UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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, Iowa 50309
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(Address of principal executive offices) (Zip Code)
(515) 242-4300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: N/A
Securities registered pursuant to Section 12(g) of the Act: N/A
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
All of the shares of MidAmerican Energy Holdings Company are held by a limited
group of private investors. As of July 31, 2003, 9,281,087 shares of common
stock were outstanding.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........29
Item 4. Controls and Procedures............................................29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................30
Item 2. Changes in Securities and Use of Proceeds..........................30
Item 3. Defaults Upon Senior Securities....................................30
Item 4. Submission of Matters to a Vote of Security Holders................30
Item 5. Other Information..................................................30
Item 6. Exhibits and Reports on Form 8-K...................................30
SIGNATURES ...................................................................31
EXHIBIT INDEX.................................................................32
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
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, 2003,
and the related consolidated statements of operations for the three-month and
six-month periods ended June 30, 2003 and 2002, and of cash flows for the
six-month periods ended June 30, 2003 and 2002. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
MidAmerican Energy Holdings Company and subsidiaries as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein); and in our report
dated January 24, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 2002 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
July 30, 2003
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
----------------------------
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 1,280,761 $ 844,430
Restricted cash and short-term investments ..................................... 48,209 50,808
Accounts receivable, net ....................................................... 626,782 707,731
Inventories .................................................................... 88,481 126,938
Other current assets ........................................................... 238,276 212,888
------------ ------------
Total current assets ......................................................... 2,282,509 1,942,795
------------ ------------
Properties, plants and equipment, net ............................................ 10,348,333 9,898,796
Goodwill ......................................................................... 4,230,048 4,258,132
Regulatory assets, net ........................................................... 549,518 415,804
Other investments ................................................................ 183,699 446,732
Equity investments ............................................................... 254,370 273,707
Deferred charges and other assets ................................................ 792,248 779,420
------------ ------------
TOTAL ASSETS ..................................................................... $ 18,640,725 $ 18,015,386
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 282,225 $ 462,960
Accrued interest ............................................................... 219,957 192,015
Accrued taxes .................................................................. 83,989 75,097
Other accrued liabilities ...................................................... 551,156 457,058
Short-term debt ................................................................ 35,033 79,782
Current portion of long-term debt .............................................. 457,958 470,213
------------ ------------
Total current liabilities .................................................... 1,630,318 1,737,125
------------ ------------
Other long-term accrued liabilities .............................................. 1,292,262 1,100,917
Parent company debt .............................................................. 2,775,414 2,323,387
Subsidiary and project debt ...................................................... 6,936,329 7,077,087
Deferred income taxes ............................................................ 1,303,209 1,238,421
------------ ------------
Total liabilities .............................................................. 13,937,532 13,476,937
------------ ------------
Deferred income .................................................................. 75,313 80,078
Minority interest ................................................................ 7,419 7,351
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts 2,035,513 2,063,412
Preferred securities of subsidiaries ............................................. 92,733 93,325
Commitments and contingencies (Note 7)
Stockholders' equity:
Zero-coupon convertible preferred stock - authorized 50,000 shares, no par value,
41,263 shares outstanding ...................................................... - -
Common stock - authorized 60,000 shares, no par value, 9,281 shares issued and
outstanding .................................................................... - -
Additional paid-in capital ....................................................... 1,956,509 1,956,509
Retained earnings ................................................................ 794,586 584,009
Accumulated other comprehensive loss ............................................. (258,880) (246,235)
------------ ------------
Total stockholders' equity ..................................................... 2,492,215 2,294,283
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ....................................... $ 18,640,725 $ 18,015,386
============ ============
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(UNAUDITED)
REVENUE:
Operating revenue ..................................... $ 1,346,240 $ 1,149,297 $ 2,909,074 $ 2,191,049
Income on equity investments .......................... 13,546 4,804 21,001 18,924
Interest and dividend income .......................... 19,314 10,740 33,185 19,095
Other income .......................................... 30,076 58,189 49,870 63,539
----------- ----------- ----------- -----------
Total revenue ....................................... 1,409,176 1,223,030 3,013,130 2,292,607
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales ......................................... 528,780 455,789 1,201,530 865,072
Operating expense ..................................... 367,792 325,943 724,285 605,610
Depreciation and amortization ......................... 160,782 130,925 302,631 257,169
Interest expense ...................................... 183,033 153,248 369,878 294,548
Capitalized interest .................................. (7,616) (8,329) (23,148) (14,976)
----------- ----------- ----------- -----------
Total costs and expenses ............................ 1,232,771 1,057,576 2,575,176 2,007,423
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES ................ 176,405 165,454 437,954 285,184
Provision for income taxes ............................ 32,471 24,308 105,471 53,438
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS . 143,934 141,146 332,483 231,746
Minority interest and preferred dividends ............. 63,993 33,972 121,906 59,823
----------- ----------- ----------- -----------
NET INCOME AVAILABLE TO COMMON AND PREFERRED STOCKHOLDERS $ 79,941 $ 107,174 $ 210,577 $ 171,923
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-5-
MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
--------------------------
2003 2002
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................... $ 210,577 $ 171,923
Adjustments to reconcile net income to net cash flows from operating activities:
Gains on disposals ..................................................................... - (54,120)
Distributions less income on equity investments ........................................ 21,041 (7,439)
Depreciation and amortization .......................................................... 302,631 257,169
Amortization of deferred financing costs ............................................... 17,516 10,324
Amortization of regulatory assets and liabilities ...................................... (19,892) 6,582
Provision for deferred income taxes .................................................... 104,946 21,084
Other .................................................................................. 30,054 27,379
Changes in other items:
Accounts receivable, net ............................................................. 89,593 (53,638)
Other current assets ................................................................. 43,318 20,889
Accounts payable and other accrued liabilities ....................................... (126,363) (22,104)
Accrued interest ..................................................................... 25,014 65,526
Accrued taxes ........................................................................ 10,167 5,911
Deferred income ...................................................................... (4,427) (998)
----------- ---------
Net cash flows from operating activities ............................................... 704,175 448,488
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired ....................................................... (34,813) (498,655)
Sale (purchase) of convertible preferred securities ...................................... 288,750 (275,000)
Capital expenditures relating to operating projects ...................................... (272,712) (198,153)
Construction and other development costs ................................................. (386,696) (181,106)
Proceeds from sales of assets ............................................................ 501 199,247
Decrease in restricted cash and investments .............................................. 3,889 16,184
Other .................................................................................... (33,097) 34,931
----------- ---------
Net cash flows from investing activities ............................................... (434,178) (902,552)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiary and project debt ................................................ 1,133,572 588,344
Proceeds from parent company debt ........................................................ 449,295 -
Net proceeds on parent company short-term debt ........................................... - 56,275
Repayments of subsidiary and project debt ................................................ (1,326,295) (56,022)
Net repayment of subsidiary short-term debt .............................................. (44,750) (191,312)
Proceeds from issuance of trust preferred securities ..................................... - 323,000
Proceeds from issuance of common and preferred stock ..................................... - 402,000
Redemption of preferred securities of subsidiaries ....................................... (588) (127,319)
Purchase and retirement of preferred securities of subsidiary trusts ..................... (33,411) -
Decrease (increase) in restricted cash ................................................... 2,785 (16,548)
Other .................................................................................... (27,628) (44,038)
----------- ---------
Net cash flows from financing activities ............................................... 152,980 934,380
----------- ---------
Effect of exchange rate changes .......................................................... 13,354 29,304
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................................................. 436,331 509,620
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................... 844,430 386,745
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 1,280,761 $ 896,365
=========== =========
SUPPLEMENTAL DISCLOSURE:
Interest paid, net of interest capitalized ............................................... $ 314,548 $ 236,285
=========== =========
Income taxes paid ....................................................................... $ 4,756 $ 29,737
=========== =========
The accompanying notes are an integral part of these financial statements.
-6-
MIDAMERICAN ENERGY HOLDINGS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of management of MidAmerican Energy Holdings Company and
subsidiaries ("MEHC" or 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,
2003, and the results of operations for the three-month and six-month periods
ended June 30, 2003 and 2002 and of cash flows for the six-month periods ended
June 30, 2003 and 2002. The results of operations for the three-month and
six-month periods ended June 30, 2003 are not necessarily indicative of the
results to be expected for the full year.
The unaudited consolidated financial statements include the accounts of
MidAmerican Energy Holdings 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 prior year financial statements and supporting note
disclosures have been reclassified to conform to the current year presentation.
Such reclassification did not impact previously reported net income or retained
earnings.
The unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
2. NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS') No. 143, "Accounting for Asset Retirement Obligations". This
statement provides accounting and disclosure requirements for retirement
obligations associated with long-lived assets. The cumulative effect of
initially applying this statement by the Company was immaterial.
The Company's review of its regulated entities identified legal retirement
obligations for nuclear decommissioning, wet and dry ash landfills and offshore
and minor lateral pipeline facilities. On January 1, 2003, the Company recorded
$289.3 million of asset retirement obligation ("ARO") liabilities; $13.9 million
of ARO assets, net of accumulated depreciation; $114.6 million of regulatory
assets; and reclassified $1.0 million of accumulated depreciation to the ARO
liability. The initial ARO liability recognized includes $266.5 million that
pertains to obligations associated with the decommissioning of the Quad Cities
nuclear station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded at December 31, 2002. The
adoption of this statement did not have a material impact on the operations of
the regulated entities, as the effects were offset by the establishment of
regulatory assets, totaling $114.6 million, pursuant to SFAS No. 71.
During the six-month period ended June 30, 2003, the Company recorded, as a
regulatory asset, accretion related to the ARO liability of $8.3 million ,
resulting in an ARO liability balance of $297.6 million at June 30, 2003.
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends SFAS No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS 149 clarifies
when a contract with an initial net investment meets the characteristic of a
derivative and clarifies when a derivative that contains a financing component
will require special reporting in the statement of cash flows. SFAS 149 is
effective for the Company for contracts entered into or modified after June 30,
2003. The Company does not expect the adoption of SFAS 149 to have a material
effect on its financial position, results of operations or cash flows.
-7-
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Effective July 1, 2003, the
Company adopted the standard which resulted in the reclassification of
approximately $2.0 billion of Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts to current ($150.0 million) and non-current
($1,850.0 million) liabilities with a corresponding reduction in their current
presentation between the liabilities section and the equity section of the
balance sheet. Similarly, payments to holders of the instruments and related
accruals will be presented separately from payments to and interest due to other
creditors in statements of cash flows and operations.
3. PROPERTIES, PLANTS AND EQUIPMENT, NET
Properties, plants and equipment, net comprise the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
Properties, plants and equipment, net:
Utility generation and distribution systems ...... $ 8,597,067 $ 8,165,140
Interstate pipelines' assets ..................... 3,432,033 2,260,799
Independent power plants ......................... 1,418,024 1,410,170
Mineral and gas reserves and exploration assets .. 524,763 500,422
Utility non-operational assets ................... 399,360 370,811
Other assets ..................................... 139,770 131,577
------------ ------------
Total operating assets ......................... 14,511,017 12,838,919
Accumulated depreciation and amortization ........ (4,418,406) (4,110,608)
------------ ------------
Net operating assets ............................. 10,092,611 8,728,311
Construction in progress ......................... 255,722 1,170,485
------------ ------------
Properties, plants and equipment, net .............. $ 10,348,333 $ 9,898,796
============ ============
Construction in Progress
- ------------------------
Kern River Gas Transmission Company ("Kern River") completed the construction of
its expansion for which it filed an application with the Federal Energy
Regulatory Commission on August 1, 2001 (the "2003 Expansion Project"), at a
total cost of approximately $1.2 billion. The expansion, which was placed into
operation on May 1, 2003, increased the design capacity of the existing Kern
River pipeline by 885,626 decatherms ("dth") per day to 1,755,626 dth per day.
4. INVESTMENT IN CE GENERATION
The equity investment in CE Generation LLC ("CE Generation") at June 30, 2003
and December 31, 2002 was approximately $220.0 million and $244.9 million,
respectively. During the three-month periods ended June 30, 2003 and 2002, the
Company recorded income from its investment in CE Generation of $5.4 million and
$1.6 million, respectively. During the six-month periods ended June 30, 2003 and
2002, the Company recorded income from its investment in CE Generation of $7.6
million and $8.8 million, respectively. During the second quarter of 2003, the
Company received a $32.5 million distribution from CE Generation.
-8-
5. DEBT ISSUANCES AND REDEMPTIONS
On January 14, 2003, MidAmerican Energy Company ("MidAmerican Energy") issued
$275.0 million of 5.125% medium-term notes due in 2013. The proceeds were used
to refinance existing debt and for other corporate purposes.
On May 1, 2003, Kern River Funding Corporation, a wholly owned subsidiary of
Kern River, issued $836 million of its 4.893% Senior Notes with a final maturity
on April 30, 2018. The proceeds were used to repay all of the approximately $815
million of outstanding borrowings under Kern River's $875 million credit
facility. Kern River entered into this credit facility in 2002 to finance the
construction of the 2003 Expansion Project. The credit facility was canceled and
a completion guarantee issued by the Company in favor of the lenders as part of
the credit facility terminated upon completion of the 2003 Expansion Project.
On May 16, 2003, the Company issued $450 million of its 3.5% Senior Notes with a
final maturity on May 15, 2008. The proceeds were used for general corporate
purposes.
On May 23, 2003, the Company terminated a $150 million credit facility, and
reduced a separate $250 million credit facility to $100 million. The remaining
$100 million facility was due to expire on June 23, 2003. On June 6, 2003, the
Company terminated the $100 million facility and closed on a new $100 million
revolving credit facility which expires on June 6, 2006.
On June 9, 2003, Yorkshire Power Group Limited, a wholly owned subsidiary of
MEHC, completed the redemption in full of the outstanding shares of the
Yorkshire Capital Trust I, 8.08% trust securities, due June 30, 2038, and paid
$243.4 million in principal amount ($25 liquidation amount per each trust
security) plus accrued distributions of $0.381555555 per trust security to the
redemption date. The redemption price was paid to holders of the trust security
on the redemption date. At December 31, 2002, $249.7 million of the 8.08% trust
securities and related fair value adjustments were included in subsidiary and
project debt.
6. OTHER INVESTMENTS
On June 10, 2003, The Williams Companies, Inc. ("Williams") repurchased, for
approximately $289 million, plus accrued dividends, all of the shares of its
9-7/8% Cumulative Convertible Preferred Stock originally acquired by MEHC in
March 2002 for $275 million.
7. COMMITMENTS AND CONTINGENCIES
MidAmerican Energy Manufactured Gas Plants
- ------------------------------------------
The United States Environmental Protection Agency ("EPA") and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute a health or
environmental risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is actively working with the regulatory
agencies and has received regulatory closure on four sites. MidAmerican Energy
is continuing to evaluate several of the sites to determine the future
liability, if any, for conducting site investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$54 million. As of June 30, 2003, MidAmerican Energy has recorded a $19.0
million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. MidAmerican Energy projects that
these amounts will be incurred or paid over the next four years.
-9-
The estimated liability is the cumulation of a site-specific cost evaluation
process. First, a determination is made as to whether MidAmerican Energy has
potential legal liability for the site and whether information exists to
indicate that contaminated wastes remain at the site. If so, the costs of
performing a preliminary investigation and the costs of removing known
contaminated soil are accrued. If it is determined during the preliminary
investigation that remedial action is required, then the best estimate of the
costs is accrued. The estimate includes incremental direct costs of remediation,
site monitoring costs and costs of compensation to employees for time expected
to be spent directly on the remediation effort. The estimated recorded
liabilities for these properties are based upon preliminary data. Thus, actual
costs could vary significantly from the estimates. The estimate could change
materially based on facts and circumstances derived from site investigations,
changes in required remedial action and changes in technology relating to
remedial alternatives. Insurance recoveries have been received for some of the
sites under investigation. Those recoveries are intended to be used principally
for accelerated remediation, as specified by the Iowa Utilities Board ("IUB")
and are recorded as a regulatory liability.
Although the timing of potential incurred costs and recovery of such costs in
rates may affect the results of operations in individual periods, management
believes that the outcome of these issues will not have a material adverse
effect on MidAmerican Energy's financial position, results of operations or cash
flows.
MidAmerican Energy Air Quality
- ------------------------------
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. Based on
data to be obtained from monitors located throughout each state, the EPA will
determine which states have areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). The standards were subjected
to legal proceedings, and in February 2001, the United States Supreme Court
upheld the constitutionality of the standards, though remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the United States Circuit Court of Appeals for the District of
Columbia, the EPA is moving forward in implementation of the ozone and fine
particulate standards and is analyzing existing monitored data to determine
attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of state implementation plans to
achieve attainment of the standards, MidAmerican Energy could be required to
install control equipment on its generating stations or decrease the number of
hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part, be
superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction initiatives to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing regulated
emissions from its generating facilities in a cost-effective manner. An
administrative law judge issued a ruling approving MidAmerican Energy's plan but
disallowing the proposed recovery of plan costs through a tracker mechanism.
MidAmerican Energy appealed the disallowance of the tracker and asked the IUB to
declare the tracker moot as it would not be used until at least 2010 if the IUB
approves a pending settlement that will "freeze" MidAmerican Energy's Iowa
electric rates through 2010. The Iowa Office of Consumer Advocate's appealed
asking the IUB to find that Iowa law allows the IUB to conduct a separate review
of plan investments for reasonableness when the costs are proposed for recovery
in a rate case. On July 17, 2003, the IUB issued an order affirming the
administrative law judge's decision. Accordingly, the IUB has rejected the
future application of a tracker mechanism
-10-
to recover emission reduction costs. However, the approved expenditures will not
be subject to a subsequent prudence review in a future electric rate case.
In recent years, the EPA has requested from several utilities information and
support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the New Source Review and the New Source Performance Standards
of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy
received requests from the EPA to provide documentation related to its capital
projects from January 1, 1980, to the present for its Neal, Council Bluffs,
Louisa and Riverside Energy Centers. MidAmerican Energy will continue to respond
to requests from the EPA and at this time cannot predict the outcome of these
requests.
MidAmerican Energy Nuclear Decommissioning Costs
- ------------------------------------------------
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator.
Based on information presently available, MidAmerican Energy expects to
contribute approximately $41 million during the period 2003 through 2007 to
external trusts established for the investment of funds for decommissioning Quad
Cities Station. Approximately 65% of the fair value of the trusts' funds is now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds. Funding for
Quad Cities Station nuclear decommissioning is reflected as depreciation expense
in the Consolidated Statement of Operations. 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.
Kern River and Northern Natural Gas Pipeline Litigation
- -------------------------------------------------------
In 1998, the United States Department of Justice informed the then current
owners of Kern River and Northern Natural Gas that Jack Grynberg, an individual,
had filed claims in the United States District Court for the District of
Colorado under the False Claims Act against such entities and certain of their
subsidiaries including Kern River and Northern Natural Gas. Mr. Grynberg has
also filed claims against numerous other energy companies and alleges that the
defendants violated the False Claims Act in connection with the measurement and
purchase of hydrocarbons. The relief sought is an unspecified amount of
royalties allegedly not paid to the federal government, treble damages, civil
penalties, attorneys' fees and costs. On April 9, 1999, the United States
Department of Justice announced that it declined to intervene in any of the
Grynberg qui tam cases, including the actions filed against Kern River and
Northern Natural Gas in the United States District Court for the District of
Colorado. On October 21, 1999, the Panel on Multi-District Litigation
transferred the Grynberg qui tam cases, including the ones filed against Kern
River and Northern Natural Gas, to the United States District Court for the
District of Wyoming for pre-trial purposes. Motions to dismiss the complaint,
filed by various defendants including Northern Natural Gas and Williams, which
was the former owner of Kern River, were denied on May 18, 2001. On October 9,
2002, the United States District Court for the District of Wyoming dismissed
Grynberg's Royalty Valuation Claims. Grynberg has appealed this dismissal to the
United States Court of Appeals for the Tenth Circuit. In connection with the
purchase of Kern River from Williams in March 2002, Williams agreed to indemnify
MEHC against any liability for this claim; however, no assurance can be given as
to the ability of Williams to perform on this indemnity should it become
necessary. No such indemnification was obtained in connection with the purchase
of Northern Natural Gas in August 2002. The Company believes that the Grynberg
cases filed against Kern River and Northern Natural Gas are without merit and
Williams, on behalf of Kern River pursuant to its indemnification, and Northern
Natural Gas, intend to defend these actions vigorously.
On June 8, 2001, a number of interstate pipeline companies, including Kern River
and Northern Natural Gas, were named as defendants in a nationwide class action
lawsuit which had been pending in the 26th Judicial District, District Court,
Stevens County Kansas, Civil Department against other defendants, generally
pipeline and gathering companies, since May 20, 1999. The plaintiffs allege that
the defendants have engaged in
-11-
mismeasurement techniques that distort the heating content of natural gas,
resulting in an alleged underpayment of royalties to the class of producer
plaintiffs. In November 2001, Kern River and Northern Natural Gas, along with
the coordinating defendants, filed a motion to dismiss under Rules 9B and 12B of
the Kansas Rules of Civil Procedure. In January 2002, Kern River and most of the
coordinating defendants filed a motion to dismiss for lack of personal
jurisdiction. The court has yet to rule on these motions. The plaintiffs filed
for certification of the plaintiff class on September 16, 2002. On January 13,
2003, oral arguments were heard on coordinating defendants' opposition to class
certification. On April 10, 2003, the court entered an order denying the
plaintiffs' motion for class certification. On May 12, 2003, the plaintiffs
filed a motion for leave to file a fourth amended petition alleging a class of
gas royalty owners in Kansas, Colorado and Wyoming. The court granted the motion
for leave to amend on July 28, 2003. Williams has agreed to indemnify MEHC
against any liability associated with Kern River for this claim; however, no
assurance can be given as to the ability of Williams to perform on this
indemnity should it become necessary. Williams, on behalf of Kern River and
other entities, anticipates joining with Northern Natural Gas and other
defendants in contesting certification of the plaintiff class. Kern River and
Northern Natural Gas believe that this claim is without merit and that Kern
River's and Northern Natural Gas' gas measurement techniques have been in
accordance with industry standards and its tariff.
Northern Natural Gas Delivery
- -----------------------------
As of June 30, 2003, Northern Natural Gas Company ("Northern Natural Gas") had
$50.1 million of obligations to deliver 9.8 billion cubic feet of natural gas in
2003. The obligations are revalued based on market prices for natural gas, with
changes in value included in the statement of operations. In 2002, Northern
Natural Gas entered into natural gas commodity price swaps and index basis swaps
to effectively fix the deferred obligation balance. These swaps have a net
receivable balance of $11.6 million at June 30, 2003. The swaps are revalued
based on market prices for natural gas, with changes in value included in the
statement of operations. Therefore, any further changes in the market value of
the deferred obligations are expected to be offset by a corresponding change in
the opposite direction in the market value of the swaps. However, at June 30,
2003, Northern Natural Gas had a $17.3 million receivable position with a third
party energy marketer relating to these swaps. Since the date of entering into
these swaps, there have been public announcements that this third party's
financial condition has deteriorated as a result of, among other factors,
reduced liquidity. This receivable would increase by approximately $9.8 million
if the price curve of natural gas were to increase by $1 per million British
thermal units from levels at June 30, 2003. MEHC has not recorded an allowance
on this receivable as of June 30, 2003, and is monitoring the situation.
Philippines
- -----------
Casecnan Construction Contract
The CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") Project (the
"Casecnan Project") was initially being constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. As
of May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults by
Hanbo and HECC including the insolvency of both companies. On the same date, CE
Casecnan entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa. (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce ("ICC") seeking schedule relief of up to 153
days through August 31, 2001 resulting from various
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alleged force majeure events. In its March 20, 2001 Supplement to Request for
Arbitration, the Contractor also seeks 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 in December 2001 amounted to a repudiation of
the Replacement Contract and has filed a claim for unspecified quantum meruit
damages, and has further alleged that the delay liquidated damages clause which
provides for payments of $125,000 per day for each day of delay in completion of
the Casecnan Project for which the Contractor is responsible is unenforceable.
The arbitration is being conducted applying New York law and pursuant to the
rules of the ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
2003. As part of those hearings, 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. As a result of the continuing nature of that
injunction, 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. As of June 30, 2003, however, CE Casecnan has
received approximately $6.0 million of liquidated damages from demands made on
the demand guarantees posted by Commerzbank on behalf of the Contractor. The
$6.0 million was recorded as a reduction in construction costs. On November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The arbitration
panel awarded the Contractor 18 days of schedule relief in the aggregate for all
of the force majeure events and awarded the Contractor $3.8 million with respect
to the cost of the collapsed surge shaft. The $3.8 million is shown as part of
the accounts payable and accrued expenses balance at June 30, 2003 and December
31, 2002. All of the Contractor's other claims with respect to force majeure and
geologic conditions were denied.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts paid to the Contractor, CE Casecnan could be liable
to make additional payments to the Contractor. CE Casecnan believes all of such
allegations and claims are without merit and is vigorously contesting the
Contractor's claims.
Casecnan NIA Arbitration
Under the terms of the Project Agreement, the Philippines National Irrigation
Administration ("NIA") has the option of timely reimbursing CE Casecnan directly
for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE
Casecnan, the taxes paid by CE Casecnan result in an increase in the Water
Delivery Fee. The payment of certain other taxes by CE Casecnan results
automatically in an increase in the Water Delivery Fee. As of June 30, 2003, CE
Casecnan had paid approximately $58.5 million in taxes, which as a result of the
foregoing provisions has resulted in an increase in the Water Delivery Fee. NIA
has failed to pay the portion of the Water Delivery Fee each month related to
the payment of these taxes by CE Casecnan. As a result of this non-payment, on
August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA,
seeking payment of such portion of the Water Delivery Fee and enforcement of the
relevant provision of the Project Agreement going forward. The arbitration is
being conducted in accordance with the rules of the ICC.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
("BOT") law. As such, NIA seeks dismissal of CE Casecnan's claims and a
declaration from the arbitral tribunal that the taxes which have been taken into
account in the Water Delivery Fee compensation mechanism are not recoverable
thereunder and that, at most, certain taxes may be directly reimbursed (rather
than compensated for through the Water Delivery Fee) by NIA. NIA also
counterclaims for
-13-
approximately $7 million which it alleges is due to it as a result of the
delayed completion of the Casecnan Project. On April 23, 2003, NIA filed a
Supplemental Counterclaim in which it asserts that the Project Agreement is
contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the Project Agreement
or any portions or sections thereof which may be determined to be contrary to
such law and or public policy. On May 23, 2003 CE Casecnan filed its reply to
NIA's counterclaims. CE Casecnan is required to file its brief and supporting
materials on October 17, 2003. Thereafter, NIA will file its response brief and
supporting materials by December 12, 2003. The parties will then exchange
documents in discovery and make rebuttal filings, in advance of the hearings on
the claims and counterclaims which are scheduled for July 2004. CE Casecnan
intends to vigorously contest all of NIA's assertions and counterclaims.
Included in revenue, for the three months ended June 30, 2003 and 2002, were
$8.1 million and $8.4 million, respectively, of tax compensation for Water
Delivery Fees under the Project Agreement, none of which has been paid. Included
in revenue for the six months ended June 30, 2003 and 2002, were $17.7 million
and $16.5 million, respectively, of tax compensation for Water Delivery Fees
under the Project Agreement, none of which has been paid. As of June 30, 2003
and December 31, 2002, the net receivable for the tax compensation piece of the
Water Delivery Fees invoiced since the start of commercial operations totaled
$35.5 million and $24.2 million, respectively.
Casecnan Stockholder Litigation
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MEHC through its indirect wholly owned subsidiary CE Casecnan
Ltd., advised the minority stockholder, LaPrairie Group Contractors
(International) Ltd. ("LPG"), that MEHC's indirect ownership interest in CE
Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, among others, CE
Casecnan Ltd. and MEHC. In the complaint, LPG seeks compensatory and punitive
damages for alleged breaches of the stockholder agreement and alleged breaches
of fiduciary duties allegedly owed by CE Casecnan Ltd. and MEHC 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 CE Casecnan. The
impact, if any, of this litigation on CE Casecnan cannot be determined at this
time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in CE
Casecnan were purchased by MEHC in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Casecnan Project. CE
Casecnan believes that San Lorenzo has no valid basis for any claim and, if
named as a defendant in any action that may be commenced by San Lorenzo, will
vigorously defend such action.
Philippine Political Risk
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other unrelated projects) has reportedly been identified as raising legal and
financial questions and, with those projects, has been prioritized for
renegotiation. The Company's subsidiaries' Upper Mahiao, Malitbog and
Mahanagdong projects have also reportedly been identified as raising legal and
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 Government 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's Philippine Projects. CE Casecnan representatives,
together with certain current and former government officials, also have been
requested to appear, and have appeared during 2002 and 2003, before a Philippine
Senate committee which has raised questions and made allegations with respect to
the Casecnan Project's tariff structure and implementation.
-14-
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case
involving an unsolicited BOT project for the development, construction and
operation of the new Manila International Airport. Various members of the
Philippine Congress and labor unions initiated the action in the Philippine
Supreme Court on September 17, 2002 seeking to enjoin the enforcement of the BOT
agreement with an international consortium known as PIATCO (the "PIATCO
Agreement"). The PIATCO consortium is unrelated to CE Casecnan or the Company.
On March 4, 2003, PIATCO separately initiated an ICC arbitration pursuant to the
terms of the PIATCO Agreement. The Supreme Court, in its ruling, stated that
there were no unresolved factual issues and therefore it had original
jurisdiction and concluded that the pendency of the arbitration did not preclude
the court from ruling on a case brought by non-parties to the PIATCO Agreement,
such as members of the Philippine Congress or nongovernmental organizations. In
a public speech on November 29, 2002 prior to the December 10, 2002 oral
arguments before the Philippine Supreme Court, Philippine President Arroyo
stated that she would not honor the PIATCO Agreement because the executive
branch's legal department had concluded it was "null and void". In light of that
announcement, the project owners stopped work on the project, which is
approximately 90% complete and accordingly has not been placed into commercial
operation. In its 10 to 3 ruling (with one abstention) issued on May 5, 2003,
the Philippine Supreme Court ruled that the PIATCO Agreement was contrary to
Philippine law and public policy and was "null and void". CE Casecnan is
assessing the impact of the PIATCO ruling on the Casecnan Project.
On April 24, 2003, Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to BB from BB+ as a result of S&P's downgrade of debt securities
issued by the Republic of the Philippines ("ROP"). The downgrade of the ROP debt
securities by S&P reflected the country's growing debt burden and fiscal
rigidity. On June 13, 2003, S&P downgraded CE Casecnan's senior secured notes
rating to B+ from BB and stated that the outlook for the rating was negative.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities. On June 6, 2003, Moody's downgraded CE
Casecnan's senior secured notes rating to B2 from Ba2.
8. COMPREHENSIVE INCOME
The differences from net income to total comprehensive income for the Company
are due to minimum pension liability adjustments, 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
Company is shown in the table below (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ----------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Net income .................................................... $ 79,941 $ 107,174 $ 210,577 $ 171,923
Other comprehensive income:
Minimum pension liability adjustment, net
of tax of $(2,392); $0; $(1,465) and $0, respectively...... (5,581) - (3,417) -
Foreign currency translation ................................ 5,959 109,983 (24,212) 81,468
Marketable securities, net of tax of $305; $(1,007); $222 and
$(2,123), respectively .................................... 458 (1,511) 325 (3,669)
Cash flow hedges, net of tax of $3,973; $(12,928); $6,415 and
$(9,125), respectively .................................... 9,433 (30,621) 14,659 (20,802)
-------- --------- --------- ---------
Total comprehensive income .................................... $ 90,210 $ 185,025 $ 197,932 $ 228,920
======== ========= ========= =========
-15-
9. SEGMENT INFORMATION
The Company has identified seven reportable operating segments based on
management structure: MidAmerican Energy, Kern River, Northern Natural Gas, CE
Electric UK Funding, Inc. ("CE Electric UK"), CalEnergy Generation-Domestic,
CalEnergy Generation-Foreign, and HomeServices of America, Inc.
("HomeServices"). Information related to the Company's reportable operating
segments is shown below (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING REVENUE:
MidAmerican Energy ............................... $ 536,440 $ 493,857 $ 1,352,356 $ 1,068,892
Kern River ....................................... 64,444 44,983 103,474 47,181
Northern Natural Gas ............................. 85,181 - 255,183 -
CE Electric UK ................................... 188,659 189,641 414,191 403,598
CalEnergy Generation - Domestic .................. 10,971 8,805 22,204 13,910
CalEnergy Generation - Foreign ................... 80,163 76,374 156,892 150,459
HomeServices ..................................... 395,632 340,661 653,620 515,227
----------- ----------- ----------- -----------
Segment operating revenue ...................... 1,361,490 1,154,321 2,957,920 2,199,267
Corporate/other .................................. (15,250) (5,024) (48,846) (8,218)
----------- ----------- ----------- -----------
Total operating revenue ........................ $ 1,346,240 $ 1,149,297 $ 2,909,074 $ 2,191,049
=========== =========== =========== ===========
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES:
MidAmerican Energy ............................... $ 47,234 $ 39,700 $ 137,126 $ 109,988
Kern River ....................................... 35,757 21,642 62,133 22,613
Northern Natural Gas ............................. (9,814) - 73,825 -
CE Electric UK ................................... 60,513 96,288 145,286 157,255
CalEnergy Generation - Domestic .................. (1,961) 623 (8,954) (1,666)
CalEnergy Generation - Foreign ................... 36,820 33,101 71,352 63,794
HomeServices ..................................... 39,693 26,160 46,698 26,031
----------- ---------- ----------- -----------
Segment income before provision for income taxes 208,242 217,514 527,466 378,015
Corporate/other .................................. (31,837) (52,060) (89,512) (92,831)
----------- ----------- ----------- -----------
Total income before provision for income taxes . $ 176,405 $ 165,454 $ 437,954 $ 285,184
=========== =========== =========== ===========
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
TOTAL ASSETS:
MidAmerican Energy ............................... $ 6,088,064 $ 6,025,452
Kern River ....................................... 2,190,828 1,797,850
Northern Natural Gas ............................. 2,212,359 2,162,367
CE Electric UK ................................... 4,619,678 4,714,459
CalEnergy Generation - Domestic .................. 865,094 881,633
CalEnergy Generation - Foreign ................... 966,192 974,852
HomeServices ..................................... 583,385 488,324
----------- -----------
Segment total assets .......................... 17,525,600 17,044,937
Corporate/other .................................. 1,115,125 970,449
----------- -----------
Total assets .................................. $18,640,725 $18,015,386
=========== ===========
The remaining differences from the segment amounts to the consolidated amounts
described as "Corporate/other" relate principally to the corporate functions
including administrative costs, corporate cash and related interest income,
intersegment eliminations, and fair value adjustments relating to acquisitions.
Total assets by segment includes the allocation of goodwill.
-16-
Goodwill as of December 31, 2002 and changes for the period from January 1, 2003
through June 30, 2003 by segment are as follows (in thousands):
Northern CalEnergy
MidAmerican Kern Natural CE Electric Generation- Home-
Energy River Gas UK Domestic Services Total
----------- ------- --------- ----------- ---------- -------- -----------
Goodwill at December 31, 2002.. $2,149,282 $32,547 $ 414,721 $ 1,195,321 $126,440 $339,821 $ 4,258,132
Goodwill from acquisitions
during the year ........... - - - - - 13,985 13,985
Other goodwill adjustments(1) - 1,353 (39,368) (4,054) - - (42,069)
---------- ------- --------- ----------- -------- -------- -----------
Goodwill at June 30, 2003 ..... $2,149,282 $33,900 $ 375,353 $ 1,191,267 $126,440 $353,806 $ 4,230,048
========== ======= ========= =========== ======== ======== ===========
(1) Other goodwill adjustments include deferred tax, foreign currency
translation and purchase price adjustments.
The Company completed the allocation of the Kern River purchase price to the
assets and liabilities acquired during the first quarter of 2003.
The Company is in the process of completing the allocation of the Northern
Natural Gas purchase price to the assets and liabilities acquired. The final
allocation will be completed during the third quarter of 2003.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is management's discussion and analysis of certain significant
factors which have affected the financial condition and results of operations of
MidAmerican Energy Holdings Company ("MEHC" or the "Company"), during the
periods included in the accompanying statements of operations. This discussion
should be read in conjunction with the Company's historical financial statements
and the notes to those statements. The Company's actual results in the future
could differ significantly from the historical results.
FORWARD-LOOKING STATEMENTS
From time to time, MEHC may make forward-looking statements within the meaning
of the federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of the Company or any of its subsidiaries
individually. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost reduction
strategies and anticipated outcomes, pricing strategies, changes in the utility
industry, planned capital expenditures, financing needs and availability,
statements of MEHC's expectations, beliefs, future plans and strategies,
anticipated events or trends and similar comments concerning matters that are
not historical facts. These types of forward-looking statements are based on
current expectations and involve a number of known and unknown risks and
uncertainties that could cause the actual results and performance of 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 Private Securities Litigation Reform Act of 1995, MEHC
has identified important factors that could cause actual results to differ
materially from those expectations, including weather effects on revenues and
other operating uncertainties, uncertainties relating to economic and political
conditions and uncertainties regarding the impact of regulations, changes in
government policy and competition. The Company does not assume any
responsibility to update forward-looking information contained herein.
BUSINESS
The Company 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 seven distinct platforms: MidAmerican Energy Company
("MidAmerican Energy"), Kern River Gas Transmission Company ("Kern River"),
Northern Natural Gas Company ("Northern Natural Gas"), CE Electric UK Funding,
Inc. ("CE Electric UK") (which includes Northern Electric Distribution Ltd
("NED") and Yorkshire Electricity Distribution plc ("YED")), CalEnergy
Generation-Domestic, CalEnergy Generation-Foreign and HomeServices of America,
Inc. ("HomeServices"). These platforms are discussed in detail in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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 Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002
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 effects of certain types of regulation, impairment of
long-lived assets, contingent liabilities and the accounting for revenue. Actual
results could differ from these estimates.
For additional discussion of the Company's critical accounting policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
-18-
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003 the Company adopted Statement of Financial Accounting
Standards ("SFAS') No. 143, "Accounting for Asset Retirement Obligations". This
statement provides accounting and disclosure requirements for retirement
obligations associated with long-lived assets. The cumulative effect of
initially applying this statement was immaterial.
The Company's review of its regulated entities identified legal retirement
obligations for nuclear decommissioning, wet and dry ash landfills and offshore
and minor lateral pipeline facilities. On January 1, 2003, the Company recorded
$289.3 million of asset retirement obligation ("ARO") liabilities; $13.9 million
of ARO assets, net of accumulated depreciation; $114.6 million of regulatory
assets; and reclassified $1.0 million of accumulated depreciation to the ARO
liability. The initial ARO liability recognized includes $266.5 million that
pertains to obligations associated with the decommissioning of the Quad Cities
nuclear station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded at December 31, 2002. The
adoption of this statement did not have a material impact on the operations of
the regulated entities, as the effects were offset by the establishment of
regulatory assets, totaling $114.6 million, pursuant to SFAS No. 71.
During the six-month period ended June 30, 2003, the Company recorded, as a
regulatory asset, accretion related to the ARO liability of $8.3 million,
resulting in an ARO liability balance of $297.6 million at June 30, 2003.
On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends SFAS No. 133 for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 149 also amends certain other
existing pronouncements. It will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS 149 clarifies
when a contract with an initial net investment meets the characteristic of a
derivative and clarifies when a derivative that contains a financing component
will require special reporting in the statement of cash flows. SFAS 149 is
effective for the Company for contracts entered into or modified after June 30,
2003. The Company does not expect the adoption of SFAS 149 to have a material
effect on its financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Effective July 1, 2003, the
Company adopted the standard which resulted in the reclassification of
approximately $2.0 billion of Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts to current ($150.0 million) and non-current
($1,850.0 million) liabilities with a corresponding reduction in their current
presentation between the liabilities section and the equity section of the
balance sheet. Similarly, payments to holders of the instruments and related
accruals will be presented separately from payments to and interest due to other
creditors in statements of cash flows and operations.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Operating revenue for the three months ended June 30, 2003 increased $196.9
million or 17.1% to $1,346.2 million from $1,149.3 million for the same period
in 2002.
MidAmerican Energy operating revenue for the three months ended June 30, 2003,
increased $42.5 million, or 8.6%, to $536.4 million. Gas revenues increased
$39.6 million, or 27.1%, to $186.2 million for the three months ended June 30,
2003, primarily due to higher gas prices partially offset by lower volumes.
Kern River operating revenue for the three months ended June 30, 2003, increased
$19.4 million, or 43.1%, to $64.4 million. The increase is primarily due to the
completion and beginning of operation, on May 1, 2003, of the expansion for
which Kern River filed an application with the Federal Energy Regulatory
Commission on August 1, 2001 (the "2003 Expansion Project").
-19-
Northern Natural Gas operating revenue for the three months ended June 30, 2003,
was $85.2 million. Northern Natural Gas was acquired on August 16, 2002,
accordingly, there was no revenue recorded during the three months ended June
30, 2002.
HomeServices operating revenue for the three months ended June 30, 2003,
increased $54.9 million, or 16.1%, to $395.6 million. The increase was due to
acquisitions, totaling $34.0 million, and growth from existing operations
reflecting higher unit sales.
Income on equity investments for the three months ended June 30, 2003, increased
$8.7 million to $13.5 million, primarily due to increased mortgage activity at
HomeServices mortgage joint ventures and increased income at CE Generation
primarily due to higher energy rates.
Interest and dividend income for the three months ended June 30, 2003, increased
$8.6 million to $19.3 million. The increase is primarily due to the dividend
received related to the sale of our investment in The Williams Cumulative
Convertible Preferred Stock in June 2003.
Other income for the three months ended June 30, 2003, decreased $28.1 million
to $30.1 million from $58.2 million, primarily due to the $53.3 million gain on
the 2002 sale of various assets of CE UK Gas Holdings Limited ("CE Gas"), an
indirect wholly owned subsidiary of the Company, partially offset by the $13.8
million gain on sale of The Williams Cumulative Convertible Preferred Stock in
June 2003.
Cost of sales for the three months ended June 30, 2003, increased $73.0 million,
or 16.0%, to $528.8 million. MidAmerican Energy cost of sales increased $44.9
million primarily due to increased gas prices and the restructuring of the
Cooper Nuclear Station ("Cooper") contract, which increased cost of sales and
decreased operating expenses, effective August 1, 2002. CE Electric UK cost of
sales decreased $12.3 million, primarily due to the sale of the retail business
in 2002 and the refund of costs from the transmission grid partially offset by
the impact of exchange rates. HomeServices cost of sales increased $33.3 million
due to the prior year acquisitions and higher commission expense on incremental
sales at existing business units.
Operating expenses for the three months ended June 30, 2003, increased $41.9
million, or 12.9%, to $367.8 million. Northern Natural Gas operating expenses
were $55.3 million. HomeServices operating expenses increased $13.7 million,
primarily due to the impact of the 2002 acquisitions. MidAmerican Energy
operating expenses decreased $15.5 million, primarily due to the restructuring
of the Cooper contract. CE Electric UK operating expenses decreased $14.2
million, primarily due to the sale of their retail business.
Depreciation and amortization for the three months ended June 30, 2003,
increased $29.9 million, or 22.8%, to $160.8 million. This was primarily due to
depreciation of $14.2 million at Northern Natural Gas, a $6.5 million increase
at MidAmerican Energy primarily due to higher revenue sharing and $2.4 million
at Kern River primarily due to the completion of the 2003 Expansion Project.
Interest expense for the three months ended June 30, 2003, increased $29.8
million, or 19.5%, to $183.0 million. This was primarily due to interest expense
of $14.7 million at Northern Natural Gas, increased interest expense at Kern
River of $8.3 million due to the 2003 Expansion Project, and additional interest
expense totaling $11.6 million on the Company's $700.0 million and $450.0
million debt issuances, partially offset by reductions in the corporate
revolver, CalEnergy Generation - Foreign project debt and YED trust securities
which were redeemed on June 9, 2003.
Capitalized interest for the three months ended June 30, 2003, decreased $0.7
million to $7.6 million. The decrease is primarily due to the discontinuance of
capitalizing interest at the project developed by a subsidiary of the Company,
which is recovering zinc from geothermal brine of certain power projects (the
"Zinc Recovery Project") partially offset by interest capitalized on Kern
River's 2003 Expansion Project.
-20-
The income tax provision for the three months ended June 30, 2003, increased
$8.2 million to $32.5 million. The effective tax rate decreased slightly due to
income earned on the dividends received on The Williams Cumulative Convertible
Preferred Stock. The effective rate is calculated after adjusting for the impact
of deductible minority interest, the $35.7 million benefit in 2002 from the
Teeside Power Limited ("Teeside") consortium relief and the write-off of $49.6
million in goodwill associated with the 2002 CE Gas asset sales.
Minority interest and preferred dividends for the three months ended June 30,
2003, increased $30.0 million to $64.0 million. The increase was primarily due
to the issuance of $950.0 million of trust preferred securities in August 2002
and a $4.8 million loss to retire the Company's trust preferred securities which
were purchased and retired in June 2003 for $33.4 million.
Net income available to common and preferred stockholders for the three months
ended June 30, 2003, decreased $27.3 million to $79.9 million.
RESULTS OF OPERATIONS FOR SIX-MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
Operating revenue for the six months ended June 30, 2003 increased $718.1
million or 32.8% to $2,909.1 million from $2,191.0 million for the same period
in 2002.
MidAmerican Energy operating revenue for the six months ended June 30, 2003,
increased $283.5 million or 26.5% to $1,352.4 million. Gas revenues increased
$265.3 million, or 66.2%, to $666.0 million for the six months ended June 30,
2003, primarily due to higher gas prices.
Kern River operating revenue for the six months ended June 30, 2003, increased
$56.3 million to $103.5 million. The increase was primarily due to operating
revenue in 2002 being recorded for Kern River beginning on March 27, 2002, the
acquisition date, and to a lesser degree, to the completion and beginning of
operation, on May 1, 2003, of the 2003 Expansion Project.
Northern Natural Gas operating revenue for the six months ended June 30, 2003,
was $255.2 million. Northern Natural Gas was acquired on August 16, 2002,
accordingly, there was no revenue recorded during the six months ended June 30,
2002.
HomeServices operating revenue for the six months ended June 30, 2003, increased
$138.4 million, or 26.9%, to $653.6 million. The increase was due to the impact
of acquisitions, totaling $96.6 million, and growth from existing operations,
reflecting higher unit sales and average home sales prices.
Income on equity investments for the six months ended June 30, 2003 increased
$2.1 million or 11.1% to $21.0 million. The increase was primarily due to
increased mortgage activity at HomeServices mortgage joint ventures partially
offset by decreased equity income at MidAmerican Energy due to a common stock
distribution from an energy investment fund in 2002.
Interest and dividend income for the six months ended June 30, 2003 increased
$14.1 million, or 73.8%, to $33.2 million. The increase is primarily due to
dividends received on the investment in The Williams Cumulative Convertible
Preferred Stock.
Other income for the six months ended June 30, 2003 decreased $13.6 million to
$49.9. The decrease was primarily due to the $53.3 million gain on sale of
various CE Gas assets in May 2002, partially offset by the $13.8 million gain on
sale of The Williams Cumulative Convertible Preferred Stock in June 2003 and the
allowance for equity funds used during construction at Kern River and
MidAmerican Energy in 2003.
Cost of sales for the six months ended June 30, 2003 increased $336.4 million or
38.9% to $1,201.5 million. MidAmerican Energy's cost of sales increased $278.3
million due primarily to increased gas prices and the restructuring of the
Cooper contract which increased cost of sales and decreased operating expenses.
HomeServices cost of sales increased $90.3 million due to the prior year
acquisitions and higher commission expense on incremental sales at existing
business units.
-21-
Operating expenses for the six months ended June 30, 2003 increased $118.7
million or 19.6% to $724.3 million. Northern Natural Gas operating expenses were
$116.8 million. HomeServices operating expenses increased $39.6 million,
primarily due to the impact of 2002 acquisitions and Kern River operating
expenses increased $10.1 million due to the inclusion of operations for the
entire six-month period. MidAmerican Energy's operating expenses decreased $30.9
million, primarily due to the restructuring of the Cooper contract.
Depreciation and amortization for the six months ended June 30, 2003 increased
$45.4 million or 17.7% to $302.6 million. The increase was primarily due to
depreciation of $25.4 million at Northern Natural Gas, increased depreciation of
$6.8 million at Kern River due to the completion of the 2003 Expansion Project
and the inclusion of Kern River's operations for the entire six-month period
ended June 30, 2003 and increased depreciation of $5.6 million at MidAmerican
Energy from higher utility plant depreciation.
Interest expense for the six months ended June 30, 2003 increased $75.4 million
or 25.6% to $369.9 million. The increase was primarily comprised of a $30.2
million increase due to the acquisition of Northern Natural Gas, $27.5 million
of increased interest expense at Kern River as a result of additional borrowings
related to the 2003 Expansion Project and additional interest expense totaling
$21.3 million on the Company's $700.0 million and $450.0 million debt issuances,
partially offset by reductions in the corporate revolver, CalEnergy Generation -
Foreign project debt and YED trust securities which were redeemed on June 9,
2003.
Capitalized interest for the six months ended June 30, 2003 increased $8.1
million to $23.1 million. The increase is primarily due to the capitalization of
interest on Kern River's 2003 Expansion Project partially offset by the
discontinuance of capitalizing interest at the Zinc Recovery Project.
The income tax provision for the six months ended June 30, 2003, increased $52.1
million to $105.5 million. The effective tax rate increased slightly due to
higher income at segments with higher tax rates partially offset by the income
earned on the dividends received on The Williams Cumulative Convertible
Preferred Stock. The effective rate is calculated after adjusting for the impact
of deductible minority interest, the $35.7 million benefit in 2002 from the
Teeside Power Limited consortium relief and the write-off of $49.6 million in
goodwill associated with the 2002 CE Gas asset sales.
Minority interest and preferred dividends for the six months ended June 30, 2003
increased $62.1 million to $121.9 million. The increase was primarily due to the
issuance of $323.0 million and $950.0 million of 11% trust preferred securities
in March 2002 and August 2002, respectively, and a $4.8 million loss to retire
the Company's trust preferred securities which were purchased and retired in
June 2003 for $33.4 million.
Net income available to common and preferred stockholders for the six-month
period ended June 30, 2003 increased $38.7 million to $210.6 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 $1,280.8 million at June 30, 2003,
compared $844.4 million at December 31, 2002. Each of the 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 the Company will be available to satisfy the obligations of
the Company or any of its other
-22-
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 the Company or affiliates thereof.
In addition, the Company recorded separately, in restricted cash and short-term
investments and deferred charges and other assets, restricted cash and
investments of $106.6 million and $58.7 million at June 30, 2003, and December
31, 2002, respectively. The restricted cash balance for both periods is
comprised primarily of amounts deposited in restricted accounts which are
reserved for the service of debt obligations and customer deposits held in
escrow.
Cash flows from operating activities for the six months ended June 30, 2003
increased $255.7 million to $704.2 million from $448.5 million for the same
period in 2002. The increase was primarily due to timing of distributions from
equity investments and changes in working capital, deferred taxes and the
positive impacts of the Kern River, Northern Natural Gas and HomeServices
acquisitions.
The remaining decrease to cash and cash equivalents is primarily due to
construction and development costs, capital expenditures related to operating
projects and repayments and redemption of debt and other obligations offset by
the issuance of debt and the sale of The Williams Cumulative Convertible
Preferred Stock.
The Williams Cumulative Convertible Preferred Stock
- ---------------------------------------------------
On June 10, 2003, Williams repurchased, for approximately $289 million, plus
accrued dividends, all of the shares of its 9-7/8% Cumulative Convertible
Preferred Stock originally acquired by MEHC in March 2002 for $275 million.
Kern River's 2003 Expansion Project
- -----------------------------------
Kern River has completed the construction of its 2003 Expansion Project at a
total cost of approximately $1.2 billion. The expansion, which was placed into
operation on May 1, 2003, increased the design capacity of the existing Kern
River pipeline by 885,626 decatherms ("dth") per day to 1,755,626 dth per day.
Kern River Funding Corporation, a wholly owned subsidiary of Kern River, issued
$836 million of its 4.893% Senior Notes with a final maturity on April 30, 2018.
The proceeds were used to repay all of the approximately $815 million of
outstanding borrowings under Kern River's $875 million credit facility. Kern
River entered into this credit facility in 2002 to finance the construction of
the 2003 Expansion Project. The credit facility was canceled and a completion
guarantee issued by the Company in favor of the lenders as part of the credit
facility terminated upon completion of the 2003 Expansion Project.
MidAmerican Energy Operating Projects and Construction and Development Costs
- ----------------------------------------------------------------------------
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first six months of 2003, utility construction
expenditures totaled $151.6 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $374 million for 2003. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2007, MidAmerican Energy plans to develop and construct three electric
generating projects in Iowa. The projects would provide service to regulated
retail electricity customers and, subject to regulatory approvals, be included
in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may
also be made from the plants to the extent the power is not needed for regulated
retail service. MidAmerican Energy expects to invest approximately $1.44 billion
in the three projects.
-23-
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, plus allowance for funds used during construction.
MidAmerican Energy will own 100% of the plant and operate it. Commercial
operation of the simple cycle mode began on May 5, 2003. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in 327 megawatts
("MW") of accredited capacity. The combined cycle operation is expected to
commence in December 2004, resulting in an expected additional 190 MW of
accredited capacity.
The second project is currently under development and is expected to be a 790-MW
(based on expected accreditation) super-critical-temperature, coal-fired plant
fueled with low-sulfur coal. If constructed, MidAmerican Energy will operate the
plant and expects to own approximately 475 MW of the plant. MidAmerican Energy
expects to invest approximately $759 million in the project, plus allowance for
funds used during construction. Municipal, cooperative and public power
utilities will own the remainder, which is a typical ownership arrangement for
large base-load plants in Iowa. On May 29, 2003, the Iowa Utilities Board
("IUB") issued an order that approves the ratemaking principles for the plant,
and on June 27, 2003, MidAmerican Energy received a certificate from the IUB
allowing MidAmerican Energy to construct the plant. On February 12, 2003,
MidAmerican Energy executed a contract with Mitsui & Co. Energy Development,
Inc. for the engineering, procurement and construction of the plant and issued a
limited notice to proceed authorizing detailed engineering. A full notice to
proceed authorizing construction is expected in the third quarter of 2003.
MidAmerican Energy is also seeking an order from the IUB approving construction
of the associated transmission facilities.
The third project is currently under development and is expected to be wind
power facilities totaling 310 MW based on the nameplate rating. Generally
speaking, accredited capacity ratings for wind power facilities are considerably
less than the nameplate ratings due to the varying nature of wind. The current
projected accredited capacity for these wind power facilities is approximately
53 MW. If constructed, MidAmerican Energy will own and operate these facilities,
which are expected to cost approximately $323 million. MidAmerican Energy's plan
to construct the wind project is in conjunction with a settlement proposal to
extend through December 31, 2010, an Iowa electric rate freeze that is currently
scheduled to expire at the end of 2005. The proposed settlement, which was filed
with the IUB as part of MidAmerican Energy's application for ratemaking
principles for the wind project, is subject to approval by the IUB. MidAmerican
Energy has received authorization from the IUB to construct the wind power
facilities and expects an order on its requested ratemaking principles for the
project in the third quarter of 2003.
Casecnan Construction Contract
- ------------------------------
The CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") Project (the
"Casecnan Project") was initially being constructed pursuant to a fixed-price,
date-certain, turnkey construction contract (the "Hanbo Contract") on a joint
and several basis by Hanbo Corporation ("Hanbo") and Hanbo Engineering and
Construction Co., Ltd. ("HECC"), both of which are South Korean corporations. As
of May 7, 1997, CE Casecnan terminated the Hanbo Contract due to defaults by
Hanbo and HECC including the insolvency of both companies. On the same date, CE
Casecnan entered into a new fixed-price, date certain, turnkey engineering,
procurement and construction contract to complete the construction of the
Casecnan Project (the "Replacement Contract"). The work under the Replacement
Contract was conducted by a consortium consisting of Cooperativa Muratori
Cementisti CMC di Ravenna and Impresa Pizzarotti & C. Spa. (collectively, the
"Contractor"), working together with Siemens A.G., Sulzer Hydro Ltd., Black &
Veatch and Colenco Power Engineering Ltd.
On November 20, 1999, the Replacement 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
Trust Indenture.
On February 12, 2001, the Contractor filed a Request for Arbitration with the
International Chamber of Commerce ("ICC") seeking schedule relief of 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 also seeks 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
-24-
alleged that the circumstances surrounding the placing of the Casecnan Project
into commercial operation in December 2001 amounted to a repudiation of the
Replacement Contract and has filed a claim for unspecified quantum meruit
damages, and has further alleged that the delay liquidated damages clause which
provides for payments of $125,000 per day for each day of delay in completion of
the Casecnan Project for which the Contractor is responsible is unenforceable.
The arbitration is being conducted applying New York law and pursuant to the
rules of the ICC.
Hearings have been held in connection with this arbitration in July 2001,
September 2001, January 2002, March 2002, November 2002, January 2003 and July
2003. As part of those hearings, 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. As a result of the continuing nature of that
injunction, 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. As of June 30, 2003, however, CE Casecnan has
received approximately $6.0 million of liquidated damages from demands made on
the demand guarantees posted by Commerzbank on behalf of the Contractor. The
$6.0 million was recorded as a reduction in construction costs. On November 7,
2002, the ICC issued the arbitration tribunal's partial award with respect to
the Contractor's force majeure and geologic conditions claims. The arbitration
panel awarded the Contractor 18 days of schedule relief in the aggregate for all
of the force majeure events and awarded the Contractor $3.8 million with respect
to the cost of the collapsed surge shaft. The $3.8 million is shown as part of
the accounts payable and accrued expenses balance at June 30, 2003 and December
31, 2002. All of the Contractor's other claims with respect to force majeure and
geologic conditions were denied.
If the Contractor were to prevail on its claim that the delay liquidated damages
clause is unenforceable, CE Casecnan would not be entitled to collect such delay
damages for the period from March 31, 2001 through December 11, 2001. If the
Contractor were to prevail in its repudiation claim and prove quantum meruit
damages in excess of amounts paid to the Contractor, CE Casecnan could be liable
to make additional payments to the Contractor. CE Casecnan believes all of such
allegations and claims are without merit and is vigorously contesting the
Contractor's claims.
Casecnan NIA Arbitration
- ------------------------
Under the terms of the Project Agreement, the Philippines National Irrigation
Administration ("NIA") has the option of timely reimbursing CE Casecnan directly
for certain taxes CE Casecnan has paid. If NIA does not so reimburse CE
Casecnan, the taxes paid by CE Casecnan result in an increase in the Water
Delivery Fee. The payment of certain other taxes by CE Casecnan results
automatically in an increase in the Water Delivery Fee. As of June 30, 2003, CE
Casecnan had paid approximately $58.5 million in taxes, which as a result of the
foregoing provisions has resulted in an increase in the Water Delivery Fee. NIA
has failed to pay the portion of the Water Delivery Fee each month related to
the payment of these taxes by CE Casecnan. As a result of this non-payment, on
August 19, 2002, CE Casecnan filed a Request for Arbitration against NIA,
seeking payment of such portion of the Water Delivery Fee and enforcement of the
relevant provision of the Project Agreement going forward. The arbitration is
being conducted in accordance with the rules of the ICC.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserts, among other things, that most of the taxes which CE Casecnan has
factored into the Water Delivery Fee compensation formula do not fall within the
scope of the relevant section of the Project Agreement, that the compensation
mechanism itself is invalid and unenforceable under Philippine law and that the
Project Agreement is inconsistent with the Philippine build-operate-transfer
("BOT") law. As such, NIA seeks dismissal of CE Casecnan's claims and a
declaration from the arbitral tribunal that the taxes which have been taken into
account in the Water Delivery Fee compensation mechanism are not recoverable
thereunder and that, at most, certain taxes may be directly reimbursed (rather
than compensated for through the Water Delivery Fee) by NIA. NIA also
counterclaims for approximately $7 million which it alleges is due to it as a
result of the delayed completion of the Casecnan Project. On April 23, 2003, NIA
filed a Supplemental Counterclaim in which it asserts that the Project Agreement
is contrary to Philippine law and public policy and by way of relief seeks a
declaration that the Project Agreement is void from the beginning or should be
cancelled, or alternatively, an order for reformation of the Project Agreement
or any portions or sections thereof which may be determined to be contrary to
such law and or
-25-
public policy. On May 23, 2003 CE Casecnan filed its reply to NIA's
counterclaims. CE Casecnan is required to file its brief and supporting
materials on October 17, 2003. Thereafter, NIA will file its response brief and
supporting materials by December 12, 2003. The parties will then exchange
documents in discovery and make rebuttal filings, in advance of the hearings on
the claims and counterclaims which are scheduled for July 2004. CE Casecnan
intends to vigorously contest all of NIA's assertions and counterclaims.
Included in revenue, for the three months ended June 30, 2003 and 2002, were
$8.1 million and $8.4 million, respectively, of tax compensation for Water
Delivery Fees under the Project Agreement, none of which has been paid. Included
in revenue for the six months ended June 30, 2003 and 2002, were $17.7 million
and $16.5 million, respectively, of tax compensation for Water Delivery Fees
under the Project Agreement, none of which has been paid. As of June 30, 2003
and December 31, 2002, the net receivable for the tax compensation piece of the
Water Delivery Fees invoiced since the start of commercial operations totaled
$35.5 million and $24.2 million, respectively.
Casecnan Stockholder Litigation
- -------------------------------
Pursuant to the share ownership adjustment mechanism in the CE Casecnan
stockholder agreement, which is based upon pro forma financial projections of
the Casecnan Project prepared following commencement of commercial operations,
in February 2002, MEHC through its indirect wholly owned subsidiary CE Casecnan
Ltd., advised the minority stockholder, LaPrairie Group Contractors
(International) Ltd. ("LPG"), that MEHC's indirect ownership interest in CE
Casecnan had increased to 100% effective from commencement of commercial
operations. On July 8, 2002, LPG filed a complaint in the Superior Court of the
State of California, City and County of San Francisco against, among others, CE
Casecnan Ltd. and MEHC. In the complaint, LPG seeks compensatory and punitive
damages for alleged breaches of the stockholder agreement and alleged breaches
of fiduciary duties allegedly owed by CE Casecnan Ltd. and MEHC 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 CE Casecnan. The
impact, if any, of this litigation on CE Casecnan cannot be determined at this
time.
In February 2003, San Lorenzo Ruiz Builders and Developers Group, Inc. ("San
Lorenzo"), an original shareholder substantially all of whose shares in CE
Casecnan were purchased by MEHC in 1998, threatened to initiate legal action in
the Philippines in connection with certain aspects of its option to repurchase
such shares on or prior to commercial operation of the Casecnan Project. CE
Casecnan believes that San Lorenzo has no valid basis for any claim and, if
named as a defendant in any action that may be commenced by San Lorenzo, will
vigorously defend such action.
Philippine Political Risk
- -------------------------
In connection with an interagency review of approximately 40 independent power
project contracts in the Philippines, the Casecnan Project (together with four
other unrelated projects) has reportedly been identified as raising legal and
financial questions and, with those projects, has been prioritized for
renegotiation. The Company's subsidiaries' Upper Mahiao, Malitbog and
Mahanagdong projects have also reportedly been identified as raising legal and
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 Government 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's Philippine Projects. CE Casecnan representatives,
together with certain current and former government officials, also have been
requested to appear, and have appeared during 2002 and 2003, before a Philippine
Senate committee which has raised questions and made allegations with respect to
the Casecnan Project's tariff structure and implementation.
On May 5, 2003, the Philippine Supreme Court issued its ruling in a case
involving an unsolicited BOT project for the development, construction and
operation of the new Manila International Airport. Various members of the
Philippine Congress and labor unions initiated the action in the Philippine
Supreme Court on September 17, 2002 seeking to enjoin the enforcement of the BOT
agreement with an international consortium known as PIATCO (the "PIATCO
Agreement"). The PIATCO consortium is unrelated to CE Casecnan or the Company.
On March 4, 2003, PIATCO separately initiated an ICC arbitration pursuant to the
terms of the PIATCO Agreement. The Supreme Court, in its
-26-
ruling, stated that there were no unresolved factual issues and therefore it had
original jurisdiction and concluded that the pendency of the arbitration did not
preclude the court from ruling on a case brought by non-parties to the PIATCO
Agreement, such as members of the Philippine Congress or nongovernmental
organizations. In a public speech on November 29, 2002 prior to the December 10,
2002 oral arguments before the Philippine Supreme Court, Philippine President
Arroyo stated that she would not honor the PIATCO Agreement because the
executive branch's legal department had concluded it was "null and void". In
light of that announcement, the project owners stopped work on the project,
which is approximately 90% complete and accordingly has not been placed into
commercial operation. In its 10 to 3 ruling (with one abstention) issued on May
5, 2003, the Philippine Supreme Court ruled that the PIATCO Agreement was
contrary to Philippine law and public policy and was "null and void". CE
Casecnan is assessing the impact of the PIATCO ruling on the Casecnan Project.
On April 24, 2003, Standard & Poor's Ratings Services ("S&P") lowered its rating
of CE Casecnan to BB from BB+ as a result of S&P's downgrade of debt securities
issued by the Republic of the Philippines ("ROP"). The downgrade of the ROP debt
securities by S&P reflected the country's growing debt burden and fiscal
rigidity. On June 13, 2003, S&P downgraded CE Casecnan's senior secured notes
rating to B+ from BB and stated that the outlook for the rating was negative.
On May 8, 2003, Moody's Investors Service ("Moody's") placed the Ba2 senior
secured notes rating of CE Casecnan on review for possible downgrade, noting
NIA's supplemental counterclaim seeking to have the Project Agreement declared
void. Moody's noted that actions by government related agencies and the
resulting instability of contractual arrangements was becoming inconsistent with
their rating approach that attaches significant benefit to offtake arrangements
with those government supported entities. On June 6, 2003, Moody's downgraded CE
Casecnan's senior secured notes rating to B2 from Ba2.
Other Debt Issuances and Redemptions
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On January 14, 2003, MidAmerican Energy issued $275.0 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
On May 16, 2003, the Company issued $450 million of its 3.5% Senior Notes with a
final maturity on May 15, 2018. The proceeds were used for general corporate
purposes.
On May 23, 2003, the Company terminated a $150 million credit facility, and
reduced a separate $250 million credit facility to $100 million. The remaining
$100 million facility was due to expire on June 23, 2003. On June 6, 2003, the
Company terminated the $100 million facility and closed on a new $100 million
revolving credit facility which expires on June 6, 2006. The facility supports
letters of credit of which $74.6 million were outstanding at June 30, 2003.
On June 9, 2003, Yorkshire Power Group Limited, a wholly owned subsidiary of
MEHC, completed the redemption in full of the outstanding shares of the
Yorkshire Capital Trust I, 8.08% trust securities, due June 30, 2038, and paid
$243.4 million in principal amount ($25 liquidation amount per each trust
security) plus accrued distributions of $0.381555555 per trust security to the
redemption date. The redemption price was paid to holders of the trust security
on the redemption date.
Contractual Obligations and Commercial Commitments
- --------------------------------------------------
There have been no material changes in the contractual obligations and
commercial commitments from the information provided in Item 7 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 other than as
discussed in this "Liquidity and Capital Resources" section.
Northern Natural Gas Delivery
- -----------------------------
As of June 30, 2003, Northern Natural Gas had $50.1 million of obligations to
deliver 9.8 billion cubic feet of natural gas in 2003. The obligations are
revalued based on market prices for natural gas, with changes in value
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included in the statement of operations. In 2002, Northern Natural Gas entered
into natural gas commodity price swaps and index basis swaps to effectively fix
the deferred obligation balance. These swaps have a net receivable balance of
$11.6 million at June 30, 2003. The swaps are revalued based on market prices
for natural gas, with changes in value included in the statement of operations.
Therefore, any further changes in the market value of the deferred obligations
are expected to be offset by a corresponding change in the opposite direction in
the market value of the swaps. However, at June 30, 2003, Northern Natural Gas
had a $17.3 million receivable position with a third party energy marketer
relating to these swaps. Since the date of entering into these swaps, there have
been public announcements that this third party's financial condition has
deteriorated as a result of, among other factors, reduced liquidity. This
receivable would increase by approximately $9.8 million if the price curve of
natural gas were to increase by $1 per million British thermal units from levels
at June 30, 2003. MEHC has not recorded an allowance on this receivable as of
June 30, 2003, and is monitoring the situation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting MEHC,
see Item 7A "Qualitative and Quantitative Disclosures About Market Risk" of
MEHC's Annual Report on Form 10-K for the year ended December 31, 2002. MEHC's
exposure to market risk has not changed materially since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2003. Based on that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 7 to the financial statements and discussion in management's discussion
and analysis.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON 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:
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Quarterly Report.
(b) Reports on Form 8-K:
The Company filed a current report on Form 8-K on May 2, 2003.
The Company filed a current report on Form 8-K on May 16, 2003.
The Company filed a current report on Form 8-K on May 20, 2003.
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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 8, 2003 /s/ Patrick J. Goodman
------------------------------------------------
Patrick J. Goodman
Senor Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
31.1 Chief Executive Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer's Certificate Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer's Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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