UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from
____________ to___________.
Commission File No. 0-25551
MIDAMERICAN ENERGY HOLDINGS COMPANY
(Exact name of registrant as specified in its charter)
Iowa 94-2213782
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
666 Grand Avenue, Des Moines, IA 50309
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (515) 242-4300
--------------
Indicate by check mark whether the Registrant (1) has 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 Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
All of the shares of MidAmerican Energy Holdings Company are held by a limited
group of private investors. As of August 12, 2002, 9,281,087 shares of common
stock were outstanding.
MIDAMERICAN ENERGY HOLDINGS COMPANY
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Page No.
ITEM 1. Financial Statements
Independent Accountants' Report.............................. 3
Consolidated Balance Sheets.................................. 4
Consolidated Statements of Operations........................ 5
Consolidated Statements of Cash Flows........................ 6
Notes to Consolidated Financial Statements................... 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 18
Part II: Other Information
ITEM 1. Legal Proceedings............................................ 33
ITEM 2. Changes in Securities and Use of Proceeds.................... 33
ITEM 3. Defaults on Senior Securities................................ 33
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 33
ITEM 5. Other Information............................................ 33
ITEM 6. Exhibits and Reports on Form 8-K............................. 33
Signatures ............................................................. 34
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
MidAmerican Energy Holdings Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Holdings Company and subsidiaries (the Company) as of June 30, 2002, and
the related consolidated statements of operations for the three-month and
six-month periods ended June 30, 2002 and 2001 and the related consolidated
statements of cash flows for the six-month periods ended June 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2001,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated January 17, 2002 (March 27, 2002 as to Notes 20.A. and 21), we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2001 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
August 2, 2002
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of
------------------------------------
June 30, December 31,
2002 2001
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 896,365 $ 386,745
Restricted cash and short-term investments 47,113 30,565
Accounts receivable 446,719 310,030
Inventories 117,494 135,822
Other current assets 137,092 106,124
----------- -----------
Total current assets 1,644,783 969,286
Property, plant, contracts and equipment, net 7,495,959 6,537,371
Excess of cost over fair value of net assets acquired, net 3,803,665 3,638,546
Regulatory assets 343,957 221,120
Long-term restricted cash and investments 8,023 24,207
Other investments 450,568 174,185
Equity investments 265,467 261,432
Deferred charges and other assets 738,558 800,505
----------- -----------
Total Assets $14,750,980 $12,626,652
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable $ 280,877 $ 266,027
Accrued interest 175,335 130,569
Accrued taxes 100,730 88,973
Other accrued liabilities 452,727 308,924
Short-term debt 244,906 256,012
Current portion of long-term debt 435,990 317,180
----------- -----------
Total current liabilities 1,690,565 1,367,685
Other long-term accrued liabilities 527,853 537,495
Parent company debt 1,836,926 1,834,498
Subsidiary and project debt 5,685,976 4,754,811
Deferred income taxes 1,353,779 1,284,268
----------- ------------
Total Liabilities 11,095,099 9,778,757
----------- ------------
Deferred income 83,919 85,917
Minority interest 45,875 44,477
Preferred securities of subsidiaries 93,914 121,183
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts 1,112,231 788,151
Subsidiary-obligated mandatorily redeemable
preferred securities of subsidiary trusts - 100,000
Commitments and contingencies (Note 12)
Shareholders' Equity:
Zero coupon convertible preferred stock - authorized 50,000 shares, no par
value, 41,263 and 34,563 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively - -
Common stock - authorized 60,000 shares, no par value, 9,281 shares
issued and outstanding - -
Additional paid-in capital 1,955,888 1,553,073
Retained earnings 375,889 223,926
Accumulated other comprehensive income (11,835) (68,832)
----------- ------------
Total Shareholders' Equity 2,319,942 1,708,167
----------- -----------
Total Liabilities and Shareholders' Equity $14,750,980 $12,626,652
=========== ===========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
Revenues:
Operating revenue $1,209,755 $1,238,747 $2,289,649 $2,937,611
Income on equity investments 4,804 10,183 18,924 17,290
Interest and other income 68,929 28,003 82,634 38,581
---------- ---------- ---------- ----------
Total revenues 1,283,488 1,276,933 2,391,207 2,993,482
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales 516,248 685,098 963,673 1,794,666
Operating expense 325,943 284,406 605,610 550,909
Depreciation and amortization 130,925 132,251 257,169 272,567
Interest expense 153,248 120,676 294,548 242,354
Less interest capitalized (8,329) (23,646) (14,976) (52,133)
---------- ---------- ---------- ----------
Total costs and expenses 1,118,035 1,198,785 2,106,024 2,808,363
---------- ---------- ---------- ----------
Income before provision for income taxes 165,453 78,148 285,183 185,119
Provision for income taxes 24,308 19,870 53,438 54,215
---------- ---------- ---------- -----------
Income before minority interest 141,145 58,278 231,745 130,904
Minority interest 33,971 27,445 59,822 52,156
---------- ---------- --------- ----------
Income before cumulative effect of change in
accounting principle 107,174 30,833 171,923 78,748
Cumulative effect of change in accounting
principle, net of tax - - - (4,604)
---------- --------- --------- ---------
Net income available to common shareholders $ 107,174 $ 30,833 $ 171,923 $ 74,144
========== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30
2002 2001
----------------------- ---------------------
Cash flows from operating activities:
Net income...................................................... $ 171,923 $ 74,144
Adjustments to reconcile to net cash flows from
operating activities:
Cumulative effect of change in accounting principle, net of tax. - 4,604
Gains on disposals.............................................. (54,120) (12,655)
Depreciation and amortization................................... 257,169 222,578
Amortization of excess of cost over fair value of
net assets acquired.......................................... - 49,989
Amortization of deferred financing costs and other costs........ 18,431 10,799
Provision for deferred income taxes............................. 21,084 34,885
Undistributed earnings on equity investments.................... (7,439) (17,290)
Changes in other items:
Accounts receivable.......................................... (53,638) 295,365
Other current assets......................................... 29,684 20,871
Accounts payable and accrued liabilities..................... (5,045) (298,307)
Accrued interest............................................. 65,526 23,941
Accrued taxes................................................ 5,911 (18,791)
Deferred income.............................................. (998) 5,219
------------ -----------
Net cash flows from operating activities........................ 448,488 395,352
----------- -----------
Cash flows from investing activities:
Acquisition of Kern River, net of cash acquired................. (414,594) -
Purchase of convertible preferred securities.................... (275,000) -
Capital expenditures relating to operating projects............. (198,153) (151,553)
Construction and other development costs........................ (181,106) (83,496)
Proceeds from sale of assets.................................... 199,247 10,500
Acquisition of realty companies, net of cash acquired........... (84,061) (29,963)
Change in restricted investments................................ 16,184 46,173
Change in other assets.......................................... 34,931 17,180
----------- -----------
Net cash flows from investing activities........................ (902,552) (191,159)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock........... 402,000 -
Proceeds from issuance of trust preferred securities............ 323,000 -
Net repayment of short-term subsidiary debt..................... (191,312) (88,564)
Net proceeds from (repayment of) short-term parent company debt. 56,275 (51,000)
Repayment of subsidiary and project debt........................ (56,022) (250,937)
Proceeds from subsidiary and project debt....................... 588,344 200,000
Redemption of preferred securities of subsidiaries.............. (127,319) (13,915)
Change in restricted investments-debt service................... (16,548) 5,215
Other........................................................... (44,038) (2,073)
----------- -----------
Net cash flows from financing activities........................ 934,380 (201,274)
----------- -----------
Effect of exchange rate changes on cash......................... 29,304 244
----------- -----------
Net increase in cash and cash equivalents....................... 509,620 3,163
Cash and cash equivalents at beginning of period................ 386,745 38,152
----------- -----------
Cash and cash equivalents at end of period...................... $ 896,365 $ 41,315
=========== ===========
Interest paid, net of amount capitalized........................ $ 236,285 $ 167,370
=========== ===========
Income taxes paid............................................... $ 29,737 $ 52,114
============ ===========
The accompanying notes are an integral part of these financial statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
In the opinion of management of MidAmerican Energy Holdings Company and
subsidiaries (the "Company"), the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position as of June 30, 2002 and the
results of operations for the three months and six months ended June 30, 2002
and 2001 and the related consolidated statements of cash flows for the six
months ended June 30, 2002 and 2001. The results of operations for the three
months and six months ended June 30, 2002 and 2001 are not necessarily
indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Other investments and corporate
joint ventures, where the Company has the ability to exercise significant
influence, are accounted for under the equity method. Investments where the
Company's ability to influence is limited are accounted for under the cost
method of accounting.
Certain amounts in the 2001 financial statements and supporting note disclosures
have been reclassified to conform to the 2002 presentation. Such
reclassification did not impact previously reported net income or retained
earnings.
Although the Company 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 the Company's latest Annual Report on Form 10-K.
2. Kern River Acquisition
On March 27, 2002, the Company closed on a definitive agreement with The
Williams Companies, Inc. ("Williams") to acquire Williams' Kern River Gas
Transmission Company ("Kern River"), a 926-mile interstate pipeline transporting
Rocky Mountain and Canadian natural gas to markets in California, Nevada and
Utah.
The Kern River pipeline is an important route for the transmission of natural
gas from the vast reserves in the Rocky Mountain states to the rapidly growing
markets in Utah, Nevada and California. Constructed in 1992, the Kern River
pipeline extends 926 miles from Opal, Wyoming, to the San Joaquin Valley near
Bakersfield, California, and has a design capacity of 845 million cubic feet per
day.
The Company paid $422.3 million, including transaction costs and working capital
adjustments, for Kern River's gas pipeline business. Additionally, the Company
assumed $505 million of debt. The acquisition has been accounted for as a
purchase business combination. The Company is in the process of completing the
allocation of the purchase price to the assets and liabilities acquired. The
results of operations for Kern River are included in the Company's results
beginning March 27, 2002.
In connection with the acquisition of Kern River, the Company issued $323
million of 11% Company-obligated mandatorily redeemable preferred securities of
subsidiary trust due March 12, 2012 with scheduled principal payments beginning
in 2005 and $127 million of no par, zero coupon convertible preferred stock to
Berkshire Hathaway. Each share of preferred stock is convertible at the option
of the holder into one share of the Company's common stock subject to certain
adjustments as described in the Company's Amended and Restated Articles of
Incorporation.
The recognition of excess of cost over fair value of net assets acquired
resulted from various attributes of Kern River's operations and business in
general. These attributes include, but are not limited to:
o Opportunities for expansion;
o High credit quality shippers contracting with Kern River;
o Kern River's strong competitive position;
o Exceptional operating track record and state-of-the-art technology;
o Strong demand for gas in the Western markets; and
o An ample supply of low-cost gas.
The following pro forma financial information of the Company represents the
unaudited pro forma results of operations as if the Kern River acquisition, the
related financing and the Yorkshire Swap, as described in Note 3 of Notes to
Consolidated Financial Statements in the Annual Report on Form 10-K for the year
ended December 31, 2001, had occurred at the beginning of each year. These pro
forma results have been prepared for comparative purposes only and do not
profess to be indicative of the results of operations which would have been
achieved had these transactions been completed at the beginning of each year,
nor are the results indicative of the Company's future results of operations (in
thousands).
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue................... $1,283,488 $1,129,376 $2,430,983 $2,515,998
Income before cumulative
effect of change
in accounting principle... 107,174 41,016 176,041 79,470
Net income available to
common shareholders....... 107,174 41,016 176,041 74,866
3. CalEnergy Gas Disposal
In May 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company,
executed the sale of several of its U.K. natural gas assets to Gaz de France for
(pound)137.0 million (approximately $200 million). As part of the sale, Gaz de
France acquired four natural gas-producing fields located in the southern basin
of the U.K. North Sea. Those fields included Anglia, Johnston, Schooner and
Windermere. The transaction also included the sale of rights in four gas fields
(in development/construction) and three exploration blocks owned by CalEnergy
Gas. As a result of the sale, the Company recognized pre-tax and after-tax
income of $53.3 million and $19.9 million, respectively, which includes a write
off of non-deductible goodwill of $49.6 million.
4. Property, Plant, Contracts and Equipment, Net
Property, plant, contracts and equipment, net comprise the following (in
thousands):
June 30, December 31,
2002 2001
------------ ------------
Operating assets:
Utility generation, distribution and transmission
systems ................................................ $8,552,854 $7,574,339
Independent power plants ................................. 1,404,749 1,402,102
Utility non-operational assets............................ 365,659 354,366
Power sales agreements.................................... 44,339 48,185
Realty company assets..................................... 67,239 51,150
Other assets.............................................. 54,116 53,876
----------- ----------
Total operating assets.................................... 10,488,956 9,484,018
Less accumulated depreciation and amortization............ (3,871,571) (3,650,875)
---------- ----------
Net operating assets...................................... 6,617,385 5,833,143
Mineral and gas reserves and exploration assets, net...... 276,316 387,697
Construction in progress:
Zinc recovery project................................ 192,849 163,366
Utility generation, distribution and transmission
systems...................................... 197,442 149,225
Natural gas pipeline expansion....................... 206,270 -
Other................................................ 5,697 3,940
---------- ----------
Total $7,495,959 $6,537,371
========== ==========
Zinc Recovery Project
CalEnergy Minerals LLC is constructing the Zinc Recovery Project. The Zinc
Recovery Project is designed to have a capacity of approximately 30,000 metric
tons per year and is scheduled to commence commercial operations in 2002. Total
project costs of the Zinc Recovery Project are expected to be approximately
$224.9 million, net of damages, which is being funded by $140.5 million of debt
and the balance from funds provided by the parent company. The Zinc Recovery
Project has incurred $192.8 million, net of damages, of such costs through June
30, 2002.
Utility generation, distribution and transmission systems
Through 2007, MidAmerican Energy plans to develop and construct two electric
generating plants in Iowa. Participation by others in a portion of the second
plant is being discussed. Excluding amounts related to any others who may
participate in the second plant, MidAmerican Energy expects to invest
approximately $1.2 billion in the two plants, including the cost of related
transmission facilities and allowance for funds used during construction. The
two plants may provide approximately 950 megawatts of generating capacity for
MidAmerican Energy depending on management's on-going assessment of needs and
related factors.
The first project is a 500-megawatt natural gas-fired combined cycle unit with
an estimated cost of $415 million. MidAmerican Energy has received a certificate
from the Iowa Utilities Board allowing it to construct the plant. In accordance
with an Iowa law passed in 2001, MidAmerican Energy has sought Iowa Utilities
Board approval for the ratemaking principles that will govern recovery of costs
related to the construction of the plant. On May 29, 2002, the Iowa Utilities
Board issued an order that provides the ratemaking principles for the gas-fired
plant. As a result of that order, MidAmerican Energy is proceeding with
construction of the plant. It is anticipated that the first phase of the project
will be completed in 2003 with the remainder being completed in 2005.
MidAmerican Energy expects to make filings for certificate and approval of
ratemaking principles for the second project during the third quarter of 2002.
Kern River Expansion
On July 17, 2002, Kern River received approval from FERC to construct, own and
operate a major expansion to its pipeline system (the "Expansion Project"). The
Expansion Project will loop most of Kern River's existing mainline, construct
three new compressor stations and upgrade or modify Kern River's six existing
compressor stations. The Expansion Project, which is expected to be completed
and operational by May 2003, will increase Kern River's capacity by
approximately 900 MMcf per day. Service will be provided under long-term
contracts subject to incremental rates. The estimated cost of the expansion is
approximately $1.2 billion.
On June 21, 2002, Kern River closed on a bank loan facility providing for
aggregate loans of up to $875 million to be used for the construction of the
Kern River Expansion Project. The facility, which matures 15 years after the
Expansion Project commences operation has a variable interest rate which
increases over the term of the facility from 1.375% to 4.5% over LIBOR.
5. Other Investments
On March 27, 2002, the Company invested $275 million in Williams in exchange for
shares of 9-7/8 percent cumulative convertible preferred stock of Williams.
Dividends are scheduled to be received quarterly, commencing July 1, 2002. This
investment is accounted for under the cost method. The Company is aware that
there have been public announcements that Williams' financial condition has
deteriorated as a result of reduced liquidity. Williams' senior unsecured debt
obligations are currently rated B1 by Moody's, B by Standard & Poor's and B- by
Fitch. The Company has not recorded an impairment on this investment as of June
30, 2002 and is monitoring the situation.
In connection with this investment, the Company issued $275 million of no par,
zero coupon convertible preferred stock to Berkshire Hathaway.
6. Teesside Power Limited Restructuring
CE Electric UK Funding, an indirect wholly owned subsidiary of the Company, has
a 15.4% interest in Teesside Power Limited ("TPL"). TPL owns and operates an
1875MW combined cycle gas-fired power plant. In May 2002, TPL executed a
restructuring and stabilization agreement with its lenders. The contract
included an agreement between TPL and its shareholders with respect to the
waiver of consortium relief. Shareholders in TPL had previously utilized TPL's
taxable losses with an obligation to reimburse TPL later in the project's life.
In May 2002, CE Electric UK Funding released $35.7 million due to the repayment
obligation being waived which is reflected as a current tax benefit in the
provision for income taxes.
7. Real Estate Company Acquisition
In February 2002, HomeServices completed its purchase of a majority interest in
Prudential California Realty. The cash purchase price of Prudential California
Realty was approximately $71 million net of cash acquired, with an option to
purchase the remaining interests. Additionally, HomeServices is obligated to pay
a maximum earnout of $18.5 million calculated based on 2002 financial
performance measures. The purchase price was financed using MidAmerican Energy
Holdings Company's corporate revolver for $40 million which was contributed to
HomeServices as equity and the remaining funds were borrowed from available
credit under the HomeServices' $65 million revolving credit facility. It is
anticipated that the borrowings in connection with this acquisition will be
repaid from HomeServices' generated funds. The Company is in the process of
completing the allocation of the purchase price to the assets and liabilities
acquired. On May 1, 2002, HomeServices acquired a 50% interest in Prudential
California Realty's mortgage operations.
8. Debt issuance and redemptions
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% medium-term
notes due in 2031. The proceeds are being used to refinance existing debt and
preferred securities and for other corporate purposes. On March 11, 2002
MidAmerican Energy redeemed all $100 million of its 7.98% MidAmerican-obligated
preferred securities of subsidiary trust at 100% of the principal amount plus
accrued interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.7 million of its $7.80
series of preferred securities. The first $13.3 million of preferred securities
were redeemed at 100% of the principal amount plus accrued dividends, and the
remaining $13.4 million was redeemed at 103.9% of the principal amount plus
accrued dividends.
9. Accounting Policy Change
Effective January 1, 2001, the Company changed its accounting policy regarding
major maintenance and repairs for nonregulated gas projects, nonregulated plant
overhaul costs and geothermal well rework costs to the direct expense method
from the former policy of monthly accruals based on long-term scheduled
maintenance plans for the gas projects and deferral and amortization of plant
overhaul costs and geothermal well rework costs over the estimated useful lives.
The cumulative effect of the change in accounting principle for 2001 was $4.6
million, net of taxes of $.7 million.
10. Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which
dictates the accounting for acquired goodwill and other intangible assets. SFAS
No. 142 requires that amortization of goodwill and indefinite-lived intangible
assets be discontinued and that entities disclose net income for prior periods
adjusted to exclude such amortization and related income tax effects, as well as
a reconciliation from the originally reported net income to the adjusted net
income. The Company's related amortization consists of goodwill amortization and
the related income tax effect. Following is a reconciliation of net income as
originally reported for the periods ended June 30, 2002 and 2001, to adjusted
net income (in thousands):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income as originally reported...... $107,174 $ 30,833 $171,923 $ 74,144
Goodwill amortization.................. - 25,035 - 49,989
Income tax benefit..................... - (526) - (1,001)
-------- -------- -------- --------
Net income as adjusted................. $107,174 $ 55,342 $171,923 $123,132
======== ======== ======== ========
In accordance with SFAS No. 142, the Company has determined its reporting units
and has completed the initial impairment testing of goodwill primarily using a
discounted cash flow methodology. No impairment was indicated as a result of the
initial impairment testing. See Note 11 for allocation of goodwill to reporting
units.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which addresses the
accounting for legal obligations associated with the retirement of tangible,
long-lived assets, and the associated asset retirement costs. This pronouncement
is effective for years beginning after June 15, 2002. The Company is evaluating
the impact that adoption of this standard will have on its consolidated
financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 on January 1, 2002 did not have any impact on the Company's
consolidated financial statements.
11. Comprehensive Income
The differences from net income to total comprehensive income for the Company
are due to foreign currency translation adjustments, unrealized holding gains
and losses of marketable securities during the periods, and the effective
portion of net gains and losses of derivative instruments classified as cash
flow hedges. Total comprehensive income for the six months ended June 30, 2001
includes a transition loss of $3.3 million related to the initial adoption of
SFAS No. 133. Total comprehensive income for the Company is shown in the table
below (in thousands).
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income................................ $107,174 $ 30,833 $171,923 $ 74,144
Other comprehensive income-
Foreign currency translation........... 109,983 (592) 81,468 (48,472)
Marketable securities, net of tax...... (1,511) 1,629 (3,669) 1,867
Cash flow hedges, net of tax........... (30,621) 58,049 (20,802) 36,495
-------- --------- ------- --------
Total comprehensive income................ $185,025 $ 89,919 $228,920 $ 64,034
======== ======== ======== =========
12. Commitments and Contingencies
A. Financial Condition of Edison
Southern California Edison Company ("Edison"), a wholly owned subsidiary of
Edison International, is a public utility primarily engaged in the business of
supplying electric energy to retail customers in Central and Southern
California, excluding Los Angeles. Due to reduced liquidity, Edison failed to
pay approximately $119 million due under the power purchase agreement with CE
Generation affiliates for power delivered in the fourth quarter 2000 and the
first quarter 2001. Due to Edison's failure to pay contractual obligations, the
CE Generation affiliates had established an allowance for doubtful accounts of
approximately $21 million as of December 31, 2001. The final payment was
received March 1, 2002. Following the receipt of Edison's payment of past due
balances, the CE Generation affiliates released the remaining allowance for
doubtful accounts.
B. Casecnan Construction Arbitration
On May 7, 1997, CE Casecnan entered into a fixed-price, date certain, turnkey
engineering, procurement and construction contract to complete the construction
of the Casecnan Project (the "Construction Contract"). The work under the
Construction Contract was conducted by a consortium consisting of Cooperativa
Muratori Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa., working
together with Siemens A.G., Sulzer Hydro Ltd., Black & Veatch and Colenco Power
Engineering Ltd. (collectively, the "Contractor").
On November 20, 1999, the Construction Contract was amended to extend the
Guaranteed Substantial Completion Date for the Casecnan Project to March 31,
2001. This amendment was approved by the lenders' independent engineer under the
Casecnan Indenture. In January 2001, CE Casecnan received a new working schedule
from the Contractor that showed a completion date of August 31, 2001. The delay
in completion was attributable in part to the collapse in December 2000 of the
Casecnan Project's partially completed vertical surge shaft and the need to
drill a replacement surge shaft.
Upon receipt of the working schedule, CE Casecnan sought and obtained from the
lender's independent engineer approval for a revised construction schedule under
the Casecnan Indenture. In connection with the revised schedule, MidAmerican
Energy Holdings Company agreed to make available up to $11.6 million of
additional funds under certain conditions pursuant to a Shareholder Support
Letter dated February 8, 2001 (Shareholder Support Letter). MidAmerican Energy
Holdings Company has fully satisfied its obligations under the Shareholder
Support Letter.
The receipt of the new working schedule did not change the Guaranteed
Substantial Completion Date under the Construction Contract, and the Contractor
was still contractually obligated either to complete the Casecnan Project by
March 31, 2001 or to pay liquidated damages for the delay in completion. As of
June 30, 2002, CE Casecnan has received approximately $6.0 million of liquidated
damages from demands made on the demand guarantees posted by Commerzbank of
behalf of the Contractor.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce seeking an extension of the Guaranteed
Substantial Completion Date by up to 153 days through August 31, 2001 resulting
from various alleged force majeure events. In its March 20, 2001 Supplement to
Request for Arbitration, the Contractor requested compensation for alleged
additional costs of approximately $4 million it incurred from the claimed force
majeure events to the extent it is unable to recover from its insurer. On April
20, 2001, the Contractor filed a further supplement seeking an additional
compensation for damages of approximately $62 million for the alleged force
majeure event (and geologic conditions) related to the collapse of the surge
shaft. The Contractor has alleged that the circumstances surrounding the placing
of the Casecnan Project into commercial operation on December 11, 2001 amounted
to a rescission of the Construction Contract and has filed a claim for
unspecified quantum meruit damages. CE Casecnan believes all such allegations
and claims are without merit and is vigorously contesting the Contractor's
claims. The arbitration is being conducted applying New York law and in
accordance with the rules of the International Chamber of Commerce. Although the
outcome of the arbitration, as with any litigious proceedings, is difficult to
access, CE Casecnan believes it will prevail and receive additional liquidated
damages in the arbitration.
On June 25, 2001, the arbitration tribunal temporarily enjoined CE Casecnan from
making calls on the demand guaranty posted by Banca di Roma in support of the
Contractor's obligations to CE Casecnan for delay liquidated damages. On April
26, 2002, CE Casecnan and the Contractor mutually agreed that no demands would
be made on the Banca di Roma demand guaranty except pursuant to an arbitration
award. Hearings on the force majeure claims were held in London from July 2 to
14, 2001, and hearings on the Contractor's April 20, 2001 supplement were held
from September 24 to October 3, 2001. Further hearings were held from January 21
to February 1, 2002 and additional hearings were held from March 14 to 19, 2002.
CE Casecnan is awaiting the arbitration tribunal's ruling.
C. Casecnan Shareholder Issue
Pursuant to the share ownership adjustment mechanism in the Casecnan Shareholder
Agreement, which is based upon pro forma financial projections of the Casecnan
Project prepared following commencement of commercial operations, the Company,
through its indirect wholly owned subsidiary CE Casecnan Ltd., has advised the
minority shareholder LaPrairie Group Contractors (International) Ltd. ("LPG"),
that the Company's ownership interest in CE Casecnan will increase to 100%. On
July 8, 2002, LPG filed a complaint in the Superior Court of the State of
California, City and County of San Francisco against, inter alia, CE Casecnan
Ltd. and MidAmerican Energy Holdings Company. In the complaint, LPG seeks
compensatory and punitive damages for alleged breaches of the Shareholder
Agreement and alleged breaches of fiduciary duties allegedly owed by the Company
and CE Casecnan Ltd. to LPG. The complaint also seeks injunctive relief against
all defendants and a declaratory judgment that LPG is entitled to maintain its
15% interest in Casecnan. The impact, if any, of this litigation on the Company
cannot be determined at this time.
D. Cooper Litigation
On July 23, 1997, Nebraska Public Power District ("NPPD") filed a complaint, in
the United States District Court for the District of Nebraska, naming
MidAmerican Energy as the defendant and seeking declaratory judgment as to
issues under the parties' long-term power purchase agreement for Cooper Nuclear
Station ("Cooper") capacity and energy.
The parties have settled the litigation with the execution of a Settlement
Agreement and Release that became effective on August 1, 2002. See footnote 13B
for discussion of the contract restructuring.
E. Kvaerner Arbitration
The Zinc Recovery Project was being constructed by Kvaerner U.S. Inc.
("Kvaerner") pursuant to a date certain, fixed-price, turnkey engineering,
procure, construct and manage contract (the "Zinc Recovery Project EPC
Contract"). On June 14, 2001, CalEnergy Minerals, LLC issued notices of default,
termination and demand for payment of damages to Kvaerner under the Zinc
Recovery Project EPC Contract due to failure to meet performance obligations. As
a result of Kvaerner's failure to pay monetary obligations under the Zinc
Recovery Project EPC Contract, CalEnergy Minerals, LLC drew $29.6 million under
the EPC Contract Letter of Credit ("LOC") on July 20, 2001 and claimed the
retainage and balance of the contract price. The LOC draw, retainage and balance
of the contract price have been accounted for as a reduction of the capitalized
costs of the project. CalEnergy Minerals, LLC has entered into a time and
materials reimbursable engineer, procure and construction management contract
with AMEC E&C Services, Inc. to complete the Zinc Recovery Project.
On May 23, 2002, following various discussions and legal filings, CalEnergy
Minerals, LLC and Kvaerner entered into a Settlement Agreement. Under the terms
of the agreement, CalEnergy Minerals, LLC retained the amounts drawn under the
LOC, the EPC retainage amounts and the EPC contract balance and will pay to
Kvaerner three equal installments of $2.25 million payable in January of 2003,
2004 and 2005.
F. Malitbog Arbitration
VGPC and PNOC-EDC have been negotiating with respect to certain disputes
concerning the Malitbog ECA but have been unable to reach a mutually acceptable
resolution. Accordingly, on October 16, 2000, VGPC commenced arbitration against
PNOC-EDC by serving it with a Notice of Arbitration and Statement of Claim (the
"Notice of Arbitration"). In the Notice of Arbitration, VGPC claimed that
PNOC-EDC breached the Malitbog ECA by improperly characterizing certain No Fault
Outages as Forced Outage Hours and then deducting them from the total number of
hours each month. On December 22, 2000, VGPC filed an Amended Statement of Claim
pursuant to which VGPC added a claim that PNOC-EDC breached the Malitbog ECA by
refusing to accept VGPC's specified Nominated Capacity for contract years July
25, 1999 to July 25, 2000, and July 25, 2000 to July 25, 2001. A Second Amended
Statement of Claim was filed on March 9, 2001 to add the Scheduled Maintenance
issue. VGPC intends to vigorously pursue its claims in this proceeding. Hearings
were conducted from June 24, 2002 to July 5, 2002 in Sydney, Australia, and the
Company expects a ruling on these hearings in the third quarter of 2002.
13. Subsequent Events
A. Northern Natural Gas Company Acquisition
On July 29, 2002 the Company announced that it had reached a definitive
agreement with Dynegy Inc. to acquire 100 percent ownership of Northern Natural
Gas Company for $928 million in cash and the assumption of $950 million in debt.
Northern Natural Gas is a 16,600-mile interstate pipeline stretching from
southwest Texas to the upper Midwest. With a design capacity of 4.4 billion
cubic feet of natural gas per day, Northern Natural Gas accesses natural gas
supply from many of the larger producing regions in North America including the
Rocky Mountains, Hugoton, Permian, Anadarko and Western Canadian basins. The
system provides transportation and storage services to approximately 70 utility
customers and numerous industrial customers in the upper Midwest.
Northern Natural Gas also provides cross-haul and grid transportation between
other interstate and intrastate pipelines in Permian, Anadarko, Hugoton and
Midwest areas. It operates three natural gas storage facilities with a capacity
of 59 billion cubic feet and two liquefied natural gas peaking units.
The acquisition is subject to Hart-Scott-Rodino clearance and is expected to
close in August 2002.
B. Cooper Contract Restructuring
On July 31, 2002, MidAmerican Energy and NPPD signed a Settlement Agreement and
Release on the restructuring of the power purchase contract for Cooper. Under
the terms of the Settlement Agreement and Release, MidAmerican Energy will pay
NPPD through December 31, 2004, a scheduled amount per unit for one-half of the
accredited capacity of Cooper and the greater of one-half the energy from Cooper
or a minimum guaranteed amount of energy representing 380 megawatts at an 85%
capacity factor for the respective hours in each year. NPPD also paid
MidAmerican Energy $39.1 million on August 1, 2002.
In December 2000, MidAmerican Energy ceased contributing decommissioning funds
to NPPD and maintained a separate fund for estimated Cooper decommissioning
costs. Through June 30, 2002, $18.3 million had been accrued and retained by
MidAmerican Energy in this separate fund. In conjunction with the contract
restructuring, MidAmerican Energy plans to recognize the $39.1 million cash
payment and the $18.3 million in decommissioning funds into income based on the
estimated energy expected to be received for the remainder of the contract.
Finally, both parties agreed to release each other from any and all claims, past
or present, each might have under the power purchase contract prior to being
restructured and file to dismiss the litigation currently pending in U.S.
District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD prior
to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed and
operating costs of Cooper, excluding depreciation but including debt service,
and MidAmerican Energy's share of the nuclear fuel cost, including Department of
Energy disposal fees, based on energy delivered. In addition, prior to December
2000, MidAmerican Energy contributed toward payment of one-half of Cooper's
project decommissioning costs based on an assumed 2004 shutdown of the plant.
C. Real Estate Company Acquisition
In August 2002, HomeServices entered into a contract to acquire RealtySouth in
Birmingham, Alabama for $23.9 million plus net working capital and certain other
adjustments. For the year ended December 31, 2001, RealtySouth and its
subsidiaries had revenue of approximately $60 million on 13,000 closed sides
representing $2.0 billion of sales volume.
11. Segment Information
The Company has identified six reportable operating segments principally based
on management structure: MidAmerican Energy (domestic utility operations), CE
Electric UK Funding (foreign utility operations), Kern River (domestic natural
gas pipeline operations), CalEnergy Generation-Domestic, CalEnergy
Generation-Foreign (primarily the Philippines), and HomeServices (real estate
operations). Information related to the Company's reportable operating segments
is shown below (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Operating Revenue: 2002 2001 2002 2001
---- ---- ---- ----
MidAmerican Energy............................... $ 554,315 $ 654,381 $1,167,492 $1,647,597
CE Electric UK Funding........................... 189,641 350,124 403,598 906,072
Kern River....................................... 44,983 - 47,181 -
CalEnergy Generation - Domestic.................. 8,805 6,155 13,910 7,043
CalEnergy Generation - Foreign................... 76,374 49,449 150,459 98,807
HomeServices..................................... 340,661 180,880 515,227 280,334
---------- ---------- ---------- ----------
Segment revenue.................................. 1,214,779 1,240,989 2,297,867 2,939,853
Corporate........................................ (5,024) (2,242) (8,218) (2,242)
---------- ---------- ---------- ----------
$1,209,755 $1,238,747 $2,289,649 $2,937,611
========== ========== ========== ==========
Income on equity investments:
MidAmerican Energy .............................. $ 680 $ 876 $ 5,976 $ 717
CalEnergy Generation - Domestic.................. 1,599 9,307 8,770 16,573
HomeServices..................................... 2,260 - 3,913 -
--------- ---------- ---------- ---------
Segment income on equity investments............. 4,539 10,183 18,659 17,290
Corporate........................................ 265 - 265 -
--------- ---------- ---------- ---------
$ 4,804 $ 10,183 $ 18,924 $ 17,290
========= ========== ========== =========
Depreciation and amortization:
MidAmerican Energy............................... $ 71,833 $ 70,330 $ 141,780 $ 154,243
CE Electric UK Funding........................... 28,745 34,347 58,810 65,922
Kern River....................................... 6,730 - 7,261 -
CalEnergy Generation - Domestic.................. 2,147 760 4,357 1,317
CalEnergy Generation - Foreign................... 21,868 16,600 44,264 33,178
HomeServices..................................... 5,315 5,332 12,313 8,411
---------- ---------- ---------- ---------
Segment depreciation and amortization............ 136,638 127,369 268,785 263,071
Corporate........................................ (5,713) 4,882 (11,616) 9,496
---------- ---------- ---------- ---------
$ 130,925 $ 132,251 $ 257,169 $ 272,567
========== ========== ========== =========
Interest expense, net:
MidAmerican Energy .............................. $ 30,483 $ 30,428 $ 59,269 $ 58,430
CE Electric UK Funding........................... 44,649 22,039 88,431 44,375
Kern River....................................... 9,015 - 9,529 -
CalEnergy Generation - Domestic.................. 5,017 674 10,035 837
CalEnergy Generation - Foreign................... 17,283 9,026 34,930 18,580
HomeServices..................................... 979 1,055 2,213 2,108
---------- ---------- ---------- ---------
Segment interest expense, net.................... 107,426 63,222 204,407 124,330
Corporate........................................ 37,493 33,808 75,165 65,891
---------- ---------- ---------- ---------
$ 144,919 $ 97,030 $ 279,572 $ 190,221
========== ========== =========== =========
Income (loss) before provision for income
taxes:
MidAmerican Energy.......................... $ 39,699 $ 46,717 $ 109,988 $ 123,895
CE Electric UK Funding...................... 96,288 19,842 157,255 87,287
Kern River.................................. 21,642 - 22,613 -
CalEnergy Generation - Domestic............. 623 10,015 (1,666) 16,589
CalEnergy Generation - Foreign.............. 33,101 22,730 63,794 45,573
HomeServices................................ 26,160 15,881 26,031 12,612
---------- ---------- ---------- ---------
Segment income before provision for income
taxes....................................... 217,513 115,185 378,015 285,956
Corporate................................... (52,060) (37,037) (92,832) (100,837)
---------- ---------- ---------- ---------
$ 165,453 $ 78,148 $ 285,183 $ 185,119
========== ========== ========== =========
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
Provision (benefit) for income taxes: 2002 2001 2002 2001
---- ---- ---- ----
MidAmerican Energy.......................... $ 15,564 $ 21,699 $ 45,003 $ 56,270
CE Electric UK Funding...................... (3,056) 7,102 15,576 27,707
Kern River.................................. 8,335 - 8,704 -
CalEnergy Generation - Domestic............. (398) (777) (4,162) (1,876)
CalEnergy Generation - Foreign.............. 6,728 2,356 12,681 7,189
HomeServices................................ 10,237 6,082 10,030 4,612
----------- ----------- ---------- ---------
Segment provision for income taxes.......... 37,410 36,462 87,832 93,902
Corporate................................... (13,102) (16,592) (34,394) (39,687)
------------ ----------- ----------- ---------
$ 24,308 $ 19,870 $ 53,438 $ 54,215
=========== =========== =========== =========
June 30, December 31,
2002 2001
------------ ---------------
Identifiable assets:
MidAmerican Energy........................ $ 6,136,879 $ 5,893,300
CE Electric UK Funding.................... 4,547,443 4,328,828
Kern River................................ 1,142,954 -
CalEnergy Generation - Domestic........... 900,529 871,952
CalEnergy Generation - Foreign............ 978,859 950,035
HomeServices.............................. 491,380 322,552
------------ ------------
Segment identifiable assets............... 14,198,044 12,366,667
Corporate................................. 552,936 259,985
------------ ------------
$ 14,750,980 $ 12,626,652
============ ============
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate" relate principally to the corporate functions including
administrative costs, corporate cash and related interest income, goodwill
amortization in 2001, intersegment eliminations, and fair value and goodwill
adjustments relating to acquisitions and disposals.
Excess of cost over fair value of net assets acquired, net:
CalEnergy
MidAmerican CE Electric Generation
Energy UK Funding Kern River - Domestic HomeServices Total
----------- ---------- ---------- ---------- ------------ -----
Goodwill at December 31,
2001..................... $2,148,859 $1,100,489 $ - $ 158,708 $ 230,490 $3,638,546
Acquisitions/purchase
price accounting
adjustments.............. - 38,341 50,120 - 87,473 175,934
Impairment losses........ - - - - - -
Goodwill written off
related to sale of
business unit............ - (49,587) - - - (49,587)
Translation adjustment... - 41,643 - - - 41,643
Other adjustments........ (1,776) (601) - (324) (170) (2,871)
---------- ---------- ---------- ---------- ---------- ----------
Goodwill at June 30, -
2002..................... $2,147,083 $1,130,285 $ 50,120 $ 158,384 $ 317,793 $3,803,665
========== ========== ========== ========== ========== ==========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-looking Statements
Certain information included in this report contains forward-looking statements
made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform
Act"). Such 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 the Company 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 Reform Act, the Company has
identified important factors that could cause actual results to differ
materially from such expectations, including development uncertainty, operating
uncertainty, acquisition uncertainty, uncertainties relating to doing business
outside of the United States, uncertainties relating to geothermal resources,
the financial condition of and relationships with customers and suppliers, the
availability and price of fuel and other inputs, uncertainties relating to
domestic and international economic and political conditions and uncertainties
regarding the impact of regulations, changes in government policy, environmental
policies, industry deregulation and competition. Reference is made to all of the
Company's SEC filings, including the Company's Report on Form 8-K dated March
26, 1999, incorporated herein by reference, for a description of such factors.
The Company assumes no responsibility to update forward-looking information
contained herein.
Business of MEHC
MidAmerican Energy Holdings Company (the "Company" or "MEHC"), is a United
States-based privately owned global energy company with publicly traded fixed
income securities that generates, distributes and supplies energy to utilities,
government entities, retail customers and other customers located throughout the
world. Through its subsidiaries, the Company is organized and managed on six
separate platforms: MidAmerican Energy, CE Electric UK Funding, Kern River,
CalEnergy Generation-Domestic, CalEnergy Generation - Foreign and HomeServices.
These platforms, with the exception of Kern River, are discussed in detail in
the Company's latest Annual Report on Form 10-K.
Kern River Gas Transmission Company
On March 27, 2002, the Company closed on a definitive agreement with The
Williams Companies, Inc. ("Williams"), to acquire Williams' Kern River Gas
Transmission Company ("Kern River"). Kern River owns and operates a 926-mile
interstate pipeline transporting Rocky Mountain and Canadian natural gas to
markets in California, Nevada and Utah. The existing firm Kern River pipeline
capacity is 100% contracted through 2011 and 84% through 2016. Kern River's
operations are regulated by the Federal Energy Regulatory Commission ("FERC").
Gas transported on the Kern River pipeline is used in enhanced oil recovery
operations in the heavy oil fields and other markets in California. Gas is also
transported to other natural gas consumers in Utah, southern Nevada and southern
California for use in the production of electricity, cogeneration of electricity
and steam and other applications.
The Kern River pipeline is comprised of 36-inch and 42-inch diameter steel pipe,
in two parts. The 707-mile section from its terminus in Opal, WY through the
Central Rocky Mountains area into Daggett, CA (the "Mainline") is owned entirely
by Kern River. The 219 mile section of pipeline from Daggett to Bakersfield, CA,
(the "Common Facilities") after including the addition of the 2002 expansion
facilities, will be jointly owned by Kern River (68%) and Mojave Pipeline
Company ("Mojave") (32%) as tenants-in-common. Kern River's ownership percentage
will increase pursuant to subsequent agreements in connection with completed and
proposed expansions. Mojave is a wholly-owned subsidiary of El Paso Natural Gas
Company. The Common Facilities has a current capacity of 1.245 billion cubic
feet per day.
Construction of the existing pipeline began on January 2, 1991 and was completed
in early 1992. Natural gas transportation began on February 15, 1992. Initial
Mainline design capacity was 700 MMcf/d, although the pipeline has operated in
excess of that level every year since 1993. Following the completion of several
recent expansion projects, the design capacity of the pipeline is currently 845
MMcf/d.
The existing Kern River pipeline incorporates eight compressor stations,
including five on the Mainline and one on the Common Facilities and two supply
area stations, and 62 metering stations, including 30 on the Mainline and 32 as
part of the Common Facilities.
Critical Accounting Policies
The preparation of financial statements and related documents in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Note 2 to the consolidated financial statements in the Company's latest
Annual Report on Form 10-K describes the significant accounting policies and
methods used in the preparation of the consolidated financial statements.
Estimates are used for, but not limited to, the accounting for revenue,
contingent liabilities and impairment of long-lived assets. Actual results could
differ from these estimates. The following critical accounting policies are
impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.
Revenue Recognition
Revenues are recorded based upon services rendered and electricity, gas and
steam delivered, distributed or supplied to the end of the period. Where there
is an over recovery of United Kingdom distribution business revenues against the
maximum regulated amount, revenues are deferred equivalent to the over recovered
amount. The deferred amount is deducted from revenue and included in other
liabilities. Where there is an under recovery, no anticipation of any potential
future recovery is made.
The Company also records unbilled revenues representing the estimated amounts
customers will be billed for services rendered between the meter reading dates
in a particular month and the end of that month. The unbilled revenues estimate
is reversed in the following month. To the extent the estimated amount differs
from that amount subsequently billed, the timing of revenues will be affected.
Accrued unbilled revenues are included in accounts receivable on the
consolidated balance sheets.
Revenues from the transportation of gas are recognized based on contractual
terms and the related transported volumes. Kern River is subject to FERC
regulations and, accordingly, certain revenues collected may be subject to
possible refunds upon final orders in pending rate cases. Kern River records
rate refund liabilities considering Kern River and other third party regulatory
proceedings, advice of counsel and estimated total exposure, as discounted and
risk weighted, as well as collection and other risks.
SFAS No. 71 - Accounting for the Effects of Certain Types of Regulation
MidAmerican Energy and Kern River prepare their financial statements in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 71, which differs in certain respects from the application of
generally accepted accounting principles ("GAAP") by non-regulated businesses.
In general, SFAS No. 71 recognizes that accounting for rate-regulated
enterprises should reflect the economic effects of regulation. As a result, a
regulated utility is required to defer the recognition of costs (a regulatory
asset) or the recognition of obligations (a regulatory liability) if it is
probable that, through the rate-making process, there will be a corresponding
increase or decrease in future rates. Accordingly, MidAmerican Energy and Kern
River have deferred certain costs, which will be amortized over various future
periods. To the extent that collection of such costs or payment of liability is
no longer probable as a result of changes in regulation, the associated
regulatory assets or liability is charged or credited to income.
A possible consequence of deregulation of the regulated energy industry is that
SFAS No. 71 may no longer apply. If portions of the Company's regulated energy
operations no longer meet the criteria of SFAS No. 71, the Company could be
required to write off the related regulatory assets and liabilities from its
balance sheet, and thus, a material adjustment to earnings in that period could
result if regulatory assets are not recovered in transition provisions of any
deregulation legislation.
The Company continues to evaluate the applicability of SFAS No. 71 to its
regulated energy operations and the recoverability of these assets and
liabilities through rates as there are on-going changes in the regulatory and
economic environment.
Impairment of Long-Lived Assets
The Company's long-lived assets consist primarily of property, plant and
equipment, goodwill and intangible assets that were acquired in business
acquisitions. The Company believes the useful lives assigned to the depreciable
assets, which range from 3 to 50 years, are reasonable.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Triggering events include a significant change in the extent or
manner in which long-lived assets are being used or in its physical condition,
in legal factors, or in the business climate that could affect the value of the
long-lived assets, including changes in regulation. The interpretation of such
events requires judgment from management as to whether such an event has
occurred and is required. If an event occurs that could affect the carrying
value of the asset and management does not identify it as triggering event,
future results of operations could significantly be affected.
Upon the occurrence of a triggering event, the carrying amount of a long-lived
asset is reviewed to assess whether the recoverable amount has declined below
its carrying amount. The recoverable amount is the estimated net future cash
flows that the Company expects to recover from the future use of the asset,
undiscounted and without interest, plus the asset's residual value on disposal.
Where the recoverable amount of the long-lived asset is less than the carrying
value, an impairment loss would be recognized to write down the asset to its
fair value which is based on discounted estimated cash flows from the future use
of the asset.
The estimated cash flows arising from future use of the asset that are used in
the impairment analysis requires judgment regarding what the Company would
expect to recover from future use of the asset. Any changes in the estimates of
cash flows arising from future use of the asset or the residual value of the
asset on disposal based on changes in the market conditions, changes in the use
of the assets, management's plans, the determination of the useful life of the
assets and technology change in the industry could significantly change the
calculation of the fair value or recoverable amount of the asset and the
resulting impairment loss, which could significantly affect the results of
operations.
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", which dictates the accounting for acquired goodwill and
other intangible assets. SFAS No. 142 requires that amortization of goodwill and
indefinite-lived intangible assets be discontinued. The Company has completed
the initial impairment testing of goodwill as required by SFAS No. 142 and no
impairment was indicated.
Contingent Liabilities
The Company establishes reserves for estimated loss contingencies when it is
management's assessment that a loss is probable and the amount of the loss can
be reasonably estimated. Revisions to contingent liabilities are reflected in
income in the period in which different facts or information become known or
circumstances change that affect the previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities are based upon
management's assumptions and estimates, advice of legal counsel or other third
parties regarding the probable outcomes of any matters. Should the outcomes
differ from the assumptions and estimates, revisions to the estimated reserves
for contingent liabilities would be required.
Results of Operations:
Operating revenue for the three months ended June 30, 2002 was $1,209.8 million
compared with $1,238.7 million for the same period in 2001, a decrease of 2.3%.
MidAmerican Energy operating revenue decreased for the three months ended June
30, 2002 to $554.3 million from $654.4 million for the same period in 2001,
primarily due to lower volumes and rates for regulated and non-regulated gas. CE
Electric UK Funding operating revenue decreased for the three months ended June
30, 2002 to $189.6 million from $350.1 million for the same period in 2001,
primarily due to the sale of Northern Supply in September 2001, partially offset
by Yorkshire distribution revenue. The remaining change in operating revenue
primarily relates to the increase of revenue at HomeServices of $159.8 million
primarily due to acquisitions in 2002 and late 2001 and the acquisition of Kern
River in March 2002 which accounted for $45.0 million of operating revenue.
Operating revenue for the six months ended June 30, 2002 was $2,289.6 million
compared with $2,937.6 million for the same period in 2001, a decrease of 22.1%.
MidAmerican Energy operating revenue decreased for the six months ended June 30,
2002 to $1,167.5 million from $1,647.6 million for the same period in 2001,
primarily due to lower volumes and rates for regulated and non-regulated gas. CE
Electric UK Funding operating revenue decreased for the six months ended June
30, 2002 to $403.6 million from $906.1 million for the same period in 2001,
primarily due to the sale of Northern Supply in September 2001, partially offset
by Yorkshire distribution revenue. The remaining change in operating revenue
primarily relates to the increase of revenue at HomeServices of $234.9 million
primarily due to acquisitions in 2002 and late 2001 and the acquisition of Kern
River in March 2002 which accounted for $47.2 million of operating revenue.
The following data represents sales from MidAmerican Energy:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Electricity Retail Sales (GWh)............. 4,308 4,008 8,267 8,029
Electricity Sales for Resale (GWh)......... 2,155 1,890 4,979 4,391
Regulated and Non-Regulated Gas
Supplied (Thousands of MMBtus)........... 52,420 62,770 130,264 145,184
MidAmerican Energy electric retail sales increased for the periods ended June
30, 2002 from the same periods in 2001 due to more extreme temperatures in the
second quarter of 2002 and an increase in non-weather related sales. Electric
sales for resale increased for the periods ended June 30, 2002 from the same
periods in 2001 due to the availability of Cordova and lower retail usage in the
first quarter of 2002 allowing for more energy to be sold in the wholesale
markets. Retail gas supplied decreased due to warmer temperatures for the
periods ended June 30, 2002 compared to the same periods in 2001, resulting in
less heating load.
CE Electric UK Funding distributed 9,374 GWh of electricity in the three months
ended June 30, 2002 compared with 4,051 GWh of electricity in the same period in
2001. CE Electric UK Funding distributed 20,709 GWh of electricity in the six
months ended June 30, 2002 compared with 8,559 GWh of electricity in the same
period in 2001. The increase in electricity distributed for both periods ended
June 30, 2002 is primarily due to the acquisition of Yorkshire distribution.
Kern River transported 94,334,000 MMBtus in the three months ended June 30, 2002
and 99,663,000 MMBtus since the Company acquired Kern River on March 27, 2002.
Income on equity investments for the three months ended June 30, 2002 was $4.8
million compared with $10.2 million for the same period in 2001. The decrease
was primarily due to lower earnings at CE Generation as a result of higher
energy prices in 2001.
Income on equity investments for the six months ended June 30, 2002 was $18.9
million compared with $17.3 million for the same period in 2001. The increase
was primarily due to a common stock distribution from an energy investment fund
and joint venture income that was fully consolidated in 2001, partially offset
by lower earnings at CE Generation as a result of higher energy prices in 2001.
Interest and other income for the three months ended June 30, 2002 was $68.9
million compared with $28.0 million for the same period in 2001. Interest and
other income for the six months ended June 30, 2002 was $82.6 million compared
with $38.6 million for the same period in 2001. The increase for both periods
was primarily due to the gain on sale of various CalEnergy Gas assets in May
2002, partially offset by the gain on the sale of Western States Geothermal, an
indirect wholly owned subsidiary of the Company, in June 2001.
Cost of sales for the three months ended June 30, 2002 was $516.2 million
compared with $685.1 million for the same period in 2001, a decrease of 24.6%.
Cost of sales for the six months ended June 30, 2002 was $963.7 million compared
with $1,794.7 million for the same period in 2001, a decrease of 46.3%. The
decreases for both periods relates primarily to the sale of Northern Supply and
decreased gas revenue at MidAmerican Energy, partially offset by increase cost
of sales at HomeServices due to higher commission on the higher revenues as a
result of the acquisitions.
Operating expenses for the three months ended June 30, 2002 were $325.9 million
compared with $284.4 million for the same period in 2001. Operating expenses for
the six months ended June 30, 2002 were $605.6 million compared with $550.9
million for the same period in 2001. The increases were due to higher costs at
HomeServices as a result of acquisitions and the Kern River acquisition.
Depreciation and amortization for the three months ended June 30, 2002 was
$130.9 million compared with $132.3 million for the same period in 2001.
Depreciation and amortization for the six months ended June 30, 2002 was $257.2
million compared with $272.6 million for the same period in 2001. These
decreases were primarily due to discontinuance of amortizing goodwill beginning
January 1, 2002, partially offset by the commencement of commercial operations
at Cordova and Casecnan, intangible assets amortization related to the
HomeServices acquisitions and the Kern River acquisition.
Interest expense, less amounts capitalized, for the three months ended June 30,
2002 was $144.9 million compared with $97.0 million for the same period in 2001,
an increase of 49.4%. The increase was due primarily to the debt assumed with
the Yorkshire and Kern River acquisitions and the discontinuance of capitalizing
interest related to the Casecnan and Cordova Projects.
Interest expense, less amounts capitalized, for the six months ended June 30,
2002 was $279.6 million compared with $190.2 million for the same period in
2001, an increase of 47.0%. The increase was due primarily to the debt assumed
with the Yorkshire and Kern River acquisitions and the discontinuance of
capitalizing interest related to the Casecnan and Cordova Projects.
Tax expense for the three months ended June 30, 2002 was $24.3 million compared
with $19.9 million for the same period in 2001. Tax expense for the six months
ended June 30, 2002 was $53.4 million compared with $54.2 million for the same
period in 2001. The decrease in the effective tax rate is due primarily to the
discontinuance of nondeductible goodwill amortization and the release of the tax
obligation in connection with the execution of the TPL restructuring agreement
in the U.K.
Minority interest for the three months ended June 30, 2002 was $34.0 million
compared with $27.4 million for the same period in 2001. Minority interest for
the six months ended June 30, 2002 was $59.8 million compared with $52.2 million
for the same periods in 2001. Minority interest includes the dividends on the
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts. The increases in minority interest for both periods is primarily due to
the issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts relating to the Kern River acquisition.
Effective January 1, 2001, the Company changed its accounting policy regarding
major maintenance and repairs for nonregulated gas projects, nonregulated plant
overhaul costs and geothermal well rework costs to the direct expense method
from the former policy of monthly accruals based on long-term scheduled
maintenance plans for the gas projects and deferral and amortization of plant
overhaul costs and geothermal well rework costs over the estimated useful lives.
The cumulative effect of the change in accounting principle for 2001 was $4.6
million, net of taxes of $.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has available a variety of sources of liquidity and capital
resources, both internal and external. These resources provide funds required
for current operations, construction expenditures, debt retirement and other
capital requirements. The Company may from time to time seek to retire its
outstanding debt through cash purchases in the open market, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any, will depend on
prevailing market conditions, the Company's liquidity requirements, contractual
restrictions and other factors. The amounts involved may be material.
The Company's cash and cash equivalents were $896.4 million at June 30, 2002
compared to $386.7 million at December 31, 2001. Each of MidAmerican Energy
Holdings Company's direct or indirect subsidiaries is organized as a legal
entity separate and apart from MidAmerican Energy Holdings Company and its other
subsidiaries. Pursuant to separate financing agreements at each subsidiary, the
assets of each subsidiary may be pledged or encumbered to support or otherwise
provide the security for their own project or subsidiary debt. It should not be
assumed that any asset of any subsidiary of MidAmerican Energy Holdings Company,
will be available to satisfy the obligations of MidAmerican Energy Holdings
Company or any of its other subsidiaries; provided, however, that unrestricted
cash or other assets which are available for distribution may, subject to
applicable law and the terms of financing arrangements for such parties, be
advanced, loaned, paid as dividends or otherwise distributed or contributed to
MidAmerican Energy Holdings Company or affiliates thereof.
The Company generated cash flows from operations of $448.5 million for the six
months ended June 30, 2002 compared with $395.4 million for the same period in
2001. The increase was primarily due to positive impact of the Kern River and
Prudential acquisitions (see below for further discussions of these
acquisitions).
The remaining increase to cash and cash equivalents is primarily due to the
issuances of convertible preferred stock, trust preferred securities and
subsidiary and project debt, partially offset by the acquisition of Kern River
and purchase of convertible preferred securities.
In addition, the Company recorded separately restricted cash and investments of
$55.1 million and $54.8 million at June 30, 2002 and December 31, 2001,
respectively. The restricted cash balance as of June 30, 2002 is comprised
primarily of amounts deposited in restricted accounts from which the Company
will fund the various projects under construction. Additionally, the Leyte
Projects', and a portion of Casecnan's and Cordova's restricted cash is reserved
for the service of debt obligations.
Kern River Acquisition
On March 27, 2002, the Company closed on a definitive agreement with The
Williams Companies, Inc. to acquire Williams' Kern River Gas Transmission
Company, a 926-mile interstate pipeline transporting Rocky Mountain and Canadian
natural gas to markets in California, Nevada and Utah.
The Company paid $422.3 million, including transaction costs and working capital
adjustments, for Kern River's gas pipeline business. Additionally, the Company
assumed $505 million of debt.
In connection with the acquisition of Kern River, the Company issued $323
million of 11% Company-obligated mandatorily redeemable preferred securities of
subsidiary trust due March 12, 2012 with scheduled principal payments beginning
in 2005 and $127 million of no par, zero coupon convertible preferred stock to
Berkshire Hathaway. Each share of preferred stock is convertible at the option
of the holder into one share of the Company's common stock subject to certain
adjustments as described in the Company's Amended and Restated Articles of
Incorporation.
Other Investments
On March 27, 2002, the Company invested $275 million in Williams in exchange for
shares of 9-7/8 percent cumulative convertible preferred stock of Williams.
Dividends are scheduled to be received quarterly, commencing July 1, 2002. This
investment is accounted for under the cost method. The Company is aware that
there have been public announcements that Williams' financial condition has
deteriorated as a result of reduced liquidity. Williams' senior unsecured debt
obligations are currently rated B1 by Moody's, B by Standard & Poor's and B- by
Fitch. The Company has not recorded an impairment on this investment as of June
30, 2002 and is monitoring the situation.
In connection with this investment, the Company issued $275 million of no par,
zero coupon convertible preferred stock to Berkshire Hathaway.
Debt issuance and redemptions
On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% medium-term
notes due in 2031. The proceeds are being used to refinance existing debt and
preferred securities and for other corporate purposes. On March 11, 2002
MidAmerican Energy redeemed all $100 million of its 7.98% MidAmerican-obligated
preferred securities of subsidiary trust at 100% of the principal amount plus
accrued interest.
On May 1, 2002, MidAmerican Energy reacquired all $26.7 million of its $7.80
series of preferred securities. The first $13.3 million of preferred securities
were redeemed at 100% of the principal amount plus accrued dividends, and the
remaining $13.4 million was redeemed at 103.9% of the principal amount plus
accrued dividends.
On June 21, 2002, Kern River closed on a bank loan facility providing for
aggregate loans of up to $875 million to be used for the construction of the
Kern River Expansion Project. The facility, which matures 15 years after the
Expansion Project commences operation has a variable interest rate which
increases over the term of the facility from 1.375% to 4.5% over LIBOR.
Real Estate Companies Acquisitions
In February 2002, HomeServices completed its purchase of a majority interest in
Prudential California Realty. The cash purchase price of Prudential California
Realty was approximately $71 million net of cash acquired, with an option to
purchase the remaining interests. Additionally, HomeServices is obligated to pay
a maximum earnout of $18.5 million calculated based on 2002 financial
performance measures. The purchase price was financed using MidAmerican Energy
Holdings Company's corporate revolver for $40 million which was contributed to
HomeServices as equity and the remaining funds were borrowed from available
credit under the HomeServices' $65 million revolving credit facility. It is
anticipated that the borrowings in connection with this acquisition will be
repaid from HomeServices' generated funds. The Company is in the process of
completing the allocation of the purchase price to the assets and liabilities
acquired. On May 1, 2002, HomeServices acquired a 50% interest in Prudential
California Realty's mortgage operations.
In August 2002, HomeServices entered into a contract to acquire RealtySouth in
Birmingham, Alabama for $23.9 million plus net working capital and certain other
adjustments. For the year ended December 31, 2001, RealtySouth and it
subsidiaries had revenue of approximately $60 million on 13,000 closed sides
representing $2.0 billion of sales volume.
CalEnergy Gas Disposal
In May 2002, CalEnergy Gas, an indirect wholly owned subsidiary of the Company,
executed the sale of several of its U.K. natural gas assets to Gaz de France for
(pound)137.0 million (approximately $200 million). As part of the sale, Gaz de
France acquired four natural gas-producing fields located in the southern basin
of the U.K. North Sea. Those fields included Anglia, Johnston, Schooner and
Windermere. The transaction also included the sale of rights in four gas fields
(in development/construction) and three exploration blocks owned by CalEnergy
Gas.
Accounts Receivable Sold
In 1997, MidAmerican Energy entered into a revolving agreement, which expires in
October 2002, to sell all of its right, title and interest in the majority of
its billed accounts receivable to MidAmerican Energy Funding Corporation, a
special purpose entity established to purchase accounts receivable from
MidAmerican Energy. MidAmerican Energy Funding Corporation in turn sells
receivable interests to outside investors. In consideration for the sale,
MidAmerican Energy received cash and a subordinated note, bearing interest at
8%, from MidAmerican Energy Funding Corporation. As of June 30, 2002, the
revolving cash balance was $36 million and the amount outstanding under the
subordinated note was $55.8 million. The agreement is structured as a true sale,
under which the creditors of MidAmerican Energy Funding Corporation will be
entitled to be satisfied out of the assets of MidAmerican Energy Funding
Corporation prior to any value being returned to MidAmerican Energy or its
creditors. Therefore, the accounts receivable sold are not reflected on the
Company's consolidated balance sheets. As of June 30, 2002, $93.0 million of
accounts receivable, net of reserves, were sold under the agreement.
Construction
Zinc Recovery Project
CalEnergy Minerals LLC is constructing the Zinc Recovery Project. The Zinc
Recovery Project is designed to have a capacity of approximately 30,000 metric
tons per year and is scheduled to commence commercial operations in 2002. Total
project costs of the Zinc Recovery Project are expected to be approximately
$224.9 million, net of damages, which is being funded by $140.5 million of debt
and the balance from funds provided by the parent company. The Zinc Recovery
Project has incurred $192.8 million, net of damages, of such costs through June
30, 2002.
MidAmerican Energy
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first six months of 2002, utility construction
expenditures totaled $136 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations, net of dividends.
Forecasted utility construction expenditures, including allowances for funds
used during construction are $382 million for 2002 and $1.614 billion for 2003
through 2006. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. Through 2007, MidAmerican
Energy plans to develop and construct two electric generating plants in Iowa.
Participation by others in a portion of the second plant is being discussed.
Excluding amounts related to any others who may participate in the second plant,
MidAmerican Energy expects to invest approximately $1.2 billion in the two
plants, including the cost of related transmission facilities and allowance for
funds used during construction. The two plants may provide approximately 950
megawatts of generating capacity for MidAmerican Energy depending on
management's on-going assessment of needs and related factors.
The first project is a 500-megawatt natural gas-fired combined cycle unit with
an estimated cost of $415 million. MidAmerican Energy has received a certificate
from the Iowa Utilities Board allowing it to construct the plant. In accordance
with an Iowa law passed in 2001, MidAmerican Energy had sought Iowa Utilities
Board approval for the ratemaking principles that will govern recovery of costs
related to the construction of the plant. On May 29, 2002, the Iowa Utilities
Board issued an order that provides the ratemaking principles for the gas-fired
plant. As a result of that order, MidAmerican Energy is proceeding with
construction of the plant. It is anticipated that the first phase of the project
will be completed in 2003 with the remainder being completed in 2005.
MidAmerican Energy expects to make filings for certificate and approval of
ratemaking principles for the second project during the third quarter of 2002.
MidAmerican Energy presently expects that all utility construction expenditures
for the next five years will be met with the issuance of long-term debt and cash
generated from utility operations, net of dividends. The actual level of cash
generated from utility operations is affected by, among other things, economic
conditions in the utility service territory, weather and federal and state
regulatory actions.
Kern River Expansion
On July 17, 2002, Kern River received approval from FERC to construct, own and
operate a major expansion to its pipeline system (the "Expansion Project"). The
Expansion Project will loop most of Kern River's existing mainline, construct
three new compressor stations and upgrade or modify Kern River's six existing
compressor stations. The Expansion Project, which is expected to be completed
and operational by May 2003, will increase Kern River's capacity by
approximately 900 MMcf per day. Service will be provided under long-term
contracts subject to incremental rates. The estimated cost of the expansion is
approximately $1.2 billion that will be financed by new loan facilities of $875
million to be issued by Kern River and the remaining balance will be financed by
other corporate funds.
Northern Natural Gas Company Acquisition
On July 29, 2002 the Company announced that it has reached a definitive
agreement with Dynegy Inc. to acquire 100 percent ownership of Northern Natural
Gas Company for $928 million in cash and the assumption of $950 million in debt.
Northern Natural Gas is a 16,600-mile interstate pipeline stretching from
southwest Texas to the upper Midwest. With a design capacity of 4.4 billion
cubic feet of natural gas per day, Northern Natural Gas accesses natural gas
supply from many of the larger producing regions in North America including the
Rocky Mountains, Hugoton, Permian, Anadarko and Western Canadian basins. The
system provides transportation and storage services to approximately 70 utility
customers and numerous industrial customers in the upper Midwest.
Northern Natural Gas also provides cross-haul and grid transportation between
other interstate and intrastate pipelines in Permian, Anadarko, Hugoton and
Midwest areas. It operates three natural gas storage facilities with a capacity
of 59 billion cubic feet and two liquefied natural gas peaking units.
The Company expects to fund the purchase by issuing Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts to Berkshire
Hathaway and its affiliates. The acquisition is subject to Hart-Scott-Rodino
clearance and is expected to close in August 2002.
Cooper Contract Restructuring
On July 31, 2002, MidAmerican Energy and NPPD signed a Settlement Agreement and
Release on the restructuring of the power purchase contract for Cooper. Under
the terms of the Settlement Agreement and Release, MidAmerican Energy will pay
NPPD through December 31, 2004, a scheduled amount per unit for one-half of the
accredited capacity of Cooper and the greater of one-half the energy from Cooper
or a minimum guaranteed amount of energy representing 380 megawatts at an 85%
capacity factor for the respective hours in each year. NPPD also paid
MidAmerican Energy $39.1 million on August 1, 2002.
In December 2000, MidAmerican Energy ceased contributing decommissioning funds
to NPPD and maintained a separate fund for estimated Cooper decommissioning
costs. Through June 30, 2002, $18.3 million had been accrued and retained by
MidAmerican Energy in this separate fund. In conjunction with the contract
restructuring, MidAmerican Energy plans to recognize the $39.1 million cash
payment and the $18.3 million in decommissioning funds into income based on the
estimated energy expected to be received for the remainder of the contract.
Finally, both parties agreed to release each other from any and all claims, past
or present, each might have under the power purchase contract prior to being
restructured and file to dismiss the litigation currently pending in U.S.
District Court.
Under the terms of MidAmerican Energy's power purchase contract with NPPD prior
to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed and
operating costs of Cooper, excluding depreciation but including debt service,
and MidAmerican Energy's share of the nuclear fuel cost, including Department of
Energy disposal fees, based on energy delivered. In addition, prior to December
2000, MidAmerican Energy contributed toward payment of one-half of Cooper's
project decommissioning costs based on an assumed 2004 shutdown of the plant.
Domestic Rate Matters: Electric
On March 15, 2002, MidAmerican Energy made a filing with the Iowa Utilities
Board requesting an increase in rates of approximately $26.6 million for its
Iowa retail natural gas customers. As part of the filing, MidAmerican Energy
requested an interim rate increase of approximately $20.4 million annually. On
June 12, 2002, the Iowa Utilities Board issued an order granting an interim rate
increase of approximately $13.8 million annually, effective immediately and
subject to refund with interest. On July 15, 2002, MidAmerican Energy and the
Office of Consumer Advocate filed a proposed settlement agreement with the Iowa
Utilities Board. The proposed settlement agreement provides for an increase in
rates of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas
customers. The new rates would be effective for usage on and after the date the
Iowa Utilities Board approves tariffs implementing the proposed settlement
agreement and would be frozen for two years thereafter. MidAmerican Energy
expects the Iowa Utilities Boards' decision on approving the proposed settlement
agreement in the fourth quarter of 2002.
Domestic Rate Matters: Gas Transmission
The FERC regulates Kern River under the Natural Gas Act, the Natural Gas Policy
Act of 1978 and other applicable FERC regulations. The FERC has jurisdiction
over Kern River with respect to virtually all aspects of its business. Kern
River holds certificates of public convenience and necessity issued by the FERC
covering its facilities, activities and services.
Kern River's rates and transportation charges are regulated by the FERC. FERC
regulations and Kern River's tariff allow Kern River to recover all operations
and maintenance costs, taxes, interest, depreciation and amortization and a
regulated return on equity. Natural gas transportation companies may not grant
any undue preference to any shipper, or maintain any unreasonable difference in
their rates or other terms of service.
Kern River's rates are set using a "levelized cost-of-service" methodology so
that the rate is constant over the contract period. This is achieved by using a
FERC-approved depreciation schedule in which depreciation increases as interest
expense decreases.
When Kern River commenced service in 1992, shippers signed 15-year long-term
firm transportation contracts that were to expire in 2007. Under terms of a 1995
rate settlement, Kern River agreed that new rates would be filed by May 1, 1999.
Instead of filing a rate case, Kern River negotiated a "pre-settlement" of the
rate case with its shippers. This was approved by the FERC (the "1999
Settlement"), which included an agreement for a moratorium on rate cases until
May 1, 2002 under which Kern River may be required to file a rate case by May 1,
2004. In order to reduce transportation rates further and extend contract terms
beyond 2007, Kern River initiated an open season in October 1998 to measure
interest in lower, extended term rates ("ET Rates") for extended term contracts.
Shippers were offered the choice of new 10- or 15-year contracts (4-9 year
extensions of their existing contracts) with both options starting on October 1,
2001 and expiring on either September 30, 2011 or September 30, 2016. On
February 8, 2001 the FERC approved implementation of the ET Rates. All existing
shippers have signed up under the ET Rates program. All of the pipeline's
existing firm capacity will continue to be contractually committed under the ET
Rates contracts until September 2011. Approximately 84% of the existing firm
pipeline volume is contracted until September 2016.
Kern River has 18 long-term firm transportation service agreements with 17
shippers for 100% of the 2003 Expansion Project's capacity. The term for all
these service agreements is either 10 or 15 years from when transportation
services of the Expansion Project commence.
Environmental Matters: Domestic
The U.S. Environmental Protection Agency, or EPA, and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at such
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $20 million to
$68 million. MidAmerican Energy's estimate of the probable cost for these sites
as of June 30, 2002 was $20 million. The estimate consists of $2 million for
investigation costs, $6 million for remediation costs, $10 million for ground
water treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 5 years.
The estimate of probable remediation costs is established on a site-specific
basis. Initially, a determination is made as to whether MidAmerican Energy has
potential remedial liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. When a potential remedial
liability exists, the best estimate of projected site closure costs are accrued.
The estimates are evaluated and revised quarterly as appropriate based on
additional information obtained during investigation and remedial activities.
The estimated recorded liabilities for these properties include incremental
direct costs of the remediation effort and oversight by the appropriate
regulatory authority, costs for future monitoring at sites and costs of
compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liability could change materially
based on facts and circumstances derived from site investigations, changes in
required remedial action and changes in technology relating to remedial
alternatives. Insurance recoveries have been received for some of the sites
under investigation. Those recoveries are intended to be used principally for
accelerated remediation, as specified by the Iowa Utilities Board, and are
recorded as a regulatory liability. Additionally, as viable potentially
responsible parties are identified, those parties are evaluated for potential
contributions, and cost recovery is pursued when appropriate.
The Illinois Commerce Commission has approved the use of a tariff rider that
permits recovery of the actual costs of litigation, investigation and
remediation relating to decommissioned manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs.
Although the timing of potential incurred costs and recovery of 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 the
Company's financial position, results of operations or cash flows.
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, United States Supreme Court upheld
the constitutionality of the standards, through remanding the issue of
implementation of the ozone standard to the EPA. The EPA is moving forward with
analyzing existing monitored data and determining attainment status.
The impact of the new standards on the Company is currently unknown. MidAmerican
Energy's generating stations may be subject to emission reductions if the
stations are located in nonattainment areas or contribute to nonattainment areas
in other states. As part of an overall state plan to achieve attainment of the
standards, MidAmerican Energy could be required to install control equipment on
its generating stations or decrease the number of hours during which these
stations operate.
In 2001, the state of Iowa passed legislation that, in part, requires
rate-regulated utilities to develop a multi-year plan and budget for managing
regulated emissions from their generating facilities in a cost-effective manner.
MidAmerican Energy's proposed plan and associated budget (the Plan) was filed
with the Iowa Utilities Board on April 1, 2002, in accordance with state law.
MidAmerican Energy expects the Iowa Utilities Board to rule on the prudence of
the Plan in the fourth quarter of 2002. MidAmerican Energy is required to file
Plan updates at least every two years.
The Plan provides MidAmerican Energy's projected air emission reductions
considering current proposals being debated at the federal level and describes a
coordinated long-range plan to achieve these air emission reductions. The Plan
provides specific actions to be taken at each coal-fired generating facility and
related costs and timing for each action.
The Plan outlines $732.0 million in environmental investments to existing
coal-fired generating units, some of which are jointly owned, over a nine-year
period from 2002 through 2010. MidAmerican Energy's share of these investments
is $546.6 million, $67.9 million of which is projected to be incurred during the
2002-2005 rate freeze period. The Plan also identifies expenses that will be
incurred at the generating facilities to operate and maintain the environmental
equipment installed as a result of the Plan.
Following the expiration of the 2001 settlement agreement on December 31, 2005,
the Plan proposes the use of an adjustment mechanism for recovery of Plan costs,
similar to the tracker mechanisms for cost recovery of renewable energy and
energy efficiency expenditures that are presently part of MidAmerican Energy's
electric regulated rates.
Environmental Matters: U.K.
The U.K. Government introduced new contaminated land legislation in April 2000
that requires companies to:
o put in place a program for investigating the company's history to identify
problem sites for which it is responsible;
o make a clear commitment to meeting responsibilities for cleaning up those
sites;
o provide funding to make sure that this can happen; and
o make commitments public.
CE Electric UK Funding is in the process of completing the evaluation work on
the three sites that may be subject to the legislation. Exploratory work with an
environmental remediation company is in progress on these sites.
The Environmental Protection Act (Disposal of PCB's and other Dangerous
Substances) Regulations 2001 were introduced on May 5, 2000. The regulations
required that transformers containing over 50 parts per million (PPM) be
registered with the Environment Agency by July 31, 2000. Transformers containing
500 PPM must be de-contaminated by December 31, 2000. CE Electric UK Funding has
registered 140 items above 50 PPM on 74 sites, decontaminated 18 items and
informed the Environment Agency that it is continuing with its sampling,
labeling and registration program.
The Groundwater Regulations seek to prevent List I and List II substances
entering groundwater and strengthens the UK Environment Agencies powers to
require additional protective measures, especially in areas of important
groundwater supplies. Mineral oils and hydrocarbons are included in the more
tightly controlled List I substances. This affects the high voltage fluid filled
electricity cable network incorporating an insulating fluid currently in the
List I category. Further research may result in recategorization because of the
biodegradable qualities of the cable fluid. The existing voluntary Operating
Code of Practice, as agreed between the Agency and the Electricity Supply
Industries, is undergoing revision through the services of the Electricity
Association to address the regulatory changes. Helpful discussions with the
Environment Agency continue.
The Oil Storage Regulations come into force in 2002 and requires the
introduction of secondary containment measures (bunding) for all above ground
oil storage locations where the capacity is more than 200 litres. The primary
containers must be in sound condition, leak free, and positioned away from
vehicle traffic routes. The secondary containment must be impermeable to water
and oil (without drainage valve) and be subject to routine maintenance. The
capacity of the bund must be sufficient to hold up to 110% of the largest stored
vessel or 25% of the maximum stored capacity, whichever is the greater. The full
impact of the regulations will be phased in over the next three years. The
Regulations come into effect as follows:
o March 1, 2002 for all new oil stores.
o September 1, 2003 for existing stores at "significant risk" (i.e. within 10
meters of a water course).
o September 1, 2005 for all remaining stores.
A detailed study of the impacts has been carried out and a plan of action
prepared to ensure compliance.
Standard Electricity Market Design
On July 31, 2002, FERC announced commencement of a notice of proposed
rulemaking, which FERC has characterized as portending "sweeping changes" to the
use and expansion of the interstate transmission and the wholesale bulk power
systems in the United States. The proposal includes numerous fundamental changes
in the regulation of transmission and generation facilities "to promote economic
efficiency" and replace the "obsolete patchwork we have today," according to
FERC's chairman. FERC does not envision that a final rule will be fully
implemented until September 30, 2004, and it has asked for industry input on
several dozen questions with respect to its 600-plus page preamble and proposed
rule. The Company has not completed its initial evaluation of the proposed rule,
and recognizes the final rule could vary considerably from the initial proposal.
Thus, the likely impact of the new FERC initiative on the Company's transmission
and generation businesses is unknown.
Regulatory Environment: Philippines
The Philippine Congress has passed the Electric Power Industry Reform Act of
2001 which is aimed at restructuring the power industry, privatization of the
NPC and introduction of a competitive electricity market, among others. The
passage of the bill may have an impact on the Company's future operations and
the industry as a whole, the effect of which is not yet determinable and
estimable.
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (along with 4 other
projects) has reportedly been identified as raising legal and financial
questions and, with those projects, has been prioritized for renegotiation. CE
Luzon Geothermal Power Company, Inc., an indirectly owned subsidiary of the
Company, CE Cebu Geothermal Power Company, Inc., an indirect wholly owned sub-
sidiary of the Company, and Visayas Geothermal Power Company, an indirect wholly
owned subsidiary of the Company, (collectively, along with CE Casecnan, the
"Philippine Projects") have reportedly been identified as raising financial
questions. No written report has yet been issued with respect to the interagency
review, and the timing and nature of steps, if any, that the Philippine Govern-
ment may take in this regard are not known. Accordingly, it is not known what,
if any, impact the government's review will have on the operations of the
Company. Company representatives, together with certain current and former
government officials, also have been requested to appear, and have appeared,
before a Philippine Senate committee which raised questions and made allegations
with respect to CE Casecnan's tariff structure and implementation. CE Casecnan
expects that these hearings will continue, although their exact scope and nature
is difficult to assess. CE Casecnan has and intends to continue to respond to
such questions and the Company intends to vigorously defend the Philippine
Projects against any allegations which may be made. The Company believes that
allegations, if any, made with respect to the Philippine Projects to be without
merit. To the extent disputes arise under the Philippine Projects' agreements
with respect to the Philippines Projects' obligations, rights and remedies
thereunder, such disputes will be determined by international arbitration in a
neutral forum conducted in accordance with the rules of the International
Chamber of Commerce or UNCITRAL, as the case may be.
Nuclear Decommissioning
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator. Based on information presently available, the Company expects to
contribute approximately $41 million during the period 2002 through 2006 to an
external trust established for the investment of funds for decommissioning Quad
Cities Station. Approximately 60% of the fair value of the trust's funds are now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds.
Quad Cities Station decommissioning costs charged to Iowa customers are included
in base rates, and recovery of increases in those amounts must be sought through
the normal ratemaking process.
As a result of a restructuring of the power purchase contract between
MidAmerican Energy and NPPD, MidAmerican Energy will no longer be accruing for
decommissioning costs for the Cooper Nuclear Station. Refer to Note 13B of the
Company's Notes to Consolidated Financial Statements for a discussion of the
contract restructuring.
Development Activity
The Company is actively seeking to develop, construct, own and operate new
energy projects, both domestically and internationally, the completion of any of
which is subject to substantial risk. Development can require the Company to
expend significant sums for preliminary engineering, permitting, fuel supply,
resource exploration, legal and other expenses in preparation for competitive
bids which the Company may not win or before it can be determined whether a
project is feasible, economically attractive or capable of being financed.
Successful development and construction is contingent upon, among other things,
negotiation on terms satisfactory to the Company of engineering, construction,
fuel supply and sales contracts with other project participants, receipt of
required governmental permits and consents and timely implementation of
construction. There can be no assurance that development efforts on any
particular project, or the Company's development efforts generally, will be
successful.
The financing, construction and development of projects outside the United
States entail significant political and financial risks (including, without
limitation, uncertainties associated with first time privatization efforts in
the countries involved, currency exchange rate fluctuations, currency
repatriation restrictions, political instability, civil unrest and
expropriation) and other structuring issues that have the potential to cause
substantial delays or material impairment of the value of the project being
developed, which the Company may not be fully capable of insuring against. The
uncertainty of the legal environment in certain foreign countries in which the
Company may develop or acquire projects could make it more difficult for the
Company to enforce its rights under agreements relating to such projects. In
addition, the laws and regulations of certain countries may limit the ability of
the Company to hold a majority interest in some of the projects that it may
develop or acquire. The Company's international projects may, in certain cases,
be terminated by a government. Projects in operation, construction and
development are subject to a number of uncertainties more specifically described
in the Company's Form 8-K, dated March 26, 1999, filed with the Securities and
Exchange Commission.
New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which addresses the
accounting for legal obligations associated with the retirement of tangible,
long-lived assets, and the associated asset retirement costs. This pronouncement
is effective for years beginning after June 15, 2002. The Company is evaluating
the impact that adoption of this standard will have on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 on January 1, 2002 did not have any impact on the Company's
consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk, including changes in the market price of
certain commodities and interest rates. To manage the price volatility relating
to these exposures, the Company enters into various financial derivative
instruments. Senior management provides the overall direction, structure,
conduct and control of the Company's risk management activities, including the
use of financial derivative instruments, authorization and communication of risk
management policies and procedures, strategic hedging program guidelines,
appropriate market and credit risk limits, and appropriate systems for
recording, monitoring and reporting the results of transactional and risk
management activities.
Refer to Note 16 in Notes to Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 2001 for discussion on
derivatives used to hedge price risk. The Company's exposure to commodity price
risk and interest rate risk did not change materially from December 31, 2001.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.
In addition to the proceedings described in Note 12 in the notes to the
consolidated financial statements, the Company and its subsidiaries are
currently parties to various minor items of litigation or arbitration, none of
which, if determined adversely, would have a material adverse effect on the
Company.
Item 2 Changes in Securities and Use of Proceeds.
Not applicable.
Item 3 Defaults on Senior Securities.
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5 Other Information.
Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
On June 26, 2002, the Company filed a Form 8-K, dated June 21, 2002,
stating that Kern River Gas Transmission Company, an indirect subsidiary of the
Company, closed on a bank loan facility providing for aggregate loans of up to
$875 million to be used for the construction of the Kern River 2003 Expansion
Project.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY
-----------------------------------
(Registrant)
Date: August 14, 2002 /s/ Patrick J. Goodman
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Patrick J. Goodman
Senior Vice President & Chief
Financial Officer