UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission 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
- ---------------------------------------- -----
(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 October 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............................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........31
Item 4. Controls and Procedures............................................31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................32
Item 2. Changes in Securities and Use of Proceeds..........................32
Item 3. Defaults Upon Senior Securities....................................32
Item 4. Submission of Matters to a Vote of Security Holders................32
Item 5. Other Information..................................................32
Item 6. Exhibits and Reports on Form 8-K...................................32
SIGNATURES ...................................................................33
EXHIBIT INDEX.................................................................34
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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 September 30,
2003, and the related consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2003 and 2002, and of cash flows for
the nine-month periods ended September 30, 2003 and 2002. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet 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
November 3, 2003
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
------------------------------
SEPTEMBER 30, DECEMBER 31,
2003 2002
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 754,416 $ 844,430
Restricted cash and short-term investments ....................................... 86,876 50,808
Accounts receivable, net ......................................................... 614,950 707,731
Inventories ...................................................................... 122,599 126,938
Other current assets ............................................................. 216,612 212,888
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Total current assets ........................................................... 1,795,453 1,942,795
----------- -----------
Properties, plants and equipment, net .............................................. 10,420,091 9,898,796
Goodwill ........................................................................... 4,258,175 4,258,132
Regulatory assets, net ............................................................. 534,650 415,804
Other investments .................................................................. 221,082 446,732
Equity investments ................................................................. 266,432 273,707
Deferred charges and other assets .................................................. 778,239 779,420
----------- -----------
TOTAL ASSETS ....................................................................... $18,274,122 $18,015,386
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 299,510 $ 462,960
Accrued interest ................................................................. 216,203 192,015
Accrued taxes .................................................................... 39,098 75,097
Other accrued liabilities ........................................................ 518,133 457,058
Short-term debt .................................................................. 33 79,782
Current portion of long-term debt ................................................ 242,967 470,213
----------- -----------
Total current liabilities ...................................................... 1,315,944 1,737,125
----------- -----------
Parent company debt ................................................................ 2,776,850 2,323,387
Subsidiary and project debt ........................................................ 6,890,323 7,077,087
Deferred income taxes .............................................................. 1,363,122 1,238,421
Other long-term liabilities ........................................................ 1,279,646 1,100,917
----------- -----------
Total liabilities ................................................................ 13,625,885 13,476,937
----------- -----------
Deferred income .................................................................... 70,933 80,078
Minority interest .................................................................. 9,301 7,351
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts . 1,871,643 2,063,412
Preferred securities of subsidiaries ............................................... 92,439 93,325
Commitments and contingencies (Notes 7 and 10)
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 ......................................................... 1,956,887 1,956,509
Retained earnings .................................................................. 904,316 584,009
Accumulated other comprehensive loss ............................................... (257,282) (246,235)
----------- -----------
Total stockholders' equity ....................................................... 2,603,921 2,294,283
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $18,274,122 $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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
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(UNAUDITED)
REVENUE:
Operating revenue ........................................... $1,476,851 $1,256,051 $4,385,925 $3,447,099
Income on equity investments ................................ 19,385 10,939 40,386 29,863
Interest and dividend income ................................ 6,747 21,770 39,932 40,865
Other income ................................................ 6,834 10,944 56,704 74,483
---------- ---------- ---------- ----------
Total revenue ............................................. 1,509,817 1,299,704 4,522,947 3,592,310
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales ............................................... 567,316 460,732 1,768,846 1,325,803
Operating expense ........................................... 399,185 343,303 1,123,470 948,913
Depreciation and amortization ............................... 135,693 129,362 438,324 386,531
Interest expense ............................................ 176,943 168,450 546,821 462,998
Capitalized interest ........................................ (2,921) (9,152) (26,069) (24,128)
---------- ---------- ---------- ----------
Total costs and expenses .................................. 1,276,216 1,092,695 3,851,392 3,100,117
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES ...................... 233,601 207,009 671,555 492,193
Provision for income taxes .................................. 65,909 26,788 171,380 80,226
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST AND PREFERRED DIVIDENDS ....... 167,692 180,221 500,175 411,967
Minority interest and preferred dividends ................... 57,962 45,344 179,868 105,167
---------- ---------- ---------- ----------
NET INCOME AVAILABLE TO COMMON AND PREFERRED STOCKHOLDERS ..... $ 109,730 $ 134,877 $ 320,307 $ 306,800
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY HOLDINGS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
2003 2002
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 320,307 $ 306,800
Adjustments to reconcile net income to net cash flows from operating activities:
Gains on disposals ............................................................... (10,174) (57,480)
Distributions less income on equity investments .................................. 9,214 (14,828)
Depreciation and amortization .................................................... 438,324 386,531
Amortization of deferred financing costs ......................................... 22,844 19,557
Amortization of regulatory assets and liabilities ................................ (8,781) 5,733
Provision for deferred income taxes .............................................. 184,508 40,518
Other ............................................................................ 33,182 15,810
Changes in other items:
Accounts receivable and other current assets ................................... 126,264 (29,128)
Accounts payable and other accrued liabilities ................................. (94,640) 11,881
Deferred income ................................................................ (7,775) (2,612)
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Net cash flows from operating activities ......................................... 1,013,273 682,782
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures relating to operating projects ................................ (450,823) (328,544)
Construction and other development costs ........................................... (435,413) (450,206)
Acquisitions, net of cash acquired ................................................. (50,893) (1,463,314)
Purchase of affiliate notes ........................................................ (35,029) -
Sale (purchase) of convertible preferred securities ................................ 288,750 (275,000)
Decrease in restricted cash and investments ........................................ 4,150 16,746
Proceeds from sales of assets ...................................................... 3,377 210,767
Other .............................................................................. (45,987) 25,895
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Net cash flows from investing activities ......................................... (721,868) (2,263,656)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subsidiary and project debt .......................................... 1,148,719 780,142
Proceeds from parent company debt .................................................. 449,295 -
Proceeds from issuance of trust preferred securities ............................... - 1,273,000
Proceeds from issuance of common and preferred stock ............................... - 402,000
Net proceeds on parent company short-term debt ..................................... - 13,500
Repayments of subsidiary and project debt .......................................... (1,389,872) (377,644)
Repayment of parent company debt ................................................... (215,000) -
Purchase and retirement of preferred securities of subsidiary trusts ............... (198,958) -
Net repayment of subsidiary short-term debt ........................................ (79,750) (77,585)
Redemption of preferred securities of subsidiaries ................................. (882) (127,613)
Increase in restricted cash ........................................................ (35,974) (25,901)
Other .............................................................................. (72,537) (44,999)
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Net cash flows from financing activities ......................................... (394,959) 1,814,900
----------- -----------
Effect of exchange rate changes .................................................... 13,540 41,290
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS .............................................. (90,014) 275,316
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................................... 844,430 386,745
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 754,416 $ 662,061
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid on debt, net of interest capitalized ................................. $ 489,051 $ 404,288
=========== ===========
Income taxes paid .................................................................. $ 7,376 $ 55,437
=========== ===========
The accompanying notes are an integral part of these financial statements.
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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 September 30,
2003, and the results of operations for the three-month and nine-month periods
ended September 30, 2003 and 2002, and of cash flows for the nine-month periods
ended September 30, 2003 and 2002. The results of operations for the three-month
and nine-month periods ended September 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 reclassifications 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, "Accounting
for the Effects of Certain Types of Regulation".
During the nine-month period ended September 30, 2003, the Company recorded, as
a regulatory asset, accretion related to the ARO liability of $12.5 million,
resulting in an ARO liability balance of $301.8 million at September 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
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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 adoption of SFAS 149 did not
have a material effect on the Company's 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). The standard is effective
for the Company for fiscal periods beginning after December 15, 2003. The
Company is currently evaluating certain financial instruments in order to
determine if SFAS 150 will impact their classification.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). On October 8, 2003, the FASB deferred
the implementation of FIN 46 to the fourth quarter of 2003. The Company is
currently evaluating certain investments in order to determine if FIN 46 will
impact their classification.
3. PROPERTIES, PLANTS AND EQUIPMENT, NET
Properties, plants and equipment, net comprise the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
Properties, plants and equipment, net:
Utility generation and distribution systems ....... $ 8,514,747 $ 8,165,140
Interstate pipelines' assets ...................... 3,456,825 2,260,799
Independent power plants .......................... 1,421,375 1,410,170
Mineral and gas reserves and exploration assets ... 540,790 500,422
Utility non-operational assets .................... 402,192 370,811
Other assets ...................................... 143,147 131,577
------------ ------------
Total operating assets .......................... 14,479,076 12,838,919
Accumulated depreciation and amortization ......... (4,508,944) (4,110,608)
------------ ------------
Net operating assets .............................. 9,970,132 8,728,311
Construction in progress .......................... 449,959 1,170,485
------------ ------------
Properties, plants and equipment, net ............... $ 10,420,091 $ 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 September 30,
2003 and December 31, 2002 was approximately $232.4 million and $244.9 million,
respectively. During the three-month periods ended September 30, 2003 and 2002,
the Company recorded income from its investment in CE Generation of $11.4
million and $12.4 million, respectively. During the nine-month periods ended
September 30, 2003 and 2002, the Company recorded income from its investment in
CE Generation of $19.0 million and $21.2 million, respectively.
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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 approximately $15
million to $54 million. As of September 30, 2003, MidAmerican Energy has
recorded a $15.9 million liability for these sites and a corresponding
regulatory asset for future
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recovery through the regulatory process. MidAmericanEnergy projects that these
amounts will be incurred or paid over the next four years.
The estimated liability is determined through a site-specific cost evaluation
process. First, a determination is made as to whether MidAmerican Energy has
potential legal liability for a site and whether information exists to indicate
that contaminated wastes remain at the site. If so, the costs of performing a
preliminary investigation and the costs of removing known contaminated soil are
accrued. If it is determined during the preliminary investigation that remedial
action is required, then the best estimate of the costs is accrued. The estimate
includes incremental direct costs of remediation, site monitoring costs and
costs of compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded liabilities for these properties are
based upon preliminary data. Thus, actual costs could vary significantly from
the estimates. The estimate could change materially based on facts and
circumstances derived from site investigations, changes in required remedial
action and changes in technology relating to remedial alternatives. Insurance
recoveries have been received for 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 standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of state implementation plans to
achieve attainment of the standards, MidAmerican Energy could be required to
install control equipment on its generating stations or decrease the number of
hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part, be
superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction initiatives to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing regulated
emissions from its generating facilities in a cost-effective manner. An
administrative law judge issued a ruling approving MidAmerican Energy's plan but
disallowing the proposed recovery of plan costs through a tracker mechanism.
MidAmerican Energy and the Iowa Office of Consumer Advocate each appealed the
administrative law judge's ruling. On July 17, 2003, the IUB issued an order
affirming the administrative law judge's decision. Accordingly, the IUB has
rejected the future application of a tracker mechanism to recover emission
reduction costs. However, the approved expenditures will not be subject to a
subsequent prudence review in a future electric rate case.
-10-
In recent years, the EPA has requested from several utilities information and
support regarding their capital projects for various generating plants. The
requests were issued as part of an industry-wide investigation to assess
compliance with the New Source Review and the New Source Performance Standards
of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy
received requests from the EPA to provide documentation related to its capital
projects from January 1, 1980, to the present for a number of its generating
plants. MidAmerican Energy has submitted information to the EPA in responses to
these requests, and there are currently no outstanding data requests pending
from the EPA. MidAmerican Energy cannot predict the outcome of these requests at
this time.
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.
MidAmerican Energy currently contributes $8.3 million annually 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
the Quad Cities Station nuclear decommissioning is reflected as depreciation
expense in the Consolidated Statements of Operation. 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. On November 19, 2002, the United States
District Court for the District of Wyoming denied Grynberg's motion for
clarification and dismissed his royalty valuation claims. Grynberg appealed this
dismissal to the United States Court of Appeals for the Tenth Circuit and on May
13, 2003, the Tenth Circuit Court dismissed his appeal. 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 mismeasurement techniques that distort the
heating content of natural gas, resulting in an alleged underpayment
-11-
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. The
court denied this motion. 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. Kern River was not a named defendant in the
amended complaint and has been dismissed from the action. Northern Natural Gas
filed an answer on the fourth amended petition on August 22, 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.
Similar to the June 8, 2001 matter referenced above, the plaintiffs have filed a
new companion action against a number of parties, including Northern Natural Gas
but excluding Kern River, in a Kansas state district court for damages for
mismeasurement of British thermal unit content, resulting in lower royalties.
The action was filed on May 12, 2003, shortly after the state district court
dismissed the plaintiffs' third amended petition in the original litigation
which sought to certify a nationwide class. The new companion action which seeks
to certify a class of royalty owners in Kansas, Colorado and Wyoming, tracking
the fourth amended petition in the action referenced above, was not served until
August 4, 2003. A motion to dismiss was filed on August 25, 2003. On October 9,
2003, the state district court denied the motion to dismiss; Northern Natural
Gas' answer date is November 10, 2003. Northern Natural Gas believes that this
claim is without merit and that Northern Natural Gas' gas measurement techniques
have been in accordance with industry standards and its tariff.
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 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
-12-
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 September 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 other accrued liabilities balance at September 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 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.
-13-
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income .......................................................... $109,730 $134,877 $320,307 $306,800
Other comprehensive income:
Minimum pension liability adjustment, net
of tax of $(220); $0; $(1,685) and $0, respectively ............. (514) - (3,931) -
Foreign currency translation ...................................... 5,117 39,437 (19,095) 120,905
Marketable securities, net of tax of $160; $221; $382 and
$(1,902), respectively ........................................ 240 332 565 (3,337)
Cash flow hedges, net of tax of $(1,367); $(1,560); $5,048 and
$(10,685), respectively ....................................... (3,245) (3,694) 11,414 (24,496)
-------- -------- -------- --------
Total comprehensive income .......................................... $111,328 $170,952 $309,260 $399,872
======== ======== ======== ========
-14-
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
OPERATING REVENUE:
MidAmerican Energy ................................... $ 577,281 $ 556,284 $1,929,637 $1,625,175
Kern River ........................................... 78,793 39,867 182,267 87,048
Northern Natural Gas ................................. 77,869 39,098 333,052 39,098
CE Electric UK ....................................... 188,143 193,360 602,334 596,958
CalEnergy Generation - Domestic ...................... 12,237 13,717 34,441 27,627
CalEnergy Generation - Foreign ....................... 89,245 84,227 246,137 234,686
HomeServices ......................................... 459,007 340,692 1,112,627 855,919
---------- ---------- ---------- ----------
Segment operating revenue .......................... 1,482,575 1,267,245 4,440,495 3,423,945
Corporate/other ...................................... (5,724) (11,194) (54,570) (19,412)
---------- ---------- ---------- ----------
Total operating revenue ............................ $1,476,851 $1,256,051 $4,385,925 $3,447,099
========== ========== ========== ==========
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES:
MidAmerican Energy ................................... $ 104,683 $ 108,577 $ 241,809 $ 218,565
Kern River ........................................... 36,234 16,774 98,367 39,387
Northern Natural Gas ................................. (4,517) (1,015) 69,308 (1,015)
CE Electric UK ....................................... 59,475 39,968 204,761 197,223
CalEnergy Generation - Domestic ...................... 4,903 14,649 (2,912) 12,983
CalEnergy Generation - Foreign ....................... 38,379 40,208 109,722 103,994
HomeServices ......................................... 44,518 26,475 91,216 52,506
---------- ---------- ---------- ----------
Segment income before provision for income taxes ... 283,675 245,636 812,271 623,643
Corporate/other ...................................... (50,074) (38,627) (140,716) (131,450)
---------- ---------- ---------- ----------
Total income before provision for income taxes ..... $ 233,601 $ 207,009 $ 671,555 $ 492,193
========== ========== ========== ==========
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
TOTAL ASSETS:
MidAmerican Energy .................................... $ 6,159,531 $ 6,025,452
Kern River ............................................ 2,175,979 1,797,850
Northern Natural Gas .................................. 2,161,061 2,162,367
CE Electric UK ........................................ 4,664,205 4,714,459
CalEnergy Generation - Domestic ....................... 887,159 881,633
CalEnergy Generation - Foreign ........................ 991,987 974,852
HomeServices .......................................... 627,798 488,324
----------- -----------
Segment total assets ................................ 17,667,720 17,044,937
Corporate/other ....................................... 606,402 970,449
----------- -----------
Total assets ........................................ $18,274,122 $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.
-15-
Goodwill as of December 31, 2002 and changes for the period from January 1, 2003
through September 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 ............. - - - - - 23,631 23,631
Other goodwill adjustments(1).. - 1,353 (24,457) (484) - - (23,588)
---------- ------- -------- ---------- -------- -------- ----------
Goodwill at September 30, 2003... $2,149,282 $33,900 $390,264 $1,194,837 $126,440 $363,452 $4,258,175
========== ======= ======== ========== ======== ======== ==========
(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 and the
Northern Natural Gas purchase price, to the assets and liabilities acquired,
during the third quarter of 2003.
10. SUBSEQUENT EVENT
Casecnan NIA Arbitration Settlement
- -----------------------------------
Under the terms of the CE Casecnan Project Agreement (the "Project Agreement"),
the Philippine National Irrigation Administration ("NIA") had the option of
timely reimbursing CE Casecnan directly for certain taxes CE Casecnan paid. If
NIA did not so reimburse CE Casecnan, certain taxes paid by CE Casecnan would
result in an increase in the Water Delivery Fee. The payment of certain other
taxes by CE Casecnan would have resulted automatically in an increase in the
Water Delivery Fee. As of September 30, 2003, CE Casecnan had paid approximately
$59.1 million in taxes, which pursuant to the foregoing provisions resulted in
an increase in the Water Delivery Fee. NIA 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 the non-payment of the tax compensation portion of the
Water Delivery Fees, on August 19, 2002, CE Casecnan filed a Statement of Claim
against NIA pursuant to the Rules of Arbitration of the ICC (the "NIA
Arbitration"), seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The NIA Arbitration was conducted in accordance with the rules of the ICC.
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserted, among other things, that most of the taxes which CE Casecnan had
factored into the Water Delivery Fee compensation formula did not fall within
the scope of the relevant section of the Project Agreement, that the
compensation mechanism itself was invalid and unenforceable under Philippine law
and that the Project Agreement was inconsistent with the Philippine
build-operate-transfer law. As such, NIA sought 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 were
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 counterclaimed 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 asserted that the
Project Agreement was contrary to Philippine law and public policy and by way of
relief sought a declaration that the Project Agreement was 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.
On October 15, 2003, CE Casecnan closed a transaction settling the NIA
Arbitration. In connection with the settlement, CE Casecnan entered into an
agreement (the "Supplemental Agreement") with NIA which, in addition
-16-
to providing for the dismissal with prejudice of all claims by CE Casecnan and
counterclaims by NIA in the NIA Arbitration, supplements and amends the Project
Agreement in certain respects as summarized below:
Payment in Cash and Delivery of Note
As part of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum
of $17.7 million plus Philippine pesos of 39.9 million (approximately $0.7
million) and delivered to CE Casecnan the Republic of the Philippines ("ROP")
$97.0 million 8.375% Note due 2013 (the "ROP Note"). Also at closing, CE
Casecnan paid to the Philippine Bureau of Internal Revenue ("BIR") approximately
$24.4 million in respect of Philippine income taxes on the foregoing
consideration.
The ROP Note is governed by New York law and constitutes a direct,
unconditional, unsecured and general obligation of the ROP. The ROP Note is
non-transferable until January 15, 2004, but may be exchanged, at the option of
the ROP, for a new note forming part of a series of direct, unconditional,
unsecured and general debt obligations of the Philippines with a yield of 8.375%
or lower. If the Philippines issues a series of direct, unconditional, unsecured
and general debt obligations having a yield in excess of 8.375%, CE Casecnan has
agreed to accept a series of such new debt with a yield no greater than 8.375%.
If not exchanged prior to January 15, 2004, CE Casecnan has the option, between
January 15, 2004 and February 15, 2004, to put the ROP Note to the ROP for a
price of par plus accrued interest. The ROP Note has default provisions
substantially identical to those set forth in other recent issuances of direct,
unconditional, unsecured and general obligation of the ROP.
Modifications to Water Delivery Fee
Under the Project Agreement, the Water Delivery Rate increased by $0.00043 per
cubic meter for each $1,000,000 of certain taxes paid by CE Casecnan. The
Supplemental Agreement amends the per cubic meter Water Delivery Fee calculation
by eliminating this increase, such that the per cubic meter Water Delivery Rate
remains at $0.029 per cubic meter, escalated at 7.5% annually from January 1,
1994 through the first five years of the Cooperation Period, extending through
December 25, 2006. In lieu of such increase, CE Casecnan will be reimbursed for
certain taxes it pays during the remainder of the Cooperation Period.
Under the Project Agreement, the Water Delivery Fee payable monthly was a fixed
monthly payment based on an average water delivery of 801.9 million cubic meters
per year, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the per cubic meter rate as described above. Under the
Supplemental Agreement the Water Delivery Fee is equal to the Guaranteed Water
Delivery Fee plus the Variable Delivered Water Delivery Fee minus the Water
Delivery Fee Credit.
Guaranteed Water Delivery Fee. For the sixty-month period from December 25, 2003
through December 25, 2008, the Guaranteed Water Delivery Fee shall equal the
Water Delivery Rate, as described above, multiplied by approximately 66.8
million cubic meters (corresponding to the 801.9 million cubic meters per year).
For each month beginning after December 25, 2008 through the remainder of the
Cooperation Period, the Guaranteed Water Delivery Fee shall equal the Water
Delivery Rate multiplied by approximately 58.3 million cubic meters
(corresponding to 700.0 million cubic meters per year).
Variable Delivered Water Delivery Fee. Variable Delivered Water Delivery Fees
will be earned for months beginning after December 25, 2008. For each month
beginning after December 25, 2008 through the end of the Cooperation Period, the
Variable Delivered Water Delivery Fee shall be payable only from the date when
the cumulative Total Available Water (total delivered water plus the water
volume not delivered to NIA as a result of NIA's failure to accept energy
deliveries at a capacity up to 150 MW) for each contract year exceeds 700.0
million cubic meters. Variable Delivered Water Delivery Fees will be earned up
to an aggregate maximum of 1,324.7 million cubic meters for the period from
December 25, 2008 through the end of the Cooperation Period. No additional
variable water delivery fees will be earned over the 1,324.7 million cubic meter
threshold.
Water Delivery Credit. The Water Delivery Credit shall be applicable only for
each of the sixty-months from December 25, 2008 through December 25, 2013 and
shall equal the Water Delivery Rate as of December 25,
-17-
2008 multiplied by the sum of each Annual Water Credit divided by sixty. The
Annual Water Credit for each contract year starting from December 25, 2003 and
ending on December 25, 2008 shall equal 801.9 million cubic meters minus the
Total Available Water for each contract year. The Total Available Water in any
such year will equal actual deliveries with a minimum threshold of 700.0 million
cubic meters.
Modifications to Excess Energy Delivery Fee
Under the Project Agreement, the Excess Energy Delivery Fee was a variable
amount based on actual electrical energy delivered in each month in excess of 19
gigawatt-hour ("GWh"), payable at a rate of $0.1509 per kilowatt-hour ("kWh").
Under the Supplemental Agreement, the per kWh rate for energy deliveries in
excess of 19 GWh per month has been reduced, commencing in 2009, to $0.1132
(escalating at 1% per annum thereafter), provided that any deliveries of energy
in excess of 490 GWh but less than 550 GWh per year are paid for at a rate of
1.3 Philippine pesos per kWh and deliveries in excess of 550 GWh per year are at
no cost to NIA.
The Supplemental Agreement provides that the unpaid portion of the excess energy
available for generation, but not generated from the commencement of commercial
operations through September 28, 2003 will not be paid. For periods after
September 28, 2003, the Supplemental Agreement provides that if the Casecnan
project is not dispatched up to 150 MW whenever water is available, NIA will pay
for excess energy that could have been generated but was not as a result of such
dispatch constraint.
Other Provisions of the Supplemental Agreement
In connection with the settlement of the NIA Arbitration and as part of the
Supplemental Agreement transaction, CE Casecnan paid to NIA $1.6 million in
respect of alleged late completion of the Project. This amount had been accrued
as of September 30, 2003 and December 31, 2002. In addition, CE Casecnan
received opinions from the Philippine Office of Government Corporate Counsel as
to the due authorization and enforceability of Supplemental Agreement and
received confirmation from the Philippine Department of Finance that the ROP
Note had been duly and validly issued and was enforceable in accordance with its
terms. CE Casecnan also received an opinion from Allen & Overy, counsel to the
Republic of the Philippines, as to the enforceability of the ROP Note under New
York law. CE Casecnan also received written confirmation from the Private Sector
Assets and Liabilities Management Corporation that the issues with respect to
the Casecnan Project that had been raised by the interagency review of
independent power producers in the Philippines or that may have existed with
respect to the Project under the Electric Power Industry Reform Act of 2001 have
been satisfactorily addressed by the Supplemental Agreement.
The Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and are in
full force and effect.
-18-
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.
-19-
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 legal retirement obligations identified 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 statement of operations, as the
effects were offset by the establishment of regulatory assets, totaling $114.6
million, pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation".
During the nine-month period ended September 30, 2003, the Company recorded, as
a regulatory asset, accretion related to the ARO liability of $12.5 million,
resulting in an ARO liability balance of $301.8 million at September 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 adoption of SFAS 149 did not have a material effect on the Company's
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). The standard is effective
for the Company for fiscal periods beginning after December 15, 2003. The
Company is currently evaluating certain financial instruments in order to
determine if SFAS 150 will impact their classification.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). On October 8, 2003, the FASB deferred
the implementation of FIN 46 to the fourth quarter of 2003. The Company is
currently evaluating certain investments in order to determine if FIN 46 will
impact their classification.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND
2002
Operating revenue for the three months ended September 30, 2003, increased
$220.8 million, or 17.6%, to $1,476.9 million from $1,256.1 million for the same
period in 2002.
MidAmerican Energy operating revenue for the three months ended September 30,
2003, increased $21.0 million, or 3.8%, to $577.3 million. Gas revenues
increased $22.1 million, or 19.7%, to $134.4 million for the three months ended
September 30, 2003, primarily due to higher gas prices partially offset by lower
volumes.
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Kern River operating revenue for the three months ended September 30, 2003,
increased $38.9 million to $78.8 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 (the "FERC") on August 1, 2001 (the "2003 Expansion Project").
Northern Natural Gas operating revenue for the three months ended September 30,
2003, increased $38.8 million to $77.9 million. During 2002, operating revenue
for Northern Natural Gas was included from August 16, 2002, the acquisition
date.
CE Electric UK operating revenue for the three months ended September 30, 2003,
decreased $5.3 million to $188.1 million, due mainly to the sale of the retail
business in 2002 partially offset by the impact of exchange rates.
HomeServices' operating revenue for the three months ended September 30, 2003,
increased $118.3 million, or 34.7%, to $459.0 million. The increase was mainly
due to growth from existing operations reflecting higher unit sales and average
sales prices totaling $80.4 million and acquisitions totaling $37.9 million.
Income on equity investments for the three months ended September 30, 2003,
increased $8.5 million to $19.4 million, mainly due to increased mortgage
activity at HomeServices' mortgage joint ventures and the impact of impairments
of alternative energy project funds in 2002.
Interest and dividend income for the three months ended September 30, 2003,
decreased $15.1 million to $6.7 million. The decrease is mainly due to the sale
of The Williams Cumulative Convertible Preferred Stock in the second quarter of
2003, amounts received in 2002 from investments and decreased interest income at
CE Electric UK as a result of lower cash balances.
Other income for the three months ended September 30, 2003, decreased $4.1
million to $6.8 million, primarily due to a working capital settlement related
to the Yorkshire Swap in 2002 and lower allowance for equity funds used during
the construction related to the Kern River 2003 Expansion Project.
Cost of sales for the three months ended September 30, 2003, increased $106.6
million, or 23.1%, to $567.3 million. HomeServices' cost of sales increased
$82.5 million due to higher commission expense on incremental sales at existing
business units and acquisitions. MidAmerican Energy cost of sales increased
$30.8 million, due to increased gas prices and, to a lesser extent, higher
retail fuel costs and the restructuring of the Cooper Nuclear Station ("Cooper")
contract effective August 1, 2002.
Operating expenses for the three months ended September 30, 2003, increased
$55.9 million, or 16.3%, to $399.2 million. Northern Natural Gas operating
expenses increased $37.4 million as expenses for Northern Natural Gas were
included from August 16, 2002, the acquisition date. HomeServices' operating
expenses increased $23.4 million, primarily due to increased compensation
expenses and acquisitions. CE Electric UK operating expenses decreased $11.5
million, primarily due to the sale of their retail business and cost savings.
Depreciation and amortization for the three months ended September 30, 2003,
increased $6.3 million, or 4.9%, to $135.7 million. This was mainly due to
increased depreciation of $6.5 million at Kern River due to the completion of
the 2003 Expansion Project, increased depreciation at CE Electric UK of $2.9
million due to an increased asset base and Minerals depreciation of $3.6
million. These increases were partially offset by decreased depreciation at
MidAmerican Energy of $10.3 million due primarily to lower revenue sharing.
Interest expense for the three months ended September 30, 2003, increased $8.4
million, or 5.0%, to $176.9 million. The increase was due to additional interest
expense totaling $13.6 million on the Company's debt issuances of $700.0 million
(October 2002) and $450.0 million (May 2003), increased interest expense of $5.0
million at Northern Natural Gas due to a full quarter of operations and
increased interest expense at Kern River of $3.1 million due to additional
borrowings related to the 2003 Expansion Project. The increases were partially
offset by decreased interest, totaling $11.9 million, due to the redemption of
the YED trust securities which were
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redeemed in June 2003, and reductions in the corporate revolver and CalEnergy
Generation - Foreign project debt.
Capitalized interest for the three months ended September 30, 2003, decreased
$6.3 million to $2.9 million. The decrease is primarily due to the
discontinuance of capitalizing interest at the Minerals and Kern River Expansion
projects.
The income tax provision for the three months ended September 30, 2003,
increased $39.1 million to $65.9 million mainly due to the $21.1 million tax
benefit related to the CE Gas asset sale in 2002 and increased tax expense
related to higher earnings at Kern River, HomeServices and CE Electric UK
Funding in 2003.
Minority interest and preferred dividends for the three months ended September
30, 2003 increased $12.7 million to $58.0 million primarily due to the August
2002 issuance of $950.0 million of 11% trust preferred securities partially
offset by reduced dividends on subsidiary preferred securities resulting from
lower outstanding balances.
Net income available to common and preferred stockholders for the three months
ended September 30, 2003, decreased $25.2 million to $109.7 million.
RESULTS OF OPERATIONS FOR NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Operating revenue for the nine months ended September 30, 2003 increased $938.8
million or 27.2% to $4,385.9 million from $3,447.1 million for the same period
in 2002.
MidAmerican Energy operating revenue for the nine months ended September 30,
2003, increased $304.4 million or 18.7% to $1,929.6 million. Gas revenues
increased $287.4 million, or 56.0%, to $800.4 million for the nine months ended
September 30, 2003, primarily due to higher gas prices.
Kern River operating revenue for the nine months ended September 30, 2003,
increased $95.3 million to $182.3 million. The increase was primarily due to the
completion and beginning of operation, on May 1, 2003, of the 2003 Expansion
Project and, to a lesser degree, operating revenue in 2002 being recorded for
Kern River beginning on March 27, 2002, the acquisition date.
Northern Natural Gas operating revenue for the nine months ended September 30,
2003 increased $294.0 million to $333.1 million as Northern Natural Gas was
acquired on August 16, 2002.
HomeServices operating revenue for the nine months ended September 30, 2003,
increased $256.7 million, or 30.0%, to $1,112.6 million. The increase was due to
the impact of acquisitions, totaling $134.5 million, and growth from existing
operations, reflecting higher unit sales and average home sales prices.
Income on equity investments for the nine months ended September 30, 2003
increased $10.5 million or 35.1% to $40.4 million. The increase was primarily
due to increased mortgage activity at HomeServices mortgage joint ventures. This
was partially offset by decreased equity income due to a common stock
distribution from an energy investment fund in 2002, partially offset by
impairments of alternative energy project funds in 2002.
Interest and dividend income for the nine months ended September 30, 2003
decreased $1.0 million, or 2.4%, to $39.9 million. The decrease is mainly due to
interest received from RACOM in 2002, decreased interest income at CE Electric
UK as a result of lower cash balances following the redemption of the YED trust
securities in June 2003 partially offset by dividends received on the investment
in The Williams Cumulative Convertible Preferred Stock.
Other income for the nine months ended September 30, 2003 decreased $17.8
million to $56.7 million. The decrease was primarily due to the $53.3 million
gain on sale of various CE Gas assets in May 2002, partially
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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 nine months ended September 30, 2003 increased $443.0
million or 33.4% to $1,768.8 million. MidAmerican Energy's cost of sales
increased $309.1 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 $172.9 million due to
the prior year acquisitions and higher commission expense on incremental sales
at existing business units.
Operating expenses for the nine months ended September 30, 2003 increased $174.6
million or 18.4% to $1,123.5 million. The increase was mainly due to the
inclusion of Northern Natural Gas and Kern River for the entire nine month
period in 2003 of $167.2 million and increased operating expenses at
HomeServices of $63.0 million, primarily due to the impact of acquisitions and
increased compensation expenses. These increases were partially offset by lower
operating expenses at CE Electric UK of $36.2 million primarily due to the sale
of the retail business in 2002 and lower operating expenses at MidAmerican
Energy of $28.7 million primarily due to the restructuring of the Cooper
contract.
Depreciation and amortization for the nine months ended September 30, 2003
increased $51.8 million or 13.4% to $438.3 million. The increase was mainly due
to the inclusion of Northern Natural Gas for the entire nine month period in
2003, of $26.8 million, increased depreciation at Kern River of $13.3 million
due to the completion of the 2003 Expansion Project and the inclusion of Kern
River's operations for the entire nine-month period ended September 30, 2003 and
increased depreciation of $5.2 million at MidAmerican Energy from higher utility
plant depreciation partially offset by lower revenue sharing.
Interest expense for the nine months ended September 30, 2003 increased $83.8
million or 18.1% to $546.8 million. The increase was primarily comprised of a
$35.2 million increase due to the acquisition of Northern Natural Gas, $30.6
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 $34.9 million on the Company's $700.0 million (October 2002) and $450.0
million (May 2003) debt issuances, partially offset by reductions in the
corporate revolver, CalEnergy Generation - Foreign project debt and YED trust
securities which were redeemed in June 2003.
Capitalized interest for the nine months ended September 30, 2003 increased $2.0
million to $26.1 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 nine months ended September 30, 2003, increased
$91.2 million to $171.4 million mainly due to the $35.7 million benefit in 2002
from the Teeside Power Limited consortium relief, the $21.1 million tax benefit
related to the CE Gas asset sale in 2002 and increased tax expense related to
higher earnings at Kern River, HomeServices and CE Electric UK in 2003.
Minority interest and preferred dividends for the nine months ended September
30, 2003 increased $74.7 million to $179.9 million. The increase was primarily
due to the August 2002 issuance of $950.0 million of 11% trust preferred
securities partially offset by reduced dividends on subsidiary preferred
securities resulting from lower outstanding balances.
Net income available to common and preferred stockholders for the nine-month
period ended September 30, 2003 increased $13.5 million to $320.3 million.
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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 $754.4 million at September 30,
2003, compared to $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 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 $122.8 million and $58.7 million at September 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 nine months ended September 30,
2003 increased $330.5 million to $1,013.3 million from $682.8 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 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.
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MidAmerican Energy Operating Projects and Construction and Development Costs
- ----------------------------------------------------------------------------
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first nine months of 2003, utility construction
expenditures totaled $226.7 million, including allowance for funds used during
construction and Quad Cities Station nuclear fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $366 million for 2003. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2007, MidAmerican Energy plans to develop and construct three electric
generating projects in Iowa. The projects would provide service to regulated
retail electricity customers and, subject to regulatory approvals, be included
in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may
also be made from the projects to the extent the power is not needed for
regulated retail service. MidAmerican Energy expects to invest approximately
$1.44 billion in the three projects.
The first project is a natural gas-fired combined cycle unit with an estimated
cost of $357 million, plus allowance for funds used during construction.
MidAmerican Energy will own 100% of the plant and operate it. Commercial
operation of the simple cycle mode began on May 5, 2003. The plant will be
operated in simple cycle mode during 2003 and 2004, resulting in 327 megawatts
("MW") of accredited capacity. The combined cycle operation is expected to
commence in December 2004, resulting in an expected additional 190 MW of
accredited capacity.
The second project is currently under construction and will be a 790-MW (based
on expected accreditation) super-critical-temperature, low-sulfur coal-fired
plant. MidAmerican Energy will operate the plant and own approximately 475 MW of
the plant. MidAmerican Energy expects to invest approximately $759 million in
the project, plus allowance for funds used during construction. Municipal,
cooperative and public power utilities will own the remainder, which is a
typical ownership arrangement for large base-load plants in Iowa. On May 29,
2003, the 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. On September 9, 2003, MidAmerican Energy began construction of the plant,
which it expects to be completed in the summer of 2007. 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 agreement that
extends through December 31, 2010, an Iowa retail electric rate freeze that was
previously scheduled to expire at the end of 2005. The settlement agreement,
which was filed with the IUB as part of MidAmerican Energy's application for
ratemaking principles for the wind project, was approved by the IUB on October
17, 2003. The obligation of MidAmerican Energy to construct the wind project may
be terminated by MidAmerican Energy if the Federal production tax credit
applicable to the wind energy facilities is not available at a rate of 1.8 cents
per kilowatt-hour ("kWh") for a period of at least ten years after the
facilities begin generating electricity. MidAmerican Energy has also received
authorization from the IUB to construct the wind power project.
Casecnan NIA Settlement
- -----------------------
Under the terms of the CE Casecnan Water and Energy Company, Inc. ("CE
Casecnan") Project Agreement (the "Project Agreement"), the Philippine National
Irrigation Administration ("NIA") had the option of timely
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reimbursing CE Casecnan directly for certain taxes CE Casecnan paid. If NIA did
not so reimburse CE Casecnan, certain taxes paid by CE Casecnan would result in
an increase in the Water Delivery Fee. The payment of certain other taxes by CE
Casecnan would have resulted automatically in an increase in the Water Delivery
Fee. As of September 30, 2003, CE Casecnan had paid approximately $59.1 million
in taxes, which pursuant to the foregoing provisions resulted in an increase in
the Water Delivery Fee. NIA 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
the non-payment of the tax compensation portion of the Water Delivery Fees, on
August 19, 2002, CE Casecnan filed a Statement of Claim against NIA pursuant to
the Rules of Arbitration of the International Chamber of Commerce (the "NIA
Arbitration"), seeking payment of such portion of the Water Delivery Fee and
enforcement of the relevant provision of the Project Agreement going forward.
The NIA Arbitration was conducted in accordance with the rules of the
International Chamber of Commerce ("ICC").
NIA filed its Answer and Counterclaim on March 31, 2003. In its Answer, NIA
asserted, among other things, that most of the taxes which CE Casecnan had
factored into the Water Delivery Fee compensation formula did not fall within
the scope of the relevant section of the Project Agreement, that the
compensation mechanism itself was invalid and unenforceable under Philippine law
and that the Project Agreement was inconsistent with the Philippine
build-operate-transfer law. As such, NIA sought 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 were
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 counterclaimed 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 asserted that the
Project Agreement was contrary to Philippine law and public policy and by way of
relief sought a declaration that the Project Agreement was 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.
On October 15, 2003, CE Casecnan closed a transaction settling the NIA
Arbitration. In connection with the settlement, CE Casecnan entered into an
agreement (the "Supplemental Agreement") with NIA which, in addition to
providing for the dismissal with prejudice of all claims by CE Casecnan and
counterclaims by NIA in the NIA Arbitration, supplements and amends the Project
Agreement in certain respects as summarized below:
Payment in Cash and Delivery of Note
As part of the settlement, on October 15, 2003, NIA paid to CE Casecnan the sum
of $17.7 million plus Philippine pesos of 39.9 million (approximately $0.7
million) and delivered to CE Casecnan the Republic of the Philippines ("ROP")
$97.0 million 8.375% Note due 2013 (the "ROP Note"). Also at closing, CE
Casecnan paid to the Philippine Bureau of Internal Revenue ("BIR") approximately
$24.4 million in respect of Philippine income taxes on the foregoing
consideration.
The ROP Note is governed by New York law and constitutes a direct,
unconditional, unsecured and general obligation of the ROP. The ROP Note is
non-transferable until January 15, 2004, but may be exchanged, at the option of
the ROP, for a new note forming part of a series of direct, unconditional,
unsecured and general debt obligations of the Philippines with a yield of 8.375%
or lower. If the Philippines issues a series of direct, unconditional, unsecured
and general debt obligations having a yield in excess of 8.375%, CE Casecnan has
agreed to accept a series of such new debt with a yield no greater than 8.375%.
If not exchanged prior to January 15, 2004, CE Casecnan has the option, between
January 15, 2004 and February 15, 2004, to put the ROP Note to the ROP for a
price of par plus accrued interest. The ROP Note has default provisions
substantially identical to those set forth in other recent issuances of direct,
unconditional, unsecured and general obligation of the ROP.
Modifications to Water Delivery Fee
Under the Project Agreement, the Water Delivery Rate increased by $0.00043 per
cubic meter for each $1,000,000 of certain taxes paid by CE Casecnan. The
Supplemental Agreement amends the per cubic meter
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Water Delivery Fee calculation by eliminating this increase, such that the per
cubic meter Water Delivery Rate remains at $0.029 per cubic meter, escalated at
7.5% annually from January 1, 1994 through the first five years of the
Cooperation Period, extending through December 25, 2006. In lieu of such
increase, CE Casecnan will be reimbursed for certain taxes it pays during the
remainder of the Cooperation Period.
Under the Project Agreement, the Water Delivery Fee payable monthly was a fixed
monthly payment based on an average water delivery of 801.9 million cubic meters
per year, pro-rated to approximately 66.8 million cubic meters per month,
multiplied by the per cubic meter rate as described above. Under the
Supplemental Agreement the Water Delivery Fee is equal to the Guaranteed Water
Delivery Fee plus the Variable Delivered Water Delivery Fee minus the Water
Delivery Fee Credit.
Guaranteed Water Delivery Fee. For the sixty-month period from December 25, 2003
through December 25, 2008, the Guaranteed Water Delivery Fee shall equal the
Water Delivery Rate, as described above, multiplied by approximately 66.8
million cubic meters (corresponding to the 801.9 million cubic meters per year).
For each month beginning after December 25, 2008 through the remainder of the
Cooperation Period, the Guaranteed Water Delivery Fee shall equal the Water
Delivery Rate multiplied by approximately 58.3 million cubic meters
(corresponding to 700.0 million cubic meters per year).
Variable Delivered Water Delivery Fee. Variable Delivered Water Delivery Fees
will be earned for months beginning after December 25, 2008. For each month
beginning after December 25, 2008 through the end of the Cooperation Period, the
Variable Delivered Water Delivery Fee shall be payable only from the date when
the cumulative Total Available Water (total delivered water plus the water
volume not delivered to NIA as a result of NIA's failure to accept energy
deliveries at a capacity up to 150 MW) for each contract year exceeds 700.0
million cubic meters. Variable Delivered Water Delivery Fees will be earned up
to an aggregate maximum of 1,324.7 million cubic meters for the period from
December 25, 2008 through the end of the Cooperation Period. No additional
variable water delivery fees will be earned over the 1,324.7 million cubic meter
threshold.
Water Delivery Credit. The Water Delivery Credit shall be applicable only for
each of the sixty-months from December 25, 2008 through December 25, 2013 and
shall equal the Water Delivery Rate as of December 25, 2008 multiplied by the
sum of each Annual Water Credit divided by sixty. The Annual Water Credit for
each contract year starting from December 25, 2003 and ending on December 25,
2008 shall equal 801.9 million cubic meters minus the Total Available Water for
each contract year. The Total Available Water in any such year will equal actual
deliveries with a minimum threshold of 700.0 million cubic meters.
Modifications to Excess Energy Delivery Fee
Under the Project Agreement, the Excess Energy Delivery Fee was a variable
amount based on actual electrical energy delivered in each month in excess of 19
gigawatt-hour ("GWh"), payable at a rate of $0.1509 per kWh. Under the
Supplemental Agreement, the per kWh rate for energy deliveries in excess of 19
GWh per month has been reduced, commencing in 2009, to $0.1132 (escalating at 1%
per annum thereafter), provided that any deliveries of energy in excess of 490
GWh but less than 550 GWh per year are paid for at a rate of 1.3 Philippine
pesos per kWh and deliveries in excess of 550 GWh per year are at no cost to
NIA. The Supplemental Agreement provides that the unpaid portion of the excess
energy available for generation, but not generated from the commencement of
commercial operations through September 28, 2003 will not be paid. For periods
after September 28, 2003, the Supplemental Agreement provides that if the
Casecnan project is not dispatched up to 150 MW whenever water is available, NIA
will pay for excess energy that could have been generated but was not as a
result of such dispatch constraint.
Other Provisions of the Supplemental Agreement
In connection with the settlement of the NIA Arbitration and as part of the
Supplemental Agreement transaction, CE Casecnan paid to NIA $1.6 million in
respect of alleged late completion of the Project. This amount had been accrued
as of September 30, 2003 and December 31, 2002. In addition, CE Casecnan
received opinions from the Philippine Office of Government Corporate Counsel as
to the due authorization and enforceability of
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Supplemental Agreement and received confirmation from the Philippine Department
of Finance that the ROP Note had been duly and validly issued and was
enforceable in accordance with its terms. CE Casecnan also received an opinion
from Allen & Overy, counsel to the Republic of the Philippines, as to the
enforceability of the ROP Note under New York law. CE Casecnan also received
written confirmation from the Private Sector Assets and Liabilities Management
Corporation that the issues with respect to the Casecnan Project that had been
raised by the interagency review of independent power producers in the
Philippines or that may have existed with respect to the Project under the
Electric Power Industry Reform Act of 2001 have been satisfactorily addressed by
the Supplemental Agreement.
The Guaranteed Energy Delivery Fee, Force Majeure, Buyout and Dispute Resolution
provisions of the Project Agreement, as well as the Performance Undertaking
provided by the ROP, remain unaffected by the Supplemental Agreement and in full
force and effect.
Casecnan Construction Contract
- ------------------------------
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
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 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 September 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
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of the other accrued liabilities balance at September 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 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.
Other Debt Issuances and Redemptions
- ------------------------------------
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 $73.9 million were outstanding at September 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.
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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.
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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
September 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 Notes 7 and 10 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:
None.
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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: November 12, 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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