q (co-chief executive officer) 31.3 Section 302 Certification for Form 10-Q (chief financial officer) 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (co-chief executive officer) 32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (co-chief executive officer) 32.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief financial officer) MidAmerican Funding 31.4 Section 302 Certification for Form 10-Q (chief executive officer) 31.5 Section 302 Certification for Form 10-Q (chief financial officer) 32.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief executive officer) 32.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (chief financial officer) -41- EX-10 3 mecexh10.txt IUB SETTLEMENT AGREEMENT - OCTOBER 17, 2003 EXHIBIT 10 STATE OF IOWA IOWA UTILITIES BOARD ------------------------------------------------------------------------------ IN RE: ) RATEMAKING PRINCIPLES FOR ) WIND ENERGY INVESTMENT MIDAMERICAN ENERGY COMPANY) ------------------------------------------------------------------------------ STIPULATION AND AGREEMENT ------------------------- Article I - Introduction ------------------------ The Honorable Thomas J. Vilsack, Governor of the state of Iowa, has established a goal of 1000 megawatts (MW) of renewable energy such as wind power in the state by 2010. The Honorable Rod Blagojevich, Governor of the state of Illinois, and members of the South Dakota Public Utilities Commission have also urged the development of more renewable energy in the Midwest. Renewable energy such as wind power will not create air pollution, will help prevent the depletion of non-renewable resources used for electric generation, does not rely on out-of- state resources and will have an important positive impact on economic development in Iowa. At the time of this Stipulation and Agreement (Stipulation), MidAmerican Energy Company (MEC) owns or has under long-term contract approximately 125 MW of renewable energy. Subject to the terms and conditions of this Stipulation and subject to final approval of this Stipulation in its entirety and without condition or modification by the Iowa Utilities Board (Board), MEC agrees to construct a minimum of an additional 310 MW (nameplate rating) of wind power facilities in Iowa (Project) as its commitment toward the renewable energy goal Page 1 of 8 established by Governor Vilsack and the expressions of support for the development of renewable energy made by representatives of Illinois and South Dakota. The Project is expected to require an investment of approximately $323 million (plus associated transmission costs) and will be dedicated to public service and subject to regulation by the Board. The first of the Project's wind power facilities is expected to begin service in late 2004, with the Project completed by 2007. Article II -- Purpose -------------------- This Stipulation and attached Appendices have been prepared and executed by the signatories for the purpose of stipulating to their mutually-agreed position in the ratemaking principles case regarding the Project, to be commenced by MEC pursuant to Section 476.53 of the Iowa Code. MEC commits to commencing such case as soon as feasible after the enactment of legislation consistent with that in Appendix 1. All signatories to this Stipulation agree to support or not oppose such legislation. In consideration of the mutual agreements set forth, the signatories stipulate that the Board should issue an order that allows the terms and provisions of this Stipulation to be fully implemented. Terms: - ------ 1. MEC commits to construct, own and operate a minimum of an additional 310 MW of wind power facilities in Iowa, representing a projected investment of approximately $323 million plus the costs of associated transmission. 2. As soon as feasible after the enactment of legislation consistent with that in Appendix 1, MEC shall file with the Board a request for a certificate to construct the Project. The signatories to this Stipulation agree to support the request, as well as any request for expedited approval or other relief to enable the first of the wind power facilities to be placed in service by late-2004 and to enable completion of the Project by 2007. 3. As soon as feasible after the enactment of legislation consistent with that in Appendix 1, MEC shall file with the Board a request pursuant to Code Section 476.53 for Page 2 of 8 ratemaking principles for the Project. The signatories to this Stipulation agree to support the request and the following ratemaking principles: a. The Iowa jurisdictional portion of MEC's prudently incurred capital costs, operation and maintenance expenses and other actual costs of the Project shall be included in MEC's regulated electric rates. MEC shall be permitted to include in rates the actual costs of the Project, up to the Iowa jurisdictional portion of the $323 million projection and $12 million in associated transmission costs, without the need to establish prudence or reasonableness. MEC shall be required to establish the prudence and reasonableness of any Project investment and transmission costs in excess of the foregoing calculated amounts before the Iowa jurisdictional portion of such excess can be included in rates. b. The depreciation life of the Project for ratemaking purposes shall be 20 years. c. The allowed return on common equity investment (ROE) on the portion of the Project included in Iowa electric rate base shall be 12.2%. d. The Iowa jurisdictional portion of any revenues from the sale of renewable energy credits and carbon dioxide credits associated with the Project shall be recorded above-the-line by MEC in the accounts specified in Appendix 2 and included in the revenue sharing calculations of items "g" and "h". e. The Iowa jurisdictional portion of any federal production tax credits associated with the Project shall be recorded above-the-line by MEC in the accounts specified in Appendix 2 and included in the revenue sharing calculations of items "g" and "h". f. Until MEC's next Iowa electric rate case decision after January 1, 2011, the Iowa jurisdictional portion of wholesale sales revenue associated with all generating units included in MEC's Iowa jurisdictional electric rate base (including the wind power facilities of the Project) shall be recorded above- the-line in the accounts specified in Appendix 2 and included in the revenue sharing calculations of items "g" and "h". g. Element 3 of the Settlement Outline incorporated by reference in the Settlement in Docket Nos. RPU-0l-3 and RPU-0l-5 provides for the customer portion of shared revenues during the period 2001 through 2005 to be used to reduce AFUDC on generating plant investment committed to by December 31, 2005. The wind power Project which is the subject of this Stipulation shall be considered a "generating plant investment committed to by December 31, 2005" for the purpose of that Settlement, and the customer portion of shared revenues, after offsetting the AFUDC on the Greater Des Moines Energy Center (GDMEC) and the Council Bluffs 4 (CB 4) generating plant investments, shall be applied sequentially to the Iowa jurisdictional portion of rate base as follows: first, to reduce to zero the AFUDC on the Project; second, to be accrued in an interest bearing account and used to accelerate depreciation on the CB 4 investment until it reaches zero; third, to accelerate depreciation on the investment in the Project until it reaches zero; fourth, to accelerate depreciation on the investment in GDMEC until it reaches zero. In the event there is money left in the accounts after the above, it shall be returned to ratepayers in a manner approved by the Board. Interest on the Page 3 of 8 amount accrued in the interest bearing account and used to accelerate depreciation on the CB 4 investment will be determined based on the monthly average U.S. Treasury 3-year constant maturities rate as reported by the Federal Reserve Board Statistical Release H. 15 and shall accrue on the average monthly balance in the account. h. If MEC's calculated ROE on Iowa jurisdictional electric operations in calendar year 2006, 2007, 2008, 2009 or 2010 exceeds 11.75%, then 40% of the annual revenues for that year between 11.75% and 13% ROE, 50% of the revenues between 13% and 14% ROE, and 83.3% of the revenues in excess of 14% ROE that is the customer portion of shared revenues shall be applied sequentially as set out in Term 3 "g", above. MEC shall be entitled to retain the revenues that are not the customer portion of shared revenues. The methodology to be used to calculate the jurisdictional ROE is set forth in Appendix 3. i. MEC commits not to seek any general increase in Iowa electric base rates to become effective before January 1, 2011, unless its Iowa jurisdictional ROE on electric operations falls below 10% in any 12-month period after January 1, 2006. If MEC's Iowa jurisdictional ROE on electric operations, as calculated pursuant to Appendix 3, falls below 10% in a 12-month period after January 1, 2006, all signatories to this Stipulation shall conduct 30 days of good faith negotiations to modify the Stipulation to provide MEC with a reasonable opportunity to earn an Iowa jurisdictional ROE between 10% and 11.75% on electric operations. If no agreement is reached at the end of the 30 days, MEC shall have the ability to file for a general increase in electric base rates. The signatories to this Stipulation may oppose MEC's request for such general increase in electric rates, but not on the grounds that such request violates this Stipulation. j. MEC has assumed that through December 31, 2010, the costs of compliance with environmental requirements to reduce emissions at existing coal-fired generating plants will be $214,090,000 for capital improvements and $45,478,000 for incremental operations and maintenance (O&M) expenses. If, at any time prior to January 1, 2011, the Board issues an order or orders in proceedings under Code Section 476.6 (25) that authorize MEC to cumulatively spend more than $325 million in capital and O&M expenses for such environmental improvements before January 1, 2011, then all signatories to this Stipulation shall conduct up to 30 days of good faith negotiations to determine whether to modify the Stipulation to provide MEC a reasonable opportunity to recover the environmental costs in excess of $325 million. If no agreement is reached at the end of 30 days, MEC shall have the ability to file a request with the Board seeking recovery of the environmental costs in excess of $325 million. The signatories to this Stipulation may oppose MEC's request, but not on the grounds that such request violates this Stipulation. k. The signatories commit not to commence or support a rate reduction proceeding regarding MEC's electric rates prior to January 1, 2011. Page 4 of 8 1. MEC may continue to recover the costs of energy efficiency expenditures pursuant to Section 476.6(19), alternate energy production purchases pursuant to Section 476.43 and alternate energy revolving loan fund payments pursuant to Section 476.46 through the rate mechanisms approved and in place at the time of this Stipulation. m. Nothing in this Stipulation shall prohibit the Board from approving changes in electric rates designed to minimize or eliminate rate disparities based on customer location or rate disparities not justified by the costs of providing utility service or other important public policy considerations; provided that any such changes in rates shall be designed in the aggregate to be revenue neutral to MEC. Article III -- Joint Motion -------------------------- The signatories shall jointly file this Stipulation in the ratemaking principles proceeding related to the Project, commenced by MEC pursuant to Section 476.53. The signatories shall also file with the Board a joint motion requesting that the Board accept the Stipulation without condition or modification. Article IV -- Condition Precedent -------------------------------- This Stipulation shall not become effective unless and until the Board accepts the same in its entirety without condition or modification. Article V -- Privilege and Limitation ------------------------------------ This Stipulation is made pursuant to Iowa Code Section 17A.10 and 199 I.A.C. Section 7.2(11). The Stipulation shall become binding upon the signatories upon its execution; provided, however, that if this Stipulation does not become effective in accordance with Article IV above, it shall be null, void and privileged. This Stipulation is intended to relate only to the specific matters referenced herein, and no signatory waives any claim or right that it may otherwise have with respect to any matter not expressly provided for herein. Except as expressly provided in this Page 5 of 8 Stipulation, no signatory shall be deemed to have approved, accepted, agreed or consented to any ratemaking principle, any method of cost of service determination, or any method of cost allocation underlying the provisions of this Stipulation or be prejudiced or bound thereby in any other current or future proceeding before any agency. This Stipulation shall not, directly or indirectly, be referred to as precedent in any other current or future proceeding before the Board. Article VI Execution -------------------- To facilitate and expedite execution, the Stipulation may be executed by the signatories in multiple conformed copies which, when the original signature pages are consolidated into a single document, shall constitute a fully-executed document binding upon all the signatories to be filed with the Board. Article VII - Modification and Amendment ---------------------------------------- This Stipulation shall not be amended or modified except by an instrument in writing signed by all signatories. Article VIII-- Term ------------------ 1. Unless terminated earlier by operation of paragraph 2 or 3 of this Article, this Stipulation shall terminate January 1, 2011, except for MEC's responsibility for revenue sharing for the year 2010 and except for items "a" through "e" of "Term 3" of Article II that shall remain in effect as long as the wind power facilities continue to provide regulated electric service to Iowa consumers. 2. This Stipulation and the obligations of the signatories shall terminate if: Page 6 of 8 a. the Board does not issue the required certificates for the Project or approve the terms of this Stipulation; or b. MEC is unable to secure access to sufficient transmission for the Project. 3. This Stipulation and the obligations of the signatories may be terminated by MEC if: a. the Board does not approve the ratemaking principles settlement regarding CB 4 in Docket No. RPU-02-10; or b. the federal production tax credit applicable to the wind energy facilities that are the subject of this Stipulation is not available at a rate of 1.8 cents per kWh or greater for a period of at least 10 years after the wind energy facilities begin generation of electricity. 4. In the event of termination pursuant to subparagraphs 2 "a", 2 "b", or 3 "a", MEC shall be permitted to record as above-the-line expenses an amortization over a 5-year period of all reasonable costs of canceling the wind power Project, but shall not be entitled to recover a return on such costs. In the event of termination pursuant to subparagraph 3 "b", MEC shall record as below-the line expenses the costs of canceling the wind power Project that is the subject of this Stipulation. Article IX - Binding Nature --------------------------- This Stipulation shall be binding on the signatories. The signatories shall take no actions directly or indirectly to eliminate or otherwise limit the scope or effect of this Stipulation throughout its term. Page 7 of 8 Article X - Further Assurances ------------------------------ The signatories agree to cooperate in order to effectuate the full and complete intent of the signatories as expressed in this Stipulation. Article XI - Entire Agreement ----------------------------- This Stipulation contains the entire agreement between the signatories. There are no additional terms, whether consistent or inconsistent, oral or written, that have not been incorporated into this Stipulation. MIDAMERICAN ENERGY COMPANY OFFICE OF CONSUMER ADVOCATE /s/ Brent E. Gale /s/ John R. Perkins - -------------------------- --------------------------- (Signature) (Signature) Name: Brent E. Gale Name: John R. Perkins ------------- --------------- Date: 3/20/03 Date: March 20, 2003 ------------- --------------- DEERE & COMPANY IBEW LOCAL 109 /s/ Kathleen R. Gibson /s/ Michael W. Kriegermeier - ---------------------- --------------------------- (Signature) Senior Counsel (Signature) Name: Kathleen R. Gibson Name: Michael W. Kriegermeier ------------------ ----------------------- Date: 24 March 2003 Date: 6-19-03 ------------------ ----------------------- IBEW STATE CONFERENC /s/ Sandy Opstuedt -------------- (Signature) Name: Sandy Opstuedt -------------- Date: 3/26/03 -------------- Page 8 of 8 APPENDIX 1 S.F. ___________ H.F. ____________ 1 Section 1. Section 476.23, subsection 1, Code 2003, is 2 amended to read as follows: 3 1. An electric utility shall not construct or extend 4 facilities or furnish or offer to furnish electric service to 5 the existing point of delivery of any customer already 6 receiving electric service from another electric utility 7 without having first filed with the board the express written 8 agreement of the electric utility presently serving this 9 customer, except as otherwise provided in this section. Any 10 municipal corporation, after being authorized by a vote of the 11 people, or any electric utility may file a petition with the 12 board requesting a certificate of authority to furnish 13 electric service to the existing point of delivery of any 14 customer already receiving electric service from another 15 electric utility. If, after notice by the board to the 16 electric utility currently serving the customer, objection to 17 the petition is not filed and investigation is not deemed 18 necessary, the board shall issue a certificate within thirty 19 days of the filing of the petition. When an objection is 20 filed, if the board, after notice and opportunity for hearing, 21 determines that service to the customer by the petitioner is 22 in the public interest, including consideration of any 23 unnecessary duplication of facilities, it shall grant this 24 certificate in whole or in part, upon such terms, conditions, 25 and restrictions as may be justified. Whether or not an 26 objection is filed, any certificate issued shall require that 27 the petitioner pay to the electric utility presently serving 28 the customer, the reasonable price for facilities serving the 29 customer. This price determination by the board shall include 30 due consideration of the cost of the facilities being 31 acquired [stricken ,] ; any necessary generating capacity and transmission - 32 capacity dedicated to the customer, including, but not limited -------------------------- 33 to, electric power generating facilities and alternate energy ------------------------------------------------------------- 34 production facilities not yet in service but for which the ---------------------------------------------------------- 35 board has issued an order pursuant to section 476.53, and --------------------------------------------------------- -1- APPENDIX 1 S.F. ___________ H.F. ____________ 1 electric power generating facility emissions plan budgets --------------------------------------------------------- 2 approved by the board pursuant to section 476.6, subsection ----------------------------------------------------------- 3 25; depreciation [stricken,]; loss of revenue [stricken,]; and the cost of --- - - 4 facilities necessary to reintegrate the system of the utility 5 after detaching the portion sold. 6 Sec. 2. Section 476.43, subsection 1, Code 2003, is 7 amended to read as follows: 8 1. Subject to section 476.44, the board shall require 9 electric utilities [stricken- to enter into long-term contracts] to do 10 both of the following under terms and conditions that the ------- ----------------------------------- 11 board finds are just and economically reasonable for the -------------------------------------------------------- 12 electric utilities' customers, are nondiscriminatory to ------------------------------------------------------- 13 alternate energy producers and small hydro producers, and will -------------------------------------------------------------- 14 further the policy stated in section 476.41: ------------------------------------------- 15 a. [stricken- Purchase] At least one of the following: ----------------------------- 16 (1) Own alternate energy production facilities or small -------------------------------------------------------- 17 hydro facilities located in this state. --------------------------------------- 18 (2) Enter into long-term contracts to purchase or wheel -------------------------------------------------------- 19 electricity from alternate energy production facilities or 20 small hydro facilities located in the utility's service area 21 [stricken- under the terms and conditions that the board finds are just 22 and economically reasonable to the electric utilities' 23 ratepayers, are nondiscriminatory to alternate energy 24 producers and small hydro producers and will further the 25 policy stated in section 476.41.] 26 b. Provide for the availability of supplemental or backup 27 power to alternate energy production facilities or small hydro 28 facilities on a nondiscriminatory basis and at just and 29 reasonable rates. 30 Sec. 3. Section 476.44, subsection 2, Code 2003, is 31 amended to read as follows: 32 2. An electric utility subject to this division, except a 33 utility [stricken- which] that elects rate regulation pursuant to section ---- 34 476.1A, shall not be required to own or purchase, at any one ------ 35 time, more than its share of one hundred five megawatts of -2- APPENDIX 1 S.F. ___________ H.F. ____________ 1 power from alternative energy production facilities or small 2 hydro facilities at the rates established pursuant to section 3 476.43. The board shall allocate the one hundred five 4 megawatts based upon each utility's percentage of the total 5 Iowa retail peak demand, for the year beginning January 1, 6 1990, of all utilities subject to this section. If a utility 7 undergoes reorganization as defined in section 476.76, the 8 board shall combine the allocated purchases of power for each 9 utility involved in the reorganization. 10 Notwithstanding the one hundred five megawatt maximum, the 11 board may increase the amount of power that a utility is 12 required to own or purchase at the rates established pursuant ------ 13 to section 476.43 if the board finds that a utility, including 14 a reorganized utility, exceeds its 1990 Iowa retail peak 15 demand by twenty percent and the additional power the utility 16 is required to purchase will encourage the development of 17 alternate energy production facilities and small hydro 18 facilities. The increase shall not exceed the utility's 19 increase in peak demand multiplied by the ratio of the 20 utility's share of the one hundred five megawatt maximum to 21 its 1990 Iowa retail peak demand. 22 Sec. 4. Section 476.45, Code 2003, is amended to read as 23 follows: 24 476.45 EXEMPTION FROM EXCESS CAPACITY. 25 Capacity [stricken- purchased from] of an alternate energy production -- 26 facility or small hydro facility, that is owned or purchased ---------------------------- 27 by an electric utility, shall not be included in a calculation ----------------------- 28 of an electric utility's excess generating capacity for [stricken- rate- 29 making] ratemaking purposes. ---------- 30 Sec. 5. Section 476.53, subsection 3, paragraph b, Code 31 2003, is amended to read as follows: 32 b. In determining the applicable ratemaking principles, 33 the board shall not be limited to traditional ratemaking 34 principles or traditional cost recovery mechanisms. In -- 35 particular, the board shall have the authority to consider ---------------------------------------------------------- -3- APPENDIX 1 S.F. ___________ H.F. ____________ 1 ratemaking proposals by a rate-regulated public utility that ------------------------------------------------------------ 2 facilitate the construction of an electric power generating ------------------------------------------------------------ 3 facility or an alternate energy production facility pursuant ------------------------------------------------------------ 4 to paragraph "a" and provide for reasonable restrictions on ----------------------------------------------------------- 5 the ability of the public utility to seek a general increase ------------------------------------------------------------ 6 in electric rates under section 476.6 for at least three years -------------------------------------------------------------- 7 after the generation facility begins providing service to Iowa -------------------------------------------------------------- 8 consumers. ---------- 9 Sec. 6. EFFECTIVE DATE. This Act, being deemed of 10 immediate importance, takes effect upon enactment. 11 EXPLANATION 12 This bill amends various provisions in Code chapter 476, 13 relating to public utilities. Specifically. the bill provides 14 for ownership of alterate energy production facilities by 15 public utilities, and makes related changes. 16 The bill in Code section 476.23 states the authority of the 17 utilities board to consider the cost of a utility's alternate 18 energy production facilities and other generating facilities, 19 as well as generating plant emissions plan budgets approved by 20 the board, when valuing an electric utility's property. 21 The bill provides in Code section 476.43 that public 22 utilities may own alternate energy production facilities or 23 small hydro facilities located in Iowa. The bill also 24 restructures the language in subsection 1. Related changes 25 are made in Code sections 476.44 and 476.45. 26 The bill in Code section 476.53 specifies the authority of 27 the utilities board to consider rate proposals that facilitate 28 construction of alternate energy production facilities or 29 other electric generating facilities when the proposal 30 provides for reasonable restrictions on the utility's ability 31 to seek rate increases for at least three years after the 32 generating facility begins providing service. 33 The bill is effective upon enactment. 34 35 -4- APPENDIX 2 MIDAMERICAN ENERGY COMPANY STIPULATION AND AGREEMENT DESCRIPTION FERC ACCOUNT - ------------------------------- ------------ Renewable Energy Credit Revenue 456 Carbon Dioxide Credit Revenue 411.8 Wholesale Sales Revenue 447 Federal Production Tax Credits 409.1 Page 1 of 1 APPENDIX 3 PAGE 1 OF 2 MIDAMERICAN ENERGY COMPANY ROE CALCULATION RELATING TO ELECTRIC PRICING SETTLEMENT INTENT - ------ The intent of the methodology is to keep the calculation as simple as possible, making it verifiable to MidAmerican's IE-1 filing, and avoiding the voluminous amount of detail required for a traditional rate filing, while arriving at a calculation that is reasonable and acceptable to all parties. The calculation will be in the form of an "imputed" return. As discussed in more detail below, Iowa electric jurisdictional operating income (before any provision for revenue sharing under the provisions of this settlement) is divided by Iowa electric jurisdiction rate base (the average of period beginning and period ending balances) to arrive at an actual overall rate of return on rate base. Weighted average embedded costs of capital (based on thirteen month end balances) of preferred and long-term debt are subtracted from this rate of return, with the difference divided by the utility's common equity percentage. MidAmerican proposes to submit this calculation by February 15 following calendar years 2006-2010. Attachment 1 presents the format of such calculation. Specific calculations are described below. The parties reserve the right to modify or change the methodology set forth herein in the event such party or parties deem the methodology to lead to unreasonable or unrepresentative results. In the event of a dispute, the parties agree to attempt to negotiate a settlement and if a settlement cannot be reached, submit the matter to the Iowa Utilities Board for a final decision and order pursuant to the Iowa Administrative Procedure Act. RATE BASE - --------- All rate base items except cash working capital are two point (beginning and end of period balances) averages (see Attachment 4 for definitions of rate base items). The Iowa electric jurisdictional rate base amounts are calculated by applying the respective total MidAmerican balance to various allocation factors (discussed in Attachment 2) for each rate base item. MidAmerican will use a cash working capital amount calculated using the percentages as shown in Attachment 5 applied to the corresponding per books values for the year, to include in rate base. APPENDIX 3 PAGE 2 OF 2 The two-factor and average and excess allocators indicated on Attachment 2 will be calculated as of the beginning of the year being reported in order that they may be used by MidAmerican's accounting system to mechanically allocate O&M costs throughout the year. The average and excess allocator will be a three-year average calculation. INCOME STATEMENT - ---------------- The income statement reflects the Iowa electric utility operations of the utility. Revenues from sales to retail customers are specifically identified. Other revenues and all other operating expenses of MidAmerican are either assigned to Iowa using specific charges by location or allocated using the allocation method as summarized on Attachment 2. The accounting system allocates common locations within detailed sub FERC account numbers using a variety of factors including labor dollars, plant, revenue, average and excess, meters and a two factor allocator of plant and labor. Line 11 of the income statement reverses, for purposes of this calculation, any accruals the Company has made in anticipation of revenue sharing pursuant to the terms of the settlement. Amortization of regulatory assets in the normal course of business will continue to be included in operating income per books. Other than the adjustments described above specifically relating to provisions of the settlement, no other pro forma adjustments are expected to be made. CAPITALIZATION - -------------- Due to the holding company reorganization that was effective December 1, 1996, MidAmerican now has a capital structure independent of that for the non-regulated subsidiaries (except CBEC Railway). The non-regulated subsidiaries, in turn, are capitalized similar to other entities in their respective industries. The capital structure and costs used to calculate the embedded cost of capital for MidAmerican shall be based on a thirteen month average for the period being reported consistent with the methodology used in the SPU-98-8 Compliance Filing. LINE DEFINITIONS - ---------------- Attachments 3 and 4 present a summary of the FERC accounts included in the various lines in the calculation. APPENDIX 3 ATTACHMENT 1 IOWA UTILITIES BOARD UTILITY NAME: MIDAMERICAN ENERGY COMPANY PERIOD ENDED: DECEMBER 31, 2OXX IOWA I RATE BASE ELECTRIC 1 Utility Plant in Service $ - 2 (Less) Accum Prov Depreciation 3 (Plus) Working Capital Amount 4 (Less) Customer Advances - Constr 5 (Less) Accum Deferred Taxes 6 (Less) Unamort Pre - 1971 ITC 7 Other a (Plus) Cooper Nuclear Investment b (Less) Customer Deposits c (Less) Reserves d (Less) Accumulated Uncollectibles -------- 8 Estimated Net Utility Rate Base $ - ======== II INCOME STATEMENT 1 Operating Revenues $ - Operating Expenses 2 Operations 3 Maintenance 4 Depreciation & Amortization 5 Taxes Other than Income Taxes 6 Income Taxes - Current 7 Prov Deferred Income Taxes - Net 8 Investment Tax Credit - Net -------- 9 Total Operating Expenses $ - -------- 10 Operating Income Before Adjustments $ - 11 (Plus) Customer Portion of Shared Revenue - 12 Net Operating Income Before Sharing $ - ======== III COST OF CAPITAL WEIGHTED AMOUNT RATIO COST AVERAGE COST 1 Common Equity 2 Preferred Equity 0.00% 3 Long Term Debt 0.00% ------ ---- 4 Cost of Debt and Preferred 0.00% ==== 5 Total $ - ------ Page 1 of 2 APPENDIX 3 Attachment 1 Iowa Utilities Board Utility Name: MidAmerican Energy Company Period Ended: December 31, 2Oxx Iowa Electric IV CUSTOMER PORTION OF SHARED REVENUE OVER 11.75% ROE 1 Net Operating Income Before Sharing $ - 2 Net Operating Income @ 11.75% ROE - -------- 3 Difference - -------- 4 40% Sharing - -------- 5 Tax Gross Up Factor 41.57% 6 Tax Gross Up Dollars - -------- 7 Customer Portion of Shared Revenue Over 11.75% ROE $ - ======== V CUSTOMER PORTION OF SHARED REVENUE OVER 13% ROE 1 Net Operating Income Before Sharing $ - 2 Net Operating Income @ 13% ROE - -------- 3 Difference - -------- 4 10% Additional Sharing - -------- 5 Tax Gross Up Factor 41.57% 6 Tax Gross Up Dollars - -------- 7 Customer Portion of Shared Revenue Over 13% ROE $ - ======== VI CUSTOMER PORTION OF SHARED REVENUE OVER 14% ROE 1 Net Operating Income Before Sharing $ - 2 Net Operating Income @ 14% ROE - -------- 3 Difference - -------- 4 33.3% Additional Sharing - -------- 5 Tax Gross Up Factor 41.57% 6 Tax Gross Up Dollars - -------- 7 Customer Portion of Shared Revenue Over 14% ROE $ - ======== VII TOTAL CUSTOMER PORTION OF SHARED REVENUE 1 Sum of line 7 from IV, V and VI Above $ - ======== Page 2 of 2 APPENDIX 3 ATTACHMENT 2 PAGE 1 OF 3 ROE MONITORING REPORT ALLOCATION SUMMARY MidAmerican Energy Company used the following methods to allocate the Company's accounts to Iowa: ELECTRIC UTILITY OPERATIONS ITEM PRIMARY METHOD OF ALLOCATION TO IOWA I. ELECTRIC PLANT ACCOUNTS 1. Intangible Plant In Service - Production & Transmission Average & Excess Allocator - General Plant Direct Assignment & Meters 2. Production Plant In Service Average & Excess Allocator 3. Transmission Plant In Service Average & Excess Allocator 4. Distribution Plant In Service(Note 4) Direct Assignment, Meters & Transformers 5. General Plant In Service - Production & Transmission Average & Excess Allocator - Other (Note 1) Direct Assignment & Meters 6. Completed Construction Not Classified Same Basis as Classified Plant 7. Nuclear Fuel Average & Excess Allocator 8. Cooper Capital Additions Average & Excess Allocator/Direct II.ELECTRIC ACCUMULATED PROVISION FOR DEPRECIATION & AMORTIZATION 1. Intangible Plant In Service - Production & Transmission Average & Excess Allocator - General Plant Direct Assignment & Meters 2. Production Plant In Service Average & Excess Allocator 3. Transmission Plant In Service Average & Excess Allocator 4. Distribution Plant In Service(Note 4) Direct Assignment, Meters & Transformers 5. General Plant In Service Production & Transmission Average & Excess Allocator Other (Note 1) Direct Assignment & Meters 6. Nuclear Fuel Average & Excess Allocator 7. Cooper Capital Additions Average & Excess Allocator/Direct III.MATERIALS AND SUPPLIES 1. Electric Production Fuel Average & Excess Allocator 2. Materials and Supplies Gross Utility Plant APPENDIX 3 ATTACHMENT 2 PAGE 2 OF 3 ELECTRIC UTILITY OPERATIONS (CONTINUED) ITEM PRIMARY METHOD OF ALLOCATION TO IOWA IV. UNAMORTIZED INVESTMENT TAX CREDIT 1. ElectriC Unamortized ITC - Production & Transmission Average & Excess Allocator - Other Directly Assigned V. CUSTOMER ADVANCES FOR CONSTRUCTION 1. Electric Customer Advances Gross Utility Plant VI. ACCUMULATED DEFERRED INCOME TAXES 1. Electric Accumulated Deferred Taxes - Production & Transmission Average & Excess Allocator - Other Directly Assigned VII. OPERATING REVENUES AND EXPENSES 1. Electric Operating Revenues Directly Assigned Except Sales for Resale-Off-System Sales and Other Revenue- Energy Components are allocated based on KWh sales to retail customers while capacity and Other are allocated per the Average & Excess Allocator 2. Electric Operating Expenses(Note 3) Production & Cooper-Fuel KWh Sales Allocator All Other Production Average & Excess Allocator Transmission Average & Excess Allocator Distribution Direct Charges or Gross Plant Customer Accounts Direct Charges or Meters Customer Service & Inform Direct Charges or Meters Sales Direct Charges or Two Factor Administrative & General Employee Benefits Labor (Note 2) Property Insurance Direct Charges or Gross Plant Regulatory Direct Charges or Revenue Other Direct Charges or Two Factor 3. Depreciation and Amortization Direct Charges and Same as Plant (I & II) 4. Taxes Other Than Income APPENDIX 3 ATTACHMENT 2 PAGE 3 OF 3 Payroll Labor Property Direct Charges or Gross Plant Other Direct Charges or Two Factor 5. Current Income Taxes Calculated 6. Deferred Income Taxes Direct Charges 7. Investment Tax Credit Direct Charges NOTES: 1. Other general plant consists primarily of office buildings, furniture, and equipment. To the extent that such assets can be directly assigned, they are; however, the majority are allocated via meters. 2. Employee benefits follow the labor with which they are associated. To the extent that different jurisdictions receive different benefits (e.g. South Dakota union employees), such costs are directly charged to those jurisdictions. 3. Most O&M accounts have the capability of being direct charged to a specific jurisdiction; however, many such costs are allocated. Direct charging is preferable when it is clear which jurisdiction benefits, consistent with the Company's affiliate transactions policy. However, when it is impractical to direct charge (e.g. supervisory costs in a border-city office or costs for a Company-wide call center), allocations are used. 4. Distribution plant is primarily directly assigned. However, capitalized meter balances are allocated based on meters actually in service. APPENDIX 3 ATTACHMENT 3 PAGE 1 OF 1 MIDAMERICAN ENERGY COMPANY ROE MONITORING REPORT LINE ITEM DEFINITION ELECTRIC OPERATIONS ACCOUNT RANGE DESCRIPTION FROM THROUGH Operating Revenues 440 456 Gains/losses from Disposition of Allowances 411.8 411.9 Operations Steam Power Production 500 509 Nuclear Power Production 517 525 Hydraulic Power Production 535 540 Other Power Production 546 550 Other Power Supply 555 557 Transmission 560 567 Distribution 580 589 Customer Accounts 901 905 Customer Service, Informational & Sales 907 916 Administrative & General 920 931 Maintenance Steam Power Production 510 514 Nuclear Power Production 528 532 Hydraulic Power Production 541 545 Other Power Production 551 554 Transmission 568 573 Distribution 590 598 Administrative & General 935 Depreciation & Amortization 403 407 Taxes Other Than Income Taxes 408.1 Income Taxes - Current 409.1 Provision for Deferred Income Taxes - Net 410.1 411.1 Investment Tax Credit - Net 411.4 APPENDIX 3 ATTACHMENT 4 PAGE 1 OF 1 MIDAMERICAN ENERGY COMPANY ROE MONITORING REPORT LINE ITEM DEFINITION ELECTRIC OPERATIONS ACCOUNT RANGE DESCRIPTION RATE BASE PLANT IN SERVICE Plant in Service 101 and 106 Nuclear Fuel 120 ACCUMULATED PROVISION - DEPRECIATION Provision Depreciation & Amortization 108 and 111 Amortization-- Nuclear Fuel 120 WORKING CAPITAL Coal and Oil Stocks 151 Materials & Supplies 154 and 163 Prepayments 165 Cash Working Capital (See Attachment 5) - - CUSTOMER ADVANCES - CONSTRUCTION 252 ACCUMULATED DEFERRED INCOME TAXES 190, 281 and 282 UNAMORTIZED PRE-1971 3% ITC 255 COOPER NUCLEAR INVESTMENT Amortization Cooper Nuclear Investment 124 CUSTOMER DEPOSITS 235 RESERVES 228 and 242 CUSTOMER ADVANCES 252 ACCUMULATED UNCOLLECTIBLES 144 APPENDIX 3 ATTACHMENT 5 PAGE 1 OF 1 MIDAMERICAN ENERGY COMPANY CALCULATION OF WORKING CAPITAL COMPONENT
DESCRIPTION SOURCE 2OXX MEC WORKING CAPITAL WORKING CAPITAL AMOUNT PERCENTAGE REQUIREMENT Labor Operations and Maintenance Iowa Per Salaries & Wages Page 354 - Total Labor - 8.22% $ - -------- -------- Fuel Costs Coal Iowa - 501 Less Labor - Oil Iowa - 547001 Less Labor - Natural Gas Iowa - 547021 Less Labor - Nuclear Fuel Iowa - 518 Less Labor - --------- Total Fuel Costs - 5.40% - --------- -------- Electricity Purchased Cooper Fuel Iowa - 555404 - Cooper - Other Iowa - 555430 - 555460 - Other Purchases Iowa - 555099 - 555304, 555411 - 555412 - -------- Total Electricity Purchased - 6.26% - -------- --------- Other Operations & Maintenance Iowa 0 & M Less (Labor-Fuel-Purchases) - Less: Uncollectibles Iowa - 904 Electric - Injuries & Damages Iowa - 925 Electric - Cooper Amortization - Capital Iowa - 555420- 555422, 555470 - NPPD Replacement Power None - -------- Total Operations & Maintenance - 5.22% - -------- --------- Other Property Tax - Iowa Iowa - 408141 Electric - (89.01%) - Property Tax - Illinois Iowa - 408143 Electric - (102.18%) - Illinois Investment Capital Tax Iowa - 408142 Electric - 2.52% - Federal Income Tax Iowa - 409 Electric ATL - (2.30%) - State Income Tax Iowa - 409 Electric ATL - (2.30%) - Interest on Long Term Debt Iowa - 427 Electric - (14.17%) - Preferred Stock Dividends Iowa - 437 Electric - (1.61%) - Federal Payroll Taxes Iowa - 408111 & 408121 Electric - 7.86% - State Payroll Taxes Iowa - 408131 Electric - (4.41%) - Use/Sales Taxes - 0.00% - Regulatory Assessments Iowa - 928311, 928312 Electric - (0.47%) - -------- Total Other - -------- Total Working Capital Requirement $ - ========
EX-15 4 exh15.txt AWARENESS LETTER EXHIBIT 15 AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS MidAmerican Energy Company Des Moines, Iowa We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited consolidated interim financial information of MidAmerican Energy Company and subsidiaries for the three-month and nine-month periods ended September 30, 2003 and 2002, as indicated in our report dated November 3, 2003; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is incorporated by reference in Registration Statement No. 333-101800 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Des Moines, Iowa November 5, 2003 EX-31.1 5 exh31-1.txt SECTION 302 CEO CERTIFICATION EXHIBIT 31.1 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS I, Jack L. Alexander, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /s/ Jack L. Alexander ---------------------------- Jack L. Alexander Senior Vice President (co-chief executive officer) EX-31.2 6 exh31-2.txt SECTION 302 CEO CERTIFICATION EXHIBIT 31.2 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Todd M. Raba, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /s/ Todd M. Raba ---------------------------- Todd M. Raba Senior Vice President (co-chief executive officer) EX-31.3 7 exh31-3.txt SECTION 302 CFO CERTFICATION EXHIBIT 31.3 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Thomas B. Specketer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /s/ Thomas B. Specketer ----------------------------- Thomas B. Specketer Vice President and Controller (chief financial officer) EX-31.4 8 exh31-4.txt SECTION 302 CEO CERTIFICATION EXHIBIT 31.4 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, David L. Sokol, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /s/ David L. Sokol ----------------------- David L. Sokol Chief Executive Officer EX-31.5 9 exh31-5.txt SECTION 302 CFO CERTIFICATION EXHIBIT 31.5 SECTION 302 CERTIFICATION FOR FORM 10-Q CERTIFICATIONS - -------------- I, Patrick J. Goodman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding, LLC; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2003 /s/ Patrick J. Goodman ---------------------------- Patrick J. Goodman Vice President and Treasurer (chief financial officer) EX-32.1 10 exh32-1.txt SECTION 906 CEO CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jack L. Alexander, Senior Vice President of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2003 /s/ Jack L. Alexander --------------------------- Jack L. Alexander Senior Vice President (co-chief executive officer) EX-32.2 11 exh32-2.txt SECTION 906 CEO CERTFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Todd M. Raba, Senior Vice President of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2003 /s/ Todd M. Raba ---------------------------- Todd M. Raba Senior Vice President (co-chief executive officer) EX-32.3 12 exh32-3.txt SECTION 906 CFO CERTIFICATION EXHIBIT 32.3 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas B. Specketer, Vice President and Controller of MidAmerican Energy Company (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2003 /s/ Thomas B. Specketer ----------------------------- Thomas B. Specketer Vice President and Controller (chief financial officer) EX-32.4 13 exh32-4.txt SECTION 906 CEO CERTIFICATION EXHIBIT 32.4 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, David L. Sokol, Chief Executive Officer of MidAmerican Funding, LLC (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2003 /s/ David L. Sokol ------------------ David L. Sokol Chief Executive Officer EX-32.5 14 exh32-5.txt SECTION 906 CFO CERTIFICATION EXHIBIT 32.5 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Patrick J. Goodman, Vice President and Treasurer of MidAmerican Funding, LLC (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: November 5, 2003 /s/ Patrick J. Goodman ---------------------- Patrick J. Goodman Vice President and Treasurer (chief financial officer) -----END PRIVACY-ENHANCED MESSAGE-----