UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
-------------
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of July 31, 2002, all of the member's equity of MidAmerican Funding, LLC was
held by MidAmerican Energy Holdings Company.
As of July 31, 2002, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc., a direct,
wholly owned subsidiary of MidAmerican Funding, LLC.
MIDAMERICAN FUNDING, LLC
AND
MIDAMERICAN ENERGY COMPANY
FORM 10-Q
This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and
MidAmerican Energy Company. Information herein relating to each individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, MidAmerican Energy makes no representation as to
information relating to any other subsidiary of MidAmerican Funding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Independent Accountants' Reports............................... 3
MidAmerican Energy Company
Consolidated Statements of Income.............................. 5
Consolidated Balance Sheets.................................... 6
Consolidated Statements of Cash Flows.......................... 7
Notes to Consolidated Financial Statements..................... 8
MidAmerican Funding, LLC
Consolidated Statements of Income.............................. 15
Consolidated Balance Sheets.................................... 16
Consolidated Statements of Cash Flows.......................... 17
Notes to Consolidated Financial Statements..................... 18
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................. 40
ITEM 6. Exhibits and Reports on Form 8-K............................... 43
Signatures.............................................................. 44
Exhibit Index........................................................... 45
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the Company) as of June 30, 2002, and the
related consolidated statements of income for the three-month and six-month
periods ended June 30, 2002 and 2001, and the related consolidated statements of
cash flows for the six-month periods ended June 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
August 2, 2002
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Funding, LLC and subsidiaries (the Company) as of June 30, 2002, and the related
consolidated statements of income for the three-month and six-month periods
ended June 30, 2002 and 2001, and the related consolidated statements of cash
flows for the six-month periods ended June 30, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
August 2, 2002
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
OPERATING REVENUES
Regulated electric .................... $ 325,810 $ 316,500 $ 632,588 $ 634,990
Regulated gas ......................... 126,070 161,648 346,127 635,191
Nonregulated .......................... 101,267 171,614 186,858 362,467
----------- ----------- ----------- -----------
553,147 649,762 1,165,573 1,632,648
----------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 72,868 60,406 145,317 126,206
Cost of gas sold .................... 86,805 127,086 235,319 526,221
Other operating expenses ............ 107,592 105,433 206,191 201,885
Maintenance ......................... 31,751 31,156 60,696 58,946
Depreciation and amortization ....... 71,345 61,345 140,669 136,255
Property and other taxes ............ 19,295 18,543 36,589 35,817
----------- ----------- ----------- -----------
389,656 403,969 824,781 1,085,330
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ....................... 93,305 164,829 172,410 347,597
Other ............................... 4,597 4,350 10,226 8,531
----------- ----------- ----------- -----------
97,902 169,179 182,636 356,128
----------- ----------- ----------- -----------
Total operating expenses .............. 487,558 573,148 1,007,417 1,441,458
----------- ----------- ----------- -----------
OPERATING INCOME ...................... 65,589 76,614 158,156 191,190
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 2,831 3,763 5,277 8,288
Other, net ............................ (227) (4,022) (22) (7,967)
----------- ----------- ----------- -----------
2,604 (259) 5,255 321
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 18,302 15,640 34,888 31,668
Other interest expense ................ 883 2,570 1,708 3,747
Preferred dividends of subsidiary trust -- 1,995 1,574 4,052
Allowance for borrowed funds .......... (669) (261) (1,265) (753)
----------- ----------- ----------- -----------
18,516 19,944 36,905 38,714
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 49,677 56,411 126,506 152,797
INCOME TAXES .......................... 20,426 23,775 53,871 64,372
----------- ----------- ----------- -----------
NET INCOME ............................ 29,251 32,636 72,635 88,425
PREFERRED DIVIDENDS ................... 1,430 1,268 2,278 2,507
----------- ----------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 27,821 $ 31,368 $ 70,357 $ 85,918
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
-------------------------
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric ............................................. $4,665,423 $4,598,372
Gas .................................................. 878,918 867,277
---------- ----------
5,544,341 5,465,649
Less accumulated depreciation and amortization ....... 2,935,195 2,847,979
---------- ----------
2,609,146 2,617,670
Construction work in progress ........................ 112,837 80,276
---------- ----------
2,721,983 2,697,946
---------- ----------
POWER PURCHASE CONTRACT .............................. 44,339 48,185
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................ 240,853 20,020
Receivables .......................................... 165,725 119,740
Inventories .......................................... 71,221 83,339
Prepaid taxes ........................................ 23,956 23,956
Other ................................................ 7,691 10,962
---------- ----------
509,446 258,017
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ........... 280,340 272,230
REGULATORY ASSETS .................................... 211,738 221,120
OTHER ASSETS ......................................... 58,828 80,394
---------- ----------
TOTAL ASSETS ......................................... $3,826,674 $3,577,892
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .......................... $1,258,575 $1,219,057
MidAmerican Energy preferred securities, not subject
to mandatory redemption ............................ 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ............ -- 26,680
MidAmerican Energy-obligated preferred securities
of subsidiary trust holding solely MidAmerican
Energy junior subordinated debentures ........... -- 100,000
Long-term debt (excluding current portion) ........... 952,815 656,740
---------- ----------
2,243,149 2,034,236
---------- ----------
CURRENT LIABILITIES
Notes payable ........................................ -- 89,350
Current portion of long-term debt .................... 261,465 163,854
Current portion of power purchase contract ........... 17,398 17,398
Accounts payable ..................................... 133,565 171,535
Taxes accrued ........................................ 78,283 54,175
Interest accrued ..................................... 22,307 11,709
Other ................................................ 41,330 43,814
---------- ----------
554,348 551,835
---------- ----------
OTHER LIABILITIES
Power purchase contract .............................. 8,469 8,469
Deferred income taxes ................................ 517,194 513,978
Investment tax credit ................................ 59,084 61,292
Quad Cities Station decommissioning .................. 160,617 158,349
Regulatory liabilities ............................... 95,554 62,378
Other ................................................ 188,259 187,355
---------- ----------
1,029,177 991,821
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES ................. $3,826,674 $3,577,892
========== ==========
The accompanying notes are an integral part of these statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
----------------------
2002 2001
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 72,635 $ 88,425
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .......................... 141,229 136,481
Deferred income taxes and investment tax credit, net ... 1,771 (8,239)
Amortization of other assets ........................... 19,789 25,893
Customer rate credits .................................. -- (21,610)
Cash outflow of accounts receivable securitization ..... (8,000) --
Impact of changes in working capital ................... (28,343) 7,458
Other .................................................. 18,416 5,977
--------- ---------
Net cash provided .................................... 217,497 234,385
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................ (135,911) (74,247)
Quad Cities Station decommissioning trust fund ........... (4,150) (4,150)
Nonregulated capital expenditures ........................ (381) (1,845)
Other investing activities, net .......................... 3,328 (2,801)
--------- ---------
Net cash used .......................................... (137,114) (83,043)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ........................................... (32,278) (92,507)
Issuance of long-term debt, net of issuance costs ........ 391,236 --
Retirement of long-term debt, including reacquisition cost (2,478) (287)
Reacquisition of preferred securities .................... (126,680) (13,320)
Net decrease in notes payable ............................ (89,350) (41,100)
--------- ---------
Net cash provided (used) ............................... 140,450 (147,214)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 220,833 4,128
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......... 20,020 9,677
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $ 240,853 $ 13,805
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ................ $ 21,390 $ 32,694
========= =========
Income taxes paid ........................................ $ 28,723 $ 107,217
========= =========
The accompanying notes are an integral part of these statements.
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MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of MidAmerican Energy, all adjustments,
consisting of normal recurring adjustments, have been made to present fairly the
financial position, the results of operations and the changes in cash flows for
the periods presented. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although MidAmerican Energy believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Energy's latest Annual Report on Form 10-K.
MidAmerican Energy is a public utility with electric and natural gas
operations and is the principal subsidiary of MHC Inc. MHC is a direct, wholly
owned subsidiary of MidAmerican Funding, LLC, whose sole member is MidAmerican
Energy Holdings Company.
B. ENVIRONMENTAL MATTERS:
(1) MANUFACTURED GAS PLANT FACILITIES -
The United States Environmental Protection Agency and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $20 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of June 30, 2002 was $20 million. The estimate consists of $2 million for
investigation costs, $6 million for remediation costs, $10 million for ground
water treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 5 years.
The estimate of probable remediation costs is established on a
site-specific basis. Initially, a determination is made as to whether
MidAmerican Energy has potential remedial liability for the site and whether
information exists to indicate that contaminated wastes remain at the site. When
a potential remedial liability exists, the best estimate of projected site
closure costs are accrued. The estimates are evaluated and revised quarterly as
appropriate based on additional information obtained during
-8-
investigation and remedial activities. The estimated recorded liabilities for
these properties include incremental direct costs of the remediation effort and
oversight by the appropriate regulatory authority, costs for future monitoring
at sites and costs of compensation to employees for time expected to be spent
directly on the remediation effort. The estimated recorded liability could
change materially based on facts and circumstances derived from site
investigations, changes in required remedial action and changes in technology
relating to remedial alternatives. Insurance recoveries have been received for
some of the sites under investigation. Those recoveries are intended to be used
principally for accelerated remediation, as specified by the Iowa Utilities
Board, and are recorded as a regulatory liability. Additionally, as viable
potentially responsible parties are identified, those parties are evaluated for
potential contributions, and cost recovery is pursued when appropriate.
The Illinois Commerce Commission has approved the use of a tariff rider
that permits recovery of the actual costs of litigation, investigation and
remediation relating to decommissioned manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs.
Although the timing of potential incurred costs and recovery of such costs
in rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position, results of operations or cash
flows.
(2) AIR QUALITY -
In July 1997, the Environmental Protection Agency adopted revisions to the
National Ambient Air Quality Standards for ozone and a new standard for fine
particulate matter. Based on data to be obtained from monitors located
throughout each state, the Environmental Protection Agency will determine which
states have areas that do not meet the air quality standards (i.e., areas that
are classified as nonattainment). The standards were subjected to legal
proceedings, and in February 2001, the United States Supreme Court upheld the
constitutionality of the standards, though remanding the issue of implementation
of the ozone standard to the Environmental Protection Agency. The Environmental
Protection Agency is moving forward with analyzing existing monitored data and
determining attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of an overall state plan to achieve
attainment of the standards, MidAmerican Energy could be required to install
control equipment on its generating stations or decrease the number of hours
during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part,
be superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. On February 14, 2002, the
Bush Administration announced its "Clear Skies Initiative" calling for reduction
in emissions of sulfur dioxide, nitrogen oxides and mercury through a
cap-and-trade system, with reductions beginning in 2008 and additional emission
reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or
other initiatives to become effective, MidAmerican Energy has implemented a
planning process that forecasts the site-specific controls and actions required
to meet emissions reductions of this nature. On April 1, 2002, in accordance
with Iowa law passed in 2001, MidAmerican Energy filed with the Iowa Utilities
Board its first multi-year plan and budget (the Plan) for managing regulated
emissions from its generating facilities in a cost-effective manner. MidAmerican
Energy expects the Iowa Utilities Board to rule on the prudence of the Plan in
the fourth quarter of 2002.
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C. RATE MATTERS:
Under a settlement agreement approved by the Iowa Utilities Board on
December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on
December 31, 2000, are frozen through December 31, 2005. Additionally, the 2001
settlement agreement reinstates, with modifications, the revenue sharing
provisions of the 1997 pricing plan settlement agreement, which expired on
December 31, 2000. Under the 2001 settlement agreement, an amount equal to 50%
of revenues associated with Iowa retail electric returns on equity between 12%
and 14%, and 83.33% of revenues associated with Iowa retail electric returns on
equity above 14%, in each year will be recorded as a regulatory liability to be
used to offset a portion of the cost to Iowa customers of future generating
plant investments. An amount equal to the regulatory liability will be recorded
as a regulatory charge in depreciation and amortization expense when the
liability is accrued. Interest expense is accrued on the portion of the
regulatory liability related to prior years. Beginning in 2002, the liability is
being relieved as it is credited against allowance for funds used during
construction, or capitalized financing costs, associated with generating plant
additions. As of June 30, 2002, the related regulatory liability reflected on
the Consolidated Balance Sheet totaled $81.8 million.
On October 19, 2001, MidAmerican Energy filed a petition with the Illinois
Commerce Commission to increase its Illinois natural gas rates by $3.2 million
annually. A final decision on the petition is required within eleven months of
the date of filing.
On March 15, 2002, MidAmerican Energy made a filing with the Iowa Utilities
Board requesting an increase in rates of approximately $26.6 million for its
Iowa retail natural gas customers. As part of the filing, MidAmerican Energy
requested an interim rate increase of approximately $20.4 million annually. On
June 12, 2002, the Iowa Utilities Board issued an order granting an interim rate
increase of approximately $13.8 million annually, effective immediately and
subject to refund with interest. On July 15, 2002, MidAmerican Energy and the
Office of Consumer Advocate filed a proposed settlement agreement with the Iowa
Utilities Board. The proposed settlement agreement provides for an increase in
rates of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas
customers. The new rates would be effective for usage on and after the date the
Iowa Utilities Board approves tariffs implementing the proposed settlement
agreement and would be frozen for two years thereafter. MidAmerican Energy
expects the Iowa Utilities Board's decision on approving the proposed settlement
agreement in the fourth quarter of 2002.
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
MidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota
Public Utilities Commission, and the Federal Energy Regulatory Commission.
MidAmerican Energy's accounting policies and the accompanying Consolidated
Financial Statements conform to generally accepted accounting principles
applicable to rate-regulated enterprises and reflect the effects of the
ratemaking process.
A possible consequence of deregulation in the utility industry is that
Statement of Financial Accounting Standards (SFAS) No. 71 may no longer apply.
SFAS No. 71 sets forth accounting principles for operations that are regulated
and meet the stated criteria. For operations that meet the criteria, SFAS No. 71
allows, among other things, the deferral of expense or income that would
otherwise be recognized when incurred. MidAmerican Energy's electric and gas
utility operations currently meet the criteria of SFAS No. 71, but its
applicability is periodically reexamined. If portions of its utility operations
no longer meet the criteria of SFAS No. 71, MidAmerican Energy could be required
to write off the related regulatory assets and liabilities from its balance
sheet and thus, a material adjustment to earnings in that
-10-
period could result if regulatory assets are not recovered in transition
provisions of any deregulation legislation.
E. DERIVATIVE FINANCIAL INSTRUMENTS:
MidAmerican Energy is exposed to market risk, including changes in the
market price of certain commodities and interest rates. To manage the price
volatility relating to these exposures, MidAmerican Energy enters into various
financial derivative instruments. Senior management provides the overall
direction, structure, conduct and control of MidAmerican Energy's risk
management activities, including the use of financial derivative instruments,
authorization and communication of risk management policies and procedures,
strategic hedging program guidelines, appropriate market and credit risk limits,
and appropriate systems for recording, monitoring and reporting the results of
transactional and risk management activities.
SFAS Nos. 133/138 require an entity to recognize all of its derivatives as
either assets or liabilities in its statement of financial position and measure
those instruments at fair value. If the conditions specified in SFAS Nos.
133/138 are met, those instruments may be designated as hedges. Only the
ineffectiveness of hedge instruments impacts earnings.
MidAmerican Energy uses hedge accounting for derivative instruments
pertaining to its natural gas purchasing, wholesale electricity activities and
financing activities.
Commodity Price Risk -
Under the current regulatory framework, MidAmerican Energy is allowed to
recover in revenues the cost of gas sold from all of its regulated gas customers
through a purchased gas adjustment clause. Because the majority of MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly market index, MidAmerican Energy's regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.
MidAmerican Energy enters into natural gas futures and swap agreements to
mitigate a portion of the market risk retained by its regulated gas customers
through the purchased gas adjustment clause. These instruments are recorded as
hedge transactions, with net amounts exchanged or accrued under swap agreements
and realized gains or losses on futures contracts included in the cost of gas
sold and recovered in revenues from regulated gas customers.
MidAmerican Energy also derives revenues from nonregulated sales of natural
gas. Pricing provisions are individually negotiated with these customers and may
include fixed prices or prices based on a daily or monthly market index.
MidAmerican Energy enters into natural gas futures and swap agreements to offset
the financial impact of variations in natural gas commodity prices for physical
delivery to nonregulated customers. These financial derivative activities are
also recorded as hedge accounting transactions.
MidAmerican Energy uses natural gas and electric derivative instruments for
trading purposes as defined by Emerging Issues Task Force (EITF) Issue No. 98-10
under strict value-at-risk guidelines outlined by senior management. Any
unrealized gains or losses on such trading transactions are reported in earnings
and were not material as of June 30, 2002. Trading revenues and costs are
reported gross on the Consolidated Statements of Income.
MidAmerican Energy is exposed to variations in the price of fuel for
generation and the price of purchased power in its Iowa jurisdiction, which
accounts for approximately 89% of electric operating revenues. Fuel price risk
is mitigated through forward contracts. Under typical operating conditions,
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MidAmerican Energy has sufficient generation to supply its retail electric
needs. A loss of such generation at a time of high market prices could subject
MidAmerican Energy to losses on its energy sales. MidAmerican Energy uses
electricity forward contracts to hedge anticipated sales of wholesale electric
power.
MidAmerican Energy and its customers are exposed to the effect of
variations in weather conditions on sales and purchases, respectively, of
electricity and natural gas. For the 2001-2002 heating season, MidAmerican
Energy entered into several degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican Energy and its customers.
Unrealized gains and losses on cash flow hedges of future transactions are
recorded in other comprehensive income. Only hedges that are highly effective in
offsetting the risk of variability in future cash flows are accounted for in
this manner. Future transactions include purchases of gas for resale to
regulated and nonregulated customers, purchases of gas for storage, and
purchases and sales of wholesale electric energy. When the associated hedged
future transaction occurs or when a forecasted transaction is no longer probable
of occurring, the unrealized gains and losses are reversed from other
comprehensive income and recognized in net income. Realized gains on cash flow
hedges are recorded in Cost of Gas Sold, Regulated Cost of Fuel, Energy and
Capacity or Nonregulated Operating Revenues, depending upon the nature of the
physical transaction being hedged.
Unrealized gains and losses on fair value hedges of firm commitments are
recognized in income as either Nonregulated Operating Revenues or Cost of Gas
Sold depending upon the nature of the item being hedged. Purchase and sales
commitments hedged by fair value hedges are recorded at fair value, with the
changes in values also recognized in income and substantially offsetting the
impact of the hedges on earnings.
F. SEGMENT INFORMATION:
MidAmerican Energy has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale and delivery of regulated retail electricity
and natural gas, while the transmission segment obtains most of its revenue from
the sale of transmission capacity. The marketing and sales segment receives its
revenue principally from nonregulated retail sales of natural gas and
electricity. Common operating costs, interest income, interest expense, income
tax expense and equity in the net income or loss of investees are allocated to
each segment.
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The following table provides MidAmerican Energy's operating revenues and
income before income taxes on an operating segment basis (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
External revenues -
Generation ................ $ 173,645 $ 275,331 $ 321,525 $ 585,548
Energy delivery ........... 353,178 338,569 779,120 941,556
Transmission .............. 5,211 5,214 10,136 10,989
Sales & marketing ......... 21,113 30,648 54,792 94,555
----------- ----------- ----------- -----------
Total .................. 553,147 649,762 1,165,573 1,632,648
----------- ----------- ----------- -----------
Intersegment revenues -
Generation ................ 161,285 139,095 292,327 264,493
Energy delivery ........... -- -- -- --
Transmission .............. 13,801 13,749 27,601 27,438
Sales & marketing ......... 776 572 776 704
----------- ----------- ----------- -----------
Total .................. 175,862 153,416 320,704 292,635
Intersegment eliminations .... (175,862) (153,416) (320,704) (292,635)
----------- ----------- ----------- -----------
Consolidated .............. $ 553,147 $ 649,762 $ 1,165,573 $ 1,632,648
=========== =========== =========== ===========
Income before income taxes:
Generation ................... $ 26,307 $ 40,680 $ 41,173 $ 70,314
Energy delivery .............. 11,286 7,490 63,432 63,658
Transmission ................. 10,928 9,067 20,844 19,289
Sales & marketing ............ (274) (2,094) (1,221) (2,971)
----------- ----------- ----------- -----------
Total ..................... 48,247 55,143 124,228 150,290
Preferred dividends .......... 1,430 1,268 2,278 2,507
----------- ----------- ----------- -----------
Consolidated .............. $ 49,677 $ 56,411 $ 126,506 $ 152,797
=========== =========== =========== ===========
As of
---------------------------
June 30, December 31,
2002 2001
----------- ------------
Total Assets:
Generation .................... $ 1,391,716 $ 1,282,677
Energy delivery ............... 2,232,938 2,107,598
Transmission .................. 237,661 226,251
Sales & marketing ............. 50,724 51,164
----------- -----------
Total ...................... 3,913,039 3,667,690
Reclassifications and
intersegment eliminations(a) (86,365) (89,798)
----------- -----------
Consolidated .................. $ 3,826,674 $ 3,577,892
=========== ===========
(a) Reclassifications and intersegment eliminations relate principally to
the reclassification of income tax balances in accordance with
generally accepted accounting principles and the elimination of
intersegment accounts receivables and payables.
-13-
G. TOTAL COMPREHENSIVE INCOME:
For the six months ended June 30, 2002 and 2001, MidAmerican Energy's total
comprehensive income was $69.3 million and $92.3 million, respectively. For the
three months ended June 30, 2002 and 2001, MidAmerican Energy's total
comprehensive income was $27.3 million and $38.4 million, respectively. The
differences from Earnings on Common Stock for the periods presented are due to
the effective portion of net gains and losses on MidAmerican Energy's derivative
instruments classified as cash flow hedges. Accumulated other comprehensive
loss, net, which also includes recognition of the minimum pension liability
adjustment, was $4.8 million and $3.8 million as of June 30, 2002, and December
31, 2001, respectively.
H. SUBSEQUENT EVENT - POWER PURCHASE CONTRACT:
On July 31, 2002, MidAmerican Energy and Nebraska Public Power District
(NPPD) signed an agreement on the restructuring of the power purchase contract
for Cooper Nuclear Station (Cooper). Under the terms of the restructured
contract, MidAmerican Energy will pay NPPD through December 31, 2004, scheduled
amounts per unit for one-half of the accredited capacity of Cooper and the
greater of one-half the energy from Cooper or a minimum guaranteed amount of
energy representing 380 megawatts at an 85% capacity factor for the respective
hours in each year. NPPD also paid MidAmerican Energy $39.1 million on
August 1, 2002.
In December 2000, MidAmerican Energy ceased contributing decommissioning
funds to NPPD and maintained a separate fund for estimated Cooper
decommissioning costs. Through June 30, 2002, $18.3 million had been accrued and
retained by MidAmerican Energy in this separate fund. In conjunction with the
power purchase contract restructuring, MidAmerican Energy plans to recognize the
$39.1 million cash payment and the $18.3 million previously accrued for
decommissioning into income based on the estimated energy expected to be
received for the remainder of the contract.
Finally, both parties agreed to release each other from any and all claims,
past or present, each might have under the power purchase contract prior to
being restructured and file to dismiss the litigation currently pending in U.S.
District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD
prior to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed
and operating costs of Cooper, excluding depreciation but including debt
service, and MidAmerican Energy's share of the nuclear fuel cost, including
Department of Energy disposal fees, based on energy delivered. In addition,
prior to December 2000, MidAmerican Energy contributed toward payment of
one-half of Cooper's projected decommissioning costs based on an assumed 2004
shutdown of the plant.
-14-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
OPERATING REVENUES
Regulated electric ........................ $ 325,810 $ 316,500 $ 632,588 $ 634,990
Regulated gas ............................. 126,070 161,648 346,127 635,191
Nonregulated .............................. 102,435 176,232 188,777 377,416
----------- ----------- ----------- -----------
554,315 654,380 1,167,492 1,647,597
----------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ....... 72,868 60,406 145,317 126,206
Cost of gas sold ........................ 86,805 127,086 235,319 526,221
Other operating expenses ................ 107,592 104,201 206,191 200,653
Maintenance ............................. 31,751 31,156 60,696 58,946
Depreciation and amortization ........... 71,345 61,345 140,669 136,255
Property and other taxes ................ 19,295 18,543 36,589 35,817
----------- ----------- ----------- -----------
389,656 402,737 824,781 1,084,098
----------- ----------- ----------- -----------
Nonregulated:
Cost of sales ........................... 93,500 167,740 172,736 360,091
Other ................................... 6,342 15,229 13,779 30,309
----------- ----------- ----------- -----------
99,842 182,969 186,515 390,400
----------- ----------- ----------- -----------
Total operating expenses ................ 489,498 585,706 1,011,296 1,474,498
----------- ----------- ----------- -----------
OPERATING INCOME .......................... 64,817 68,674 156,196 173,099
----------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest income ........................... 4,282 6,176 8,260 12,213
Dividend income ........................... 231 685 497 1,423
Marketable securities gains and losses, net (306) 962 (3,524) (1,276)
Other, net ................................ 1,159 647 7,828 (3,135)
----------- ----------- ----------- -----------
5,366 8,470 13,061 9,225
----------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ................ 30,269 28,104 58,822 55,415
Other interest expense .................... 884 2,585 1,712 3,768
Preferred dividends of subsidiaries ....... 1,430 3,263 3,852 6,558
Allowance for borrowed funds .............. (669) (261) (1,265) (753)
----------- ----------- ----------- -----------
31,914 33,691 63,121 64,988
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ................ 38,269 43,453 106,136 117,336
INCOME TAXES .............................. 15,564 21,699 45,003 56,270
----------- ----------- ----------- -----------
NET INCOME ................................ $ 22,705 $ 21,754 $ 61,133 $ 61,066
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
-15-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF
-------------------------
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
(UNAUDITED)
ASSETS
UTILITY PLANT
Electric .............................................................. $4,665,423 $4,598,372
Gas ................................................................... 878,918 867,277
---------- ----------
5,544,341 5,465,649
Less accumulated depreciation and amortization ........................ 2,935,195 2,847,979
---------- ----------
2,609,146 2,617,670
Construction work in progress ......................................... 112,837 80,276
---------- ----------
2,721,983 2,697,946
---------- ----------
POWER PURCHASE CONTRACT ............................................... 44,339 48,185
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ............................................. 247,915 20,270
Marketable securities, trading ........................................ 10,053 20,743
Receivables ........................................................... 224,111 167,969
Inventories ........................................................... 71,221 83,339
Prepaid taxes ......................................................... 23,956 23,956
Other ................................................................. 8,839 12,640
---------- ----------
586,095 328,917
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............................ 497,064 519,680
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET ................ 1,279,143 1,279,143
REGULATORY ASSETS ..................................................... 211,738 221,120
OTHER ASSETS .......................................................... 58,936 80,481
---------- ----------
TOTAL ASSETS .......................................................... $5,399,298 $5,175,472
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ....................................................... $2,000,978 $1,974,605
MidAmerican Energy preferred securities, not subject to
mandatory redemption ............................................... 31,759 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ............................. -- 26,680
MidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures .. -- 100,000
Long-term debt (excluding current portion) ............................ 1,653,234 1,357,782
---------- ----------
3,685,971 3,490,826
---------- ----------
CURRENT LIABILITIES
Notes payable ......................................................... 2,100 91,780
Current portion of long-term debt ..................................... 284,798 187,187
Current portion of power purchase contract ............................ 17,398 17,398
Accounts payable ...................................................... 146,083 185,528
Taxes accrued ......................................................... 80,636 61,269
Interest accrued ...................................................... 38,412 27,813
Other ................................................................. 42,068 44,762
---------- ----------
611,495 615,737
---------- ----------
OTHER LIABILITIES
Power purchase contract ............................................... 8,469 8,469
Deferred income taxes ................................................. 564,912 564,334
Investment tax credit ................................................. 59,084 61,292
Quad Cities Station decommissioning ................................... 160,617 158,349
Regulatory liabilities ................................................ 95,554 62,378
Other ................................................................. 213,196 214,087
---------- ----------
1,101,832 1,068,909
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES .................................. $5,399,298 $5,175,472
========== ==========
The accompanying notes are an integral part of these statements.
-16-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30,
----------------------
2002 2001
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 61,133 $ 61,066
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ................................. 141,781 154,243
Deferred income taxes and investment tax credit, net .......... 1,004 (8,136)
Amortization of other assets and liabilities .................. 18,288 23,622
Customer rate credits ......................................... -- (21,610)
Other-than-temporary declines in value of investments ......... 2,913 --
Income on equity investments .................................. (6,388) (2,961)
(Gain) loss on sale of securities, assets and other investments 19 (1,367)
Cash outflow of accounts receivable securitization ............ (8,000) --
Impact of changes in working capital .......................... (33,706) 5,266
Other ......................................................... 18,279 8,726
--------- ---------
Net cash provided ........................................... 195,323 218,849
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ............................... (135,911) (74,247)
Quad Cities Station decommissioning trust fund .................. (4,150) (4,150)
Nonregulated capital expenditures ............................... (550) (1,836)
Purchase of assets and long-term investments .................... -- (2,218)
Proceeds from sale of available-for-sale securities ............. 4,288 --
Notes receivable from affiliate ................................. 21,532 (74,014)
Other investing activities, net ................................. 4,715 (2,067)
--------- ---------
Net cash used ................................................. (110,076) (158,532)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ........................................... (30,000) --
Issuance of long-term debt, net of issuance costs ............... 391,236 198,150
Retirement of long-term debt, including reacquisition cost ...... (2,478) (200,287)
Reacquisition of preferred securities ........................... (126,680) (13,320)
Net decrease in notes payable ................................... (89,680) (41,100)
--------- ---------
Net cash provided (used) ...................................... 142,398 (56,557)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 227,645 3,760
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 20,270 10,018
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 247,915 $ 13,778
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ....................... $ 45,939 $ 57,513
========= =========
Income taxes paid ............................................... $ 23,969 $ 96,588
========= =========
The accompanying notes are an integral part of these statements.
-17-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
The consolidated financial statements included herein have been prepared by
MidAmerican Funding, LLC, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of MidAmerican Funding, all adjustments,
consisting of normal recurring adjustments, have been made to present fairly the
financial position, the results of operations and the changes in cash flows for
the periods presented. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although MidAmerican Funding believes that
the disclosures are adequate to make the information presented not misleading,
it is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Funding's latest Annual Report on Form 10-K.
MidAmerican Funding is an Iowa limited liability company with MidAmerican
Energy Holdings Company as its sole member. MidAmerican Funding's direct, wholly
owned subsidiary is MHC Inc. MHC, MidAmerican Funding and MidAmerican Energy
Holdings are exempt public utility holding companies headquartered in Des
Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company, a public
utility with electric and natural gas operations. Other direct, wholly owned
subsidiaries of MHC include MidAmerican Capital Company, Midwest Capital Group,
Inc., MidAmerican Services Company and MEC Construction Services Co.
B. ENVIRONMENTAL MATTERS:
Refer to Note B of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's environmental
matters.
C. RATE MATTERS:
Refer to Note C of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's rate matters.
D. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION:
Refer to Note D of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's accounting for the
effects of certain types of regulation.
-18-
E. DERIVATIVE FINANCIAL INSTRUMENTS:
Refer to Note E of MidAmerican Energy's Notes to Consolidated Financial
Statements, for information regarding MidAmerican Funding's derivative financial
instruments. The first paragraph of MidAmerican Energy's Note E is also
applicable to MidAmerican Funding as a whole.
In addition, MidAmerican Capital is exposed to market value risk from
changes in interest rates on its preferred stock investments. MidAmerican
Capital reviews the interest rate sensitivity of these securities and purchases
put options in order to reduce related interest rate risk. MidAmerican Capital's
intent is to manage the risk arising from changes in the general level of
interest rates with a change in market value of the hedging instruments. As
permitted by SFAS No. 133, MidAmerican Capital accounts for these hedging
instruments as trading securities.
F. SEGMENT INFORMATION:
MidAmerican Funding has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale and delivery of regulated retail electricity
and natural gas, while the transmission segment obtains most of its revenue from
the sale of transmission capacity. The marketing and sales segment receives its
revenue principally from nonregulated retail sales of natural gas and
electricity. Common operating costs, interest income, interest expense, income
tax expense and equity in the net income or loss of investees are allocated to
each segment.
-19-
The following table provides MidAmerican Funding's operating revenues and
income before income taxes on an operating segment basis (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
External revenues -
Generation ............ $ 173,645 $ 275,331 $ 321,525 $ 585,548
Energy delivery ....... 353,178 338,569 779,120 941,556
Transmission .......... 5,211 5,214 10,136 10,989
Sales & marketing ..... 21,113 30,648 54,792 94,555
Other (a) ............. 1,168 4,618 1,919 14,949
----------- ----------- ----------- -----------
Total .............. 554,315 654,380 1,167,492 1,647,597
----------- ----------- ----------- -----------
Intersegment revenues -
Generation ............ 161,285 139,095 292,327 264,493
Energy delivery ....... -- -- -- --
Transmission .......... 13,801 13,749 27,601 27,438
Sales & marketing ..... 776 572 776 704
Other (a) ............. -- 30 -- 61
----------- ----------- ----------- -----------
Total .............. 175,862 153,446 320,704 292,696
Intersegment eliminations (175,862) (153,446) (320,704) (292,696)
----------- ----------- ----------- -----------
Consolidated .......... $ 554,315 $ 654,380 $ 1,167,492 $ 1,647,597
=========== =========== =========== ===========
Income before income taxes:
Generation .............. $ 26,307 $ 40,680 $ 41,173 $ 70,314
Energy delivery ......... 11,286 7,490 63,432 63,658
Transmission ............ 10,928 9,067 20,844 19,289
Sales & marketing ....... (274) (2,094) (1,221) (2,971)
Other (a) ............... (9,978) (11,690) (18,092) (32,954)
----------- ----------- ----------- -----------
Total ................ $ 38,269 $ 43,453 $ 106,136 $ 117,336
=========== =========== =========== ===========
As of
--------------------------
June 30, December 31,
2002 2001
----------- ------------
Total Assets(b):
Generation .................... $ 2,319,609 $ 2,210,569
Energy delivery ............... 2,500,111 2,374,771
Transmission .................. 321,839 310,429
Sales & marketing ............. 50,724 51,164
Other (a) ..................... 510,626 506,331
----------- -----------
Total ...................... 5,702,909 5,453,264
Reclassifications and
intersegment eliminations(c) (303,611) (277,792)
----------- -----------
Consolidated .................. $ 5,399,298 $ 5,175,472
=========== ===========
(a) Other includes the combined amounts for all segments that do not meet
the requirements for being a reportable segment. It includes
MidAmerican Capital, Midwest Capital, MidAmerican Services, MEC
Construction and amounts of the parent companies.
-20-
(b) Total assets by operating segment reflect the assignment of goodwill
to applicable reporting units in accordance with SFAS No. 142. Refer
to Note I for further discussion of SFAS No. 142 and the assignment of
goodwill.
(c) Reclassifications and intersegment eliminations relate principally to
the reclassification of income tax balances in accordance with
generally accepted accounting principles and the elimination of
intersegment accounts receivables and payables.
G. TOTAL COMPREHENSIVE INCOME:
Total comprehensive income for MidAmerican Funding is shown in the table
below. The differences from Net Income to total comprehensive income for
MidAmerican Funding are due to unrealized holding gains and losses of marketable
securities during the periods and the effective portion of net gains and losses
of derivative instruments classified as cash flow hedges. Accumulated other
comprehensive loss, net, which is a component of common equity and also includes
recognition of the minimum pension liability adjustment, was $5.4 million and
$0.6 million as of June 30, 2002, and December 31, 2001, respectively.
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net Income ........................ $ 22,705 $ 21,754 $ 61,133 $ 61,066
Other Comprehensive Income (Loss) -
Marketable securities ........... (1,174) 7,004 (3,694) 2,239
Cash flow hedges ................ (528) 1,110 (1,066) 6,396
-------- -------- -------- --------
Total Comprehensive Income ........ $ 21,003 $ 29,868 $ 56,373 $ 69,701
======== ======== ======== ========
H. SUBSEQUENT EVENT - POWER PURCHASE CONTRACT:
Refer to Note H of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's subsequent event.
I. EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET:
On January 1, 2002, MidAmerican Funding adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which dictates the accounting for acquired goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and indefinite-lived intangible assets be discontinued and that entities
disclose net income for prior periods adjusted to exclude such amortization and
related income tax effects, as well as a reconciliation from the originally
reported net income to the adjusted net income. MidAmerican Funding's related
amortization consisted solely of goodwill amortization, which had no income tax
effect. Following is a reconciliation of net income as originally reported for
the periods ended June 30, 2001, to adjusted net income (in thousands):
Three Six
Months Months
------- -------
Net income as originally reported $21,754 $61,066
Goodwill amortization ........... 8,604 17,206
------- -------
Net income as adjusted .......... $30,358 $78,272
======= =======
-21-
MidAmerican Funding has completed the initial goodwill impairment test as
required by SFAS No. 142, and no impairment was indicated. As of January 1,
2002, and June 30, 2002, goodwill has been assigned to MidAmerican Funding's
reportable segments as follows (in thousands):
Generation ........ $ 927,892
Energy delivery ... 267,173
Transmission ...... 84,178
Sales & marketing.. --
----------
$1,279,243
==========
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
------------
MidAmerican Funding, LLC is an Iowa limited liability company formed in
March 1999. The sole member of MidAmerican Funding is MidAmerican Energy
Holdings Company. MidAmerican Funding owns all of the outstanding common stock
of MHC Inc. MHC's principal subsidiary is MidAmerican Energy, a public utility
with electric and gas operations. Other direct, wholly owned subsidiaries of MHC
include MidAmerican Capital Company, Midwest Capital Group, Inc., MEC
Construction Services Co. and MidAmerican Services Company.
Management's Discussion and Analysis (MD&A) addresses the financial
statements of MidAmerican Funding and MidAmerican Energy 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.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Funding, or one of its subsidiaries
individually, may make forward-looking statements within the meaning of the
federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of MidAmerican Funding or any of its
subsidiaries individually. These forward-looking statements may include, among
others, statements concerning revenue and cost trends, cost recovery, cost
reduction strategies and anticipated outcomes, pricing strategies, changes in
the utility industry, planned capital expenditures, financing needs and
availability, statements of MidAmerican Funding's expectations, beliefs, future
plans and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. These type of forward-looking
statements are based on current expectations and involve a number of known and
unknown risks and uncertainties that could cause the actual results and
performance of MidAmerican Funding to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, MidAmerican Funding has identified important
factors that could cause actual results to differ materially from those
expectations, including weather effects on sales and revenues, fuel prices, fuel
transportation and other operating uncertainties, acquisition uncertainty,
uncertainties relating to economic and political conditions and uncertainties
regarding the impact of regulations, changes in government policy, utility
industry deregulation and competition. Neither MidAmerican Funding, nor any one
of its subsidiaries individually, assumes any responsibility to update
forward-looking information contained herein.
-23-
RESULTS OF OPERATIONS
---------------------
REGULATED GROSS MARGIN
Regulated Electric Gross Margin -
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Operating revenues .............. $326 $316 $633 $635
Cost of fuel, energy and capacity 73 60 145 126
---- ---- ---- ----
Electric gross margin ......... $253 $256 $488 $509
==== ==== ==== ====
Electric gross margin for the second quarter of 2002 decreased $3 million
compared to the second quarter of 2001. MidAmerican Energy's gross margin on
wholesale sales decreased $10.6 million due to a decline in prices. The price
declines were somewhat offset by a 14.0% increase in wholesale sales volumes
compared to the 2001 quarter. Wholesale sales are the sales of energy to other
utilities, municipalities and marketers outside of MidAmerican Energy's delivery
system.
Temperature conditions during the three months ended June 30, 2002, were
more extreme than in the second quarter of 2001, resulting in an $8 million
increase in electric margin. Other usage factors not dependent on weather
increased electric margin by $12.7 million compared to the second quarter of
2001, while a decrease in the average retail rate reduced electric margin by
$0.8 million. In total, retail electric sales volumes increased 7.5% for the
three months ended June 30, 2002.
Electric revenues from the recovery of energy efficiency program costs
decreased $5.3 million compared to the quarter ended June 30, 2001. The decrease
in the second quarter of 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.
Changes in these revenues are substantially matched with corresponding changes
in other operating expenses.
MidAmerican Energy sells and purchases electric capacity. The net margin
from those sales and purchases decreased $3.7 million compared to the second
quarter of 2001. Additionally, a change in the mix of fuel sources increased
fuel costs related to Iowa retail electric sales by $2.5 million, further
reducing electric margin relative to the three months ended June 30, 2001.
For the six months ended June 30, 2002, compared to the first six months of
2001, electric gross margin decreased $21 million. MidAmerican Energy's gross
margin on wholesale sales decreased $17.6 million compared to the first six
months of 2001 due to price declines. The impact of price declines was partially
offset by a 13.4% increase in wholesale sales volumes.
Electric revenues from the recovery of energy efficiency program costs
decreased $10.9 million compared to the six months ended June 30, 2001. As
discussed above, changes in these revenues are substantially matched with
corresponding changes in other operating expenses.
MidAmerican Energy's net margin from sales and purchases of electric
capacity decreased $7.6 million compared to the first six months of 2001. Gains
from sales of emission allowances decreased
-24-
$3.2 million due to a gain on a sale in the six-month period ended June 30,
2001. Transmission revenues decreased $1.2 million for the 2002 six-month
period. Additionally, fuel costs related to Iowa retail sales increased $4.1
million, reducing electric margin for the first six months of 2002, due to a
change in the mix of fuel sources compared to the first six months of 2001.
Electricity usage factors not dependent on weather increased electric
margin by $18.7 million compared to the first six months of 2001. Temperature
conditions had little impact on electric gross margin due to milder conditions
in the first quarter of 2002 and more extreme conditions in the second quarter
of 2002 compared to the respective 2001 periods. An increase in the average
retail rate increased electric margin by $5.4 million. In total, retail electric
sales volumes increased 3.0% for the six months ended June 30, 2002.
Regulated Gas Gross Margin -
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Operating revenues...... $126 $162 $346 $635
Cost of gas sold........ 87 127 235 526
---- ---- ---- ----
Gas gross margin...... $ 39 $ 35 $111 $109
==== ==== ==== ====
Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from most of
its gas utility customers. Consequently, fluctuations in the cost of gas sold do
not affect gross margin or net income because revenues reflect comparable
fluctuations through the purchase gas adjustment clauses. A decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold by
approximately $33 million for the second quarter of 2002 and $230 million for
the first six months of 2002.
Temperature conditions during the three months ended June 30, 2002, were
more extreme than those in the second quarter of 2001, resulting in a $3 million
increase in gas gross margin. Other usage factors increased gross margin by $2.8
million compared to the second quarter of 2001. Total retail gas sales volumes
increased 27.8% for the three months ended June 30, 2002.
A decrease in revenues from the recovery of energy efficiency costs reduced
gas margin by $0.8 million compared to the three months ended June 30, 2001.
Refer to the "Regulated Electric Gross Margin" section above for a discussion of
energy efficiency revenues.
Gas gross margin also increased due to an increase in rates for South
Dakota customers. On February 20, 2002, the South Dakota Public Utility
Commission approved a settlement agreement allowing increased natural gas rates
of $3.1 million annually, effective immediately. Refer to the "Rate Matters"
discussion in the "Liquidity and Capital Resources" section of MD&A for comments
on the Iowa gas rate proceeding.
Compared to the first six months of 2001, gas gross margin increased $2
million. Milder temperature conditions in the first quarter of 2002 compared to
the first six months of 2001, offset partially by the temperature conditions of
the second quarter, resulted in a $6 million reduction in gas gross margin.
Other usage factors not dependent on weather increased gas margin by $10.3
million. An increase in the average retail rate, due in part to the rate
increases discussed above, increased gas margin by $0.4 million compared to the
first six months of 2001.
-25-
A decrease in revenues from the recovery of energy efficiency costs reduced
gas margin by $2.4 million compared to the six months ended June 30, 2001.
REGULATED OPERATING EXPENSES
Regulated other operating expenses for the second quarter of 2002 increased
$2.2 million for MidAmerican Energy and $3.4 million for MidAmerican Funding
compared to the second quarter of 2001. Significant items contributing to the
variances were increases of $5.1 million in pension and other postretirement
costs and $3.6 million in Cooper Nuclear Station costs. The increases were
partially offset by a $4.1 million decrease in amortization of energy efficiency
program costs and a $1.5 million decrease in the provision for uncollectible
accounts receivable. Refer to the "Regulated Electric Gross Margin" section for
discussion regarding energy efficiency costs. MidAmerican Funding's regulated
other operating expenses for the 2001 quarter include a reduction for the
amortization of a purchase accounting adjustment related to MidAmerican
Funding's 1999 merger.
Regulated other operating expenses for the six months ended June 30, 2002,
increased $4.3 million for MidAmerican Energy and $5.5 million for MidAmerican
Funding compared to the 2001 period. The more significant increases included
$9.6 million in pension and other postretirement costs, $4.2 million in Cooper
Nuclear Station costs, $3.6 million for health care and other benefit costs and
$2.3 million in property and liability insurance due to greater premium refunds
in the 2001 period. The increase in pension and postretirement costs is due
principally to a change in the assumed discount rate beginning in the fourth
quarter of 2001. Pension and postretirement costs for the twelve months ended
December 31, 2001, were adjusted when the assumed discount rate was changed.
Accordingly, the amounts recorded in the first three quarters of 2001 are not
representative of the annual pension and postretirement expense for 2001. The
increases in other operating expenses were partially offset by a $10.0 million
decrease in amortization of energy efficiency program costs, a $2.8 million
decrease in the provision for uncollectible accounts receivable and a number of
less substantive decreases. MidAmerican Funding's regulated other operating
expenses for the 2001 period include a reduction for the amortization of a
purchase accounting adjustment related to the 1999 merger.
Maintenance expenses increased $0.6 million for the three months ended June
30, 2002, and $1.8 million for the six months ended June 30, 2002, compared to
the respective 2001 periods due primarily to fossil-fuel generation maintenance
expenses. Decreases in electric distribution maintenance expenses and Quad
Cities Station maintenance costs partially offset the increases.
Depreciation and amortization expense increased $10.0 million compared to
the second quarter of 2001 due to a $5.8 million increase in the regulatory
charge related to the establishment of a regulatory liability for the electric
revenue sharing arrangement in Iowa and an increase in utility plant
depreciation. The increase in utility plant depreciation includes a $3.4 million
adjustment for a change in the estimated useful life of general utility plant
assets. Depreciation and amortization expense increased $4.4 million compared to
the first six months of 2001 due to an increase in utility plant depreciation,
including the adjustment discussed previously.
-26-
NONREGULATED GROSS MARGIN
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
(In millions)
MidAmerican Energy -
Operating revenues ............. $ 101.3 $ 171.6 $ 186.9 $ 362.5
Cost of sales .................. 93.3 164.8 172.4 347.6
-------- -------- -------- --------
Gross margin .............. $ 8.0 $ 6.8 $ 14.5 $ 14.9
======== ======== ======== ========
MidAmerican Funding Consolidated -
Operating revenues ............. $ 102.4 $ 176.2 $ 188.8 $ 377.4
Cost of sales .................. 93.5 167.7 172.7 360.1
-------- -------- -------- --------
Gross margin .............. $ 8.9 $ 8.5 $ 16.1 $ 17.3
======== ======== ======== ========
MidAmerican Energy -
Nonregulated revenues and cost of sales consist substantially of
nonregulated natural gas marketing operations. The nonregulated natural gas
marketing operations include wholesale and retail activities. Approximately 72%
of the nonregulated natural gas revenues for the six months ended June 30, 2002,
are related to wholesale sales.
Gross margin for MidAmerican Energy's nonregulated natural gas operations
decreased $1.8 million to $1.0 million for the second quarter of 2002. The
decline in gross margin was due to a decrease in the margin per unit and sales
volumes. Revenues from nonregulated natural gas marketing operations decreased
$70.4 million compared to the second quarter of 2001 to $90.7 million for the
second quarter of 2002. A decrease in the average price per unit sold,
reflective of a 26% decrease in the average cost of gas, resulted in a $32.3
million decrease in revenues. Sales volumes decreased 8 million MMBtus (24%)
resulting in a $38.1 million decrease in revenues. Cost of sales decreased $68.7
million to $89.7 million for the three months ended June 30, 2002, due to the
decreases in the per-unit cost of gas sold and sales volumes.
Gross margin for MidAmerican Energy's nonregulated natural gas operations
decreased $3.7 million to $2.3 million for the first six months of 2002. The
decline in gross margin reflects a decrease in margin per unit and sales
volumes. Revenues from nonregulated natural gas operations decreased $171.2
million to $170.2 million for the first six months of 2002. A decrease in the
average price per unit sold, reflective of a 46% decrease in the average cost of
gas, accounted for $148.9 million of the decrease in revenues. Sales volumes
decreased 4 million MMBtus (7%) resulting in a $22.3 million decrease in
revenues. Cost of sales decreased $167.5 million to $167.9 million for the six
months ended June 30, 2002, due to the decreases in the per-unit cost of gas
sold and sales volumes.
Nonregulated revenues for the second quarter of 2001 include $2.6 million
from MidAmerican Energy's market access service project. Related costs of sales
totaled $2.1 million. The pilot project, which concluded in May 2001, allowed
larger Iowa customers that were participating in the project to choose their
electric power supplier. MidAmerican Energy's revenues from project participants
related to non-supply services, such as distribution and transmission, are
reflected in regulated electric revenues. For the six months ended June 30,
2001, revenues from the market access service project totaled $6.2 million, and
related costs of sales totaled $5.4 million.
-27-
All retail customers in Illinois are allowed to select their electric power
supplier. For the three months ended June 30, 2002, compared to the three months
ended June 30, 2001, related nonregulated retail revenues decreased $0.7 million
to $2.5 million, and related cost of sales decreased $3.2 million to $0.3
million, resulting in a $2.4 million increase in gross margin. For the six
months ended June 30, 2002, compared to the six months ended June 30, 2001,
revenues decreased $2.4 million to $4.4 million, and related cost of sales
decreased $5.0 million to $0.4 million, resulting in a $2.6 million increase in
gross margin.
MidAmerican Energy's nonregulated revenues in the second quarter of 2002
include $1.8 million of pre-tax income from an award for successful performance
under an incentive gas procurement program. A similar award of $2.1 million was
recorded in the second quarter of 2001.
Additionally, revenues for the first six months of 2002 include $1.2
million for emergency storm restoration work performed outside of MidAmerican
Energy's service territory during the first quarter of 2002. Related costs are
reflected in "Nonregulated Operating Expenses: Other".
MidAmerican Funding:
During 2001, a subsidiary of MidAmerican Capital had nonregulated natural
gas marketing operations. For the second quarter of 2001, those operations had
revenues and costs of sales totaling $2.2 million and $1.9 million,
respectively. For the six months ended June 30, 2001, related revenues and costs
of sales totaled $11.1 million and $11.2 million, respectively. All contracts of
that subsidiary have terminated.
NONREGULATED OPERATING EXPENSES: OTHER
MidAmerican Energy -
Nonregulated other operating expenses increased $1.7 million for the six
months ended June 30, 2002, due largely to $1.0 million of costs related to the
emergency storm restoration work discussed above.
MidAmerican Funding -
MidAmerican Funding's nonregulated other operating expenses, inclusive of
MidAmerican Energy amounts, decreased $8.9 million and $16.5 million for three
months and six months ended June 30, 2002, respectively, compared to the 2001
periods. MidAmerican Funding's goodwill is no longer being amortized as a result
of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on
January 1, 2002. Amortization of MidAmerican Funding's goodwill totaled $8.6
million for the second quarter of 2001 and $17.2 million first six months of
2001.
INTEREST AND DIVIDEND INCOME
MidAmerican Energy -
The decreases in interest income compared to the 2001 periods presented
were due principally to decreases in interest income on a note receivable
related to MidAmerican Energy's accounts receivable sold. Related interest
income decreased $2.2 million for the quarter and $4.8 million for the six
months ended June 30, 2002. The decreases related to the note receivable were
partially offset by MidAmerican Energy's favorable cash position due to the
issuance of $400 million of medium-term notes in February 2002.
-28-
MidAmerican Funding -
Dividend income decreased due to partial liquidation of the preferred stock
investment portfolio in the past twelve months.
MARKETABLE SECURITIES GAINS AND LOSSES, NET
MidAmerican Funding -
Net losses on marketable securities increased $1.3 million for the second
quarter of 2002 and $2.2 million for the six-month period ended June 30, 2002,
compared to the respective 2001 periods. The decrease for the second quarter of
2002 includes a $0.7 million decrease for unrealized losses on trading
securities. In the first quarter of 2002, MidAmerican Capital recorded a $2.9
million loss related to other-than-temporary declines in two of its common stock
investments. The first quarter of 2001 includes a $2.4 million pre-tax loss
related to the re-characterization of marketable securities to "trading" as
allowed by Statement of Financial Accounting Standards No. 133.
OTHER, NET
MidAmerican Energy -
MidAmerican Energy's Other, Net, which includes a number of non-operating
income and deduction items, reduced Non-Operating Income by $0.2 million for the
three months ended June 30, 2002, and $4.0 million for the three months ended
June 30, 2001. Other, Net reduced Non-Operating Income by $22,000 for the
six-month period ended June 30, 2002, and $8.0 million for the six-month period
ended June 30, 2001.
Other, Net includes a discount on sold accounts receivable, net of a
subservicer fee charged to MidAmerican Energy Funding Corporation for servicing
the accounts. The discount is designed to cover the expenses of MidAmerican
Energy Funding Corporation, including bad debt expense, subservicer fees,
monthly administrative costs and interest. The discount is recorded in Other,
Net because it is not reflected in utility cost of service for regulatory
purposes. The discount, net of the subservicer fee, reduced Other, Net by $1.6
million and $3.3 million in the second quarter of 2002 and 2001, respectively,
and by $2.9 million and $8.8 million for the six-month periods ended June 30,
2002 and 2001, respectively.
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. Accordingly,
Other, Net includes income for the allowance on equity funds used during
construction of $2.1 million and $3.3 million for the three months and six
months ended June 30, 2002, respectively.
Other, Net for the first six months of 2001 also reflects a $1.4 million
gain on the sale of MidAmerican Energy rail cars.
MidAmerican Funding -
Other, Net for MidAmerican Funding, including MidAmerican Energy amounts,
increased Non-Operating Income by $1.2 million for the three months ended June
30, 2002, and $0.6 million for the
-29-
three months ended June 30, 2001. Other, Net increased Non-Operating Income by
$7.8 million for the six months ended June 30, 2002, and reduced it by $3.1
million for the comparable period in 2001.
Income from MidAmerican Capital's equity investments totaled $0.7 million
for the second quarter of 2002 compared to $3.2 million for the second quarter
of 2001. The 2001 quarter reflects $2.3 million of income related to a gain on a
common stock distribution by one of MidAmerican Capital's venture capital fund
investments. Income from MidAmerican Capital's equity investments totaled $6.0
million for the six-month period ended June 30, 2002, and $3.0 million for six
months ended June 30, 2001. During the first quarter of 2002, MidAmerican
Capital received a distribution of common stock held by one of its venture
capital fund investments and recognized $5.3 million of income.
Additionally, MidAmerican Funding recorded $0.4 million of income in the
first quarter of 2002 for a distribution related to MidAmerican Capital's
investments in energy projects.
FIXED CHARGES AND PREFERRED DIVIDENDS
MidAmerican Energy -
The increase in interest on long-term debt was due to interest on $400
million of MidAmerican Energy medium-term notes issued in February 2002, net of
the impact of debt maturities in 2001 and lower variable interest rates in 2002.
Other interest expense decreased for three months and six months ended June
30, 2002, compared to the respective 2001 periods due principally to interest in
the second quarter of 2001 related to an income tax audit payable. Additionally,
other interest expense decreased due to a reduction in short-term debt
outstanding at MidAmerican Energy. Other interest expense increased for interest
on a regulatory liability associated with the electric revenue sharing
arrangement in Iowa.
MidAmerican Energy's preferred dividends of its subsidiary trust decreased
due to the reacquisition of all of the related preferred securities on March 11,
2002. Dividends for MidAmerican Energy's preferred securities, which are
reflected after Net Income for MidAmerican Energy, decreased due to preferred
securities reacquired in May and November 2001 and May 2002. Preferred dividends
for the three months and six months ended June 30, 2002 reflect a $0.6 million
loss on reacquisition of preferred securities.
MidAmerican Funding -
MidAmerican Funding also retired $200 million of long-term debt and issued
$200 million of long-term debt in the first quarter of 2001, resulting in an
increase in interest on long-term debt for the first six months of 2002.
Interest expense was reduced in the first quarter of 2001 due to the period of
time between the retirement of the former debt series and the issuance of the
current debt series. Interest expense for the first six months of 2002 reflects
a full six months of interest expense for the new series of debt, which has a
higher interest rate than the previous debt.
-30-
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MidAmerican Funding and MidAmerican Energy have available a variety of
sources of liquidity and capital resources, both internal and external. These
resources provide funds required for current operations, construction
expenditures, dividends, debt retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican
Energy's net cash provided from operating activities was $217 million and $234
million for the six months ended June 30, 2002 and 2001, respectively.
MidAmerican Funding's net cash provided from operating activities was $195
million and $219 million for the six months ended June 30, 2002 and 2001,
respectively.
INVESTING ACTIVITIES AND PLANS
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first six months of 2002, utility construction
expenditures totaled $136 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations, net of dividends.
Forecasted utility construction expenditures, including allowance for funds
used during construction are $382 million for 2002 and $1.614 billion for 2003
through 2006. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. Through 2007, MidAmerican
Energy plans to develop and construct two electric generating plants in Iowa.
Participation by others in a portion of the second plant is being discussed.
Excluding amounts related to any others who may participate in the second plant,
MidAmerican Energy expects to invest approximately $1.2 billion in the two
plants, including the cost of related transmission facilities and allowance for
funds used during construction. The two plants may provide up to 950 megawatts
of generating capacity for MidAmerican Energy depending on management's on-going
assessment of needs and related factors.
The first project is a 500-megawatt natural gas-fired combined cycle unit
with an estimated cost of $415 million. MidAmerican Energy has received a
certificate from the Iowa Utilities Board allowing it to construct the plant. In
accordance with an Iowa law passed in 2001, MidAmerican Energy sought Iowa
Utilities Board approval for the ratemaking principles that will govern recovery
of costs related to construction of the plant. On May 29, 2002, the Iowa
Utilities Board issued an order that provides the ratemaking principles for the
gas-fired plant. As a result of that order, MidAmerican Energy is proceeding
with the construction of the plant. It is anticipated that the first phase of
the project will be completed in 2003 with the remainder being completed in
2005. MidAmerican Energy expects to make filings for a certificate and approval
of ratemaking principles for the second project during the third quarter of
2002.
MidAmerican Energy presently expects that all utility construction
expenditures for the next five years will be met with the issuance of long-term
debt and cash generated from utility operations, net of dividends. The actual
level of cash generated from utility operations is affected by, among other
things, economic conditions in the utility service territory, weather and
federal and state regulatory actions.
-31-
Nuclear Decommissioning -
Each licensee of a nuclear facility is required to provide financial
assurance for the cost of decommissioning its licensed nuclear facility. In
general, decommissioning of a nuclear facility means to safely remove the
facility from service and restore the property to a condition allowing
unrestricted use by the operator. Based on information presently available,
MidAmerican Energy expects to contribute approximately $41 million during the
period 2002 through 2006 to external trusts established for the investment of
funds for decommissioning Quad Cities Station. Approximately 60% of the fair
value of the trusts' funds is now invested in domestic corporate debt and common
equity securities. The remainder is invested in investment grade municipal and
U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is
reflected in Depreciation and Amortization in the Consolidated Statements of
Income.
Amounts related to Cooper decommissioning are reflected in Other Operating
Expenses in the Consolidated Statements of Income. In July 1997, the Nebraska
Public Power District filed a lawsuit in United States District Court for the
District of Nebraska naming MidAmerican Energy as the defendant and seeking a
declaration of MidAmerican Energy's rights and obligations in connection with
Cooper nuclear decommissioning funding. As a result of a restructuring of the
power purchase contract between MidAmerican Energy and the Nebraska Public Power
District, MidAmerican Energy will no longer be accruing for decommissioning
costs. Refer to Part II, Item 1, "Legal Proceedings" of this Form 10-Q for
further discussion of the litigation and to Note H of MidAmerican Energy's Notes
to Financial Statements for a discussion of the contract restructuring.
Quad Cities Station decommissioning costs charged to Iowa customers are
included in base rates, and recovery of increases in those amounts must be
sought through the normal ratemaking process.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
Debt Authorizations and Credit Facilities -
MidAmerican Energy has authority from the Federal Energy Regulatory
Commission to issue through April 14, 2003 short-term debt in the form of
commercial paper and bank notes aggregating $500 million. MidAmerican Energy
currently has in place a $370.4 million revolving credit facility that supports
its $250 million commercial paper program and its variable rate pollution
control revenue obligations. The facility expires January 16, 2003. In addition,
MidAmerican Energy has a $5 million line of credit, which expires July 1, 2003.
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75%
medium-term notes due in 2031. The proceeds are being used to refinance existing
debt and preferred securities and for other corporate purposes. On March 11,
2002, MidAmerican Energy redeemed all $100 million of its 7.98%
MidAmerican-obligated preferred securities of subsidiary trust at 100% of the
principal amount plus accrued interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.68 million of its
$7.80 series of preferred securities. The first $13.32 million of preferred
securities were redeemed at 100% of the principal amount plus accrued dividends,
and the remaining $13.36 million was redeemed at 103.9% of the principal amount
plus accrued dividends.
MidAmerican Energy has on file with the Securities and Exchange Commission
a registration statement for $500 million in various forms of senior and
subordinated, unsecured long-term debt and
-32-
preferred securities, $100 million of which remains available following the
issuance of the $400 million of medium-term notes discussed above.
MidAmerican Energy has authorization from the Federal Energy Regulatory
Commission to issue, through November 30, 2002, up to an additional $100 million
in various forms of long-term debt following the issuance of the $400 million of
medium-term notes discussed above. MidAmerican Energy will also need
authorization from the Illinois Commerce Commission prior to issuing any
securities. If 90% or more of the proceeds from a securities issuance are used
for refinancing purposes, MidAmerican Energy need only provide the Illinois
Commerce Commission with an "informational statement" prior to the issuance
which sets forth the type, amount and use of the proceeds of the securities to
be issued. If less than 90% of the proceeds are used for refinancing,
MidAmerican must file a comprehensive application seeking authorization prior to
issuance. The Illinois Commerce Commission is required to hold a hearing before
issuing its authorization.
Accounts Receivable Sold -
In 1997, MidAmerican Energy entered into a revolving agreement, which
expires on October 29, 2002, to sell all of its right, title and interest in the
majority of its billed accounts receivable to MidAmerican Energy Funding
Corporation, a special purpose entity established to purchase accounts
receivable from MidAmerican Energy. MidAmerican Energy Funding Corporation in
turn sells receivable interests to outside investors. In consideration for the
sale, MidAmerican Energy received cash and a subordinated note, bearing interest
at 8%, from MidAmerican Energy Funding Corporation. As of June 30, 2002, the
revolving cash balance was $36 million and the amount outstanding under the
subordinated note was $55.8 million. The agreement is structured as a true sale,
under which the creditors of MidAmerican Energy Funding Corporation will