UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Preferred Stock, $3.30 Series, no par value
Preferred Stock, $3.75 Series, no par value
Preferred Stock, $3.90 Series, no par value
Preferred Stock, $4.20 Series, no par value
Preferred Stock, $4.35 Series, no par value
Preferred Stock, $4.40 Series, no par value
Preferred Stock, $4.80 Series, no par value
_______________________________________________________________________________
(Title of each Class)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
----
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12-b-2 of the Act). Yes No X
---- ----
All of the member's equity of MidAmerican Funding, LLC is held by its parent
company, MidAmerican Energy Holdings Company, as of March 20, 2003.
All common stock of MidAmerican Energy Company is held by its parent company,
MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding,
LLC. As of March 20, 2003, 70,980,203 shares of MidAmerican Energy common stock,
without par value, were outstanding.
MidAmerican Funding, LLC and MidAmerican Energy Company meet the conditions set
forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore
filing this Form 10-K with the reduced disclosure format specified in General
Instruction I(2) of Form 10-K.
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MIDAMERICAN FUNDING, LLC
MIDAMERICAN ENERGY COMPANY
2002 ANNUAL REPORT ON FORM 10-K
MidAmerican Funding, LLC, or MidAmerican Funding, and MidAmerican Energy
Company, or MidAmerican Energy, separately file this combined Form 10-K.
Information relating to each individual registrant is filed by such registrant
on its own behalf. Except for its subsidiaries, MidAmerican Energy makes no
representation as to information relating to any other subsidiary of MidAmerican
Funding.
TABLE OF CONTENTS
Part I Page
------ ----
Item 1 Business
General Overview............................................ 4
Financial Information About Industry Segments............... 4
Description of Business..................................... 4
Business of MidAmerican Funding and MHC................... 4
Business of MidAmerican Energy............................ 5
Regulated Electric Operations ............................ 6
Regulated Natural Gas Operations.......................... 10
Nonregulated Operations................................... 12
Regulation................................................ 14
Business of MidAmerican Capital........................... 18
Business of Midwest Capital............................... 18
Item 2 Properties...................................................... 19
Item 3 Legal Proceedings............................................... 21
Item 4 Submission of Matters to a Vote of Security Holders............. 21
Part II
-------
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters................................... 22
Item 6 Selected Financial Data......................................... 22
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 22
Item 8 Financial Statements and Supplementary Data..................... 22
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................... 22
Part III
--------
Item 10 Directors and Executive Officers of the Registrant.............. 23
Item 11 Executive Compensation.......................................... 26
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.............. 26
Item 13 Certain Relationships and Related Transactions.................. 26
Item 14 Controls and Procedures......................................... 26
Part IV
-------
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 27
Signatures ............................................................... 119
Certifications............................................................ 121
Exhibit Index............................................................. 131
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PART I
ITEM 1. BUSINESS
- ----------------
(A) GENERAL OVERVIEW
MidAmerican Funding, LLC, or MidAmerican Funding, is an Iowa limited
liability company that was formed in March 1999. Its sole member is MidAmerican
Energy Holdings Company, or MidAmerican Energy Holdings. MidAmerican Funding
owns all of the outstanding common stock of MHC Inc., formerly known as
MidAmerican Energy Holdings Company, which owns all of the common stock of
MidAmerican Energy Company, or MidAmerican Energy; MidAmerican Capital Company,
or MidAmerican Capital; Midwest Capital Group, Inc., or MidAmerican Capital;
MidAmerican Services Company, or MidAmerican Services; and MEC Construction
Services Co., or MEC Construction. MidAmerican Energy is a public utility
company headquartered in Des Moines, Iowa, and incorporated in the state of
Iowa.
On March 12, 1999, MidAmerican Funding acquired MHC. As a part of this
transaction, the former CalEnergy Company, Inc., a Delaware corporation, was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings. As a result, MHC and all direct and indirect subsidiaries of MHC each
became a subsidiary of MidAmerican Funding.
On March 14, 2000, an investor group including Berkshire Hathaway Inc.,
Walter Scott, Jr., David L. Sokol and Gregory E. Abel completed its acquisition
of MidAmerican Energy Holdings in accordance with a previously disclosed
agreement and plan of merger, dated October 24, 1999, among MidAmerican Energy
Holdings, Teton Formation L.L.C. and Teton Acquisition Corp. Mr. Scott is an
Omaha, Nebraska businessman and a director of MidAmerican Energy Holdings, Mr.
Sokol is Chairman and Chief Executive Officer of MidAmerican Energy Holdings and
Mr. Abel is Chief Operating Officer of MidAmerican Energy Holdings. In
accordance with the merger agreement, Teton Acquisition was merged with and into
MidAmerican Energy Holdings, maintaining the name MidAmerican Energy Holdings.
With the completion of the transaction, MidAmerican Energy Holdings is now a
privately owned company with publicly traded fixed-income securities.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information on MidAmerican Funding's segments of business is
included in Note (12) of Notes to Consolidated Financial Statements included in
Item 15 of this Form 10-K.
(C) DESCRIPTION OF BUSINESS
BUSINESS OF MIDAMERICAN FUNDING AND MHC
---------------------------------------
MidAmerican Funding conducts no business other than activities related to
the issuance of its debt securities and the ownership of MHC.
MHC conducts no business other than the ownership of its subsidiaries.
MHC's interests include 100% of the common stock of MidAmerican Energy,
MidAmerican Capital, Midwest Capital, MidAmerican Services and MEC Construction.
MidAmerican Energy is primarily engaged in the business of generating,
transmitting, distributing and selling electric energy and in distributing,
selling and transporting natural gas. It accounts for the predominant part of
MHC's assets and earnings. MidAmerican Capital manages equipment leases and
other passive investment activities. Midwest
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Capital functions as a regional business development company in MidAmerican
Energy's service territory. MidAmerican Services provides comprehensive energy
services to commercial and industrial companies, and MEC Construction provides
nonregulated utility construction services.
For the year ended December 31, 2002, 99.8% of MidAmerican Funding's
operating revenues were from MidAmerican Energy.
MidAmerican Funding and its subsidiaries had 3,735 full-time employees as
of December 31, 2002.
BUSINESS OF MIDAMERICAN ENERGY
------------------------------
MidAmerican Energy is the largest energy company headquartered in Iowa,
with $3.8 billion of assets as of December 31, 2002, and revenues for 2002
totaling $2.2 billion. MidAmerican Energy is principally engaged in the business
of generating, transmitting, distributing and selling electric energy and in
distributing, selling and transporting natural gas. MidAmerican Energy
distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge,
Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities (Davenport and
Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois); and a
number of adjacent communities and areas. It also distributes natural gas at
retail in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and
Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and a number of
adjacent communities and areas. As of December 31, 2002, MidAmerican Energy had
approximately 681,000 retail electric customers and 660,000 retail natural gas
customers.
In addition to retail sales, MidAmerican Energy sells electric energy and
natural gas to other utilities, marketers and municipalities inside and outside
of MidAmerican Energy's delivery system. These sales are referred to as
wholesale sales. It also transports natural gas through its distribution system
for a number of end-use customers who have independently secured their supply of
natural gas.
MidAmerican Energy's regulated electric and gas operations are conducted
under franchises, certificates, permits and licenses obtained from state and
local authorities. The franchises, with various expiration dates, are typically
for 25-year terms.
MidAmerican Energy has a diverse customer base consisting of residential,
agricultural, and a variety of commercial and industrial customer groups. Among
the primary industries served by MidAmerican Energy are those that are concerned
with food products, the manufacturing, processing and fabrication of primary
metals, real estate, farm and other non-electrical machinery, and cement and
gypsum products.
MidAmerican Energy also conducts a number of nonregulated business
activities. Refer to the "Nonregulated Operations" section later in Part I for
further discussion.
For the year ended December 31, 2002, MidAmerican Energy derived
approximately 61% of its gross operating revenues from its regulated electric
business, 31% from its regulated gas business and 8% from its nonregulated
business activities. For 2001 and 2000, the corresponding percentages were 56%
electric, 37% gas and 7% nonregulated; and 53% electric, 41% gas and 6%
nonregulated, respectively.
At December 31, 2002, MidAmerican Energy had 3,718 full-time employees of
which 1,739 were covered by union contracts. MidAmerican Energy has five
separate contracts with locals of the International Brotherhood of Electrical
Workers (IBEW), the United Association of Plumbers and Pipefitters and the
United Paper Workers International Union. One contract with IBEW locals 109 and
499 expires February 29, 2004, and covers 1,659 employee members.
-5-
REGULATED ELECTRIC OPERATIONS
The following tables present historical regulated electric sales data
related to customer class and jurisdictions.
Total Regulated Electric Sales
By Customer Class
------------------------------
2002 2001 2000
---- ---- ----
Residential...................... 19.8% 20.6% 20.7%
Small general service............ 14.2 15.3 15.9
Large general service............ 24.5 25.8 28.6
Other ........................... 9.1 7.3 5.4
Wholesale........................ 32.4% 31.0 29.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Regulated Retail Electric Sales
By State
------------------------------
2002 2001 2000
---- ---- ----
Iowa ........................... 88.5% 88.6% 89.3%
Illinois......................... 10.7 10.6 10.0
South Dakota..................... 0.8 0.8 0.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric business
that are principally related to the use of electricity for air conditioning. In
2002, 41% of MidAmerican Energy's regulated electric revenues were reported in
the months of June, July, August and September.
The annual hourly peak demand on MidAmerican Energy's electric system
usually occurs as a result of air conditioning use during the cooling season. In
July 2002, MidAmerican Energy reached a new record hourly peak demand of 3,889
megawatts, or MW, which was 56 MW greater than MidAmerican Energy's previous
record hourly peak demand of 3,833 MW set in July 1999.
MidAmerican Energy's accredited net generating capability in the summer of
2002 was 4,724 MW. Accredited net generating capability represents the amount of
generation available to meet the requirements on MidAmerican Energy's system and
consists of MidAmerican Energy-owned generation, generation under power purchase
contracts and the net amount of capacity purchases and sales. The net generating
capability at any time may be less than it would otherwise be due to regulatory
restrictions, fuel restrictions and generating units being temporarily out of
service for inspection, maintenance, refueling or modifications. Refer to Item 2
of this Form 10-K for detail of the accredited net generating capability for the
summer of 2002.
MidAmerican Energy plans to develop and construct two electric generating
plants in Iowa. Both plants would provide service to regulated retail
electricity customers and be included in regulated rate base in Iowa, Illinois
and South Dakota. Wholesale sales may also be made from the plants to the extent
the power is not needed for regulated retail service.
The first plant will be a 500-MW (based on expected accreditation) natural
gas-fired, combined cycle plant with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and operate it. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in
-6-
310 MW of accredited capacity. The combined cycle operation will commence in
2005. MidAmerican Energy has received a certificate from the Iowa Utilities
Board, or IUB, allowing it to construct the plant. In May 2002, the IUB issued
an order that specified the Iowa ratemaking principles that will apply to the
plant over its life. As a result of that order, MidAmerican Energy is proceeding
with the construction of the plant and has initiated start-up and testing of the
simple cycle phase.
The second plant is currently under development and is expected to be a
790-MW (based on expected accreditation) super-critical-temperature, coal-fired
plant fueled with low-sulfur coal. If constructed, MidAmerican Energy will
operate the plant and expects to own approximately 475 MW of the plant.
Municipal, cooperative and public power utilities will own the remainder, which
is a typical ownership arrangement for large base-load plants in Iowa. On
January 23, 2003, the IUB issued an order granting MidAmerican Energy a
certificate to construct the plant conditioned upon retention of other required
governmental permits. MidAmerican Energy has made a filing with the IUB for
approval of Iowa ratemaking principles for this second plant. The development of
this plant is subject to obtaining environmental and other required permits, as
well as to receiving orders from the IUB approving construction of the
associated transmission facilities and establishing ratemaking principles which
are satisfactory to MidAmerican Energy.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring states and is involved in an electric power pooling agreement known
as Mid-Continent Area Power Pool, or MAPP. MAPP is a voluntary association of
electric utilities doing business in Minnesota, Nebraska, North Dakota and the
Canadian provinces of Saskatchewan and Manitoba and portions of Iowa, Montana,
South Dakota and Wisconsin. Its membership also includes power marketers,
regulatory agencies and independent power producers. MAPP facilitates operation
of the transmission system and is responsible for the safety and reliability of
the bulk electric system.
In November 2001, MAPPCOR, the contractor to MAPP, sold its
transmission-related assets to the Midwest Independent Transmission System
Operator, Inc., or Midwest ISO. The Midwest ISO now has responsibility for
administration of MAPP's Open-Access Transmission Tariff.
Each MAPP participant is required to maintain for emergency purposes a net
generating capability reserve of at least 15% above its system peak demand. If a
participant's capability reserve falls below the 15% minimum, significant
penalties could be contractually imposed by MAPP. MidAmerican Energy's reserve
margin at peak demand for 2002 was approximately 21%.
MidAmerican Energy's transmission system connects its generating facilities
with distribution substations and interconnects with 14 other transmission
providers in Iowa and five adjacent states. Under normal operating conditions,
MidAmerican Energy's transmission system is unconstrained and has adequate
capacity to deliver energy to MidAmerican Energy's distribution system and to
export and import energy with other interconnected systems. Refer to Item 2 of
this Form 10-K for additional information on transmission lines.
In December 1999, the Federal Energy Regulatory Commission, or FERC, issued
Order No. 2000 establishing, among other things, minimum characteristics and
functions for regional transmission organizations. Public utilities that were
not a member of an independent system operator at the time of the order were
required to submit a plan by which its transmission facilities would be
transferred to a regional transmission organization. On September 28, 2001,
MidAmerican Energy and five other electric utilities filed with the FERC a plan
to create TRANSLink Transmission Company LLC and to integrate their electric
transmission systems into a single, coordinated system operating as a for-profit
independent transmission company in conjunction with a FERC-approved regional
transmission organization. On April 25, 2002, the FERC issued an order approving
the transfer of control of MidAmerican Energy and
-7-
other utilities' transmission assets to TRANSLink in conjunction with
TRANSLink's participation in the Midwest Independent Transmission System
Operator, Inc. regional transmission organization. MidAmerican Energy has filed
an application for state regulatory approval with the IUB and anticipates a
ruling in mid-2003. Transferring the operations and control of MidAmerican
Energy's transmission assets to other entities could increase costs for
MidAmerican Energy; however, the actual impact of TRANSLink on MidAmerican
Energy's future transmission costs is not yet known. Transfer of control is not
anticipated until the third quarter of 2003 at the earliest.
On July 31, 2002, the FERC issued a notice of proposed rulemaking with
respect to Standard Market Design. The FERC has characterized the proposal as
portending "sweeping changes" to the use and expansion of the interstate
transmission and wholesale bulk power systems in the United States. The proposal
includes numerous proposed changes in the current regulation of transmission and
generation facilities designed "to promote economic efficiency" and replace the
"obsolete patchwork we have today," according to the FERC's chairman. The final
rule, if adopted as currently proposed, would require all public utilities
operating transmission facilities subject to the FERC jurisdiction to file
revised open access transmission tariffs that would require changes to the basic
services these public utilities currently provide. The proposed rule may impact
the pricing of MidAmerican Energy's electricity and transmission products. The
FERC does not envision that a final rule will be fully implemented until 2004.
MidAmerican Energy is still evaluating the proposed rule and recognizes the
final rule could vary considerably from the initial proposal. Accordingly, the
likely impact of the proposed rule on MidAmerican Energy's transmission and
generation businesses is unknown.
Energy Supply for Electric Operations
- -------------------------------------
MidAmerican Energy's total energy supplied to retail and wholesale electric
customers was from the following sources:
2002 2001 2000
----- ----- -----
MidAmerican Energy-owned generation........ 76.5% 82.6% 83.8%
Energy purchased under long-term contracts. 14.3 13.5 14.0
Energy purchased - other................... 9.2 3.9 2.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The increase in the percent of other energy purchased for 2002 compared to
2001 is due to additional purchases to supply an increase in wholesale sales
volumes and a portion of the increase in retail sales volumes. MidAmerican
Energy-owned generation and energy purchased under long-term contracts increased
to a lesser degree to supply a portion of the increase in retail sales volumes.
-8-
MidAmerican Energy's sources of fuel for electric generation were as
follows for the years ended December 31:
2002 2001 2000
----- ----- -----
Coal................... 73.3% 74.4% 75.9%
Nuclear (a)............ 24.4 24.3 23.6
Gas (b)................ 2.2 1.2 0.3
Oil/Hydro.............. 0.1 0.1 0.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(a) Nuclear includes energy purchased through a power purchase
contract with Nebraska Public Power District. As a result of a
contract restructuring effective August 1, 2002, energy purchased
under that contract is similar to other purchased energy in that
it is not restricted to a particular energy source. However, it
is included in Nuclear for all of 2002 for comparison purposes.
(b) Gas includes energy purchased through a power purchase contract
with Cordova Energy Company LLC. Each of these contracts is
discussed below. Refer to Item 2 of this Form 10-K for detail of
generating facilities.
MidAmerican Energy is no longer allowed to recover a portion of its energy
costs relating to retail sales through energy adjustment clauses. Accordingly,
fluctuations in energy costs now affect MidAmerican Energy's earnings.
All of the coal-fired generating stations operated by MidAmerican Energy
are fueled by low-sulfur, western coal from the Powder River Basin and Hanna
Basin mines. MidAmerican Energy's coal supply portfolio includes multiple
suppliers and mines under agreements of varying term and quantity flexibility.
MidAmerican Energy regularly monitors the western coal market, looking for
opportunities to improve its coal supply portfolio. MidAmerican Energy believes
its sources of coal supply are, and will continue to be, satisfactory.
Additional information regarding MidAmerican Energy's coal supply contracts is
included in Note (4)(f) of Notes to Consolidated Financial Statements in Item 15
of this Form 10-K.
MidAmerican Energy has agreements with Union Pacific Railroad Company to
deliver coal directly to its Neal and Council Bluffs Energy Centers. Coal for
MidAmerican Energy's Louisa and Riverside Energy Centers is delivered to an
interchange point by Union Pacific for transportation to its destination by
Iowa, Chicago & Eastern Railroad Corporation. MidAmerican Energy has the ability
to use The Burlington Northern and Santa Fe Railway Company for delivery of a
small amount of coal to the Council Bluffs, Louisa and Riverside Energy Centers
should the need arise. MidAmerican Energy believes its coal transportation
arrangements are adequate to meet its coal delivery needs.
MidAmerican Energy uses natural gas and oil as fuel for intermediate and
peak demand electric generation, igniter fuel, transmission support and standby
purposes. These sources are presently in adequate supply and available to meet
MidAmerican Energy's needs.
MidAmerican Energy has an agreement with the Nebraska Public Power
District, or NPPD, to purchase electric capacity and energy through December 31,
2004. Under the contract, as restructured effective August 1, 2002, MidAmerican
Energy will purchase 380 MW of the accredited capacity of Cooper Nuclear Station
and a minimum of approximately 2.5 million megawatt-hours in each of the years
-9-
2003 and 2004. NPPD is not required to use Cooper Nuclear Station to meet the
minimum energy requirement.
MidAmerican Energy has an agreement with Cordova Energy Company LLC, a
subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and
energy from a gas-fired combined cycle generation plant that started commercial
operation in June 2001. The agreement, which terminates in May 2004, provides
for MidAmerican Energy to purchase up to 50% of the net capacity of the plant
and to supply the fuel stock required to generate the energy purchased.
MidAmerican Energy is a 25% joint owner of Quad Cities Generating Station,
a nuclear power plant. Exelon Generation Company, LLC, the other joint owner and
the operator of Quad Cities Station, is a subsidiary of Exelon Corporation.
Approximately one-third of the nuclear fuel assemblies in the core at Quad
Cities Station Units 1 and 2 is replaced every 24 months. MidAmerican Energy has
been advised by Exelon Generation that the majority of its uranium concentrate
and uranium conversion requirements for Quad Cities Station through 2003 can be
met under existing supplies or commitments. Exelon Generation foresees no
problem in obtaining the remaining requirements now or obtaining future
requirements. Exelon Generation further advises that enrichment services
contracted through 2007 provide flexibility as to the quantity purchased.
Commitments for fuel fabrication have been obtained at least through 2007.
Exelon Generation does not anticipate that it will have difficulty in
contracting for uranium concentrates for conversion, enrichment or fabrication
of nuclear fuel needed to operate Quad Cities Station.
REGULATED NATURAL GAS OPERATIONS
MidAmerican Energy is engaged in the procurement, transportation, storage
and distribution of natural gas for customers in the Midwest. MidAmerican Energy
purchases natural gas from various suppliers, transports it from the production
area to MidAmerican Energy's service territory under contracts with interstate
pipelines, stores it in various storage facilities to manage fluctuations in
system demand and seasonal pricing, and distributes it to customers through
MidAmerican Energy's distribution system.
MidAmerican Energy sells natural gas to end-use, or retail, customers and
to other utilities, marketers and municipalities outside of MidAmerican Energy's
delivery system. MidAmerican Energy also transports through its distribution
system natural gas purchased independently by a number of end-use customers.
During 2002, approximately 45% of total gas delivered through MidAmerican
Energy's system for end-use customers was under gas transportation service.
There are seasonal variations in MidAmerican Energy's gas business that are
principally due to the use of natural gas for heating. In 2002, 47% of
MidAmerican Energy's regulated gas revenues were reported in the months of
January, February, March, and December.
-10-
The following tables present historical regulated gas sales data, excluding
transportation throughput, related to customer class and jurisdictions.
Total Regulated Gas Sales
By Customer Class
-------------------------------
2002 2001 2000
----- ----- -----
Residential..................... 39.0% 34.5% 34.9%
Small general service........... 19.7 18.2 17.4
Large general service........... 1.5 1.5 2.2
Other .......................... 1.2 1.7 1.2
Wholesale....................... 38.6 44.1 44.3
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Regulated Retail Gas Sales
By State
-------------------------------
2002 2001 2000
----- ----- -----
Iowa .......................... 78.0% 78.9% 78.0%
Illinois........................ 10.0 9.8 10.2
South Dakota.................... 11.2 10.5 11.0
Nebraska........................ 0.8 0.8 0.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
Fuel Supply and Capacity
- ------------------------
MidAmerican Energy purchases gas supplies from producers and third party
marketers. To ensure system reliability, a geographically diverse supply
portfolio with varying terms and contract conditions is utilized for the gas
supplies.
MidAmerican Energy has rights to firm pipeline capacity to transport gas to
its service territory through direct interconnects to the pipeline systems of
Northern Natural Gas Company (an affiliate company), Natural Gas Pipeline
Company of America, Northern Border Pipeline Company and ANR Pipeline Company.
At times, the capacity available through MidAmerican Energy's firm capacity
portfolio may exceed the demand on MidAmerican Energy's distribution system.
Firm capacity in excess of MidAmerican Energy's system needs can be resold to
other companies to achieve optimum use of the available capacity. Past IUB and
South Dakota Public Utilities Commission rulings have allowed MidAmerican Energy
to retain 30% of the respective jurisdictional margins earned on the resold
capacity, with the remaining 70% being returned to customers through the
purchased gas adjustment clause.
MidAmerican Energy's cost of gas is recovered from customers through
purchased gas adjustment clauses. In 1995, the IUB gave initial approval of
MidAmerican Energy's Incentive Gas Supply Procurement Program, which currently
has been extended through October 31, 2003. Under the program, as amended,
MidAmerican Energy is required to file with the IUB every six months a
comparison of its gas procurement costs to an index-based reference price. If
MidAmerican Energy's cost of gas for the period is less or greater than an
established tolerance band around the reference price, then MidAmerican Energy
shares a portion of the savings or costs with customers. A similar program is
currently in effect in South Dakota through October 31, 2005. Since the
implementation of the program, MidAmerican Energy has successfully achieved and
shared savings with its natural gas customers.
-11-
MidAmerican Energy utilizes leased gas storage to meet peak day
requirements and to manage the daily changes in demand due to changes in
weather. The storage gas is typically replaced during the summer months. In
addition, MidAmerican Energy also utilizes three liquefied natural gas plants
and two propane-air plants to meet peak day demands.
On February 2, 1996, MidAmerican Energy had its highest peak-day delivery
of 1,143,026 million British thermal units, or MMBtus. This peak-day delivery
consisted of approximately 88% traditional sales service and 12% transportation
service of customer-owned gas. MidAmerican Energy's 2002/2003 winter heating
season peak-day delivery of 1,083,647 MMBtus was reached on January 22, 2003.
This peak-day delivery included approximately 70% traditional sales service and
30% transportation service.
The supply sources utilized by MidAmerican Energy to meet its 2002/2003
peak-day deliveries to its traditional sales service customers were:
Thousands Percent
of of
MMBtus Total
--------- -------
Leased storage and peak shaving plants....... 352.1 46.1%
Firm supply.................................. 411.7 53.9
----- -----
763.8 100.0%
===== =====
MidAmerican Energy has strategically built multiple pipeline
interconnections into several of its larger communities. MidAmerican Energy
operates interconnects with Northern Natural Gas, Natural Gas Pipeline, Northern
Border, and ANR Pipeline into the Quad Cities; with Northern Natural Gas,
Natural Gas Pipeline, and Northern Border into Cedar Rapids/Iowa City; and with
Northern Natural Gas and Natural Gas Pipeline into Des Moines. Multiple pipeline
interconnects create competition among pipeline suppliers for transportation
capacity to serve those communities, thus reducing costs. In addition, multiple
pipeline interconnects give MidAmerican Energy the ability to optimize delivery
of the lowest cost supply from the various supply basins into these communities
and increase delivery reliability. Benefits to MidAmerican Energy's system
customers are shared with all jurisdictions through a consolidated purchased gas
adjustment clause.
MidAmerican Energy does not anticipate difficulties in meeting its future
demands through the use of its supply portfolio and pipeline interconnections
for the foreseeable future.
NONREGULATED OPERATIONS
MidAmerican Energy's nonregulated operations include a variety of
activities outside of the traditional regulated electric and gas services.
-12-
Historical gross margins, or revenues less related cost of sales, for
MidAmerican Energy's nonregulated operations are shown below (in millions):
2002 2001 2000
----- ----- -----
Nonregulated retail electric .......... $11.4 $ 4.6 $ 0.3
Gas and electric energy trading ....... 3.3 6.9 2.1
Income sharing arrangements under
regulated gas tariffs ............... 3.1 4.4 5.2
Incentive gas supply procurement
program award ....................... 3.4 4.1 3.9
Nonregulated retail gas ............... 2.7 2.0 1.4
Extended Service Protection Program ... 1.0 1.3 1.3
Nonregulated energy delivery services . 0.1 0.1 5.7
Other ................................. 3.4 2.2 1.5
----- ----- -----
$28.4 $25.6 $21.4
===== ===== =====
As of May 1, 2002, all retail electric customers in Illinois, except for
those served by electric cooperatives and municipalities, had been phased in to
allow them to select their provider of electric supply services. MidAmerican
Energy's nonregulated electric retail revenues include revenues related to these
supply services provided to customers within and outside of MidAmerican Energy's
delivery system who choose their energy supplier. Revenues related to non-supply
services, such as distribution and transmission, are reflected in regulated
electric revenues. In September 2002, MidAmerican Energy began serving retail
customers in Ohio.
MidAmerican Energy's gas and electric energy trading consists of
nonregulated wholesale electric and natural gas marketing operations through
which it buys from, and sells to, other utilities and marketers. These
operations qualify as "energy trading" activities under generally accepted
accounting principles, and accordingly, related revenues are recorded net of the
related cost of sales on the statements of income. Refer to the "Results of
Operations" section of Management's Discussion and Analysis in Item 15 of this
Form 10-K for further discussion.
Nonregulated operations also include earnings from sharing arrangements
under applicable state regulations and tariffs filed with the IUB and the South
Dakota Public Utilities Commission, or SDPUC, for MidAmerican Energy's regulated
natural gas operations. Under these arrangements, MidAmerican Energy is allowed
to keep a portion of the benefits of gas sales for resale and capacity release
transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
Program, under which it can receive awards for successful performance of gas
supply procurement. Refer to the preceding "Regulated Natural Gas Operations"
section for further discussion of the sharing arrangements and the gas
procurement program.
MidAmerican Energy's nonregulated retail gas marketing services operate in
Iowa, Illinois and Ohio. MidAmerican Energy purchases gas from producers and
third party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements.
-13-
REGULATION
General Utility Regulation
- --------------------------
MidAmerican Energy is a public utility within the meaning of the Federal
Power Act and a natural gas company within the meaning of the Natural Gas Act.
Therefore, it is subject to regulation by the FERC in regard to numerous
activities, including the issuance of securities, accounting policies and
practices, electricity sales for resale rates, the establishment and regulation
of electric interconnections and transmission services and replacement of
certain gas utility property.
MidAmerican Energy is regulated by the IUB as to retail rates, services,
construction of utility property and in other respects as provided by the laws
of Iowa. MidAmerican Energy is regulated by the Illinois Commerce Commission, or
ICC, as to bundled retail rates, unbundled delivery services, services that have
not been declared to be competitive, issuance of securities, affiliate
transactions, construction, acquisition and sale of utility property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican Energy is also subject to regulation by the SDPUC as to
electric and gas retail rates and service as provided by the laws of South
Dakota.
Rate Regulation
- ---------------
Under Iowa law, temporary collection of higher rates can begin, subject to
refund, 90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common equity previously approved. If the IUB has not issued a final order
within ten months after the filing date, the temporary rates cease to be subject
to refund and any balance of the requested rate increase may then be collected
subject to refund. Exceptions to the ten-month limitation provide for extensions
due to a utility's lack of due diligence in the rate proceeding, judicial
appeals and situations involving new generating units being placed in service.
MidAmerican Energy's cost of gas is reflected in its Iowa gas rates through the
Iowa Uniform Purchased Gas Adjustment Clause.
In accordance with a 2001 rate settlement, MidAmerican Energy's Iowa retail
electric rates are effectively fixed through 2005. Additionally, under the
incentive regulation aspects of the settlement, earnings exceeding a 12% return
on equity are shared with customers. See Note (10) of Notes to Consolidated
Financial Statements in Item 15 of this Form 10-K for additional discussion of
this settlement. In accordance with a 2002 rate settlement, MidAmerican Energy's
Iowa retail gas rates are effectively fixed through November 2004.
South Dakota law authorizes its Public Utilities Commission to suspend new
rates for up to six months during the pendency of rate proceedings; however, the
rates are permitted to be implemented after six months subject to refund pending
a final order in the proceeding.
Under Illinois law, new rates may become effective 45 days after filing
with the ICC, or on such earlier date as the ICC may approve, subject to its
authority to suspend the proposed new rates, subject to hearing, for a period
not to exceed approximately eleven months after filing. Under Illinois electric
tariffs, MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in
the cost of all fuels used for electric generation, including certain fuel
transportation costs, nuclear fuel disposition costs and the effects of energy
transactions (other than capacity and margins on interchange sales) with other
utilities. MidAmerican Energy's cost of gas is reflected in its Illinois gas
rates through the Illinois Uniform Purchased Gas Adjustment Clause.
-14-
In December 1997, Illinois enacted a law to restructure Illinois' electric
utility industry. The law changes how and what electric services are regulated
by the ICC and transitions portions of the traditional electric services to a
competitive environment. In general, the law limits the ICC's regulatory
authority over a utility's generation and also relaxes its regulatory authority
over many corporate transactions, such as the transfer of generation assets to
affiliates. Special authority and limitations of authority apply during the
transition to a competitive marketplace. Also, the law permits utilities to
eliminate their fuel adjustment clauses and incorporates provisions by which
earnings in excess of allowed amounts are either partially refunded to customers
or are used to accelerate a company's regulatory asset cost recovery. Electric
rates are frozen, subject to certain exceptions allowing for increases, until
2007.
The FERC regulates MidAmerican Energy's rates charged to wholesale
customers for energy and transmission services. Most of MidAmerican Energy's
electric wholesale sales and purchases take place under market-based pricing
allowed by the FERC and are therefore subject to market volatility.
Refer to the "Legislative and Regulatory Evolution" section of Management's
Discussion and Analysis in Item 15 of this Form 10-K for additional discussion
of matters affecting utility regulation.
Nuclear Regulation
- ------------------
Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy
is responsible for the selection and development of repositories for, and the
permanent disposal of, spent nuclear fuel and high-level radioactive wastes.
Exelon Generation, as required by the Nuclear Waste Act, signed a contract with
the Department of Energy to provide for the disposal of spent nuclear fuel and
high-level radioactive waste beginning not later than January 1998. The
Department of Energy did not begin receiving spent nuclear fuel on the scheduled
date, and it is expected that the schedule will be significantly delayed. The
costs incurred by the Department of Energy for disposal activities are being
financed by fees charged to owners and generators of the waste. Exelon
Generation has informed MidAmerican Energy that existing on-site storage
capability at Quad Cities Station is sufficient to permit interim storage into
2005. For Quad Cities Station, Exelon Generation has informed MidAmerican Energy
that it plans to develop interim spent fuel storage installation at Quad Cities
Station to store additional spent nuclear fuel in dry casks. Exelon Generation
expects the bulk of the construction work will be done in 2004.
MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory
Commission, or NRC, with respect to its license and 25% ownership interest in
Quad Cities Station Units 1 and 2. Exelon Generation is the operator of Quad
Cities Station and is under contract with MidAmerican Energy to secure and keep
in effect all necessary NRC licenses and authorizations.
The NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear generating stations and subject such
stations to continuing review and regulation. The NRC review and regulatory
process covers, among other things, operations, maintenance, and environmental
and radiological aspects of such stations. The NRC may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations under such Act or the terms of such licenses.
Federal regulations provide that any nuclear operating facility may be
required to cease operation if the NRC determines there are deficiencies in
state, local or utility emergency preparedness plans relating to such facility,
and the deficiencies are not corrected. Exelon Generation has advised
MidAmerican Energy that an emergency preparedness plan for Quad Cities Station
has been approved by the NRC. Exelon Generation has also advised MidAmerican
Energy that state and local plans relating to Quad Cities Station have been
approved by the Federal Emergency Management Agency.
-15-
The NRC also regulates the decommissioning of nuclear power plants
including the planning and funding for the eventual decommissioning of the
plants. In accordance with these regulations, MidAmerican Energy submits a
report to the NRC every two years providing "reasonable assurance" that funds
will be available to pay the costs of decommissioning its share of Quad Cities
Station.
MidAmerican Energy has established external trusts for the investment of
funds collected for nuclear decommissioning associated with Quad Cities Station.
Electric tariffs currently in effect include provisions for annualized
collection of estimated decommissioning costs at Quad Cities Station. In Iowa,
Quad Cities Station decommissioning costs are reflected in base rates.
MidAmerican Energy's cost related to decommissioning funding in 2002 was $8.3
million.
Environmental Regulations
- -------------------------
MidAmerican Energy is subject to a number of federal, state and local
environmental laws and regulations affecting many aspects of our present and
future operations. These requirements relate to air emissions, water quality,
waste management, hazardous chemical use, noise abatement, land use aesthetics
and atomic radiation.
Environmental laws and regulations currently have, and future modifications
may have, the effect of (i) increasing the lead time for the construction of new
facilities, (ii) significantly increasing the total cost of new facilities,
(iii) requiring modification of MidAmerican Energy's existing facilities, (iv)
increasing the risk of delay on construction projects, (v) increasing
MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of
service provided by MidAmerican Energy and the amount of energy available from
MidAmerican Energy's facilities. Any of these items could have a substantial
impact on amounts required to be expended by MidAmerican Energy in the future.
Air Quality -
Essentially all utility generating units are subject to the provisions of
the Clean Air Act Amendments of 1990, or CAAA, which address continuous
emissions monitoring, permit requirements and fees and emissions of certain
substances. MidAmerican Energy has five jointly owned and six wholly owned
coal-fired generating units, which represent approximately 60% of MidAmerican
Energy's electric net accredited generating capability. MidAmerican Energy's
generating units meet all requirements under Title IV of the CAAA. Title IV,
which is also known as the Acid Rain Program, sets forth requirements for the
emission of sulfur dioxide and nitrogen oxides at electric utility generating
stations.
In accordance with the requirements of Section 112 of the CAAA, the U.S.
Environmental Protection Agency, or EPA, has performed a study of the hazards to
public health reasonably anticipated to occur as a result of emissions of
hazardous air pollutants by electric utility steam generating units. In December
2000, after research and monitoring of mercury emissions, the EPA concluded that
it is appropriate and necessary to regulate mercury emissions from coal-fired
generating units. It is anticipated that rules will be developed to regulate
these emissions in 2003 or 2004 with reductions of mercury emissions effective
in 2007. The cost to MidAmerican Energy of reducing its mercury emissions would
depend on available technology at the time, but could be material.
Refer to Note (4)(b) of Notes to Consolidated Financial Statements in Item
15 of this Form 10-K for additional information regarding air quality
regulation.
-16-
Hazardous Materials and Waste Management -
The EPA and state environmental agencies have determined that contaminated
wastes remaining at certain decommissioned manufactured gas plant facilities may
pose a threat to the public health or the environment if such contaminants are
in sufficient quantities and at such concentrations as to warrant remedial
action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which MidAmerican Energy may
be a potentially responsible party. MidAmerican Energy estimates the range of
possible costs for investigation, remediation and monitoring for these sites to
be $16 million to $54 million. As of December 31, 2002, MidAmerican Energy has
recorded a liability of $17 million for these sites. MidAmerican Energy's
present rates in Iowa provide for a fixed annual recovery of manufactured gas
plant costs.
Additional information relating to MidAmerican Energy's manufactured gas
plant facilities is included under Note (4)(a) of Notes to Consolidated
Financial Statements in Item 15 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by
the EPA, MidAmerican Energy developed a comprehensive program for the use,
handling, control and disposal of all polychlorinated biphenyls, or PCBs,
contained in electrical equipment. The future use of equipment containing PCBs
will be minimized. Capacitors, transformers and other miscellaneous equipment
are being purchased with a non-PCB dielectric fluid. MidAmerican Energy's
exposure to PCB liability has been reduced through the orderly replacement of a
number of such electrical devices with similar non-PCB electrical devices.
-17-
BUSINESS OF MIDAMERICAN CAPITAL
-------------------------------
MidAmerican Capital is a wholly owned nonregulated subsidiary of MHC
primarily engaged in investment activities. Investments include marketable
securities, energy-related venture capital interests and equipment leases.
MidAmerican Capital manages these activities through its nonregulated investment
companies. Assets of MidAmerican Capital totaled $56 million as of December 31,
2002.
INVESTMENTS
MidAmerican Capital's investments totaled $56 million at December 31, 2002,
and $181 million, including a $73 million note receivable from MidAmerican
Energy Holdings, at December 31, 2001. A majority of the remaining investment
dollars relate to equipment leases and investment grade marketable securities.
As discussed below, MidAmerican Capital and its subsidiaries also have
investments in energy projects, technology development interests and venture
capital funds.
MidAmerican Capital's marketable securities portfolio totaled $5 million
and $21 million at December 31, 2002 and 2001, respectively. The marketable
securities portfolio consisted substantially of a managed preferred stock
portfolio. MidAmerican Capital continued to liquidate the portfolio in 2002 and
will complete the liquidation in the second quarter of 2003.
MidAmerican Capital holds equity participations in equipment leases
totaling $33 million and $46 million at December 31, 2002 and 2001,
respectively. At December 31, 2002, approximately $23 million was invested in
five commercial passenger aircraft. Approximately $9 million of the December 31,
2002, investment in equipment leases related to a seven percent undivided
interest in an electric generating station leased to a utility located in
Arizona. MidAmerican Capital also has investments in safe harbor lease
transactions. Refer to Note (1)(f) of MidAmerican Funding's Notes to
Consolidated Financial Statements in Item 15 of this Form 10-K for additional
discussion of equipment leases.
In addition, MidAmerican Capital and several of its subsidiaries have
indirect investments, through venture capital funds, in a variety of
nonregulated energy production technologies.
BUSINESS OF MIDWEST CAPITAL
---------------------------
Midwest Capital is a wholly owned nonregulated subsidiary of MHC with total
assets of $9 million as of December 31, 2002. Midwest Capital's primary activity
is the management of utility service area investments to support economic
development. Midwest Capital's principal interest is a 2,000-acre master planned
residential and business community in southeastern South Dakota. The major
construction phase of the planned community is complete, and the marketing phase
to sell developed residential and commercial lots is in progress.
-18-
ITEM 2. PROPERTIES
- ------------------
MidAmerican Energy's utility properties consist of physical assets
necessary and appropriate to render electric and gas service in its service
territories. Electric property consists primarily of generation, transmission
and distribution facilities. Gas property consists primarily of natural gas
mains and services pipelines, meters and related distribution equipment,
including feeder lines to communities served from natural gas pipelines owned by
others. It is the opinion of management that the principal depreciable
properties owned by MidAmerican Energy are in good operating condition and well
maintained.
Net utility plant in service by operating segment is as follows as of
December 31, 2002 (in thousands):
Generation...................... $ 975,278
Energy delivery -
Electric distribution........ 1,119,808
Gas distribution............. 508,948
Transmission.................... 203,941
Marketing and sales............. 18,101
-----------
$2,826,076
==========
-19-
The net accredited generating capacity of MidAmerican Energy, along with
participation purchases and sales, net, are shown for summer 2002 accreditation.
Company's Share of
Percent Accredited Generating
Plant Ownership Fuel Capability (MW)
- ----------------------------------- --------- ---- ---------------------
Steam electric generating plants:
Council Bluffs Energy Center
Unit No. 1........................... 100.0 Coal 45
Unit No. 2........................... 100.0 Coal 88
Unit No. 3........................... 79.1 Coal 546
George Neal Station
Unit No. 1.......................... 100.0 Coal 135
Unit No. 2.......................... 100.0 Coal 300
Unit No. 3 ......................... 72.0 Coal 371
Unit No. 4 ......................... 40.6 Coal 261
Louisa Unit........................... 88.0 Coal 616
Ottumwa Unit ......................... 52.0 Coal 368
Riverside Station
Unit No. 3.......................... 100.0 Coal 5
Unit No. 5.......................... 100.0 Coal 130
-----
2,865
-----
Combustion turbines:
Coralville - 4 units.................. 100.0 Gas/Oil 64
Electrifarm - 3 units................. 100.0 Gas/Oil 200
Moline - 4 units...................... 100.0 Gas/Oil 64
Parr - 2 units........................ 100.0 Gas/Oil 32
Pleasant Hill Energy Center - 3 units. 100.0 Oil 157
River Hills Energy Center - 8 units... 100.0 Gas/Oil 120
Sycamore Energy Center - 2 units...... 100.0 Gas/Oil 148
-----
785
-----
Nuclear: Quad Cities Station
Unit No. 1............................ 25.0 Nuclear 190
Unit No. 2............................ 25.0 Nuclear 219
-----
409
-----
Hydro: Moline - 4 units................. 100.0 Water 3
Portable power modules - 28 units........ 100.0 Oil 56
-----
Accredited generating capacity........... 4,118
Participation purchases and sales, net:
Cordova Energy Company, LLC (1)....... 250
Nebraska Public Power District (2).... 380
Other, net............................ (24)
-----
Net accredited generating capability.... 4,724
=====
(1) The amount shown above is MidAmerican Energy's entitlement (50%)
of the Cordova Energy Center's net accredited capacity under a
purchase power contract extending to May 2004. Cordova Energy
Company LLC, a subsidiary of MidAmerican Energy Holdings, owns
Cordova Energy Center.
(2) The amount shown is capacity purchased under a power purchase
contract with the NPPD extending to December 2004.
-20-
The electric transmission system of MidAmerican Energy at December 31,
2002, included 920 miles of 345 kilovolt (kV) lines and 1,111 miles of 161-kV
lines. MidAmerican Energy's electric distribution system included approximately
218,500 transformers and 377 substations at December 31, 2002.
The gas distribution facilities of MidAmerican Energy at December 31, 2002,
included 20,835 miles of gas mains and services.
Substantially all the former Iowa-Illinois Gas and Electric Company utility
property and franchises, and substantially all of the former Midwest Power
Systems electric utility property located in Iowa, or approximately 80% of gross
utility plant, is pledged to secure mortgage bonds.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
MidAmerican Funding and its subsidiaries currently have no material legal
proceedings. Information on MidAmerican Energy's environmental matters is
included in Item 1 - Business and in the "Environmental Matters" section of
Management's Discussion and Analysis in Item 15 of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------
None.
-21-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- -------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
MidAmerican Funding is an Iowa limited liability company whose membership
interest is held solely by MidAmerican Energy Holdings.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
Reference is made to Note (8) of Notes to Consolidated Financial Statements
in Item 15 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Reference is made to Item 15 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
None.
-22-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
MIDAMERICAN ENERGY
Information concerning the current directors and executive officers of
MidAmerican Energy is as follows:
(A) IDENTIFICATION
Served in Served as
Present Present Director
Name Age Position Position Since Since
---- --- -------- -------------- ----------
Jack L. Alexander 55 Senior Vice President 1998 2002
and Director
Keith D. Hartje 53 Senior Vice President 1999
Todd M. Raba 46 Senior Vice President 2001 2002
and Director
Brian K. Hankel 40 Vice President, Treasurer 1999 2002
and Director
Thomas B. Specketer 46 Vice President and 1999
and Controller
The Board of Directors elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
(B) BUSINESS EXPERIENCE
JACK L. ALEXANDER has been Director of MidAmerican Energy since September
2002 and Senior Vice President of MidAmerican Energy since November 1998. Mr.
Alexander served as Vice President of MidAmerican Energy from November 1996 to
October 1998 and held various executive and management positions with
MidAmerican Energy and its predecessors for more than five years prior thereto.
KEITH D. HARTJE has been Senior Vice President of MidAmerican Energy since
March 1999. Mr. Hartje served as Vice President of MidAmerican Energy from 1996
to March 1999 and held various executive and management positions with
MidAmerican Energy and its predecessors for more than five years prior thereto.
TODD M. RABA has been Director of MidAmerican Energy since September 2002
and Senior Vice President of MidAmerican Energy since July 2001. Mr. Raba joined
MidAmerican Energy in 1997 as Vice President. Prior to joining MidAmerican
Energy, he was employed for 13 years with Rollins Environmental Services.
-23-
BRIAN K. HANKEL has been Director of MidAmerican Energy since September
2002 and Vice President and Treasurer of MidAmerican Energy since March 1999.
Mr. Hankel has been Vice President and Treasurer of MidAmerican Energy Holdings
since January 1997.
THOMAS B. SPECKETER has been Vice President and Controller of MidAmerican
Energy since September 1999. Mr. Specketer served as Manager Tax Compliance of
MidAmerican Energy from March 1999 to August 1999 and held various other tax and
accounting management positions for MidAmerican Energy and its predecessors for
more than five years prior to that.
-24-
MIDAMERICAN FUNDING
Information concerning the current managers and executive officers of
MidAmerican Funding is as follows:
(A) IDENTIFICATION
Served in
Present Served as
Present Position Manager
Name Age Position Since Since
---- --- -------- -------- ---------
David L. Sokol 46 Chief Executive Officer
and Manager 1999 1999
Gregory E. Abel 40 President and Chief Operating
Officer and Manager 1999 2001
Douglas L. Anderson 45 Vice President and
General Counsel 2002
Patrick J. Goodman 36 Vice President and Treasurer 1999 1999
Ronald W. Roskens 70 Independent Manager 2003 2003
The Board of Managers elects officers annually. There are no family
relationships among these officers, nor any arrangements or understanding
between any officer and any other person pursuant to which the officer was
selected.
(B) BUSINESS EXPERIENCE
DAVID L. SOKOL has been MidAmerican Funding's Chief Executive Officer and
Chairman of the Board of Managers since MidAmerican Funding's formation in March
1999. Mr. Sokol has been Chief Executive Officer of MidAmerican Energy Holdings
since April 1993 and served as President of MidAmerican Energy Holdings from
April 1993 until January 1995. He has been Chairman of the Board of Directors of
MidAmerican Energy Holdings since May 1994 and a director since March 1991.
Formerly, among other positions held in the independent power industry, Mr.
Sokol served as President and Chief Executive Officer of Kiewit Energy Company
and Ogden Projects, Inc.
GREGORY E. ABEL has been MidAmerican Funding's President and Chief
Operating Officer since its formation in March 1999 and a manager since 2001.
Mr. Abel joined MidAmerican Energy Holdings in 1992. Mr. Abel is a Chartered
Accountant, and from 1984 to 1992, he was employed by PriceWaterhouse. As a
Manager in the San Francisco office of PriceWaterhouse, he was responsible for
clients in the energy industry.
DOUGLAS L. ANDERSON has been MidAmerican Funding's Vice President and
General Counsel since May 2002. Mr. Anderson joined MidAmerican Energy Holdings
in 1993 and has served in various legal positions including General Counsel of
MidAmerican Energy Holdings' independent power affiliates. From 1990 to 1993,
Mr. Anderson was a corporate attorney with Fraser, Stryker. Prior to that, Mr.
Anderson was a principal in the firm Anderson and Anderson.
-25-
PATRICK J. GOODMAN has been MidAmerican Funding's Vice President and
Treasurer since April 1999. Mr. Goodman joined MidAmerican Energy Holdings in
June 1995, and served in various accounting positions including Senior Vice
President and Chief Accounting Officer. Prior to joining MidAmerican Energy
Holdings, Mr. Goodman was a financial manager for National Indemnity Company and
a senior associate at Coopers & Lybrand.
RONALD W. ROSKENS has been MidAmerican Funding's Independent Manager since
January 2003. Dr. Roskens has served since 1996 as the President of Global
Connections, Inc. (Omaha, Nebraska), an international business consulting firm.
Dr. Roskens has previously served as Administrator of the U.S. Agency for
International Development, President of the University of Nebraska System and
Executive Vice President and professor at Kent State University. He is a
director of ConAgra Inc.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information required by Item 11 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ---------------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Information required by Item 12 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Information required by Item 13 is omitted pursuant to General Instruction
I(2)(c) to Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
MidAmerican Funding's and MidAmerican Energy's respective chief executive
officer and chief financial officer have established "disclosure controls and
procedures" (as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities
and Exchange Act of 1934) to ensure that material information of the companies
and their subsidiaries is made known to them by others within the respective
companies. Under their supervision, an evaluation of the disclosure controls and
procedures was performed within 90 days prior to the filing of this annual
report. Based on that evaluation, the above-mentioned officers have concluded
that, as of the date of the evaluation, the disclosure controls and procedures
were operating effectively. Additionally, the above-mentioned officers find that
there have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date of
that evaluation.
-26-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K
--------
(A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN)
Page
----
Selected Consolidated Financial Data............................ 29
Management's Discussion and Analysis of Financial Condition
And Results of Operations..................................... 32
MidAmerican Energy
------------------
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 57
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 58
Consolidated Balance Sheets
As of December 31, 2002 and 2001 ............................. 59
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000.......... 60
Consolidated Statements of Capitalization
As of December 31, 2002 and 2001 ............................. 61
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 2002, 2001 and 2000.......... 62
Notes to Consolidated Financial Statements...................... 63
Independent Auditors' Report.................................... 91
MidAmerican Funding
-------------------
Consolidated Statements of Income
For the Years Ended December 31, 2002, 2001 and 2000.......... 92
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001, and 2000......... 93
Consolidated Balance Sheets
As of December 31, 2002 and 2001.............................. 94
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000.......... 95
Consolidated Statements of Capitalization
As of December 31, 2002 and 2001.............................. 96
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 2002, 2001 and 2000.......... 97
Notes to Consolidated Financial Statements...................... 98
Independent Auditors' Report.................................... 116
-27-
(A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN)
The following schedules should be read in conjunction with the
aforementioned financial statements.
Page
----
MidAmerican Energy Company Consolidated Valuation and Qualifying
Accounts (Schedule II) .......................................... 117
MidAmerican Funding, LLC Consolidated Valuation and Qualifying
Accounts (Schedule II)........................................... 118
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
financial statements or notes thereto.
(A)3. EXHIBITS
See Exhibit Index on page 131.
(B) REPORTS ON FORM 8-K
On November 12, 2002, MidAmerican Funding and MidAmerican Energy filed a
joint Current Report on Form 8-K with certifications of their respective chief
executive officer and chief financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for the Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.
-28-
MIDAMERICAN ENERGY COMPANY
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
DECEMBER 31
--------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Revenues ............................ $2,236,159 $2,367,249 $2,271,832 $1,762,350 $1,664,953
Operating income .................... 354,997 333,574 338,756 300,064 280,920
Net income .......................... 175,821 152,778 165,456 127,331 115,593
Earnings on common stock ............ 172,888 148,234 160,501 122,376 110,641
BALANCE SHEET DATA:
Total assets ........................ $3,811,879 $3,577,892 $3,823,566 $3,609,591 $3,585,530
Long-term debt (a) .................. 1,053,418 820,594 921,682 870,499 930,966
Power purchase obligation (b) ....... -- 25,867 52,282 68,049 83,127
Short-term borrowings ............... 55,000 89,350 81,600 204,000 206,221
Preferred stock:
Not subject to mandatory redemption 31,759 31,759 31,759 31,759 31,759
Subject to mandatory redemption (c) -- 126,680 150,000 150,000 150,000
Common shareholder's equity ......... 1,307,067 1,219,057 1,161,968 1,057,855 972,278
(a) Includes amounts due within one year.
(b) In July 2002, MidAmerican Energy's contract with the Nebraska Public
Power District regarding Cooper Nuclear Station was restructured. As a
result, the power purchase obligation and the related asset were written
off. Refer to Note (1)(h) of Notes to Consolidated Financial Statements
later in Item 15 of this Form 10-K for further discussion.
(c) The years 1998-2001 include $100 million of MidAmerican Energy-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely MidAmerican Energy junior subordinated debentures.
-29-
MIDAMERICAN FUNDING, LLC
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
MIDAMERICAN FUNDING MHC (PREDECESSOR)
-------------------------------------------------- -----------------------
YEARS ENDED MAR. 12 JAN. 1 YEAR
DECEMBER 31, THROUGH THROUGH ENDED
------------------------------------- DEC. 31, MAR. 11, DEC. 31,
2002 2001 2000 1999 1999 1998
----------- ---------- ----------- ---------- ---------- ----------
INCOME STATEMENT DATA:
Revenues ......................... $2,240,879 $2,388,650 $2,316,343 $1,411,542 $ 375,884 $1,733,688
Operating income ................. 349,988 300,085 327,560 227,133 58,898 271,412
Income from continuing
operations (a) ............... 136,716 103,087 126,784 124,077 16,789 127,154
Net income ....................... 136,716 103,087 126,784 135,335 17,210 131,318
AS OF DECEMBER 31,
------------------------------------------------- DEC. 31,
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Total assets ..................... $5,153,984 $5,175,472 $5,423,009 $5,212,387 $4,244,336
Long-term debt (b) ............... 1,753,418 1,544,969 1,670,636 1,642,476 1,045,548
Power purchase obligation (c) .... -- 25,867 52,282 68,049 83,127
Short-term borrowings ............ 55,000 91,780 81,600 204,000 339,826
Preferred securities not subject
to mandatory redemption ...... 31,759 31,759 31,759 31,759 31,759
Preferred securities subject
to mandatory redemption (d) . -- 126,680 150,000 151,598 150,000
Member's equity (e) .............. 1,867,119 1,974,605 1,874,787 1,800,416 1,200,950
(a) In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," beginning January 1, 2002,
MidAmerican Funding's goodwill is no longer amortized. Refer to Note (1)(k)
of MidAmerican Funding's Notes to Consolidated Financial Statements later
in Item 15 of this Form 10-K. In 2002, MidAmerican Funding recorded pre-tax
expense of $21.9 million of writedowns for impaired assets and investments,
including a $12.6 pre-tax million writedown of airplane leases. In May
1999, MidAmerican Funding sold most of its investment in the common stock
of McLeodUSA and recorded an after-tax gain of $47.1 million. For the
period ended March 11, 1999, MHC expensed $18.6 million for transaction
costs related to its acquisition by MidAmerican Energy Holdings. In 1998,
MHC recorded after-tax gains totaling $15.7 million for sales of several
properties and investments, including a portion of its investment in the
common stock of McLeodUSA, Inc. Also, in 1998, MHC expensed $4.2 million
for transaction costs related to the acquisition by MidAmerican Energy
Holdings of MHC.
(b) Includes amounts due within one year.
(c) In July 2002, MidAmerican Energy's contract with the Nebraska Public Power
District regarding Cooper Nuclear Station was restructured. As a result,
the power purchase obligation and the related asset were written off. Refer
to Note (1)(h) of Notes to Consolidated Financial Statements later in Item
15 of this Form 10-K for further discussion.
-30-
(d) The years 1998-2001 include $100 million of MidAmerican Energy-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely MidAmerican Energy junior subordinated debentures.
(e) For MHC the amounts represent common shareholders' equity.
-31-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INDEX
Page
----
Introduction......................................................... 33
Forward-Looking Statements........................................... 33
Results of Operations................................................ 34
Liquidity and Capital Resources...................................... 45
- Investing Activities and Plans.............................. 45
- Financing Activities, Plans and Availability................ 48
- Credit Ratings Risks........................................ 49
- Rate Matters................................................ 49
- Legislative and Regulatory Evolution........................ 50
- Environmental Matters....................................... 51
- Generating Capability....................................... 53
- Critical Accounting Policies and Estimates.................. 53
- New Accounting Pronouncements............................... 55
- Quantitative and Qualitative Disclosures About Market Risk.. 56
-32-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
------------
MidAmerican Funding, LLC is an Iowa limited liability company that was
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., formerly known as MidAmerican Energy Holdings Company, which
owns all of the common stock of MidAmerican Energy Company, MidAmerican Capital
Company, Midwest Capital Group, Inc., MidAmerican Services Company and MEC
Construction Services Co.
On March 12, 1999, MidAmerican Funding acquired MHC. As a part of this
transaction, the former CalEnergy Company Inc., a Delaware corporation, was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings Company. As a result, MHC and all direct and indirect subsidiaries of
MHC each became a subsidiary of MidAmerican Funding.
Management's Discussion and Analysis, or MD&A, addresses the financial
statements of MidAmerican Energy and MidAmerican Funding as presented in this
joint filing. Information related to MidAmerican Energy, whether or not
segregated, also relates to MidAmerican Funding. Information related to other
subsidiaries of MidAmerican Funding pertains only to the discussion of the
financial condition and results of operations of MidAmerican Funding. Where
necessary, discussions have been segregated and labeled to allow the reader to
identify information applicable only to MidAmerican Funding.
FORWARD-LOOKING STATEMENTS
--------------------------
This annual report contains statements that do not directly or exclusively
relate to historical facts. Such statements are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can typically be identified by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast,"
and similar terms. These statements represent MidAmerican Funding's and/or
MidAmerican Energy's intentions, plans, expectations and beliefs and are subject
to risks, uncertainties and other factors. Many of these factors are outside the
control of MidAmerican Funding or MidAmerican Energy and could cause actual
results to differ materially from such forward-looking statements. These factors
include, among others:
- general economic and business conditions in the United States as a
whole and in the midwestern United States and MidAmerican Energy's
service territory in particular;
- governmental, statutory, regulatory or administrative initiatives;
- weather effects on sales and revenues;
- general industry trends;
- increased competition in the power generation industry;
- fuel and power costs and availability;
- changes in business strategy, development plans or vendor
relationships;
-33-
- availability, term and deployment of capital;
- availability of qualified personnel;
- risks relating to nuclear generation;
- financial or regulatory accounting principles or policies imposed
by the Financial Accounting Standards Board, the Securities and
Exchange Commission, the Federal Energy Regulatory Commission and
similar entities with regulatory oversight; and
- other business or investment considerations that may be disclosed
from time to time in MidAmerican Funding's or MidAmerican Energy's
Securities and Exchange Commission filings or in other publicly
disseminated written documents.
MidAmerican Funding and MidAmerican Energy undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. The foregoing review of factors
should not be construed as exhaustive.
RESULTS OF OPERATIONS
---------------------
EARNINGS OVERVIEW
MidAmerican Energy -
MidAmerican Energy's earnings on common stock improved $24.7 million to
$172.9 million for 2002 compared to $148.2 million for 2001. Significant factors
contributing to the improvement in earnings were: 1) warmer temperatures during
the 2002 cooling season, 2) a reduction in costs related to Cooper Nuclear
Station due to a restructuring of the power purchase contract, and 3) an
increase in retail gas rates.
MidAmerican Funding -
MidAmerican Funding's net income for 2002 totaled $136.7 million compared
to $103.1 million for 2001. In accordance with Statement of Financial Accounting
Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets," MidAmerican
Funding's goodwill ceased being amortized effective January 1, 2002. Net income
for 2001 was reduced by $34.4 million for goodwill amortization. Excluding the
difference due to goodwill amortization, net income for 2002 declined $0.8
million compared to 2001. In addition to the factors discussed above for
MidAmerican Energy, net income for 2002 reflects $4.9 million of after-tax
income related to a gain and interest income from the sale of an investment in a
communications company, $17.1 million of after-tax loss for write-downs of
impaired investments and $4.0 million of additional income taxes for an
adjustment of deferred taxes related to MidAmerican Funding's goodwill.
-34-
REGULATED GROSS MARGIN
Regulated Electric Gross Margin -
2002 2001 2000
------ ------ ------
(In millions)
Operating revenues ..................... $1,353 $1,318 $1,212
Cost of fuel, energy and capacity ...... 347 276 249
------ ------ ------
Electric gross margin .............. $1,006 $1,042 $ 963
====== ====== ======
2002 vs. 2001
Electric gross margin for 2002 decreased $36 million compared to 2001.
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District, or NPPD, restructured their contract for Cooper Nuclear Station.
Accordingly, MidAmerican Energy's costs for energy and capacity purchased from
Cooper Nuclear Station are now classified differently on the Consolidated
Statement of Income. As a result, electric gross margin for 2002 decreased by
$33.2 million compared to 2001 due to the change in classification of the
related costs. Prior to August 1, 2002, only the fuel costs for energy purchased
from Cooper Nuclear Station were classified as a cost of fuel, energy and
capacity. Other costs under the contract were classified as other operating
expenses. Following the restructuring, all costs for energy and capacity
purchased under that contract are included in MidAmerican Energy's cost of fuel,
energy and capacity, as with other purchased power. Other operating expenses
decreased accordingly. Refer to Note (1)(h) of Notes to Consolidated Financial
Statements later in Item 15 of this Form 10-K for a discussion of the contract
restructuring.
In addition to the effect of restructuring the contract for Cooper Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$23.1 million for 2002 due to a decline in prices, partially offset by a 21.1%
increase in wholesale sales volumes compared to 2001. Wholesale sales are the
sales of energy to other utilities, municipalities and marketers inside and
outside of MidAmerican Energy's delivery system.
Warmer temperatures in the 2002 cooling season resulted in approximately a
$16 million increase in electric margin compared to 2001. Electricity usage
factors not dependent on weather increased electric margin by $17.8 million
compared to 2001. An increase in the average retail rate increased electric
margin by $7.2 million. Additionally, a decrease in fuel costs related to Iowa
retail electric sales, excluding the impact of restructuring the Cooper Nuclear
Station contract, increased electric margin by $7.9 million relative to 2001.
Related financial derivative instruments used for hedging purposes resulted in a
$1.7 million decrease in electric gross margin. In total, retail electric sales
volumes increased 3.9% for 2002.
Electric revenues from the recovery of energy efficiency program costs
decreased $14.9 million compared to 2001. The decrease in 2002 was due to
completion in the third quarter of 2001 of the final recovery phase for deferred
energy efficiency costs. Deferred energy efficiency costs were costs previously
incurred by MidAmerican Energy, which, in accordance with rate treatment, were
not charged to expense until recovery from customers began. Recovery of deferred
energy efficiency costs occurred over a four-year period from the date
collection began for each phase. The decrease in recovery of deferred costs was
offset partially by an increase in the recovery of current energy efficiency
costs. Changes in these revenues are substantially matched with corresponding
changes in other operating expenses. Approximately $13.9 million of MidAmerican
Energy's 2002 electric revenues were from the recovery of energy efficiency
program costs compared to $28.8 million in 2001.
-35-
MidAmerican Energy sells and purchases electric capacity. The net margin
from those sales and purchases decreased $2.3 million compared to 2001. Also,
MidAmerican Energy's gains from sales of emission allowances decreased $3.2
million in 2002 due to a gain in 2001. Revenues from transmission services
decreased $2.5 million compared to 2001, and electric revenues from recovery
mechanisms related to Cooper Nuclear Station and manufactured gas plant costs
decreased $2.6 million.
2001 vs. 2000
Electric gross margin for 2001 increased $79 million compared to 2000.
MidAmerican Energy's gross margin on wholesale sales increased $63.5
million compared to 2000. The increase was due to an increase in the average
margin per unit sold and an 11.7% increase in related sales volumes compared to
2000.
Additionally, electric margin for 2001 increased $21.6 million compared to
2000 due to a refund accrual in 2000 that reduced electric margin. The refund
accrual was for a revenue sharing arrangement in Iowa that terminated December
31, 2000. Refer to the "Rate Matters" section of MD&A for a discussion of the
current arrangement.
The impact of temperatures increased electric gross margin approximately $2
million compared to 2000. Temperature conditions during the cooling season in
2001 were slightly hotter than 2000 while temperatures during the heating season
in 2001 were slightly milder than in 2000. Other usage factors not dependent on
weather increased electric margin by $9.7 million compared to 2000. In total,
retail sales of electricity increased 3.2% in 2001.
In 2001, MidAmerican Energy recorded gains from the sales of emission
allowances which improved electric margin by $3.3 million compared to 2000.
Revenues from transmission services increased $4.0 million compared to 2000 due
to additional revenues from the Mid-Continent Area Power Pool.
An increase in the average cost of energy per unit sold for Iowa retail
sales reduced electric gross margin by $20.3 million compared to 2000. The
increase in the average cost of energy per unit sold was due in part to an
increase in coal costs and increased use of combustion turbines and combined
cycle plants.
Electric revenues from the recovery of energy efficiency program costs
decreased $6.0 million compared to 2000 due to completion in 2001 of the final
recovery phase. Approximately $28.8 million of MidAmerican Energy's 2001
electric revenues were from the recovery of energy efficiency program costs
compared to $34.8 million in 2000.
Regulated Gas Gross Margin -
2002 2001 2000
---- ---- ----
(In millions)
Operating revenues ............... $696 $869 $930
Cost of gas sold ................. 483 675 721
---- ---- ----
Gas gross margin ............. $213 $194 $209
==== ==== ====
Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from its
retail gas utility customers. Consequently, fluctuations in the cost of gas sold
do not affect gross margin or net income because revenues reflect
-36-
comparable fluctuations from 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 $135 million for 2002.
2002 vs. 2001
Gas gross margin for 2002 increased $19 million compared to 2001.
Increases in retail rates in 2002 improved gas margin by $11.5 million
compared to 2001. On February 20, 2002, the South Dakota Public Utilities
Commission approved a settlement agreement allowing increased natural gas rates
of $3.1 million annually, effective immediately. On June 12, 2002, the Iowa
Utilities Board, or IUB, issued an order granting an interim rate increase of
approximately $13.8 million annually, effective immediately. On November 8,
2002, the IUB approved a proposed settlement agreement previously filed by
MidAmerican Energy and the Office of Consumer Advocate that provides for a final
increase of $17.7 million annually for MidAmerican Energy's Iowa retail natural
gas customers. On September 11, 2002, MidAmerican Energy received a final order
from the Illinois Commerce Commission to increase its Illinois natural gas rates
by $2.2 million annually. Refer to the "Rate Matters" section of MD&A for
comments on the Iowa gas rate settlement.
Colder temperature conditions in the second and fourth quarters of 2002
compared to the same quarters in 2001, offset partially by milder temperature
conditions in the remainder of 2002, resulted in approximately a $1 million
increase in gas gross margin. A $1.3 million loss on a weather derivative
financial instrument offset the increase due to colder temperature conditions.
Other usage factors not dependent on weather increased gas margin by $7.7
million. Total natural gas retail sales volumes increased 1.3%.
2001 vs. 2000
Gas margin for 2001 decreased $15 million compared to 2000.
Warmer temperature conditions in the second and fourth quarters of 2001
compared to the same quarters in 2000 and conservation by customers due to
higher prices in early 2001 resulted in approximately a $9 million decrease in
gas margin compared to 2000. Other usage factors not dependent on weather
resulted in a $4.7 million decrease in gas margin compared to 2000. In total,
retail sales of natural gas decreased 7.2% compared to 2000. The decrease in gas
margin due to warmer temperature conditions was partially mitigated by a $1.7
million gain on a weather derivative financial instrument.
Recovery of gas energy efficiency costs decreased $1.2 million for 2001
compared to 2000 due to the completion of the final four-year recovery phase.
Additionally, margin on gas transported decreased $1.1 million.
-37-
REGULATED OPERATING EXPENSES
Other Operating Expenses -
Regulated other operating expenses for 2002 decreased $54.9 million for
MidAmerican Energy and $50.8 million for MidAmerican Funding compared to 2001.
Effective August 1, 2002, MidAmerican Energy and NPPD restructured their
contract for Cooper Nuclear Station. Accordingly, MidAmerican Energy's costs for
energy and capacity purchased from Cooper Nuclear Station are now classified
differently on the Consolidated Statement of Income. As a result, other
operating expenses for 2002 decreased by $46.2 million compared to 2001. Prior
to August 1, 2002, costs under the contract other than fuel costs for energy
purchased were classified as other operating expenses. Following the
restructuring, all costs for energy and capacity purchased under that contract
are included in MidAmerican Energy's cost of fuel, energy and capacity, as with
other purchased power. Refer to Note (1)(h) of Notes to Consolidated Financial
Statements later in Item 15 of this Form 10-K for a discussion of the contract
restructuring.
Other substantive decreases included $10.4 million in energy efficiency
program costs, $6.5 million in the provision for uncollectible accounts
receivable and $2.5 million related to information technology. Numerous less
substantive decreases also contributed to the total decrease in other operating
expenses. Compared to 2001, pension and other postretirement costs increased
$10.8 million; health care costs increased $4.2 million; and Quad Cities Station
(nuclear) costs increased $3.9 million.
Regulated other operating expenses for 2001 increased $15.2 million for
MidAmerican Energy and $30.5 million for MidAmerican Funding compared to 2000.
Increases include a $15.9 million increase in pension and other postretirement
benefits costs, a $6.7 million increase in the allowance for uncollectible
accounts, a $5.5 million increase in Cooper Nuclear Station costs and a $4.2
million increase in electric distribution expense. In addition, MidAmerican
Funding's other operating expenses increased $15.3 million due to purchase
accounting adjustments relating principally to the Cooper Nuclear Station
contract. The increases were partially offset by a $7.3 million reduction in
Quad Cities Station operating expenses, a $4.5 million reduction in energy
efficiency amortization and program costs and decreases in various other costs.
Maintenance -
Maintenance expenses decreased $2.9 million for 2002 compared to 2001 due
to a $5.6 million decrease in electric distribution maintenance expenses as a
result of a reduction in costs for tree-trimming activity. Fossil-fuel
generation maintenance expenses increased $1.9 million for 2002.
Maintenance expenses for 2001 compared to 2000 increased $11.3 million.
Fossil fuel generating plant maintenance expenses increased $8.6 million, while
maintenance costs for Quad Cities Station decreased $5.7 million. Electric
distribution system maintenance increased $5.4 million in part due to a more
aggressive tree-trimming program. Gas distribution maintenance expenses
increased $3.0 million.
Depreciation and Amortization -
Depreciation and amortization expense for 2002 increased $16.7 million
compared to 2001 due to a $13.5 million increase in utility plant depreciation
due, in part, to a change in the estimated useful life of general utility plant
assets. Additionally, the charge related to the establishment of a regulatory
liability for the electric revenue sharing arrangement in Iowa increased $7.8
million for 2002 compared to 2001. Refer to the "Rate Matters" section of MD&A
for further discussion.
-38-
Depreciation and amortization expense increased $53.2 million for
MidAmerican Energy and $57.2 million for MidAmerican Funding in 2001 compared to
2000. During 2001, MidAmerican Energy recorded $47.1 million for the charge
related to the establishment of a regulatory liability for the electric revenue
sharing arrangement in Iowa that began in 2001. The IUB approved a settlement
agreement, which includes the revenue sharing arrangement, in December 2001. In
addition, utility plant depreciation expense increased as a result of an
increase in depreciation rates in 2001 and an increase in utility plant.
Property and Other Taxes -
Property and other taxes fluctuated in 2002 and 2001 compared to each
preceding year due primarily to changes in MidAmerican Energy's Iowa property
tax assessed values.
NONREGULATED GROSS MARGIN
2002 2001 2000
------ ------ ------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues:
Energy trading gross revenues ......... $261.8 $290.3 $282.5
Energy trading cost of sales .......... 258.5 283.4 280.4
------ ------ ------
Energy trading net revenues ......... 3.3 6.9 2.1
Other nonregulated revenues ........... 183.6 173.1 127.8
------ ------ ------
Total nonregulated operating revenues 186.9 180.0 129.9
Nonregulated cost of sales .............. 158.5 154.4 108.5
------ ------ ------
Nonregulated gross margin .......... $ 28.4 $ 25.6 $ 21.4
====== ====== ======
MidAmerican Funding Consolidated -
Nonregulated operating revenues:
Energy trading gross revenues ......... $261.8 $290.3 $282.5
Energy trading cost of sales .......... 258.5 283.4 280.4
------ ------ ------
Energy trading net revenues ......... 3.3 6.9 2.1
Other nonregulated revenues ........... 188.4 194.5 172.3
------ ------ ------
Total nonregulated operating revenues 191.7 201.4 174.4
Nonregulated cost of sales .............. 159.4 170.5 144.6
------ ------ ------
Nonregulated gross margin .......... $ 32.3 $ 30.9 $ 29.8
====== ====== ======
MidAmerican Energy -
The Emerging Issues Task Force, or EITF, issued EITF Issue No. 02-3,
"Recognition and Reporting of Gains and Losses on Energy Trading Contracts under
Issues No. 98-10 and 00-17." In accordance with EITF Issue No. 02-3, all gains
and losses on MidAmerican Energy's energy trading contracts are now reported net
on the statement of income, and all prior period amounts have been reclassified
to a consistent presentation. MidAmerican Energy's nonregulated wholesale gas
and electric marketing activities qualify as "energy trading" contracts under
the guidance of EITF Issue No. 02-3. The preceding tables provide the gross
revenues and cost of sales for those activities for discussion purposes. For
2002, approximately 95% of MidAmerican Energy's gross revenues from energy
trading activities were from gas trading operations.
-39-
2002 vs. 2001
MidAmerican Energy's nonregulated gross margin for 2002 increased $2.8
million compared to 2001.
Energy Trading
--------------
Energy trading net revenues decreased from $6.9 million for 2001 to $3.3
million for 2002 due principally to a reduction in net revenues, or gross
margin, on MidAmerican Energy's gas energy trading operations. Gross margin for
MidAmerican Energy's gas energy trading operations decreased $5.0 million to
$1.6 million for 2002 compared to 2001 due primarily to a decrease in the margin
per unit sold. Additionally, sales volumes decreased 1.1%, or 0.8 million
MMBtus; an MMBtu is one million British thermal units. Cost of sales for gas
energy trading decreased for 2002 due principally to an 11.5% decrease in the
average per-unit cost of gas. Related gross revenues reflect the decrease in the
average cost of gas and a reduction in the per-unit margin on sales. Gross
margin for electric trading operations increased $1.4 million compared to 2001
to $1.7 million for 2002.
Other Nonregulated Revenues and Cost of Sales
---------------------------------------------
Other nonregulated revenues and cost of sales consist substantially of
nonregulated retail natural gas marketing operations. Gross margin for
MidAmerican Energy's nonregulated retail natural gas operations increased $0.7
million to $2.7 million for 2002. The improvement in gross margin reflects a
19.8% increase in margin per unit and a 12.0% increase in sales volumes. Sales
volumes increased 2.6 million MMBtus. Revenues from nonregulated retail natural
gas operations decreased $11.8 million to $106.9 million for 2002. A decrease in
the average price per unit sold, reflective of a 20.3% decrease in the average
cost of gas, resulted in a $26.1 million decrease in revenues, but was partially
offset by the increase in sales volumes.
All electric retail customers in Illinois, except for those served by
electric cooperatives and municipalities, are allowed to select their electric
power supplier. For 2002 compared to 2001, gross margin for nonregulated retail
electric operations increased $7.6 million to $11.4 million. Related revenues
increased $29.7 million to $63.1 million for 2002 while cost of sales increased
$22.1 million to $51.7 million. The improvement in gross margin was due to an
increase in sales volumes as a result of the addition of customers and an
increase in margin per unit sold as a result of decreases in the related cost of
energy.
Nonregulated revenues include income from sharing arrangements under
regulated natural gas tariffs. Total related income decreased from $4.4 million
for 2001 to $3.1 million for 2002.
Under MidAmerican Energy's incentive gas procurement program, if
MidAmerican Energy's cost of gas varies from an established reference price
range, then the savings or cost is shared between customers and shareholders.
Nonregulated revenues in 2002 include $3.4 million of pre-tax income from awards
for successful performance under program. Similar awards totaling $4.1 million
were recorded in 2001.
MidAmerican Energy currently offers an Extended Service Protection Plan to
its customers for appliance and other maintenance related services. Revenues for
2002 totaled $2.9 million, down $0.7 mi