UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $3.30 Series, no par value
Preferred Stock, $3.75 Series, no par value
Preferred Stock, $3.90 Series, no par value
Preferred Stock, $4.20 Series, no par value
Preferred Stock, $4.35 Series, no par value
Preferred Stock, $4.40 Series, no par value
Preferred Stock, $4.80 Series, no par value
(Title of each Class)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sect. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants' knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12-b-2 of the Act). Yes [ ] No [X]
All of the member's equity of MidAmerican Funding, LLC is held by its parent
company, MidAmerican Energy Holdings Company, as of February 1, 2004.
All common stock of MidAmerican Energy Company is held by its parent company,
MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding,
LLC. As of February 1, 2004, 70,980,203 shares of MidAmerican Energy Company
common stock, without par value, were outstanding.
MidAmerican Funding, LLC and MidAmerican Energy Company meet the conditions set
forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format specified in General
Instruction I(2) of Form 10-K.
-2-
MidAmerican Funding, LLC ("MidAmerican Funding"), and MidAmerican Energy Company
("MidAmerican Energy"), separately file this combined Form 10-K. Information
relating to each individual registrant is filed by such registrant on its own
behalf. Except for its subsidiaries, MidAmerican Energy makes no representation
as to information relating to any other subsidiary of MidAmerican Funding.
TABLE OF CONTENTS
Page
PART I
Item 1. Business...........................................................4
Item 2. Properties........................................................20
Item 3. Legal Proceedings.................................................21
Item 4. Submission of Matters to Vote of Security Holders.................21
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.................21
Item 6. Selected Financial Data...........................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........46
Item 8. Financial Statements and Supplementary Data.......................50
Item 9. Changes in and Disagreements with Accountants on Accounting......107
Item 9A. Controls and Procedures..........................................107
PART III
Item 10. Directors and Executive Officers of the Registrant...............108
Item 11. Executive Compensation...........................................110
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................110
Item 13. Certain Relationships and Related Transactions...................110
Item 14. Principal Accountant Fees and Services...........................111
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................................112
Signatures..................................................................115
Exhibit Index...............................................................117
-3-
PART I
ITEM 1. BUSINESS
MidAmerican Funding, LLC ("MidAmerican Funding"), is an Iowa limited liability
company that was formed in March 1999. Its sole member is MidAmerican Energy
Holdings Company ("MidAmerican Energy Holdings"). MidAmerican Funding owns all
of the outstanding common stock of MHC Inc., which owns all of the common stock
of MidAmerican Energy Company ("MidAmerican Energy"); InterCoast Capital Company
("InterCoast Capital", formerly named MidAmerican Capital Company); Midwest
Capital Group, Inc. ("Midwest Capital"); MidAmerican Services Company
("MidAmerican Services"); and MEC Construction Services Co. ("MEC
Construction"). MidAmerican Energy is a public utility company headquartered in
Des Moines, Iowa, and incorporated in the state of Iowa.
On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company, completed
a merger transaction with CalEnergy Company, Inc. On that date, MidAmerican
Funding, which was formed by CalEnergy Company, Inc. as a single member limited
liability company, acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result of this transaction, MHC and its subsidiaries,
including MidAmerican Energy, became wholly owned subsidiaries of MidAmerican
Funding. MHC, MidAmerican Funding and MidAmerican Energy Holdings Company are
exempt public utility holding companies headquartered in Des Moines, Iowa.
MidAmerican Energy Holdings is a privately owned company with publicly traded
fixed-income securities and is owned by an investor group consisting of
Berkshire Hathaway Inc., Walter Scott, Jr., David L. Sokol and Gregory E. Abel.
FORWARD-LOOKING STATEMENTS
This annual report contains statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can typically be identified by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast,"
and similar terms. These statements represent MidAmerican Funding's and/or
MidAmerican Energy's intentions, plans, expectations and beliefs and are subject
to risks, uncertainties and other factors. Many of these factors are outside the
control of MidAmerican Funding or MidAmerican Energy and could cause actual
results to differ materially from such forward-looking statements. These factors
include, among others:
- general economic and business conditions in the United States as a
whole and in the midwestern United States and MidAmerican Energy's
service territory in particular;
- governmental, statutory, regulatory or administrative initiatives;
- weather effects on sales and revenues;
- general industry trends;
- increased competition in the power generation industry;
- fuel and power costs and availability;
- changes in business strategy, development plans or vendor
relationships;
- availability, term and deployment of capital;
-4-
- availability of qualified personnel;
- unscheduled generation outages or repairs;
- risks relating to nuclear generation;
- financial or regulatory accounting principles or policies imposed by
the Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar
entities with regulatory oversight;
- other risks or unforeseen events, including wars, the effects of
terrorism, embargoes and other catastrophic events; and
- other business or investment considerations that may be disclosed from
time to time in MidAmerican Funding's or MidAmerican Energy's
Securities and Exchange Commission filings or in other publicly
disseminated written documents.
MidAmerican Funding and MidAmerican Energy undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The foregoing review of factors should
not be construed as exhaustive.
MIDAMERICAN FUNDING AND MHC
---------------------------
MidAmerican Funding conducts no business other than activities related to the
issuance of its debt securities and the ownership of MHC.
MHC conducts no business other than the ownership of its subsidiaries. MHC's
interests include 100% of the common stock of MidAmerican Energy, InterCoast
Capital, Midwest Capital, MidAmerican Services and MEC Construction. MidAmerican
Energy is primarily engaged in the business of generating, transmitting,
distributing and selling electric energy and in distributing, selling and
transporting natural gas. It accounts for the predominant part of MHC's assets
and earnings. InterCoast Capital manages equipment leases and other passive
investment activities. Midwest Capital functions as a regional business
development company in MidAmerican Energy's service territory. MidAmerican
Services provides comprehensive energy services to commercial and industrial
companies, and MEC Construction provides nonregulated utility construction
services.
Substantially all of MidAmerican Funding's operating revenues are from
MidAmerican Energy. Financial information on MidAmerican Funding's segments of
business is included in Note (12) of Notes to Consolidated Financial Statements
included in Item 8 of this Form 10-K.
MidAmerican Funding and its subsidiaries had 3,709 employees as of December 31,
2003.
MIDAMERICAN ENERGY
------------------
MidAmerican Energy is a public utility company headquartered in Iowa with $4.4
billion of assets as of December 31, 2003, and operating revenues for 2003
totaling $2.6 billion. MidAmerican Energy is principally engaged in the business
of generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Energy
distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge,
Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities (Davenport and
Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois); and a
number of adjacent communities and areas. It also distributes natural gas at
retail in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and
Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and a number of
adjacent communities and areas. As of December 31, 2003, MidAmerican Energy had
approximately 689,000 retail electric customers and 668,000 retail natural gas
customers.
-5-
In addition to retail sales, MidAmerican Energy sells electric energy and
natural gas to other utilities, marketers and municipalities. These sales are
referred to as wholesale sales. It also transports natural gas through its
distribution system for a number of end-use customers who have independently
secured their supply of natural gas.
Financial information on MidAmerican Energy's segments of business is included
in Note (12) of Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.
MidAmerican Energy's regulated electric and gas operations are conducted under
franchises, certificates, permits and licenses obtained from state and local
authorities. The franchises, with various expiration dates, are typically for
25-year terms.
MidAmerican Energy has a diverse customer base consisting of residential,
agricultural, and a variety of commercial and industrial customer groups. Among
the primary industries served by MidAmerican Energy are those that are concerned
with food products, the manufacturing, processing and fabrication of primary
metals, real estate, farm and other non-electrical machinery, and cement and
gypsum products.
MidAmerican Energy also conducts a number of nonregulated business activities.
Refer to the "Nonregulated Operations" section later in Part I for further
discussion.
For the year ended December 31, 2003, MidAmerican Energy derived approximately
54% of its gross operating revenues from its regulated electric business, 36%
from its regulated gas business and 10% from its nonregulated business
activities. For 2002 and 2001, the corresponding percentages were 61% electric,
31% gas and 8% nonregulated; and 56% electric, 37% gas and 7% nonregulated,
respectively.
At December 31, 2003, MidAmerican Energy had 3,694 employees of which 1,735 were
covered by union contracts. MidAmerican Energy has five separate contracts with
locals of the International Brotherhood of Electrical Workers ("IBEW"), the
United Association of Plumbers and Pipefitters and the United Paper Workers
International Union. One contract with IBEW locals 109 and 499 expires February
28, 2006, and covers 1,678 employee members.
-6-
REGULATED ELECTRIC OPERATIONS
The following tables present historical regulated electric sales data related to
customer class and jurisdictions.
Total Regulated Electric Sales
By Customer Class
------------------------------
2003 2002 2001
----- ----- -----
Residential ................. 19.4% 19.8% 20.6%
Small general service (1) ... 14.0 14.2 15.3
Large general service (2) ... 25.4 24.5 25.8
Wholesale (3) ............... 32.7 32.4% 31.0
Other ....................... 8.5 9.1 7.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(1) Small general service generally includes commercial and industrial
customers with a demand of 200 kilowatts or less.
(2) Large general service generally includes commercial and industrial
customers with a demand of more than 200 kilowatts.
(3) Wholesale generally includes other utilities, marketers and
municipalities to whom electric energy is sold at wholesale for resale
to ultimate customers.
Regulated Retail Electric Sales
By State
-------------------------------
2003 2002 2001
---- ---- ----
Iowa......................... 88.8% 88.5% 88.6%
Illinois..................... 10.4 10.7 10.6
South Dakota................. 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric business that are
principally related to the use of electricity for air conditioning. In 2003, 39%
of MidAmerican Energy's regulated electric revenues were reported in the months
of June, July, August and September.
The annual hourly peak demand on MidAmerican Energy's electric system usually
occurs as a result of air conditioning use during the cooling season. In August
2003, MidAmerican Energy reached a new record hourly peak demand of 3,935
megawatts ("MW"), which was 46 MW greater than MidAmerican Energy's previous
record hourly peak demand of 3,889 MW set in July 2002.
MidAmerican Energy's accredited net generating capability in the summer of 2003
was 4,787 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican Energy's system and
consists of MidAmerican Energy-owned generation, generation under power purchase
contracts and the net amount of capacity purchases and sales. The net generating
capability at any time may be less than it would otherwise be due to regulatory
restrictions, fuel restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications.
-7-
The following table details net accredited generating capacity of MidAmerican
Energy, along with participation purchases and sales, net, for summer 2003
accreditation.
Company's Share
of Accredited
Percent Generating
Plant Ownership Fuel Capability (MW)
- -------------------------------------------- --------- ---- ---------------
Steam electric generating plants:
Council Bluffs Energy Center
Unit No. 1 ............................. 100.0 Coal 45
Unit No. 2 ............................. 100.0 Coal 88
Unit No. 3 ............................. 79.1 Coal 546
George Neal Station
Unit No. 1 ............................. 100.0 Coal 135
Unit No. 2 ............................. 100.0 Coal 300
Unit No. 3 ............................. 72.0 Coal 371
Unit No. 4 ............................. 40.6 Coal 261
Louisa Unit .............................. 88.0 Coal 616
Ottumwa Unit ............................. 52.0 Coal 368
Riverside Station
Unit No. 3 ............................. 100.0 Coal 5
Unit No. 5 ............................. 100.0 Coal 130
-----
2,865
-----
Combustion turbines:
Coralville - 4 units ..................... 100.0 Gas/Oil 64
Electrifarm - 3 units .................... 100.0 Gas/Oil 200
Greater Des Moines Energy Center - 2 units 100.0 Gas 327
Moline - 4 units ......................... 100.0 Gas/Oil 64
Parr - 2 units ........................... 100.0 Gas/Oil 32
Pleasant Hill Energy Center - 3 units .... 100.0 Oil 157
River Hills Energy Center - 8 units ...... 100.0 Gas/Oil 120
Sycamore Energy Center - 2 units ......... 100.0 Gas/Oil 148
-----
1,112
-----
Nuclear: Quad Cities Station
Unit No. 1 ............................... 25.0 Nuclear 218
Unit No. 2 ............................... 25.0 Nuclear 219
-----
437
-----
Hydro: Moline - 4 units .................... 100.0 Water 3
Portable power modules - 28 units .......... 100.0 Oil 56
-----
Accredited generating capacity ............. 4,473
Participation purchases and (sales), net:
Cordova Energy Company, LLC (1) .......... 250
Nebraska Public Power District (2) ....... 380
Other, net ............................... (316)
-----
Net accredited generating capability ....... 4,787
=====
(1) The amount shown above is MidAmerican Energy's entitlement (50%) of
the Cordova Energy Center's net accredited capacity under a power
purchase contract extending to May 2004. Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, owns Cordova Energy Center.
(2) The amount shown is capacity purchased under a power purchase contract
with the NPPD extending to December 2004. Subsequent to December 31,
2003, MidAmerican Energy entered into a power purchase contract with
NPPD for January 1, 2005, through December 31, 2009, that will result
in MidAmerican Energy obtaining 250 MW annually for the five-year
period.
-8-
MidAmerican Energy anticipates a continuing increase in demand for electricity
from its regulated customers. To meet anticipated demand and ensure adequate
electric generation in its service territory, MidAmerican Energy is currently
constructing two electric generating projects in Iowa and is developing a third.
Upon completion, the projects will provide service to regulated retail
electricity customers. MidAmerican Energy has obtained regulatory approval to
include the actual costs of the generation projects in its Iowa rate base as
long as actual costs do not exceed a cap MidAmerican Energy has deemed to be
reasonable. Wholesale sales may also be made from the projects to the extent the
power is not needed for regulated retail service.
The first project is a natural gas-fired, combined cycle unit with an estimated
cost of $357 million, excluding allowance for funds used during construction.
MidAmerican Energy will own and operate the plant. Commercial operation of the
simple cycle mode began on May 5, 2003. The plant, which will continue to be
operated in simple cycle mode during 2004, resulted in 327 MW of accredited
capacity in the summer of 2003. The combined cycle operation is expected to
commence in December 2004 and achieve an expected additional accredited capacity
of 190 MW.
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 hold an undivided ownership
interest as a tenant in common with the other owners of the plant. MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy expects its share of the estimated cost of the project to be
approximately $713 million, excluding 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 Iowa Utilities Board ("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 comprised of wind power
facilities totaling 310 MW based on the nameplate rating. Generally speaking,
accredited capacity ratings for the 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, 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 in conjunction with 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. The production tax credit is available only to
wind facilities placed in service before January 1, 2004. MidAmerican Energy has
received authorization from the IUB to construct the wind power project. If
MidAmerican Energy does not construct the facilities by December 31, 2007, the
rate extension from January 1, 2006 through December 31, 2010 may terminate.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring states and is party to an electric generation and transmission
pooling agreement administered by the Mid-Continent Area Power Pool ("MAPP").
MAPP is a voluntary association of electric utilities doing business in
Minnesota, Nebraska, North Dakota and the Canadian provinces of Saskatchewan and
Manitoba and portions of Iowa, Montana, South Dakota and Wisconsin. Its
membership also includes power marketers, regulatory agencies and independent
power producers. MAPP facilitates operation of the transmission system, is
responsible for the safety and reliability of the bulk electric system, and has
responsibility for administration of MAPP's Open-Access Transmission Tariff.
Each MAPP participant is required to maintain for emergency purposes a net
generating capability reserve of at least 15% above its system peak demand. If a
participant's capability reserve falls below the 15% minimum,
-9-
significant penalties could be contractually imposed by MAPP. MidAmerican
Energy's reserve margin at peak demand for 2003 was approximately 22%.
MidAmerican Energy's transmission system connects its generating facilities with
distribution substations and interconnects with 14 other transmission providers
in Iowa and five adjacent states. Under normal operating conditions, MidAmerican
Energy's transmission system has adequate capacity to deliver energy to
MidAmerican Energy's distribution system and to export and import energy with
other interconnected systems. Refer to Item 2 of this Form 10-K for additional
information on transmission lines.
The Federal Energy Regulatory Commission (the "FERC") has undertaken several
measures to increase competition in the markets for wholesale electric energy,
including efforts to foster the development of regional transmission
organizations ("RTO") in its Order No. 2000 issued December 1999 and its July
2002 proposed rulemaking that would implement a standard market design ("SMD")
for wholesale electric markets.
In response to Order No. 2000, MidAmerican Energy and five other electric
utilities applied for FERC approval to create TRANSLink Transmission Company LLC
("TRANSLink") as a for-profit independent transmission company to be operated in
conjunction with a FERC-approved RTO. The FERC approved that application in
April 2002. In June 2003, the IUB issued an order disapproving MidAmerican
Energy's application for state regulatory approval of MidAmerican Energy's
participation in TRANSLink and inviting MidAmerican Energy to refile the
application once certain issues at the federal level have been resolved. On
November 21, 2003, in response to continued regulatory uncertainty, TRANSLink
suspended its operations and dissolved its interim management team. MidAmerican
Energy is currently evaluating options relating to its transmission options in
light of TRANSLink's current status.
If implemented, the FERC's July 2002 proposed rule for SMD would require
sweeping changes to the use and expansion of the interstate transmission and
wholesale bulk power systems in the United States. However, it is unclear when
or even whether FERC will issue a final rule and what form the final rule would
ultimately take. In response to significant criticism of its proposed rule, the
FERC subsequently indicated that it had changed its proposal and would adopt a
flexible approach to SMD that would accommodate regional differences.
Legislation that is currently pending in Congress would forbid the FERC from
implementing the SMD rule for several years, but it is not certain whether that
legislation will be adopted. Any final rule on SMD may impact the costs of
MidAmerican Energy's electricity and transmission products. A final rule on SMD
could directly or indirectly influence how transmission services are priced, the
availability of transmission services, and how transmission services are
obtained. In addition, the rule could affect how wholesale electricity is bought
and sold, as well as the geographic scope of the wholesale marketplace in which
MidAmerican Energy buys and sells electricity. MidAmerican Energy recognizes
there is considerable uncertainty as to the timing and outcome of this
rulemaking and will continue to evaluate the status of the adoption of SMD for
the wholesale markets. Transferring the operations and control of MidAmerican
Energy's transmission assets to other entities could increase costs for
MidAmerican Energy; however, the actual effect of any such transaction on
MidAmerican Energy's future transmission costs, or alternate RTO strategies, is
not yet known.
-10-
Energy Supply for Electric Operations
- -------------------------------------
MidAmerican Energy's total energy supplied to retail and wholesale electric
customers was from the following sources:
2003 2002 2001
---- ---- ----
MidAmerican Energy-owned generation ....... 77.9% 76.5% 82.6%
Energy purchased under long-term contracts 11.5 14.3 13.5
Energy purchased - other .................. 10.6 9.2 3.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Sources of fuel for MidAmerican Energy-owned electric generation were as follows
for the years ended December 31:
2003 2002 2001
---- ---- ----
Coal ...................................... 83.9% 79.1% 74.9%
Nuclear (a) ............................... 15.5 20.5 24.5
Gas ....................................... 0.5 0.3 0.5
Oil/Hydro ................................. 0.1 0.1 0.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(a) In 2001 and 2002, nuclear includes energy purchased through a power
purchase contract with Nebraska Public Power District. As a result of
a contract restructuring effective August 1, 2002, energy purchased
under that contract after the restructuring is excluded from the table
since it is similar to other purchased energy in that it is not
restricted to a particular energy source.
MidAmerican Energy is not allowed to automatically recover a portion of its
energy costs relating to retail sales in Iowa through energy adjustment clauses.
Accordingly, fluctuations in energy costs affect MidAmerican Energy's earnings.
All of the coal-fired generating stations operated by MidAmerican Energy are
fueled by low-sulfur, western coal from the Powder River Basin and Hanna Basin.
MidAmerican Energy's coal supply portfolio includes multiple suppliers and mines
under agreements of varying terms and quantities. MidAmerican Energy regularly
monitors the western coal market, looking for opportunities to improve its coal
supply portfolio. MidAmerican Energy believes its sources of coal supply are,
and will continue to be, satisfactory. Additional information regarding
MidAmerican Energy's coal supply contracts is included in Note (4)(f) of Notes
to Consolidated Financial Statements in Item 8 of this Form 10-K.
MidAmerican Energy has agreements with Union Pacific Railroad Company to deliver
coal directly to its Neal and Council Bluffs Energy Centers. Coal for
MidAmerican Energy's Louisa and Riverside Energy Centers is delivered to an
interchange point by Union Pacific for transportation to its destination by
Iowa, Chicago & Eastern Railroad Corporation. MidAmerican Energy has the ability
to use The Burlington Northern and Santa Fe Railway Company for delivery of a
small amount of coal to the Council Bluffs, Louisa and Riverside Energy Centers
should the need arise. MidAmerican Energy believes its coal transportation
arrangements are adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for intermediate and peak
demand electric generation, igniter fuel, transmission support and standby
purposes. These sources are presently in adequate supply and available to meet
MidAmerican Energy's needs.
MidAmerican Energy has an agreement with the Nebraska Public Power District
("NPPD"), to purchase electric capacity and energy through December 31, 2004.
Under the contract, as restructured effective August 1, 2002, MidAmerican Energy
will purchase 380 MW of the accredited capacity of Cooper Nuclear Station and a
-11-
minimum volume of energy in 2004. NPPD is not required to use Cooper Nuclear
Station to meet the minimum energy requirement. In January 2004, MidAmerican
Energy and NPPD entered into a series of agreements that will result in
MidAmerican purchasing 250 MW of NPPD capacity for a five-year period commencing
January 1, 2005.
MidAmerican Energy has an agreement with Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant that started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy is a 25% joint owner of Quad Cities Generating Station, a
nuclear power plant. Exelon Generation Company, LLC ("Exelon Generation"), the
other joint owner and the operator of Quad Cities Station, is a subsidiary of
Exelon Corporation.
Approximately one-third of the nuclear fuel assemblies in the core at Quad
Cities Station Units 1 and 2 is replaced every 24 months. MidAmerican Energy has
been advised by Exelon Generation that the majority of its uranium concentrate
and uranium conversion requirements for Quad Cities Station through 2005 can be
met under existing supplies or commitments. Exelon Generation foresees no
problem in obtaining the remaining requirements now or obtaining future
requirements. Exelon Generation further advises that enrichment services
contracted through 2007 provide flexibility as to the quantity purchased.
Commitments for fuel fabrication have been obtained through 2013. Exelon
Generation does not anticipate that it will have difficulty in contracting for
uranium concentrates for conversion, enrichment or fabrication of nuclear fuel
needed to operate Quad Cities Station.
REGULATED NATURAL GAS OPERATIONS
MidAmerican Energy is engaged in the procurement, transportation, storage and
distribution of natural gas for customers in the Midwest. MidAmerican Energy
purchases natural gas from various suppliers, transports it from the production
area to MidAmerican Energy's service territory under contracts with interstate
pipelines, stores it in various storage facilities to manage fluctuations in
system demand and seasonal pricing, and distributes it to customers through
MidAmerican Energy's distribution system.
MidAmerican Energy sells natural gas to end-use, or retail, customers and to
other utilities, marketers and municipalities. MidAmerican Energy also
transports through its distribution system natural gas purchased independently
by a number of end-use customers. During 2003, approximately 43% of total gas
delivered through MidAmerican Energy's system for end-use customers was under
gas transportation service.
There are seasonal variations in MidAmerican Energy's gas business that are
principally due to the use of natural gas for heating. In 2003, 58% of
MidAmerican Energy's regulated gas revenues were reported in the months of
January, February, March, and December.
-12-
The following tables present historical regulated gas sales data, excluding
transportation throughput, related to customer class and jurisdictions.
Total Regulated Gas Sales
By Customer Class
--------------------------
2003 2002 2001
---- ---- ----
Residential ................ 43.7% 39.0% 34.5%
Small general service (1) .. 20.8 19.7 18.2
Large general service (1) .. 1.9 1.5 1.5
Wholesale (2) .............. 28.1 38.6 44.1
Other ...................... 5.5 1.2 1.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(1) Small and large general service customers are classified primarily
based on the nature of their business and gas usage. Small general
service customers are business customers whose gas usage is
principally for heating. Large general service customers are business
customers whose principal gas usage is for their manufacturing
processes.
(2) Wholesale generally includes other utilities, marketers and
municipalities to whom natural gas is sold at wholesale for eventual
resale to ultimate customers.
Regulated Retail Gas Sales
By State
--------------------------
2003 2002 2001
---- ---- ----
Iowa ....................... 77.9% 78.0% 78.9%
Illinois ................... 10.0 10.0 9.8
South Dakota ............... 11.3 11.2 10.5
Nebraska ................... 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Fuel Supply and Capacity
- ------------------------
MidAmerican Energy purchases gas supplies from producers and third party
marketers. To ensure system reliability, a geographically diverse supply
portfolio with varying terms and contract conditions is utilized for the gas
supplies. MidAmerican Energy attempts to optimize the value of its regulatory
assets by engaging in sales for resale transactions. IUB and South Dakota Public
Utilities Commission rulings have allowed MidAmerican Energy to retain 50% of
the respective jurisdictional margins earned on sales for resale of natural gas,
with the remaining 50% being returned to customers through the purchased gas
adjustment clause discussed below.
MidAmerican Energy has rights to firm pipeline capacity to transport gas to its
service territory through direct interconnects to the pipeline systems of
Northern Natural Gas Company (an affiliate company), Natural Gas Pipeline
Company of America, Northern Border Pipeline Company and ANR Pipeline Company.
At times, the capacity available through MidAmerican Energy's firm capacity
portfolio may exceed the demand on MidAmerican Energy's distribution system.
Firm capacity in excess of MidAmerican Energy's system needs can be resold to
other companies to achieve optimum use of the available capacity. Past IUB and
South Dakota Public Utilities Commission rulings have allowed MidAmerican Energy
to retain 30% of the respective jurisdictional margins earned on the resold
capacity, with the remaining 70% being returned to customers through the
purchased gas adjustment clause.
MidAmerican Energy's cost of gas is recovered from customers through purchased
gas adjustment clauses. In 1995, the IUB gave initial approval of MidAmerican
Energy's Incentive Gas Supply Procurement Program. In November 2003, the IUB
extended the program through October 31, 2004. Under the program, as amended,
MidAmerican Energy is required to file with the IUB every six months a
comparison of its gas procurement costs to an index-based reference price. If
MidAmerican Energy's cost of gas for the period is less or greater than an
-13-
established tolerance band around the reference price, then MidAmerican Energy
shares a portion of the savings or costs with customers. A similar program is
currently in effect in South Dakota through October 31, 2005. Since the
implementation of the program, MidAmerican Energy has successfully achieved and
shared savings with its natural gas customers. Refer to the "Nonregulated
Operations" section below for additional information.
MidAmerican Energy utilizes leased gas storage to meet peak day requirements and
to manage the daily changes in demand due to changes in weather. The storage gas
is typically replaced during the summer months. In addition, MidAmerican Energy
also utilizes three liquefied natural gas plants and two propane-air plants to
meet peak day demands in the winter. The storage and peak shaving facilities
reduce MidAmerican Energy's dependence on gas purchases during the volatile
winter heating season. In addition, MidAmerican Energy has entered into various
financial and physical gas purchase agreements to mitigate the volatility of gas
prices during the winter heating season.
On February 2, 1996, MidAmerican Energy had its highest peak-day delivery of
1,143,026 million British thermal units ("MMBtus"). This peak-day delivery
consisted of approximately 88% traditional sales service and 12% transportation
service of customer-owned gas. As of January 31, 2004, MidAmerican Energy's
2003/2004 winter heating season peak-day delivery of 1,093,294 MMBtus was
reached on January 29, 2004. This peak-day delivery included approximately 73%
traditional sales service and 27% transportation service.
The supply sources utilized by MidAmerican Energy to meet its 2003/2004 peak-day
deliveries to its traditional sales service customers were:
Thousands Percent
of of
MMBtus Total
--------- -------
Leased storage and peak shaving plants 314.5 39.2%
Firm supply .......................... 487.8 60.8
----- -----
802.3 100.0%
===== =====
MidAmerican Energy has strategically built multiple pipeline interconnections
into several of its larger communities. Multiple pipeline interconnects create
competition among pipeline suppliers for transportation capacity to serve those
communities, thus reducing costs. In addition, multiple pipeline interconnects
give MidAmerican Energy the ability to optimize delivery of the lowest cost
supply from the various supply basins into these communities and increase
delivery reliability. Benefits to MidAmerican Energy's system customers are
shared with all jurisdictions through a consolidated purchased gas adjustment
clause.
MidAmerican Energy does not anticipate difficulties in meeting its future
demands through the use of its supply portfolio and pipeline interconnections
for the foreseeable future.
NONREGULATED OPERATIONS
MidAmerican Energy's nonregulated operations include a variety of activities
outside of the traditional regulated electric and gas services.
-14-
Historical gross margins, or revenues less related cost of sales, for
MidAmerican Energy's nonregulated operations are shown below (in millions):
2003 2002 2001
----- ----- ----
Nonregulated retail electric.............. $13.2 $11.4 $ 4.6
Nonregulated retail gas................... 4.9 2.7 2.0
Wholesale gas and electric................ 4.7 3.3 6.9
Income sharing arrangements under
regulated gas tariffs................... 5.0 3.1 4.4
Incentive gas supply procurement
program award........................... 3.8 3.4 4.1
Other .................................... 3.1 4.5 3.6
----- ----- -----
$34.7 $28.4 $25.6
===== ===== =====
As of May 1, 2002, all retail electric customers in Illinois, except for those
served by electric cooperatives and municipalities, had been phased in to allow
them to select their provider of electric supply services. MidAmerican Energy's
nonregulated electric retail revenues include revenues related to these supply
services provided to customers outside of MidAmerican Energy's delivery system
who choose their energy supplier. Revenues related to non-supply services, such
as distribution and transmission, are reflected in regulated electric revenues.
In September 2002, MidAmerican Energy began serving retail customers in Ohio.
MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements.
MidAmerican Energy's wholesale gas and electric operations consist of
nonregulated wholesale electric and natural gas marketing operations through
which it buys from, and sells to, other utilities and marketers. These
operations are considered "energy trading" activities under generally accepted
accounting principles, and accordingly, related revenues are recorded net of the
related cost of sales on the statements of operations.
Nonregulated operations also include earnings from sharing arrangements under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public Utilities Commission ("SDPUC"), for MidAmerican Energy's regulated
natural gas operations. Under these arrangements, MidAmerican Energy is allowed
to keep a portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program, under which it can receive awards for successful performance of gas
supply procurement. Refer to the preceding "Regulated Natural Gas Operations"
section for further discussion of the sharing arrangements and the gas
procurement program.
REGULATION
General Utility Regulation
- --------------------------
MidAmerican Energy is a public utility within the meaning of the Federal Power
Act and a natural gas company within the meaning of the Natural Gas Act.
Therefore, it is subject to regulation by the FERC in regard to numerous
activities, including the issuance of securities, accounting policies and
practices, electricity sales for resale rates, the establishment and regulation
of electric interconnections and transmission services and replacement of
certain gas utility property.
MidAmerican Energy is regulated by the IUB as to retail rates, services,
construction of utility property and in other respects as provided by the laws
of Iowa. MidAmerican Energy is regulated by the Illinois Commerce Commission
("ICC"), as to bundled retail rates, unbundled delivery services, services that
have not been declared to be competitive, issuance of securities, affiliate
transactions, construction, acquisition and sale of utility property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican
-15-
Energy is also subject to regulation by the SDPUC as to electric and gas retail
rates and service as provided by the laws of South Dakota.
Rate Regulation
- ---------------
Under Iowa law, temporary collection of higher rates can begin, subject to
refund, 90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common equity previously approved. If the IUB has not issued a final order
within ten months after the filing date, the temporary rates cease to be subject
to refund and any balance of the requested rate increase may then be collected
subject to refund. Exceptions to the ten-month limitation provide for extensions
due to a utility's lack of due diligence in the rate proceeding, judicial
appeals and situations involving new generating units being placed in service.
MidAmerican Energy's cost of gas is collected in its Iowa gas rates through the
Iowa Uniform Purchased Gas Adjustment Clause.
In accordance with two electric rate settlements, approved by the IUB in 2001
and 2003, respectively, MidAmerican Energy's Iowa retail electric rates are
effectively frozen through December 31, 2010. Additionally, under the incentive
regulation aspects of the settlements, earnings exceeding a return on equity of
12% through December 31, 2005, and 11.75% for January 1, 2006 through December
31, 2010, are shared with customers. See Note (10) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional discussion of
this settlement. In accordance with a 2002 rate settlement, MidAmerican Energy's
Iowa retail gas rates are effectively fixed through November 2004.
South Dakota law authorizes its Public Utilities Commission to suspend new rates
for up to six months during the pendency of rate proceedings; however, the rates
are permitted to be implemented after six months subject to refund pending a
final order in the proceeding.
Under Illinois law, new rates may become effective 45 days after filing with the
ICC, or on such earlier date as the ICC may approve, subject to its authority to
suspend the proposed new rates, subject to hearing, for a period not to exceed
approximately eleven months after filing. Under Illinois electric tariffs,
MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in the cost of
all fuels used for retail electric generation, including certain fuel
transportation costs, nuclear fuel disposition costs and the effects of energy
transactions (other than wholesale capacity and energy sales) with other
utilities. MidAmerican Energy's cost of gas is reflected in its Illinois gas
rates through the Illinois Uniform Purchased Gas Adjustment Clause.
In December 1997, Illinois enacted a law to restructure Illinois' electric
utility industry. The law changes how and what electric services are regulated
by the ICC and transitions portions of the traditional electric services to a
competitive environment. In general, the law allows for certain limits on the
ICC's regulatory authority over a utility's generation and also relaxes its
regulatory authority over many corporate transactions, such as the transfer of
generation assets to affiliates. Special authority and limitations of authority
apply during the transition to a competitive marketplace. Also, the law permits
utilities to eliminate their fuel adjustment clauses and incorporates provisions
by which earnings in excess of allowed amounts are either partially refunded to
customers or are used to accelerate a company's regulatory asset cost recovery.
Electric rates in Illinois are frozen until 2007, subject to certain exceptions
allowing for increases, at which time bundled rates are subject to cost-based
ratemaking.
The FERC regulates MidAmerican Energy's rates charged to wholesale customers for
energy and transmission services. Most of MidAmerican Energy's electric
wholesale sales and purchases take place under market-based pricing allowed by
the FERC and are therefore subject to market volatility. Margins earned on
wholesale sales have historically been included as a component of retail cost of
service upon which retail rates are based.
Refer to the "Legislative and Utility Regulatory Matters" section of
Management's Discussion and Analysis in Item 7 of this Form 10-K for additional
discussion of matters affecting utility regulation.
-16-
Nuclear Regulation
- ------------------
MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory
Commission ("NRC"), with respect to its license and 25% ownership interest in
Quad Cities Station Units 1 and 2. Exelon Generation is the operator of Quad
Cities Station and is under contract with MidAmerican Energy to secure and keep
in effect all necessary NRC licenses and authorizations.
The NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear generating stations and subject such
stations to continuing review and regulation. The NRC review and regulatory
process covers, among other things, operations, maintenance, and environmental
and radiological aspects of such stations. The NRC may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under such Act or the terms of such licenses. Quad Cities
Station Licenses currently expire in 2012. Exelon Generation submitted an
application to renew the Quad Cities Station licenses with the NRC in January
2003. Action by the NRC on the application is expected by November 2004.
Approval would result in the licenses allowing operation through 2032.
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy is
responsible for the selection and development of repositories for, and the
permanent disposal of, spent nuclear fuel and high-level radioactive wastes.
Exelon Generation, as required by the Nuclear Waste Act, signed a contract with
the Department of Energy to provide for the disposal of spent nuclear fuel and
high-level radioactive waste beginning not later than January 1998. The
Department of Energy did not begin receiving spent nuclear fuel on the scheduled
date, and the schedule will be significantly delayed. The earliest expectation
for completion is now 2010. The costs to be incurred by the Department of Energy
for disposal activities are being financed by fees charged to owners and
generators of the waste. Exelon Generation has informed MidAmerican Energy that
existing on-site storage capability at Quad Cities Station is sufficient to
permit interim storage into 2005. For Quad Cities Station, Exelon Generation has
begun to develop an interim spent fuel storage installation ("ISFSI") at Quad
Cities Station to store spent nuclear fuel in dry casks in order to free space
in the storage pool. The first pad at the ISFSI is expected to facilitate
storage of casks to support operations at Quad Cities Station until at least
2017. Exelon Generation expects the bulk of the construction work will be done
in 2004 with the first cask loading to take place in 2005. In the 2017 to 2022
timeframe, Exelon Generation plans to add a second pad to the ISFSI to
accommodate storage of spent nuclear fuel through the end of operations at Quad
Cities Station.
Federal regulations provide that any nuclear operating facility may be required
to cease operation if the NRC determines there are deficiencies in state, local
or utility emergency preparedness plans relating to such facility, and the
deficiencies are not corrected. Exelon Generation has advised MidAmerican Energy
that an emergency preparedness plan for Quad Cities Station has been approved by
the NRC. Exelon Generation has also advised MidAmerican Energy that state and
local plans relating to Quad Cities Station have been approved by the Federal
Emergency Management Agency.
The NRC also regulates the decommissioning of nuclear power plants including the
planning and funding for the eventual decommissioning of the plants. In
accordance with these regulations, MidAmerican Energy submits a report to the
NRC every two years providing reasonable assurance that funds will be available
to pay the costs of decommissioning its share of Quad Cities Station.
MidAmerican Energy has established external trusts for the investment of funds
collected for nuclear decommissioning associated with Quad Cities Station.
Electric tariffs currently in effect include provisions for annualized
collection of estimated decommissioning costs at Quad Cities Station. In Iowa,
estimated Quad Cities Station decommissioning costs are reflected in base rates.
MidAmerican Energy's cost related to decommissioning funding in 2003 was $8.3
million.
-17-
Environmental Regulations
- -------------------------
MidAmerican Energy is subject to a number of federal, state and local
environmental laws and regulations affecting many aspects of our present and
future operations. These requirements relate to air emissions, water quality,
waste management, hazardous chemical use, noise abatement, land use aesthetics
and atomic radiation.
Environmental laws and regulations currently have, and future modifications may
have, the effect of (i) increasing the lead time for the construction of new
facilities, (ii) significantly increasing the total cost of new facilities,
(iii) requiring modification of MidAmerican Energy's existing facilities, (iv)
increasing the risk of delay on construction projects, (v) increasing
MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of
service provided by MidAmerican Energy and the amount of energy available from
MidAmerican Energy's facilities. Any of these items could have a substantial
impact on amounts required to be expended by MidAmerican Energy in the future.
Air Quality -
MidAmerican Energy's generating facilities are subject to applicable provisions
of the Clean Air Act and related air quality standards promulgated by the U.S.
Environmental Protection Agency ("EPA"). MidAmerican Energy has five jointly
owned, and six wholly owned, coal-fired generating units, which represent
approximately 60% of MidAmerican Energy's electric net accredited generating
capability. MidAmerican Energy believes it is in material compliance with
current air quality requirements. Refer to Note (4)(b) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information
regarding air quality regulation.
Hazardous Materials and Waste Management -
The EPA and state environmental agencies have determined that contaminated
wastes remaining at certain decommissioned manufactured gas plant facilities may
pose a threat to the public health or the environment if such contaminants are
in sufficient quantities and at such concentrations as to warrant remedial
action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which MidAmerican Energy may be a
potentially responsible party. MidAmerican Energy estimates the range of
possible costs for investigation, remediation and monitoring for these sites to
be $11 million to $30 million. As of December 31, 2003, MidAmerican Energy has
recorded a liability and regulatory asset of $14.0 million for these sites.
MidAmerican Energy's present rates in Iowa provide for a fixed annual recovery
of manufactured gas plant costs. Additional information relating to MidAmerican
Energy's manufactured gas plant facilities is included under Note (4)(a) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by the
EPA, MidAmerican Energy developed a comprehensive program for the use, handling,
control and disposal of all polychlorinated biphenyls ("PCBs") contained in
electrical equipment. The future use of equipment containing PCBs will be
minimized. Capacitors, transformers and other miscellaneous equipment are being
purchased with a non-PCB dielectric fluid. MidAmerican Energy's exposure to PCB
liability has been reduced through the orderly replacement of a number of such
electrical devices with similar non-PCB electrical devices.
-18-
INTERCOAST CAPITAL
------------------
InterCoast Capital is a wholly owned nonregulated subsidiary of MHC primarily
engaged in investment activities. Investments include equipment leases,
marketable securities and energy-related venture capital interests. InterCoast
Capital manages these activities through its nonregulated investment
subsidiaries. As of December 31, 2003, InterCoast Capital had total assets of
$41.3 million, a majority of which relate to investments in equipment leases.
InterCoast Capital had equity participations in equipment leases totaling $29.5
million and $32.6 million at December 31, 2003 and 2002, respectively. At
December 31, 2003, approximately $20.9 million was invested in five commercial
passenger aircraft. Approximately $8.2 million of the December 31, 2003,
investment in equipment leases related to a seven percent undivided interest in
an electric generating station leased to a utility located in Arizona.
InterCoast Capital also has investments in safe harbor lease transactions. Refer
to Note (1)(f) of MidAmerican Funding's Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K for additional discussion of equipment
leases.
In addition, InterCoast Capital and its subsidiaries have direct investments in
energy projects and indirect investments, through venture capital funds, in a
variety of nonregulated energy production technologies.
MIDWEST CAPITAL
---------------
Midwest Capital is a wholly owned nonregulated subsidiary of MHC with total
assets of $8.1 million as of December 31, 2003. Midwest Capital's primary
activity is the management of utility service area investments to support
economic development. Midwest Capital's principal interest is a 2,000-acre
master planned residential and business community in southeastern South Dakota.
The major construction phase of the planned community is complete, and the
marketing phase to sell developed residential and commercial lots is in
progress.
-19-
ITEM 2. PROPERTIES
MidAmerican Energy's utility properties consist of physical assets necessary and
appropriate to render electric and gas service in its service territories. It is
the opinion of management that the principal depreciable properties owned by
MidAmerican Energy are in good operating condition and well maintained.
MidAmerican Energy's most significant properties are its electric generation
facilities. For information regarding these facilities, please refer to the
"Regulated Electric Operations" discussion in Item 1 - Business of this Form
10-K. Additional electric property consists primarily of transmission and
distribution facilities.
The electric transmission system of MidAmerican Energy at December 31, 2003,
included 918 miles of 345-kilovolt ("kV") lines and 1,128 miles of 161-kV lines.
MidAmerican Energy's electric distribution system included approximately 220,400
transformers and 373 substations at December 31, 2003.
Gas property consists primarily of natural gas mains and services pipelines,
meters and related distribution equipment, including feeder lines to communities
served from natural gas pipelines owned by others. The gas distribution
facilities of MidAmerican Energy at December 31, 2003, included 21,182 miles of
gas mains and service pipelines.
Net utility plant in service by operating segment is as follows as of December
31, 2003 (in thousands):
Generation ............ $1,239,370
Energy delivery -
Electric distribution 1,271,110
Gas distribution .... 603,381
Transmission .......... 229,694
Marketing and sales ... 16,705
----------
$3,360,260
==========
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems, a predecessor company, electric utility
property located in Iowa, or approximately 80% of gross utility plant, is
pledged to secure mortgage bonds.
-20-
ITEM 3. LEGAL PROCEEDINGS
MidAmerican Energy is one of dozens of companies named as defendants in a
January 20, 2004 consolidated class action lawsuit filed in the U.S. District
Court for the Southern District of New York. The suit alleges that the
defendants have engaged in unlawful manipulation of the prices of natural gas
futures and options contracts traded on the New York Mercantile Exchange
("NYMEX") during the period of January 1, 2000 to December 31, 2002. MidAmerican
Energy is mentioned as a company that has engaged in wash trades on Enron Online
(an electronic trading platform) that had the effect of distorting prices for
gas trades on the NYMEX. The plaintiffs to the class action do not specify the
amount of alleged damages. At this time MidAmerican Energy does not believe that
it has any material exposure in this lawsuit.
The original complaint in this matter, Cornerstone Propane Partners, L.P. v.
Reliant, et al. ("Cornerstone"), was filed on August 18, 2003 in the United
States District Court, Southern District of New York naming MidAmerican Energy.
On October 1, 2003, a second complaint , Roberto, E. Calle Gracey, et al.
("Calle Gracey"), was filed in the same court but did not name MidAmerican
Energy. On November 14, 2003, a third complaint, Dominick Viola ("Viola"), et
al., was filed in the same court and named MidAmerican Energy as a defendant. On
December 5, 2003, the court entered Pretrial Order No. 1, which among other
procedural matters, ordered the consolidation of the Cornerstone, Calle Gracey
and Viola complaints and permitted plaintiffs to file an amended complaint in
this matter. On January 20, 2004, plaintiffs filed In Re: Natural Gas Commodity
Litigation as the amended complaint reasserting their previous allegations.
Unless extended by agreement of the parties or by court order, MidAmerican
Energy's answer and/or responsive pleading in this matter is due February 19,
2004. MidAmerican Energy will coordinate with the other defendants and
vigorously defend the allegations against it.
Other than the litigation described above, MidAmerican Funding and its
subsidiaries currently have no material legal proceedings. Information on
MidAmerican Energy's environmental matters is included in Item 1 - Business and
in the "Environmental Matters" section of Management's Discussion and Analysis
in Item 7 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MidAmerican Funding is an Iowa limited liability company whose membership
interest is held solely by MidAmerican Energy Holdings.
-21-
ITEM 6. SELECTED FINANCIAL DATA
MIDAMERICAN ENERGY COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
DECEMBER 31
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $2,595,812 $2,236,159 $2,367,249 $2,271,832 $1,762,350
Operating income ...................... 370,820 354,997 333,574 338,756 300,064
Net income ............................ 188,597 175,821 152,778 165,456 127,331
Earnings on common stock .............. 187,187 172,888 148,234 160,501 122,376
BALANCE SHEET DATA:
Total assets (a) ...................... $4,404,434 $3,823,951 $3,585,127 $3,825,954 $3,609,591
Long-term debt (b) .................... 1,128,647 1,053,418 820,594 921,682 870,499
Power purchase obligation (c) ......... - - 25,867 52,282 68,049
Short-term borrowings ................. 48,000 55,000 89,350 81,600 204,000
Preferred stock:
Not subject to mandatory redemption . 31,759 31,759 31,759 31,759 31,759
Subject to mandatory redemption ..... - - 126,680 150,000 150,000
Common shareholder's equity ........... 1,318,519 1,319,139 1,226,292 1,164,356 1,057,855
(a) In January 2003, MidAmerican Energy adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," ("SFAS No. 143"). Accordingly, MidAmerican Energy recorded
$114.4 million of assets related to the asset retirement obligation ("ARO")
liability required by SFAS No. 143. Additionally, an accrual for non-ARO
costs of removing electric and gas assets that was previously reflected in
accumulated depreciation is now classified as a regulatory liability, thus
increasing total assets compared to prior years. The accrual was
approximately $408.6 million at December 31, 2003. Refer to Note (1)(j) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for
further discussion.
(b) Includes amounts due within one year.
(c) On August 1, 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were removed
from the balance sheet. Refer to Note (1)(h) of Notes to Consolidated
Financial Statements later in Item 8 of this Form 10-K for further
discussion.
-22-
MIDAMERICAN FUNDING, LLC
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
MHC
MIDAMERICAN FUNDING (PREDECESSOR)
-------------------------------------------------------------- -------------
MAR. 12 JAN. 1
YEARS ENDED DECEMBER 31, THROUGH THROUGH
------------------------------------------------- DEC. 31, MAR. 11,
2003 2002 2001 2000 1999 1999
---------- ---------- ---------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA:
Revenues ......................... $2,600,239 $2,240,879 $2,388,650 $2,316,343 $1,411,542 $375,884
Operating income ................. 367,868 349,988 300,085 327,560 227,133 58,898
Income from continuing
operations (a) ................. 157,176 136,716 103,087 126,784 124,077 16,789
Net income ....................... 157,176 136,716 103,087 126,784 135,335 17,210
AS OF DECEMBER 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets (b) ................. $5,737,614 $5,166,056 $5,182,707 $5,425,397 $5,212,387
Long-term debt (c) ............... 1,828,647 1,753,418 1,544,969 1,670,636 1,642,476
Power purchase obligation (d) .... - - 25,867 52,282 68,049
Short-term borrowings ............ 48,000 55,000 91,780 81,600 204,000
Preferred securities not subject
to mandatory redemption ........ 31,759 31,759 31,759 31,759 31,759
Preferred securities subject
to mandatory redemption ........ - - 126,680 150,000 151,598
Member's equity .................. 1,863,769 1,879,191 1,981,840 1,877,175 1,800,416
(a) In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," beginning January 1, 2002,
MidAmerican Funding's goodwill is no longer amortized. Refer to Note (1)(k)
of MidAmerican Funding's Notes to Consolidated Financial Statements later
in Item 8 of this Form 10-K. In 2002, MidAmerican Funding recorded pre-tax
expense of $21.9 million of write downs for impaired assets and
investments, including a $12.6 million pre-tax write down of airplane
leases. In May 1999, MidAmerican Funding sold most of its investment in the
common stock of McLeodUSA and recorded an after-tax gain of $47.1 million.
For the period ended March 11, 1999, MHC expensed $18.6 million for
transaction costs related to its acquisition by MidAmerican Energy
Holdings.
(b) In January 2003, MidAmerican Energy adopted Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations," ("SFAS No. 143"). Accordingly, MidAmerican Energy recorded
$114.4 million of assets related to the asset retirement obligation ("ARO")
liability required by SFAS No. 143. Additionally, an accrual for non-ARO
costs of removing electric and gas assets that was previously reflected in
accumulated depreciation is now classified as a regulatory liability, thus
increasing total assets compared to prior years. The accrual was
approximately $408.6 million at December 31, 2003. Refer to Note (1)(j) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for
further discussion.
(c) Includes amounts due within one year.
(d) On August 1, 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were removed
from the balance sheet. Refer to Note (1)(h) of Notes to Consolidated
Financial Statements later in Item 8 of this Form 10-K for further
discussion.
-23-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDEX
Page
----
General...................................................................25
Results of Operations.....................................................31
Liquidity and Capital Resources...........................................38
Credit Ratings Risks......................................................41
Legislative and Utility Regulatory Matters................................41
Environmental Matters.....................................................43
Generating Capability.....................................................43
New Accounting Pronouncements.............................................44
Critical Accounting Policies and Estimates................................45
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
MidAmerican Funding, LLC ("MidAmerican Funding"), is an Iowa limited liability
company that was formed in March 1999. The sole member of MidAmerican Funding is
MidAmerican Energy Holdings Company ("MidAmerican Energy Holdings"). MidAmerican
Funding owns all of the outstanding common stock of MHC Inc., which owns all of
the common stock of MidAmerican Energy Company ("MidAmerican Energy"),
InterCoast Capital Company (formerly MidAmerican Capital Company) Midwest
Capital Group, Inc., MidAmerican Services Company and MEC Construction Services
Co.
On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company, completed
a merger transaction with CalEnergy Company, Inc. On that date, MidAmerican
Funding, which was formed by CalEnergy Company, Inc. as a single member limited
liability company, acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result of this transaction, MHC and its subsidiaries,
including MidAmerican Energy became wholly owned subsidiaries of MidAmerican
Funding. MHC, MidAmerican Funding and MidAmerican Energy Holdings are exempt
public utility holding companies headquartered in Des Moines, Iowa.
Management's Discussion and Analysis ("MD&A") addresses the financial statements
of MidAmerican Energy and MidAmerican Funding as presented in this joint filing.
Information 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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Earnings Overview
- -----------------
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $14.3 million to $187.2
million for 2003 compared to $172.9 million for 2002. Significant factors
contributing to the improvement in earnings were: 1) a reduction in costs
related to Cooper Nuclear Station due to a restructuring of the power purchase
contract in August 2002, 2) an increase in the number of electric and gas retail
customers, 3) an increase in retail gas rates, and 4) a decrease in Iowa
electric retail costs due to the recognition of cost recovery related to a coal
purchase contract with Enron Corp. The impact of these factors were partially
offset by increases in other expenses.
MidAmerican Funding -
MidAmerican Funding's net income for 2003 totaled $157.2 million compared to
$136.7 million for 2002. In addition to the factors discussed above for
MidAmerican Energy, net income for 2003 includes $4.0 million of after-tax loss
for write-downs of impaired investments. Net income for 2002 reflects $4.9
million of after-tax income related to a gain and interest income from the sale
of an investment in a communications company, $17.1 million after-tax loss for
impairments of investments and $4.0 million of additional income taxes.
-25-
Regulated Electric Gross Margin
- -------------------------------
2003 2002
-------- --------
(In millions)
Operating revenues ................... $1,398.0 $1,353.4
Less cost of fuel, energy and capacity 397.7 346.7
-------- -------
Electric gross margin ............. $1,000.3 $1,006.7
======== ========
Electric gross margin for 2003 decreased $6.4 million compared to 2002.
The most significant factor influencing the comparison of electric margin for
2003 and 2002 was a change in the classification of costs for energy purchased
under the Cooper Nuclear Station contract due to MidAmerican Energy and the
Nebraska Public Power District ("NPPD") restructuring their contract, effective
August 1, 2002. The restructuring affected both the classification of related
costs on MidAmerican Energy's statement of operations and the total cost to
MidAmerican Energy.
Prior to the restructuring, MidAmerican Energy paid for its share of Cooper
Nuclear Station costs based on 50% of the fixed and operating costs of Cooper
Nuclear Station, excluding depreciation but including debt service and in
exchange received 50% of the actual electrical output of the facility. During
that time, only MidAmerican Energy's share of nuclear fuel cost was classified
as a cost of fuel, energy and capacity, thus impacting electric margin. Other
costs under the contract were classified as other operating expenses.
Under the terms of the restructured contract, MidAmerican Energy pays for
contracted amounts of capacity and energy at fixed prices specified in the
contract and therefore, there is no distinction between fuel costs and any other
actual costs of operating Cooper Nuclear Station. Accordingly, all costs
incurred under the restructured contract are included in MidAmerican Energy's
cost of fuel, energy and capacity, consistent with the cost of power purchased
from other entities.
In aggregate, MidAmerican Energy's costs for the Cooper Nuclear Station contract
declined $46.7 million for 2003 compared to 2002, which is reflected as an
increase in cost of fuel, energy and capacity of $10.8 million and a decrease in
other operating expenses of $57.5 million. The $46.7 million aggregate decrease
was due to cost savings resulting from the restructuring of the contract. The
savings resulted from the restructured contract costs being less than 50% of
NPPD's historical fixed and operating costs of Cooper Nuclear Station that
MidAmerican Energy was required to pay under the original contract, $7.7 million
of amortization related to a cash payment from NPPD in August 2002 and $3.6
million of amortization related to decommissioning expense recognized from
December 2000 through July 2002. The cash payment and the previously recognized
decommissioning expense are being recognized into income based on the estimated
energy expected to be received for the remainder of the contract, which expires
December 31, 2004. Refer to Notes (1)(h) and (4)(c) of Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K for additional discussion of
the Cooper Nuclear Station contract and related costs.
Restructuring the contract has enhanced MidAmerican Energy's ability to
economically purchase energy. The restructured contract provides 1) certainty of
price paid for capacity and energy, 2) market-competitive prices, and 3)
certainty of supply because NPPD must provide the contracted energy even if the
Cooper Nuclear Station is not available. Under the original contract,
MidAmerican Energy was subject to the fluctuating costs and plant outages of
Cooper Nuclear Station.
Following is a discussion of various factors other than the Cooper Nuclear
Station contract that affected gross margin. Margin variation explanations are
management's best estimate of the impact of weather, customer growth and other
factors based on historical consumption patterns. The effect of temperature
conditions during 2003 compared to 2002, resulted in approximately a $7.4
million decrease in electric margin. Other electricity usage factors, such as
changes due to individual customer conservation and a variety of circumstances
affecting customers within MidAmerican Energy's service territory, decreased
electric margin by $11.5 million compared to 2002. Conversely, a 1.1% increase
in the average number of retail customers improved electric gross margin by
$14.3 million compared to 2002. In total, retail electric sales volumes
increased 0.6% compared to 2002.
-26-
Lower fuel costs for Iowa retail electric sales, excluding the impact of
restructuring the Cooper contract, increased electric margin by $6.3 million
relative to 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 recognized the value of the collateral in June 2003 after
resolution of related bankruptcy proceedings. 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.
MidAmerican Energy sells and purchases electric capacity. The net margin from
those sales and purchases decreased $2.7 million compared to 2002. Revenues from
transmission services increased $5.2 million compared to 2002.
Regulated Gas Gross Margin
- --------------------------
2003 2002
------ ------
(In millions)
Operating revenues ....... $947.4 $695.8
Less cost of gas sold .... 720.6 482.8
------ ------
Gas gross margin ....... $226.8 $213.0
====== ======
Gas gross margin for 2003 increased $13.8 million compared to 2002.
Regulated gas revenues include purchase 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 sold do not
affect gross margin or net income because revenues reflect comparable
fluctuations from purchase gas adjustment clauses. A 59.9% increase in the
average per-unit cost of gas compared to 2002 increased revenues and cost of gas
sold for 2003 by $269.9 million. That increase in cost of gas sold was partially
offset by the effect of a decrease in sales volumes related to sales for resale
customers.
The following table summarizes the variance in gas operating revenues, including
the impact of the fluctuation in the cost of gas sold. Amounts not related to
the increase in cost of gas have the same impact on gross margin (in millions):
2003 vs. 2002
-------------
Increase in cost of gas:
Price ..................... $269.9
Sales volumes ............. (32.1)
------
Total ................... 237.8
Increases in retail rates ... 12.3
Weather ..................... 4.0
Weather derivative .......... (2.5)
Transported gas ............. 3.0
Customer growth ............. 2.7
Other usage factors ......... (7.3)
Other ....................... 1.6
------
Total revenue variance $251.6
======
The increases in MidAmerican Energy's natural gas retail rates largely took
effect subsequent to the second quarter of 2002. 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. On
June 12, 2002, the Iowa Utilities Board ("IUB") issued an order granting an
interim rate increase of approximately $13.8 million annually, effective
immediately. On November 8, 2002, the IUB approved a proposed settlement
-27-
agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer
Advocate that provides for a final increase 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. Refer to
the "Legislative and Utility Regulatory Matters" section of MD&A for comments on
the Iowa gas rate settlement.
The increase in gas gross margin due to weather was the result of colder
temperature conditions in the first quarter of 2003 compared to the same quarter
in 2002, offset partially by milder temperature conditions in much of the
remainder of 2003. Other gas usage factors, such as changes due to individual
customer conservation, reaction to prices, and a variety of circumstances
affecting customers within MidAmerican Energy's service territory, decreased gas
margin. MidAmerican Energy's average number of gas retail customers increased
1.0% compared to 2002. Total natural gas retail sales volumes increased 3.0%.
MidAmerican Energy may enter into degree day swaps to offset a portion of the
financial impact of variations in weather conditions on its delivery margins for
the winter heating season. The net loss on such weather derivative financial
instruments partially offset the increased delivery margins due to colder
temperature conditions.
The transported gas increase relates to revenue from natural gas transported
through MidAmerican Energy's distribution system to a number of end-use
customers who have independently purchased their supply from third parties.
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for 2003 decreased $34.3 million compared to
2002. As discussed in the "Regulated Electric Gross Margin" section above,
effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. Prior to the restructuring, all costs
incurred under the contract, other than the cost of fuel to generate the energy
purchased by MidAmerican Energy, were classified as other operating expenses.
Following the restructuring, substantially all costs incurred by MidAmerican
Energy under the contract are classified as a cost of fuel, energy and capacity.
Accordingly, as a result of that change, MidAmerican Energy's other operating
expenses decreased $57.5 million in 2003 compared to 2002.
The decrease in other operating expenses due to Cooper Nuclear Station costs was
partially offset by increases totaling $15.0 million related to employee costs
for deferred compensation, health care costs, and pension and other
postretirement costs; and by a $4.7 million increase in electric distribution
costs; and a $3.2 million increase in safety costs.
Maintenance expenses increased $17.9 million compared to 2002 due principally to
a $12.4 million increase in fossil fuel generation maintenance costs due
generally to the timing of maintenance. Additionally, maintenance costs at Quad
Cities Station increased $2.5 million and general plant maintenance costs
increased $2.6 million.
Depreciation and amortization expense increased $12.7 million compared to 2002.
Utility plant depreciation increased $4.9 million due primarily to an April 2002
change in the estimated useful life of general utility plant assets. The change
in estimated useful lives from eleven years to eight years increased 2003
depreciation expense by approximately $3.4 million compared to 2002.
Amortization related to an Illinois revenue sharing arrangement accounted for
$4.5 million of the increase in depreciation and amortization expense.
Additionally, amortization for 2002 includes a $2.2 million 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 the
revenue sharing arrangements.
Property and other taxes increased $4.1 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.
-28-
Nonregulated Gross Margin
- -------------------------
2003 2002
------- -------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues ..... $ 250.4 $ 186.9
Less nonregulated cost of sales ..... 215.7 158.5
------- -------
Nonregulated gross margin ......... $ 34.7 $ 28.4
======= =======
2003 2002
------- -------
(In millions)
MidAmerican Funding Consolidated -
Nonregulated operating revenues ..... $ 254.8 $ 191.6
Less nonregulated cost of sales ..... 216.2 159.4
------- -------
Nonregulated gross margin ......... $ 38.6 $ 32.2
======= =======
MidAmerican Energy -
MidAmerican Energy's nonregulated gross margin for 2003 increased $6.3 million
compared to 2002. The following table presents the margins related to various
nonregulated activities (in millions):
2003 2002
---- ----
Nonregulated retail electric ....... $13.2 $11.4
Nonregulated retail gas ............ 4.9 2.7
Income sharing arrangements under
regulated gas tariffs ............ 5.0 3.1
Incentive gas supply procurement
program award .................... 3.8 3.4
Wholesale gas and electric ......... 4.7 3.3
Other .............................. 3.1 4.5
----- -----
$34.7 $28.4
Electric retail customers in Illinois, except for those served by electric
cooperatives and municipalities, are allowed to select their electric power
supplier. MidAmerican Energy's nonregulated electric retail revenues include
revenues related to these supply services provided to customers outside of
MidAmerican Energy's delivery system who choose their energy supplier. The
improvement in gross margin was due primarily to a 43.9% increase in sales
volumes. Nonregulated electric retail revenues increased $6.4 million to $69.5
million for 2003, while the related cost of sales increased $4.6 million to
$56.3 million.
MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements. The improvement in gross margin from these operations
was due almost entirely to a 75.0% increase in the margin per unit sold.
Additionally, sales volumes increased 4.6% compared to 2002. Nonregulated retail
gas revenues increased $55.5 million to $162.4 million due principally to an
increase in the average price per unit sold, which reflects a 44.4% increase in
the average cost of gas. Related nonregulated cost of gas increased $53.3
million to $157.5 million for 2003.
-29-
Nonregulated operations also include earnings from sharing arrangements under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public Utilities Commission for MidAmerican Energy's regulated natural gas
operations. Under these arrangements, MidAmerican Energy is allowed to keep a
portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program ("IGSPP") in Iowa and a similar program in South Dakota, under which it
can receive awards for successful performance of gas supply procurement. Under
the IGSPP, if MidAmerican Energy's cost of gas varies from an established
reference price range, then the savings or cost is shared between customers and
shareholders. The IGSPP extends through October 31, 2004, and the South Dakota
program extends through October 31, 2005.
Interest and Dividend Income
- ----------------------------
MidAmerican Energy -
Interest and dividend income decreased $3.9 million for 2003 compared to 2002
due to a reduction in interest income on a note receivable associated with
MidAmerican Energy's accounts receivable sold. The related agreement terminated
on October 29, 2002.
MidAmerican Funding -
Interest income related to notes receivable with MidAmerican Funding's parent
company decreased $4.7 million compared to 2002. The related note receivable
balances have been zero throughout 2003. Additionally, 2002 includes $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 2002 due primarily to
$4.4 million of losses recorded in 2002 related to other-than-temporary declines
in MidAmerican Funding's available-for-sale common stock investments.
Other Income and Expense
- ------------------------
MidAmerican Energy -
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").
Accordingly, other income for the capitalized allowance on equity funds used
during construction totaled $11.4 million in 2003 and $8.6 million in 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.
Other income also includes net earnings related to the cash surrender value of
corporate-owned life insurance policies. Such income totaled $6.3 million and
$1.3 million for 2003 and 2002, respectively. The increase was due to general
improvement in the stock market.
Other income for 2002 includes $1.3 million of income from a fee charged to
MidAmerican Energy Funding Corporation for servicing MidAmerican Energy's
accounts receivable sold to them. Likewise, other expense for 2002 includes a
discount on sold accounts receivable. 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 $6.4 million for 2002. The related
arrangement terminated October 29, 2002.
-30-
MidAmerican Funding -
Other income for 2003 and 2002 includes $1.8 million and $7.9 million,
respectively, of income from equity method investments. Of the $7.9 million for
2002, $5.3 million relates to a distribution of common stock held by a venture
capital fund investment.
Additionally, other income for 2003 includes $3.1 million of income related to
the settlement of a lawsuit. Other income for 2002 also includes gains of $2.6
million from the sale of an investment in a communications company and $0.5
million from the sale of rail cars.
Other expense for MidAmerican Funding in 2003 includes losses of $4.3 million
for the write-down of an impaired energy project and $2.1 million for the
write-off of a receivable from a venture capital investment. Other expense in
2002 includes write-downs for impaired assets and investments. MidAmerican
Funding has investments in commercial passenger aircraft, including two aircraft
leased to United Air Lines, Inc., which it accounts for as leveraged leases.
Evaluation of these investments resulted in a $12.6 million write-down in 2002.
Additionally, MidAmerican Funding recorded a $5.1 million loss for the
impairment of an equity method investment, a $2.7 million loss related to a
receivable from a venture capital investment and losses totaling $1.5 million
from impairments on three venture capital fund investments in 2002.
Fixed Charges and Preferred Dividends
- -------------------------------------
MidAmerican Energy -
Preferred dividends of MidAmerican Energy's subsidiary trust decreased due to
the reacquisition of all of the related preferred securities on March 11, 2002.
Dividends for MidAmerican Energy's preferred securities, which are reflected
after Net Income on MidAmerican Energy's Consolidated Statements of Operations,
decreased due to preferred securities reacquired in May 2002. Preferred
dividends for 2002 reflect a $0.7 million loss on reacquisition of preferred
securities.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Earnings Overview
- -----------------
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $24.7 million to $172.9
million for 2002 compared to $148.2 million for 2001. Significant factors
contributing to the improvement in earnings were: 1) warmer temperatures during
the 2002 cooling season, 2) a reduction in costs related to Cooper Nuclear
Station due to a restructuring of the power purchase contract in August 2002 and
3) an increase in retail gas rates.
MidAmerican Funding -
MidAmerican Funding's net income for 2002 totaled $136.7 million compared to
$103.1 million for 2001. In accordance with SFAS No. 142, MidAmerican Funding's
goodwill ceased being amortized effective January 1, 2002. Net income for 2001
was reduced by $34.4 million for goodwill amortization. After considering the
difference due to goodwill amortization, net income for 2002 declined $0.8
million compared to 2001. In addition to the factors discussed above for
MidAmerican Energy, net income for 2002 reflects $4.9 million of after-tax
income related to a gain and interest income from the sale of an investment in a
communications company, $17.1 million of after-tax loss for impairments of
investments and $4.0 million of additional income taxes.
-31-
Regulated Electric Gross Margin
- -------------------------------
2002 2001
-------- --------
(In millions)
Operating revenues........................ $1,353.4 $1,318.1
Less cost of fuel, energy and capacity.... 346.7 275.9
-------- --------
Electric gross margin................... $1,006.7 $1,042.2
======== ========
Electric gross margin for 2002 decreased $35.5 million compared to 2001.
Effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. In aggregate, MidAmerican Energy's costs
for the Cooper Nuclear Station contract declined $13.0 million for 2002 compared
to 2001. Refer to the "Regulated Electric Gross Margin" section for 2003
compared to 2002 for a discussion of the restructuring. As a result of the
restructuring, MidAmerican Energy's costs under the contract are now classified
differently on its statement of operations. The change in cost classification,
partially offset by savings from the contract restructuring, resulted in a $33.2
million decrease in electric gross margin compared to 2002.
In addition to the effect of restructuring the contract for Cooper Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$23.1 million for 2002 compared to 2001. Lower margins per unit sold reduced
electric wholesale gross margin by $48.9 million but were offset by a $25.8
million improvement due to a 21.1% increase in wholesale sales volumes.
Wholesale sales are the sales of energy to other utilities, municipalities and
marketers inside and outside of MidAmerican Energy's delivery system.
Warmer temperatures in the 2002 cooling season resulted in approximately a $16.0
million increase in electric margin compared to 2001. Other electricity usage
factors, such as changes due to individual customer conservation and a variety
of circumstances affecting customers within the MidAmerican Energy's service
territory, increased electric margin by $16.3 million compared to 2001. A 1.0%
increase in the average number of customers improved electric gross margin by
$8.6 million for 2002. Additionally, a decrease in fuel costs related to Iowa
retail electric sales, excluding the impact of restructuring the Cooper Nuclear
Station contract, increased electric margin by $7.9 million relative to 2001. In
total, retail electric sales volumes increased 3.9% for 2002.
Electric revenues from the recovery of energy efficiency program costs decreased
$14.9 million compared to 2001. The decrease in 2002 was due to completion in
the third quarter of 2001 of the final recovery phase for deferred energy
efficiency costs. Deferred energy efficiency costs were costs previously
incurred by MidAmerican Energy, which, in accordance with rate treatment, were
not charged to expense until recovery from customers began. Recovery of deferred
energy efficiency costs occurred over a four-year period from the date
collection began for each phase. The decrease in recovery of deferred costs was
offset partially by an increase in the recovery of current energy efficiency
costs. Changes in these revenues are substantially matched with corresponding
changes in other operating expenses. Approximately $13.9 million of MidAmerican
Energy's 2002 electric revenues were from the recovery of energy efficiency
program costs compared to $28.8 million in 2001.
MidAmerican Energy sells and purchases electric capacity. The net margin from
those sales and purchases decreased $2.3 million compared to 2001. Also,
MidAmerican Energy's gains from sales of emission allowances decreased $3.2
million in 2002 due to a gain in 2001. Revenues from transmission services
decreased $2.5 million compared to 2001, and electric revenues from recovery
mechanisms related to Cooper Nuclear Station and manufactured gas plant costs
decreased $2.6 million.
-32-
Regulated Gas Gross Margin
- --------------------------
2002 2001
------ ------
(In millions)
Operating revenues ......... $695.8 $869.1
Less cost of gas sold ...... 482.8 674.9
------ ------
Gas gross margin ......... $213.0 $194.2
====== ======
Gas gross margin for 2002 increased $18.8 million compared to 2001.
Regulated gas revenues include purchase 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 sold do not
affect gross margin or net income because revenues reflect comparable
fluctuations from purchase gas adjustment clauses. A 22.9% decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold
for 2002 by approximately $135.2 million. The remainder of the decrease in cost
of gas sold was due to a decrease in volumes purchased as a result of a
reduction in sales volumes related to sales-for-resale customers.
The following table summarizes the variance in gas operating revenues, including
the impact of the fluctuation in the cost of gas sold (in thousands):
2002 vs. 2001
-------------
Decrease in cost of gas:
Price ........................ $(135.2)
Sales volumes ................ (56.9)
-------
Total ........................ (192.1)
Increases in retail rates .... 11.5
Weather ...................... 1.0
Weather derivative ........... (1.3)
Customer growth .............. 2.0
Other usage factors .......... 5.7
Other ........................ (0.1)
-------
Total revenue variance ....... $(173.3)
=======
The increases in retail rates reflects the impact of a portion of several rate
increases throughout 2002. 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. On June 12, 2002, the
IUB issued an order granting an interim rate increase of approximately $13.8
million annually, effective immediately. On November 8, 2002, the IUB approved a
proposed settlement agreement previously filed by MidAmerican Energy and the
Office of Consumer Advocate that provides for a final increase 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. Refer to the "Legislative and Utility Regulatory Matters" section of
MD&A for comments on