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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 March 31, 2003
Commission Registrant's Name, State of Incorporation, IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2003, all of the member's equity of MidAmerican Funding, LLC was
held by its parent company, MidAmerican Energy Holdings Company.
As of April 30, 2003, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc., a direct,
wholly owned subsidiary of MidAmerican Funding, LLC.
This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and
MidAmerican Energy Company. Information herein relating to each individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, MidAmerican Energy Company makes no representation as to
information relating to any other subsidiary of MidAmerican Funding, LLC.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements.......................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 36
Item 4. Controls and Procedures....................................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 37
Item 2. Changes in Securities and Use of Proceeds..................... 37
Item 3. Defaults Upon Senior Securities............................... 37
Item 4. Submission of Matters to a Vote of Security Holders........... 37
Item 5. Other Information............................................. 37
Item 6. Exhibits and Reports on Form 8-K.............................. 37
Signatures.................................................................. 38
Certifications.............................................................. 39
Exhibit Index .............................................................. 49
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- -----------------------------
Independent Accountants' Reports...................................... 4
MidAmerican Energy Company
Consolidated Balance Sheets........................................... 6
Consolidated Statements of Income..................................... 7
Consolidated Statements of Comprehensive Income....................... 8
Consolidated Statements of Cash Flows................................. 9
Notes to Consolidated Financial Statements............................ 10
MidAmerican Funding, LLC
Consolidated Balance Sheets........................................... 15
Consolidated Statements of Income..................................... 16
Consolidated Statements of Comprehensive Income....................... 17
Consolidated Statements of Cash Flows................................. 18
Notes to Consolidated Financial Statements............................ 19
-3-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the "Company") as of March 31, 2003, and the
related consolidated statements of income, comprehensive income and cash flows
for the three-month periods ended March 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
24, 2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
May 8, 2003
-4-
INDEPENDENT ACCOUNTANTS' REPORT
Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa
We have reviewed the accompanying consolidated balance sheet of MidAmerican
Funding, LLC and subsidiaries (the "Company") as of March 31, 2003, and the
related consolidated statements of income, comprehensive income and cash flows
for the three-month periods ended March 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
24, 2003, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
DELOITEE & TOUCHE LLP
Des Moines, Iowa
May 8, 2003
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
---------------------------
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT, NET
Electric .............................................. $ 4,801,325 $ 4,731,002
Gas ................................................... 906,784 900,209
----------- -----------
5,708,109 5,631,211
Accumulated depreciation and amortization ............. (3,097,435) (3,011,123)
----------- -----------
2,610,674 2,620,088
Construction work in progress ......................... 247,149 205,988
----------- -----------
2,857,823 2,826,076
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................. 207,390 28,500
Receivables, net ...................................... 376,420 321,321
Inventories ........................................... 23,044 88,492
Other ................................................. 27,741 28,655
----------- -----------
634,595 466,968
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 270,570 273,864
REGULATORY ASSETS ..................................... 301,955 192,514
OTHER ASSETS .......................................... 41,329 52,457
----------- -----------
TOTAL ASSETS .......................................... $ 4,106,272 $ 3,811,879
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity ........................... $ 1,365,286 $ 1,307,067
MidAmerican Energy preferred securities ............... 31,759 31,759
Long-term debt, excluding current portion ............. 1,140,436 947,691
----------- -----------
2,537,481 2,286,517
----------- -----------
CURRENT LIABILITIES
Notes payable ......................................... -- 55,000
Current portion of long-term debt ..................... 5,625 105,727
Accounts payable ...................................... 276,174 239,531
Taxes accrued ......................................... 107,802 83,063
Interest accrued ...................................... 16,466 9,731
Other ................................................. 51,352 55,464
----------- -----------
457,419 548,516
----------- -----------
OTHER LIABILITIES
Deferred income taxes ................................. 425,826 424,153
Investment tax credit ................................. 55,792 56,886
Asset retirement obligations .......................... 279,185 159,757
Regulatory liabilities ................................ 132,446 118,011
Other ................................................. 218,123 218,039
----------- -----------
1,111,372 976,846
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES .................. $ 4,106,272 $ 3,811,879
=========== ===========
The accompanying notes are an integral part of these financial statements.
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MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
--------- ---------
(UNAUDITED)
OPERATING REVENUES
Regulated electric .................... $ 314,942 $ 306,778
Regulated gas ......................... 413,779 220,057
Nonregulated .......................... 86,475 47,449
--------- ---------
815,196 574,284
--------- ---------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ... 88,418 72,449
Cost of gas sold .................... 329,527 148,514
Other operating expenses ............ 82,648 98,599
Maintenance ......................... 28,282 28,945
Depreciation and amortization ....... 68,485 69,324
Property and other taxes ............ 20,557 17,294
--------- ---------
617,917 435,125
--------- ---------
Nonregulated:
Cost of sales ....................... 77,389 40,963
Other ............................... 3,732 5,629
--------- ---------
81,121 46,592
--------- ---------
Total operating expenses ............ 699,038 481,717
--------- ---------
OPERATING INCOME ...................... 116,158 92,567
--------- ---------
NON-OPERATING INCOME
Interest and dividend income .......... 1,126 2,446
Other income .......................... 4,438 2,365
Other expense ......................... (349) (2,160)
--------- ---------
5,215 2,651
--------- ---------
FIXED CHARGES
Interest on long-term debt ............ 18,558 16,586
Other interest expense ................ 1,019 825
Preferred dividends of subsidiary trust -- 1,574
Allowance for borrowed funds .......... (1,591) (596)
--------- ---------
17,986 18,389
--------- ---------
INCOME BEFORE INCOME TAXES ............ 103,387 76,829
INCOME TAXES .......................... 44,695 33,445
--------- ---------
NET INCOME ............................ 58,692 43,384
PREFERRED DIVIDENDS ................... 437 848
--------- ---------
EARNINGS ON COMMON STOCK .............. $ 58,255 $ 42,536
========= =========
The accompanying notes are an integral part of these financial statements.
-7-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
-------- --------
(UNAUDITED)
EARNINGS ON COMMON STOCK ............................... $ 58,255 $ 42,536
-------- --------
OTHER COMPREHENSIVE LOSS, NET
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ................................ 10,668 (2,886)
Income tax (expense) benefit ....................... (4,435) 1,199
-------- --------
6,233 (1,687)
-------- --------
Less reclassification adjustment for realized (gains)
losses reflected in earnings on common stock
during period-
Before income taxes ................................ (10,731) 1,966
Income tax expense (benefit) ....................... 4,461 (817)
-------- --------
(6,270) 1,149
-------- --------
Other comprehensive loss, net ........................ (37) (538)
-------- --------
COMPREHENSIVE INCOME ................................... $ 58,218 $ 41,998
======== ========
The accompanying notes are an integral part of these financial statements.
-8-
MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
--------- ---------
(UNAUDITED)
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 58,692 $ 43,384
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization .................................... 68,736 69,604
Deferred income taxes and investment tax credit, net ............. 605 (4,554)
Amortization of other assets and liabilities ..................... 5,111 9,318
Cash outflows of accounts receivable securitization .............. -- (8,000)
Impact of changes in working capital ............................. 85,361 32,576
Other, net ....................................................... 7,994 18,519
--------- ---------
Net cash provided by operating activities ...................... 226,499 160,847
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................... (76,555) (62,480)
Less non-cash and change in accrued utility construction expenditures (6,199) 303
Quad Cities Station decommissioning trust fund ...................... (2,075) (2,075)
Nonregulated capital expenditures ................................... (522) (191)
Other investing activities, net ..................................... 4,087 (2,143)
--------- ---------
Net cash used in investing activities ............................. (81,264) (66,586)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ...................................................... (437) (30,848)
Issuance of long-term debt, net ..................................... 272,572 391,438
Retirement of long-term debt, including reacquisition cost .......... (183,480) (283)
Reacquisition of preferred securities ............................... -- (100,000)
Net decrease in notes payable ....................................... (55,000) (89,350)
--------- ---------
Net cash provided by financing activities ......................... 33,655 170,957
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 178,890 265,218
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,500 20,020
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 207,390 $ 285,238
========= =========
ADDITIONAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized ........................... $ 9,703 $ 11,964
========= =========
Income taxes paid (received), net ................................... $ 3,544 $ (2,232)
========= =========
The accompanying notes are an integral part of these financial statements.
-9-
MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company ("MidAmerican Energy"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of MidAmerican
Energy, all adjustments, consisting of normal recurring adjustments, have been
made to present fairly the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation. All
significant intercompany transactions have been eliminated. Although MidAmerican
Energy believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in MidAmerican Energy's latest Annual Report on Form 10-K.
MidAmerican Energy is a public utility with electric and natural gas operations
and is the principal subsidiary of MHC Inc ("MHC"). MHC is a direct, wholly
owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), whose sole
member is MidAmerican Energy Holdings Company.
2. ENVIRONMENTAL MATTERS
a. Manufactured Gas Plant Facilities:
The United States Environmental Protection Agency ("EPA"), and the state
environmental agencies have determined that contaminated wastes remaining at
decommissioned manufactured gas plant facilities may pose a threat to the public
health or the environment if such contaminants are in sufficient quantities and
at such concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. MidAmerican Energy is currently conducting field investigations
at 21 sites, has conducted interim removal actions at 14 sites and has received
regulatory closure on two sites. MidAmerican Energy is continuing to evaluate
several of the sites to determine the future liability, if any, for conducting
site investigations or other site activity.
MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$54 million. As of March 31, 2003, MidAmerican Energy has recorded a $21 million
liability for these sites and a corresponding regulatory asset for future
recovery through the regulatory process. MidAmerican Energy projects that these
amounts will be paid or incurred over the next four years.
The estimate of probable remediation costs is established on a site-specific
basis. The costs are accumulated in a three-step process. First, a determination
is made as to whether MidAmerican Energy has potential legal liability for the
site and whether information exists to indicate that contaminated wastes remain
at the site. If so, the costs of performing a preliminary investigation and the
costs of removing known contaminated soil are accrued. As the investigation is
performed and if it is determined
-10-
remedial action is required, the best estimate of remedial costs is accrued. The
estimated recorded liabilities for these properties include incremental direct
costs of the remediation effort, costs for future monitoring at sites and costs
of compensation to employees for time expected to be spent directly on the
remediation effort. The estimated recorded 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 or results of operations.
b. Air Quality:
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. Based on
data to be obtained from monitors located throughout each state, the EPA will
determine which states have areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). The standards were subjected
to legal proceedings, and in February 2001, the United States Supreme Court
upheld the constitutionality of the standards, though remanding the issue of
implementation of the ozone standard to the EPA. As a result of a decision
rendered by the United States Circuit Court of Appeals for the District of
Columbia, the EPA is moving forward in implementation of the ozone and fine
particulate standards and is analyzing existing monitored data to determine
attainment status.
The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of state implementation plans to
achieve attainment of the standards, MidAmerican Energy could be required to
install control equipment on its generating stations or decrease the number of
hours during which these stations operate.
The ozone and fine particulate matter standards could, in whole or in part, be
superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Administration's "Clear Skies
Initiative," calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.
While legislative action is necessary for the Clear Skies Initiative or other
multi-pollutant emission reduction initiatives to become effective, MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions required to meet emissions reductions of this nature. On
April 1, 2002, in accordance with Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing regulated
emissions from its generating facilities in a cost-effective manner. MidAmerican
Energy expects the IUB to rule on the prudence of the multi-year plan and budget
in 2003.
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, MidAmerican Energy received a request
from the
-11-
EPA to provide documentation related to its capital projects from January 1,
1980, to the present for its Neal, Council Bluffs, Louisa and Riverside Energy
Centers. MidAmerican Energy has responded to this request and at this time
cannot predict the outcome of this request.
3. RATE MATTERS
Under a settlement agreement approved by the IUB on December 21, 2001,
MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000,
are effectively frozen through December 31, 2005. In approving that settlement,
the IUB specifically allows the filing of electric rate design and/or cost of
service rate changes that are intended to keep overall company revenues
unchanged, but could result in changes to individual tariffs. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
is recorded as a regulatory liability to be used to offset a portion of the cost
to Iowa customers of future generating plant investments. An amount equal to the
regulatory liability is recorded as a regulatory charge in depreciation and
amortization expense when the liability is accrued. Interest expense is accrued
on the portion of the regulatory liability related to prior years. Beginning in
2002, the liability is being relieved as it is credited against allowance for
funds used during construction, or capitalized financing costs, associated with
generating plant additions. As of March 31, 2003, the related regulatory
liability reflected on the Consolidated Balance Sheet totaled $117.4 million.
Illinois law provides for Illinois electric earnings above a computed level of
return on common equity to be shared equally between customers and MidAmerican
Energy. MidAmerican Energy's computed level of return on common equity is based
on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as
published by the Federal Reserve System, plus a premium of 8.5% for 2000 through
2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which
sharing must occur for 2002 was 14.03%. The law allows MidAmerican Energy to
mitigate the sharing of earnings above the threshold return on common equity
through accelerated recovery of electric assets.
On November 8, 2002, the IUB approved a settlement agreement previously filed
with it by MidAmerican Energy and the Iowa Office of Consumer Advocate. The
settlement agreement provided for an increase in rates of $17.7 million annually
for MidAmerican Energy's Iowa retail natural gas customers and effectively froze
base rates through November 2004. However, MidAmerican Energy will continue
collecting fluctuations in gas costs through its purchased gas adjustment
clause. The new rates were implemented for usage beginning November 25, 2002.
4. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
MidAmerican Energy's utility operations are subject to the regulation of the
IUB, the Illinois Commerce Commission, the South Dakota Public Utilities
Commission, and the Federal Energy Regulatory Commission. MidAmerican Energy's
accounting policies and the accompanying consolidated financial statements
conform to generally accepted accounting principles applicable to rate-regulated
enterprises and reflect the effects of the ratemaking process.
A possible consequence of deregulation in the utility industry is that Statement
of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects
of Certain Types of Regulation," may no longer apply. SFAS No. 71 sets forth
accounting principles for operations that are regulated and meet the stated
criteria. For operations that meet the criteria, SFAS No. 71 allows, among other
things, the deferral of expense or income that would otherwise be recognized
when incurred. Predominantly all of MidAmerican Energy's electric and gas
utility operations currently meet the criteria of SFAS No. 71, but its
applicability is periodically reexamined. If portions of its utility operations
no longer meet the criteria
-12-
of SFAS No. 71, MidAmerican Energy could be required to write off the related
regulatory assets and liabilities from its balance sheet, and thus, a material
adjustment to earnings in that period could result if regulatory assets are not
recovered in transition provisions of any deregulation legislation.
5. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, MidAmerican Energy adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation
of such assets. Concurrent with the recognition of the liability, the estimated
cost of an asset retirement obligation is capitalized and depreciated over the
remaining life of the asset.
On January 1, 2003, MidAmerican Energy recorded $275.2 million of asset
retirement obligation ("ARO") liabilities; $12.6 million of associated ARO
assets, net of accumulated depreciation; $101.8 million of regulatory assets;
and reclassified $1.0 million of accumulated depreciation to the ARO liability
in conjunction with adoption of SFAS No. 143. Adoption of SFAS No. 143 did not
impact net income. The initial ARO liability recognized includes $266.5 million
that pertains to obligations associated with the decommissioning of the Quad
Cities Station. The $266.5 million includes a $159.8 million nuclear
decommissioning liability that had been recorded as of December 31, 2002. As of
March 31, 2003, $157.7 million of assets reflected in Investments and
Nonregulated Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.
The change in the balance of the ARO liability during the first quarter of 2003
is summarized as follows (in thousands):
Balance January 1, 2003 ........... $275,228
Capitalized accretion ............. 3,957
Revised estimates ................. --
--------
Balance March 31, 2003 ............ $279,185
========
Regulatory assets are increased by an amount equal to accretion. In addition to
the ARO liabilities recognized on January 1, MidAmerican Energy has accrued for
the cost of removing other electric and gas assets through its depreciation
rates, in accordance with accepted regulatory practices. As of March 31, 2003,
the estimated amount of such accruals included in accumulated depreciation was
approximately $391 million based on the cost of removal component in current
depreciation rates.
6. SEGMENT INFORMATION
MidAmerican Energy has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense, income tax expense and equity in the
net income or loss of investees are allocated to each segment.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the
-13-
segments. MidAmerican Energy's external revenues by product and services are
displayed on the Consolidated Statements of Income.
The following tables provide MidAmerican Energy's operating revenues, income
before income taxes and total assets on an operating segment basis (in
thousands):
Three Months
Ended March 31,
--------------------------
2003 2002
----------- -----------
Operating revenues:
External revenues -
Generation .................... $ 157,536 $ 109,738
Energy delivery ............... 569,727 425,942
Transmission .................. 6,248 4,925
Marketing & sales ............. 81,685 33,679
----------- -----------
Total ....................... 815,196 574,284
----------- -----------
Intersegment revenues -
Generation .................... 130,355 131,042
Energy delivery ............... -- --
Transmission .................. 14,487 13,800
Marketing & sales ............. -- --
----------- -----------
Total ....................... 144,842 144,842
Intersegment eliminations ....... (144,842) (144,842)
----------- -----------
Consolidated .................. $ 815,196 $ 574,284
=========== ===========
Income before income taxes:
Generation ...................... $ 28,831 $ 14,866
Energy delivery ................. 60,580 52,146
Transmission .................... 12,442 9,916
Marketing & sales ............... 1,097 (947)
----------- -----------
Total ......................... 102,950 75,981
Preferred dividends ............. 437 848
----------- -----------
Consolidated .................. $ 103,387 $ 76,829
=========== ===========
As of
--------------------------
March 31, December 31,
2003 2002
----------- ------------
Total assets:
Generation ...................... $ 1,591,816 $ 1,393,271
Energy delivery ................. 2,296,432 2,224,238
Transmission .................... 232,652 222,051
Marketing & sales ............... 60,778 52,143
----------- -----------
Total ......................... 4,181,678 3,891,703
Reclassifications and
intersegment eliminations(a) .. (75,406) (79,824)
----------- -----------
Consolidated .................... $ 4,106,272 $ 3,811,879
=========== ===========
(a) Reclassifications and intersegment eliminations related principally to the
reclassification of income tax balances in accordance with generally
accepted accounting principles and the elimination of intersegment accounts
receivables and payables.
-14-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF
---------------------------
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
UTILITY PLANT, NET
Electric .............................................. $ 4,801,325 $ 4,731,002
Gas ................................................... 906,784 900,209
----------- -----------
5,708,109 5,631,211
Accumulated depreciation and amortization ............. (3,097,435) (3,011,123)
----------- -----------
2,610,674 2,620,088
Construction work in progress ......................... 247,149 205,988
----------- -----------
2,857,823 2,826,076
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ............................. 208,389 28,915
Receivables, net ...................................... 375,810 321,698
Inventories ........................................... 23,044 88,492
Other ................................................. 29,635 35,009
----------- -----------
636,878 474,114
----------- -----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ............ 326,240 333,382
EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED ..... 1,275,143 1,275,143
REGULATORY ASSETS ..................................... 301,955 192,514
OTHER ASSETS .......................................... 41,338 52,755
----------- -----------
TOTAL ASSETS .......................................... $ 5,439,377 $ 5,153,984
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ....................................... $ 1,917,399 $ 1,867,119
MidAmerican Energy preferred securities ............... 31,759 31,759
Long-term debt, excluding current portion ............. 1,840,436 1,647,691
----------- -----------
3,789,594 3,546,569
----------- -----------
CURRENT LIABILITIES
Notes payable ......................................... 16,350 55,000
Current portion of long-term debt ..................... 5,625 105,727
Accounts payable ...................................... 277,350 242,733
Taxes accrued ......................................... 109,546 85,987
Interest accrued ...................................... 20,475 25,487
Other ................................................. 52,006 56,291
----------- -----------
481,352 571,225
----------- -----------
OTHER LIABILITIES
Deferred income taxes ................................. 461,816 461,862
Investment tax credit ................................. 55,792 56,886
Asset retirement obligations .......................... 279,185 159,757
Regulatory liabilities ................................ 132,446 118,011
Other ................................................. 239,192 239,674
----------- -----------
1,168,431 1,036,190
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES .................. $ 5,439,377 $ 5,153,984
=========== ===========
The accompanying notes are an integral part of these financial statements.
-15-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
-------- ---------
(UNAUDITED)
OPERATING REVENUES
Regulated electric .......................... $314,942 $306,778
Regulated gas ............................... 413,779 220,057
Nonregulated ................................ 87,195 48,200
-------- --------
815,916 575,035
-------- --------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ......... 88,418 72,449
Cost of gas sold .......................... 329,527 148,514
Other operating expenses .................. 82,648 98,599
Maintenance ............................... 28,282 28,945
Depreciation and amortization ............. 68,485 69,324
Property and other taxes .................. 20,557 17,294
-------- --------
617,917 435,125
-------- --------
Nonregulated:
Cost of sales ............................. 77,506 41,094
Other ..................................... 4,750 7,437
-------- --------
82,256 48,531
-------- --------
Total operating expenses ................. 700,173 483,656
-------- --------
OPERATING INCOME ............................ 115,743 91,379
-------- --------
NON-OPERATING INCOME
Interest and dividend income ................ 1,242 4,244
Marketable securities gains and (losses), net 94 (3,218)
Other income ................................ 5,157 8,963
Other expense ............................... (2,551) (2,294)
-------- --------
3,942 7,695
-------- --------
FIXED CHARGES
Interest on long-term debt .................. 30,340 28,553
Other interest expense ...................... 1,044 828
Preferred dividends of subsidiaries ......... 437 2,422
Allowance for borrowed funds ................ (1,591) (596)
-------- --------
30,230 31,207
-------- --------
INCOME BEFORE INCOME TAXES .................. 89,455 67,867
INCOME TAXES ................................ 39,102 29,439
-------- --------
NET INCOME .................................. $ 50,353 $ 38,428
======== ========
The accompanying notes are an integral part of these financial statements.
-16-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
THREE MONTHS
ENDED MARCH 31,
---------------------
2003 2002
-------- --------
(UNAUDITED)
NET INCOME ............................................ $ 50,353 $ 38,428
-------- --------
OTHER COMPREHENSIVE LOSS, NET
Unrealized gains (losses) on available-for-sale
securities:
Unrealized holding losses during period-
Before income taxes ............................... (466) (6,917)
Income tax benefit ................................ 163 2,421
-------- --------
(303) (4,496)
-------- --------
Less reclassification adjustment for realized
losses reflected in net income during period-
Before income taxes ............................... 410 3,040
Income tax benefit ................................ (144) (1,064)
-------- --------
266 1,976
-------- --------
Net unrealized losses ........................... (37) (2,520)
-------- --------
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) during period-
Before income taxes ............................... 10,668 (2,886)
Income tax (expense) benefit ...................... (4,435) 1,199
-------- --------
6,233 (1,687)
-------- --------
Less reclassification adjustment for realized (gains)
losses reflected in net income during period-
Before income taxes ............................... (10,731) 1,966
Income tax expense (benefit) ...................... 4,461 (817)
-------- --------
(6,270) 1,149
-------- --------
Net unrealized losses ........................... (37) (538)
-------- --------
Other comprehensive loss, net ....................... (74) (3,058)
-------- --------
COMPREHENSIVE INCOME .................................. $ 50,279 $ 35,370
======== ========
The accompanying notes are an integral part of these financial statements.
-17-
MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
--------- ---------
(UNAUDITED)
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 50,353 $ 38,428
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ..................................... 68,779 69,947
Deferred income taxes and investment tax credit, net .............. (1,155) (5,617)
Amortization of other assets and liabilities ...................... 4,812 8,591
Other-than-temporary decline in value of investments .............. -- 2,913
Loss from impairment of assets and investments .................... 2,069 --
Income on equity investments ...................................... (262) (5,483)
Cash outflows of accounts receivable securitization ............... -- (8,000)
Impact of changes in working capital .............................. 75,681 20,395
Other, net ........................................................ 9,891 19,353
--------- ---------
Net cash provided by operating activities ....................... 210,168 140,527
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ................................... (76,555) (62,480)
Less non-cash and change in accrued utility construction expenditures (6,199) 303
Quad Cities Station decommissioning trust fund ...................... (2,075) (2,075)
Nonregulated capital expenditures ................................... (770) (252)
Notes receivable from affiliate ..................................... -- 22,240
Other investing activities, net ..................................... 4,463 679
--------- ---------
Net cash used in investing activities ............................. (81,136) (41,585)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ............................................... -- (30,000)
Issuance of long-term debt, net ..................................... 272,572 391,438
Retirement of long-term debt, including reacquisition cost .......... (183,480) (283)
Reacquisition of preferred securities ............................... -- (100,000)
Net decrease in notes payable ....................................... (38,650) (91,780)
--------- ---------
Net cash provided by financing activities ......................... 50,442 169,375
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 179,474 268,317
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 28,915 20,270
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 208,389 $ 288,587
========= =========
ADDITIONAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized ........................... $ 33,253 $ 35,520
========= =========
Income taxes paid (received), net ................................... $ 904 $ (138)
========= =========
The accompanying notes are an integral part of these financial statements.
-18-
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The consolidated financial statements included herein have been prepared by
MidAmerican Funding, LLC ("MidAmerican Funding"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. In the opinion of MidAmerican
Funding, all adjustments, consisting of normal recurring adjustments, have been
made to present fairly the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation. All
significant intercompany transactions have been eliminated. Although MidAmerican
Funding believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in MidAmerican Funding's latest Annual Report on Form 10-K.
MidAmerican Funding is an Iowa limited liability company with MidAmerican Energy
Holdings Company as its sole member. MidAmerican Funding's direct, wholly owned
subsidiary is MHC Inc. ("MHC"). MHC, MidAmerican Funding and MidAmerican Energy
Holdings Company are exempt public utility holding companies headquartered in
Des Moines, Iowa. MHC's principal subsidiary is MidAmerican Energy Company, a
public utility with electric and natural gas operations. Other direct, wholly
owned subsidiaries of MHC include MidAmerican Capital Company, Midwest Capital
Group, Inc., MidAmerican Services Company and MEC Construction Services Co.
2. ENVIRONMENTAL MATTERS
Refer to Note 2 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's environmental
matters.
3. RATE MATTERS
Refer to Note 3 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's rate matters.
4. ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
Refer to Note 4 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's accounting for the
effects of certain types of regulation.
-19-
5. NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 5 of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's new accounting
pronouncements.
6. SEGMENT INFORMATION
MidAmerican Funding has identified four reportable operating segments based
principally on management structure. The generation segment derives most of its
revenue from the sale of regulated and nonregulated wholesale electricity and
natural gas. The energy delivery segment derives its revenue principally from
the sale and delivery of regulated retail electricity and natural gas, while the
transmission segment obtains most of its revenue from the sale of transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense, income tax expense and equity in the
net income or loss of investees are allocated to each segment.
The energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. For internal segment reporting purposes,
MidAmerican Energy has developed transfer prices for services provided between
the segments. MidAmerican Funding's external revenues by product and services
are displayed on the Consolidated Statements of Income.
-20-
The following tables provide MidAmerican Funding's operating revenues, income
before income taxes and total assets on an operating segment basis (in
thousands):
Three Months
Ended March 31,
--------------------------
2003 2002
----------- -----------
Operating revenues:
External revenues -
Generation .................... $ 157,536 $ 109,738
Energy delivery ............... 569,727 425,942
Transmission .................. 6,248 4,925
Marketing & sales ............. 81,685 33,679
Other ......................... 720 751
----------- -----------
Total ....................... 815,916 575,035
----------- -----------
Intersegment revenues -
Generation .................... 130,355 131,042
Energy delivery ............... -- --
Transmission .................. 14,487 13,800
Marketing & sales ............. -- --
Other ......................... -- --
----------- -----------
Total ....................... 144,842 144,842
Intersegment eliminations ....... (144,842) (144,842)
----------- -----------
Consolidated .................. $ 815,916 $ 575,035
=========== ===========
Income before income taxes:
Generation ...................... $ 28,831 $ 14,866
Energy delivery ................. 60,580 52,146
Transmission .................... 12,442 9,916
Marketing & sales ............... 1,097 (947)
Other ........................... (13,495) (8,114)
----------- -----------
Total ......................... $ 89,455 $ 67,867
=========== ===========
As of
--------------------------
March 31, December 31,
2003 2002
----------- ------------
Total assets (a):
Generation ...................... $ 2,519,635 $ 2,321,090
Energy delivery ................. 2,559,584 2,487,390
Transmission .................... 316,824 306,223
Marketing & sales ............... 60,778 52,143
Other ........................... 193,420 179,141
----------- -----------
Total ......................... 5,650,241 5,345,987
Reclassifications and
intersegment eliminations(b) .. (210,864) (192,003)
----------- -----------
Consolidated .................... $ 5,439,377 $ 5,153,984
=========== ===========
(a) Total assets by operating segment reflect the assignment of goodwill to
applicable reporting units in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets."
(b) Reclassifications and intersegment eliminations relate principally to the
reclassification of income tax balances in accordance with generally
accepted accounting principles and the elimination of intersegment accounts
receivables and payables.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
MidAmerican Energy Company ("MidAmerican Energy") is a public utility with
electric and natural gas operations and is the principal subsidiary within
MidAmerican Funding, LLC ("MidAmerican Funding").
Management's Discussion and Analysis ("MD&A") addresses the financial statements
of MidAmerican Funding and MidAmerican Energy as presented in this joint filing.
Information in MD&A related to MidAmerican Energy, whether or not segregated,
also relates to MidAmerican Funding. Information related to other subsidiaries
of MidAmerican Funding pertains only to the discussion of the financial
condition and results of operations of MidAmerican Funding. Where necessary,
discussions have been segregated and labeled to allow the reader to identify
information applicable only to MidAmerican Funding.
MD&A should be read in conjunction with the financial statements included in
this Form 10-Q and the notes to those statements, together with MD&A in
MidAmerican Energy's and MidAmerican Funding's most recently filed Annual Report
on Form 10-K.
FORWARD-LOOKING STATEMENTS
From time to time, MidAmerican Funding, or one of its subsidiaries individually,
including MidAmerican Energy, may make forward-looking statements within the
meaning of the federal securities laws that involve judgments, assumptions and
other uncertainties beyond the control of MidAmerican Funding or any of its
subsidiaries individually. These forward-looking statements may include, among
others, statements concerning revenue and cost trends, cost recovery, cost
reduction strategies and anticipated outcomes, pricing strategies, changes in
the utility industry, planned capital expenditures, financing needs and
availability, statements of MidAmerican Funding's expectations, beliefs, future
plans and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. These type of forward-looking
statements are based on current expectations and involve a number of known and
unknown risks and uncertainties that could cause the actual results and
performance of MidAmerican Funding to differ materially from any expected future
results or performance, expressed or implied, by the forward-looking statements.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, MidAmerican Funding has identified important
factors that could cause actual results to differ materially from those
expectations, including weather effects on sales volumes and revenues, fuel
prices, fuel transportation and other operating uncertainties, acquisition
uncertainty, uncertainties relating to economic and political conditions and
uncertainties regarding the impact of regulations, changes in government policy,
utility industry deregulation and competition. Neither MidAmerican Funding, nor
any one of its subsidiaries individually, assumes any responsibility to update
forward-looking information contained herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
MidAmerican Energy's and MidAmerican Funding's significant accounting policies
are described in their respective Note (1) of Notes to Consolidated Financial
Statements in Item 15 of their most recently filed Annual Report on Form 10-K.
For a discussion of their critical accounting policies and estimates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in their most recently filed Annual Report on Form 10-K.
-22-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2002
Regulated Electric Gross Margin
- -------------------------------
Three Months
Ended March 31,
---------------
2003 2002
------ ------
(In millions)
Operating revenues ................ $314.9 $306.8
Cost of fuel, energy and capacity.. 88.4 72.4
------ ------
Electric gross margin ........ $226.5 $234.4
====== ======
Electric gross margin for the first quarter of 2003 decreased $7.9 million
compared to the first quarter of 2002.
Effective August 1, 2002, MidAmerican Energy and the Nebraska Public Power
District ("NPPD") restructured their contract for Cooper Nuclear Station.
Accordingly, MidAmerican Energy's costs for energy and capacity purchased from
Cooper Nuclear Station are now classified differently on the statement of
income. As a result, electric gross margin for the first quarter of 2003
decreased by $8.0 million compared to the first quarter of 2002 due to the
change in classification of the related costs. Prior to August 1, 2002, only the
fuel costs for energy purchased from Cooper Nuclear Station were classified as a
cost of fuel, energy and capacity. Other costs under the contract were
classified as other operating expenses. Following the restructuring, all costs
for energy and capacity purchased under that contract are included in
MidAmerican Energy's cost of fuel, energy and capacity, as with other purchased
power costs. Other operating expenses decreased accordingly. Refer to Note
(1)(h) of Notes to Consolidated Financial Statements in Item 15 of MidAmerican
Energy's most recently filed Annual Report on Form 10-K for a discussion of the
contract restructuring.
Temperature conditions during the first quarter of 2003 were colder than in the
first quarter of 2002, resulting in approximately an $8 million increase in
electric margin. Electricity usage factors not dependent on weather increased
electric margin by $1.4 million compared to the first quarter of 2002.
Additionally, a decrease in fuel costs related to Iowa retail electric sales,
excluding the impact of restructuring the Cooper Nuclear Station contract,
increased electric margin by $2.5 million relative to first quarter of 2002. A
decrease in the average retail rate decreased electric margin by $6.4 million.
In total, retail electric sales volumes increased 4.8% for the three months
ended March 31, 2003.
In addition to the effect of restructuring the contract for Cooper Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$2.6 million for first quarter of 2003 due to a decrease in sales volumes,
partially offset by an increase in prices compared to the first quarter of 2002.
Wholesale sales are the sales of energy to other utilities, municipalities and
marketers inside and outside of MidAmerican Energy's delivery system.
MidAmerican Energy sells and purchases electric capacity. The net margin from
those sales and purchases decreased $3.9 million compared to the first quarter
of 2002.
-23-
Regulated Gas Gross Margin
- --------------------------
Three Months
Ended March 31,
---------------
2003 2002
------ ------
(In millions)
Operating revenues ...... $413.8 $220.1
Cost of gas sold ........ 329.5 148.5
------ ------
Gas gross margin ... $ 84.3 $ 71.6
====== ======
Regulated gas revenues include purchased gas adjustment clauses through which
MidAmerican Energy is allowed to recover the cost of gas sold from its retail
gas utility customers. Consequently, fluctuations in the cost of gas sold do not
affect gross margin or net income because revenues reflect comparable
fluctuations from purchased gas adjustment clauses. An increase in the per-unit
cost of gas for the three-month period ended March 31, 2003, compared to the
same period in 2002, increased revenues and cost of gas sold by approximately
$163 million.
Gas margin for the three months ended March 31, 2003, increased $12.7 million
compared to the three months ended March 31, 2002.
Increases in retail gas rates initiated in 2002 improved gas margin by $8.5
million compared to the first quarter of 2002. On February 20, 2002, the South
Dakota Public Utilities Commission approved a settlement agreement allowing
increased natural gas rates of $3.1 million annually, effective immediately. On
June 12, 2002, the Iowa Utilities Board ("IUB") issued an order granting an
interim rate increase of approximately $13.8 million annually, effective
immediately. On November 8, 2002, the IUB approved a proposed settlement
agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer
Advocate that provided for a final increase, implemented on November 25, 2002,
of $17.7 million annually for MidAmerican Energy's Iowa retail natural gas
customers. On September 11, 2002, MidAmerican Energy received a final order from
the Illinois Commerce Commission to increase its Illinois natural gas rates by
$2.2 million annually and implemented the rates on September 18, 2002. Refer to
the "Rate Matters" section of MD&A for comments on the Iowa gas rate settlement.
Colder temperature conditions during the first quarter of 2003 compared to the
same quarter in 2002 resulted in approximately a $6 million increase in gas
gross margin. A $2.2 million loss on a weather derivative financial instrument
partially offset the increase due to colder temperature conditions. Other usage
factors not dependent on weather decreased gas margin by $4.5 million compared
to the first quarter of 2002. Total natural gas retail sales volumes increased
11.9%.
Additionally, gas gross margin increased compared to the first quarter of 2002
due to a $2.0 million increase in revenues from the recovery of energy
efficiency costs and a $2.3 million increase from gas transported.
Regulated Operating Expenses
- ----------------------------
Regulated other operating expenses for the first quarter of 2003 decreased $16.0
million compared to the first quarter of 2002. Effective August 1, 2002,
MidAmerican Energy and NPPD restructured their contract for Cooper Nuclear
Station. Accordingly, MidAmerican Energy's costs for energy and capacity
purchased from Cooper Nuclear Station are now classified differently on the
statement of income. As a result, other operating expenses for the first quarter
of 2003 decreased by $24.1 million compared to the first quarter of 2002. Prior
to August 1, 2002, costs under the contract other than fuel costs for energy
purchased were classified as other operating expenses. Following the
restructuring, all costs for energy
-24-
and capacity purchased under that contract are included in MidAmerican Energy's
cost of fuel, energy and capacity, as with other purchased power. Refer to Note
(1)(h) of Notes to Consolidated Financial Statements in Item 15 of MidAmerican
Energy's most recently filed Annual Report on Form 10-K for a discussion of the
contract restructuring.
The decrease in other operating expenses due to Cooper Nuclear Station costs was
partially offset by increases of $3.3 million in energy efficiency program
costs, $2.2 million in pension and other postretirement costs and $1.6 million
for health care and other benefit costs.
Property and other taxes increased $3.3 million due to an increase in property
taxes.
Nonregulated Operating Revenues and Operating Expenses
- ------------------------------------------------------
Three Months
Ended March 31,
---------------
2003 2002
----- -----
(In millions)
MidAmerican Energy -
Nonregulated operating revenues .. $86.5 $47.4
Nonregulated cost of sales ....... 77.4 41.0
----- -----
Nonregulated gross margin .... $ 9.1 $ 6.4
===== =====
MidAmerican Funding Consolidated -
Nonregulated operating revenues .. $87.2 $48.2
Nonregulated cost of sales ....... 77.5 41.1
----- -----
Nonregulated gross margin .... $ 9.7 $ 7.1
===== =====
MidAmerican Energy -
All gains and losses on MidAmerican Energy's energy trading contracts are now
reported net on the statement of income in accordance with Emerging Issues Task
Force ("EITF") Issue No. 02-3, and 2002 amounts have been reclassified to a
consistent presentation. MidAmerican Energy's nonregulated wholesale gas and
electric marketing activities qualify as "energy trading" contracts under the
guidance of EITF Issue No. 02-3.
MidAmerican Energy's nonregulated gross margin for the first quarter of 2003
increased $2.7 million compared to the first quarter of 2002.
Nonregulated revenues and cost of sales consist substantially of nonregulated
retail natural gas marketing operations. Gross margin for MidAmerican Energy's
nonregulated retail natural gas operations increased $0.8 million to $1.7
million for the first quarter of 2003. The improvement in gross margin reflects
a 66.9% increase in margin per unit and a 16.8% increase in sales volumes. Sales
volumes increased 1.3 million MMBtus. Revenues from nonregulated retail natural
gas operations increased $31.7 million to $65.4 million for the first quarter of
2003. The increase in revenues was due principally to an increase in the average
price per unit sold, which reflects a 66.1% increase in the average cost of gas
and accounts for $26.1 million of the increase in nonregulated retail natural
gas revenues.
Electric retail customers in Illinois, except for those served by electric
cooperatives and municipalities, are allowed to select their electric power
supplier. For the first quarter of 2003 compared to the same
-25-
quarter in 2002, gross margin for nonregulated retail electric operations
increased $0.5 million to $2.3 million. Related revenues increased $6.2 million
to $15.5 million for the first quarter of 2003 while cost of sales increased
$5.7 million to $13.2 million.
Energy trading net revenues increased from $0.6 million for the first quarter of
2002 to $0.7 million for the first quarter of 2003 due to an increase in net
revenues, or gross margin, on MidAmerican Energy's gas energy trading
operations. Gross margin for MidAmerican Energy's gas energy trading operations
increased $0.2 million to $0.6 million for the first quarter of 2003 compared to
the first quarter of 2002 due to an increase in the margin per unit sold. Gas
trading volumes decreased 28.5%, or 6.9 million MMBtus; an MMBtu is one million
British thermal units. Gross margin for electric trading operations decreased
$0.1 million compared to the first quarter of 2002.
Nonregulated revenues include income from sharing arrangements under regulated
natural gas tariffs. Related income totaled $3.3 million for the first quarter
of 2003, an increase of $2.2 million compared to the first quarter of 2002.
Nonregulated revenues decreased relative to the first quarter of 2002, as the
2002 quarter included $1.2 million for emergency storm restoration work
performed outside of MidAmerican Energy's service territory.
Nonregulated other operating expenses decreased $1.9 million for the three
months ended March 31, 2003, due principally to costs related to the emergency
storm restoration work discussed above.
Interest and Dividend Income
- ----------------------------
The decrease in interest and dividend income was due principally to a $1.2
million decrease in interest income on a note receivable related to MidAmerican
Energy's accounts receivable sold. The related arrangement terminated in October
2002.
Marketable Securities Gains and Losses, Net
- -------------------------------------------
MidAmerican Funding -
Net losses on marketable securities decreased $3.3 million compared to the first
quarter of 2002 due to a $2.9 million loss recorded in the 2002 period related
to other-than-temporary declines in two of MidAmerican Funding's common stock
investments.
Other Income and Other Expense
- ------------------------------
MidAmerican Energy -
As a regulated public utility, MidAmerican Energy is allowed to capitalize, and
record as income, a cost of construction for equity funds used, based on
guidelines set forth by the Federal Energy Regulatory Commission ("FERC"). Other
income for the capitalized allowance on equity funds used during construction
totaled $3.9 million in the first quarter of 2003 compared to $1.2 million in
the first quarter of 2002. MidAmerican Energy anticipates recording income for
the allowance on equity funds used during construction over the next several
years while the announced generating plants are constructed.
Other expense includes a discount on MidAmerican Energy's accounts receivable
sold to MidAmerican Energy Funding Corporation. The discount was designed to
cover the expenses of MidAmerican Energy Funding Corporation, including bad debt
expense, subservicer fees, monthly administrative costs and
-26-
interest. The discount was recorded in other expense because it is not reflected
in utility cost of service for regulatory purposes. The discount totaled $1.7
million for the first quarter of 2002. The related arrangement terminated in
October 2002
MidAmerican Funding -
Other income for the first quarter of 2003 and 2002 includes $0.3 million and
$5.3 million, respectively, of income from MidAmerican Capital Company's
("MidAmerican Capital") equity method investments. Equity income for 2002
includes $5.3 million of income for a distribution of common stock held by one
of MidAmerican Capital's venture capital fund investments.
Other expense for the first quarter of 2003 includes a $2.1 million write down
for the impairment of a special purpose fund investment.
Fixed Charges and Preferred Dividends
- -------------------------------------
The increase in interest on long-term debt was due to interest on $400 million
of MidAmerican Energy notes issued in February 2002 and another $275 million
issued in January 2003. The increase was partially offset by the effect of debt
maturities in 2002 and 2003 and lower variable interest rates in the first
quarter of 2003.
Other interest expense increased in the first quarter of 2003 for interest on
regulatory liabilities associated with the electric revenue sharing arrangement
in Iowa and the restructuring of MidAmerican Energy's contract related to Cooper
Nuclear Station.
MidAmerican Energy's preferred dividends of its subsidiary trust decreased due
to the reacquisition of all of the related preferred securities on March 11,
2002. In addition, preferred dividends decreased due to the reacquisition of
preferred securities in May 2002.
-27-
LIQUIDITY AND CAPITAL RESOURCES
MidAmerican Energy and MidAmerican Funding have available a variety of sources
of liquidity and capital resources, both internal and external. These resources
provide funds required for current operations, construction expenditures,
dividends, debt retirement and other capital requirements.
As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy's
net cash provided by operating activities was $226.5 million and $160.8 million
for the three months ended March 31, 2003 and 2002, respectively. MidAmerican
Funding's net cash provided by operating activities was $210.2 million and
$140.5 million for the three months ended March 31, 2003 and 2002, respectively.
Investing Activities and Plans
- ------------------------------
Utility Construction Expenditures -
MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first three months of 2003, utility construction
expenditures totaled $76.6 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases.
Forecasted utility construction expenditures, including allowance for funds used
during construction, are $368 million for 2003. Capital expenditure needs are
reviewed regularly by management and may change significantly as a result of
such reviews.
Through 2007, MidAmerican Energy plans to develop and construct three electric
generating projects in Iowa. The projects would provide service to regulated
retail electricity customers and, subject to regulatory approvals, be included
in regulated rate base in Iowa, Illinois and South Dakota. Wholesale sales may
also be made from the plants to the extent the power is not needed for regulated
retail service. MidAmerican Energy expects to invest approximately $1.44 billion
in the three projects.
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. MidAmerican Energy
has received a certificate from the Iowa Utilities Board ("IUB") allowing it to
construct the plant. Also, on May 29, 2002, the IUB issued an order that
provides the ratemaking principles for the plant. The plant will be operated in
simple cycle mode during 2003 and 2004, resulting in 327 megawatts ("MW") of
accredited capacity. Commercial operation of the simple cycle mode began on May
5, 2003. The combined cycle operation is expected to commence in 2005, resulting
in an expected additional 190 MW of accredited capacity.
The second project is currently under development and is expected to be a 790-MW
(based on expected accreditation) super-critical-temperature, coal-fired plant
fueled with low-sulfur coal. If constructed, MidAmerican Energy will operate the
plant and expects to own approximately 475 MW of the plant. MidAmerican Energy
expects to invest approximately $759 million in the project, plus allowance for
funds used during construction. Municipal, cooperative and public power
utilities will own the remainder, which is a typical ownership arrangement for
large base-load plants in Iowa. On January 23, 2003, MidAmerican Energy received
an order approving the issuance of a certificate from the IUB allowing it to
construct the plant. MidAmerican Energy has made a filing with the IUB for
approval of ratemaking principles pertaining to this plant. On February 12,
2003, MidAmerican Energy executed a contract with Mitsui & Co. Energy
Development, Inc. for the engineering, procurement and construction of the plant
and issued a limited notice to proceed authorizing detailed engineering. A full
notice to proceed authorizing construction is expected following approval of the
ratemaking principles. Continued development of this plant is subject
-28-
to obtaining environmental and other required permits, as well as receiving
orders from the IUB approving construction of the associated transmission
facilities and establishing ratemaking principles which are satisfactory to
MidAmerican Energy.
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. If constructed, MidAmerican Energy will own and
operate these facilities, which are expected to cost approximately $323 million,
plus associated transmission facilities. MidAmerican Energy's plan to construct
the wind project is in conjunction with a settlement proposal to extend through
December 31, 2010, a rate freeze that is currently scheduled to expire at the
end of 2005. The proposed settlement is subject to approval by the IUB. Refer to
the "Rate Matters" section below for more discussion of the rate aspects of the
proposed settlement.
Nuclear Decommissioning -
Each licensee of a nuclear facility is required to provide financial assurance
for the cost of decommissioning its licensed nuclear facility. In general,
decommissioning of a nuclear facility means to safely remove the facility from
service and restore the property to a condition allowing unrestricted use by the
operator.
Based on information presently available, MidAmerican Energy expects to
contribute approximately $41 million during the period 2003 through 2007 to
external trusts established for the investment of funds for decommissioning Quad
Cities Station. Approximately 60% of the fair value of the trusts' funds is now
invested in domestic corporate debt and common equity securities. The remainder
is invested in investment grade municipal and U.S. Treasury bonds. Funding for
Quad Cities Station nuclear decommissioning is reflected as depreciation expense
in the Consolidated Statements of Income. 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.
-29-
Contractual Obligations and Commercial Commitments -
MidAmerican Energy and MidAmerican Funding have various contractual obligations
and commercial commitments. The following table summarizes as of March 31, 2003,
the material cash obligations of MidAmerican Energy and MidAmerican Funding (in
millions). The table has been updated from December 31, 2002, to reflect
issuances and retirements of long-term debt and on-going changes in commitments
due to operating lease and fuel transactions.
Period Payments are Due
-------------------------------------
April 1 to
Dec. 31, 2004- 2006- After
Type of Obligation Total 2003 2005 2007 2007
- ------------------ -------- ---------- ------ ------ --------
MidAmerican Energy:
Long-term debt, excluding unamortized
debt premium and discount, net .............. $1,151.9 $ 5.6 $147.0 $162.0 $ 837.3
Operating leases (1) ............................. 19.5 5.7 8.8 4.2 0.8
Coal, electricity and natural gas
contract commitments (1) .................... 561.9 141.2 253.3 74.2 93.2
-------- ------ ------ ------ --------
Total ....................................... 1,733.3 152.5 409.1 240.4 931.3
MidAmerican Funding parent and other subsidiaries:
Long-term debt, excluding unamortized
debt premium and discount, net .............. 700.0 -- -- -- 700.0
-------- ------ ------ ------ --------
Total ....................................... $2,433.3 $152.5 $409.1 $240.4 $1,631.3
======== ====== ====== ====== ========
(1) The operating leases and fuel and energy commitments are not reflected on
the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes to
Consolidated Financial Statements in Item 15 of MidAmerican Energy's and
MidAmerican Funding's most recently filed Annual Report on Form 10-K for a
discussion of the nature of these commitments.
The above table includes MidAmerican Energy's and MidAmerican Funding's
unconditional purchase obligations. MidAmerican Energy has other types of
commitments that are subject to change and relate primarily to the items listed
below. For additional information, refer, where applicable, to the respective
referenced note in Notes to Consolidated Financial Statements of MidAmerican
Energy's and MidAmerican Funding's most recently filed Annual Report on Form
10-K.
- - Construction expenditures: Refer to the "Utility Construction Expenditures"
section above.
- - Manufactured gas plant facilities (see Note 2 a. of this Form 10-Q)
- - Nuclear decommissioning costs (see Note (4)(d) of MidAmerican Energy's and
MidAmerican Funding's most recently filed Annual Report on Form 10-K)
- - Residual guarantees on operating leases (see Note (1)(j) of MidAmerican
Energy's and MidAmerican Funding's most recently filed Annual Report on
Form 10-K)
Financing Activities, Plans and Availability
- --------------------------------------------
Debt Authorizations and Credit Facilities -
MidAmerican Energy has authority from the Federal Energy Regulatory Commission
("FERC") to issue through April 14, 2005, short-term debt in the form of
commercial paper and bank notes aggregating $500
-30-
million. MidAmerican Energy currently has in place a $370.4 million revolving
credit facility that supports its $250 million commercial paper program and its
variable rate pollution control revenue obligations. The facility expires
January 15, 2004. In addition, MidAmerican Energy has a $5.0 million line of
credit, which expires July 1, 2003.
On January 14, 2003, MidAmerican Energy issued $275 million of 5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.
On February 10, 2003, MidAmerican Energy redeemed all $75 million of its 7.375%
series of mortgage bonds, and on March 17, 2003, it redeemed all $6.94 million
of its 7.45% series of mortgage bonds. Additionally, MidAmerican Energy's 7.125%
series of mortgage bonds totaling $100 million matured on February 3, 2003.
MidAmerican Energy has on file with the Securities and Exchange Commission a
registration statement providing for an additional $425 million in various forms
of senior and subordinated, unsecured long-term debt and preferred securities.
MidAmerican Energy also has authorization from the FERC to issue, through
November 30, 2004, an additional $425 million in various forms of long-term
debt.
MidAmerican Energy is required to obtain authorization from the Illinois
Commerce Commission ("ICC") prior to issuing any securities. If 90% or more of
the proceeds from a securities issuance are used for refinancing purposes,
MidAmerican Energy need only provide the ICC with an "informational statement"
prior to the issuance which sets forth the type, amount and use of the proceeds
of the securities to be issued. If less than 90% of the proceeds are used for
refinancing, MidAmerican must file a comprehensive application seeking
authorization prior to issuance. The ICC is required to hold a hearing before
issuing its authorization. MidAmerican Energy currently has authority from the
ICC to issue up to approximately $15 million of medium-term notes for
refinancing purposes.
Other Information -
MHC Inc., MidAmerican Energy's parent company, has a $4.0 million line of
credit, expiring July 1, 2003, to provide for short-term financing needs, none
of which was outstanding at March 31, 2003. MidAmerican Capital has a $6.1
million line of credit expiring July 1, 2003, none of which was outstanding at
March 31, 2003.
MidAmerican Funding or one of its subsidiaries, including MidAmerican Energy,
may from time to time seek to retire its outstanding debt through cash purchases
and/or exchanges for equity securities, in open market purchases, privately
negotiated transactions or otherwise. The repurchases or exchanges, if any, will
depend on prevailing market conditions, the issuing company's liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
CREDIT RATINGS RISKS
Debt and preferred securities of MidAmerican Funding and MidAmerican Energy are
rated by nationally recognized credit rating agencies. Assigned credit ratings
are based on each rating agency's assessment of MidAmerican Funding's or
MidAmerican Energy's ability to, in general, meet the obligations of the debt or
preferred securities issued by the rated company. The credit ratings are not a
recommendation to buy, sell or hold securities, and there is no assurance that a
particular credit rating will continue for any given period of time. Other than
the energy trading agreements discussed below, neither MidAmerican Funding nor
MidAmerican Energy has any credit agreements that require termination or a
material change in collateral requirements or payment schedule in the event of a
downgrade in the credit ratings of the respective company's securities.
MidAmerican Funding's long-term debt agreements provide that no
-31-
additional debt can be issued by MidAmerican Funding if doing so would cause a
downgrade in MidAmerican Funding's credit ratings.
In conjunction with its wholesale marketing and trading activities, MidAmerican
Energy must meet credit quality standards as required by counterparties.
MidAmerican Energy has energy trading agreements that, in accordance with
industry practice, either specifically require it to maintain investment grade
credit ratings or provide the right for counterparties to demand "adequate
assurances" in the event of a material adverse change in MidAmerican Energy's
creditworthiness. If one or more of MidAmerican Energy's credit ratings decline
below investment grade, MidAmerican Energy may be required to post cash
collateral, letters of credit or other similar credit support to facilitate
ongoing wholesale marketing and trading activities. As of March 31, 2003,
MidAmerican Energy's estimated potential collateral requirements totaled
approximately $157 million. MidAmerican Energy's collateral requirements could
fluctuate considerably due to seasonality, market price volatility, a loss of
key MidAmerican Energy generating facilities or other related factors.
RATE MATTERS
Under a settlement agreement approved by the IUB on December 21, 2001,
MidAmerican Energy's Iowa retail electric rates in effect on December 31, 2000,
are effectively frozen through December 31, 2005. In approving that settlement,
the IUB specifically allows the filing of electric rate design and/or cost of
service rate changes that are intended to keep overall company revenues
unchanged but could result in changes to individual tariffs. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
is recorded as a regulatory liability to be used to offset a portion of the cost
to Iowa customers of future generating plant investments. An amount equal to the
regulatory liability is recorded as a regulatory charge in depreciation and
amortization expense when the liability is accrued. Interest expense is accrued
on the portion of the regulatory liability related to prior years. Beginning in
2002, the liability is being relieved as it is credited against allowance for
funds used during construction, or capitalized financing costs, associated with
generating plant additions. As of March 31, 2003, the related regulatory
liability reflected on the Consolidated Balance Sheet totaled $117.4 million.
On March 20, 2003, MidAmerican Energy and the Iowa Office of Consumer Advocate
agreed upon a proposed settlement in which the rate freeze described above would
be extended through December 31, 2010. Under the proposed settlement, for
calendar years 2006 through 2010, an amount equal to 40% of revenues associated
with Iowa retail electric returns on equity between 11.75% and 13.0%; 50% of
revenues associated with Iowa retail electric returns on equity between 13.0%
and 14.0%; and 83.3% of revenues associated with Iowa retail electric returns on
equity greater than 14.0% will be applied as a reduction to offset some of the
capital costs on the Iowa portion of three generation projects. In addition, the
proposed settlement provides that if Iowa retail electric returns on equity fall
below 10% in any consecutive 12-month period after January 1, 2006, MidAmerican
Energy may seek to file for a general increase in rates. However, prior to
filing for a general increase in rates, MidAmerican Energy is required by the
proposed settlement to conduct 30 days of good faith negotiations with all of
the signatories to the proposed settlement to attempt to avoid a general
increase in rates. The proposed settlement is subject to approval by the IUB.
The IUB is expected to rule on the proposal during the second half of 2003.
-32-
LEGISLATIVE AND REGULATORY EVOLUTION
Electric Deregulation
- ---------------------
Under Illinois law, as of December 31, 2000, all non-residential customers in
Illinois had been phased in to allow them to select their provider of electric
supply services. Residential customers all received the opportunity to select
their electric supplier beginning May 1, 2002.
Illinois law also provides for Illinois electric earnings above a computed level
of return on common equity to be shared equally between customers and
MidAmerican Energy. MidAmerican Energy's computed level of return on common
equity is based on a rolling two-year average of the Monthly Treasury Long-Term
Average Rate, as published by the Federal Reserve System, plus a premium of 8.5%
for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year
average above which sharing must occur for 2002 was 14.03%. The law allows
MidAmerican Energy to mitigate the sharing of earnings above the threshold
return on common equity through accelerated recovery of electric assets.
The energy crisis and related events in California have heightened concerns
nationally about deregulation of the electric utility industry. Accordingly, the
pace of deregulation in Iowa and elsewhere has slowed considerably.
Regional Transmission Organizations
- -----------------------------------
In December 1999, the FERC issued Order No. 2000 establishing, among other
things, minimum characteristics and functions for regional transmission
organizations. Public utilities that were not a member of an independent system
operator at the time of the order were required to submit a plan by which its
transmission facilities would be transferred to a regional transmission
organization. On September 28, 2001, MidAmerican Energy and five other electric
utilities filed with the FERC a plan to create TRANSLink Transmission Company
LLC and to integrate their electric transmission systems into a single,
coordinated system operating as a for-profit independent transmission company in
conjunction with a FERC-approved regional transmission organization. On April
25, 2002, the FERC issued an order approving the transfer of control of
MidAmerican Energy and other utilities' transmission assets to TRANSLink in
conjunction with TRANSLink's participation in the Midwest Independent
Transmission System Operator, Inc. regional transmission organization.
MidAmerican Energy has filed an application for state regulatory approval with
the IUB and anticipates a ruling in mid-2003. Transferring the operations and
control of MidAmerican Energy's transmission assets to other entities could
increase costs for MidAmerican Energy; however, the actual impact of TRANSLink
on MidAmerican Energy's future transmission costs is not yet known.
Standard Electricity Market Design
- ----------------------------------
On July 31, 2002, the FERC issued a notice of proposed rulemaking with respect
to Standard Market Design. The FERC initially characterized the proposal as
portending "sweeping changes" to the use and expansion of the interstate
transmission and wholesale bulk power systems in the United States. The proposal
includes numerous proposed changes to the current regulation of transmission and
generation facilities designed "to promote economic efficiency" and replace the
"obsolete patchwork we have today," according to the FERC's chairman. The FERC
recently issued a White Paper indicating that a final rule may focus on the
formation of regional transmission organizations and allow for regional
differences. The proposed rule may impact the costs of MidAmerican Energy's
electricity and transmission products. A final rule is unlikely to be fully
implemented until at least 2004. MidAmerican Energy is still evaluating the
proposed rule and recognizes there is uncertainty as to the timing and
-33-
outcome of this rulemaking. Accordingly, the likely impact of the proposed rule
on MidAmerican Energy's transmission and generation businesses is unknown.
ENVIRONMENTAL MATTERS
The U.S. Environmental Protection Agency ("EPA") and state environmental
agencies have determined that contaminated wastes remaining at decommissioned
manufactured gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.
MidAmerican Energy has evaluated or is evaluating 27 properties that were, at
one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. As of March 31, 2003, MidAmerican Energy has recorded a $21
million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. Refer to Note 2a of Notes to
Consolidated Financial Statements in Item 1 of this Form 10-Q for further
discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.
Although the timing of potential incurred costs and recovery of costs in rates
may affect the results of operations in individual periods, management believes
that the outcome of these issues will not have a material adverse effect on
MidAmerican Energy's financial position or results of operations.
In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. 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. The impact of the new standards on MidAmerican Energy is currently
unknown. These standards could be superceded, in whole or in part, by a variety
of multi-pollutant emission reduction initiatives. Refer to Note 2b of Notes to
Consolidated Financial Statements in Item 2 of this Form 10-Q for further
discussion of this issue.
In 2001, the state of Iowa passed legislation that, in part, requires
rate-regulated utilities to develop a multi-year plan and budget for managing
regulated emissions from their generating facilities in a cost-effective manner.
MidAmerican Energy's proposed plan and associated budget ("the Plan") was filed
with the IUB on April 1, 2002, in accordance with state law. MidAmerican Energy
expects the IUB to rule on the prudence of the Plan in 2003. MidAmerican Energy
is required to file updates to the Plan at least every two years.
The Plan provides MidAmerican Energy's projected air emission reductions
considering the current proposals that are being debated at the federal level
and describes a coordinated long-range plan to achieve these air emission
reductions. The Plan also provides specific actions to be taken at each
coal-fired generating facility and the related costs and timing for each action.
The Plan outlines $732.0 million in environmental investments to existing
coal-fired generating units, some of which are jointly owned, over a nine-year
period from 2002 through 2010. MidAmerican Energy's share of these investments
is $546.6 million, $67.9 million of which was projected to be incurred in the
years 2002 through 2005, when MidAmerican Energy's Iowa retail electric rates
are effectively frozen. The Plan also identifies expenses that will be incurred
at the generating facilities to operate and maintain the environmental equipment
installed as a result of the Plan.
-34-
Following the expiration of MidAmerican Energy's 2001 settlement agreement on
December 31, 2005, the Plan proposes the use of an adjustment mechanism for
recovery of Plan costs, similar to the tracking mechanisms for cost recovery of
renewable energy and energy efficiency expenditures that are presently part of
MidAmerican Energy's regulated electric rates. Refer to the preceding "Rate
Matters" section for a discussion of the settlement agreement.
Under the New Source Review ("NSR") provisions of the Clean Air Act ("CAA") a
utility is required to obtain a permit from the EPA prior to (1) beginning
construction of a new major stationary source of an NSR-regulated pollutant or
(2) making a physical or operational change (a "major modification") to an
existing facility that potentially increases emissions, unless the changes are
exempt under the regulations. In general, projects subject to NSR regulations
are subject to pre-construction review and permitting under the Prevention of
Significant Deterioration ("PSD") provisions of the CAA. Under the PSD program,
a project that emits threshold levels of regulated pollutants must undergo a
Best Available Control Technology analysis and evaluate the most effective
emissions controls. These controls must be installed in order to receive a
permit. Routine maintenance, repair and replacement are not subject to the NSR
provisions; however, these types of activities have historically been subject to
changing interpretations under the NSR program. The EPA has proposed a change to
the NSR provisions relating to routine maintenance, repair and replacement.
Violation of NSR regulations potentially subjects a utility to fines and/or
other sanctions. The impact on MidAmerican Energy of any final rules is not
currently known.
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 NSR and the New Source Performance Standards of the CAA. In
December 2002, MidAmerican Energy received an initial request from the EPA to
provide documentation related to its capital projects from January 1, 1980, to
the present for its Neal, Council Bluffs, Louisa and Riverside Energy Centers.
MidAmerican Energy is in the process of responding to requests and at this time
cannot predict the outcome of the requests.
GENERATING CAPABILITY
In July 2002, retail customer usage of electricity caused a new record hourly
peak demand of 3,889 megawatts on MidAmerican Energy's energy system, surpassing
the previous record peak of 3,833 MW set in July 1999. MidAmerican Energy is
interconnected with Iowa and neighboring utilities and is involved in an
electric power pooling agreement known as Mid-Continent Area Power Pool
("MAPP"). Each MAPP participant is required to maintain for emergency purposes a
net generating capability reserve of at least 15% above its system peak demand.
For the 2002 cooling season, MidAmerican Energy's reserve was approximately 21%
above its system peak demand.
MidAmerican Energy believes it has adequate electric capacity reserve through
2003 and continues to manage its generating resources to ensure an adequate
reserve in the future. MidAmerican Energy is in the process of constructing a
natural gas-fired combined cycle unit to be completed in two phases in 2003 and
2005. The first phase, totaling 327 MW, began commercial operation on May 5,
2003. MidAmerican Energy expects the second phase to provide approximately 190
MW of additional accredited capacity. Up to an additional 475 MW of owned
coal-fired generation is expected to be operational by the summer of 2007.
MidAmerican Energy has also announced a plan to construct wind power facilities,
subject to approval by the IUB. However, significantly higher-than-normal
temperatures during the cooling season could cause MidAmerican Energy's reserve
to fall below the 15% minimum. If MidAmerican Energy fails to maintain the
appropriate reserve, significant penalties could be contractually imposed by
MAPP.
-35-
MidAmerican Energy is financially exposed to movements in energy prices since it
no longer recovers fluctuations in its energy costs through an energy adjustment
clause in Iowa. Although MidAmerican Energy believes it has sufficient
generation under typical operating conditions for its retail electric needs, a
loss of adequate generation by MidAmerican Energy requiring the purchase of
replacement power at a time of high market prices could subject MidAmerican
Energy to losses on its energy sales.
NEW ACCOUNTING PRONOUNCEMENT
On April 30, 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 149 also amends certain
other existing pronouncements and will require contracts with comparable
characteristics to be accounted for similarly. In particular, SFAS No. 149
clarifies when a contract with an initial net investment meets the
characteristic of a derivative and clarifies when a derivative that contains a
financing component will require special reporting in the statement of cash
flows. SFAS No. 149 is effective for MidAmerican Energy and MidAmerican Funding
for contracts entered into or modified after June 30, 2003. MidAmerican Energy
and MidAmerican Funding are evaluating the impact of adopting the requirements
of SFAS No. 149.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- -------------------------------------------------------------------
Reference is made to MidAmerican Energy's and MidAmerican Funding's most
recently filed Annual Report on Form 10-K, and in particular, Notes (1)(i) and
(8) in Notes to Consolidated Financial Statements in Item 15 of that report. As
of March 31, 2003, there have been no material changes in the market risks
described therein.
ITEM 4. CONTROLS AND PROCEDURES.
- --------------------------------
MidAmerican Funding's and MidAmerican Energy's respective chief executive
officer and chief financial officer have established "disclosure controls and
procedures" (as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities
and Exchange Act of 1934) to ensure that material information of the companies
and their subsidiaries is made known to them by others within the respective
companies. Under their supervision, an evaluation of the disclosure controls and
procedures was performed within 90 days prior to the filing of this quarterly
report. Based on that evaluation, the above-mentioned officers have concluded
that, as of the date of the evaluation, the disclosure controls and procedures
were operating effectively. Additionally, the above-mentioned officers find that
there have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date of
that evaluation.
-36-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
MidAmerican Funding and its subsidiaries currently have no material legal
proceedings.
Information on MidAmerican Energy's environmental matters is included in the
"Environmental Matters" section of Management's Discussion and Analysis in Item
2 of this Form 10-Q.
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
Reference is made to the accompanying Exhibit Index for a list of exhibits filed
as a part of this Quarterly Report.
(B) REPORTS ON FORM 8-K
None.
-37-
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 FUNDING, LLC
MIDAMERICAN ENERGY COMPANY
--------------------------
(Registrants)
Date May 12, 2003 /s/ Patrick J. Goodman
-------------- ----------------------------
Patrick J. Goodman
Vice President and Treasurer
of MidAmerican Funding, LLC
/s/ Thomas B. Specketer
--------------------------------------------
Thomas B. Specketer
Vice President and Controller
of MidAmerican Energy Company
(principal financial and accounting officer)
-38-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, David L. Sokol, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
-39-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ David L. Sokol
------------------
David L. Sokol
Chief Executive Officer
-40-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Patrick J. Goodman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
-41-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Patrick J. Goodman
----------------------
Patrick J. Goodman
Vice President and Treasurer
(chief financial officer)
-42-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Jack L. Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
-43-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Jack L. Alexander
---------------------
Jack L. Alexander
Senior Vice President
(co-chief executive officer)
-44-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Todd M. Raba, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
-45-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Todd M. Raba
----------------
Todd M. Raba
Senior Vice President
(co-chief executive officer)
-46-
SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------
I, Thomas B. Specketer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
-47-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/s/ Thomas B. Specketer
-----------------------
Thomas B. Specketer
Vice President and Controller
(chief financial officer)
-48-
EXHIBIT INDEX
EXHIBIT NO.
- -----------
MidAmerican Energy
- ------------------
15 Awareness Letter of Independent Accountants
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (co-chief executive officer)
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (co-chief executive officer)
99.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (chief financial officer)
MidAmerican Funding
- -------------------
99.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (chief executive officer)
99.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (chief financial officer)
-49-