UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 27, 2003, all of the member's equity of MidAmerican Funding, LLC
was held by its parent company, MidAmerican Energy Holdings Company.
As of October 27, 2003, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc., a direct,
wholly owned subsidiary of MidAmerican Funding, LLC.
This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and
MidAmerican Energy Company. Information herein relating to each individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, MidAmerican Energy Company makes no representation as to
information relating to any other subsidiary of MidAmerican Funding, LLC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements.............................................. 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 4. Controls and Procedures........................................... 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 39
Item 2. Changes in Securities and Use of Proceeds......................... 39
Item 3. Defaults Upon Senior Securities................................... 39
Item 4. Submission of Matters to a Vote of Security Holders............... 39
Item 5. Other Information................................................. 39
Item 6. Exhibits and Reports on Form 8-K.................................. 39
SIGNATURES................................................................. 40
EXHIBIT INDEX ............................................................. 41
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. Page
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MidAmerican Energy Company
Independent Accountants' Report............................................ 4
Consolidated Balance Sheets................................................ 5
Consolidated Statements of Income.......................................... 6
Consolidated Statements of Comprehensive Income............................ 7
Consolidated Statements of Cash Flows...................................... 8
Notes to Consolidated Financial Statements................................. 9
MidAmerican Funding, LLC
Independent Accountants' Report............................................ 14
Consolidated Balance Sheets................................................ 15
Consolidated Statements of Income.......................................... 16
Consolidated Statements of Comprehensive Income............................ 17
Consolidated Statements of Cash Flows...................................... 18
Notes to Consolidated Financial Statements................................. 19
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the "Company") as of September 30, 2003, and
the related consolidated statements of income and comprehensive income for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
24, 2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
November 3, 2003
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT, NET
Electric .............................................. $ 5,015,716 $ 4,731,002
Gas ................................................... 909,061 900,209
----------- -----------
5,924,777 5,631,211
Accumulated depreciation and amortization ............. (3,185,004) (3,011,123)
----------- -----------
2,739,773 2,620,088
Construction work in progress ......................... 127,755 205,988
----------- -----------
2,867,528 2,826,076
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................. 106,665 28,500
Receivables, net ...................................... 245,014 321,321
Inventories ........................................... 85,044 88,492
Other ................................................. 15,870 28,655
----------- -----------
452,593 466,968
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 285,878 273,864
REGULATORY ASSETS ..................................... 278,803 192,514
OTHER ASSETS .......................................... 36,966 52,457
----------- -----------
TOTAL ASSETS .......................................... $ 3,921,768 $ 3,811,879
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity ........................... $ 1,284,011 $ 1,307,067
MidAmerican Energy preferred securities ............... 31,759 31,759
Long-term debt, excluding current portion ............. 1,085,416 947,691
----------- -----------
2,401,186 2,286,517
----------- -----------
CURRENT LIABILITIES
Notes payable ......................................... - 55,000
Current portion of long-term debt ..................... 56,771 105,727
Accounts payable ...................................... 154,317 239,531
Taxes accrued ......................................... 111,211 83,063
Interest accrued ...................................... 16,346 9,731
Other ................................................. 72,960 55,464
----------- -----------
411,605 548,516
----------- -----------
OTHER LIABILITIES
Deferred income taxes ................................. 425,271 424,153
Investment tax credits ................................ 53,604 56,886
Asset retirement obligations .......................... 287,097 159,757
Regulatory liabilities ................................ 131,054 118,011
Other ................................................. 211,951 218,039
----------- -----------
1,108,977 976,846
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES .................. $ 3,921,768 $ 3,811,879
=========== ===========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- --------------------------
2003 2002 2003 2002
--------- --------- ----------- -----------
(UNAUDITED)
OPERATING REVENUES
Regulated electric .................... $ 422,565 $ 419,542 $ 1,066,794 $ 1,052,130
Regulated gas ......................... 110,882 96,163 679,736 442,290
Nonregulated .......................... 42,554 38,676 180,550 126,933
--------- --------- ----------- -----------
576,001 554,381 1,927,080 1,621,353
--------- --------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 123,261 110,590 294,133 255,907
Cost of gas sold .................... 76,125 61,907 517,399 297,226
Other operating expenses ............ 91,157 93,810 263,026 300,001
Maintenance ......................... 37,947 30,002 103,676 90,698
Depreciation and amortization ....... 56,260 66,451 202,542 207,120
Property and other taxes ............ 19,693 19,640 59,623 56,229
--------- --------- ----------- -----------
404,443 382,400 1,440,399 1,207,181
--------- --------- ----------- -----------
Nonregulated:
Cost of sales ....................... 36,056 31,968 156,805 105,777
Other ............................... 4,311 4,439 12,379 14,665
--------- --------- ----------- -----------
40,367 36,407 169,184 120,442
--------- --------- ----------- -----------
Total operating expenses ............ 444,810 418,807 1,609,583 1,327,623
--------- --------- ----------- -----------
OPERATING INCOME ...................... 131,191 135,574 317,497 293,730
--------- --------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income .......... 633 2,377 3,142 7,654
Other income .......................... 3,239 3,342 13,138 8,063
Other expense ......................... (1,044) (2,502) (1,916) (7,245)
--------- --------- ----------- -----------
2,828 3,217 14,364 8,472
--------- --------- ----------- -----------
FIXED CHARGES
Interest on long-term debt ............ 17,871 18,262 54,441 53,150
Other interest expense ................ 921 886 2,867 2,594
Preferred dividends of subsidiary trust - - - 1,574
Allowance for borrowed funds .......... (838) (895) (3,521) (2,160)
--------- --------- ----------- -----------
17,954 18,253 53,787 55,158
--------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 116,065 120,538 278,074 247,044
INCOME TAXES .......................... 51,760 50,028 121,945 103,899
--------- --------- ----------- -----------
NET INCOME ............................ 64,305 70,510 156,129 143,145
PREFERRED DIVIDENDS ................... 327 327 1,091 2,605
--------- --------- ----------- -----------
EARNINGS ON COMMON STOCK .............. $ 63,978 $ 70,183 $ 155,038 $ 140,540
========= ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(UNAUDITED)
EARNINGS ON COMMON STOCK ..................... $ 63,978 $ 70,183 $ 155,038 $ 140,540
-------- -------- --------- ---------
OTHER COMPREHENSIVE LOSS
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ...................... (4,746) (1,665) 6,889 (3,869)
Income tax (expense) benefit ............. 1,973 692 (2,864) 1,608
-------- -------- --------- ---------
(2,773) (973) 4,025 (2,261)
-------- -------- --------- ---------
Less realized gains (losses) reflected in
earnings on common stock during period-
Before income taxes ...................... 3,620 1,197 16,463 817
Income tax (expense) benefit ............. (1,505) (498) (6,844) (340)
-------- -------- --------- ---------
2,115 699 9,619 477
-------- -------- --------- ---------
Other comprehensive loss ..................... (4,888) (1,672) (5,594) (2,738)
-------- -------- --------- ---------
COMPREHENSIVE INCOME ......................... $ 59,090 $ 68,511 $ 149,444 $ 137,802
======== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
2003 2002
--------- ---------
(UNAUDITED)
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 156,129 $ 143,145
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ..................................... 203,403 207,966
Deferred income taxes and investment tax credit, net .............. 1,816 2,657
Amortization of other assets and liabilities ...................... 17,508 28,209
Power purchase contract restructuring receipt ..................... - 39,100
Cash outflows of accounts receivable securitization ............... - (8,000)
Impact of changes in working capital .............................. 70,317 (30,590)
Other, net ........................................................ (11,350) 14,953
--------- ---------
Net cash provided by operating activities ....................... 437,823 397,440
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................... (226,726) (228,771)
Less non-cash and change in accrued utility construction expenditures 5,855 4,146
Quad Cities Station decommissioning trust fund ...................... (6,224) (6,224)
Nonregulated capital expenditures ................................... (1,032) (586)
Other investing activities, net ..................................... 12,513 3,932
--------- ---------
Net cash used in investing activities ............................. (215,614) (227,503)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ...................................................... (173,591) (80,106)
Issuance of long-term debt, net ..................................... 272,550 391,147
Retirement of long-term debt, including reacquisition cost .......... (188,003) (163,845)
Reacquisition of preferred securities ............................... - (126,680)
Net decrease in notes payable ....................................... (55,000) (89,350)
--------- ---------
Net cash used in financing activities ............................. (144,044) (68,834)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 78,165 101,103
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,500 20,020
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 106,665 $ 121,123
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized ........................... $ 42,777 $ 44,681
========= =========
Income taxes paid, net .............................................. $ 74,673 $ 67,406
========= =========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company ("MidAmerican Energy"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of MidAmerican
Energy, all adjustments, consisting of normal recurring adjustments, have been
made to present fairly the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation. All
significant intercompany transactions have been eliminated. Although MidAmerican
Energy believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in MidAmerican Energy's latest Annual Report on Form 10-K.
MidAmerican Energy is a public utility with electric and natural gas operations
and is the principal subsidiary of MHC Inc ("MHC"). MHC is a direct, wholly
owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), whose sole
member is MidAmerican Energy Holdings Company.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, MidAmerican Energy adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires recognition on the balance sheet of legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal operation of such assets.
Concurrent with the recognition of the liability, the estimated cost of an asset
retirement obligation is capitalized and depreciated over the remaining life of
the asset.
On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset
retirement obligation ("ARO") liabilities; $12.6 million of associated ARO
assets, net of accumulated depreciation; $101.8 million of regulatory assets;
and reclassified $1.0 million of accumulated depreciation to the ARO liability
in conjunction with the adoption of SFAS No. 143. Adoption of SFAS No. 143 did
not impact net income. The initial ARO liability recognized includes $266.5
million that pertains to obligations associated with the decommissioning of the
Quad Cities Station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded as of December 31, 2002. As of
September 30, 2003, $175.2 million of assets reflected in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.
The change in the balance of the ARO liability during the first nine months of
2003 is summarized as follows (in thousands):
Balance January 1, 2003.......................... $275,228
Capitalized accretion............................ 11,869
--------
Balance September 30, 2003....................... $287,097
========
Accretion on the ARO liability is capitalized as a regulatory asset. In addition
to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued
for the cost of removing other electric and gas assets through its depreciation
rates, in accordance with accepted regulatory practices. As of September 30,
2003, the estimated amount of such accruals included in accumulated depreciation
was approximately $413 million based on the cost of removal component in current
depreciation rates.
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On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 149 also amends certain other existing
pronouncements and requires contracts with comparable characteristics to be
accounted for similarly. In particular, SFAS No. 149 clarifies when a contract
with an initial net investment meets the characteristic of a derivative and when
a derivative that contains a financing component will require special reporting
in the statement of cash flows. SFAS No. 149 was effective for MidAmerican
Energy and MidAmerican Funding for contracts entered into or modified after June
30, 2003. Adoption of SFAS No. 149 did not have a material effect on the results
of operations, financial position or cash flows of MidAmerican Energy or
MidAmerican Funding.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS No. 150 was
effective for MidAmerican Funding and MidAmerican Energy for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the third quarter of 2003. MidAmerican Funding and
MidAmerican Energy do not currently have financial instruments within the scope
of SFAS No. 150.
3. ENVIRONMENTAL MATTERS
a. Manufactured Gas Plant Facilities:
The United States Environmental Protection Agency ("EPA"), and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute a health or
environmental risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is actively working with the regulatory
agencies and has received regulatory closure on four sites. MidAmerican Energy
is continuing to evaluate several of the sites to determine the future
liability, if any, for conducting site investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be approximately $15
million to $54 million. As of September 30, 2003, MidAmerican Energy has
recorded a $15.9 million liability for these sites and a corresponding
regulatory asset for future recovery through the regulatory process. MidAmerican
Energy projects that these amounts will be incurred or paid over the next four
years.
The estimated liability is determined through a site-specific cost evaluation
process. First, a determination is made as to whether MidAmerican Energy has
potential legal liability for a site and whether information exists to indicate
that contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. If it is determined during the preliminary investigation that remedial
action is required, then the best estimate of the costs is accrued. The estimate
includes incremental direct costs of remediation, site monitoring costs and
costs of compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. Insurance
recoveries have been received for
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some of the sites under investigation. Those recoveries are intended to be used
principally for accelerated remediation, as specified by the Iowa Utilities
Board ("IUB"), and are recorded as a regulatory liability.
Although the timing of potential incurred costs and recovery of such costs in
rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position, results of operations or cash
flows.
b. Air Quality:
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. Based on
data to be obtained from monitors located throughout each state, the EPA will
determine which states have areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). The standards were subjected
to legal proceedings, and in February 2001, the United States Supreme Court
upheld the constitutionality of the standards, though remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the United States Circuit Court of Appeals for the District of
Columbia, the EPA is moving forward in implementation of the ozone and fine
particulate standards and is analyzing existing monitored data to determine
attainment status.
The impact of the standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of state implementation plans to
achieve attainment of the standards, MidAmerican Energy could be required to
install control equipment on its generating stations or decrease the number of
hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part, be
superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction initiatives to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing regulated
emissions from its generating facilities in a cost-effective manner. An
administrative law judge issued a ruling approving MidAmerican Energy's plan but
disallowing the proposed recovery of plan costs through a tracker mechanism.
MidAmerican Energy and the Iowa Office of Consumer Advocate each appealed the
administrative law judge's ruling. On July 17, 2003, the IUB issued an order
affirming the administrative law judge's decision. Accordingly, the IUB has
rejected the future application of a tracker mechanism to recover emission
reduction costs. However, the approved expenditures will not be subject to a
subsequent prudence review in a future electric rate case.
In recent years, the EPA has requested from several utilities information and
support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the New Source Review and the New Source Performance Standards
of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy
received requests from the EPA to provide documentation related to its capital
projects from January 1, 1980, to the present for a number of its generating
plants. MidAmerican Energy has submitted information to the EPA in responses to
these requests, and there are currently no outstanding data requests pending
from the EPA. MidAmerican Energy cannot predict the outcome of these requests at
this time.
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4. RATE MATTERS
Under two settlement agreements approved by the IUB, MidAmerican Energy's Iowa
retail electric rates in effect on December 31, 2000, are effectively frozen
through December 31, 2010. The settlement agreements specifically allow the
filing of electric rate design and/or cost of service rate changes that are
intended to keep MidAmerican Energy's overall Iowa retail electric revenue
unchanged, but could result in changes to individual tariffs. The settlement
agreements also each provide that portions of revenues associated with Iowa
retail electric returns on equity within specified ranges will be recorded as a
regulatory liability to be used to offset a portion of the cost to Iowa
customers of future generating plant investment.
Under the first settlement agreement, which was approved by the IUB on December
21, 2001, and is effective through December 31, 2005, an amount equal to 50% of
revenues associated with returns on equity between 12% and 14%, and 83.33% of
revenues associated with returns on equity above 14%, in each year is recorded
as a regulatory liability. The second settlement agreement, which was filed as
part of MidAmerican Energy's application for ratemaking principles on a wind
power project and was approved by the IUB on October 17, 2003, provides that
during the period January 1, 2006 through December 31, 2010, an amount equal to
40% of revenues associated with returns on equity between 11.75% and 13%, 50% of
revenues associated with returns on equity between 13% and 14%, and 83.3% of
revenues associated with returns on equity above 14%, in each year will be
recorded as a regulatory liability. An amount equal to the regulatory liability
is recorded as a regulatory charge in depreciation and amortization expense when
the liability is accrued. Interest expense is accrued on the portion of the
regulatory liability related to prior years. Beginning in 2002, the liability is
being reduced as it is credited against plant in service in amounts equal to the
allowance for funds used during construction associated with generating plant
additions. As of September 30, 2003 and December 31, 2002, the related
regulatory liability reflected on the Consolidated Balance Sheets was $123.6
million and $102.9 million, respectively.
In addition, the 2003 settlement agreement provides that if Iowa retail electric
returns on equity fall below 10% in any consecutive 12-month period after
January 1, 2006, MidAmerican Energy may seek to file for a general increase in
rates. However, prior to filing for a general increase in rates, MidAmerican
Energy is required by the settlement agreement to conduct 30 days of good faith
negotiations with all of the signatories to the settlement agreement to attempt
to avoid a general increase in rates.
Illinois law provides for Illinois earnings above a computed level of return on
common equity to be shared equally between regulated retail electric customers
and MidAmerican Energy. MidAmerican Energy's computed level of return on common
equity is based on a rolling two-year average of the Monthly Treasury Long-Term
Average Rate, as published by the Federal Reserve System, plus a premium of 8.5%
for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year
average above which sharing must occur for 2003 is 13.73%. The law allows
MidAmerican Energy to mitigate the sharing of earnings above the threshold
return on common equity through accelerated recovery of electric assets.
On November 8, 2002, the IUB approved a settlement agreement previously filed
with it by MidAmerican Energy and the Iowa Office of Consumer Advocate. The
settlement agreement provided for an increase in rates of $17.7 million annually
for MidAmerican Energy's Iowa retail natural gas customers and effectively froze
base rates through November 2004. However, MidAmerican Energy will continue
collecting fluctuating gas costs through its purchased gas adjustment clause.
The new rates were implemented for usage beginning November 25, 2002.
5. SEGMENT INFORMATION
MidAmerican Energy has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense, income tax expense and equity in the
net income or loss of investees are allocated to each segment.
-12-
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the segments. MidAmerican Energy's external revenues by product and services are
displayed on the Consolidated Statements of Income.
The following tables provide MidAmerican Energy's operating revenues, income
before income taxes and total assets on an operating segment basis (in
thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating revenues:
External revenues -
Generation ................. $ 127,730 $ 130,338 $ 393,438 $ 353,262
Energy delivery ............ 400,954 399,572 1,345,689 1,178,692
Transmission ............... 6,178 5,553 18,282 15,689
Marketing & sales .......... 41,139 18,918 169,671 73,710
----------- ----------- ----------- -----------
Total .................... 576,001 554,381 1,927,080 1,621,353
----------- ----------- ----------- -----------
Intersegment revenues -
Generation ................. 216,625 228,964 495,669 521,291
Transmission ............... 14,487 13,803 43,460 41,404
Marketing & sales .......... 1,100 1,276 1,854 2,052
----------- ----------- ----------- -----------
Total .................... 232,212 244,043 540,983 564,747
Intersegment eliminations .... (232,212) (244,043) (540,983) (564,747)
----------- ----------- ----------- -----------
Consolidated ............... $ 576,001 $ 554,381 $ 1,927,080 $ 1,621,353
=========== =========== =========== ===========
Income before income taxes:
Generation ................... $ 97,299 $ 104,454 $ 160,259 $ 145,627
Energy delivery .............. 4,566 3,399 78,113 66,831
Transmission ................. 11,393 10,318 34,440 31,162
Marketing & sales ............ 2,480 2,040 4,171 819
----------- ----------- ----------- -----------
Total ...................... 115,738 120,211 276,983 244,439
Preferred dividends .......... 327 327 1,091 2,605
----------- ----------- ----------- -----------
Consolidated ............... $ 116,065 $ 120,538 $ 278,074 $ 247,044
=========== =========== =========== ===========
As of
----------------------------
September 30, December 31,
2003 2002
------------- ------------
Total assets:
Generation ................... $ 1,419,142 $ 1,393,271
Energy delivery .............. 2,306,012 2,224,238
Transmission ................. 228,624 222,051
Marketing & sales ............ 43,395 52,143
----------- -----------
Total ...................... 3,997,173 3,891,703
Reclassifications and
intersegment eliminations(a) (75,405) (79,824)
----------- -----------
Consolidated ................. $ 3,921,768 $ 3,811,879
=========== ===========
(a) Reclassifications and intersegment eliminations relate principally to the
reclassification of income tax balances in accordance with generally
accepted accounting principles and the elimination of intersegment accounts
receivables and payables.
-13-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Funding, LLC and subsidiaries (the "Company") as of September 30, 2003, and the
related consolidated statements of income and comprehensive income for the
three-month and nine-month periods ended September 30, 2003 and 2002, and of
cash flows for the nine-month periods ended September 30, 2003 and 2002. These
interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
24, 2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
November 3, 2003
-14-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
----------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT, NET
Electric .............................................. $ 5,015,716 $ 4,731,002
Gas ................................................... 909,061 900,209
----------- -----------
5,924,777 5,631,211
Accumulated depreciation and amortization ............. (3,185,004) (3,011,123)
----------- -----------
2,739,773 2,620,088
Construction work in progress ......................... 127,755 205,988
----------- -----------
2,867,528 2,826,076
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................. 106,705 28,915
Receivables, net ...................................... 246,486 321,698
Inventories ........................................... 85,044 88,492
Other ................................................. 16,955 35,009
----------- -----------
455,190 474,114
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 344,386 333,382
GOODWILL .............................................. 1,275,143 1,275,143
REGULATORY ASSETS ..................................... 278,803 192,514
OTHER ASSETS .......................................... 37,253 52,755
----------- -----------
TOTAL ASSETS .......................................... $ 5,258,303 $ 5,153,984
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ....................................... $ 1,823,314 $ 1,867,119
MidAmerican Energy preferred securities ............... 31,759 31,759
Long-term debt, excluding current portion ............. 1,785,417 1,647,691
----------- -----------
3,640,490 3,546,569
----------- -----------
CURRENT LIABILITIES
Notes payable ......................................... - 55,000
Note payable to affiliate ............................. 31,200 -
Current portion of long-term debt ..................... 56,771 105,727
Accounts payable ...................................... 156,613 242,733
Taxes accrued ......................................... 111,526 85,987
Interest accrued ...................................... 20,370 25,487
Other ................................................. 73,604 56,291
----------- -----------
450,084 571,225
----------- -----------
OTHER LIABILITIES
Deferred income taxes ................................. 464,589 461,862
Investment tax credits ................................ 53,605 56,886
Asset retirement obligations .......................... 287,097 159,757
Regulatory liabilities ................................ 131,054 118,011
Other ................................................. 231,384 239,674
----------- -----------
1,167,729 1,036,190
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES .................. $ 5,258,303 $ 5,153,984
=========== ===========
The accompanying notes are an integral part of these financial statements.
-15-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ --------------------------
2003 2002 2003 2002
--------- ----------- ----------- -----------
(UNAUDITED)
OPERATING REVENUES
Regulated electric .......................... $ 422,565 $ 419,542 $ 1,066,794 $ 1,052,130
Regulated gas ............................... 110,882 96,163 679,736 442,290
Nonregulated ................................ 43,834 40,579 183,107 130,755
--------- ----------- ----------- -----------
577,281 556,284 1,929,637 1,625,175
--------- ----------- ----------- -----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ......... 123,261 110,590 294,133 255,907
Cost of gas sold .......................... 76,125 61,907 517,399 297,226
Other operating expenses .................. 91,157 93,810 263,026 300,001
Maintenance ............................... 37,946 30,002 103,675 90,698
Depreciation and amortization ............. 56,260 66,451 202,542 207,120
Property and other taxes .................. 19,693 19,640 59,623 56,229
--------- ----------- ----------- -----------
404,442 382,400 1,440,398 1,207,181
--------- ----------- ----------- -----------
Nonregulated:
Cost of sales ............................. 36,381 32,487 157,277 106,622
Other ..................................... 5,752 7,594 15,909 21,373
--------- ----------- ----------- -----------
42,133 40,081 173,186 127,995
--------- ----------- ----------- -----------
Total operating expenses .................. 446,575 422,481 1,613,584 1,335,176
--------- ----------- ----------- -----------
OPERATING INCOME ............................ 130,706 133,803 316,053 289,999
--------- ----------- ----------- -----------
NON-OPERATING INCOME
Interest and dividend income ................ 667 9,004 3,132 17,761
Marketable securities gains and (losses), net 3 (1,697) 204 (5,221)
Other income ................................ 4,294 6,916 16,103 19,758
Other expense ............................... (1,178) (9,229) (4,386) (14,243)
--------- ----------- ----------- -----------
3,786 4,994 15,053 18,055
--------- ----------- ----------- -----------
FIXED CHARGES
Interest on long-term debt .................. 29,653 30,230 89,786 89,052
Other interest expense ...................... 993 886 3,031 2,598
Preferred dividends of subsidiaries ......... 327 327 1,091 4,179
Allowance for borrowed funds ................ (838) (895) (3,521) (2,160)
--------- ----------- ----------- -----------
30,135 30,548 90,387 93,669
--------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .................. 104,357 108,249 240,719 214,385
INCOME TAXES ................................ 46,913 44,702 106,629 89,705
--------- ----------- ----------- -----------
NET INCOME .................................. $ 57,444 $ 63,547 $ 134,090 $ 124,680
========= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-16-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
(UNAUDITED)
NET INCOME ................................................ $ 57,444 $ 63,547 $ 134,090 $ 124,680
-------- -------- --------- ---------
OTHER COMPREHENSIVE LOSS
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) during period-
Before income taxes ................................... 242 (1,009) 378 (9,623)
Income tax (expense) benefit .......................... (85) 353 (133) 3,368
-------- -------- --------- ---------
157 (656) 245 (6,255)
-------- -------- --------- ---------
Less realized gains (losses) reflected in
net income during period-
Before income taxes ................................... - (1,812) 71 (4,743)
Income tax (expense) benefit .......................... - 634 (25) 1,660
-------- -------- --------- ---------
- (1,178) 46 (3,083)
-------- -------- --------- ---------
Net unrealized gains (losses) ....................... 157 522 199 (3,172)
-------- -------- --------- ---------
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ................................... (4,746) (1,665) 6,889 (3,869)
Income tax (expense) benefit .......................... 1,973 692 (2,864) 1,608
-------- -------- --------- ---------
(2,773) (973) 4,025 (2,261)
-------- -------- --------- ---------
Less realized gains (losses) reflected in
net income during period-
Before income taxes ................................... 3,620 1,197 16,463 817
Income tax (expense) benefit .......................... (1,505) (498) (6,844) (340)
-------- -------- --------- ---------
2,115 699 9,619 477
-------- -------- --------- ---------
Net unrealized losses ............................... (4,888) (1,672) (5,594) (2,738)
-------- -------- --------- ---------
Other comprehensive loss .................................. (4,731) (1,150) (5,395) (5,910)
-------- -------- --------- ---------
COMPREHENSIVE INCOME ...................................... $ 52,713 $ 62,397 $ 128,695 $ 118,770
======== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
-17-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
2003 2002
--------- ---------
(UNAUDITED)
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 134,090 $ 124,680
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ..................................... 203,550 208,725
Deferred income taxes and investment tax credit, net .............. 3,134 333
Amortization of other assets and liabilities ...................... 15,930 26,165
Loss from impairment of assets and investments .................... 2,069 4,363
Gain on sale of securities, assets and other investments .......... (151) (3,458)
Income on equity investments ...................................... (1,753) (1,916)
Power purchase contract restructuring receipt ..................... - 39,100
Cash outflows of accounts receivable securitization ............... - (8,000)
Impact of changes in working capital .............................. 59,061 (49,069)
Other, net ........................................................ (8,221) 19,129
--------- ---------
Net cash provided by operating activities ....................... 407,709 360,052
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................... (226,726) (228,771)
Less non-cash and change in accrued utility construction expenditures 5,855 4,146
Quad Cities Station decommissioning trust fund ...................... (6,224) (6,224)
Nonregulated capital expenditures ................................... (1,806) (990)
Proceeds from sale of assets and other investments .................. 326 11,520
Notes receivable from affiliate ..................................... - 34,164
Other investing activities, net ..................................... 10,409 6,995
--------- ---------
Net cash used in investing activities ............................. (218,166) (179,160)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ............................................... (172,500) (77,500)
Issuance of long-term debt, net ..................................... 272,550 391,147
Retirement of long-term debt, including reacquisition cost .......... (188,003) (163,845)
Reacquisition of preferred securities ............................... - (126,680)
Note payable to affiliate ........................................... 31,200 -
Net decrease in notes payable ....................................... (55,000) (91,780)
--------- ---------
Net cash used in financing activities ............................. (111,753) (68,658)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 77,790 112,234
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,915 20,270
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 106,705 $ 132,504
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized ........................... $ 90,003 $ 92,784
========= =========
Income taxes paid, net .............................................. $ 60,666 $ 57,384
========= =========
The accompanying notes are an integral part of these financial statements.
-18-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
MidAmerican Funding, LLC ("MidAmerican Funding"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of MidAmerican
Funding, all adjustments, consisting of normal recurring adjustments, have been
made to present fairly the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation. All
significant intercompany transactions have been eliminated. Although MidAmerican
Funding believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in MidAmerican Funding's latest Annual Report on Form 10-K.
MidAmerican Funding is an Iowa limited liability company with MidAmerican Energy
Holdings Company as its sole member. MidAmerican Funding's direct, wholly owned
subsidiary is MHC Inc. ("MHC"). MHC, MidAmerican Funding and MidAmerican Energy
Holdings Company are exempt public utility holding companies headquartered in
Des Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company, a
public utility with electric and natural gas operations. Other direct, wholly
owned subsidiaries of MHC include InterCoast Capital Company (previously named
MidAmerican Capital Company), Midwest Capital Group, Inc., MidAmerican Services
Company and MEC Construction Services Co.
2. NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's new accounting
pronouncements.
3. ENVIRONMENTAL MATTERS
Refer to Note 3 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's environmental
matters.
4. RATE MATTERS
Refer to Note 4 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's rate matters.
5. SEGMENT INFORMATION
MidAmerican Funding has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense, income tax expense and equity in the
net income or loss of investees are allocated to each segment, except for
interest in MidAmerican Funding parent debt.
-19-
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the segments. MidAmerican Funding's external revenues by product and services
are displayed on the Consolidated Statements of Income.
The following tables provide MidAmerican Funding's operating revenues, income
before income taxes and total assets on an operating segment basis (in
thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- --------------------------
2003 2002 2003 2002
--------- --------- ----------- -----------
Operating revenues:
External revenues -
Generation .................. $ 127,730 $ 130,338 $ 393,438 $ 353,262
Energy delivery ............. 400,954 399,572 1,345,689 1,178,692
Transmission ................ 6,178 5,553 18,282 15,689
Marketing & sales ........... 41,139 18,918 169,671 73,710
Other ....................... 1,280 1,903 2,557 3,822
--------- --------- ----------- -----------
Total ..................... 577,281 556,284 1,929,637 1,625,175
--------- --------- ----------- -----------
Intersegment revenues -
Generation .................. 216,625 228,964 495,669 521,291
Transmission ................ 14,487 13,803 43,460 41,404
Marketing & sales ........... 1,100 1,276 1,854 2,052
--------- --------- ----------- -----------
Total ..................... 232,212 244,043 540,983 564,747
Intersegment eliminations ..... (232,212) (244,043) (540,983) (564,747)
--------- --------- ----------- -----------
Consolidated ................ $ 577,281 $ 556,284 $ 1,929,637 $ 1,625,175
========= ========= =========== ===========
Income before income taxes:
Generation .................... $ 97,299 $ 104,454 $ 160,259 $ 145,627
Energy delivery ............... 4,566 3,399 78,113 66,831
Transmission .................. 11,393 10,318 34,440 31,162
Marketing & sales ............. 2,480 2,040 4,171 819
Other ......................... (11,381) (11,962) (36,264) (30,054)
--------- --------- ----------- -----------
Total ....................... $ 104,357 $ 108,249 $ 240,719 $ 214,385
========= ========= =========== ===========
As of
----------------------------
September 30, December 31,
2003 2002
------------- ------------
Total assets (a):
Generation .................... $ 2,346,961 $ 2,321,090
Energy delivery ............... 2,569,164 2,487,390
Transmission .................. 312,796 306,223
Marketing & sales ............. 43,395 52,143
Other ......................... 208,554 179,141
----------- -----------
Total ......................... 5,480,870 5,345,987
Reclassifications and
intersegment eliminations(b) (222,567) (192,003)
----------- -----------
Consolidated .................. $ 5,258,303 $ 5,153,984
=========== ===========
(a) Total assets by operating segment reflect the assignment of goodwill
to applicable reporting units in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets."
(b) Reclassifications and intersegment eliminations relate principally
to the reclassification of income tax balances in accordance with
generally accepted accounting principles and the elimination of
intersegment accounts receivables and payables.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MidAmerican Energy Company ("MidAmerican Energy") is a public utility with
electric and natural gas operations and is the principal subsidiary within
MidAmerican Funding, LLC ("MidAmerican Funding").
Management's Discussion and Analysis ("MD&A") addresses the financial statements
of MidAmerican Funding and MidAmerican Energy as presented in this joint filing.
Information in MD&A related to MidAmerican Energy, whether or not segregated,
also relates to MidAmerican Funding. Information related to other subsidiaries
of MidAmerican Funding pertains only to the discussion of the financial
condition and results of operations of MidAmerican Funding. Where necessary,
discussions have been segregated and labeled to allow the reader to identify
information applicable only to MidAmerican Funding.
MD&A should be read in conjunction with the financial statements included in
this Form 10-Q and the notes to those statements, together with MD&A in
MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report
on Form 10-K.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Funding, or one of its subsidiaries individually,
including MidAmerican Energy, may make forward-looking statements within the
meaning of the federal securities laws that involve judgments, assumptions and
other uncertainties beyond the control of MidAmerican Funding or any of its
subsidiaries individually. These forward-looking statements may include, among
others, statements concerning revenue and cost trends, cost recovery, cost
reduction strategies and anticipated outcomes, pricing strategies, changes in
the utility industry, planned capital expenditures, financing needs and
availability, statements of MidAmerican Funding's expectations, beliefs, future
plans and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. These type of forward-looking
statements are based on current expectations and involve a number of known and
unknown risks and uncertainties that could cause the actual results and
performance of MidAmerican Funding to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, MidAmerican Funding has identified important
factors that could cause actual results to differ materially from those
expectations, including weather effects on sales volumes and revenues, fuel
prices, fuel transportation and other operating uncertainties, acquisition
uncertainty, uncertainties relating to economic and political conditions and
uncertainties regarding the impact of regulations, changes in government policy,
utility industry deregulation and competition. Neither MidAmerican Funding, nor
any one of its subsidiaries individually, assumes any responsibility to update
forward-looking information contained herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MidAmerican Energy's and MidAmerican Funding's significant accounting policies
are described in their respective Note (1) of Notes to Consolidated Financial
Statements in Item 15 of their most recently filed Annual Report on Form 10-K.
For a discussion of their critical accounting policies and estimates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in their most recently filed Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENT
In January 2003, MidAmerican Energy adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires recognition on the balance sheet of legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal operation of such assets.
Concurrent with the recognition of the liability, the estimated cost of an asset
retirement obligation is capitalized and depreciated over the remaining life of
the asset.
-21-
On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset
retirement obligation ("ARO") liabilities; $12.6 million of associated ARO
assets, net of accumulated depreciation; $101.8 million of regulatory assets;
and reclassified $1.0 million of accumulated depreciation to the ARO liability
in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not
impact net income. The initial ARO liability recognized includes $266.5 million
that pertains to obligations associated with the decommissioning of the Quad
Cities Station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded as of December 31, 2002. As of
September 30, 2003, $175.2 million of assets reflected in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.
The change in the balance of the ARO liability during the first nine months of
2003 is summarized as follows (in thousands):
Balance January 1, 2003.......................... $275,228
Capitalized accretion............................ 11,869
--------
Balance September 30, 2003....................... $287,097
========
Accretion on the ARO liability is capitalized as a regulatory asset. In addition
to the ARO liabilities recognized on January 1, MidAmerican Energy has accrued
for the cost of removing other electric and gas assets through its depreciation
rates, in accordance with accepted regulatory practices. As of September 30,
2003, the estimated amount of such accruals included in accumulated depreciation
was approximately $413 million based on the cost of removal component in current
depreciation rates.
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends SFAS No. 133 for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 149 also amends certain other existing
pronouncements and requires contracts with comparable characteristics to be
accounted for similarly. In particular, SFAS No. 149 clarifies when a contract
with an initial net investment meets the characteristic of a derivative and when
a derivative that contains a financing component will require special reporting
in the statement of cash flows. SFAS No. 149 was effective for MidAmerican
Energy and MidAmerican Funding for contracts entered into or modified after June
30, 2003. Adoption of SFAS No. 149 did not have a material effect on the results
of operations, financial position or cash flows of MidAmerican Energy and
MidAmerican Funding.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS No. 150 was
effective for MidAmerican Funding and MidAmerican Energy for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the third quarter of 2003. MidAmerican Funding and
MidAmerican Energy do not currently have financial instruments within the scope
of SFAS No. 150.
-22-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Regulated Electric Gross Margin
- -------------------------------
Three Months
Ended September 30,
-------------------
2003 2002
------ ------
(In millions)
Operating revenues ..................... $422.6 $419.5
Less cost of fuel, energy and capacity.. 123.3 110.6
------ ------
Electric gross margin ................ $299.3 $308.9
====== ======
Electric gross margin for the third quarter of 2003 decreased $9.6 million
compared to the third quarter of 2002.
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District ("NPPD") restructured their contract for Cooper Nuclear Station.
Accordingly, MidAmerican Energy's costs for energy and capacity purchased from
Cooper Nuclear Station are now classified differently on the statement of
income. As a result, electric gross margin for the third quarter of 2003
decreased by $3.5 million compared to the third quarter of 2002 due to the
change in classification of the related costs. Prior to August 1, 2002, only the
fuel costs for energy purchased from Cooper Nuclear Station were classified as a
cost of fuel, energy and capacity. Other costs under the contract were
classified as other operating expenses. Following the restructuring, all costs
for energy and capacity purchased under that contract are included in
MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased
power costs. Other operating expenses decreased accordingly. Refer to Note
(1)(h) of Notes to Consolidated Financial Statements in Item 15 of MidAmerican
Energy's most recently filed Annual Report on Form 10-K for a discussion of the
contract restructuring.
Temperature conditions during the third quarter of 2003 were milder than in the
third quarter of 2002, resulting in approximately a $4.2 million decrease in
electric margin. Electricity usage and rate factors not dependent on weather
decreased electric margin by $3.3 million compared to the third quarter of 2002.
In total, retail electric sales volumes decreased 0.7% for the three months
ended September 30, 2003.
Higher fuel costs related to Iowa retail electric sales, excluding the impact of
restructuring the Cooper Nuclear Station contract, decreased electric margin by
$6.9 million relative to the third quarter of 2002.
MidAmerican Energy sells and purchases electric capacity in the wholesale
market. The net margin from those sales and purchases increased $5.1 million
compared to the third quarter of 2002. In addition to increased capacity sales
margins, the gross margin on electric wholesale energy sales increased $2.8
million for the third quarter of 2003 due to an increase in prices, partially
offset by a decrease in sales volumes, compared to the third quarter of 2002.
Wholesale sales are the sales of energy to other utilities, municipalities and
marketers inside and outside of MidAmerican Energy's delivery system.
Regulated Gas Gross Margin
- --------------------------
Three Months
Ended September 30,
-------------------
2003 2002
------ ------
(In millions)
Operating revenues .......... $110.9 $ 96.2
Less cost of gas sold........ 76.1 61.9
------ ------
Gas gross margin .......... $ 34.8 $ 34.3
====== ======
Regulated gas revenues include purchased gas adjustment clauses through which
MidAmerican Energy is allowed to recover the cost of gas sold from its retail
gas utility customers. Consequently, fluctuations in the cost of gas
-23-
sold do not affect gross margin or net income because revenues reflect
comparable fluctuations from purchased gas adjustment clauses. A 51.3% increase
in the average per-unit cost of gas for the three-month period ended September
30, 2003, compared to the same period in 2002, increased revenues and cost of
gas sold.
Gas margin for the three months ended September 30, 2003, increased $0.5 million
compared to the three months ended September 30, 2002. Retail sales volumes
increased 9.4% compared to the third quarter of 2002.
Increases in retail gas rates that took effect subsequent to the third quarter
of 2002 improved gas margin by $1.3 million compared to the third quarter of
2002. On November 8, 2002, the Iowa Utilities Board ("IUB") approved a proposed
settlement agreement previously filed by MidAmerican Energy and the Iowa Office
of Consumer Advocate that provided for a final increase, implemented on November
25, 2002, of $17.7 million annually for MidAmerican Energy's Iowa retail natural
gas customers. On September 11, 2002, MidAmerican Energy received a final order
from the Illinois Commerce Commission to increase its Illinois natural gas rates
by $2.2 million annually and implemented the rates on September 18, 2002. Refer
to the "Rate Matters" section of MD&A for comments on the Iowa gas rate
settlement.
Additionally, gas gross margin decreased compared to the third quarter of 2002
due to a $1.1 million decrease in revenues from the recovery of energy
efficiency costs. Changes in these revenues are substantially matched with
corresponding changes in other operating expenses.
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for the third quarter of 2003 decreased $2.7
million compared to the third quarter of 2002. Effective August 1, 2002,
MidAmerican Energy and NPPD restructured their contract for Cooper Nuclear
Station. Prior to August 1, 2002, costs under the contract other than fuel costs
for energy purchased were classified as other operating expenses. Following the
restructuring, all costs for energy and capacity purchased under that contract
are included in MidAmerican Energy's cost of fuel, energy and capacity, as with
other purchased power. As a result, other operating expenses for the third
quarter of 2003 decreased by $9.6 million compared to the third quarter of 2002.
The decrease in other operating expenses due to Cooper Nuclear Station was
partially offset by increases totaling $3.6 million related to employee costs
for compensation and health care and $2.9 million for electric distribution and
transmission operations.
Maintenance expenses increased $7.9 million compared to the third quarter of
2002 due primarily to a $4.9 million increase from the timing of fossil fuel
generation maintenance compared to the third quarter of 2002, as well as a $1.4
million increase in general plant maintenance and a $1.0 million increase in
Quad Cities Station maintenance costs.
Depreciation and amortization expense decreased $10.2 million compared to the
three months ended September 30, 2003, due principally to decreases in
regulatory expense related to revenue sharing arrangements in Iowa and Illinois.
Refer to the "Legislative and Utility Regulatory Matters" section for an
explanation of these revenue sharing arrangements.
Interest and Dividend Income
- ----------------------------
MidAmerican Energy -
The decrease in interest and dividend income was due principally to a $1.3
million decrease in interest income on a note receivable related to MidAmerican
Energy's accounts receivable sales arrangement, which terminated in October
2002.
-24-
MidAmerican Funding -
Interest income for MidAmerican Funding for the third quarter of 2002 includes
$5.0 million from the settlement of an investment in a communications company.
Interest income related to notes receivable with MidAmerican Funding's parent
company decreased $1.3 million compared to the third quarter of 2002. The note
receivable balances have been zero throughout 2003.
Marketable Securities Gains and Losses, Net
- -------------------------------------------
MidAmerican Funding -
In the third quarter of 2002, MidAmerican Funding recorded a $1.4 million loss
for other-than-temporary declines in its available-for-sale common stock
investments.
Other Income and Other Expense
- ------------------------------
MidAmerican Energy -
MidAmerican Energy's other income includes net earnings related to the cash
surrender value of corporate-owned life insurance. Related net earnings
increased $1.5 million to $0.8 million for the third quarter of 2003 compared to
the third quarter of 2002.
As a regulated public utility, MidAmerican Energy is allowed to capitalize, and
record as income, a cost of construction for equity funds used, based on
guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). Other
income for the capitalized allowance on equity funds used during construction
totaled $2.2 million in each of the third quarters of 2003 and 2002. MidAmerican
Energy anticipates recording income for the allowance on equity funds used
during construction over the next several years while the announced generating
plants are constructed.
Additionally, other income for the third quarter of 2002 reflects a $0.9 million
gain from the sale of utility property.
Other expense includes a discount on MidAmerican Energy's accounts receivable
sold to MidAmerican Energy Funding Corporation. The discount was designed to
cover the expenses of MidAmerican Energy Funding Corporation, including bad debt
expense, subservicer fees, monthly administrative costs and interest. The
discount was recorded in other expense because it is not reflected in utility
cost of service for regulatory purposes. The discount totaled $2.2 million for
the third quarter of 2002. The related arrangement terminated in October 2002.
MidAmerican Funding -
Other income for the third quarter of 2002 includes a $2.6 million gain on the
sale of an investment in a communications company.
Other expense for the third quarter of 2002 reflects a $5.1 million loss for the
impairment of an equity method investment and losses totaling $1.5 million from
impairments on three venture capital fund investments.
Fixed Charges and Preferred Dividends
- -------------------------------------
The decrease in interest on long-term debt was due to the effect of debt
maturities in 2002 and 2003 offset partially by interest on $275 million of
MidAmerican Energy notes issued in January 2003.
-25-
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Regulated Electric Gross Margin
- -------------------------------
Nine Months
Ended September 30,
--------------------
2003 2002
-------- --------
(In millions)
Operating revenues ..................... $1,066.8 $1,052.1
Less cost of fuel, energy and capacity.. 294.1 255.9
-------- --------
Electric gross margin ................ $ 772.7 $ 796.2
======== ========
Electric gross margin for the first nine months of 2003 decreased $23.5 million
compared to the first nine months of 2002.
Electric gross margin for the first nine months of 2003 decreased by $21.5
million compared to the first nine months of 2002 due to the change in
classification of costs related to MidAmerican Energy's contract for Cooper
Nuclear Station. Refer to the "Regulated Electric Gross Margin" section in
three-month results of operations discussion above for additional information
regarding this change.
The effect of temperature conditions during the first nine months of 2003
compared to the first nine months of 2002, resulted in approximately a $6.0
million decrease in electric margin. Electricity usage and rate factors not
dependent on weather decreased electric margin by $4.1 million compared to the
first nine months of 2002. In total, retail electric sales volumes were
relatively unchanged for the nine months ended September 30, 2003.
Lower fuel costs for Iowa retail electric sales, excluding the impact of
restructuring the Cooper Nuclear Station contract, increased electric margin by
$3.0 million relative to first nine months of 2002. The decrease in fuel costs
for Iowa electric retail sales includes the Iowa portion of $10.9 million of
cost recovery recognized in the second quarter of 2003 related to MidAmerican
Energy's coal purchase contract with Enron Corp. ("Enron"). In November 2001,
MidAmerican Energy received collateral from Enron for costs to MidAmerican
Energy related to the coal purchase contract as a result of a downgrade in
Enron's credit ratings in 2001. MidAmerican Energy deferred recognition of the
value of the collateral at that time, pending resolution of related bankruptcy
proceedings. MidAmerican Energy and Enron agreed on a settlement of their
bankruptcy claims, including the coal purchase contract, and received the final
required approval in June 2003. Accordingly, MidAmerican Energy recognized the
reduced costs associated with the collateral for the settlement of the coal
purchase contract. The decrease in fuel costs due to the coal purchase contract
with Enron was partially offset by the Iowa portion of $5.1 million of expense
related to the write-off of the remaining value of failed nuclear fuel
assemblies at Quad Cities Station.
Electric revenues from the recovery of energy efficiency program costs increased
$1.1 million compared to the first nine months of 2002. Changes in these
revenues are substantially matched with corresponding changes in other operating
expenses.
MidAmerican Energy's gross margin on electric wholesale sales increased $3.1
million for the first nine months of 2003 compared to the first nine months of
2002 due to an increase in prices, partially offset by a decrease in sales
volumes.
-26-
Regulated Gas Gross Margin
- --------------------------
Nine Months
Ended September 30,
-------------------
2003 2002
------ ------
(In millions)
Operating revenues ......... $679.7 $442.3
Less cost of gas sold....... 517.4 297.2
------ ------
Gas gross margin ......... $162.3 $145.1
====== ======
Regulated gas revenues include purchased gas adjustment clauses through which
MidAmerican Energy is allowed to recover the cost of gas sold from its retail
gas utility customers. An 83.9% increase in the average per-unit cost of gas for
the nine-month period ended September 30, 2003, compared to the same period in
2002, increased revenues and cost of gas sold.
Gas gross margin for the nine months ended September 30, 2003, increased $17.2
million compared to the nine months ended September 30, 2002.
Increases in retail gas rates that largely took effect subsequent to the second
quarter of 2002 improved gas margin by $12.6 million compared to the first nine
months of 2002. In addition to the rate increases discussed in the three-month
"Regulated Gas Gross Margin" section, on June 12, 2002, the IUB issued an order
granting an interim rate increase of approximately $13.8 million annually,
effective immediately. Also, on February 20, 2002, the South Dakota Public
Utilities Commission approved a settlement agreement allowing increased natural
gas rates of $3.1 million annually, effective immediately.
The effect of colder temperature conditions during the first quarter of 2003
compared to the same quarter in 2002 was partially offset by the effect of
milder temperature conditions in the second quarter of 2003 compared to the
second quarter of 2002. Accordingly, gas gross margin for the first nine months
of 2003 increased approximately $6.8 million compared to the first nine months
of 2002. A $2.2 million loss on a weather hedge partially offset the increase
due to temperature conditions. Other usage factors not dependent on weather
decreased gas margin by $5.2 million compared to the first nine months of 2002.
Total natural gas retail sales volumes increased 8.9%.
Gas gross margin increased compared to the first nine months of 2002 due to a
$2.0 million increase in revenues from the recovery of energy efficiency costs
and a $2.7 million increase in revenues from gas transported.
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for the first nine months of 2003 decreased
$37.0 million compared to the first nine months of 2002 due to a $57.8 million
decrease in costs related to Cooper Nuclear Station. Cooper Nuclear Station
costs are now classified differently on the statement of income as a result of
the restructuring of the related contract. Refer to the three-month discussion
of regulated operating expenses for additional comments on the restructuring of
the contract.
The decrease in other operating expenses due to Cooper Nuclear Station costs was
partially offset by increases totaling $14.3 million related to employee costs
for compensation, health care costs, and pension and other postretirement costs;
and by a $3.4 million increase in electric distribution costs and a $3.0 million
increase in energy efficiency program costs.
Maintenance expenses increased $13.0 million compared to the first nine months
of 2002 due principally to a $6.1 million increase in fossil fuel generation
maintenance and a $3.2 million increase in maintenance costs at Quad Cities
Station.
Depreciation and amortization expense decreased $4.6 million compared to the
first nine months of 2002 due to a $14.0 million decrease in regulatory expense
related to the Iowa revenue sharing arrangement. The decrease was
-27-
partially offset by increases in utility plant depreciation and in amortization
related to an Illinois revenue sharing arrangement. Additionally, amortization
for the first nine months of 2002 includes a gain related to the restructuring
of the Cooper Nuclear Station contract in 2002. Refer to the "Legislative and
Utility Regulatory Matters" section for an explanation of these revenue sharing
arrangements.
Property and other taxes increased $3.4 million due primarily to an increase in
property taxes as a result of higher levels of electricity generated and
delivered during the measurement period. Iowa law provides for property taxes
for electric and gas utilities to be based predominantly on energy consumption.
Nonregulated Operating Revenues and Operating Expenses
- ------------------------------------------------------
Nine Months
Ended September 30,
-------------------
2003 2002
------ ------
(In millions)
MidAmerican Energy -
Nonregulated operating revenues .... $180.6 $126.9
Less nonregulated cost of sales .... 156.8 105.8
------ ------
Nonregulated gross margin .......... $ 23.8 $ 21.1
====== ======
MidAmerican Funding Consolidated -
Nonregulated operating revenues .... $183.1 $130.8
Less nonregulated cost of sales .... 157.3 106.6
------ ------
Nonregulated gross margin .......... $ 25.8 $ 24.2
====== ======
MidAmerican Energy -
All gains and losses on MidAmerican Energy's energy trading contracts are now
reported net on the statement of income in accordance with Emerging Issues Task
Force ("EITF") Issue No. 02-3. MidAmerican Energy's nonregulated wholesale gas
and electric marketing activities qualify as "energy trading" contracts under
the guidance of EITF Issue No. 02-3.
MidAmerican Energy's nonregulated gross margin for the first nine months of 2003
increased $2.7 million compared to the first nine months of 2002.
Nonregulated revenues and cost of sales consist substantially of nonregulated
retail natural gas marketing operations. Gross margin for MidAmerican Energy's
nonregulated retail natural gas operations increased $1.6 million for the first
nine months of 2003. The improvement in gross margin reflects increases in
margin per unit sold and in sales volumes. An increase in related revenues was
due principally to an increase in the average price per unit sold, which
reflects a 57.5% increase in the average cost of gas and accounts for $43.7
million of the increase in nonregulated retail natural gas revenues.
Electric retail customers in Illinois, except for those served by electric
cooperatives and municipalities, are allowed to select their electric power
supplier. Related revenues increased $4.9 million to $48.4 million for the first
nine months of 2003 while cost of sales increased $3.8 million to $39.7 million.
Additionally, nonregulated revenues include income from sharing arrangements
under regulated natural gas tariffs. Related income totaled $4.4 million for the
first nine months of 2003 and $2.6 million for the first nine months of 2002.
-28-
Interest and Dividend Income
- ----------------------------
MidAmerican Energy -
The decrease in interest and dividend income was due principally to a $3.5
million decrease in interest income on a note receivable related to MidAmerican
Energy's accounts receivable sales arrangement, which terminated in October
2002.
MidAmerican Funding -
Interest income related to notes receivable with MidAmerican Funding's parent
company decreased $4.1 million compared to the first nine months of 2002. The
related note receivable balances have been zero throughout 2003. Additionally,
the first nine months of 2002 include $5.0 million from the settlement of an
investment in a communications company.
Marketable Securities Gains and Losses, Net
- -------------------------------------------
MidAmerican Funding -
Net losses on marketable securities decreased compared to the first nine months
of 2002 due primarily to $4.4 million of losses recorded in the 2002 period
related to other-than-temporary declines in MidAmerican Funding's
available-for-sale common stock investments.
Other Income and Other Expense
- ------------------------------
MidAmerican Energy -
Other income from net earnings related to the cash surrender value of
corporate-owned life insurance totaled $3.7 million for the first nine months of
2003 compared to a loss of $0.6 million for the first nine months of 2002. Other
income for the capitalized allowance on equity funds used during construction
totaled $8.7 million in the first nine months of 2003 compared to $5.4 million
in the first nine months of 2002.
Other income for the first nine months of 2002 reflects $1.2 million of
subservicer fee income related to accounts receivable sold to MidAmerican Energy
Funding Company. The related arrangement terminated in October 2002.
Additionally, the 2002 nine-month period includes a $0.9 million gain on the
sale of utility property.
Other expense includes a discount on MidAmerican Energy's accounts receivable
sold to MidAmerican Energy Funding Corporation. The discount totaled $5.8
million for the first nine months of 2002.
MidAmerican Funding -
Other income for the first nine months of 2003 and 2002 includes $1.8 million
and $6.5 million, respectively, of income from equity method investments. Equity
income for 2002 includes $5.3 million of income for a distribution of common
stock held by a venture capital fund investment.
Other income for the first nine months of 2002 reflects a $2.6 million gain on
the sale of an investment in a communications company.
Other expense for the first nine months of 2003 includes a $2.1 million
write-down for the impairment of a special purpose fund investment. The first
nine months of 2002 includes a $5.1 million loss for the impairment of an equity
method investment and losses totaling $1.5 million for impairments on three
venture capital investments.
-29-
Fixed Charges and Preferred Dividends
- -------------------------------------
The increase in interest on long-term debt was due to interest on $400 million
of MidAmerican Energy notes issued in February 2002 and another $275 million
issued in January 2003. The increase was partially offset by the effect of debt
maturities in 2002 and 2003.
MidAmerican Energy's preferred dividends of its subsidiary trust decreased due
to the reacquisition of all of the related preferred securities on March 11,
2002. In addition, preferred dividends decreased due to the reacquisition of
preferred securities in May 2002.
-30-
LIQUIDITY AND CAPITAL RESOURCES
MidAmerican Energy and MidAmerican Funding have available a variety of sources
of liquidity and capital resources, both internal and external. These resources
provide funds required for current operations, construction expenditures,
dividends, debt retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy's
net cash provided by operating activities was $437.8 million and $397.4 million
for the nine months ended September 30, 2003 and 2002, respectively. MidAmerican
Funding's net cash provided by operating activities was $407.7 million and
$360.1 million for the nine months ended September 30, 2003 and 2002,
respectively.
Investing Activities and Plans
- ------------------------------
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first nine months of 2003, utility construction
expenditures totaled $226.7 million, including allowance for funds used during
construction and Quad Cities Station nuclear fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $366 million for 2003. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2007, MidAmerican Energy plans to develop and construct three electric
generating projects in Iowa. The projects would provide service to regulated
retail electricity customers and, subject to regulatory approvals, be included
in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may
also be made from the projects to the extent the power is not needed for
regulated retail service. MidAmerican Energy expects to invest approximately
$1.44 billion in the three projects.
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, plus allowance for funds used during construction.
MidAmerican Energy will own 100% of the plant and operate it. Commercial
operation of the simple cycle mode began on May 5, 2003. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in 327 megawatts
("MW") of accredited capacity. The combined cycle operation is expected to
commence in December 2004, resulting in an expected additional 190 MW of
accredited capacity.
The second project is currently under construction and will be a 790-MW (based
on expected accreditation) super-critical-temperature, low-sulfur coal-fired
plant. MidAmerican Energy will operate the plant and own approximately 475 MW of
the plant. MidAmerican Energy expects to invest approximately $759 million in
the project, plus allowance for funds used during construction. Municipal,
cooperative and public power utilities will own the remainder, which is a
typical ownership arrangement for large base-load plants in Iowa. On May 29,
2003, the IUB issued an order that approves the rate