AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8,DECEMBER 16, 1999
REGISTRATION NO. 333-______
===============================================================================333-90553
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MIDAMERICAN FUNDING, LLC
(Exact name of registrant as specified in its charter)
IOWA 4911 47-0819200
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
----------------------------------------------------------
666 GRAND AVENUE
DES MOINES, IOWA 50303
(515) 242-4000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN A. RASMUSSEN, JR., ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
MIDAMERICAN FUNDING, LLC
666 GRAND AVENUE
DES MOINES, IOWA 50303
(515) 242-4000242-4300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------------------------------
Copy to:
BRYANT B. EDWARDS
LATHAM & WATKINS
633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90071
(213) 485-1234
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED
IN CONNECTION WITH THE FORMATION OF A HOLDING COMPANY AND THERE IS COMPLIANCE
WITH GENERAL INSTRUCTION G, CHECK THE FOLLOWING BOX. [ ]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND
LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================
Proposed
Offering Proposed Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered per Security(1) Offering Price(1) Fee
- ------------------------------------------------------------------------ --------------- ------------------ -------------------Fee(2)
5.85% Senior Secured Exchange Notes due 2001 $200,000,000 100% $200,000,000 $55,600
- ----------------------------------------------------------------------------------------------------------------------------------
6.339% Senior Secured Exchange Notes due 2009 $175,000,000 100% $175,000,000 $48,650
- ----------------------------------------------------------------------------------------------------------------------------------
6.927% Senior Secured Exchange Bonds due 2029 $325,000,000 100% $325,000,000 100% $325,000,000 $90,350
- ----------------------------------------------------------------------------------------------------------------------------------
================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
-----------------------------------------(2) The registration fee was paid in connection with the initial filing of the
registration statement.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
==============================================================================- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED NOVEMBER 8,DECEMBER 16, 1999
PROSPECTUS
MIDAMERICAN FUNDING, LLC
Exchange Offer forEXCHANGE OFFER FOR
5.85% Senior Secured Notes dueSENIOR SECURED NOTES DUE 2001
6.339% Senior Secured Notes dueSENIOR SECURED NOTES DUE 2009
6.927% Senior Secured Bonds dueSENIOR SECURED BONDS DUE 2029
-----------------------------------
This is an offer to exchange our outstanding 5.85% Senior Secured Notes
due 2001, 6.339% Senior Secured Notes due 2009 and 6.927% Senior Secured Bonds
due 2029 you now hold for new, substantially identical 5.85% Senior Secured
Exchange Notes due 2001, 6.339% Senior Secured Exchange Notes due 2009 and
6.927% Senior Secured Exchange Bonds due 2029 that will be free of the transfer
restrictions that apply to the initial securities. This offer will expire at
5:00 p.m., New York City time, on _____________,2000, unless we extend it. You must
tender theyour initial securities by the deadline to obtain exchange securities
and the liquidity benefits they offer.
We agreed with the initial purchasers of the initial securities to make
this offer and register the issuance of the exchange securities following the
closing for the initial securities. This offer applies to any and all initial
securities tendered before the expiration of the exchange offer.
The exchange securities will not trade on any established exchange. The
exchange securities have the same financial terms and covenants as the initial
securities, and are subject to the same business and financial risks.
A DESCRIPTION OF THOSE RISKS BEGINS ON PAGE 11.
The terms of the exchange offer will include the following:
o We will exchange all initial securities that are validly tendered and
not withdrawn prior to the expiration of the exchange offer.
o You may withdraw tenders of initial securities at any time prior to the
expiration of the exchange offer.
o We will not receive any proceeds from the exchange offer.
-----------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------------------
The date of this prospectus is __________,December , 1999
TABLE OF CONTENTS
PAGE
Prospectus Summary..................................................... 1
Risk Factors........................................................... 11
The Exchange Offer..................................................... 16
Use of Proceeds........................................................ 26
Capitalization......................................................... 26
Selected Financial Data................................................ 27
Management's Discussion and Analysis of
Financial Condition and Results of Operation......................... 30
Our Business and the Business of MHC and MidAmerican Energy............ 54
Management............................................................. 60
Ownership of Our Membership Interests.................................. 62
Description of the Securities.......................................... 63
Plan of Distribution................................................... 85
United States Federal Income Tax Considerations........................ 86
Legal Matters.......................................................... 87
Experts................................................................ 87
Incorporation by Reference............................................. 87
Where You Can Find More Information.................................... 87
Index to Financial Statements..........................................
PAGE
----
Prospectus Summary ................................................................... 1
Risk Factors ......................................................................... 11
The Exchange Offer ................................................................... 16
Use of Proceeds ...................................................................... 26
Capitalization ....................................................................... 26
Selected Consolidated Financial Data ................................................. 27
Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Our Business and the Business of MHC and MidAmerican Energy .......................... 55
Management ........................................................................... 62
Ownership of Our Membership Interests ................................................ 65
Description of the Securities ........................................................ 65
Plan of Distribution ................................................................. 86
United States Federal Income Tax Considerations for United States Holders ............ 87
Legal Matters ........................................................................ 88
Experts .............................................................................. 88
Incorporation by Reference ........................................................... 88
Where You Can Find More Information .................................................. 88
Index to Financial Statements ........................................................ F-1
i
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of the securities that are subject to the
exchange offer, as well as information regarding our business and detailed
financial data. We encourage you to read the prospectus in its entirety. Unless
the context clearly indicates otherwise, the terms "we," "our" or "us" as used
in this prospectus refer to MidAmerican Funding, LLC, the obligor on your
securities. You
should pay special attention to the "Risk Factors" section beginning on page 11
of this prospectus.
SUMMARY OF OUR EXCHANGE OFFER
On March 11, 1999 we completed the offering of $200,000,000 aggregate
principal amount of our 5.85% Senior Secured Notes due 2001, $175,000,000
aggregate principal amount of our 6.339% Senior Secured Notes due 2009 and
$325,000,000 aggregate principal amount of our 6.927% Senior Secured Bonds due
2029. We offered these initial securities in reliance on exemptions from the
registration requirements of the Securities Act. As part of the offering of the
initial securities, we entered into a registration rights agreement with the
initial purchasers of the initial securities in which we agreed, among other
things, to deliver this prospectus to you and to complete an exchange offer for
the initial securities. Below is a summary of that exchange offer.
The Exchange Offer.......... We are offering to exchange up to $700,000,000
principal amount of exchange securities which
have been registered under the Securities Act for
up to $700,000,000 principal amount of initial
securities. We will exchange initial securities
only in integral multiples of $1,000.
In order to be exchanged, an initial security
must be properly tendered and accepted. We will
exchange all initial securities that are validly
tendered and not withdrawn. As of the date of
this prospectus, there are $700,000,000
principal amount of initial securities
outstanding. We will issue exchange securities
promptly after the expiration of the exchange
offer.
Resales Without Further
Registration............... Based on interpretations by the staff of the
Securities and Exchange Commission, we believe
that the exchange securities issued in the
exchange offer may be offered for resale, resold
or otherwise transferred by you without
compliance with the registration and prospectus
delivery requirements of the Securities Act, so
long as:
o you are acquiring the exchange securities in
the ordinary course of your business;
o you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate,
in a distribution of the exchange securities;
and
o you are not our "affiliate."
By tendering your initial securities as
described below, you will be making
representations to this effect.
Transfer Restrictions on
Exchange Securities......... If you are our affiliate or are engaged in,
intend to engage in or have any arrangement or
understanding with any person to participate in,
the distribution of exchange securities:
1
o you cannot rely on the applicable
interpretations of the staff of the
Securities and Exchange Commission; and
o you must comply with the registration
requirements of the Securities Act in
connection with any resale transaction.
Each broker or dealer that receives exchange
securities for its own account in exchange for
initial securities that were acquired as a
result of market-making or other trading
activities must acknowledge that it will deliver
this prospectus in connection with any offer to
resell, resale or other transfer of the exchange
securities issued in the exchange offer.
Expiration Date............. 5:00 p.m., New York City time, on 2000,
unless we extend the expiration date.
Accrued Interest on the
Exchange Securities and
Initial Securities......... The exchange securities will bear interest from
the most recent date to which interest has been
paid on the initial securities. If your initial
securities are accepted for exchange, then you
will waive interest on the initial securities
accrued to the date the exchange securities are
issued.
Increase in Interest Rate... As the registration statement of which this
prospectus is a part was not declared effective
by December 7, 1999, the interest rate on the
initial securities was increased by 0.50% per
annum beginning on December 7, 1999 until the
registration statement is declared effective.
Conditions to Our Acceptance
and Exchange of
Initial Securities......... Our obligations to accept initial securities and
exchange initial securities for exchange
securities are subject to the following
conditions, which we may assert or waive in our
sole discretion:
o the exchange offer cannot violate applicable
law;
o there cannot exist any law or governmental
proceeding which (1) seeks to restrain or
prohibit the exchange offer, (2) seeks
damages as a result of the exchange offer or
(3) results in a material delay in our
ability to exchange initial securities;
o there cannot have occurred (1) a suspension
of trading in securities on the New York
Stock Exchange, (2) a declaration of a
banking moratorium or (3) a commencement of a
war involving the United States; and
o there cannot have occurred a material
adverse change in our business, financial or
other condition, operations, stock ownership
or prospects.
2
Procedures for Tendering
Initial Securities......... If you wish to tender your initial securities,
you must complete, sign and date the letter of
transmittal, or a facsimile of it, in accordance
with its instructions, and transmit the letter of
transmittal, together with your initial
securities and any other required documentation,
and The Bank of New York, who is the exchange
agent, must receive your documentation at the
address set forth in the letter of transmittal by
5:00 p.m. New York City time, on the expiration
date. By executing the letter of transmittal, you
will represent to us that you are acquiring the
exchange securities in the ordinary course of
your business, that you are not participating, do
not intend to participate and have no arrangement
or understanding with any person to participate,
in the distribution of exchange securities, and
that you are not our "affiliate."
Special Procedures for
Beneficial Holders......... If you are the beneficial holder of initial
securities that are registered in the name of
your broker, dealer, commercial bank, trust
company or other nominee, and you wish to tender
in the exchange offer, you should promptly
contact the person in whose name your initial
securities are registered and instruct that
person to tender on your behalf.
Guaranteed Delivery
Procedures.................. If you wish to tender your initial securities and
you cannot deliver your certificates, the letter
of transmittal or any other required documents to
the exchange agent before the expiration date,
you may tender your initial securities according
to the guaranteed delivery procedures.
Withdrawal Rights........... You may withdraw the tender of your initial
securities at any time before 5:00 p.m., New York
City time, on the expiration date.
Acceptance of Initial
Securities and Delivery of
Exchange Securities........ Subject to the conditions described above, we
will accept for exchange any and all initial
securities which are properly tendered in the
exchange offer before 5:00 p.m., New York City
time, on the expiration date. The exchange
securities will be delivered promptly after the
expiration date.
Exchange Agent.............. The Bank of New York is serving as exchange
agent in connection with the exchange offer.
Federal Income
Tax Considerations......... We believe that your exchange of initial
securities for exchange securities in the
exchange offer will not result in any gain or
loss to you for United States federal income tax
purposes.
Use of Proceeds............. We will not receive any proceeds from the
issuance of exchange securities in the exchange
offer. We will pay all expenses incident to the
exchange offer.
3
SUMMARY OF OUR BUSINESS
MIDAMERICAN FUNDING, LLC
We are an Iowa limited liability company that was formed in March 1999 to
facilitate the acquisition by MidAmerican Energy Holdings Company (formerlyof MHC Inc.
MidAmerican Energy Holdings Company was formerly called CalEnergy Company, Inc.) of
and MHC Inc. (formerlywas formerly called MidAmerican Energy Holdings Company). We refer to this acquisition as the merger throughout this
prospectus.Company. We are a
direct wholly-owned subsidiary of MidAmerican Holdings. We own all of the
outstanding common stock of MHC, which owns all of the common stock of
MidAmerican Energy Company. We conduct no business other than activities
related to the issuance of the securities and the ownership of MHC.
Our principal executive offices are located at 666 Grand Avenue, Des
Moines, Iowa 50303, and our telephone number is (515) 242-4000.
MIDAMERICAN HOLDINGS
MidAmerican Holdings is a fast-growing global energy company with an
increasingly diversified portfolio of regulated and nonregulated assets. The
focus of MidAmerican Holdings has evolved over time from development and
acquisition activities in the domestic and international power generation
markets to strategic electric and gas utility acquisitions, with a particular
emphasis on investment-grade countries such aslike the United States, the United
Kingdom, Australia, Canada, New Zealand and the countries of Western Europe.
This focus has provided MidAmerican Holdings with increased scale, skill,
revenue diversity, credit quality, quality of cash flows and additional growth
opportunities associated with each of the acquired businesses. MidAmerican
Holdings' investments in related activities (e.g. producing gas fields, gas
reserves and advanced utility information systems) are primarily intended to support
and augment the profitability of its existing core businesses.
MidAmerican Holdings, headquartered in Des Moines, Iowa, has approximately
9,800 employees and is the largest publicly traded company in Iowa. Through its
retail utility subsidiaries, MidAmerican Energy in the United States and
Northern Electric plc in the United Kingdom, MidAmerican Holdings provides
electric service to 2.2 million customers and natural gas service to 1.2
million customers worldwide. Through CalEnergy Generation, MidAmerican
Holdings' independent power production and nonregulated business subsidiary,
and MidAmerican Energy's utility operations, MidAmerican Holdings manages and
owns interests in approximately 8,300 net megawatts of diversified power
generation facilities in operation, construction and development.
On October 25, 1999, MidAmerican Holdings announced that an investor group
comprised of Berkshire Hathaway Inc., Walter Scott, Jr. and David L. Sokol had
reached agreement to acquire MidAmerican Holdings for $35.05 per share in cash.
The purchase price together with the assumption of debt represents a total
enterprise value of approximately $9 billion. Upon completion of the
transaction, which is expected to occur by April 2000, MidAmerican Holdings
would become a privately owned company with publicly traded fixed income
securities.
4
MIDAMERICAN ENERGY AND MHC
MidAmerican Energy is the largest combined electric and gas utility in
Iowa with approximately 652,900 electric and 621,500 gas customers. It has gas
and electric operations in Iowa, Illinois and South Dakota and gas operations
in Nebraska. The regulated service area is comprised of 10,600 square miles
with a total population of approximately 1.7 million. MidAmerican Energy owns
installed generation capacity of approximately 4,000 1
megawatts, comprised of
71% coal, 19% natural gas and 10% nuclear fuel sources. Due to its geographic
location and fuel sources, MidAmerican Energy is a low cost producer of
electricity in the Mid-Continent Area Power Pool, which is
known as MAPP.Pool. From time to time,
MidAmerican Energy supplies electricity to other utilities in major energy
markets in the midwestern United States, such
aslike the Chicago, St. Louis, Kansas
City, Milwaukee and Minneapolis areas. MidAmerican Energy's gas operations are
served by at least four major gas pipelines on which MidAmerican Energy has
rights to firm and interruptible pipeline capacity. Approximately 88% of the
total revenues of MHC in 1998 came from MidAmerican Energy.
MidAmerican Energy is subject to regulation and oversight by one or more
of the Federal Energy Regulatory Commission, the Iowa Utilities Board, the
Illinois Commerce Commission and other regulatory bodies. These governmental
agencies regulate the following aspects of MidAmerican Energy's business, among
other things: the issuance of securities, accounting policies and practices,
electric interconnections and transmission services, retail rates and affiliate
transactions.
MidAmerican Energy is a wholly-owned subsidiary of MHC. In addition to its
regulated business conducted through MidAmerican Energy, MHC conducts
nonregulated businesses through its subsidiaries MidAmerican Capital Company,
Midwest Capital Group and MidAmerican Services Company, including real estate
development, financial and energy investments and energy services.
The following chart shows the ownership structure of MidAmerican Holdings,
us and our subsidiaries.
MIDAMERICAN
HOLDINGS
|
| 100%
|
MIDAMERICAN
FUNDING
|
| 100%
100% |MHC 100%
--------------------------------MHC-------------------------------
| | |
MIDAMERICAN 100% | 100% MIDAMERICAN
CAPITAL ----------------------- SERVICES
| |
MIDAMERICAN MIDWEST
ENERGY CAPITAL
25
THE MERGER
On March 12, 1999 our subsidiary, MAVH Inc., was merged with and into MHC
pursuant tounder a merger agreement among MidAmerican Holdings, MAVH, MHC and another
subsidiary of MidAmerican Holdings. The merger resulted in MHC becoming our
direct wholly-owned subsidiary and an indirect wholly-owned subsidiary of
MidAmerican Holdings. MidAmerican Holdings paid $27.15 in cash for each
outstanding share of MHC common stock for a total of $2.42 billion. The merger
was financed with the net proceeds of the initial securities and an equity
contribution from MidAmerican Holdings. In connection with the merger,
MidAmerican Holdings became an exempt public utility holding company.
3
SUMMARY OF OUR EXCHANGE OFFER
On March 11, 1999 we completed the offering of $200,000,000 aggregate
principal amount of our 5.85% Senior Secured Notes due 2001, $175,000,000
aggregate principal amount of our 6.339% Senior Secured Notes due 2009 and
$325,000,000 aggregate principal amount of our 6.927% Senior Secured Bonds due
2029 in reliance on exemptions from the registration requirements of the
Securities Act. Throughout this prospectus, we refer to the securities described
in the preceding sentence as the initial Securities. As part of the offering of
the initial Securities, we entered into a registration rights agreement with the
initial purchasers of the initial Securities in which we agreed, among other
things, to deliver this prospectus to you and to complete an exchange offer for
the initial Securities. Below is a summary of that exchange offer.
The Exchange Offer.......................... We are offering to exchange up to $700,000,000 principal
amount of exchange Securities which have been registered
under the Securities Act for up to $700,000,000
principal amount of initial Securities. We will
exchange initial Securities only in integral multiples
of $1,000.
In order to be exchanged, an initial Security must be
properly tendered and accepted. We will exchange all
initial Securities that are validly tendered and not
withdrawn. As of the date of this prospectus, there are
$700,000,000 principal amount of initial Securities
outstanding. We will issue exchange Securities promptly
after the expiration of the exchange offer.
Resales Without
Further Registration................... Based on interpretations by the staff of the Securities
and Exchange Commission, we believe that the exchange
Securities issued in the exchange offer may be offered
for resale, resold or otherwise transferred by you
without compliance with the registration and prospectus
delivery requirements of the Securities Act, so long as:
o you are acquiring the exchange Securities in
the ordinary course of your business;
o you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate, in
a distribution of the exchange Securities; and
o you are not our "affiliate."
By tendering your initial Securities as described below,
you will be making representations to this effect.
Transfer Restrictions on
Exchange Securities.................... If you are our affiliate or are engaged in, intend to
engage in or have any arrangement or understanding with
any person to participate in, the distribution of the
exchange Securities:
o you cannot rely on the applicable interpretations of
the staff of the Securities and Exchange
4
Commission; and
o you must comply with the registration requirements of
the Securities Act in connection with any resale
transaction.
Each broker or dealer that receives exchange Securities for
its own account in exchange for initial Securities that
were acquired as a result of market-making or other trading
activities must acknowledge that it will deliver this
prospectus in connection with any offer to resell, resale
or other transfer of the exchange Securities issued in the
exchange offer.
Expiration Date............................. 5:00 p.m., New York City time, on _________, unless we
extend the expiration date.
Accrued Interest on the
Exchange Securities
and Initial Securities................. The exchange Securities will bear interest from the most
recent date to which interest has been paid on the
initial Securities. If your initial Securities are
accepted for exchange, then you will waive interest on
the initial Securities accrued to the date the exchange
Securities are issued.
Conditions to the
Exchange Offer......................... The exchange offer is subject to conditions. We may
assert or waive these conditions in our sole discretion.
Procedures for Tendering
Initial Securities..................... If you wish to tender your initial Securities, you must
complete, sign and date the letter of transmittal, or a
facsimile of it, in accordance with its instructions,
and transmit the letter of transmittal, together with
your initial Securities and any other required
documentation, and The Bank of New York, who is the
exchange agent, must receive your documentation at the
address set forth in the letter of transmittal by 5:00
p.m. New York City time, on the expiration date. By
executing the letter of transmittal, you will represent
to us that you are acquiring the exchange Securities in
the ordinary course of your business, that you are not
participating, do not intend to participate and have no
arrangement or understanding with any person to
participate, in the distribution of exchange Securities,
and that you are not our "affiliate."
Special Procedures for
Beneficial Holders..................... If you are the beneficial holder of initial Securities
that are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee, and you
wish to tender in the exchange offer, you should
promptly contact the person in whose name your initial
Securities are registered and instruct that person to
tender on your behalf.
5
Guaranteed Delivery Procedures.............. If you wish to tender your initial Securities and you
cannot deliver your certificates, the letter of
transmittal or any other required documents to the
exchange agent before the expiration date, you may
tender your initial Securities according to the
guaranteed delivery procedures.
Withdrawal Rights........................... You may withdraw the tender of your initial Securities
at any time before 5:00 p.m., New York City time, on the
expiration date.
Acceptance of Initial Securities
and Delivery of Exchange Securities.... Subject to conditions explained later in this prospectus,
we will accept for exchange any and all initial Securities
which are properly tendered in the exchange offer before
5:00 p.m., New York City time, on the expiration date. The
exchange Securities will be delivered promptly after the
expiration date.
Exchange Agent.............................. The Bank of New York is serving as exchange agent in
connection with the exchange offer.
Federal Income Tax Considerations........... We believe that your exchange of initial Securities for
exchange Securities pursuant to the exchange offer will not
result in any gain or loss to you for United States federal
income tax purposes.
Use of Proceeds............................. We will not receive any proceeds from the issuance of
exchange Securities pursuant to the exchange offer. We
will pay all expenses incident to the exchange offer.
6
SUMMARY OF THE TERMS OF THE SECURITIES
The form and terms of the exchange Securitiessecurities and the initial Securitiessecurities
are identical in all material respects, except that transfer restrictions and
registration rights applicable to the initial Securitiessecurities do not apply to the
exchange Securities.securities. The exchange Securitiessecurities will evidence the same debt as the
initial Securitiessecurities and will be governed by the same indenture.
WhereInitial Securities.......... The initial securities include the following:
o $200,000,000 principal amount of 5.85%
Senior Secured Notes due 2001
o $175,000,000 principal amount of 6.339%
Senior Secured Notes due 2009
o $325,000,000 principal amount of 6.927%
Senior Secured Bonds due 2029
Exchange Securities......... The exchange securities include the following:
o $200,000,000 principal amount of 5.85%
Senior Secured Exchange Notes due 2001
o $175,000,000 principal amount of 6.339%
Senior Secured Exchange Notes due 2009
o $325,000,000 principal amount of 6.927%
Senior Secured Exchange Bonds due 2029
Maturity................... o The entire principal amount of the 2001
securities matures on March 1, 2001.
o The entire principal amount of the 2009
securities matures on March 1, 2009.
o The entire principal amount of the 2029
securities matures on March 1, 2029.
Interest.................... Annual rate:
o 5.85%, in the case of the 2001 securities;
o 6.339%, in the case of the 2009 securities;
and
o 6.927%, in the case of the 2029 securities.
Interest is paid every six months on March 1 and
September 1.
Collateral.................. The securities are secured by a pledge of all
of the common stock of MHC.
Ranking..................... The securities:
o are our direct senior secured obligations;
o rank on an equal basis with all of our other
existing and future senior obligations;
o rank senior to all of our existing and
future subordinated indebtedness; and
7
o effectively rank junior to all indebtedness
and other liabilities, including preferred
stock, of our direct and indirect
subsidiaries, to the extent of the assets of
the subsidiaries.
The amount of additional indebtedness that we
refercan incur under the indenture for the securities
which is ranked equally with the securities is
unlimited so long as (1) the indebtedness is
incurred as part of our permitted businesses and
activities as described below or (2) the rating
agencies confirm that the incurrence of the
indebtedness will not result in a downgrade of
the ratings for the securities.
The indenture for the securities does not
restrict the incurrence of additional unsecured
indebtedness by our subsidiaries and permits our
subsidiaries to "Securities"incur a significant amount of
secured indebtedness. At September 30, 1999, MHC
and its direct and indirect subsidiaries had
total indebtedness, including preferred stock,
of approximately $1,316 million, all of which is
effectively senior to the securities.
Ratings..................... The securities have been assigned ratings of
BBB+ by Standard & Poor's Ratings Group, BBB+ by
Duff & Phelps Credit Rating Co. and Baa1 by
Moody's Investors Service, Inc.
Covenants Limiting
Our Activities.............. The indenture contains covenants which, among
other things and subject to exceptions described
later in this prospectus, restrict our ability
to:
o make distributions unless no event of
default exists or would result from the
distribution and either:
(1) at the time and as a result of the
distribution, our leverage ratio does not
exceed 0.67:1 and our interest coverage
ratio is not less than 2.2:1; or
(2) at the time our senior secured long-term
debt is rated at least BBB by Standard &
Poor's and Duff & Phelps, and at least
Baa2 by Moody's.
o enter into any business operations other
than:
(1) the transactions contemplated by the
indenture and the other financing
documents related to the offering of the
securities;
(2) activities related to the management and
ownership of MHC;
(3) entering into and performing any
agreements to accomplish the activities
described in clauses (1) and (2) above;
and
(4) exercising any corporate powers that are
incidental to or necessary, suitable or
convenient for the accomplishment of the
activities described in clauses (1), (2)
and (3) above.
8
However, we may enter into additional business
operations from time to time in the future
if, prior to doing so, we obtain written
confirmation from the rating agencies that
the entering into of the new business
operations will not result in a downgrade of
the ratings for the securities.
o merge or consolidate with or into any other
person or transfer or lease all or
substantially all of our assets to another
person.
o incur any indebtedness other than:
(1) as a part of our permitted businesses and
activities as described above; and
(2) other indebtedness so long as the rating
agencies confirm that the incurrence of
the indebtedness will not result in a
downgrade of the ratings for the
securities.
o issue, assume or guarantee indebtedness
secured by a lien, other than the securities
or any other indebtedness issued under the
indenture.
The covenants and restrictions which limit our
ability to pay dividends or make other
distributions will cease to be in effect if the
rating agencies confirm in writing that, without
these covenants and restrictions, our long-term
senior secured debt would still be rated at
least BBB+ by each of Standard & Poor's and Duff
& Phelps and at least Baa1 by Moody's.
Covenants Limiting the
Activities of Our
Significant Subsidiaries.... The indenture also restricts, among other things
and subject to exceptions described later in this
prospectus, the ability of our significant
subsidiaries to:
o incur any indebtedness at the MHC level
other than indebtedness outstanding on the
closing date for the initial securities under
MHC's existing agreements and extensions of
this indebtedness.
o issue, assume or guarantee indebtedness
secured by a lien, other than liens permitted
under the indenture.
o enter into new businesses and activities
other than those types of businesses and
activities in which we are referringor MidAmerican
Energy is engaged today and any other
business or activity which is deemed
necessary, useful or desirable in connection
with those businesses and activities.
The indenture defines a significant subsidiary
as any subsidiary whose gross assets or gross
revenues represent at least 25% of our gross
assets or gross revenues.
9
Optional Redemption......... We may redeem any series of securities in whole
or in part at any time at a redemption price
equal to the sum of:
o the greater of:
(1) 100% of the principal amount of the series
of securities being redeemed, and
(2) the sum of the present values of the
remaining scheduled payments of principal
of and interest on the series of
securities being redeemed, discounted to
the date of redemption on a semiannual
basis at the treasury yield plus (x) 15
basis points in the case of the 2009
securities, or (y) 25 basis points in the
case of the 2029 securities, plus
o accrued and unpaid interest on the
securities being redeemed to the date of
redemption.
10
RISK FACTORS
You should carefully consider the following factors before deciding to
tender your initial securities in the exchange offer.
YOUR FAILURE TO EXCHANGE YOUR INITIAL SECURITIES FOR EXCHANGE SECURITIES COULD
RESULT IN YOUR HOLDING ILLIQUID SECURITIES WHICH CANNOT BE RESOLD UNLESS YOU
REGISTER THEM UNDER THE SECURITIES ACT OR FIND AN EXEMPTION FROM REGISTRATION.
The initial securities were not registered under the Securities Act or
under the securities laws of any state and may not be resold, offered for
resale or otherwise transferred unless they are subsequently registered or
resold in reliance on an exemption from the registration requirements of the
Securities Act and applicable state securities laws. If you do not exchange
your unregistered initial securities for registered exchange securities in the
exchange offer, you will not be able to resell, offer to resell or otherwise
transfer the initial securities unless they are registered under the Securities
Act or unless you resell them, offer to resell them or otherwise transfer them
under an exemption from the registration requirements of, or in a transaction
not subject to, the Securities Act. In addition, we will no longer be under an
obligation to register the initial securities under the Securities Act except
in the limited circumstances provided under the registration rights agreement
between us and the initial purchasers of the initial securities. In addition,
to the extent that initial securities are tendered for exchange and accepted in
the exchange offer, the trading market for the untendered and tendered but
unaccepted initial securities could be illiquid.
OUR ABILITY TO MAKE PAYMENTS ON THE SECURITIES IS DEPENDENT ON THE RECEIPT OF
DISTRIBUTIONS FROM OUR SUBSIDIARIES AND OUR SUBSIDIARIES CANNOT MAKE THESE
DISTRIBUTIONS UNTIL THEY MAKE PAYMENTS ON THEIR OWN INDEBTEDNESS.
We conduct our operations predominantly through MHC and substantially all
of our consolidated assets related to operations are held by MHC and its
subsidiaries. Our ability to pay interest on the securities is entirely
dependent upon our receipt of dividends and other distributions from MHC and its
subsidiaries. The availability of distributions from our subsidiaries is subject
to the satisfaction of various covenants and conditions contained in the
applicable subsidiaries' existing and future financing documents. The
distributions are also subject to utility regulatory restrictions agreed to by
MHC in March 1999 whereby it committed to the Iowa Utilities Board to (1) use
commercially reasonable efforts to maintain an investment grade rating on
MidAmerican Energy's long-term debt and (2) maintain MidAmerican Energy's common
equity level above 42% of total capitalization unless circumstances beyond MHC's
control result in the common equity level decreasing to below 39% of total
capitalization. MHC must seek the approval of the Iowa Utilities Board of a
reasonable utility capital structure if MidAmerican Energy's common equity level
decreases below 42% of total capitalization, unless the decrease is beyond the
control of MHC. MHC is also required to seek the approval of the Iowa Utilities
Board if MidAmerican Energy's equity level decreases to below 39%, even if the
decrease is due to circumstances beyond the control of MHC.
Our subsidiaries, including MHC and MidAmerican Energy, will not have any
obligation to pay any amounts due on the securities or to make any funds
available for payment, and do not guarantee any payment on the securities. Any
right we may have to receive assets of any of our subsidiaries upon any
liquidation or reorganization of the subsidiary would be effectively
subordinated to the claims of any of the subsidiary's creditors and preferred
stockholders.
The indenture contains limitations on our ability and the ability of MHC
to incur additional secured or unsecured indebtedness. However, the indenture
contains no restrictions on the amount of additional unsecured indebtedness
which may be incurred by our subsidiaries other than MHC. In addition, the
indenture permits our subsidiaries other than MHC to incur significant
additional amounts of secured indebtedness. At September 30, 1999, MHC and its
subsidiaries had total indebtedness, including preferred stock, of
approximately $1,316 million, all of which is effectively senior to the
securities.
IF WE DEFAULT UNDER THE INDENTURE AND YOU FORECLOSE ON AND SELL THE STOCK
PLEDGED TO SECURE OUR OBLIGATIONS, THE PRICE YOU RECEIVE FOR THE STOCK MAY NOT
BE SUFFICIENT TO PAY ALL AMOUNTS DUE ON THE SECURITIES.
11
The securities are secured by a pledge of all of the common stock of MHC.
There is currently no market for this stock. We cannot assure you that, if the
securities were to become due and payable because of an event of default under
the indenture, the proceeds from the sale of the MHC stock would be sufficient
to pay all amounts due on the securities.
BECAUSE MIDAMERICAN ENERGY IS OUR WHOLLY-OWNED SUBSIDIARY, WE ARE SUBJECT TO
THE OPERATING UNCERTAINTIES ASSOCIATED WITH UTILITIES.
The operation of a utility involves many risks, including the breakdown or
failure of power generation equipment, pipelines, transmission lines,
distribution lines or other equipment or processes, fuel interruption, and
performance below expected levels of output or efficiency. Sales and revenues
of a utility may also be adversely affected by general economic and business
conditions and weather conditions in its territory. Our subsidiary, MidAmerican
Energy, is subject to the specific risks described above, and its sales and
revenues could be affected by general economic and business conditions and
weather conditions in its service territory. If MidAmerican Energy's revenues
are adversely affected by any of these specific risks or general conditions,
its ability to make distributions to us will also be adversely affected. As a
result, the amount of funds available to us to make payments on the securities
would be decreased.
THE GENERATING FACILITIES OWNED BY OUR SUBSIDIARY, MIDAMERICAN ENERGY, ARE
DEPENDENT ON A LIMITED NUMBER OF SUPPLIERS AND SERVICE PROVIDERS.
The electric generating facilities owned by MidAmerican Energy are often
dependent on a single or limited number of entities to supply or transport gas,
coal or other fuels, to dispose of wastes or to deliver electricity. The
failure of any of these third parties to fulfill its contractual obligations
could increase the costs incurred by MidAmerican Energy to provide electric
service to its customers. As a result, MidAmerican Energy's net revenues would
decrease and it would have less funds available to make distributions to us. We
would then have less funds available to make payments on the securities.
INCREASED COMPETITION COULD PUT PRESSURE ON MARGINS FOR TRADITIONAL ELECTRIC
SERVICES PROVIDED BY MIDAMERICAN ENERGY AND DECREASE THE REVENUES EARNED BY
MIDAMERICAN ENERGY.
In the traditional regulated electric industry prior to restructuring, the
generation, transmission, delivery and sales functions are integrated and
electricity is provided as a bundled service. Generally, in states that have
enacted electric restructuring, the generation and sales functions have been
deregulated and are subject to competition while the transmission and delivery
functions remain regulated. For local gas distribution businesses, the supply
and transportation functions are similarly being separated, with the supply
function being opened to competitors for all classes of customers.
MidAmerican Energy conducts its business primarily in Iowa and Illinois.
88.6% of MidAmerican Energy's electric business is in Iowa and 10.7% of its
electric business is in Illinois. 79.8% of MidAmerican Energy's gas business is
in Iowa and 10.3% of its gas business is in Illinois.
While retail electric competition is presently not permitted in Iowa,
legislation to do so was introduced in Iowa's legislature during the 1999
session. While this legislation was not passed, it is expected to be considered
again by the Iowa legislature in 2000.
In Illinois, legislation to restructure Illinois' electric utility
industry was enacted in December 1997. Under the law, beginning October 1,
1999, larger non-residential customers in Illinois and 33% of the remaining
non-residential Illinois customers are allowed to select their provider of
electric supply services. All other non-residential customers will have the
right to choose starting on December 31, 2000. Residential customers all
receive the opportunity to select their electric supplier on May 1, 2002.
In Iowa and Illinois, gas customers are permitted to transport gas
purchased from independent suppliers using MidAmerican Energy's distribution
facilities.
Although the anticipated changes in the electric utility industry may
create opportunities, they will also create additional challenges and risks for
utilities. Competition will put pressure on margins
12
for traditional electric services. Restructuring efforts in Iowa and Illinois
could materially impact the results of operations of MidAmerican Energy and,
accordingly, our results of operations, in a manner which is difficult to
predict.
MIDAMERICAN ENERGY IS SUBJECT TO COMPREHENSIVE ENERGY REGULATION BY
GOVERNMENTAL AGENCIES AND THE RECOVERY OF ITS FULL FUEL COSTS IS DEPENDENT ON
REGULATORY ACTION.
MidAmerican Energy is subject to comprehensive regulation by several
utility regulatory agencies, which significantly influences its operating
environment and its ability to recover its costs from utility customers.
Further, in connection with the approval by the Iowa Utilities Board of the
acquisition by MidAmerican Holdings of MHC, MHC agreed to use all commercially
reasonable efforts to maintain an investment grade credit rating for
MidAmerican Energy and its long-term debt. MHC also agreed to seek the approval
of the Iowa Utilities Board of a reasonable utility capital structure if
MidAmerican Energy's common equity level decreases below 42% of total
capitalization, unless the decrease is beyond the control of MHC. MHC is also
required to seek the approval of the Iowa Utilities Board if MidAmerican
Energy's equity level decreases to below 39%, even if the decrease is due to
circumstances beyond the control of MHC.
So far, the regulatory environment presently applicable to MidAmerican
Energy has, in general, given MidAmerican Energy an exclusive right to serve
customers within its electric service territory and, in turn, the obligation to
provide electric service to those customers. Base electricity rates for Iowa
customers include a factor which provides for the recovery of a representative
level of fuel costs. However, to the extent actual fuel costs vary from that
factor, earnings are impacted.
We cannot assure you that regulations described above will not change or
that additional regulations will not become applicable to MidAmerican Energy's
business in the future. Changes in regulations or additional regulations could
have an adverse impact on MidAmerican Energy's results of operations and,
accordingly, on our results of operations.
WE AND OUR SUBSIDIARIES ARE SUBJECT TO ENVIRONMENTAL REGULATIONS WHICH COULD BE
DIFFICULT AND COSTLY TO COMPLY WITH.
We and our subsidiaries are subject to a number of environmental laws and
regulations affecting many aspects of our and our subsidiaries' present and
future operations, including the disposal of various forms of waste, the
construction or permitting of new facilities and air and water quality. These
laws and regulations generally require us and our subsidiaries to obtain and
comply with a wide variety of environmental licenses, permits and other
approvals. We and our subsidiaries are also subject to a number of complex and
stringent environmental laws and regulations that both public officials and
private individuals may seek to enforce. We cannot assure you that existing
environmental regulations will not be revised or that new regulations seeking
to protect the environment will not be adopted or become applicable to us or
our subsidiaries. Revised or additional regulations which result in increased
compliance costs or additional operating restrictions could have a material
adverse effect on our results of operations.
In particular, regulatory compliance associated with the construction of
new facilities is a costly and time-consuming process. Intricate and rapidly
changing environmental regulations may require major expenditures for
permitting and create the risk of expensive delays or material impairment of
project value if projects cannot function as planned due to changing regulatory
requirements or local opposition.
WE ARE SUBJECT TO THE UNIQUE RISKS ASSOCIATED WITH NUCLEAR GENERATION.
The risks of nuclear generation risks include the following:
(1) the potential harmful effects on the environment and human health
resulting from the operation of nuclear facilities and the storage,
handling and disposal of high-level and low-level radioactive
materials;
(2) limitations on the amounts and types of insurance commercially
available to cover losses that might arise in connection with nuclear
operations; and
13
(3) uncertainties with respect to the technological and financial aspects
of decommissioning nuclear plants at the end of their licensed lives.
The Nuclear Regulatory Commission has broad authority under federal law to
impose licensing and safety-related requirements for the operation of nuclear
generating facilities. In the event of non-compliance, the Nuclear Regulatory
Commission has the authority to impose fines or shut down a unit, or both,
depending upon its assessment of the severity of the situation, until
compliance is achieved. Revised safety requirements promulgated by the Nuclear
Regulatory Commission have, in the past, necessitated substantial capital
expenditures at nuclear plants, including those with which we have a long-term
power purchase contract or in which we have an ownership interest, like the
Cooper and Quad Cities units, and additional expenditures could be required in
the future. In addition, although we have no reason to anticipate a serious
nuclear incident at the units in which we have an interest, if an incident did
occur, it could have a material but presently undeterminable adverse effect on
our financial condition.
WE CANNOT PREDICT THE TYPE OR MAGNITUDE OF POTENTIAL PROBLEMS ASSOCIATED WITH
THE "YEAR 2000" ISSUE AND THESE PROBLEMS COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR RESULTS OF OPERATIONS.
The "year 2000" issue arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations or decision-making
functions. Many of these programs may fail due to an inability to properly
interpret date codes beginning January 1, 2000. We and our subsidiaries have
undertaken an extensive ongoing project to address our information technology
and non-information technology systems potentially affected by the year 2000
date change. We and our subsidiaries have completed both (1) the inventory,
assessment and planning phases for substantially all of our systems and (2) the
resolution and implementation phases for nearly all of our high-and
medium-priority systems to ensure that these systems are suitable for continued
use into the year 2000.
Despite the comprehensive nature of our year 2000 project, it is possible
that MidAmerican Energy may experience random, widespread and/or simultaneous
failures in its generation, transmission and distribution systems during
January 2000. Although MidAmerican Energy is developing contingency plans for
anticipated risks of interruption to the generation or distribution of energy,
we cannot assure you that outages will not occur. Although the impact on future
operations and revenues is unknown, any failure of computer systems to perform
because of year 2000 implications could result in operating problems and costs
that are material to us. Although we believe the compliance project will be
completed sufficiently in advance of January 1, 2000, unforeseen and other
factors could cause delays in the project and/or require material expenditures,
which could have a material adverse effect on our results of operations. In
addition, we cannot assure you that we and our subsidiaries will not be
adversely affected by year 2000 problems experienced by third parties.
THERE IS NO EXISTING MARKET FOR THE EXCHANGE SECURITIES AND WE CANNOT ASSURE
YOU THAT AN ACTIVE TRADING MARKET WILL DEVELOP.
We are offering the exchange securities to the holders of the initial
securities. There is no existing market for the exchange securities and we
cannot assure you that a market will develop. If a market for the exchange
securities were to develop, future trading prices would depend on many factors,
including prevailing interest rates, our operating results and the market for
similar securities. We do not intend to apply for listing or quotation of the
exchange securities on any securities exchange or stock market. As a result, it
may be difficult for you to find a buyer for your securities at the time you
want to sell them, and even if you found a buyer, you might not get the price
you want.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE DEPENDENT ON
CIRCUMSTANCES AND EVENTS WHICH MAY BE OUTSIDE OF OUR CONTROL.
Some of the statements contained in this prospectus are forward-looking
statements that are dependent on circumstances and events that may be outside
of our control. We identify these statements by using words like "expect,"
"believe," "anticipate," "estimate" and "projected" and similar expressions.
The forward-looking statements in this prospectus involve known and unknown
risks, uncertainties and other important factors that could cause our actual
results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by the
forward-looking statements.
14
These risks, uncertainties and other important factors include, among other
things:
o general economic and business conditions in the United States and the
midwestern United States, and MidAmerican Energy's service territory in
particular;
o governmental, statutory, regulatory or administrative initiatives
affecting us, MidAmerican Energy or the United States electricity
industry;
o weather effects on sales and revenues;
o general industry trends;
o competition;
o fuel and power costs and availability;
o changes in business strategy, development plans or vendor
relationships;
o availability, term and deployment of capital;
o availability of qualified personnel; and
o risks relating to nuclear generation.
15
THE EXCHANGE OFFER
WE AGREED WITH THE INITIAL PURCHASERS OF THE INITIAL SECURITIES TO EFFECT THE
EXCHANGE OFFER PURSUANT TO THE REGISTRATION RIGHTS AGREEMENT.
We sold the initial securities on March 11, 1999 in a transaction exempt
from the registration requirements of the Securities Act. Credit Suisse First
Boston Corporation, Lehman Brothers Inc., Goldman Sachs & Co. and Merrill Lynch
& Co., as the initial purchasers, subsequently resold the initial securities to
qualified institutional buyers in reliance on Rule 144A and under Regulation S
under the Securities Act. As of the date of this prospectus, $700,000,000
aggregate principal amount of unregistered initial securities are outstanding.
We entered into a registration rights agreement with the initial
purchasers under which we agreed that we would, at our own cost:
o use our reasonable best efforts to cause the registration statement, of
which this prospectus is a part, relating to the exchange offer to be
declared effective by the securities and Exchange Commission on or before
December 7, 1999;
o keep the exchange offer open for a period of not less than the shorter
of (1) the period ending when the last of the remaining initial
securities is tendered and (2) 30 days from the date notice is mailed to
holders of the initial securities; and
o maintain the registration statement continuously effective for a period
of not less than the longer of (1) the period until consummation of the
exchange offer and (2) 120 days after effectiveness of the registration
statement, subject to extension. However, in the event that all resales
of exchange securities covered by the registration statement have been
made, the registration statement need not remain continuously effective.
THERE WILL BE RESTRICTIONS ON THE ABILITY OF SOME HOLDERS TO RESELL THE
EXCHANGE SECURITIES.
Based on no-action letters issued by the staff of the securities and
Exchange Commission to third parties, we believe that a holder of initial
securities who exchanges initial securities for exchange securities in the
exchange offer generally may offer the exchange securities for resale, sell the
exchange securities and otherwise transfer the exchange securities without
further registration under the Securities Act and without delivery of a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
This does not apply, however, to a holder who is an affiliate of ours within
the meaning of Rule 405 of the Securities Act. We also believe that a holder
may offer, sell or transfer the exchange securities only if the holder acquires
the exchange securities in the ordinary course of its business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in a distribution of the exchange
securities.
Any holder of initial securities using the exchange offer to participate
in a distribution of exchange securities cannot rely on the no-action letters
referred to above. This category of holders includes a broker-dealer that
acquired initial securities directly from us, but not as a result of
market-making activities or other trading activities. Consequently, this type
of holder must comply with the registration and prospectus delivery
requirements of the Securities Act in the absence of an exemption from these
requirements.
Each broker-dealer that receives exchange securities for its own account
in exchange for initial securities, where the initial securities were acquired
by the broker-dealer as a result of market-making activities or other trading
activities, may be a statutory underwriter and must acknowledge that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with the resale of exchange securities received in exchange for
initial securities. The letter of transmittal which accompanies this prospectus
states that by so acknowledging and by delivering a prospectus, a participating
broker-dealer will not be deemed to admit that it is an underwriter within the
meaning of the Securities Act. A participating broker-dealer may use this
prospectus, as it may be amended from time to time, in connection with resales
of exchange securities it receives in exchange for initial securities in the
exchange offer. We will make this prospectus available to any participating
broker-dealer in connection with any resale of this kind for a period of 30
days after the expiration date of the exchange offer.
16
YOU MUST MAKE THE FOLLOWING REPRESENTATIONS AND ACKNOWLEDGEMENTS IN THE LETTER
OF TRANSMITTAL IN ORDER TO EXCHANGE YOUR INITIAL SECURITIES FOR EXCHANGE
SECURITIES.
Each holder of initial securities who wishes to exchange initial
securities for exchange securities in the exchange offer will be required to
represent and acknowledge, for the holder and for each beneficial owner of the
initial securities, whether or not the beneficial owner is the holder, in the
letter of transmittal that:
o the exchange securities acquired in the exchange offer in exchange for
initial securities are being obtained in the holder's ordinary course of
business;
o neither the holder nor any beneficial is engaging in or intends to
engage in a distribution of exchange securities;
o neither the holder nor any beneficial owner has an arrangement or
understanding with any person to participate in the distribution of
exchange securities;
o if the holder or any beneficial owner is a resident of the State of
California, it falls under the self-executing institutional investor
exemption set forth under applicable California law;
o if the holder or any beneficial owner is a resident of the Commonwealth
of Pennsylvania, it falls under the self-executing institutional
investor exemption set forth under applicable Pennsylvania law;
o it understands that any person who is a broker-dealer registered under
the Exchange Act, or is participating in the exchange offer for the
purpose of distributing the exchange securities, must comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the exchange
securities or interests in exchange securities acquired by that person
and cannot rely on the position of the staff of the Securities and
Exchange Commission set forth in the no-action letters described above;
o it understands that a secondary resale transaction described above and
any resales of exchange Securities.
Initial Securities.................. The initial securities include the following:
o $200,000,000 principal amount of 5.85% Senior
Secured Notes due 2001
o $175,000,000 principal amount of 6.339% Senior
Secured Notes due 2009
o $325,000,000 principal amount of 6.927% Senior
Secured Bonds due 2029
Exchange Securities................. The exchange securities include the following:
o $200,000,000 principal amount of 5.85% Senior
Secured Exchange Notes due 2001
o $175,000,000 principal amount of 6.339% Senior
Secured Exchange Notes due 2009
o $325,000,000 principal amount of 6.927% Senior
Secured Exchange Bonds due 2029
Maturity............................ o In the case of the 2001 Securities, the entire principal
amount on March 1, 2001.
o In the case of the 2009 Securities, the entire
principal amount on March 1, 2009.
o In the case of the 2029 Securities, the entire
principal amount on March 1, 2029.
Interest............................ Annual rate:
o 5.85%, in the case of the 2001 Securities;
o 6.339%, in the case of the 2009 Securities; and
o 6.927%, in the case of the 2029 Securities.
Interest payment frequency: every six months on March 1
and September 1.
Collateral.......................... The Securities are secured by a pledge of all of the
common stock of MHC.
Ranking............................. The Securities:
o are our direct senior secured obligations;
7
o rank on an equal basis with all of our other
existing and future senior obligations;
o rank senior to all of our existing and future
subordinated indebtedness; and
o effectively rank junior to all indebtedness and other
liabilities, including preferred stock, of our direct
and indirect subsidiaries (to the extent of the assets
of the subsidiaries).
The indenture for the Securities does not restrict the
incurrence of additional unsecured indebtedness by our
subsidiaries and permits our subsidiaries to incur a
significant amount of secured indebtedness. At September
30, 1999, MHC and its direct and indirect subsidiaries had
total indebtedness, including preferred stock, of
approximately $1,316 million, all of which is effectively
senior to the Securities.
Ratings............................. The Securities have been assigned ratings of BBB+ by
Standard & Poor's Ratings Group, BBB+ by Duff & Phelps
Credit Rating Co. and Baa1 by Moody's Investors Service,
Inc.
Covenants Limiting
Our Activities................ The indenture contains covenants which, among other things
and subject to exceptions described later in this
prospectus, restrict our ability to:
o make distributions unless no event of default exists
or would result from the distribution and either:
(1) at the time and as a result of the distribution, our
leverage ratio does not exceed 0.67:1 and our interest
coverage ratio is not less than 2.2:1; or
(2) at such time our senior secured long term debt is
rated at least BBB by Standard & Poor's and Duff &
Phelps, and at least Baa2 by Moody's.
o enter into any business operations other than:
(1) the transactions contemplated by the indenture and the
other financing documents related to the offering of
the Securities;
(2) activities related to the management and ownership of
MHC;
(3) entering into and performing any agreements to
accomplish the activities described in clauses (1) and
(2) above; and
(4) exercising any corporate powers that are incidental to
or necessary, suitable or convenient for the
accomplishment of the activities described in clauses
(1), (2) and (3) above.
8
However, we may enter into additional business operations
from time to time in the future if, prior to doing so, we
obtain written confirmation from the rating agencies that
the entering into of the newsecurities or interests in exchange securities
obtained by the holder in exchange for initial securities or interests
in initial securities originally acquired by the holder directly from us
should be covered by an effective registration statement containing the
selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Securities and Exchange Commission;
and
o neither the holder nor any beneficial owner is our "affiliate," as this
term is defined under Rule 405 under the Securities Act.
WE MAY BE REQUIRED TO FILE A SHELF REGISTRATION STATEMENT COVERING RESALES OF
THE INITIAL SECURITIES.
If applicable law or interpretations of the staff of the Securities and
Exchange Commission are changed so that the exchange securities received by
holders who make all of the above representations in the letter of transmittal
are not or would not be, upon receipt, transferable by each holder without
restriction under the Securities Act, we will, at our cost:
o file a shelf registration statement covering resales of the initial
securities,
o use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act on or prior
to December 7, 1999, and
o use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of two years after March 11,
1999, subject to exceptions, or the time when all of the applicable
initial securities are no longer outstanding.
We may postpone or suspend the filing or the effectiveness of any shelf
registration statement if done by us in good faith and for valid business
reasons. We will, if and when we file the shelf registration statement, provide
to each holder of the initial securities copies of the prospectus which is a
part of the shelf registration statement, notify each holder when the shelf
registration statement has become effective and take other actions as are
required to permit unrestricted resales of the initial securities.
17
THE INTEREST RATE ON THE INITIAL SECURITIES IS INCREASED FROM AND AFTER
DECEMBER 7, 1999 BECAUSE A REGISTRATION STATEMENT WAS NOT DECLARED EFFECTIVE BY
DECEMBER 7, 1999.
As neither the exchange offer registration statement nor a shelf
registration statement was declared effective by December 7, 1999, the interest
rate on the initial securities was increased by 0.50% per annum from and after
December 7, 1999 until the exchange offer registration statement or the shelf
registration statement is declared effective. Upon consummation of the exchange
offer, holders of initial securities will not be entitled to any increase in
the rate of interest on the initial securities, but the initial securities will
still be governed by the indenture under which the initial securities were
issued.
THE GENERAL TERMS OF THE EXCHANGE OFFER ARE DESCRIBED IN THE FOLLOWING
PARAGRAPHS.
We are offering, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal, to exchange
exchange securities for a like aggregate principal amount of initial securities
properly tendered on or prior to the expiration date and not properly withdrawn
in accordance with the procedures described below. We will issue, promptly
after the expiration date, the exchange securities in exchange for a like
principal amount of outstanding initial securities tendered and accepted in
connection with the exchange offer. You may tender your initial securities in
whole or in part in a principal amount of $1,000 and integral multiples of
$1,000. However, if any initial securities are tendered for exchange in part,
the untendered principal amount of those initial securities must be $100,000 or
any integral multiple of $1,000 in excess of $100,000.
The exchange offer is not conditioned upon any minimum principal amount of
initial securities being tendered. As of the date of this prospectus,
$700,000,000 aggregate principal amount of the initial securities is
outstanding.
If any tendered initial securities are not accepted for exchange because
of an invalid tender or any other reason, certificates for any unaccepted
initial securities will be returned, without expense to the tendering holder
promptly after the expiration date.
You will not be required to pay brokerage commissions or fees or, subject
to the instructions in the letter of transmittal, transfer taxes with respect
to the exchange of initial securities. We will pay all charges and expenses,
other than applicable taxes described below, in connection with the exchange
offer.
Neither we nor our board of managers makes any recommendation to you as to
whether to tender or refrain from tendering all or any portion of your initial
securities in the exchange offer. In addition, no one has been authorized to
make this type of recommendation. You must make your own decision whether to
tender in the exchange offer and, if you do tender, the aggregate amount of
initial securities to tender. In making these decisions, you should read this
prospectus and the letter of transmittal and consult with your advisers. You
should make the decision whether to tender based on your own financial position
and requirements.
THE EXCHANGE OFFER IS SCHEDULED TO EXPIRE ON , 2000, BUT WE HAVE THE
ABILITY TO EXTEND THE EXPIRATION DATE.
The exchange offer expires on the expiration date. The term "expiration
date" means 5:00 p.m., New York City time, on , 2000, unless we in our
sole discretion extend the period during which the exchange offer is open. If
we do so, the term "expiration date" will mean the latest time and date to
which the exchange offer is extended. We may extend the exchange offer at any
time and from time to time by giving oral or written notice to the exchange
agent and by timely public announcement. Without limiting the manner in which
we may choose to make any public announcement and subject to applicable law, we
will have no obligation to publish, advertise or otherwise communicate any
public announcement other than by issuing a release to an appropriate news
agency.
During any extension of the exchange offer, all initial securities
previously tendered in the exchange offer will remain subject to the exchange
offer.
18
WE CAN WAIVE CONDITIONS TO THE EXCHANGE OFFER AND AMEND THE EXCHANGE OFFER IN
OTHER WAYS
We reserve the right (1) to delay accepting any initial securities, to
extend the exchange offer or to terminate the exchange offer and not accept
initial securities not previously accepted for any reason, including if any of
the conditions to the exchange offer described below are not satisfied and are
not waived by us, or (2) to amend the terms of the exchange offer in any
manner, whether prior to or after the tender of any of the initial securities.
If any delay, extension, termination or amendment occurs, we will give oral or
written notice to the exchange agent and will either issue a public
announcement or give notice to the holders of the initial securities as
promptly as practicable. If the delay, extension, termination or amendment is
material, we will be required to file a post-effective amendment to the
registration statement of which this prospectus is a part.
If (1) we waive any material condition to the exchange offer or amend the
exchange offer in any other material respect and (2) the exchange offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the fifth business day after the date that notice of the waiver or amendment
is first published, sent or given, then the exchange offer will be extended
until the expiration of the five business day period.
FOLLOWING IS A DESCRIPTION OF THE PROCEDURES YOU MUST FOLLOW IN ORDER TO TENDER
YOUR INITIAL SECURITIES IN THE EXCHANGE OFFER.
THE ITEMS YOU MUST SUBMIT IN ORDER TO TENDER YOUR INITIAL SECURITIES
To tender in the exchange offer, you must (1) complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, (2) have
the signatures on the letter of transmittal guaranteed if required by the
letter of transmittal and (3) mail or otherwise deliver the letter of
transmittal, together with any other required documents or an agent's message
in case of book-entry delivery as described below, to the exchange agent before
the expiration date. In addition, either
o certificates for the initial securities being tendered must be received
by the exchange agent along with the letter of transmittal on or before
the expiration date,
o a timely confirmation of a book-entry transfer of the initial
securities, if this procedure is available, into the exchange agent's
account at The Depository Trust Company in accordance with the procedure
for book-entry transfer described below, along with the letter of
transmittal, must be received by the exchange agent on or before the
expiration date, or
o you must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT YOUR OPTION AND SOLE RISK. IF YOU DELIVER BY MAIL, WE
RECOMMEND REGISTERED MAIL, RETURN RECEIPT REQUESTED AND PROPERLY INSURED, OR AN
OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO
ENSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR INITIAL SECURITIES SHOULD
BE SENT TO US.
SPECIAL CIRCUMSTANCES THAT MAY APPLY TO YOUR TENDER
To be tendered effectively, the initial securities, the letter of
transmittal and all other required documents, or, in the case of a participant
in The Depository Trust Company, an agent's message, must be received by the
exchange agent prior to 5:00 p.m., New York City time, on the expiration date.
Except in the case of a participant in The Depository Trust Company who
transfers initial securities by an agent's message, delivery of all documents
must be made to the exchange agent at its address set forth on the back of this
prospectus. You may also request your respective broker, dealer, commercial
bank, trust company or nominee to effect your tender for you.
Your tender of initial securities will constitute an agreement between you
and us in accordance with the terms and subject to the conditions set forth in
the prospectus and in the letter of transmittal. If you tender less than all of
your initial securities, you should fill in the amount of initial securities
being tendered in the appropriate box on the letter of transmittal. The entire
amount of initial securities delivered to the exchange agent will be deemed to
have been tendered unless you indicate otherwise.
19
Only a holder of initial securities may tender initial securities in the
exchange offer. The term "holder" means any person in whose name initial
securities are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial owner whose initial securities are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct the
registered holder to tender on its behalf. If the beneficial owner wishes to
tender on its own behalf, the beneficial owner must, prior to completing and
executing the letter of transmittal and delivering its initial securities,
either make appropriate arrangements to register ownership of the initial
securities in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a firm (an "eligible institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Exchange Act, unless the initial securities tendered
pursuant to the letter of transmittal are tendered (1) by a registered holder
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal or (2) for the
account of an eligible institution. If signatures on a letter of transmittal or
a notice of withdrawal are required to be guaranteed, the guarantee must be by
an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any initial securities listed in the letter of
transmittal, the initial securities must be endorsed or accompanied by bond
powers and a proxy which authorizes the other person to tender the initial
securities on behalf of the registered holder, in each case as the name of the
registered holder appears on the initial securities. If the letter of
transmittal or any initial securities or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, that
person should so indicate when signing, and unless waived by us, evidence
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
OUR RIGHTS IN CONNECTION WITH THE TENDERING PROCEDURES
All questions as to the validity, form, eligibility and withdrawal of the
tendered initial securities will be determined by us in our sole discretion,
which determination will be final and binding. We reserve the absolute right to
reject any and all initial securities not properly tendered or any initial
securities which, if accepted by us, would be unlawful. We also reserve the
right to waive any irregularities or conditions of tender as to particular
initial securities. Our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of transmittal, will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial securities must be cured
within a time that we determine. Neither we, the exchange agent or any other
person will be under any duty to give notification of defects or irregularities
with respect to tenders of initial securities, nor will we or any of them incur
any liability for failure to give notification. Tenders of initial securities
will not be deemed to have been made until any irregularities have been cured
or waived. Any initial securities received by the exchange agent that are not
properly tendered, and which have defects or irregularities which have not been
timely cured or waived, will be returned without cost to the holder by the
exchange agent as soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion (1) to purchase
or make offers for any initial securities that remain outstanding subsequent to
the expiration date or to terminate the exchange offer, and (2) to the extent
permitted by applicable law, to purchase initial securities in the open market,
in privately negotiated transactions or otherwise. We have no present plan to
acquire any initial securities which are not tendered in the exchange offer.
The terms of any purchases or offers could differ from the terms of the
exchange offer.
20
YOU MAY BE ABLE TO USE THE DEPOSITORY TRUST COMPANY IN CONNECTION WITH THE
TENDER OF YOUR INITIAL SECURITIES.
The exchange agent will make a request to establish an account with
respect to the initial securities at The Depository Trust Company for purposes
of the exchange offer within two business days after the date of this
prospectus. Any financial institution that is a participant in The Depository
Trust Company may book-entry deliver initial securities by causing The
Depository Trust Company to transfer the initial securities into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer on or prior to the
expiration date. If you are a participant in The Depository Trust Company and
transfer your initial securities by an agent's message, you do not need to
transmit the letter of transmittal to the exchange agent to consummate your
exchange.
The term "agent's message" means a message which is transmitted
electronically by The Depository Trust Company to the exchange agent and which
forms part of a book-entry confirmation that states that The Depository Trust
Company has received an express acknowledgment from the participant in The
Depository Trust Company tendering the securities that the participant has
received and agrees to be bound by the letter of transmittal and/or the notice
of guaranteed delivery discussed below, where applicable.
YOU MAY BE ABLE TO TENDER YOUR INITIAL SECURITIES BY PROVIDING A NOTICE OF
GUARANTEED DELIVERY.
If you would like to tender your initial securities, and (1) your initial
securities are not immediately available, (2) time will not permit your initial
securities or other required documents to reach the exchange agent before the
expiration date, or (3) the procedure for book-entry transfer cannot be
completed on a timely basis, your tender may still be effected if:
o the tender is made through an eligible institution;
o on or prior to the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed letter of
transmittal, or in the case of a participant in The Depository Trust
Company, an agent's message, and a notice of guaranteed delivery,
substantially in the form provided by us, or, in the case of a
participant in The Depository Trust Company, by an agent's message, (1)
setting forth your name and address and the amount of initial securities
tendered, (2) stating that the tender is being made by the notice of
guaranteed delivery and (3) guaranteeing that within three New York
Stock Exchange trading days after the date of execution of the notice of
guaranteed delivery, the certificates for all physically tendered
initial securities, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by
the letter of transmittal, will be deposited by the eligible institution
with the exchange agent; and
o the certificates for all physically tendered initial securities, in
proper form for transfer, or a book-entry confirmation, as the case may
be, and any other documents required by the letter of transmittal are
received by the exchange agent within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery.
A tender will be deemed to have been received as of the date when your
properly completed and duly signed letter of transmittal accompanied by your
initial securities is received by the exchange agent, or if you are a
participant in The Depository Trust Company, as of the date when an agent's
message has been received by the exchange agent. Issuances of exchange
securities in exchange for initial securities tendered with a notice of
guaranteed delivery by an eligible institution will be made only against
deposit of the letter of transmittal with the tendered initial securities and
any other required documents.
FOLLOWING IS A DESCRIPTION OF THE TERMS AND CONDITIONS OF THE LETTER OF
TRANSMITTAL. THESE TERMS AND CONDITIONS ARE PART OF THE EXCHANGE OFFER.
The letter of transmittal contains the following terms and conditions,
among others, which are part of the exchange offer:
21
o You represent and warrant that you have full authority to tender your
initial securities.
o You agree to, upon our request, execute and deliver any additional
documents deemed by us to be necessary or desirable to complete the
tender of your initial securities.
o You acknowledge that the tender of your initial securities will
constitute an agreement between you and us as to the terms and
conditions of the exchange offer described in this prospectus.
o You make the representations and warranties described above.
o Your obligations under the letter of transmittal will be binding on
your successors, assigns, executors, administrators, trustees in
bankruptcy and legal and personal representatives.
YOU MAY WITHDRAW A TENDER OF YOUR INITIAL SECURITIES PRIOR TO THE EXPIRATION
DATE.
Initial securities tendered in the exchange offer may be withdrawn at any
time prior to 5:00 p.m. New York City time, on the expiration date. For a
withdrawal to be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must be timely received by the exchange agent
at its address set forth on the back of this prospectus. Any notice of
withdrawal must specify the name of the person having tendered the initial
securities to be withdrawn, identify the initial securities to be withdrawn,
specify the name in which the initial securities are registered if different
from that of the withdrawing holder, accompanied by evidence satisfactory to us
that the person withdrawing the tender has succeeded to the beneficial
ownership of the initial securities being withdrawn. If certificates for
initial securities have been delivered or otherwise identified to the exchange
agent, then, prior to the release of the certificates, the withdrawing holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
eligible institution unless the holder is an eligible institution. If initial
securities have been tendered in accordance with the procedure for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at The Depository Trust Company to be credited with the
withdrawn initial securities and otherwise comply with The Depository Trust
Company's procedures. If any initial securities are tendered for exchange but
are not exchanged for any reason, or if any initial securities are submitted
for a greater principal amount than the holder desires to exchange, the
unaccepted or nonexchanged initial securities will be returned to the holder
without cost to the holder as soon as practicable after withdrawal, rejection
of tender, termination of the exchange offer or submission of nonexchanged
initial securities.
IF YOU WITHDRAW YOUR TENDER, YOU MAY RETENDER YOUR INITIAL SECURITIES PRIOR TO
THE EXPIRATION DATE IN ACCORDANCE WITH THE PROCEDURES FOR TENDERING DESCRIBED
ABOVE.
Withdrawals of tenders of initial securities may not be rescinded. Initial
securities properly withdrawn will not be deemed validly tendered for purposes
of the exchange offer, but may be retendered at any subsequent time on or prior
to the expiration date by following any of the procedures described above.
All questions as to the validity, form and eligibility of withdrawal
notices will be determined by us in our sole discretion, and our determination
will be final and binding on all parties. Neither we, any affiliates or assigns
of ours, the exchange agent nor any other person will be under any duty to give
any notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give notification.
FOLLOWING IS A DESCRIPTION OF HOW WE WILL ACCEPT INITIAL SECURITIES AND DELIVER
EXCHANGE SECURITIES.
Upon the terms and subject to the conditions of the exchange offer, we
will exchange, and will issue to the exchange agent, exchange securities for
initial securities validly tendered and not withdrawn promptly after the
expiration date. For the purposes of the exchange offer, we will be deemed to
have accepted for exchange validly tendered initial securities when and if we
have given oral or written notice of acceptance to the exchange agent. The
exchange agent will act as agent for the tendering holders of initial
securities for the purposes of receiving exchange securities from us and
22
causing the initial securities to be assigned, transferred and exchanged. Upon
the terms and subject to the conditions of the exchange offer, delivery of
exchange securities to be issued in exchange for accepted initial securities
will be made by the exchange agent only after timely receipt by the exchange
agent of certificates for the initial securities or a timely book-entry
confirmation of the initial securities into the exchange agent's account at The
Depository Trust Company, a properly completed and duly executed letter of
transmittal and all other required documents, or, in the case of a book-entry
delivery, an agent's message.
THE CIRCUMSTANCES IN WHICH WE WILL NOT BE REQUIRED TO EFFECT THE EXCHANGE OFFER
ARE DESCRIBED BELOW.
Notwithstanding any other provisions of the exchange offer, or any
extension of the exchange offer, we will not be required to accept for
exchange, or to exchange, any initial securities for any exchange securities,
and, as described below, may terminate the exchange offer, whether or not any
initial securities have previously been accepted for exchange, or may waive any
conditions to or amend the exchange offer, if any of the following conditions
has occurred or exists or has not been satisfied:
o the exchange offer, or the making of any exchange by a holder, violates
any applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission;
o in our reasonable judgment there has been or is threatened, instituted
or pending any action or proceeding before, or any injunction, order or
decree has been issued by, any court or governmental agency or other
governmental regulatory or administrative agency or commission, which:
(1) seeks to restrain or prohibit the making or consummation of the
exchange offer or any other transaction contemplated by the exchange
offer;
(2) assesses or seeks any damages as a result the making or consummation
of the exchange offer or any other transaction contemplated by the
exchange offer; or
(3) results in a material delay in our ability to accept for exchange or
exchange some or all of the initial securities in the exchange
offer;
o any statute, rule, regulation, order or injunction is sought, proposed,
introduced, enacted, promulgated or deemed applicable to the exchange
offer or any of the transactions contemplated by the exchange offer by
any government or governmental authority, domestic or foreign, or any
action will have been taken, proposed or threatened by any government,
governmental authority, agency or court, domestic or foreign, that in
our reasonable judgment might directly or indirectly result in any of
the consequences referred to in clauses (1), (2) or (3) immediately
above or, in our reasonable judgment, might result in the holders of
exchange securities having obligations with respect to resales and
transfers of exchange securities which are greater than those described
in the interpretations of the staff of the Securities and Exchange
Commission referred to in this prospectus, or would otherwise make it
inadvisable to proceed with the exchange offer;
o there will have occurred any of the following:
(1) any general suspension of trading in, or general limitation on
prices for, securities on the New York Stock Exchange;
(2) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any
limitation by any governmental agency or authority that adversely
affects the extension of credit to us; or
(3) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case any of the foregoing exists at the time of
commencement of the exchange offer, a material acceleration or
worsening of the event; or
23
o a material adverse change will have occurred or be threatened in our
business, financial or other condition, operations, stock ownership or
prospects.
The foregoing conditions are for our sole benefit and may be asserted by
us with respect to all or any portion of the exchange offer regardless of the
circumstances, including any action or inaction by us, giving rise to the
condition, or may be waived by us in whole or in part at any time or from time
to time in our sole discretion. Our failure at any time to exercise any of the
foregoing rights will not be deemed a waiver of any right, and each right will
be deemed an ongoing right which may be asserted at any time or from time to
time. In addition, we have reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to amend the exchange offer. Any
determination by us concerning the fulfillment or non-fulfillment of any
conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any initial securities
tendered, and no exchange securities will be issued in exchange for any initial
securities tendered, if at the time any stop order will be threatened or in
effect with respect to (1) the registration statement of which this prospectus
constitutes a part or (2) the qualification of the indenture under the Trust
Indenture Act of 1939.
THE BANK OF NEW YORK WILL ACT AS EXCHANGE AGENT FOR THE EXCHANGE OFFER.
The Bank of New York has been appointed as the exchange agent for the
exchange offer. The Bank of New York also acts as trustee under the indenture.
Delivery of letters of transmittal and any other required documents and
questions, requests for assistance and requests for additional copies of this
prospectus or the letter of transmittal, should be directed to the exchange
agent at its address and numbers set forth on the back of this prospectus.
Except in the case of a participant in The Depository Trust Company who
transfers initial securities by an agent's message, delivery to an address
other than as set forth on the back of this prospectus, or transmissions of
instructions via a facsimile or telex number other than to the exchange agent
as set forth on the back of this prospectus, will not constitute a valid
delivery.
WE ARE REQUIRED TO PAY THE FEES AND EXPENSES DESCRIBED BELOW IN CONNECTION WITH
THE EXCHANGE OFFER.
We have not retained any dealer-manager or similar agent in connection
with the exchange offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the exchange offer. We will, however, pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for reasonable out-of-pocket expenses in connection therewith. We
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this prospectus and related documents to the beneficial owners of initial
securities, and in handling tenders for their customers. We estimate that the
expenses we will incur in connection with the exchange offer, including the
fees and expenses of the exchange agent and printing, accounting and legal
fees, will be approximately $200,000.
YOU MAY BE REQUIRED TO PAY TRANSFER TAXES IN CONNECTION WITH YOUR TENDER.
Holders who tender their initial securities for exchange will not be
obligated to pay any transfer taxes in connection with the exchange. If,
however, exchange securities are to be delivered to, or are to be issued in the
name of, any person other than a registered holder of the initial securities
tendered, or if a transfer tax is imposed for any reason other than the
exchange of initial securities in connection with the exchange offer, then the
amount of transfer taxes, whether imposed on the registered holder or any other
person, will be payable by the tendering holder. If satisfactory evidence of
payment of the taxes or exemption from payment is not submitted with the letter
of transmittal, the transfer taxes will be billed directly to the tendering
holder.
NO ONE ELSE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH INFORMATION REGARDING THE
EXCHANGE OFFER.
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those
contained in this prospectus. If given or made,
24
the information or representations should not be relied upon as having been
authorized by us. Neither the delivery of this prospectus nor any exchange made
under this prospectus will, under any circumstances, create any implication
that there has been no change in our affairs since the respective dates as of
which information is given in this prospectus.
The exchange offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of initial securities in any jurisdiction in which the
making or acceptance of the exchange offer would not be in compliance with the
laws of the jurisdiction. However, we may, at our discretion, take any action
as we may deem necessary to make the exchange offer in the affected
jurisdiction and extend the exchange offer to holders of initial securities in
that jurisdiction. In any jurisdiction that has securities laws or blue sky
laws which require the exchange offer to be made by a licensed broker or
dealer, the exchange offer is being made on behalf of us by one or more
registered brokers or dealers which are licensed under the laws of the
jurisdiction.
YOU WILL NOT HAVE APPRAISAL RIGHTS.
Holders of initial securities will not have dissenters' rights or
appraisal rights in connection with the exchange offer.
THE FEDERAL INCOME TAX CONSEQUENCES OF YOUR EXCHANGE.
The exchange of initial securities for exchange securities will not be a
taxable exchange for federal income tax purposes, and holders will not
result in a downgrade of the ratings for the Securities.
o merge or consolidate with or into any other person or
transfer or lease all or substantially all of our
assets to another person.
o incur any indebtedness other than:
(1) as a part of our permitted businesses and activities;
and
(2) other indebtedness so long as the rating agencies
confirm that the incurrence of such indebtedness will
not result in a downgrade of the ratings for the
Securities.
o issue, assume or guarantee indebtedness secured by a
lien, other than the Securities or any other
indebtedness issued under the indenture.
The covenants and restrictions which limit our ability to
pay dividends or make other distributions will cease to be
in effect if the rating agencies confirm in writing that,
without these covenants and restrictions, our long-term
senior secured debt would still be rated at least BBB+ by
each of Standard & Poor's and Duff & Phelps and at least
Baa1 by Moody's.
Covenants Limiting the Activities
of Our Significant Subsidiaries....... The indenture also restricts, among other things and
subject to exceptions described later in this prospectus,
the ability of our significant subsidiaries to:
o incur any indebtedness at the MHC level other than
indebtedness outstanding on the closing date for the
initial Securities under MHC's existing agreements and
extensions of this indebtedness.
o issue, assume or guarantee indebtedness secured by a
lien, other than liens permitted under the indenture.
o enter into new businesses and activities other than
those types of businesses and activities in which we
are or MidAmerican Energy is engaged today and any
other business or activity which is deemed necessary,
useful or desirable in connection with such businesses
and activities.
The indenture defines a significant subsidiary as any
subsidiary whose gross assets or gross revenues represent
at least 25% of our gross assets or gross revenues.
Optional Redemption....................... Each series of Securities will be redeemable in whole or
in part at our option at any time at a redemption price
equal to the sum of:
9
o the greater of:
(1) 100% of the principal amount of the series of
Securities being redeemed, and
(2) the sum of the present values of the remaining
scheduled payments of principal of and interest on the
series of Securities being redeemed, discounted to the
date of redemption on a semiannual basis at the
treasury yield (plus 15 basis points in the case of
the 2009 Securities or 25 basis points in the case of
the 2029 Securities), plus
o accrued and unpaid interest on the Securities being
redeemed to the date of redemption.
10
RISK FACTORS
You should carefully consider the following factors before deciding to
tender your initial Securities in the exchange offer.
YOUR FAILURE TO EXCHANGE YOUR INITIAL SECURITIES FOR EXCHANGE SECURITIES COULD
RESULT IN YOUR HOLDING ILLIQUID SECURITIES WHICH CANNOT BE RESOLD UNLESS YOU
REGISTER THEM UNDER THE SECURITIES ACT OR FIND AN EXEMPTION FROM REGISTRATION.
The initial Securities were not registered under the Securities Act or
under the securities laws of any state and may not be resold, offered for
resale or otherwise transferred unless they are subsequently registered or
resold pursuant to an exemption from the registration requirements of the
Securities Act and applicable state securities laws. If you do not exchange
your unregistered initial Securities for registered exchange Securities
pursuant to the exchange offer, you will not be able to resell, offer to resell
or otherwise transfer the initial Securities unless they are registered under
the Securities Act or unless you resell them, offer to resell them or otherwise
transfer them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, we will no longer
be under an obligation to register the initial Securities under the Securities
Act except in the limited circumstances provided under the registration rights
agreement between us and the initial purchasers of the initial Securities. In
addition, to the extent that initial Securities are tendered for exchange and
accepted in the exchange offer, the trading market for the untendered and
tendered but unaccepted initial Securities could be illiquid.
OUR ABILITY TO MAKE PAYMENTS ON THE SECURITIES IS DEPENDENT ON THE RECEIPT OF
DISTRIBUTIONS FROM OUR SUBSIDIARIES AND OUR SUBSIDIARIES CANNOT MAKE THESE
DISTRIBUTIONS UNTIL THEY MAKE PAYMENTS ON THEIR OWN INDEBTEDNESS.
We conduct our operations predominantly through MHC and substantially
all of our consolidated assets related to operations are held by MHC and its
subsidiaries. Our ability to pay interest on the Securities is entirely
dependent upon our receipt of dividends and other distributions from MHC and its
subsidiaries. The availability of distributions from our subsidiaries is subject
to the satisfaction of various covenants and conditions contained in the
applicable subsidiaries' existing and future financing documents and to utility
regulatory restrictions. Our subsidiaries, including MHC and MidAmerican Energy,
will not have any obligation to pay any amounts due pursuant to the Securities
or to make any funds available for payment, and do not guarantee any payment on
the Securities. Any right we may have to receive assets of any of our
subsidiaries upon any liquidation or reorganization of the subsidiary would be
effectively subordinated to the claims of any of the subsidiary's creditors and
preferred stockholders.
The indenture contains limitations on our ability and the ability of
MHC to incur additional secured or unsecured indebtedness. However, the
indenture contains no restrictions on the amount of additional unsecured
indebtedness which may be incurred by our subsidiaries (other than MHC). In
addition, the indenture permits our subsidiaries (other than MHC) to incur
significant additional amounts of secured indebtedness. At September 30, 1999,
MHC and its subsidiaries had total indebtedness, including preferred stock, of
approximately $1,316 million, all of which would be effectively senior to the
Securities.
IF WE DEFAULT UNDER THE INDENTURE AND YOU FORECLOSE ON AND SELL THE STOCK
PLEDGED TO SECURE OUR OBLIGATIONS, THE PRICE YOU RECEIVE FOR THE STOCK MAY NOT
BE SUFFICIENT TO PAY ALL AMOUNTS DUE ON THE SECURITIES.
The Securities are secured by a pledge of all of the common stock of
MHC. There is currently no market for this stock. We cannot assure you that if
the Securities were to become due and payable because of an event of default
under the indenture that the proceeds from the sale of the MHC stock would be
sufficient to pay all amounts due on the Securities.
11
BECAUSE MIDAMERICAN ENERGY IS OUR WHOLLY-OWNED SUBSIDIARY, WE ARE SUBJECT TO THE
OPERATING UNCERTAINTIES ASSOCIATED WITH UTILITIES.
The operation of a utility involves many risks, including the breakdown
or failure of power generation equipment, pipelines, transmission lines,
distribution lines or other equipment or processes, fuel interruption, and
performance below expected levels of output or efficiency. Sales and revenues of
a utility may also be adversely affected by general economic and business
conditions and weather conditions in its territory. Each generating facility may
depend on a single or limited number of entities to supply or transport gas,
coal or other fuels, to dispose of wastes or to wheel electricity. The failure
of any of these third parties to fulfill its contractual obligations could have
a material adverse impact on MidAmerican Energy and, accordingly, on us.
THE UTILITY INDUSTRY IN WHICH SOME OF OUR SUBSIDIARIES PARTICIPATE IS UNDERGOING
RESTRUCTURING AS IT IS BEING DEREGULATED, MAKING IT SUBJECT TO INCREASED
COMPETITION.
Throughout the United States, the utility industry continues to move
towards a competitive environment. Although the extent of deregulation varies
between states, increased competition is becoming a reality in virtually every
region of the country. Numerous states have passed restructuring legislation,
some of which initiated a phase-in of customer choice in 1998. Legislators and
regulators in many other states are addressing the issue.
As part of many restructuring legislation packages, electric utilities
are required to unbundle traditional services previously provided as a "packaged
product" under their rate tariffs. Unbundling allows customers to choose their
energy supplier and the level of energy delivery and retail services they
desire. Gas utilities are also experiencing separation of the merchant and
delivery functions for all classes of customers.
The generation segment of the electric industry will be significantly
impacted by competition. The introduction of competition in the wholesale market
has resulted in a proliferation of power marketers and a substantial increase in
market activity. As retail competition evolves, margins will be pressured by
competition from other utilities, power marketers and self-generation. In
addition, many states are implementing or considering regulatory initiatives
that would increase access to electric utilities' transmission and distribution
systems for independent power producers, utilities, power marketers and
electricity customers.
Although the anticipated changes in the electric utility industry may
create opportunities, they will also create additional challenges and risks for
utilities. Competition will put pressure on margins for traditional electric
services.
These and other industry restructuring efforts by states in the Midwest
(such as Iowa and Illinois) where MidAmerican Energy has or expects to have
substantial operations could materially impact the results of operations of
MidAmerican Energy and, accordingly, our results of operations, in a manner
which is difficult to predict.
MIDAMERICAN ENERGY IS SUBJECT TO COMPREHENSIVE ENERGY REGULATION BY GOVERNMENTAL
AGENCIES AND THE RECOVERY OF ITS FULL FUEL COSTS IS DEPENDENT ON REGULATORY
ACTION.
MidAmerican Energy is subject to comprehensive regulation by several
utility regulatory agencies, which significantly influences its operating
environment and its ability to recover its costs from utility customers.
Further, in connection with the approval by the Iowa Utilities Board of the
merger, MHC agreed, among other things, to use all commercially reasonable
efforts to maintain an investment grade credit rating for MidAmerican Energy and
its long-term debt and to seek the approval of the Iowa Utilities Board of a
reasonable utility capital structure if MidAmerican Energy's common equity level
decreases below 42% of total capitalization unless such equity level decreases
to below 39% due to circumstances beyond the control of MidAmerican Energy.
The regulatory environment presently applicable to MidAmerican Energy
has to date, in general, given MidAmerican Energy an exclusive right to serve
customers within its electric service territory and, in turn, the obligation to
provide electric service to those customers. Base electricity rates for Iowa
customers include a factor
12
which provides for the recovery of a representative level of fuel costs.
However, to the extent actual fuel costs vary from that factor, earnings are
impacted.
We cannot assure you that regulations described above will not change
or that additional regulations will not become applicable to MidAmerican
Energy's business in the future. Changes in regulations or additional
regulations could have an adverse impact on MidAmerican Energy's results of
operations and, accordingly, our results of operations.
WE AND OUR SUBSIDIARIES ARE SUBJECT TO ENVIRONMENTAL REGULATIONS WHICH COULD BE
DIFFICULT AND COSTLY TO COMPLY WITH.
We and our subsidiaries are subject to a number of environmental laws
and regulations affecting many aspects of our and our subsidiaries' present and
future operations, including the disposal of various forms of waste, the
construction or permitting of new facilities and air and water quality. These
laws and regulations generally require us and our subsidiaries to obtain and
comply with a wide variety of environmental licenses, permits and other
approvals. We and our subsidiaries are also subject to a number of complex and
stringent environmental laws and regulations that both public officials and
private individuals may seek to enforce. We cannot assure you that existing
environmental regulations will not be revised or that new regulations seeking to
protect the environment will not be adopted or become applicable to us or our
subsidiaries. Revised or additional regulations which result in increased
compliance costs or additional operating restrictions could have a material
adverse effect on our results of operations.
In particular, regulatory compliance associated with the construction
of new facilities is a costly and time-consuming process. Intricate and rapidly
changing environmental regulations may require major expenditures for permitting
and create the risk of expensive delays or material impairment of project value
if projects cannot function as planned due to changing regulatory requirements
or local opposition.
WE ARE SUBJECT TO THE UNIQUE RISKS ASSOCIATED WITH NUCLEAR GENERATION.
The risks of nuclear generation risks include (1) the potential harmful
effects on the environment and human health resulting from the operation of
nuclear facilities and the storage, handling and disposal of high-level and
low-level radioactive materials, (2) limitations on the amounts and types of
insurance commercially available to cover losses that might arise in connection
with nuclear operations and (3) uncertainties with respect to the technological
and financial aspects of decommissioning nuclear plants at the end of their
licensed lives. The Nuclear Regulatory Commission has broad authority under
federal law to impose licensing and safety-related requirements for the
operation of nuclear generating facilities and in the event of non-compliance,
has the authority to impose fines or shut down a unit, or both, depending upon
its assessment of the severity of the situation, until compliance is achieved.
Revised safety requirements promulgated by the NRC have, in the past,
necessitated substantial capital expenditures at nuclear plants, including those
with which we have a long-term power purchase contract or in which we have an
ownership interest, such as the Cooper and Quad Cities units, and additional
such expenditures could be required in the future. In addition, although we have
no reason to anticipate a serious nuclear incident at the units in which we have
an interest, if such an incident did occur, it could have a material but
presently undeterminable adverse effect on our financial condition.
WE CANNOT PREDICT THE TYPE OR MAGNITUDE OF POTENTIAL PROBLEMS ASSOCIATED THE
"YEAR 2000" ISSUE AND THESE PROBLEMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS.
The "year 2000" issue arises from the widespread use of computer
programs that rely on two-digit date codes to perform computations or
decision-making functions. Many of these programs may fail due to an inability
to properly interpret date codes beginning January 1, 2000. We and our
subsidiaries have undertaken an extensive ongoing project to address our
information technology and non-information technology (including embedded
technology) systems potentially affected by the year 2000 date change. We and
our subsidiaries have completed both (1) the inventory, assessment and planning
phases for substantially all of our systems and (2) the resolution and
implementation phases for nearly all of our high-and medium-priority systems to
ensure that these systems are suitable for continued use into the year 2000.
Despite the comprehensive nature of our year 2000 project, it is
possible that MidAmerican Energy may experience random, widespread and/or
simultaneous failures in its generation, transmission and distribution systems
during January 2000. Although MidAmerican Energy is developing contingency plans
for anticipated risks of interruption to the generation or distribution of
energy, we cannot assure you that outages will not occur. Although the impact on
future operations and revenues is unknown, any failure of computer systems to
perform because of year 2000 implications could result in operating problems and
costs that are material to us. Although we believe the compliance project will
be completed sufficiently in advance of January 1, 2000, unforeseen and other
factors could cause delays in the project and/or require material expenditures,
which could have a material adverse effect on our results of operations. In
addition, we cannot assure you that we and our subsidiaries will not be
adversely affected by year 2000 problems experienced by third parties.
THERE IS NO EXISTING MARKET FOR THE EXCHANGE SECURITIES AND WE CANNOT ASSURE YOU
THAT AN ACTIVE TRADING MARKET WILL DEVELOP.
We are offering the exchange Securities to the holders of the initial
Securities. There is no existing market for the exchange Securities and we
cannot assure you that a market will develop. If a market for the exchange
Securities were to develop, future trading prices would depend on many factors,
including prevailing interest rates, our operating results and the market for
similar securities. We do not intend to apply for listing or quotation of the
exchange Securities on any securities exchange or stock market. As a result, it
may be difficult for you to find a buyer for your Securities at the time you
want to sell them, and even if you found a buyer, you might not get the price
you want.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE DEPENDENT ON
CIRCUMSTANCES AND EVENTS WHICH MAY BE OUTSIDE OF OUR CONTROL.
Some of the statements contained in this prospectus are forward-looking
statements, as defined in Section 21D of the Exchange Act, that are dependent on
circumstances and events that may be outside of our control. We identify these
statements by using words such as "expect," "believe," "anticipate," "estimate"
and "projected" and similar expressions. The forward-looking statements in this
prospectus involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements to
differ materially from any future results, performance or achievements expressed
or implied by the forward-looking statements.
These risks, uncertainties and other important factors include, among
other things:
[] general economic and business conditions in the United States and the
midwestern United States and MidAmerican Energy's service territory
in particular;
[] governmental, statutory, regulatory or administrative initiatives
affecting us, MidAmerican Energy or the United States electricity
industry;
[] weather effects on sales and revenues;
[] general industry trends;
[] competition;
[] fuel and power costs and availability;
[] changes in business strategy, development plans or vendor
relationships;
14
[] availability, term and deployment of capital;
[] availability of qualified personnel; and
[] risks relating to nuclear generation.
We do not have any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in our expectations regarding the statement or any change in events,
conditions or circumstances on which the statement is based.
15
THE EXCHANGE OFFER
WE AGREED WITH THE INITIAL PURCHASERS OF THE INITIAL SECURITIES TO EFFECT THE
EXCHANGE OFFER PURSUANT TO THE REGISTRATION RIGHTS AGREEMENT.
We sold the initial Securities on March 11, 1999 in a transaction exempt
from the registration requirements of the Securities Act. Credit Suisse First
Boston Corporation and Lehman Brothers Inc., Goldman Sachs & Co. and Merrill
Lynch & Co., as the initial purchasers, subsequently resold the initial
Securities to qualified institutional buyers in reliance on Rule 144A and under
Regulation S under the Securities Act. As of the date of this prospectus,
$700,000,000 aggregate principal amount of unregistered initial Securities are
outstanding.
We entered into a registration rights agreement with the initial
purchasers under which we agreed that we would, at our own cost:
[] use our reasonable best efforts to cause the registration statement,
of which this prospectus is a part, relating to the exchange offer to
be declared effective by the Securities and Exchange Commission prior
to December 7, 1999;
[] keep the exchange offer open for a period of not less than the
shorter of (1) the period ending when the last of the remaining
initial Securities is tendered into the exchange offer and (2) 30
days from the date notice is mailed to holders of the initial
Securities; and
[] maintain the registration statement continuously effective for a
period of not less than the longer of (1) the period until
consummation of the exchange offer and (2) 120 days after
effectiveness of the registration statement, subject to extension.
However, in the event that all resales of exchange Securities covered
by the registration statement have been made, the registration
statement need not remain continuously effective.
The description in this prospectus of provisions of the registration
rights agreement is a summary only and is subject to, and is qualified in its
entirety by, all the provisions of the registration rights agreement, a copy of
which is filed as an exhibit to the registration statement.
THERE WILL BE RESTRICTIONS ON THE ABILITY OF SOME HOLDERS TO RESELL THE EXCHANGE
SECURITIES.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties, we believe that a holder of initial
Securities who exchanges initial Securities for exchange Securities in the
exchange offer generally may offer the exchange Securities for resale, sell the
exchange Securities and otherwise transfer the exchange Securities without
further registration under the Securities Act and without delivery of a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
This does not apply, however, to a holder who is an affiliate of ours within
the meaning of Rule 405 of the Securities Act. We also believe that a holder
may offer, sell or transfer the exchange Securities only if the holder acquires
the exchange Securities in the ordinary course of its business and is not
participating, does not intend to participate and has no arrangement or
understanding with any person to participate in a distribution of the exchange
Securities.
Any holder of initial Securities using the exchange offer to participate
in a distribution of exchange Securities cannot rely on the no-action letters
referred to above. This category of holders includes a broker-dealer that
acquired initial Securities directly from us, but not as a result of
market-making activities or other trading activities. Consequently, this type
of holder must comply with the registration and prospectus delivery
requirements of the Securities Act in the absence of an exemption from these
requirements.
Each broker-dealer that receives exchange Securities for its own
account in exchange for initial Securities, where the initial Securities were
acquired by the broker-dealer as a result of market-making activities or other
trading activities, may be a statutory underwriter and must acknowledge that it
will deliver a prospectus meeting the
16
requirements of the Securities Act in connection with the resale of exchange
Securities received in exchange for initial Securities. The letter of
transmittal which accompanies this prospectus states that by so acknowledging
and by delivering a prospectus, a participating broker-dealer will not be
deemed to admit that it is an underwriter within the meaning of the Securities
Act. A participating broker-dealer may use this prospectus, as it may be
amended from time to time, in connection with resales of exchange Securities it
receives in exchange for initial Securities in the exchange offer. We will make
this prospectus available to any participating broker-dealer in connection with
any resale of this kind for a period of 30 days after the expiration date of
the exchange offer.
YOU MUST MAKE THE FOLLOWING REPRESENTATIONS AND ACKNOWLEDGEMENTS IN THE LETTER
OF TRANSMITTAL IN ORDER TO EXCHANGE YOUR INITIAL SECURITIES FOR EXCHANGE
SECURITIES.
Each holder of the initial Securities who wishes to exchange initial
Securities for exchange Securities in the exchange offer will be required to
represent and acknowledge, for the holder and for each beneficial owner of the
initial Securities, whether or not the beneficial owner is the holder, in the
letter of transmittal that:
[] the exchange Securities acquired pursuant to the exchange offer in
exchange for initial Securities are being obtained in the holder's
ordinary course of business;
[] neither the holder nor any beneficial is engaging in or intends to
engage in a distribution of exchange Securities;
[] neither the holder nor any beneficial owner has an arrangement or
understanding with any person to participate in the distribution of
exchange Securities;
[] if the holder or any beneficial owner is a resident of the State of
California, it falls under the self-executing institutional investor
exemption set forth under applicable California law;
[] if the holder or any beneficial owner is a resident of the
Commonwealth of Pennsylvania, it falls under the self-executing
institutional investor exemption set forth under applicable
Pennsylvania law;
[] any person who is a broker-dealer registered under the Exchange Act,
or is participating in the exchange offer for the purpose of
distributing the exchange Securities must comply with the
registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction of the exchange
Securities or interests therein acquired by such person and cannot
rely on the position of the staff of the Securities and Exchange
Commission set forth in certain no-action letters;
[] it understands that a secondary resale transaction described above
and any resales of exchange Securities or interests therein obtained
by the holder in exchange for initial Securities or interests therein
originally acquired by the holder directly from us should be covered
by an effective registration statement containing the selling
security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Securities and Exchange
Commission; and
[] neither the holder nor any beneficial owner is our "affiliate," as
such term is defined under Rule 405 promulgated under the Securities
Act.
WE MAY BE REQUIRED TO FILE A SHELF REGISTRATION STATEMENT COVERING RESALES OF
THE INITIAL SECURITIES.
If applicable law or interpretations of the staff of the Securities and
Exchange Commission are changed so that the exchange Securities received by
holders who make all of the above representations in the letter of transmittal
are not or would not be, upon receipt, transferable by each holder without
restriction under the Securities Act, we will, at our cost:
17
o file a shelf registration statement covering resales of the initial
Securities,
o use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act on or
prior to December 7, 1999, and
o use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of two years after March 11,
1999, subject to exceptions, or the time when all of the applicable
initial Securities are no longer outstanding.
We may postpone or suspend the filing or the effectiveness of any shelf
registration statement if such action is taken by us in good faith and for
valid business reasons. We will, if and when we file the shelf registration
statement, provide to each holder of the initial Securities copies of the
prospectus which is a part of the shelf registration statement, notify each
holder when the shelf registration statement has become effective and take
other actions as are required to permit unrestricted resales of the initial
Securities.
THE INTEREST RATE ON THE INITIAL SECURITIES WILL INCREASE IF A REGISTRATION
STATEMENT IS NOT DECLARED EFFECTIVE BY DECEMBER 7, 1999.
In the event that neither the exchange offer registration statement nor a
shelf registration statement has been declared effective by December 7, 1999,
the interest rate on the initial Securities will increase by 0.50% per annum
until the exchange offer registration statement or the shelf registration
statement is declared effective. Upon consummation of the exchange offer,
holders of initial Securities will not be entitled to any increase in the rate
of interest on the initial Securities, but will be entitled to the benefits of
the indenture under which the initial Securities were issued.
THE GENERAL TERMS OF THE EXCHANGE OFFER ARE DESCRIBED IN THE FOLLOWING
PARAGRAPHS.
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal, to exchange
exchange Securities for a like aggregate principal amount of initial Securities
properly tendered on or prior to the expiration date and not properly withdrawn
in accordance with the procedures described below. We will issue, promptly
after the expiration date, the exchange Securities in exchange for a like
principal amount of outstanding initial Securities tendered and accepted in
connection with the exchange offer. You may tender your initial Securities in
whole or in part in a principal amount of $1,000 and integral multiples of
$1,000, provided that if any initial Securities are tendered for exchange in
part, the untendered principal amount of those initial Securities must be
$100,000 or any integral multiple of $1,000 in excess of $100,000.
The exchange offer is not conditioned upon any minimum principal amount of
initial Securities being tendered. As of the date of this prospectus,
$700,000,000 aggregate principal amount of the initial Securities is
outstanding.
If any tendered initial Securities are not accepted for exchange because
of an invalid tender or any other reason, certificates for any unaccepted
initial Securities will be returned, without expense to the tendering holder
thereof promptly after the expiration date.
You will not be required to pay brokerage commissions or fees or, subject
to the instructions in the Letter of Transmittal, transfer taxes with respect
to the exchange of initial Securities. We will pay all charges and expenses,
other than applicable taxes described below, in connection with the exchange
offer.
Neither we nor our board of managers makes any recommendation to you as to
whether to tender or refrain from tendering all or any portion of your initial
Securities pursuant to the exchange offer. In addition, no one has been
authorized to make this type of recommendation. You must make your own decision
whether to tender pursuant to the exchange offer and, if you do tender, the
aggregate amount of initial Securities to tender. In making
18
these decisions, you should read this prospectus and the letter of transmittal
and consult with your advisers. You should make the decision whether to tender
based on your own financial position and requirements.
THE EXCHANGE OFFER IS SCHEDULED TO EXPIRE ON [_________], BUT WE HAVE THE
ABILITY TO EXTEND THE EXPIRATION DATE.
The exchange offer expires on the expiration date. The term "expiration
date" means 5:00 p.m., New York City time, on __________, unless we in our sole
discretion extend the period during which the exchange offer is open. If we do
so, the term "expiration date" will mean the latest time and date to which the
exchange offer is extended. We may extend the exchange offer at any time and
from time to time by giving oral or written notice to the exchange agent and by
timely public announcement. Without limiting the manner in which we may choose
to make any public announcement and subject to applicable law, we will have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
During any extension of the exchange offer, all initial Securities previously
tendered pursuant to the exchange offer will remain subject to the exchange
offer.
WE CAN WAIVE CONDITIONS TO THE EXCHANGE OFFER AND AMEND THE EXCHANGE OFFER IN
OTHER WAYS
We reserve the right (1) to delay accepting any initial Securities, to
extend the exchange offer or to terminate the exchange offer and not accept
initial Securities not previously accepted for any reason, including if any of
the conditions to the exchange offer described below are not satisfied and are
not waived by us, or (2) to amend the terms of the exchange offer in any
manner, whether prior to or after the tender of any of the initial Securities.
If any such delay, extension, termination or amendment occurs, we will give
oral or written notice to the exchange agent and will either issue a public
announcement or give notice to the holders of the initial Securities as
promptly as practicable.
If (1) we waive any material condition to the exchange offer or amend
the exchange offer in any other material respect and (2) the exchange offer is
scheduled to expire at any time earlier than the expiration of a period ending
on the fifth business day after the date that notice of the waiver or amendment
is first published, sent or given, then the exchange offer will be extended
until the expiration of the five business day period.
FOLLOWING IS A DESCRIPTION OF THE PROCEDURES YOU MUST FOLLOW IN ORDER TO TENDER
YOUR INITIAL SECURITIES IN THE EXCHANGE OFFER.
THE ITEMS YOU MUST SUBMIT IN ORDER TO TENDER YOUR INITIAL SECURITIES
To tender in the exchange offer, you must (1) complete, sign and date the
letter of transmittal, or a facsimile thereof, (2) have the signatures thereon
guaranteed if required by the letter of transmittal and (3) mail or otherwise
deliver the letter of transmittal, together with any other required documents
or an agent's message in case of book-entry delivery as described below, to the
exchange agent before the expiration date. In addition, either
o certificates for the initial Securities being tendered must be
received by the exchange agent along with the letter of transmittal
on or before the expiration date,
o a timely confirmation of a book-entry transfer of the initial
Securities, if this procedure is available, into the exchange agent's
account at The Depository Trust Company pursuant to the procedure for
book-entry transfer described below, along with the letter of
transmittal must be received by the exchange agent on or before the
expiration date, or
o you must comply with the guaranteed delivery procedures described
below.
19
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT YOUR OPTION AND SOLE RISK. IF YOU DELIVER BY
MAIL, WE RECOMMEND REGISTERED MAIL (RETURN RECEIPT REQUESTED AND PROPERLY
INSURED) OR AN OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR INITIAL
SECURITIES SHOULD BE SENT TO US.
SPECIAL CIRCUMSTANCES THAT MAY APPLY TO YOUR TENDER
To be tendered effectively, the initial Securities, letter of transmittal
and all other required documents, or, in the case of a participant in The
Depository Trust Company, an agent's message must be received by the exchange
agent prior to 5:00 p.m., New York City time, on the expiration date. Except in
the case of a participant in The Depository Trust Company who transfers initial
Securities by an agent's message, delivery of all documents must be made to the
exchange agent at its address set forth on the back of this prospectus. You may
also request your respective broker, dealer, commercial bank, trust company or
nominee to effect your tender for you.
Your tender of initial Securities will constitute an agreement between you
and us in accordance with the terms and subject to the conditions set forth in
the prospectus and in the letter of transmittal. If you tender less than all of
your initial Securities, you should fill in the amount of initial Securities
being tendered in the appropriate box on the letter of transmittal. The entire
amount of initial Securities delivered to the exchange agent will be deemed to
have been tendered unless you indicate otherwise.
Only a holder of initial Securities may tender initial Securities in the
exchange offer. The term "holder" means any person in whose name initial
Securities are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial owner whose initial Securities are registered in the name
of a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct the
registered holder to tender on its behalf. If the beneficial owner wishes to
tender on its own behalf, the beneficial owner must, prior to completing and
executing the letter of transmittal and delivering its initial Securities,
either make appropriate arrangements to register ownership of the initial
Securities in the beneficial owner's name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a firm (an "eligible institution") that is a
member of a recognized signature guarantee medallion program within the meaning
of Rule 17Ad-15 under the Exchange Act, unless the initial Securities tendered
pursuant thereto are tendered (1) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal or (2) for the account of an
eligible institution. If signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, the guarantee must be by an eligible
institution.
If the letter of transmittal is signed by a person other than the
registered holder of any initial Securities listed therein, the initial
Securities must be endorsed or accompanied by bond powers and a proxy which
authorizes such person to tender the initial Securities on behalf of the
registered holder, in each case as the name of the registered holder appears on
the initial Securities. If the letter of transmittal or any initial Securities
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such person should so indicate when signing, and
unless waived by us, evidence satisfactory to us of their authority to so act
must be submitted with the letter of transmittal.
OUR RIGHTS IN CONNECTION WITH THE TENDERING PROCEDURES
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered initial Securities will be determined
by us in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all initial Securities not
properly tendered or any initial Securities which,
20
if accepted by us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular initial Securities. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of initial Securities must be cured within such time as we determine.
Neither we, the exchange agent or any other person will be under any duty to
give notification of defects or irregularities with respect to tenders of
initial Securities, nor will we or any of them incur any liability for failure
to give notification. Tenders of initial Securities will not be deemed to have
been made until any irregularities have been cured or waived. Any initial
Securities received by the exchange agent that are not properly tendered, and
which have defects or irregularities which have not been timely cured or
waived, will be returned without cost to the holder by the exchange agent as
soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion (1) to purchase
or make offers for any initial Securities that remain outstanding subsequent to
the expiration date or to terminate the exchange offer, and (2) to the extent
permitted by applicable law, to purchase initial Securities in the open market,
in privately negotiated transactions or otherwise. We have no present plan to
acquire any initial Securities which are not tendered in the exchange offer.
The terms of any purchases or offers could differ from the terms of the
exchange offer.
YOU MAY BE ABLE TO USE THE DEPOSITORY TRUST COMPANY IN CONNECTION WITH THE
TENDER OF YOUR INITIAL SECURITIES.
The exchange agent will make a request to establish an account with
respect to the initial Securities at The Depository Trust Company for purposes
of the exchange offer within two business days after the date of this
prospectus. Any financial institution that is a participant in The Depository
Trust Company may book-entry deliver initial Securities by causing The
Depository Trust Company to transfer the initial Securities into the exchange
agent's account at The Depository Trust Company in accordance with The
Depository Trust Company's procedures for transfer on or prior to the
expiration date. If you are a participant in The Depository Trust Company and
transfer your initial Securities by an agent's message, you do not need to
transmit the letter of transmittal to the exchange agent to consummate your
exchange.
The term "agent's message" means a message transmitted through electronic
means by The Depository Trust Company to and received by the exchange agent and
forming a part of a book-entry confirmation, which states that The Depository
Trust Company has received an express acknowledgment from the participant in
The Depository Trust Company tendering the Securities that the participant has
received and agrees to be bound by the letter of transmittal and/or the notice
of guaranteed delivery discussed below, where applicable.
YOU MAY BE ABLE TO TENDER YOUR INITIAL SECURITIES BY PROVIDING A NOTICE OF
GUARANTEED DELIVERY
If you would like to tender your initial Securities, and (1) your initial
Securities are not immediately available, (2) time will not permit your initial
Securities or other required documents to reach the exchange agent before the
expiration date, or (3) the procedure for book-entry transfer cannot be
completed on a timely basis, your tender may still be effected if:
o the tender is made through an eligible institution;
o on or prior to the expiration date, the exchange agent receives from
the eligible institution a properly completed and duly executed
letter of transmittal, or in the case of a participant in The
Depository Trust Company, an agent's message, and notice of
guaranteed delivery, substantially in the form provided by us, or, in
the case of a participant in The Depository Trust Company, by an
agent's message, setting forth your name and address and the amount
of initial Securities tendered, stating that the tender is being made
thereby and guaranteeing that within three New York Stock Exchange
trading days after the date of execution of the notice of guaranteed
delivery, the certificates for all physically tendered initial
Securities, in proper form for transfer, or a book-entry
confirmation, as the case may
21
be, and any other documents required by the letter of transmittal,
will be deposited by the eligible institution with the exchange
agent; and
o the certificates for all physically tendered initial Securities, in
proper form for transfer, or a book-entry confirmation, as the case
may be, and any other documents required by the letter of transmittal
are received by the exchange agent within three New York Stock
Exchange trading days after the date of execution of the notice of
guaranteed delivery.
A tender will be deemed to have been received as of the date when your
properly completed and duly signed letter of transmittal accompanied by your
initial Securities is received by the exchange agent, or if you are a
participant in The Depository Trust Company, as of the date when an agent's
message has been received by the exchange agent. Issuances of exchange
Securities in exchange for initial Securities tendered pursuant to a notice of
guaranteed delivery by an eligible institution will be made only against
deposit of the letter of transmittal (and any other required documents) and the
tendered initial Securities.
FOLLOWING IS A DESCRIPTION OF THE TERMS AND CONDITIONS OF THE LETTER OF
TRANSMITTAL. THESE TERMS AND CONDITIONS ARE PART OF THE EXCHANGE OFFER.
The letter of transmittal contains the following terms and conditions,
among others, which are part of the exchange offer:
[] You represent and warrant that you have full authority to tender your
initial Securities.
[] You agree to, upon our request, execute and deliver any additional
documents deemed by us to be necessary or desirable to complete the
tender of your initial Securities.
[] You acknowledge that the tender of your initial Securities will
constitute an agreement between you and us as to the terms and
conditions of the exchange offer described in this prospectus.
[] You make the representations and warranties described above.
[] Your obligations under the letter of transmittal will be binding on
your successors, assigns, executors, administrators, trustees in
bankruptcy and legal and personal representatives.
YOU MAY WITHDRAW A TENDER OF YOUR INITIAL SECURITIES PRIOR TO THE EXPIRATION
DATE.
Initial Securities tendered pursuant to the exchange offer may be
withdrawn at any time prior to 5:00 p.m. New York City time, on the expiration
date. For a withdrawal to be effective, a written, telegraphic, telex or
facsimile transmission notice of withdrawal must be timely received by the
exchange agent at its address set forth on the back of this prospectus. Any
notice of withdrawal must specify the name of the person having tendered the
initial Securities to be withdrawn, identify the initial Securities to be
withdrawn, specify the name in which the initial Securities are registered if
different from that of the withdrawing holder, accompanied by evidence
satisfactory to us that the person withdrawing the tender has succeeded to the
beneficial ownership of the initial Securities being withdrawn. If certificates
for initial Securities have been delivered or otherwise identified to the
exchange agent, then, prior to the release of the certificates, the withdrawing
holder must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
eligible institution unless such holder is an eligible institution. If initial
Securities have been tendered pursuant to the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at The Depository Trust Company to be credited with the withdrawn
initial Securities and otherwise comply with the Depository Trust Company's
procedures. If any initial Securities are tendered for exchange but are not
exchanged for any reason, or if any initial Securities are submitted for a
greater principal amount than the holder desires to exchange, the unaccepted or
nonexchanged initial Securities will be returned to the
22
holder without cost to the holder as soon as practicable after withdrawal,
rejection of tender, termination of the exchange offer or submission of
nonexchanged initial Securities.
IF YOU WITHDRAW YOUR TENDER, YOU MAY RETENDER YOUR INITIAL SECURITIES PRIOR TO
THE EXPIRATION DATE IN ACCORDANCE WITH THE PROCEDURES FOR TENDERING DESCRIBED
ABOVE.
Withdrawals of tenders of initial Securities may not be rescinded. Initial
Securities properly withdrawn will not be deemed validly tendered for purposes
of the exchange offer, but may be retendered at any subsequent time on or prior
to the expiration date by following any of the procedures described above.
All questions as to the validity, form and eligibility (including time of
receipt) of withdrawal notices will be determined by us in our sole discretion,
and our determination will be final and binding on all parties. Neither we, any
affiliates or assigns of ours, the exchange agent nor any other person will be
under any duty to give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification.
FOLLOWING IS A DESCRIPTION OF HOW WE WILL ACCEPT INITIAL SECURITIES AND DELIVER
EXCHANGE SECURITIES.
Upon the terms and subject to the conditions of the exchange offer, we
will exchange, and will issue to the exchange agent, exchange Securities for
initial Securities validly tendered and not withdrawn promptly after the
expiration date. For the purposes of the exchange offer, we will be deemed to
have accepted for exchange validly tendered initial Securities when and if we
have given oral or written notice thereof to the exchange agent. The exchange
agent will act as agent for the tendering holders of initial Securities for the
purposes of receiving exchange Securities from us and causing the initial
Securities to be assigned, transferred and exchanged. Upon the terms and
subject to the conditions of the exchange offer, delivery of exchange
Securities to be issued in exchange for accepted initial Securities will be
made by the exchange agent only after timely receipt by the exchange agent of
certificates for such initial Securities or a timely book-entry confirmation of
the initial Securities into the exchange agent's account at The Depository
Trust Company, a properly completed and duly executed letter of transmittal and
all other required documents, or, in the case of a book-entry delivery, an
agent's message.
THE CIRCUMSTANCES IN WHICH WE WILL NOT BE REQUIRED TO EFFECT THE EXCHANGE OFFER
ARE DESCRIBED BELOW.
Notwithstanding any other provisions of the exchange offer, or any
extension of the exchange offer, we will not be required to accept for
exchange, or to exchange, any initial Securities for any exchange Securities,
and, as described below, may terminate the exchange offer (whether or not any
initial Securities have previously been accepted for exchange) or may waive any
conditions to or amend the exchange offer, if any of the following conditions
has occurred or exists or has not been satisfied:
o the exchange offer, or the making of any exchange by a holder,
violates any applicable law or any applicable interpretation of the
staff of the Securities and Exchange Commission;
o in our reasonable judgment there is be threatened, instituted or
pending any action or proceeding before, or any injunction, order or
decree has been issued by, any court or governmental agency or other
governmental regulatory or administrative agency or commission, (1)
seeking to restrain or prohibit the making or consummation of the
exchange offer or any other transaction contemplated by the exchange
offer, (2) assessing or seeking any damages as a result thereof, or
(3) resulting in a material delay in our ability to accept for
exchange or exchange some or all of the initial Securities pursuant
to the exchange offer;
o any statute, rule, regulation, order or injunction is sought,
proposed, introduced, enacted, promulgated or deemed applicable to
the exchange offer or any of the transactions contemplated by the
exchange
23
offer by any government or governmental authority, domestic or
foreign, or any action will have been taken, proposed or threatened
by any government, governmental authority, agency or court, domestic
or foreign, that in our reasonable judgment might directly or
indirectly result in any of the consequences referred to in clauses
(1), (2) or (3) immediately above or, in our reasonable judgment,
might result in the holders of exchange Securities having obligations
with respect to resales and transfers of exchange Securities which
are greater than those described in the interpretations of the staff
of the Securities and Exchange Commission referred to in this
prospectus, or would otherwise make it inadvisable to proceed with
the exchange offer;
o there will have occurred (1) any general suspension of trading in, or
general limitation on prices for, securities on the New York Stock
Exchange, (2) a declaration of a banking moratorium or any suspension
of payments in respect of banks in the United States or any
limitation by any governmental agency or authority that adversely
affects the extension of credit to us, or (3) a commencement of a
war, armed hostilities or other similar international calamity
directly or indirectly involving the United States, or, in the case
any of the foregoing exists at the time of commencement of the
exchange offer, a material acceleration or worsening thereof; or
o a material adverse change will have occurred or be threatened in our
business, condition (financial or otherwise), operations, stock
ownership or prospects.
The foregoing conditions are for our sole benefit and may be asserted by
us with respect to all or any portion of the exchange offer regardless of the
circumstances (including any action or inaction by us) giving rise to such
condition or may be waived by us in whole or in part at any time or from time
to time in our sole discretion. Our failure at any time to exercise any of the
foregoing rights will not be deemed a waiver of any such right, and each right
will be deemed an ongoing right which may be asserted at any time or from time
to time. In addition, we have reserved the right, notwithstanding the
satisfaction of each of the foregoing conditions, to amend the exchange offer.
Any determination by us concerning the fulfillment or non-fulfillment of any
conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any initial Securities
tendered and no exchange Securities will be issued in exchange for any such
initial Securities, if at such time any stop order will be threatened or in
effect with respect to (1) the registration statement of which this prospectus
constitutes a part or (2) the qualification of the indenture under the Trust
Indenture Act of 1939.
THE BANK OF NEW YORK WILL ACT AS EXCHANGE AGENT FOR THE EXCHANGE OFFER.
The Bank of New York has been appointed as the exchange agent for the
exchange offer. The Bank of New York also acts as trustee under the indenture.
Delivery of letters of transmittal and any other required documents and
questions, requests for assistance and requests for additional copies of this
prospectus or the letter of transmittal, should be directed to the exchange
agent at its address and numbers set forth on the back of this prospectus.
Except in the case of a participant in The Depository Trust Company who
transfers initial Securities by an agent's message, delivery to an address
other than as set forth herein, or transmissions of instructions via a
facsimile or telex number other than to the exchange agent as set forth herein,
will not constitute a valid delivery.
WE ARE REQUIRED TO PAY THE FEES AND EXPENSES DESCRIBED BELOW IN CONNECTION
WITH THE EXCHANGE OFFER.
We have not retained any dealer-manager or similar agent in connection
with the exchange offer and will not make any payments to brokers, dealers or
others for soliciting acceptances of the exchange offer. We will, however, pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for reasonable out-of-pocket expenses in connection therewith. We
will also pay brokerage houses and other custodians, nominees
24
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this prospectus and related documents to the beneficial
owners of initial Securities, and in handling tenders for their customers. We
estimate that the expenses we will incur in connection with the exchange offer,
including the fees and expenses of the exchange agent and printing, accounting
and legal fees, will be approximately $200,000.
YOU MAY BE REQUIRED TO PAY TRANSFER TAXES IN CONNECTION WITH YOUR TENDER.
Holders who tender their initial Securities for exchange will not be
obligated to pay any transfer taxes in connection with the exchange. If,
however, exchange Securities are to be delivered to, or are to be issued in the
name of, any person other than a registered holder of the initial Securities
tendered, or if a transfer tax is imposed for any reason other than the
exchange of initial Securities in connection with the exchange offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption from payment is not submitted
with the letter of transmittal, the amount of such transfer taxes will be
billed directly to the tendering holder.
NO ONE ELSE HAS BEEN AUTHORIZED TO PROVIDE YOU WITH INFORMATION REGARDING THE
EXCHANGE OFFER.
No person has been authorized to give any information or to make any
representations in connection with the exchange offer other than those
contained in this prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by us.
Neither the delivery of this prospectus nor any exchange made under this
prospectus will, under any circumstances, create any implication that there has
been no change in our affairs since the respective dates as of which
information is given in this prospectus.
The exchange offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of initial Securities in any jurisdiction in which the
making of the exchange offer or the acceptance thereof would not be in
compliance with the laws of the jurisdiction. However, we may, at our
discretion, take such action as we may deem necessary to make the exchange
offer in any such jurisdiction and extend the exchange offer to holders of
initial Securities in the jurisdiction. In any jurisdiction that has securities
laws or blue sky laws which require the exchange offer to be made by a licensed
broker or dealer, the exchange offer is being made on behalf of us by one or
more registered brokers or dealers which are licensed under the laws of the
jurisdiction.
YOU WILL NOT HAVE APPRAISAL RIGHTS.
Holders of initial Securities will not have dissenters' rights or
appraisal rights in connection with the exchange offer.
THE FEDERAL INCOME TAX CONSEQUENCES OF YOUR EXCHANGE.
The exchange of initial Securities for exchange Securities will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of the
exchange.
25
USE OF PROCEEDS
USE OF PROCEEDS FROM THE SALE OF THE INITIAL SECURITIES
MidAmerican Holdings acquired MHC on March 12, 1999 for $27.15 in cash for
each outstanding share of common stock of MHC. The total acquisition cost was
approximately $2.42 billion. Approximately $1.5 billion in debt and preferred
stock of MidAmerican Energy remained outstanding after the acquisition.
We received approximately $695 million of net proceeds from the sale of
the initial securities. All of these proceeds were used to fund a portion of
MidAmerican Holdings' cost of acquiring MHC. The remaining $1.72 billion of the
acquisition cost was funded by an equity contribution from MidAmerican
Holdings. The funding sources for this equity contribution were as follows:
o the sale by MidAmerican Holdings of its $1.5 billion senior notes in
September and November of 1998, of which approximately $940 million was
used to acquire MHC;
o the sale by MidAmerican Holdings of interests in its domestic
independent power projects in February and March of 1999; and
o other cash on hand.
MidAmerican Holdings' acquisition of MHC did not involve payments to any
individuals or entities other than the stockholders of MHC, and did not involve
any related party transactions.
USE OF PROCEEDS FROM THE EXCHANGE OFFER
The exchange offer satisfies an obligation under the registration rights
agreement. We will not receive any cash proceeds from the exchange offer.
CAPITALIZATION
(IN THOUSANDS)
The following table sets forth our capitalization as of September 30,
1999. This table should be read in conjunction with our consolidated financial
statements and the notes to the financial statements and the notes thereto appearing elsewhere in
this prospectus.
SEPTEMBER 30, 1999
(UNAUDITED)
---------------------
Common Shareholders'-------------------
Members' Equity:..................... ...................................................... $1,836,163
MidAmerican Enery preferred securities, not subject to mandatory
redemption...............redemption .......................................................... 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities.......securities ............................. 50,000
MidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures..................debentures ... 101,598
Long-term debt:
MidAmerican Funding ........................................................................... 702,742
MidAmerican Energy long-term debt............................................................... 759,683
Nonregulated subsidiaries notes...............notes ..................................... 70,000
Notes payable....................................payable ......................................................... 89,115
Current portion of long-term debt................debt ..................................... 215,635
----------
Total capitalization........................capitalization ............................................... $3,856,695
==========
26
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data of MHC for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 set forth below have been derived
from audited financial statements of MHC. The selected consolidated financial
data of MHC for the nine months ended September 30, 1998 and January 1, 1999
through March 11, 1999, and the selected consolidated financial data of
MidAmerican Funding for the period March 12, 1999 through September 30, 1999,
set forth below have been derived from unaudited financial statements. You
should read the financial data set forth below in conjunction with the
historical consolidated financial statements of MHC and MidAmerican Funding and
related notes theretoto the financial statements included and incorporated by
reference in this registration statement.prospectus.
The summary pro forma as adjusted information of MidAmerican Funding is
based on the historical financial data of MHC and MidAmerican Funding and gives
effect to the offering of the initial Securitiessecurities and the merger,acquisition by
MidAmerican Funding of MHC, using proceeds from the offering and the equity
contributions from MidAmerican Holdings. In each case, the information is
presented as if suchthese transactions had occurred at the beginning of the period presented,January 1, 1998, with
respect to the statement of operations data and other financial data. The
summary pro forma as adjusted financial information does not purport to
represent what the results of operations or financial condition of MidAmerican
Funding actually would have been had the mergeracquisition and the related financing
transactions in fact occurred on the assumed dates,date, nor does it purport to
project the results of operations and financial position for any future period.
You should read the summary pro forma as adjusted financial information set
forth below in conjunction with the unaudited pro forma condensed consolidated
financial statements and the historical consolidated financial statements of
MHC and MidAmerican Funding and the related notes theretoto the financial statements
appearing elsewhere in this registration statement.prospectus.
HISTORICAL DATA
| MIDAMERICAN
MHC (THE PREDECESSOR)
| FUNDING
------------------------------------------------------ ------------------- | ------------
NINE MONTHS |-------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
ENDED JAN. 1 - | MAR. 12 -
------------------------------------------------------ SEPT. 30, MAR. 11, | SEPT. 30,-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
1998 1999 | 1999
---------- --------- --------- --------- ---------- --------- -------- | -------------------------- --------------- --------------- --------------- ---------------
|
Revenues................. $1,635,187 $1,655,474 $1,911,204 $1,969,537 $1,775,924 $1,333,464 $383,066 | $961,885Revenues .................... $ 1,635,187 $ 1,655,474 $ 1,911,204 $ 1,969,537 $ 1,775,924
Operating income(1)...... ......... 264,783 292,464 349,399 276,726 271,412
235,372 58,898 | 166,863
Income from continuing
|
operations(2)(7)...... ........... 123,098 119,705 143,761 139,332 127,154
107,105 16,789 | 108,628
Net income...............income .................. 120,189 122,764 131,046 135,104 131,318
113,355 17,210 | 119,886
|
OTHER FINANCIAL DATA: |
Ratio of earnings to |
fixed
charges(3)...... ................. 2.4x 2.5x 2.8x 2.8x 2.8x
MIDAMERICAN
MHC (THE PREDECESSOR) FUNDING
----------------------------- ------------
NINE MONTHS
ENDED JAN. 1- MAR. 12-
SEPT. 30, MAR. 11, SEPT. 30,
1998 1999 1999
--------------- ------------- ------------
Revenues .................... $ 1,333,464 $ 383,066 $ 943,574
Operating income(1) ......... 235,372 58,898 166,863
Income from continuing
operations(2)(7) ........... 107,105 16,789 108,628
Net income .................. 113,355 17,210 119,886
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(3) ................. 3.1x 2.7x | 3.3x
27
| MIDAMERICAN
MHC (THE PREDECESSOR) | FUNDING
-------------------------------------------------------------------------- |--------------------------------------------------------------------- ----------------
AS OF DECEMBER 31, | AS OF SEPT. 30,
1994 1995 1996 1997 1998 | 1999
----------- ----------- ----------- ----------- ----------- | --------------
|------------- ------------- ------------- ------------- ------------- ----------------
|
BALANCE SHEET DATA:
|
Total assets..................assets .................... $4,388,894 $4,470,097 $4,521,848 $4,278,091 $4,244,336 | $5,264,570
Long-term debt(4)............. ............... 1,471,127 1,468,617 1,474,701 1,178,769 1,045,548 | 1,748,060
Power purchase contract.......contract ......... 137,809 125,729 111,222 97,504 83,127 | 83,127
Short-term borrowings.........borrowings ........... 124,500 184,800 161,990 138,054 339,826 | 89,115
Preferred stock:
|
Not subject to mandatory.. |
redemption..............mandatory
redemption .................... 89,955 89,945 31,769 31,763 31,759 | 31,759
Subject to mandatory
|
redemption(5)........... ................. 50,000 50,000 150,000 150,000 150,000 | 151,598
Common equity(6).............. ................ 1,204,112 1,225,715 1,239,946 1,301,286 1,200,950 | 1,836,163
PRO FORMA DATA
MIDAMERICAN FUNDING
---------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------- ------------------
INCOME STATEMENT DATA:
Revenues.............................. $1,775,924 $1,344,951
Operating income...................... 241,053 219,725
Income from continuing operations(7).. 76,099 130,628
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(3)........................
MIDAMERICAN FUNDING
-----------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- ------------------
INCOME STATEMENT DATA:
Revenues ..................................... $ 1,775,924 $ 1,326,640
Operating income ............................. 241,053 219,725
Income from continuing operations(7) ......... 74,632 130,534
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges(3) .................................. 1.9x 3.1x
- ------------------------------------------------------------------------------------------------------------------------------------------
(1) MHC's 1995 operating income reflects $33,400 of costs related to a
restructuring and workforce reduction plan implemented and completed in
1995.
(2) In 1998, MHC recorded after-tax gains totaling $15,700 for sales of
several properties and investments, including a portion of its investment
in the common stock of McLeodUSA, Inc. Also, in 1998, MHC expensed $4,200
for transaction costs related to the merger.acquisition by MidAmerican Holdings
of MHC. In 1997, MHC recorded after-tax gains totaling $11,200 for sales
of assets of certain railcar businesses and a portion of a its investment in
McLeodUSA Inc. common stock. MHC recorded after-tax losses of approximately
$10,200 and $9,400 for the write-down of certain nonregulated assets during 1995
and 1996, respectively. In 1996, MHC incurred $8,700 of costs in
connection with its merger proposal to IES Industries, Inc.
(3) For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate
of (a) the pre-tax income of MidAmerican Funding, and (b) fixed charges.
"Fixed charges" represent interest, (whetherwhether expensed or capitalized),capitalized,
amortization of deferred financing and bank fees, and the portion of
rentals considered to be representative of the interest factor, (one-thirdwhich is
one-third of lease payments)payments, and preferred stock dividend requirements of
majority-owned subsidiaries.
(4) Includes amounts due within one year.
(5) Post-1995 years include MHC-obligated mandatorily redeemable preferred
securities of a subsidiary trust holding solely MidAmerican Energy junior
subordinated debentures.
28
(6) Common equity increased in 1997 primarily due to recording the market
value of an investment in McLeodUSA Inc. common stock.
(7) In May 1999, MidAmerican Funding sold most of its investment in the
common stock of McLeodUSA Inc. and recorded an after-tax gain of $47,114.
2928
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
COMPANY STRUCTURE
The current corporate structure of MidAmerican Funding, LLC (Funding or
Company) is the result
of the merger transaction completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings Company) and
CalEnergy Company, Inc. (CalEnergy).MHC was named MidAmerican Energy Holdings Company
before the merger transaction. CalEnergy, through a reincorporation
transaction, was renamed MidAmerican Energy Holdings Company (Holdings).in connection with
the merger transaction. MidAmerican Funding, a wholly-owned subsidiary of
MidAmerican Holdings, acquired all of the outstanding common stock of MHC.
MidAmerican Holdings is an exempt public utility holding company headquartered
in Des Moines. References to MHC regarding information, events or transactions
prior to the merger relate to the former MidAmerican Energy Holdings Company.
MHC is a holding company for MidAmerican Energy Company, (MidAmerican),
MidAmerican
Capital Company, (MidAmerican Capital), Midwest Capital Group, Inc.
(Midwest Capital), MidAmerican Services Company and
MidAmerican Realty Services Company (MidAmerican Realty).Company. Prior to December 1, 1996, MidAmerican
Energy held the capital stock of MidAmerican Capital and Midwest Capital.
Effective December 1, 1996, each share of MidAmerican Energy common stock was
exchanged for one share of MHC common stock. As part of the transaction,
MidAmerican Energy distributed the capital stock of MidAmerican Capital and
Midwest Capital to MHC.
In October 1999, MHC distributed its investment in MidAmerican Realty to
MidAmerican Holdings in conjunction with an initial public offering of common
stock of HomeServices.Com, a successor company to MidAmerican Realty.
DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis (MD&A) addresses the financial
statements of MidAmerican Funding and MHC. The financial statements of
MidAmerican Funding include the results of MHC beginning March 12, 1999. Due to
its significance, the results for MidAmerican Energy are described specifically
in the "Results of Operations" section of MD&A. Information related to
MidAmerican Energy also relates to MHC. Information related to MidAmerican
Capital and Midwest Capital pertains only to the discussion of the financial
condition and results of operations of MHC.
As discussed above, MHC's investment in MidAmerican Realty was distributed
to MidAmerican Holdings in October 1999. Accordingly, results of operations for
MidAmerican Realty are reflected as discontinued operations for each period and
entity presented.
FORWARD-LOOKING STATEMENTS
From time to time, the CompanyMidAmerican Funding or one of its subsidiaries
individually may make forward-looking statements within the meaning of the
federal securities laws that involve judgments, assumptions and other
uncertainties beyond the control of the CompanyMidAmerican 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 the Company'sMidAmerican Funding's expectations, beliefs, future
plans and strategies, anticipated events or trends and similar comments
concerning matters that are not historical facts. Investors and other users of
the forward-looking statements are cautioned that suchthese statements are not a
guarantee of future performance of the CompanyMidAmerican Funding and that suchthe
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially
29
from those expressed in, or implied by, suchthose statements. Some, but not all, of
the risks and uncertainties include weather effects on sales and revenues, fuel
prices, competitive factors, general economic conditions in the Company'sMidAmerican
Energy's service territory, interest rates, inflation and federal and state
regulatory actions.
30
RESULTS OF OPERATIONS - 1996-1998
MHC:MHC
The following tables provide a summary of the earnings contributions of
MHC's operations for each of the years ended December 31:
1998 1997 1996
-------- ------- -------
Net Income (in millions)
Continuing operations
Utility $110.6 $119.5 $154.7
Nonregulated operations 16.5 19.8 (11.0)
Discontinued operations 4.2 (4.2) (12.7)
--------- --------- --------
Consolidated earnings $131.3 $135.1 $131.0
====== ====== ======
MIDAMERICAN:
1998 1997 1996
----------- ----------- -----------
Net Income (in millions)
Continuing operations
Utility $ 110.6 $ 119.5 $ 154.7
Nonregulated operations 16.5 19.8 (11.0)
Discontinued operations 4.2 (4.2) (12.7)
-------- -------- --------
Consolidated earnings $ 131.3 $ 135.1 $ 131.0
======== ======== ========
MIDAMERICAN ENERGY
The following table provides a summary of the earnings contributions of
MidAmerican'sMidAmerican Energy's operations for each of the years ended December 31:
1998 1997 1996
------- -------- --------
(In millions)
Earnings on Common Stock
Continuing operations $110.6 $119.5 $154.7
Discontinued operations * - - (10.1)
------- --------- --------
Consolidated earnings $110.6 $119.5 $144.6
====== ====== ======
1998 1997 1996
----------- ----------- -----------
(In millions)
Earnings on Common Stock
Continuing operations $ 110.6 $ 119.5 $ 154.7
Discontinued operations* -- -- (10.1)
------- ------- --------
Consolidated earnings $ 110.6 $ 119.5 $ 144.6
======= ======= ========
* 1996 includes the net losses of MidAmerican Capital and Midwest Capital
prior to their transfer to MHC on December 1, 1996.
EARNINGS SUMMARY
The following discussion details significant impacts on the results of
operations for MHC, the predecessor to MidAmerican Funding, for the years ended
December 31, 1998, 1997 and 1996.
Although utility earnings for 1998 were lower than in the prior year, a
reduction was anticipated because of the electric pricing settlements achieved
in 1996 and 1997 in Iowa and Illinois. Warmer-than-normal temperatures during
the heating season also had a negative impact on 1998 earnings. Growth in the
number of customers and in other sales factors contributed positively to
earnings in 1998. Additionally, MidAmerican'sMidAmerican Energy's successful performance in
the non-retail (off-system) energy market helped offset decreases from weather
and reductions in electric retail prices. Utility operating expenses increased
as MidAmerican Energy continued strengthening its customer service and
marketing capabilities and adding to its information technology resources.
Beginning the second half of 1997 and continuing throughout 1998,
MidAmerican Energy charged to expense additional amortization of deferred
energy efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear
Station costs consistent with ratemaking treatment. These items significantly
increased other operating expenses. In conjunction with expensing these items,
MidAmerican Energy began recovery of these costs from its customers, which
resulted in additional revenues.
Realized after-tax gains on the sale of McLeodUSA stock and other
nonregulated investments not aligned with MHC's corporate vision are also
included in 1998 earnings.
30
DISCONTINUED OPERATIONS
MHC:
31
During 1996, MHC discontinued some of its nonregulated operations. The
income or loss from those operations and the losses on disposal are reflected
as discontinued operations in each of the periods presented in the Consolidated
Statementsconsolidated
statements of Income.income of MHC included in this prospectus. Net assets of the
discontinued operations are separately presented in the Consolidated Balance
Sheets as Investment in Discontinued Operations.
In the fourth quarter of 1996, MHC and KCS Energy, Inc. (KCS) of Edison, New
Jersey, signed a definitive agreement to sell a portion of MHC's nonregulated
operations to KCS for $210 million in cash and warrants to purchase KCS Energy
common stock. The sale, which included MHC's oil and gas exploration and
development operations, was completed in January 1997. MHC recorded an
after-tax loss of $7.1 million for the transaction in 1996 and an additional
$0.9 million in 1997.
In October 1997, MHC also divested a subsidiary that developed and
operated a computerized information system which facilitated real-time exchange
of power in the electric industry. MHC recorded a $4.0 million anticipated
after-tax loss on disposal of those operations in September 1996 and an
additional $3.2 million after-tax loss on disposal in September 1997.
In October 1999, MHC distributed its investment in MidAmerican Realty to
MidAmerican Holdings in conjunction with an initial public offering of common
stock of HomeServices.Com, a successor company to MidAmerican Realty.
MIDAMERICAN:MIDAMERICAN ENERGY:
MidAmerican Energy received $15.3 million in cash in 1996 as final
settlement for the sale of a former coal mining subsidiary which was reflected
as discontinued operations in 1982 by one of MidAmerican'sMidAmerican Energy's predecessors.
The final settlement included reacquisition by the buyer of preferred equity
issued to MidAmerican Energy and the settlement of reclamation reserves.obligations.
MidAmerican Energy recorded an after-tax loss on disposal of $3.3 million for
the transaction in September 1996.1996, representing the after-tax difference
between proceeds received and the carrying value of the assets. This
transaction is included in discontinued operations in the consolidated
financial statements of MidAmerican Energy as well as MHC. Discontinued
operations of MidAmerican Energy includes the net earnings/loss of MidAmerican
Capital and Midwest Capital for periods prior to their December 1, 1996
transfer to MHC.
UTILITY GROSS MARGIN
REGULATED ELECTRIC GROSS MARGIN:
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
Operating revenues $1,170 $1,126 $1,099
Cost of fuel, energy and capacity 226 236 234
------ ------ ------
Electric gross margin $ 944 $ 890 $ 865
====== ====== ======
1998 1997 1996
-------- -------- -------
(In millions)
Operating revenues $1,170 $1,126 $1,099
Cost of fuel, energy and capacity 226 236 234
-------- ------- --------
Electric gross margin $ 944 $ 890 $ 865
======= ======= =======
1998 vsvs. 1997 -
Electric gross margin improved $54 million in 1998 compared to 1997. An
increase in revenues from energy efficiency cost recovery and the Cooper
Tracker, (discussed below)which is discussed below, accounted for $26.1 million and $2.5
million, respectively, of the increase in margin. Increases in revenues from
these factors are substantially offset by increases in other operating
expenses.
Regarding the increase in energy efficiency revenues, on September 29,
1997, MidAmerican Energy began recovering from customers its remaining deferred
energy efficiency costs and current, ongoing energy efficiency costs. Deferred
energy efficiency costs are costs previously incurred by MidAmerican Energy
which, in accordance with rate treatment, were not charged to expense until
recovery from customers began. Recovery of deferred energy efficiency costs
occurs over a four-year
31
period from the date collection begins. Approximately $44.4 million of
MidAmerican'sMidAmerican Energy's 1998 electric revenues were from the recovery of energy
efficiency
32
program costs compared to $18.3 million in 1997. Collection of
deferred energy efficiency costs will decrease starting in 1999 as various
recovery periods are completed. Refer to the discussion under Energy Efficiency"Energy
Efficiency" in the "Operating Activities and Other Matters" section of MD&A for
further discussion.
The Cooper Tracker allows MidAmerican Energy to collect on a current basis
the Iowa portion of expenses for Cooper Nuclear Station (Cooper) capital improvement
advances. Prior to the Cooper Tracker, which began in July 1997, capital
improvement advances were capitalized when incurred and amortized over future
periods in accordance with rate treatment.
Electric margin also improved due to an increase in sales volume. In
total, electric retail sales for 1998 increased 2.7% compared to 1997. Moderate
but steady growth in the number of customers increased electric gross margin by
$8.6 million compared to 1997. In addition, an increase in sales that are not
dependent on weather contributed $15.5 million to the increase. When compared
to normal, the impact of temperatures resulted in an estimated $2 million
reduction of electric gross margin for 1998 compared to a $4 million reduction
in 1997 - or, a $2 million increase in margin for 1998 compared to 1997.
Temperatures in 1998 were warmer-than-normalwarmer than normal during the heating seasons and
hotter-than-normalhotter than normal during the cooling season.
As anticipated, the effect of rate proceedings in 1996 and 1997 reduced
electric gross margin for 1998 compared to 1997. Revenues in 1998 reflect the
full-year effect of a June 1997 price reduction for Illinois customers and a
small price reduction in August 1998 related to Illinois utility industry
restructuring. Prices for Iowa residential customers were reduced $10 million
annually in July 1997 and $5 million annually in June 1998. Since July 1997,
MidAmerican Energy has reduced prices a total of approximately $10 million
annually for its Iowa commercial and industrial customers. The commercial and
industrial price reductions were achieved through negotiated contracts, a pilot
project and tariffed rate reductions. The combined effect of price reductions
decreased revenues and electric margin by $17.0 million for 1998 compared to
1997.
Prior to July 11, 1997, MidAmerican Energy was allowed to recover its
energy costs from most of its electric utility customers through energy
adjustment clauses (EACs) included in revenues. Effective July 11, 1997, the EACenergy
adjustment clause was eliminated for Iowa customers as part of MidAmerican'sMidAmerican
Energy's Iowa pricing plan. Previously, variations in energy costs did not
affect gross margin or net income due to corresponding changes in revenues
collected through the EACs.energy adjustment clauses. With the elimination of the
Iowa EAC,energy adjustment clause, fluctuations in energy costs now may have an
impact on gross margin and net income.
In addition to retail sales, MidAmerican Energy delivers electric energy
at wholesale to other utilities and municipalities which distribute it to
end-use customers. Under the Iowa pricing settlement, revenues from these
off-system sales are considered a component of total energy costs. Accordingly,
electric margin in 1998 reflects MidAmerican'sMidAmerican Energy's strong performance in the
off-system market relative to 1997. Margins on off-system sales, which account
for most of MidAmerican'sMidAmerican Energy's sales for resale, contributed $14.2 million
more to gross margin in 1998 than in 1997. Though related sales volumes
decreased 11.5% compared to the 1997 level, MidAmerican Energy obtained
improved margins per unit for the 1998 sales. Refer to comments on the energy
market under "Industry Evolution" in the "Operating Activities and Other
Matters" section of MD&A.
1997 vs. 1996 -
Electric margin for 1997 increased $25 million compared to 1996. An
increase in revenues from energy efficiency cost recovery accounted for $9.0
million of the increase in margin while revenues from the Cooper Tracker
totaled $3.9 million in 1997, the first year for that collection mechanism.
Retail sales of electricity increased 2.6% compared to 1996 sales. A
moderate but steady growth in the number of customers contributed $11.1 million
to the increase in electric gross margin. Compared to 1996, sales and gross
margin improved due to the impact of temperatures in
MidAmerican's32
MidAmerican Energy's service territory. Although temperatures overall were
milder than normal in both years, comparatively, margin for 1997 increased $5
million over 1996 margin due to the effect of weather. When compared to normal,
the impact of temperatures
33
resulted in a $4 million reduction of electric gross
margin in 1997 compared to a $9 million reduction in the 1996 margin.
Additionally, revenues and margin increased due to an improvement in sales not
dependent on weather.
As discussed above, the Iowa EACenergy adjustment clause was eliminated in
July 1997. Energy costs per unit for the remainder of 1997 were below the
amount recovered in rates under the Iowa pricing plan and resulted in an
increase to gross margin. Margins on off-system sales contributed $3.2 million
more to electric margin in 1997 than in 1996. Additionally, the 1997 electric
margin benefited from a $6.2 million increase in transmission revenues.
In total, price reductions decreased electric gross margin by $21.4
million in 1997 compared to 1996. In addition to the price reductions discussed
above, MidAmerican Energy reduced prices for its Illinois customers by $13.1
million annually on November 3, 1996, in conjunction with a rate reduction
proceeding. In Iowa, MidAmerican Energy reduced its electric retail prices by
$8.7 million effective November 1, 1996. This was the first reduction related
to MidAmerican'sMidAmerican Energy's pricing plan filed in June 1996. Refer to "Rate
Matters" in "Liquidity and Capital Resources" later in MD&A for further
information regarding prices in Iowa.
REGULATED GAS GROSS MARGIN:
1998 1997 1996
-------- -------- --------
(In millions)
Operating revenues $ 430 $ 536 $ 537
Cost of gas sold 243 346 345
------ ------ ------
Gas gross margin $ 187 $ 190 $ 192
===== ===== =====
1998 1997 1996
------ ------ -------
(IN MILLIONS)
Operating revenues $430 $536 $537
Cost of gas sold 243 346 345
---- ---- ----
Gas gross margin $187 $190 $192
==== ==== ====
1998 vs. 1997 -
MidAmerican'sMidAmerican Energy's regulated gas revenues include purchase gas
adjustment clauses (PGAs) through which MidAmerican Energy is allowed to recover the
cost of gas sold from most of its gas utility customers. Consequently,
fluctuations in the cost of gas sold do not affect gross margin or net income
because revenues reflect comparable fluctuations in revenues from PGAs.purchase gas
adjustment clauses. A decrease in the 1998 per-unit cost of gas compared to
1997 reduced revenues and cost of gas sold by approximately $59 million.
MidAmerican Energy recently made a filing with the IUBIowa Utilities Board that
would modify the use of the PGApurchase gas adjustment clause beginning May 1,
2000. Refer to Small"Small Volume Gas TransportationTransportation" under the "Operating
Activities and Other Matters" section of MD&A for further discussion.
Recovery of gas energy efficiency costs resulted in a $9.2 million
increase in revenues and gross margin for 1998 compared to 1997. As discussed
in the "Electric"Regulated Electric Gross Margin" section, on September 29, 1997,
MidAmerican Energy began recovery of its deferred energy efficiency costs that
had not previously been approved for recovery. Approximately $17.5 million of
MidAmerican'sMidAmerican Energy's 1998 gas revenues were from the recovery of energy
efficiency program costs compared to $8.3 million in 1997. Again, increases in
revenues from energy efficiency cost recovery are substantially offset by
corresponding increases in other operating expenses.
Unusually mild temperatures during the 1998 heating seasons resulted in a
decrease in gas margin for 1998. Temperatures in 1998 were 15.6% warmer than
normal, reducing gas gross margin in 1998 by an estimated $18 million compared
to normal. In 1997, temperatures were closer to normal, resulting in a
reduction of the 1997 margin of only $2 million. Comparing the two years then,
gas margin decreased $16 million in 1998 due to the variation in temperatures.
Customer growth, which contributed $1.6 million to gas margin in 1998, and
other sales factors, helped mitigate the negative effect of weather on the 1998
margin. In total, retail sales of natural gas in 1998 decreased 12.7% compared
to 1997.
33
1997 vs. 1996 -
Gas gross margin for 1997 decreased $2 million compared to 1996. On a
comparative basis, the 1997 gas margin decreased an estimated $10 million due
to the effect of weather. Temperatures in 1997 were close to normal, resulting
in a $2 million reduction in margin, while temperatures in 1996 were 10.1%
colder than normal, contributing $8 million to the 1996 gas gross margin. The
decrease in gross margin due to weather was partially
34
offset by a $2.3 million
increase from growth in the number of retail customers. In total, retail sales
of natural gas in 1997 decreased 7.1% compared to 1996 sales.
Revenues from energy efficiency cost recovery contributed $3.4 million
more to gas margin in 1997 than in 1996. Revenues and cost of gas sold
increased approximately $25 million in 1997 due to an increase in the average
cost of gas per unit compared to 1996.
REGULATED OPERATING EXPENSES
OTHER OPERATING EXPENSES
Regulated other operating expenses increased $32.3 million for 1998
compared to 1997. An increase in energy efficiency costs accounted for $31.6
million of the increase in other operating expenses compared to 1997. Refer to
the "Electric"Regulated Electric Gross Margin" section for further comments on energy
efficiency costs.
Operating expenses related to Cooper increased due in part to the
ratemaking treatment for Cooper capital improvements, as discussed in the
"Electric"Regulated Electric Gross Margin" section. Cooper capital improvement advances
are now expensed when incurred. MidAmerican Energy is recovering the Iowa
portion of these costs through the Cooper Tracker, while recovery in Illinois
is included in base rates. This change accounted for a $1.7 million increase in
nuclear operations costs compared to 1997. Excluding those costs, nuclear
operations expenses decreased $8.2 million for 1998 compared to 1997 due to an
extended outage at the Quad Cities Station.
MidAmerican Energy continued its focus on customer service and reliability
during 1998. Further emphasis on customer service operations and
marketing-related efforts resulted in increases in customer service costs,
ITinformation technology consulting costs, advertising costs and other related
expenses. Increases in suchthese expenses accounted for a majority of the remaining
increase. The impact of these items was partially offset by a decrease in
employee benefits expenses.
Regulated other operating expenses increased $79.4 million in 1997
compared to 1996. Nuclear operating costs increased $14.0 million compared to
1996. Of that increase, $4.5 million related to the change in rate treatment of
Cooper capital improvement advances. An increase in energy efficiency costs,
including amortization of historical costs and charging expense for current
costs, accounted for $13.1 million of the increase in other operating expenses.
MidAmerican'sMidAmerican Energy's efforts to improve its customer service and
reliability resulted in increases in consulting costs, advertising costs and
other related expenses. In addition, 1997 reflects increases in uncollectable
accounts expense, employee incentive compensation and certain employee benefits
expenses. Other operating expenses for 1997 also reflect an increase in energy
transmission
wheeling expense due in part to changes required by FERC Order Nos.Federal Energy
Regulatory Commission order nos. 888 and 889.
MAINTENANCE
Maintenance expenses increased $9.4 million in 1998 compared to 1997. An
increase in maintenance costs at the Quad Cities Station accounted for $8.0
million of the total. Additionally, MidAmerican Energy incurred repair costs
for storms in June 1998, totaling $3.8 million, compared to $2.0 million in
1997 for costs related to a snowstorm in October of that year.
Maintenance expenses increased $9.5 million for 1997 compared to 1996. The
main cause of the increase was an adjustment in 1996 to aligncapitalize to power
plant inventory accountingthe cost of predecessor companiesspare parts which were previously charged to
expense. The adjustment, which reduced 1996 expense by $6.2 million.million, was
34
made to conform accounting methodologies of predecessor companies. Restoration
costs for thean October 1997 snowstorm also contributed to the increase, while
maintenance expenses at the Quad Cities Station decreased $2.5 million in 1997
compared to 1996.
DEPRECIATION AND AMORTIZATION
35
The increase in 1998 expense compared to 1997 is due to additional
decommissioning funding for the Quad Cities Station, an increase in utility
plant and regulatory accruals.
PROPERTY AND OTHER TAXES
Deregulation of the Illinois electric utility industry resulted in changes
in the way certainpublic utility taxes are assessed in Illinois. The changes resulted
in a decrease in MidAmerican'sMidAmerican Energy's tax expense for 1998 compared to 1997.
One of the taxes is now assessed directly on the energy consumer instead of
through the utility. Accordingly, MidAmerican'sMidAmerican Energy's electric revenues
reflect an equal reduction in 1998. Property taxes increased $8.8 million in
1997 compared to 1996 due primarily to an increase in the assessed value for
Iowa property tax purposes.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
MIDAMERICAN:MIDAMERICAN ENERGY:
Revenues and Cost of Sales -
Revenues from wholesale natural gas marketing operations increased $32.5
million in 1998 compared to 1997 due to an increase of 18 million MMBtus (88%)
in related sales volumes. AThe increase in sales volumes was due primarily to
gas marketing contracts previously serviced by one of MHC's nonregulated
subsidiaries that were renewed as MidAmerican Energy contracts starting in May
1998. While the increase from sales volumes alone resulted in a $49.8 million
increase in revenues, it was partially offset by a $17.3 million decrease due
to a decrease in the average price per unit, reflective of a lower cost of gas
per unit, partially offset the effect of increased
sales.unit. Cost of sales related to natural gas marketing for 1998 reflects the
increase in sales and the decrease in the average cost of gas per unit. Total
gross margin, (totalwhich is total price less cost of gas)gas, on nonregulated natural
gas sales was unchanged compared to 1997.
Other activities contributing to the increase in nonregulated revenues for
1998 relate to work for other utilities and work beyond the meter for
customers. In addition, the 1998 amount includes revenues of CBEC Railway, a
subsidiary of MidAmerican Energy that operates rail services on a section of
railroad track it owns. MidAmerican'sMidAmerican Energy's revenues in 1998 and 1997 also
include pre-tax income from awards for successful performance under its
incentive gas procurement program. Under the program, if MidAmerican'sMidAmerican Energy's
cost of gas varies from an established reference price range, then the savings
or cost is shared between customers and shareholders. The awards totaled $4.3
million and $4.9 million in 1998 and 1997, respectively.
For the comparison of 1997 with 1996, revenues from wholesale natural gas
marketing operations increased $23.1 million due primarily to an increase in
sales volumes of 7 million MMBtus (51%). The increase in sales volumes resulted
in a $16.8 million increase in revenues. In addition, an increase in the
average price per unit,
increased, reflecting an increase in the average cost of gas per
unit.unit, contributed $6.3 million. Cost of sales related to natural gas marketing
for 1997 reflects the increases in sales and the average cost of gas per unit.
Total gross margin on nonregulated natural gas sales decreased $0.3 million
compared to 1996.
Nonregulated revenues for 1997 also reflect a $2.2 million increase
compared to 1996 in MidAmerican'sMidAmerican Energy's award for performance under its
incentive gas procurement program.
Other Nonregulated Operating Expenses -
Other operating expenses increased in 1998 compared to 1997 due to costs
related to work for other utilities, costs of work beyond the meter for
MidAmerican Energy customers, costs of appliance services and costs of
initiatives for new products and services in preparation for deregulation.
35
The increase in 1997 costs compared to 1996 relates to appliance services
and initiatives for new products and services.
MHC:
36
Revenues of MidAmerican Capital and Midwest Capital decreased by a total
of $163 million in 1998 compared to 1997, primarily due to lower volumetric
sales associated with the expiration of wholesale gas contracts which were not
replaced. As discussed above, some of the contracts were renewed as MidAmerican
Energy contracts. Accordingly, nonregulated cost of gas sold decreased
significantly in 1998 from 1997.
Nonregulated other operating expenses for 1998 a decrease ofdecreased approximately
$5.7 million due primarily to corporate administrative costs in 1997 which are
no longer incurred because of the absence of operationsthe oil and gas exploration and
development subsidiary that MHC sold in 1997.
NON-OPERATING INCOME AND INTEREST EXPENSE
MIDAMERICAN:MIDAMERICAN ENERGY:
Interest and Dividend Income-Income -
In December 1997, MidAmerican Energy sold its billed accounts receivable.
A portion of the consideration for the sale was a subordinated note from the
purchaser. Interest income on that note caused the increase in 1998 compared to
1997. Refer to FINANCING ACTIVITIES, PLANS AND AVAILABILITY later in MD&A"Financing Activities, Plans and Availability" below for a
discussion of the sale.
Other, Net -
Other, Net for 1998 and 1997 reflects the discount on sold accounts
receivable, net of a fee for servicing amounts. The discount is designed to
cover the accounts.expenses of MidAmerican Energy Funding Corporation, including bad
debt expense, sub-servicer fees, monthly administrative costs and interest. The
discount is recorded in other because it is considered "a below the line" cost
for regulatory purposes. The net discount reduced Other, Net by $7.0 million
and $0.3 million in 1998 and 1997 respectively. The net discount for 1997
reflects one month of activity, while 1998 reflects a full year of activity.
In September 1997, MidAmerican Energy received a $15 million cash payment
from Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by
MidAmerican Energy against NPPD.the Nebraska Public Power District. Approximately
$12 million was refunded to MidAmerican'sMidAmerican Energy's customers. The remaining
amount was retained by MidAmerican Energy for recovery of litigation costs in
the lawsuit. Other, Net for 1997 reflects $2.2 million of pre-tax income for
recovery of litigation costs incurred in prior years.
In addition, Other, Net includes the recognition of deferred income from
energy efficiency programs totaling $0.2 million, $5.0 million and $3.3 million
for 1998, 1997 and 1996, respectively. As discussed in the gross margin
sections, MidAmerican Energy started recovery of its remaining deferred energy
efficiency costs in September 1997. Accordingly, carrying costs for, or return
on, deferred balances are now being collected from customers and are reflected
in revenues.
In 1996, MidAmerican Energy recorded an initial pre-tax gain of $3.2
million on its sale of the certain storage gas supplies. MidAmerican Energy recorded an
additional $0.8 million gain in the second quarter of 1997 after receiving
favorable treatment on the transaction from the Iowa Utilities Board (IUB).Board.
Other, Net for 1997 reflects a net loss on reacquired long-term debt of
$0.9 million compared to a $1.1 million net gain in 1996.
Other, Net for 1996 includes approximately $8.7 million of expenses for
costs incurred by MidAmerican Energy for its merger proposal to IES Industries
Inc. in 1996.
36
Fixed Charges -
During 1998, MidAmerican Energy reduced its long-term debt through
maturities and refinancing. Refer to "Financing Activities, Plans and
Availability" later in MD&A for more details.
37
An increase in the average amount of commercial paper outstanding in 1998
compared to 1997 resulted in a decreasean increase in other interest expense for 1998.
Preferred securities of MidAmerican'sMidAmerican Energy's subsidiary trust were issued
in December 1996. MidAmerican Energy preferred shares were reacquired at that
time, resulting in the decrease in preferred dividends. Preferred dividends
include net gains or losses on the reacquisition of MidAmerican Energy
preferred shares. Net losses on reacquisitions totaled $1.4 million and $1.6
million for 1997 and 1996, respectively.
MHC:
Dividend Income -
Dividend income decreased for 1998 due to MidAmerican Capital's reduced
holdings of preferred stock.
Realized Gains and Losses on Securities, Net -
Net realized gains on securities for 1998 includes a $14.0 million pre-tax
gain on the sale of shares of McLeodUSA common stock. Realized gains on
securities in 1997 also includes an $8.0 million pre-tax gain on the sale of
shares of McLeodUSA common stock.
Other, Net -
Other, Net for 1998 includes $4.7 million from the divestment of
nonregulated assets in the first quarter, including the sale of MHC's interest
in a financial management company, the sale of a commercial office building and
liquidation of a partnership interest concurrent with the sale of its
commercial property. MHC also recorded $2.1 million of income from an equity
investment in a venture capital fund.
Additionally, other, net for 1998 includes a $2.7 million gain on the sale
of railcars and a $2.9 million gasgain on the sale of real estate. During 1997,
MHC sold all of the assets of its railcar repair services subsidiary and most
of the assets of its railcar leasing subsidiary and recorded pre-tax gains
totaling $10.0 million.
Write-downsDuring 1996, MHC began to reevaluate its nonregulated investments which
were held by predecessor companies to the 1995 merger creating MHC. Through the
evaluation process, management determined which investments fit MHC's
objectives and which should be divested. The method of divestiture could
include alternatives from finding an immediate buyer to holding the investment
until maturity. At the time, MHC held approximately 70 different investments
within its MidAmerican Capital and Midwest Capital subsidiaries which it was
evaluating. Other, Net includes writedowns totaling $3.4 million and $15.6
million for 1997 and 1996, respectively, from the evaluation of nonregulated
investments. The investments decreased Other, net by
$15.6 million in 1996.consisted primarily of alternative energy projects
such as wind power and hydroelectric.
37
RESULTS OF OPERATION --OPERATIONS - 1999
The following is a discussion of the historical unaudited interim results
for MidAmerican Funding for the period March 12, 1999 through September 30,
1999 and its predecessor MHC for the year to date periods ending March 11, 1999
and September 30, 1999 and 1998. Results for MidAmerican Funding include the results
from MHC beginning March 12, 1999, in conjunction with the acquisition by
MidAmerican merger. CertainHoldings of MHC. Some of the impacts of the MidAmerican mergeracquisition are
reflected in MidAmerican Funding's results of operations, predominantly
interest costs on debt issued by MidAmerican Funding to complete the
mergeracquisition and the effects of purchase accounting, including goodwill
amortization and the impacts of fair value adjustments to the carrying value of
assets and liabilities.
While MHC's resultsRESULTS OF OPERATIONS OF MIDAMERICAN FUNDING FOR THE PERIOD MARCH 12, 1999
THROUGH SEPTEMBER 30, 1999
On March 12, 1999, the merger of operations are not includedMHC and CalEnergy Company Inc. was
completed. CalEnergy, through a reincorporation transaction, was renamed
MidAmerican Energy Holdings Company. MidAmerican Funding is the subsidiary of
MidAmerican Holdings that purchased MHC.
In conjunction with the transaction, MidAmerican Funding paid $27.15 in
cash for each outstanding share of MHC common stock for a total of
approximately $2.42 billion in a merger pursuant to which MHC became a direct
wholly owned subsidiary of MidAmerican Funding. The MidAmerican Merger has been
accounted for as a purchase business combination and as such the results of
operations of MidAmerican Funding for allinclude the results of MHC beginning March
12, 1999. The purchase price has been allocated to assets acquired and
liabilities assumed based on preliminary valuations, and MidAmerican Funding is
awaiting final valuations. MidAmerican Funding recorded goodwill of
approximately $1.5 billion which is being amortized using the straight line
method over a 40-year period.
On March 11, 1999, management believes that
discussionMidAmerican Funding issued $200 million of trends in5.85% Senior
Secured Notes due 2001, $175 million of 6.339% Senior Secured Notes due 2009,
and $325 million of 6.927% Senior Secured Bonds due 2029. The proceeds from the
ongoing operations that now comprise Funding
provides meaningful information.offering were used to complete the MidAmerican Merger.
UTILITY GROSS MARGIN
REGULATED ELECTRIC GROSS MARGIN:
MidAmerican'sMidAmerican Energy's electric gross margin for the nine-month period endedMarch 12, 1999
through September 30, 1999, decreased $5totaled $560 million.
Approximately $21 million of MidAmerican Energy's electric revenues for
the period were from the comparable period in 1998.
The impactrecovery of various factors affecting electric margin are discussed in the
following paragraphs.
Collection of deferred energy efficiency costs decreased in 1999 compared
to the 1998 period due to the completion of one of the four recovery periods.
Changes in revenuesprogram costs. Revenues
from energy efficiency cost recovery are substantially offset by corresponding
changescosts in other operating expenses. Refer to the discussion under "Energy
Efficiency" in the "Operating Activities and Other Matters" section of MD&A for
further discussion.
Temperatures during the period were milder than normal, reducing electric
margin by approximately $4 million.
Additionally, MidAmerican Energy recorded an accrual for a revenue sharing
arrangement under its 1997 pricing plan settlement. The accrual reduced
revenues and electric margin by $15 million during the period.
REGULATED GAS GROSS MARGIN:
MidAmerican Energy's regulated gas gross margin totaled $80 million for
the period March 12, 1999 through September 30, 1999.
38
Revenues from recovery of gas energy efficiency program costs totaled
approximately $8 million for the period. Again, revenues from energy efficiency
cost recovery are substantially offset by corresponding costs in other
operating expenses. Refer to the discussion under "Energy Efficiency" in the
"Operating Activities and Other Matters" section of MD&A for further
discussion.
On January 22, 1999, the Iowa Utilities Board approved a $6.7 million
annual interim increase in gas rates for Iowa retail customers effective
immediately. An additional increase was implemented on May 27, 1999, which
resulted in a final rate increase of $13.9 million annually.
Temperatures during the heating months were warmer than normal, resulting
in a decrease in gas gross margin of approximately $3 million.
REGULATED OPERATING EXPENSES
Other operating expenses totaled $232 million for the period March 12,
1999 through September 30, 1999. As mentioned in the gross margin discussions,
other operating expenses includes energy efficiency program costs. For
MidAmerican Funding's period ended September 30, 1999, these costs totaled
approximately $25 million. MidAmerican Energy incurred approximately $3 million
in operating costs related to its year 2000 readiness efforts during the
period.
Property and other taxes were reduced by an adjustment of $0.8 million for
property taxes related to periods prior to the March 12, 1999 merger.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Revenues from nonregulated operations include $68 million from
nonregulated natural gas activities. Nonregulated cost of sales reflects $66
million of related cost of gas.
Approximately $7 million of nonregulated revenues related to MidAmerican
Energy's market access service project, which began in the third quarter of
1999. This pilot project allows customers with at least 4 MW of load that are
participating in the project to choose their electric power supplier. Since the
project is a pilot, or test, project, the level of future revenues and
possibility of a similar program continuing beyond the project is not
determinable. Revenues from project participants related to non-supply
services, such as distribution and transmission, continue to be reflected in
MidAmerican Energy's regulated electric revenues.
Nonregulated other operating costs for the period March 12, 1999 through
September 30, 1999 include approximately $20 million from amortization of
goodwill at MidAmerican Funding associated with the acquisition by MidAmerican
Holdings of MHC. Additionally, nonregulated other operating costs include $9
million from nonregulated marketing initiatives at MidAmerican Energy.
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income -
Interest income reflects interest on temporary cash investments which
include proceeds from the sale of McLeodUSA common stock described below.
Realized Gains and Losses on Securities, Net -
In May 1999 6,741,116 shares of McLeodUSA common stock held by MHC were
sold in a secondary offering. A pre-tax gain of $78.2 million resulting from
this transaction is reflected in realized gains and losses on securities, net.
Fixed Charges -
Interest on long-term debt includes $25 million of interest expense on the
$700 million in debt issued by MidAmerican Funding in conjunction with
MidAmerican Holdings acquisition of MHC.
39
RESULTS OF OPERATIONS OF MHC FOR THE PERIOD JANUARY 1, 1999 THROUGH MARCH 11,
1999
UTILITY GROSS MARGIN
REGULATED ELECTRIC GROSS MARGIN:
MidAmerican Energy's electric gross margin for the period January 1, 1999
periods reflect price reductionsthrough March 12, 1999, totaled $169 million.
Temperatures during the period were warmer than normal, reducing electric
margin by approximately $4 million.
Approximately $7 million of MidAmerican Energy's electric revenues for the
period were from the recovery of energy efficiency program costs. MidAmerican
Energy also recorded an accrual for a revenue sharing arrangement under its
1997 pricing plan settlement. The accrual reduced revenues and electric margin
by $3 million during the period.
REGULATED GAS GROSS MARGIN:
MidAmerican Energy's regulated gas gross margin totaled $60 million for
the period March 12, 1999 through September 30, 1999.
Revenues from recovery of gas energy efficiency program costs totaled
approximately $3 million for the period. Again, revenues from energy efficiency
cost recovery are substantially offset by corresponding costs in other
operating expenses.
On January 22, 1999, the Iowa Utilities Board approved a $6.7 million
annual interim increase in gas rates for Iowa retail customers effective
immediately.
Temperatures during the period were warmer than normal, resulting in a
decrease in gas gross margin of approximately $4 million.
REGULATED OPERATING EXPENSES
Other operating expenses totaled $94 million for the period January 1,
1999 through March 11, 1999. As mentioned in the gross margin discussions,
other operating expenses includes energy efficiency program costs. These costs
totaled $8 million for the period. MidAmerican Energy also incurred
approximately $2 million in operating costs related to its year 2000 readiness
efforts.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
For the year to date period ended March 11, 1999, nonregulated natural gas
marketing activities accounted for $29 million and $28 million of nonregulated
revenues and nonregulated cost of sales, respectively.
Nonregulated other operating costs include $3 million from nonregulated
marketing initiatives at MidAmerican Energy.
NON-OPERATING INCOME AND INTEREST EXPENSE
Realized Gains and Losses on Securities, Net -
Realized gains and losses on securities, net reflects a $16 million gain
on the sale of shares of McLeodUSA common stock held by MHC.
Other, Net -
Other, net non-operating income for the period ended March 11, 1999
includes approximately $19 million of costs related to the acquisition of MHC
by MidAmerican Holdings. In addition, it includes $2 million of expense related
to accounts receivables sold.
40
RESULTS OF OPERATIONS OF MHC FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
UTILITY GROSS MARGIN
REGULATED ELECTRIC GROSS MARGIN:
MidAmerican Energy's electric gross margin for the nine months ended
September 30, 1998 totaled $733 million.
Temperatures in the third quarter were hotter than normal while
temperatures in the first two quarters of 1998 were milder than normal.
Overall, the effect of the variance from normal temperatures improved electric
gross margin by approximately $6 million.
Approximately $34 million of MidAmerican Energy's electric revenues for
the period were from the recovery of energy efficiency program costs, which were notare
substantially offset by energy efficiency costs reflected in effect, or were only partially in effect, during 1998.other operating
expenses.
In June 1998, revenues from Iowa residential customers were reduced $5
million annually. Since July 1997, MidAmerican Energy has reduced revenues from
its Iowa commercial and industrial customers a total of approximately $10
million annually through negotiated contracts and a tariffed rate reduction.
These reductions were only partially in effect in the 1998 nine-month period.
Revenues from Illinois customers were reduced $0.9 million in August 1998
related to Illinois utility industry restructuring.
MidAmerican also recorded a refund accrual for
a revenue sharing arrangement in Iowa. Refer to "Rate Matters: Electric" in the
"Operating Activities and Other Matters" section of MD&A for a discussion of
revenue sharing.
38
Temperatures during the nine months ended September 30, 1999,Off-system sales were milder
than those for the same period in 1998, reducing electric margin. An increase
in sales not dependent on weather and moderate growth in the number of
customers increased revenues, significantly offsettingrestricted somewhat by the impact of the mild
weather. In total, retail sales of electricity in the first nine months of 1999
were almost equal to those of the same period of 1998.
MidAmerican also sells energy and capacity in the off-system market.
Margins on off-system sales, which account for most of MidAmerican's sales for
resale, increased primarily due to lower costs per unit of energy sold, which
in part is due to the improved availability ofa Quad Cities
Nuclear Station in
1999. Additionally, favorable sales pricesoutage during the hot temperaturesfirst five months of 1998. However, a
volatile wholesale energy market provided opportunities in July
1999 contributedJune to the increase.
Deregulation of the Illinois electric utility industry resulted in changes
in the way certain taxes are assessed in Illinois. One of the taxes is now
assessed directly on thesell energy
consumer instead of through the utility.
Accordingly, MidAmerican's electric revenues and electric margin reflect
reductions this tax collection change.at prices substantially higher than normal.
REGULATED GAS GROSS MARGIN:
MidAmerican'sMidAmerican Energy's regulated gas revenues include purchase gas adjustment
clauses (PGAs) through which MidAmerican is allowed to recover the cost of gas
sold from most of its gas utility customers. Consequently, fluctuations in the
cost of gas sold do not affect gross margin or net income because revenues
reflect comparable fluctuations in revenues from PGAs. A decrease in the
per-unit cost of gastotaled $133 million for
the nine-months endedyear to date September 30, 1999 reduced
revenues and cost of gas compared to the same period in 1998.
RecoveryRevenues from recovery of gas energy efficiency program costs decreasedtotaled
approximately $13 million for the 1999
nine-month period compared to the same period in 1998.period. Again, changes in revenues from energy
efficiency cost recovery are substantially offset by corresponding changescosts in
other operating expenses.
Refer toTemperatures during the discussion under
"Energy Efficiency" in the "Operating Activities and Other Matters" section of
MD&A for further discussion.
On January 22, 1999, the IUB approved a $6.7 million annual interim
increase in gas rates for Iowa retail customers effective immediately. An
additional increase was implemented on May 27, 1999, as a result of the IUB's
approval of a final rate increase of $13.9 million annually.
Temperatures in the first nine months of 1999nine-month period were coolerwarmer than 1998,normal,
resulting in an increasea decrease in gas gross margin for the period. The effect of cooler temperatures and customer growth resulted in an increase in retail sales
of natural gas in the first nine months of 1999 compared to the 1998 period,
also contributing to the margin improvement.
39
approximately $10 million.
REGULATED OPERATING EXPENSES
Other operating expenses decreasedtotaled $343 million for the nineperiod. Energy
efficiency program costs accounted for $40 million of the total for the
nine-month period.
Some costs for the Quad Cities Nuclear Station were shifted from other
operating expenses to maintenance expense due to the outage in the first five
months of the period. Using the nine-month period ended September 30, 1999, compared1997 as a
comparison, other operating costs were down $12 million while maintenance
expenses were up $6 million.
In addition to the same periodshift in 1998.
As mentioned in the gross margin discussions, the recovery of one phase of
deferred energy efficiencynuclear costs, is complete, and accordingly, the costs for
that phase have been fully amortized to expense. As a result, energy efficiency
costs decreased in the nine months ended September 30, 1999 compared to the
same period in 1998.
Reductions in gas distribution costs, marketing and sales-relatedmaintenance expenses certain administrative and general costs and customer service costs
also contributed to the decrease in other operating expenses in the nine months
ended September 30, 1999 compared to the same period in 1998.
Maintenance expenses increased for the
nine months ended September 30,
1999 comparedperiod included $3.5 million for repair costs related to the same periodstorms in 1998 due to the timing of generating plant
maintenance and an increase in gas distribution maintenance. The increases in
these areas were partially offset by a decrease in both 1999 periods for
maintenance at the Quad Cities Station.
Property and other taxes decreased for the nine months ended September 30,
1999 compared to the same period inJune 1998. MidAmerican's Iowa property tax
decreased for the 1999 period due to reduced assessed values. Deregulation of
the Illinois electric utility industry resulted in changes in the way certain
taxes are assessed in Illinois. The changes resulted in decreases in
MidAmerican's tax expense for 1999 compared to 1998. One of the taxes is now
assessed directly on the energy consumer instead of through the utility.
Accordingly, MidAmerican's electric revenues reflect an equal reduction in 1999
for this tax collection change.
NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES
Revenues from nonregulated operations increased forFor the nine monthsyear to date period ended September 30, 1999 compared to the same period in 1998, primarily due to
increased salesnonregulated natural
gas marketing activities accounted for $103 million and $98 million of
wholesale natural gas. Nonregulatednonregulated revenues and nonregulated cost of sales, increased
for the same reason.
Revenues for the nine months ended September 30, 1999 reflect revenues
from MidAmerican's market access service project, which began in the third
quarter of 1999. This pilot project allows customers with at least 4MW of load
that are participating in the project to choose their electric power supplier.
MidAmerican's revenues from project participants related to non-supply
services, such as distribution and transmission, continue to be reflected in
regulated electric revenues.respectively.
Nonregulated other operating costs increased for the nine months ended
September 30, 1999 compared to the same period in 1998, primarily due to
amortization of goodwill at Funding associated with the MidAmerican merger.
Increasedinclude $6 million from nonregulated
operating costsmarketing initiatives at MidAmerican related to nonregulated
marketing initiatives.
40Energy.
41
NON-OPERATING INCOME AND INTEREST EXPENSE
Interest and Dividend Income --
Interest income increased for the nine months ended September 30, 1999
compared to the same period in 1998 due to an increase in temporary cash
investments, primarily due to the sale of McLeodUSA common stock described
below.
Realized Gains and Losses on Securities, Net --
In May 1999 most of the shares of McLeodUSA common stock held by MHC was
sold in a secondary offering. A pre-tax gain of $78.2 million resulting from
this transaction is reflected in realized gains and losses on securities, net.
Other, Net ---
Other, net non-operating income decreased for the nine monthsnine-month period ended September
30, 1999 compared to the same period in 1998 primarily due to costsincludes $4 million of expense related to accounts receivables sold.
In addition, the MidAmerican merger accrued at MHC. Additionally,first nine months of 1998 includes $5 million gain from the
divestment of nonregulated assets in gains onthe first quarter, including the sale of
nonregulated investments are includedMHC's interest in a financial management company, the 1998 period.
Fixed Charges --
Interest on long-term debt increased for the nine months ended September
30, 1999 compared to the same period in 1998. The increase due to primarily tosale of a commercial
office building and liquidation of a partnership interest on $700 million in debt issued by Funding in conjuctionconcurrent with the
MidAmerican merger, partially offset bysale of its commercial property. MHC also recorded $2.1 million of income from
an equity investment in a decrease in interest expense
resulting from debt maturities at MHC in 1999.
41
venture capital fund.
LIQUIDITY AND CAPITAL RESOURCES
MidAmerican Funding has available a variety of sources of liquidity and
capital resources, both internal and external. These resources provide funds
required for current operations, construction expenditures, dividends, debt
retirement and other capital requirements.
As reflected on the Consolidated Statementsconsolidated statements of Cash Flows,cash flows included in this
prospectus, MHC had net cash provided from operating activities of $334 million
in 1998 compared to $392 million in 1997. For the period ended September 30,
1999 MidAmerican Funding had net cash provided from operating activities of
$47.5 million.
INVESTING ACTIVITIES AND PLANS
UTILITY CONSTRUCTION EXPENDITURES
MidAmerican'sMidAmerican Energy's primary need for capital is utility construction
expenditures. For the first nine months ofperiod March 12, 1999 through September 30, 1999, utility
construction expenditures totaled $116$99 million, including allowance for funds used during
construction (AFUDC)capitalized interest
and Quad Cities Nuclear Station nuclear fuel purchases. All suchof these
expenditures were met with cash generated from utility operations, net of
dividends.
Forecasted utility construction expenditures, including AFUDC,capitalized
interest, for 1999 are $179 million and $720 million for 2000 through 2003.
Capital expenditure needs are reviewed regularly by MidAmerican'sMidAmerican Energy's
management and may change significantly as a result of suchthese reviews.
MidAmerican Energy presently expects that all utility construction expenditures
for the next five years will be met with cash generated from utility
operations, net of dividends. The actual level of cash generated from utility
operations is affected by, among other things, economic conditions in the
utility service territory, weather and federal and state regulatory actions.
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 $42 million during the
period 1999 through 2003 to an external trust established for the investment of
funds for decommissioning the Quad Cities Nuclear Station. Approximately 65% of
the trust's funds are now invested in domestic corporate debt and common equity
securities. The remainder is invested in investment grade municipal and U.S.United
States Treasury bonds.
In addition, MidAmerican Energy makes payments to Nebraska Public Power
District (NPPD) related to decommissioning Cooper. These payments are reflected in
other operating expenses in the Consolidated Statementsconsolidated statements of Income. NPPDincome included in
this prospectus. The Nebraska Public Power District estimates call for
MidAmerican Energy to pay approximately $57 million to NPPDthe Nebraska Public
Power District for Cooper decommissioning during the period 1999 through 2003.
NPPDThe Nebraska Public Power District invests the funds predominately in U.S.United
States Treasury Bondsbonds and other U.S. GovernmentUnited States government securities.
Approximately 20% was invested in domestic corporate debt. MidAmerican'sMidAmerican Energy's
obligation for Cooper decommissioning may be affected by the actual plant
42
shutdown date and the status of the power purchase contract at that time. In
July 1997, NPPDthe Nebraska Public Power District filed a lawsuit in the United
States District Court for the District of Nebraska naming MidAmerican Energy as
the defendant and seeking a declaration of MidAmerican'sMidAmerican Energy's rights and
obligations in connection with Cooper nuclear decommissioning funding.
Refer to Part II, Item 1. Legal Proceedings, for
further discussion of the litigation.
42
Cooper and Quad Cities Nuclear 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. Decommissioning
costs charged to Illinois customers are recovered through a rate rider on
customer billings.
INVESTMENTS
MidAmerican Capital invests in a variety of marketable securities which it
holds for indefinite periods of time. In the Consolidated Statementsconsolidated statements of Cash
Flows,cash
flows included in this prospectus, the lines Purchaseunder "Purchase of SecuritiesSecurities" and
Proceeds"Proceeds from Sale of SecuritiesSecurities" consist primarily of the gross amounts of
these activities, including realized gains and losses on investments in
marketable securities.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
MIDAMERICAN ENERGY
MidAmerican Energy currently has authority from the FERCFederal Energy
Regulatory Commission to issue short-term debt in the form of commercial paper
and bank notes aggregating $400 million. As of September 30, 1999, MidAmerican
Energy had a $250 million revolving credit facility agreement and a $5 million
bank line of credit. MidAmerican'sMidAmerican Energy's commercial paper borrowings are
supported by the revolving credit facility and the line of credit. MidAmerican
Energy also has a revolving credit facility which is dedicated to providing
liquidity for its obligations under outstanding pollution control revenue bonds
that are periodically remarketed.
In 1997, MidAmerican Energy entered into a revolving agreement, which
expires in 2002, to sell all of its right, title and interest in the majority
of its billed accounts receivable to MidAmerican Energy Funding Corporation, (Funding
Corp.), a
special purpose entity established to purchase accounts receivable from
MidAmerican.MidAmerican Energy. MidAmerican Funding Corp. in turn sold receivable interests
to outside investors. In consideration for the sale, MidAmerican Energy
received $70 million in cash and the remaining balance in the form of a
subordinated note, bearing interest at 8%, from MidAmerican Funding Corp. As of
September 30, 1999, the revolving cash balance was $66 million due to a decline
during the second quarter of 1999 in accounts receivable available for sale.sale and
the amount outstanding under the subordinated note was $28.3 million. The
agreement is structured as a true sale, as determined by Statement of Financial
Accounting Standards (SFAS) No. 125, under which the creditors of MidAmerican
Funding Corp. will be entitled to be satisfied out of the assets of MidAmerican
Funding Corp. prior to any value being returned to MidAmerican Energy or its
creditors. Therefore, the accounts receivable sold are not reflected on
MidAmerican's Consolidated Balance Sheets.MidAmerican Energy's consolidated balance sheets included in this prospectus.
As of September 30, 1999, $98.6 million of accounts receivable, net of
reserves, were sold under the agreement.
MidAmerican Energy has authorization from the FERCFederal Energy Regulatory
Commission to issue up to an additional $500 million in various forms of
long-term debt. MidAmerican Energy will also need authorization from the
ICCIllinois Commerce Commission 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 ICCCommission 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 Energy must file a comprehensive
application seeking authorization prior to issuance. The ICCCommission is required
to hold a hearing before issuing its authorization.
MHC:MHC
As of September 30, 1999, MHC had lines of credit totaling $44 million to
provide for short-term financing needs, under which no debt was outstanding.
43
As of September 30, 1999, MidAmerican Capital had unsecured revolving
credit facilities in the amount of $6 million, under which no debt was
outstanding. MidAmerican Capital has $115 million of long-term debt maturities
and sinking fund requirements for 1999 through 2003 related to debt outstanding
at September 30, 1999.
Midwest Capital currently has a $25 million line of credit with
MidAmerican Energy, of which $5 million was outstanding at December 31, 1998.
43
September 30, 1999.
OPERATING ACTIVITIES AND OTHER MATTERS
INDUSTRY EVOLUTION
The utility industry continues to evolve into an increasingly competitive
environment. In virtually every region of the country, legislative and
regulatory actions are being taken which result in customers having more
choices in their energy decisions.
In the electric industry, the traditional vertical integration of
generation, delivery and marketing is being unbundled, with the generation and
marketing functions being deregulated. For local gas distribution businesses,
the supply, local delivery and marketing functions are similarly being
separated and opened to competitors for all classes of customers. While retail
electric competition is presently not permitted in Iowa, MidAmerican'sMidAmerican Energy's
primary market, legislation to do so was introduced in the Iowa legislature in
the last session. Deregulation of the gas supply function related to small
volume customers is also being considered by the IUB.Iowa Utilities Board.
MidAmerican Energy is actively participating in the legislative and regulatory
processes shaping the new environment in which its businesses will operate.
The generation and retail portions of MidAmerican'sMidAmerican Energy's electric
business will be most affected by competition. The introduction of competition
in the wholesale market has resulted in a proliferation of power marketers and
a substantial increase in market activity. As retail choice evolves,
competition from other traditional utilities, power marketers and
customer-owned generation could put pressure on utility margins.
During the transition to full competition, increased volatility in the
marketplace can be expected. With the elimination of the energy adjustment
clause in Iowa, MidAmerican Energy is exposed to movements in energy prices.
Although MidAmerican Energy has sufficient low cost generation under typical
operating conditions for its retail electric needs, a loss of adequate
generation by MidAmerican Energy at a time of high market prices could subject
MidAmerican Energy to losses on its energy sales.
LEGISLATIVE AND REGULATORY EVOLUTION
In December 1997, the Governor of Illinois signed into law a bill to
restructure Illinois' electric utility industry and transition it to a
competitive market. Under the law, beginning October 1, 1999 larger
non-residential customers in Illinois and 33% of the remaining non-residential
Illinois customers are allowed to select their provider of electric supply
services. All other non-residential customers will have supplier choice
starting December 31, 2000. Residential customers all receive the opportunity
to select their electric supplier on May 1, 2002.
The law required a 15% electric rate reduction for all Illinois
residential customers in 1998. To satisfy its obligation, MidAmerican Energy
received credit for its 1996 and 1997 Illinois rate reductions, totaling $15.5
million, and reduced rates an additional $0.9 million annually, effective
August 1, 1998. MidAmerican Energy is exempted from the requirement to join an
independent system operator (ISO) or to form an in-state ISO.independent system operator.
In addition, the law provides for Illinois earnings above a certainspecified
level of ROEreturn on common equity to be shared equally between customers and
MidAmerican Energy beginning in April 2000. MidAmerican's ROEMidAmerican Energy's return on
common equity level will be based on a rolling two-year average, with the first
determination being based on an average of 1998 and 1999. The ROEreturn on common
equity level at which MidAmerican Energy will be required to share earnings is
a multi-step
44
calculation of average 30-year United States Treasury Bondbond rates plus 5.50% for
1998 and 1999. Legislation passed in July 1999 increases the benchmark for 2000
through 2004 to 8.5% above the 30-year Treasury bond rate. If the resulting
average Treasury Bondbond rate were equal to the December 1998 30-year Treasury
Bondbond rate, the ROEreturn on common equity level above which sharing must occur
would be approximately 10.6% for 1998 and 1999 and 13.6% for 2000 through 2004.
The law allows MidAmerican Energy to mitigate the sharing of earnings above the
threshold ROEreturn on common equity through accelerated cost recognition that
would reduce MidAmerican'sMidAmerican Energy's earnings. MidAmerican Energy continues to
evaluate its strategy regarding the sharing mechanism.
44
The law also addresses charges to customers for transition costs based on
a lost-revenue approach. These transition fees, designed to help utilities
recover stranded costs, will end December 31, 2006, subject to possible
extension. MidAmerican Energy continues its involvement in proceedings which
detail the new competitive environment and continues to evaluate the impact of
the law on its operations and the opportunities the law presents.
In Iowa, a replacement of the prior utility property tax system, which was
supported by MidAmerican Energy, went into effect on January 1, 1999. The
replacement tax is primarily a consumption-based tax on the user of energy and
assures stability in tax collections as the industry is deregulated in Iowa.
With resolution of the utility property tax issue, MidAmerican Energy is
pursuing the adoption of electric utility industry restructuring legislation.
Progress was made during the 1999 Iowa legislative session, and MidAmerican
Energy continues workingto work toward adoption of new legislation in a future
session.
RESIDENTIAL AND COMMERCIAL PILOT PROJECT
On August 21, 1998, the IUBIowa Utilities Board issued an Orderorder approving
MidAmerican'sMidAmerican Energy's proposal to allow at least 15,000 Iowa families and 2,000
small businesses to have the opportunity to select among competing electricity
providers. The two-year pilot program will allow participating retail customers
in the selected test area to choose among several electricity providers,
including MidAmerican Energy, and to have that energy delivered by MidAmerican.MidAmerican
Energy. Customer enrollment is currently allowed and the pilot may begin in
1999 should additional suppliers register. Businesses in the test area will be
eligible for the program if their annual peak demand is less than four
megawatts. New suppliers participating in the program will have to be certified
by the IUBIowa Utilities Board and meet specified requirements.
ACCOUNTING EFFECTS OF INDUSTRY RESTRUCTURING
A possible consequence of competition in the utility industry is that SFAS
71 may no longer apply. SFAS 71 sets forth accounting principles for operations
that are regulated and meet certain criteria.the criteria specified in SFAS 71. For operations
that meet the criteria, SFAS 71 allows, among other things, the deferral of
costs that would otherwise be expensed when incurred. A majority of MidAmerican'sMidAmerican
Energy's electric and gas utility operations currently meet the criteria
required by SFAS 71, but its applicability is periodically reexamined. On
December 16, 1997, MidAmerican'sMidAmerican Energy's generation operations serving Illinois
were no longer subject to the provisions of SFAS 71 due to passage of industry
restructuring legislation in Illinois. Thus, in 1997 MidAmerican Energy was
required to write off the regulatory assets and liabilities from its balance
sheet related to its Illinois generation operations. The net amount of suchthese
write-offs was not material. If other portions of its utility operations no
longer meet the criteria of SFAS 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. As of
September 30, 1999, MidAmerican Energy had $266$274 million of regulatory assets on
its Consolidated Balance Sheet.consolidated balance sheet included in this prospectus.
ENERGY EFFICIENCY
MidAmerican'sMidAmerican Energy's regulatory assets as of September 30, 1999 included
$47.9 million of deferred energy efficiency costs. Based on the current level
of recovery, MidAmerican Energy expects to recover these costs by the end of
2001. MidAmerican Energy is also allowed to recover its ongoing energy
efficiency costs on a current basis. Recovery of these costs is being collected
from customers
45
based on projected annual costs of $17.4 million, which may be adjusted
annually. Amortization of the deferred energy efficiency costs and current
expenditures for energy efficiency costs will be reflected in other operating
expenses over the related periods of recovery. The total of suchthese costs for the
years 1999, 2000 and 2001 is estimated to be $43 million, $40 million and $35
million, respectively.
RATE MATTERS: ELECTRIC
Through several steps from mid-1997 to the end of 1998, electric prices
for Iowa industrial customers were reduced by an amount which will have a $6
million annual impact on revenues, and electric prices for Iowa commercial
customers were reduced by an amount which will have a $4 million annual impact
on revenues. The 45
reductions were achieved through a retail access pilot
project, negotiated individual electric contracts and a $1.5 million tariffed
rate reduction for certainselected non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although some large customers have agreed to ten-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose
programs, tax changes and transition costs. While the contract prices are
fixed, (exceptexcept for the potential adjustment elements),elements, the costs MidAmerican
Energy incurs to fulfill these contracts will vary. On an aggregate basis the
annual revenues under contract are approximately $180 million.
If MidAmerican'sUnder a 1997 pricing plan settlement agreement resulting from an Iowa
Utilities Board rate proceeding, if MidAmerican Energy's annual Iowa electric
jurisdictional ROEreturn on common equity exceeds 12%, then earnings above the 12%
level will be shared equally between customers and MidAmerican; ifMidAmerican Energy. If the
ROEreturn on common equity exceeds 14%, then two-thirds of MidAmerican'sMidAmerican Energy's
share of those earnings above the 12%14% level will be used for accelerated
recovery of certain regulatory assets. A 1997The pricing plan settlement agreement precludes
MidAmerican Energy from filing for increased rates prior to 2001 unless the
ROEreturn on common equity falls below 9%. Other parties signing the agreement are
prohibited from filing for reduced rates prior to 2001 unless the ROE,return on
common equity, after reflecting credits to customers, exceeds 14%. On April 14,
1999, the IUBIowa Utilities Board approved, subject to additional refund,
MidAmerican'sMidAmerican Energy's 1998 ROEreturn on common equity calculation. During the
second quarter of 1999, MidAmerican Energy refunded $2.2 million to its Iowa
non-contract customers related to the ROEreturn on common equity calculation for
1998. The agreement also eliminated MidAmerican'sMidAmerican Energy's energy adjustment
clause, and, as a result, the cost of fuel is not directly passed on to
customers.
RATE MATTERS: GAS
In October 1998, MidAmerican Energy made a filing with the IUBIowa Utilities
Board requesting a rate increase for its Iowa retail gas customers. An interim
rate increase of approximately $6.7 million annually was approved by the IUBIowa
Utilities Board on January 22, 1999, effective immediately. On April 23, 1999,
the IUBIowa Utilities Board issued an order approving a settlement agreement
between MidAmerican Energy, the OCA and other parties which provides for an
annual increase of $13.9 million. The new rates were implemented May 27, 1999.
In November 1998, MidAmerican Energy filed with the South Dakota Public
Utilities Commission (SDPUC) requesting a rate increase for its South Dakota retail gas
customers. The SDPUCCommission in April 1999 approved a rate increase of $2.4
million annually, effective May 1, 1999.
On September 1, 1999, MidAmerican Energy filed with the ICCIllinois Commerce
Commission requesting a rate increase totaling $3.2 million annually for its
Illinois retail gas customers. An ICCIllinois Commerce Commission decision is
anticipated prior to August 2000.
46
ENVIRONMENTAL MATTERS
The EPAUnited States Environmental Protection Agency (EPA) and state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned MGPmanufactured gas plant facilities may pose a threat to the
public health or the environment if suchthese contaminants are in sufficient
quantities and at suchsufficient concentrations as to warrant remedial action.
MidAmerican Energy is evaluating 27 properties which were, at one time,
sites of gas manufacturing plants in which it may be a PRP.potentially responsible
party. The purpose of these evaluations is to determine whether waste materials
are present, whether suchthe materials constitute an environmental or health risk,
and whether MidAmerican Energy has any responsibility for remedial action.
MidAmerican'sMidAmerican Energy's estimate of probable remediation costs for these sites as
of September 30, 1999 was $21$29 million. This estimate has been recorded as a
liability and a regulatory asset for future recovery through the regulatory
process. Refer to Note B (1)4 of the Notes to MidAmerican Funding's Audited
Consolidated Financial Statements as of September 30, 1999, for a further
discussion of MidAmerican'sMidAmerican Energy's environmental activities related to
MGPmanufactured gas plant sites and cost recovery.
46
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'sMidAmerican Energy's financial position or results of operations.
Following recommendations provided by the Ozone Transport Assessment
Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making significant
contribution to nonattainment of the ozone standard in downwind states in the
eastern half of the United States. The nonattainment of the downwind states is
based on the ozone standard established prior to the 1997 revisions discussed
below. In September 1998, the EPA issued its final rules in this proceeding.
Iowa is not subject to the emissions reduction requirements in the final rules,
and, as such, MidAmerican's facilities are not currently subject to additional
emissions reductions as a result of this initiative.
On July 18, 1997, the EPA adopted revisions to the NAAQSNational Ambient Air
Quality Standards for ozone and a new standard for fine particulate matter.
Based on data to be obtained from monitors located throughout the states, the
EPA will make a determination of whether the states have any areas that do not
meet the air quality standards (i.e., areas that are classified as
nonattainment). If a state has area(s) classified as nonattainment area(s), the
state is required to submit a State Implementation Plan specifying how it will
reach attainment of the standards through emission reductions or other means.
In May 1999, the U.S.United States District Court of Appeals for the District
of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA
indicating the EPA had not expressed sufficient justification for the basis of
establishing the standards and ruling that the EPA has exceeded its
constitutionally-delegated authority in setting the standards. The EPA has
appealedEPA's appeal
of the court's ruling to the full panel of the U.S.United States District Court of
Appeals for the District of Columbia Circuit. Argument in the appeal proceeding
is scheduled for the fall of 1999.was denied. As a result of the court's
initial decision and the current status of the standards, the impact of any new
standards on MidAmerican Energy is currently unknown. If the EPA successfully
appeals the court's decision, however, and the new standards are implemented,
then MidAmerican Energy's fossil fuel generating stations may be subject to
emission reductions if the stations are located in nonattainment areas. As part
of an overall state plan to achieve attainment of the standards, MidAmerican
Energy could be required to install control equipment on its fossil fuel
generating stations or decrease the number of hours during whch these stations
operate. The degree to which MidAmerican Energy may be required to install
control equipment or decrease operating hours under a nonattainment scenario
will be determined by the state's assessment of MidAmerican Energy's relative
contribution, along with other emission sources, to the nonattainment status.
The installation of control equipment would result in increased costs to
MidAmerican Energy. A decrease in the number of hours during which the affected
stations operate would decrease the revenues of MidAmerican Energy. An increase
in costs incurred by MidAmerican Energy or a decrease in the revenues earned by
MidAmerican Energy would decrease the amount of funds MidAmerican Energy has
available to make distributions to MidAmerican Funding. This decrease would
have a corresponding decrease in the amount of funds available to MidAmerican
Funding to make payments on the securities.
In December 1997, negotiators from more than 150 nations met in Kyoto,
Japan to negotiate an international agreement designed to address global
climate change impacts by attempting to reduce so-called greenhouse gas
emissions. Some scientists contend that these gases build up in the Earth'searth's
47
atmosphere and cause global temperatures to rise. The primary target of these
emissions is carbon dioxide (CO2) which is formed by, among other things, the
combustion of fossil fuels. The agreement currently calls for the United States
to reduce its emissions of CO2carbon dioxide and other greenhouse gases to 7% below
1990 levels in the 2008-2012 time frame. The United States became a signatory to
the agreement on November 12, 1998. In order for the agreement to become binding
upon the United States, ratification by the U.S.United States Senate is necessary.
The cost to the utility industry in general, and to MidAmerican Energy
specifically, of reducing its CO2carbon dioxide emissions levels by 7% below 1990
levels would depend on available technology at the time, but could be material.
QUAD CITIES NUCLEAR POWER STATION
The Quad Cities Nuclear Station is operated by, and 75% owned by,
Commonwealth Edison Company (ComEd).Company. On May 6, 1999, the Nuclear Regulatory Commission
(NRC)
advised ComEdCommonwealth Edison that it had classified the Quad Cities Nuclear
Station in the NRC'sCommission's Routine Oversight category (the best of the
NRC'sCommission's three new categories) for nuclear power plants, removing the
station from the Trending (adversely) Letter status initiated in January 1998.
During the first nine months of 1999, the station capacity factor was in excess
of 93.5%.
GENERATING CAPABILITY
In July 1999, retail customer usage of electricity caused an hourly peak
demand of 3,833 MWmegawatts on MidAmerican'sMidAmerican Energy's energy system. MidAmerican
Energy is interconnected with certain Iowa and neighboring utilities and is involved in
an electric power pooling agreement known as Mid-Continent Area Power Pool
(MAPP).Pool.
Each MAPPPower Pool participant is required to maintain for emergency purposes a
net generating capability reserve of at least 15% above 47
its system peak demand.
MidAmerican Energy was able to maintain its capacity reserve requirement during
the hot weather in July 1999 and was not adversely affected by the resultant
high prices in the off-system market.
MidAmerican Energy believes it has adequate electric capacity reserve and
continues to manage its generating resources to ensure an adequate reserve in
the future. However, significantly higher-than-normalhigher than normal temperatures during the
cooling season could cause MidAmerican'sMidAmerican 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.the Mid-Continent Power
Pool.
ACTIVITIES REGARDING YEAR 2000 DATE ISSUES
The following discussion of year 2000 issues describes MidAmerican'sMidAmerican
Funding's plans to address technical problems relating to calculations,
manipulations, storage and other uses of date-sensitive data which could cause
some computer-controlled systems, applications and processes (hereinafter referred
to as "Systems") to incorrectly
process critical financial and operational information, or stop processing
altogether. The discussion contains by necessity many forward-looking
statements. MidAmerican Funding wishes to avail itself of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, and in
order to do so includes the following meaningful cautionary statements with
regard to the forward looking statements of its year 2000 plans. MidAmerican'sMidAmerican
Funding's intentions, expectations, and predictions relating to its year 2000
efforts are subject to risks and uncertainties that could cause actual results
to differ materially from those expressed in, or implied by, suchthe
forward-looking statements. SuchThese risks and uncertainties include, among
others, the effects of weather, federal and state regulatory actions, and other
matters, many of which are beyond MidAmerican'sMidAmerican Funding's control. In addition,
MidAmerican Funding claims the full protections established by the Year 2000
Information and Readiness Disclosure Act for Year 2000 Statements and Year 2000
Readiness Disclosure. This Act does not, however, preclude third party claims
which are based on the Federal securities laws.
PROJECT DESCRIPTION
MidAmerican Energy has undertaken an extensive ongoing project to address
its information technology (IT) and non-IT (including embedded technology)
Systemssystems potentially affected by the year 2000 date change. MidAmerican'sMidAmerican Energy's
approach is based on a five-phase project methodology -
48
inventory, assessment, planning, resolution and implementation - designed to
result in the identification and evaluation of potential problems, and
remediation of MidAmerican's Systems.
MidAmerican Energy's computer-controlled systems, applications
and processes. MidAmerican Energy generally defines the five phases as follows:
1. Inventory Phase - The purpose of the inventory phase is to identify and
document Systemscomputer-controlled systems, applications and processes used by
MidAmerican Energy that may have a date-sensitive function.
2. Assessment Phase - The purpose of the assessment phase is to collect
information about inventoried Systems,systems, including the business and technical
context in which individual Systemssystems operate, to make an informed judgment
concerning an appropriate plan to mitigate year 2000 related risks.
3. Planning Phase - The purpose of the planning phase is to develop
strategic and tactical plans for Systemssystems that require replacement, repairs,
upgrades or other appropriate actions (collectively referred to as "remedial
actions").
4. Resolution Phase - The purpose of the resolution phase is to execute
the plan developed during the preceding phases. Testing of Systemssystems and/or
components of Systems,systems, as well as any preceding or subsequent remedial action,
is commenced during this phase.
5. Implementation Phase - The purpose of the implementation phase is to
examine the Systemssystems to determine whether they will function adequately in a
production environment and to perform follow-up administrative tasks as
required to develop appropriate documentation in support of year 2000
readiness.
MidAmerican Energy classifies all Systemssystems ranging from low- to
high-priority based on their importance to carrying out MidAmerican'sMidAmerican Energy's
business mission. System priority is based on potential impacts resulting from
year
48
2000 problems on public and employee safety, prolonged and widespread
service outages, long-term shareholder value, and ability to comply with
regulatory requirements. In the case of low-priority Systems,systems, year 2000
readiness may be delayed beyond January 1, 2000, or perhaps indefinitely.
MidAmerican Energy plans to use the last two months of 1999 to perform
post-implementation testing, address selected lower priority Systemssystems and
conduct preparedness exercises.
Vendors, customers and other third parties may affect MidAmerican'sMidAmerican Energy's
ability to achieve year 2000 readiness. Because service reliability and
financial stability are dependent on MidAmerican'sMidAmerican Energy's supply chain, a
concerted effort is being made to investigate important third parties to assess
their ability to continue to supply products or services to, or purchase
products or services from, MidAmerican.MidAmerican Energy.
STATE OF READINESS
Due to factors such asincluding the overlapping nature of the project phases and
the varying degree of complexity of the Systemscomputer-controlled systems,
applications and processes being addressed, it is difficult to accurately
determine the status of completion of a particular phase of the project at any
given point in time. MidAmerican Energy uses three methods to measure the
status of project completion:
1. As an entity with public utility operations, MidAmerican Energy must
comply with certainthe year 2000 regulatory requirements imposed by the North
American Electric Reliability Council. Council (NERC). NERC reporting data is limited
primarily to Systemssystems that are directly associated with transmission grid
stability. The transmission grid consists of the interconnected
transmission systems of North American utilities. Reporting categories
include nuclear generation, non-nuclear generation, Energy Management
Systems and Supervisory Control and Data Acquisition (SCADA) system,systems,
telecommunications systems, substation controls and system protection,
and IT business information systems. MidAmerican Energy reported in its
July compliance filing with NERCthe Council that it is "100% Y2K Ready" on
systems considered mission-critical by NERCthe Council definition. The
Council defines "100% Y2K Ready" to mean that the primary
49
function of a system or component will continue to operate as designed
irrespective of whether or not a secondary or tertiary date function
operates. The Council defines "mission-critical systems" to mean those
systems directly associated with transmission grid stability that could
cause or perpetuate a system wide instability or have a significant effect
on the transmission grid.
2. A "checklist" approach is used to monitor the completion status of each
Systemsystem that is unique to a given organizational group. For example,
identical substation meters may be located in several individual
substations, but the meter is counted as only one System.system. All Systemssystems are
viewed as equivalent, regardless of priority, in the checklist approach.
Systems are categorized as complete or not complete, without regard to
percentage of completion of the Systemsystem in total or percentage of
completion of any particular phase of the project. As of September 30,
1999, there were 5,554 separate Systemssystems in MidAmerican'sMidAmerican Energy's
inventory. Of these, over 99% had been completed.
3. MidAmerican'sMidAmerican Energy's internally developed measure is more sensitive than
the methods discussed above and is based on business risk/priority,
weighted tasks and weighted phases. Only high- and medium-risk/priority
Systemssystems are included in the status of completion calculation. The data
related to Systemssystems that could impact grid stability pertains only to
those Systemssystems that directly affect MidAmerican'sMidAmerican Energy's customers. Also,
progress toward completion is measured. As of September 30, 1999,
MidAmerican Energy as a whole is generally in the resolution phase.
Percentage of completion for six areas of business operations is aas
follows:
A. IT - Applications: 95-100% complete
B. IT - Operations & Infrastructure: 95-100% complete
C. Generation: 95-100% complete
D. Energy Delivery: 95-100% complete
E. Retail: 95-100% complete
F. Corporate Services (excluding IT): 95-100% complete
The investigation of supply chain issues consists of documenting the
nature of business relationships in correspondence, surveys and meetings with
third parties and making determinations regarding their year 2000 readiness
status based on the responses received. MidAmerican Energy has initiated
contact with vendors and business partners it considers to represent a
significant financial or operational risk if they were to experience year 2000
49
problems. In addition, interconnected utilities and wholesale customers, as
well as high-volume retail customers, have been contacted for the purpose of
reviewing the status of their year 2000 readiness efforts. To date, information
made available to MidAmerican Energy has not been uniform in terms of quality
and quantity. Although none of the information has suggested that the year 2000
readiness efforts of these vendors, business partners and customers have been
inadequate, MidAmerican Energy intends to maintain ongoing communications with
some third parties through the few months of 1999. MidAmerican Energy, will
also continue monitoring information provided by vendors regarding year 2000
readiness about specific products in MidAmerican's inventory.systems or components supplied by these vendors for
use by MidAmerican Energy, but on which MidAmerican Energy cannot perform its
own year 2000 readiness testing.
COSTS
As of September 30, 1999 approximately $10.2 million in operating expenses
have been incurred to carry out year 2000 activities. It is anticipated that up
to $2.8 million in additional operating expenses and capital costs will need to
be incurred to complete the project. Although additional unforeseen costs may
be incurred, at this time MidAmerican Energy has not become aware of any
material costs which may arise in order to achieve year 2000 readiness. Future
progress toward achievement of year 2000 readiness could change this outlook.
MidAmerican Energy has renovated or replaced several high-priority Systemssystems
(e.g., management information, materials management information, work
management information, customer service,
50
electric outage management, meter control and inventory, and others) to gain
enhanced functionalities. For example, the development and installation of a new
customer service system (CSS) and related applications was an outcome of the merger
which created MidAmerican Energy in July of 1995. Although potential year 2000
problems existing in the predecessor companies' CSScustomer service system products
were recognized, the decision to implement the new CSScustomer service system was
primarily in response to integration difficulties and the need for additional
application functionalities. The costs of these renovations and replacements are
not reported hereinin this discussion as their development and installation was not
driven by year 2000 concerns.
CONTINGENCY PLANS
A contingency plan identifying credible worst-case scenarios has been
developed. The contingency plan is comprised of both mitigation and recovery
aspects. Mitigation entails planning to reduce the impact of unresolved year
2000 problems, and recovery entails planning to restore services in the event
that year 2000 problems occur. MidAmerican'sMidAmerican Energy's contingency plan has been
reviewed by senior management. Although the plan is substantially complete, it
will be refined throughout the remainder of the year based on results of
contingency planning drills and changes in circumstances.
Although a number of factors come into play in defining reasonably likely
worst case scenarios, the loss of voice and data communications, volatile load
patterns, and inability to control generation and/or return generation units to
service are viewed as the most serious threats. The relative seriousness of
these threats is based on recognition that the occurrence of any of these types
of problems could have an immediate and significant effect on service
reliability and financial performance.
MidAmerican Energy participated in contingency planning drills coordinated
by NERCthe North American Electric Reliability Council on April 9, 1999 and
September 8-9, 1999. The drills focused on managing problems resulting from a
simulated partial loss of voice and data communications services. During thoseThe drills
demonstrated that MidAmerican did not experience any
unexpected results.Energy would be able to maintain its voice and
data communications through the efficient use of its backup systems.
RISKS
Despite the comprehensive nature of MidAmerican'sMidAmerican Energy's year 2000 project
and the results the project is designed to produce, MidAmerican Energy may
experience random, widespread and simultaneous failures in its generation,
distribution and Systemsother computer-controlled systems during year 2000 transition
periods. Contingency plans for any known or reasonably anticipated risk of
interruption to the generation or distribution of energy are being developed to
plan for resources needed to be put in place to reduce the potential outage
period to a minimum. Although the impact on future operations and revenues is
unknown, failure of MidAmerican's SystemsMidAmerican Energy's systems to perform because of year
2000 implications could result in operating problems and costs material to
MidAmerican.
50
MidAmerican Energy.
Although management believes the project will be completed sufficiently in
advance of January 1, 2000, unforeseen and other factors could cause delays in
the project, the results of which may have a material effect on MidAmerican'sMidAmerican
Energy's results of operations. In addition, there is no assurance that
MidAmerican Energy will not be affected by year 2000 problems experienced by
third parties.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities", which was
delayed by SFAS 137 and is effective for fiscal years beginning after June 15,
2000. SFAS 133 requires an entity to recognize all of its derivatives as either
assets or liabilities in its statement of financial position and measure those
instruments at fair value. The CompanyMidAmerican Funding is in the process of evaluating
the impact of this accounting standard.
51
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican Funding is exposed to market risk, including changes in the
market price of certain commodities. To manage the price volatility relating to these
exposures, MidAmerican Funding enters into various financial derivative
instruments. A Risk Management Committeerisk management committee governs the overall direction,
structure, conduct and control of the Company'sMidAmerican Funding's risk management
activities, including the use of financial derivative instruments.
Responsibilities of the Risk Management
Committeerisk management committee include authorization and
communication of risk management policies and procedures, strategic hedging
program guidelines, appropriate market and credit risk limits, and appropriate
systems for recording, monitoring and reporting the results of transactional
and risk management activities.
MidAmerican Funding uses hedge accounting for commodity-related instruments
pertaining to its natural gas purchasing operations.
COMMODITY PRICE RISK
Regulated Natural Gas Operations-Operations -
Under the current regulatory framework, MidAmerican Funding is allowed to
recover in revenues the cost of gas sold from most of its regulated gas
customers through a purchased gas adjustment clause (PGA).clause. MidAmerican Funding derived
approximately 94% of its regulated gas revenues from suchthese customers in 1998.
SinceBecause the majority of MidAmerican'sMidAmerican Funding's firm natural gas supply contracts
contain pricing provisions based on a daily or monthly market index,
MidAmerican'sMidAmerican Funding's regulated gas customers, although ensured of the
availability of gas supplies, retain the risk associated with market price
volatility.
MidAmerican Funding enters into natural gas futures and swap agreements to
mitigate a portion of the market risk retained by its regulated gas customers
through the PGA.purchase gas adjustment clause. These financial derivative
activities are recorded as hedge accounting transactions, with net amounts
exchanged or accrued under swap agreements and realized gains or losses on
futures contracts included in the cost of gas sold and recovered in revenues
from regulated gas customers. At December 31, 1998, MidAmerican Funding had
entered into the following financial derivative instruments for regulated
operations:
Futures Contracts:
Net Contract Volumes- Long (Short) ........................ (240,000) MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) ......... $(1,843)
Swap Contracts:
Contract Volumes .......................................... 7,200,000 MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) ......... $225
A $0.05 increase in underlying natural gas prices would increase
unrealized losses on the above futures contracts by approximately $12,000 and
would increase unrealized gains on the above swap contracts by approximately
$360,000.
51
Nonregulated Natural Gas Operations-Operations -
MidAmerican Funding also derives revenues from nonregulated sales of
natural gas. Pricing provisions are individually negotiated with these
customers and may include fixed prices or prices based on a daily or monthly
market index. MidAmerican Funding enters into natural gas futures and swap
agreements to offset the financial impact of variations in natural gas
commodity prices for physical delivery to non-regulated customers. These
financial derivative activities are recorded as hedge accounting transactions,
with net amounts exchanged or accrued under swap agreements and realized gains
or losses on futures contracts included in the cost of gas sold. At December
31, 1998,
52
MidAmerican Funding had entered into the following financial derivative
instruments for non-regulated operations:
Futures Contracts:
Net Contract Volumes- Long (Short) ........................ (110,000) MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) ......... $28
Swap Contracts:
Contract Volumes .......................................... 9,122,181 MMBtu
Unrealized Gain (Loss) at 12/31/98 (in thousands) ......... $(3,121)
A $0.05 increase in underlying natural gas prices would decrease
unrealized gains on the above futures contracts by approximately $6,000 and
would decrease unrealized losses on the above swap contracts by approximately
$456,000. Unrealized gains and losses on financial derivatives entered into for
nonregulated operations have little ultimate impact on MidAmerican'sMidAmerican Funding's
earnings and cash flow as these amounts are offset by corresponding changes in
the theoretical value of underlying contracts for physical delivery of natural
gas to nonregulated customers.
1997 Total Natural Gas Operations-Operations -
At December 31, 1997, MidAmerican Funding had entered into the following
financial derivative instruments for natural gas operations:
Futures Contracts:
Net Contract Volumes- Long (Short) ........................ 2,000,000 MMBtu
Unrealized Gain (Loss) at 12/31/97 (in thousands) ......... $(386)
Swap Contracts:
Contract Volumes .......................................... 6,968,807 MMBtu
Unrealized Gain (Loss) at 12/31/97 (in thousands) ......... $(885)
52
INTEREST RATE RISK
The CompanyMidAmerican Funding is exposed to market value risk from changes in
interest rates on its preferred stock investments. The CompanyMidAmerican Funding reviews
the interest rate sensitivity of these securities and purchases put options and
enters into "short" positions in futures contracts on U.S.United States Treasury
securities for other than trading purposes in order to reduce related interest
rate risk. The
Company'sMidAmerican Funding's intent is to manage the risk arising from
changes in the general level of interest rates with a change in market value of
the hedging instruments. The
CompanyMidAmerican Funding does not purchase or sell hedging
instruments for speculative purposes.
The following table demonstrates the impact of varying interest rate
changes to the market value at December 31, 1998:
PREFERRED FUTURES AND CHANGE IN MARKET
STOCK MARKET OPTIONS MARKET TOTAL PORTFOLIO VALUE OF TOTAL
VALUE VALUE MARKET VALUE PORTFOLIO
-------------- ---------------- ----------------- -----------------
(amounts in millions)
- --------------------------- ----------------- -------------------- --------------------- --------------------
Preferred Futures and Total Portfolio Change in Market
Stock Market Options Market Market Value Value of Total
Vaule Value Portfolio
- --------------------------- ----------------- -------------------- --------------------- --------------------
Interest Rate Change
- --------------------------- ----------------- -------------------- --------------------- --------------------Change:
200 basis pt decrease $150.8 $ - $150.8 $10.6
- --------------------------- ----------------- -------------------- --------------------- --------------------150.8 $ -- $ 150.8 $ 10.6
100 basis pt decrease 144.4 0.1 144.5 4.3
- --------------------------- ----------------- -------------------- --------------------- --------------------
Current interest rates 137.3 2.9 140.2 -
- --------------------------- ----------------- -------------------- --------------------- ----------------------
100 basis pt increase 129.2 10.0 139.2 (1.0)
- --------------------------- ----------------- -------------------- --------------------- --------------------( 1.0)
200 basis pt increase 120.9 17.3 138.2 (2.0)
- --------------------------- ----------------- -------------------- --------------------- --------------------( 2.0)
The number of hedging instrument contracts entered into, or their notional
amount, is dependent on, among other things, the duration of the portfolio,
specific call provisions of each fixed rate preferred stock, the slope of the
Treasury yield curve, the expected volatility of Treasury yields and the cost
of
53
using futures and/or options. The notional amount of the Company'sMidAmerican Funding's
hedging instruments at December 31, 1998 and 1997, respectively are set forth
in the following table:
1998 1997
- ----------------------- --------------------- -------------------- --------------------- --------------------
Contracts Notional Amt. Contracts Notional Amt.
- ----------------------- --------------------- -------------------- --------------------- ------------------------------------------------- ----------------------------
CONTRACTS NOTIONAL AMT. CONTRACTS NOTIONAL AMT.
----------- --------------- ----------- --------------
Put Options 697 $89,064 815 $ 98,182
- ----------------------- --------------------- -------------------- --------------------- --------------------
Futures Contracts 33 4,217 142 17,107
- ----------------------- --------------------- -------------------- --------------------- --------------------
- ----------------------- --------------------- -------------------- --------------------- ----------------------- ------- --- --------
Total 730 $93,281 957 $115,289
- ----------------------- --------------------- -------------------- --------------------- --------------------=== ======= === ========
The notional amounts of these hedging instruments do not represent the amounts
exchanged by the parties and are not a measure of the Company'sMidAmerican Funding's
financial exposure through its use of these hedging instruments. The CompanyMidAmerican
Funding is exposed only to the initial purchase price of the put options and to
changes in the market value of the futures contracts.
5354
OUR BUSINESS AND THE BUSINESS OF MHC AND MIDAMERICAN ENERGY
OUR BUSINESS
We were formed as an Iowa limited liability company on March 9, 1999 to
issue the initial Securitiessecurities and facilitate the merger.MidAmerican Holdings' acquisition
of MHC. MidAmerican Holdings is our sole member. We currently own all of the
outstanding common stock of MHC. We do not engage in any business other than
activities associated with the issuance of the Securitiessecurities and the ownership of
MHC.
THE BUSINESS OF MHC
MHC is an exempt public utility holding company headquartered in Des
Moines, Iowa, and incorporated in the State of Iowa. As an exempt public
utility holding company, MHC is exempt from regulation by the securities and
Exchange Commission as a registered holding company under the Public Utility
Holding Company Act of 1935, as amended, except for the acquisition of utility
companies operating in states other than Iowa. As a holding company, MHC is
able to segregate its regulated utility operations from its nonregulated
operations which is beneficial from both financial and regulatory perspectives.
This type of structure also provides flexibility with respect to the
development of the nonregulated operations. While there are additional
administrative costs incurred by a holding company structure, we believe the
benefits described above are greater than these costs.
MHC's interests include:
[]o 100% of the common stock of MidAmerican Energy;
[]o 100% of the common stock of MidAmerican Capital;
[]o 100% of the common stock of Midwest Capital; and
[]o 100% of the common stock of MidAmerican Services.
MidAmerican Energy is primarily engaged in the business of generating,
transmitting, distributing and selling electricity and distributing, selling
and transporting natural gas. MidAmerican Capital manages marketable securities
and passive investment activities, nonregulated wholesale and retail natural
gas businesses, security services and other energy-related, nonregulated
activities. Midwest Capital functions as a regional business development
company in MidAmerican Energy's service territory. MidAmerican Services, which
was formed in April 22, 1997, provides comprehensive energy services to
utilities and other companies.
Prior to the initial public offering described below, MidAmerican
Holdings' real estate brokerage and related services were conducted through
MHC's subsidiary, MidAmerican Realty Services. On October 14, 1999,
HomeServices.Com, the successor to MidAmerican Realty, sold 35% of its common
stock in an initial public offering. The remaining 65% is owned by MidAmerican
Holdings.
For the nine months ended September 30, 1999, 93%96% of MHC's operating
revenues, (excludingexcluding revenues from MidAmerican Realty Services)Services, were from
MidAmerican Energy, 4% were from MidAmerican Capital and 3%less than 1% were from
Midwest Capital. For the year ended December 31, 1998, 95% of MHC's operating
revenues, (excludingexcluding revenues from MidAmerican Realty Services)Services, were from
MidAmerican Energy, 5% were from MidAmerican Capital and less than 1% were from
Midwest Capital.
THE BUSINESS OF MIDAMERICAN ENERGY
OVERVIEW OF MIDAMERICAN ENERGY'S BUSINESS
Currently, most of MidAmerican Energy's business is conducted in a
rate-regulated environment and accordingly, many of its decisions as to the
source and use of resources and other strategic matters are evaluated from a
utility business perspective. However, beginning January 1, 1998, MidAmerican
Energy began managing its operations as four distinct business units:
generation, transmission, energy
55
delivery and retail. Under this corporate framework, MidAmerican Energy
believes that its preparations for, and opportunities to succeed in, the future
electric and gas energy environment will be enhanced. With the establishment of
these four business units, MidAmerican Energy believes that it is able to focus
on the specific needs and anticipated risks and opportunities of its major
business units in a more flexible manner. Some administrative functions are
handled by a corporate services group which supports all of the business units.
54
Although specific functions may be moved between business units as future
circumstances warrant, the principal focus of each business unit has been
established:
[]o Generation--Significant functions of the generation business unit
include the production and purchase of energy and the sale of wholesale
energy.
[]o Transmission--The transmission business unit coordinates all activities
related to MidAmerican Energy's transmission facilities, including
monitoring access to and assuring the reliability of the transmission
system.
[]o Energy Delivery--Energy delivery includes the distribution of
electricity and natural gas to end-users and related activities.
[]o Retail--Retail includes marketing, customer service and related
functions for core and complementary products and services.
ELECTRICITY AND GAS DISTRIBUTION AND SALES
MidAmerican Energy distributes electricity in Council Bluffs, Des Moines,
Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa, the Quad Cities
(Davenport and Bettendorf, Iowa and Rock Island, Moline and East Moline,
Illinois) and a number of adjacent communities and areas. MidAmerican Energy
distributes natural gas in Cedar Rapids, Des Moines, Fort Dodge, Iowa City,
Sioux City and Waterloo, Iowa, the Quad Cities, Sioux Falls, South Dakota, and
a number of adjacent communities and areas. As of September 30, 1999,
MidAmerican Energy had approximately 655,100 retail electric customers and
627,700 retail natural gas customers.
In addition to retail sales, MidAmerican Energy delivers electricity to
other utilities and municipalities who distribute it to end-use customers.
These sales are referred to as sales for resale. MidAmerican Energy also
transports natural gas, for a fee, through its distribution system for certain
large
customers who have independently secured their own supply of natural gas.
MidAmerican Energy's electric and gas operations are conducted under
franchises, certificates, permits and licenses obtained from state and local
authorities. The franchises, with various expiration dates, are typically for
25-year terms.
MidAmerican Energy has a residential, agricultural, commercial and
diversified industrial customer group in which no single industry or customer
accounted for more than 3% (food and kindred products industry) of its total 1998 electric operating revenues or 3% (food and kindred products industry)
of its total 1998 gas operating margin. Among the primary industries served by
MidAmerican Energy are those which are concerned with the manufacturing,
processing and fabrication of food products, primary metals, real estate, food products, farm
and other non-electrical machinery, and cement and gypsum products.
For the year ended December 31, 1998, MidAmerican Energy derived
approximately 69% of its gross operating revenues from its regulated electric
business and 25% from its regulated gas business. For 1997 and 1996, the
corresponding percentages were 65% electric and 31% gas, and 66% electric and
32% gas, respectively.
MidAmerican Energy's historical electric sales by customer class as a
percentage of total electric sales and MidAmerican Energy's retail electric
sales data by state as a percentage of total retail electric sales are each
shown below:
56
TOTAL ELECTRIC SALES OF MIDAMERICAN ENERGY BY CUSTOMER CLASS
1998 1997 1996
---- ---- ----
Residential............................. 22.2% 20.9% 21.1%
Small General Service................... 17.5 16.5 16.2
Large General Service................... 28.1 27.4 27.6
Other................................... 4.4 4.4 4.5
Sales for Resale........................ 27.8 30.8 30.6
---- ------ -----
Total.............................. 100.0% 100.0% 100.0%
======
1998 1997 1996
---------- ---------- ----------
Residential .................... 22.2% 20.9% 21.1%
Small General Service .......... 17.5 16.5 16.2
Large General Service .......... 28.1 27.4 27.6
Other .......................... 4.4 4.4 4.5
Sales for Resale ............... 27.8 30.8 30.6
----- ----- -----
Total ......................... 100.0% 100.0% 100.0%
===== ===== =====
55
RETAIL ELECTRIC SALES OF MIDAMERICAN ENERGY BY STATE
1998 1997 1996
---- ---- ----
Iowa.................................... 88.4% 88.6% 88.7%
Illinois................................ 10.9 10.7 10.6
South Dakota............................ 0.7 0.7 0.7
------ ------ ------
Total..............................
1998 1997 1996
---------- ---------- ----------
Iowa .................. 88.4% 88.6% 88.7%
Illinois .............. 10.9 10.7 10.6
South Dakota .......... 0.7 0.7 0.7
----- ----- -----
Total ................ 100.0% 100.0% 100.0%
======
===== ===== =====
In an Iowa pricing settlement approved in 1997 by the Iowa Utilities
Board, MidAmerican Energy was given permission to negotiate individual
contracts with its industrial and commercial electric customers. The negotiated
contracts have differing terms and conditions as well as prices. The contracts
range in length from five to ten years, and some have price renegotiation and
early termination provisions exercisable by either party. A vast majority of
the contracts are for terms of seven years or less, although some large
customers have agreed to 10-year contracts. Prices are set as fixed prices;
however, many contracts allow for potential price adjustments with respect to
environmental costs, government imposed public purpose programs, tax changes
and transition costs. While the contract prices are fixed, (exceptexcept for the
potential adjustment elements),elements, the costs MidAmerican Energy incurs to fulfill
these contracts will vary. MidAmerican Energy presently intends to manage this
risk through hedging and other similar arrangements. On an aggregate basis, the
annual revenues under these contracts are approximately $180,000,000.
In addition, MidAmerican Energy is precluded by the 1997 settlement
agreement from filing for an increase in its Iowa electric rates prior to 2001,
unless its annual return on common equity falls below 9%. Likewise, the other
parties to the agreement, including the Office of the Consumer Advocate, are
prohibited from seeking a reduction in MidAmerican Energy's electric rates
prior to 2001, unless the return on common equity, adjusted for the equal
sharing between shareholders and customers of earnings above a 12% return on
common equity, exceeds 14%.
Historical gas sales, excluding transportation throughput, by customer
class as a percentage of total gas sales and by state as a percentage of total
retail gas sales are shown below:
TOTAL REGULATED GAS SALES OF MIDAMERICAN ENERGY BY CUSTOMER CLASS
1998 1997 1996
---- ---- ----
Residential................................ 59.9% 60.8% 61.1%
Small General Service...................... 32.1 33.1 33.3
Large General Service...................... 3.7 4.2 4.6
Sales for Resale and Other................. 4.3 1.9 1.0
------- ------ ------
Total................................. 100.0% 100.0% 100.0%
======
1998 1997 1996
---------- ---------- ----------
Residential ......................... 59.9% 60.8% 61.1%
Small General Service ............... 32.1 33.1 33.3
Large General Service ............... 3.7 4.2 4.6
Sales for Resale and Other .......... 4.3 1.9 1.0
----- ----- -----
Total .............................. 100.0% 100.0% 100.0%
===== ===== =====
56
57
RETAIL GAS SALES OF MIDAMERICAN ENERGY BY STATE
1998 1997 1996
---- ---- ----
Iowa........................................ 79.0% 79.1% 78.0%
Illinois.................................... 10.2 10.4 11.0
South Dakota................................ 10.1 9.8 10.3
Nebraska.................................... 0.7 0.7 0.7
------- ------ ------
Total.......................................
1998 1997 1996
---------- ---------- ----------
Iowa .................. 79.0% 79.1% 78.0%
Illinois .............. 10.2 10.4 11.0
South Dakota .......... 10.1 9.8 10.3
Nebraska .............. 0.7 0.7 0.7
----- ----- -----
Total ................ 100.0% 100.0% 100.0%
======
===== ===== =====
There are seasonal variations in MidAmerican Energy's electric and gas
businesses which are principally related to the use of energy for air
conditioning and heating. In 1998, 40% of MidAmerican Energy's electric
revenues were reported in the months of June, July, August and September,
reflecting the use of electricity for cooling, and 54% of MidAmerican Energy's
gas revenues were reported in the months of January, February, March and
December, reflecting the use of gas for heating.
MIDAMERICAN ENERGY'S ELECTRIC SYSTEM
The annual hourly peak demand on MidAmerican Energy's electric system
occurs principally as a result of air conditioning use during the cooling
season. In July 1999, MidAmerican Energy recorded an hourly peak demand of
3,833 megawatts, which is 190 megawatts more than MidAmerican Energy's previous
record hourly peak of 3,643 megawatts set in 1998.
MidAmerican Energy's accredited 1998 summer net generating capability was
4,425 megawatts. Accredited net generating capability represents the amount of
MidAmerican Energy-owned generation or generation under power purchase
contracts available to meet the requirements onof MidAmerican Energy's electric
system, net of the effect of participation purchases and sales. The net
generating capability at any time may be lower than it would otherwise be due
to regulatory restrictions, fuel restrictions and generating units being
temporarily out of service for inspection, maintenance, refueling or
modifications.
MidAmerican Energy is interconnected with Iowa utilities and utilities in
neighboring utilitiesstates and is involved in an electric power pooling agreement known
as MAPP. MAPPthe Mid-Continent Power Pool. The Power Pool is a voluntary association of
electric utilities doing business in Iowa, Minnesota, Nebraska and North Dakota
and portions of Montana, South Dakota and Wisconsin and the Canadian provinces
of Saskatchewan and Manitoba. Its membership also includes power marketers,
regulatory agencies and independent power producers. MAPPThe Power Pool facilitates
operation of the regional transmission system, serves as a power and energy
market clearing house and is responsible for the safety and reliability of the
bulk electric system.
Each MAPPPower Pool participant is required to maintain for emergency purposes
a net generating capability reserve of at least 15% above its system peak
demand. If a participant's capability reserve falls below the 15% minimum,
significant penalties could be contractually imposed by MAPP.the Power Pool.
MidAmerican's reserve margin for 1998 was approximately 20%.
THE NET GENERATING CAPACITY OWNED BY MIDAMERICAN ENERGY
The table below sets forth the owned net operating capacity of MidAmerican
Energy's power plants as of September 30, 1999. It operates all of these plants
other than those indicated with an asterisk.
Net
Ownership Capacity Owned
Council Bluffs Energy Center units 1 & 2..... 100% 131 megawatts
Council Bluffs Energy Center unit 3.......... 79% 534 megawatts
Louisa Generation Station.................... 88% 616 megawatts
Neal Generation Station units 1 & 2.......... 100% 435 megawatts
5758
Neal Generation Station unit 3............... 72% 371 megawatts
Neal Generation Station unit 4............... 41% 253 megawatts
Ottumwa Generation Station*.................. 52% 372 megawatts
Quad-Cities Power Station units 1 & 2*....... 25% 383 megawatts
Riverside Generation Station................. 100% 135 megawatts
Combustion Turbines.......................... 100% 758 megawatts
Moline Water Power........................... 100% 3 megawatts
-+-------------
Total Net Generating Capacity Owned..... 3,996 megawatts
===============
Net
Ownership Capacity Owned
----------- ----------------
Council Bluffs Energy Center units 1 & 2 ......... 100% 131 megawatts
Council Bluffs Energy Center unit 3 .............. 79% 534 megawatts
Louisa Generation Station ........................ 88% 616 megawatts
Neal Generation Station units 1 & 2 .............. 100% 435 megawatts
Neal Generation Station unit 3 ................... 72% 371 megawatts
Neal Generation Station unit 4 ................... 41% 253 megawatts
Ottumwa Generation Station* ...................... 52% 372 megawatts
Quad Cities Nuclear Station units 1 & 2* ......... 25% 383 megawatts
Riverside Generation Station ..................... 100% 135 megawatts
Combustion Turbines .............................. 100% 758 megawatts
Moline Water Power ............................... 100% 3 megawatts
----------------
Total Net Generating Capacity Owned ............. 3,996 megawatts
================
ENVIRONMENTAL MATTERS
For information relating to MidAmerican Energy's environmental matters,
reference is made to Note B to our consolidated financial statements appearing
elsewhere instarting on
page F-43 of this prospectus.
59
LITIGATION
COOPER LITIGATION
MidAmerican Energy purchases one-half of the output from the Cooper
Nuclear Station, a 773 megawatt nuclear generating plant, pursuant to a long
term power purchase agreement with the Nebraska Public Power District which
expires in 2004. Cooper represents approximately 16% of the total generating
capacity available to MidAmerican Energy and provided approximately 14% of the
energy delivered to MidAmerican Energy's customers for the nine month period
ending September 30, 1999. On July 23, 1997, the Nebraska Public Power District (or NPPD)
filed a complaint, in the United States District Court for the District of
Nebraska, naming MidAmerican Energy as the defendant and seeking declaratory
judgment as to three issues under the parties' long-term power purchase
agreement for the
capacity and energy of MidAmerican Energy's Cooper Nuclear Station.agreement. More specifically, NPPDthe Nebraska Public Power District sought a
declaratory judgment in the following respects:
(1) that MidAmerican Energy is obligated to pay 50% of all costs and
expenses associated with decommissioning Cooper, and that in the event
NPPDthe Nebraska Public Power District continues to operate Cooper after
expiration of the power purchase agreement (September 2004),
MidAmerican Energy is not entitled to reimbursement of any
decommissioning funds it has paid to date or will pay in the future;
(2) that the current method of allocating transition costs as part of the
decommissioning cost is proper under the power purchase agreement; and
(3) that the current method of investing decommissioning funds is proper
under the power purchase agreement.
MidAmerican Energy filed its answer and contingent counterclaims. The
contingent counterclaims filed by MidAmerican Energy are generally as follows:
(1) that MidAmerican has no duty under the power purchase agreement to
reimburse or pay 50% of the decommissioning costs unless certain conditions to
reimbursement occur;
(2) that NPPDthe Nebraska Public Power District has the duty to repay all
amounts that MidAmerican Energy has prefunded for decommissioning in
the event NPPDthe Nebraska Public Power District operates the plant after
the term of the power purchase agreement;
(3) that NPPDthe Nebraska Public Power District is equitably estopped from
continuing to operate the plant after the term of the power purchase
agreement;
(4) that NPPDthe Nebraska Public Power District has granted MidAmerican
Energy an option to continue taking 50% of the power from the plant;
(5) that the term "monthly power costs" as defined in
the power purchase agreement does not include costs and
expenses associated with decommissioning the plant;
(6) that MidAmerican Energy has no duty to pay for nuclear fuel,
operation and maintenance projects or capital improvements that have
useful lives after the term of the power purchase agreement;
(7) that transition costs are not included in any decommissioning costs
and expenses;
(8) that NPPDthe Nebraska Public Power District has breached its duty to
MidAmerican Energy in making investments of certaindecommissioning funds;
(9) that reserves in certainnamed accounts are excessive and should be refunded
to MidAmerican Energy; and
(10) that NPPDthe Nebraska Public Power District must credit MidAmerican
Energy for certain payments by MidAmerican for low-level radioactive waste
disposal.
On October 6, 1999, the Courtcourt rendered summary judgment for NPPDthe Nebraska
Public Power District on the above-mentioned issue concerning liability for
decommissioning (issue one in the first
60
paragraph above) and the related contingent counterclaims filed by MidAmerican
Energy (issues one, two, three and five in the second paragraph above). The
Courtcourt referred all remaining issues in the case to mediation, and cancelled the
November 1999 trial date. MidAmerican Energy plans to appealhas appealed the Court'scourt's summary
judgment ruling and will participate in mediation in an attempt to resolve the
remaining issues. MidAmerican Energy and NPPDthe Nebraska Public Power District are
currently involved in discovery.
LITIGATIONThe issues raised by the Nebraska Public Power District reflect the
current practices between it and MidAmerican Energy with respect to the Cooper
power purchase agreement. Accordingly, we do not expect that MidAmerican Energy
would incur any material costs in excess of those currently incurred under the
power purchase agreement if the Nebraska Public Power District were to prevail
on all of its claims.
NORTH STAR STEEL COMPANY
On December 8, 1997, North Star Steel Company, a MidAmerican Energy
electric retail customer, filed a complaint in the United States District Court
for the Southern District of Iowa naming MHC and MidAmerican Energy as
defendants. The complaint alleged that MidAmerican Energy's refusal to allow
North Star to obtain retail electric service from an unspecified alternative
energy company amounted to a violation of federal antitrust laws. North Star
sought to recover an unspecified 58
level of damages, and to require MidAmerican
Energy to provide retail wheelingenergy delivery service so that North Star could
obtain electricity from an unnamed supplier. On June 23, 1998, the District Courtcourt issued
an Order Granting Summary Judgmentorder granting summary judgment in favor of MidAmerican Energy. On July 20,
1998, North Star appealed that decision to the United States Court of Appeals
for the Eighth Circuit. On July 7, 1999, the United States Court of Appeals for the Eighth Circuit affirmed the
District Court grant of summary judgment in favor of MidAmerican Energy. On
October 5, 1999, North Star filed a petition for a writ of certiorari seeking
to have the U.S.United States Supreme Court agree to review a decision by the 8th Circuit Court
of Appeals which had upheld a ruling by the U.S. District Court for the Southern
District of Iowa granting summary
judgment in favor of MidAmerican Energy. In a
related matterOn December 6, 1999, the United States
Supreme Court denied the writ of certiorari requested by North Star, unsuccessfully appealed to the Iowa District Court an
Iowa Utilities Board declaratory ruling that was favorable to MidAmerican
Energy.
59thus
concluding this litigation.
61
MANAGEMENT
OUR BOARD OF MANAGERS AND EXECUTIVE OFFICERS
Below are our current managers and executive officers and their positions
with us:
NAME POSITION
David L. Sokol.........
NAME POSITION
---- --------
David L. Sokol .................. Chairman, Chief Executive Officer and Manager
Gregory E. Abel ................. President and Chief Operating Officer
Patrick J. Goodman .............. Vice President and Treasurer
Steven A. McArthur .............. Vice President, Secretary and Manager
John A. Rasmussen, Jr. .......... Vice President and General Counsel
Delbert D. Weber ................ Independent Manager
Gregory E. Abel........ President and Chief Operating Officer
Patrick J. Goodman..... Vice President and Treasurer
Steven A. McArthur..... Vice President, Secretary and Manager
John A. Rasmussen, Jr.. Vice President and General Counsel
Delbert D. Weber....... Independent Manager
DAVID L. SOKOL, 42, has been our Chairman and Chief Executive Officer and
Chairman of our Board of Managers since our formation in March 1999. Mr. Sokol
has been Chairman of MidAmerican Holdings since May 1994 and Chief Executive
Officer of MidAmerican Holdings since April 1993. He has served as a director
of MidAmerican Holdings since 1991. From January 1992 until October 1992, Mr.
Sokol was Chairman, Chief Executive Officer, President and a Director of JWP,
Inc. From November 1990 until February 1991, Mr. Sokol was the President and
Chief Executive Officer of Kiewit Energy Company.
GREGORY E. ABEL, 36, has been our President and Chief Operating Officer
since our formation in March 1999. Mr. Abel joined MidAmerican Holdings in
1992. At MidAmerican Holdings he has held various executive positions including
responsibility for engineering, construction, accounting and various
administrative functions. Mr. Abel is a Chartered Accountant and from 1984 to
1992 was employed by Price Waterhouse in San Francisco, where he was
responsible for clients in the energy industry.
PARTRICKPATRICK J. GOODMAN, 32,33, has been our Vice President and Treasurer since
August 1999. Mr. Goodman is also Senior Vice President and Chief Financial
Officer of MidAmerican Holdings. Prior to joining MidAmerican Holdings in 1995,
for more than five years prior theretoto 1995 Mr. Goodman was a financial manager for
National Indemnity Company and a senior associate at PricewaterhouseCoopers LLP
(formerly Coopers & Lybrand L.L.P.).
STEVEN A. MCARTHUR, 41, has been our Vice President and Secretary and a
member of our Board of Managers since our formation in March 1999. Mr. McArthur
is Senior Vice President and Secretary of MidAmerican Holdings. Mr. McArthur
joined MidAmerican Holdings in 1991. From 1988 to 1991, he was an attorney in
the Corporate Finance Group at Shearman & Sterling in San Francisco. From 1984
to 1988, Mr. McArthur was an attorney in the Corporate Finance Group at
Winthrop, Stimson, Putnam & Roberts in New York.
JOHN A. RASMUSSEN, JR., 53, has been our Vice President and General
Counsel since March 1999. Mr. Rasmussen has also been Senior Vice President and
General Counsel of MidAmerican Holdings since March 1999, of MHC since December
1, 1996 and of MidAmerican Energy since November 1, 1996. Mr. Rasmussen served
as Group Vice President and General Counsel of MidAmerican Energy from July 1,
1995 to November 1, 1996. He served as Vice President and General Counsel of
Midwest Power Systems Inc. and Midwest Resources Inc., each a predecessor to
MidAmerican Energy, from 1990 to 1995.
DELBERT D. WEBER, 67, has been our Independent Manager since March 1999.
Dr. Weber serves as President of the Omaha Community Foundation, a position he
assumed on September 1, 1998. He retired in July 1997 as Chancellor Emeritus,
after serving as Chancellor of the University of Nebraska at Omaha for 20
years. Dr. 60
Weber has also served on the boards of directors of several
prominent Omaha-based charities and community organizations.
62
Our articles of organization require the unanimous affirmative vote or
consent of our Board of Managers, including the Independent Manager, to (1)do any
of the following:
o institute bankruptcy or insolvency proceedings, (2)proceedings;
o consent to the institution of suchbankruptcy or insolvency proceedings
against us, (3)us;
o dissolve or liquidate,liquidate;
o make assignments for the benefit of creditors, (4)creditors;
o take other similar actions, (5)actions;
o change our form of organization or jurisdiction of formationformation; or
(6)o amend various provisions of our articles of organization.
In all suchof these matters, our Board of Managers will owe their fiduciary
obligations to us and our creditors.
None of our managers or executive officers receivereceives any compensation in
excess of $60,000 for serving in these positions.
THE DIRECTORS AND EXECUTIVE OFFICERS OF MHC AND MIDAMERICAN ENERGY
Below are the current managers and executive officers of MHC and
MidAmerican Energy and their positions with those companies:
NAME POSITION COMPANY
- ---- -------- -------
David L. Sokol...................Sokol .................. Chairman and Chief Executive Officer/Chairman....... MHC/MidAmerican Energy
Officer/Chairman
Gregory E. Abel..................Abel ................. President/Chief Executive Officer...................Officer MHC/MidAmerican Energy
Ronald W. Stepien................ President...........................................Stepien ............... President MidAmerican Energy
Jack L. Alexander................Alexander ............... Senior Vice President...............................President MidAmerican Energy
Patrick J. Goodman...............Goodman .............. Senior Vice President and Chief Financial MHC and MidAmerican
Financial Officer Energy
Officer..........................................
Keith D. Hartje..................Hartje ................. Senior Vice President...............................President MidAmerican Energy
Steven A. McArthur...............McArthur .............. Senior Vice President...............................President MHC and MidAmerican
Energy
John A. Rasmussen, Jr............Jr. .......... Senior Vice President and General Counsel........... MHC and MidAmerican
Counsel Energy
RONALD W. STEPIEN, 52, has been President of MidAmerican Energy since
November 1, 1998. Mr. Stepien served as Executive Vice President of MidAmerican
Energy from November 1, 1996 to October 31, 1998 and as Group Vice President of
MidAmerican Energy from 1995 to October 31, 1996. He served as Vice President
of Iowa-Illinois Gas and Electric Company, a predecessor company, from 1990 to
1995.
JACK L. ALEXANDER, 51, has been Senior Vice President of MidAmerican
Energy since November 1, 1998. Mr. Alexander served as Vice President of
MidAmerican Energy from November 1, 1996 to October 31, 1998 and in various
executive and management positions with MidAmerican Energy and its predecessors
Midwest Power Systems Inc. and Midwest Resources Inc. for more than five years
prior thereto.to November 1, 1996.
KEITH D. HARTJE, 49, has been Senior Vice President of MidAmerican Energy
since March 12, 1999 and Vice President of MidAmerican Energy from November 1,
1996 to March 12, 1999.
63
Mr. Hartje served in various executive and management positions with
MidAmerican Energy and its predecessors Midwest Power Systems Inc. and Midwest
Resources Inc. for more than five years prior thereto.to November 1, 1996.
For information regarding Messrs. Sokol, Abel, Goodman, McArthur and
Rasmussen, see the description of our Board of Managers and executive officers
above.
6164
OWNERSHIP OF OUR MEMBERSHIP INTERESTS
All of our membership interests are owned by MidAmerican Holdings. As of
September 30, 1999, our total capitalization was $1,836 million. There is no
public trading market for our membership interests. None of our managers or
executive officers beneficially own any of our equity interests. MidAmerican
Holdings' common stock is publicly traded on the New York, Pacific and London
Stock Exchanges.
62
DESCRIPTION OF THE SECURITIES
The Securitiesinitial securities have been and the exchange securities will be
issued under and governed by an indenture, as supplemented by a First Supplemental Indenture,first
supplemental indenture, dated as of March 11, 1999, between the Companyus and The Bank of
New York, as trustee. The following summary of the material terms contained in
the indenture and the Securitiessecurities is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, and all the
provisions of the indenture and the Securities,securities, including the definitions of
terms not defined in this prospectus. This summary does not restate the
indenture in its entirety. We urge you to read the indenture because it, and
not this description, defines your rights as holders of these Securities.securities. We
have filed copies of the indenture and the registration rights agreement as
exhibits to the registration statement that includes this prospectus.
The form and terms of the exchange Securitiessecurities and the initial Securitiessecurities
are identical in all material respects, except that transfer restrictions and
registration rights applicable to the initial Securitiessecurities do not apply to the
exchange Securities.securities. The exchange Securitiessecurities will evidence the same debt as the
initial Securitiessecurities and will be governed by the same indenture. Where we refer
to "Securities" in this prospectus, we are referring to both initial Securities
and exchange Securities.
As used in this description, the term "Company" refers only to MidAmerican
Funding, LLC, and not to any of its subsidiaries or affiliates.
GENERAL
The indenture does not limit the aggregate principal amount of the debt
securities that may be issued under the indenture and provides that debt
securities may be issued from time to time in one or more series.
The 5.85% Senior Secured Notes due 2001 and 5.85% Senior Secured Exchange
Notes due 2001 (collectively, the "2001 Notes") will be issued in the aggregate principal amount of $200
million. The Notes due 2001 Notes will mature, and shallwill be repaid at their principal
amount, on March 1, 2001.
The 6.339% Senior Secured Notes due 2009 and 6.339% Senior Secured
Exchange Notes due 2009 (collectively, the "2009 Notes") will be issued in the aggregate principal amount of
$175 million. The Notes due 2009 Notes will mature, and shallwill be repaid at their
principal amount, on March 1, 2009.
The 6.927% Senior Secured Bonds due 2029 and 6.927% Senior Secured
Exchange Bonds due 2029 (collectively, the "Bonds") will be issued in the aggregate principal amount of
$325 million. The Bonds due 2029 will mature, and shallwill be repaid at their
principal amount, on March 1, 2029.
Each Securitysecurity will bear interest at the relevant rate per annum stated
above from March 11, 1999, or from the most recent interest payment date to
which interest has been paid or provided for. Interest on the Securitiessecurities will
be payable semiannually on March 1 and September 1 of each year, commencing
September 1, 1999, to the holders of record at the close of business on the
preceding February 15 and August 15, respectively, until the relevant principal
amount has been paid or made available for payment. Interest on the Securitiessecurities
will be computed on the basis of a 360-day year of twelve 30-day months.
If neither the exchange offer is consummated nor a shelf registration with
respect to the resale of the Securitiessecurities is declared effective by December 7,
1999, the interest rate on each series of the Securitiessecurities will increase by 0.5%0.50%
from and including such date,December 7, 1999, until the consummation of an exchange
offer or the effective date of a shelf registration statement. If the exchange
offer is not consummated or the shelf registration statement is not declared
effective by March 12, 2001, suchthis increase in interest rates will become
permanent.
63
Any initial Notes due 2001 Notes that remain outstanding after the consummation
of the exchange offer, together with all exchange Notes due 2001 Exchangeissued in
connection with the exchange offer, will be
65
treated as a single class of securities under the indenture. Any initial Notes
due 2009 that remain outstanding after the consummation of the exchange offer,
together with all exchange Notes due 2009 issued in connection with the
exchange offer, will be treated as a single class of securities under the
indenture. Any 2009 Notesinitial Bonds due 2029 that remain outstanding after the
consummation of the exchange offer, together with all 2009 Exchange Notes issued in connection with
the exchange offer, will be treated as a single class of securities under the
indenture. Any Bonds that remain outstanding after the consummation of the
exchange offer, together with all Exchange Bondsdue 2029
issued in connection with the exchange offer, will be treated as a single class
of securities under the indenture.
RANKING
The Securitiessecurities will be our senior secured obligations of the Company ranking on an equal
basis with all our other existing and future senior obligations of the
Company.obligations. The Securitiessecurities
will rank senior to all our existing and future subordinated indebtedness of the Company.indebtedness. The
Securitiessecurities will effectively rank junior to all indebtedness and other
liabilities, including preferred stock, of the Company'sour Subsidiaries, to the extent of
the assets of suchthe Subsidiaries. The indenture contains restrictions on our
ability and the ability of the Company and MHC to incur additional indebtedness. The indenture
contains no restrictions on the amount of additional unsecured indebtedness
which the Company'sour Subsidiaries, other than MHC, may incur. In addition, the indenture
permits each of the
Company'sour Subsidiaries, other than MHC, to incur significant
additional amounts of secured indebtedness.
Prior to the initial offering of the Securitiessecurities in March 1999, the Companywe did not
have any debt obligations. The Company conducts itsWe conduct our operations predominantly through MHC,
its wholly ownedwe wholly-owned subsidiary, and substantially all of the Company'sour consolidated assets
relating to operations are held by MHC and its Subsidiaries, including
MidAmerican Energy. Because the Company iswe are a holding company, itsour rights and the rights
of itsour creditors, including Holdersholders of the Securities,securities, in respect of claims on
the assets of each of the Company'sour Subsidiaries upon any liquidation or administration
are structurally subordinated to, and therefore will be subject to the prior
claims of, each such Subsidiary's preferred stockholders and creditors, (including trade
creditors of and holders of debt issued by such subsidiary), except to
the extent that the Companywe may itself be a creditor with recognized claims against suchthe
Subsidiary. At September 30, 1999, MHC and its direct and indirect Subsidiaries
had total indebtedness, including preferred stock, of approximately $1.316
million, all of which would be effectively senior to the Securities.
Thesecurities.
Our ability of the Company to pay interest on the Securitiessecurities is, to a large extent,
dependent upon theour receipt by it of dividends and other distributions from itsour direct
and indirect Subsidiaries, and from MidAmerican Energy in particular. The Company believesWe
believe that suchthese payments, which will be funded by cash flows generated
through MidAmerican Energy's operations, will be sufficient to enable the Companyus to
meet all of itsour obligations as they become due, including the Company'sour obligations under
the Securities.securities. The availability of distributions from the Company'sour Subsidiaries is
subject to the satisfaction of various covenants and conditions contained in
the applicable Subsidiaries' existing and future financing documents and
certain utility regulatory restrictions.
COLLATERAL
The Securitiessecurities will be secured by a pledge of all of the capital stock of
MHC.
Unless there is an Event of Default, the Companywe will be able to vote, as it seeswe see
fit in itsour sole discretion, the pledged shares of capital stock.
If the Company meetswe meet the conditions to itsour defeasance option or itsour covenant
defeasance option as described below under the caption "--Defeasance and
Covenant Defeasance," or the indenture is otherwise discharged, the lien of the
indenture on the pledged shares will terminate and the pledged shares will be
released to the Companyus without any further action by the trustee or any other person.
The proceeds of any sale of the collateral securing the Securities (the
"Collateral")securities
following an Event of Default might not be sufficient to satisfy the payments
due on the Securities.securities. If an Event of Default occurs under the
64
indenture, the
trustee, on behalf of the holders of the Securities,securities, in addition to any rights
or remedies available to it under the indenture, may take such
action asthe actions it deems
advisable to protect and enforce its right in the Collateral,collateral for the
securities, including the institution of foreclosure proceedings. The proceeds
received by the trustee from any foreclosure will be applied by the trustee,
first, to pay the expenses of such foreclosure and fees and other amounts then
payable to the trustee under the indenture and, second, to pay the Securities.securities.
66
COVENANTS
Except as otherwise described under the caption "--Defeasance and Covenant
Defeasance" below, for so long as any Securitiessecurities remain outstanding or any
amount remains unpaid on any of the Securities, the Companysecurities, we will comply with the terms
of the covenants described below.
PAYMENT OF PRINCIPAL AND INTEREST
The CompanyWe will duly and punctually pay the principal of and interest on the
Securitiessecurities in accordance with the terms of the Securitiessecurities and the indenture.
MAINTENANCE OF OFFICE OR AGENCY
The CompanyWe will maintain in the Borough of Manhattan, The City of New York, (1) an
office or agency of a paying agent where the Securitiessecurities may be paid and notices
and demands to or upon the Companyus in respect of the Securitiessecurities and the indenture may be
served and (2) an office or agency of a registrar where Securitiessecurities may be
surrendered for registration of transfer and exchange. The CompanyWe will give prompt
written notice to the trustee of the location, and any change in the location,
of any such office or agency. If at any time the Company failswe fail to maintain any required office
or agency or failsfail to furnish the trustee with the address of that office or
agency, all presentations, surrenders, notices and demands may be served at the
office of the trustee.
AVAILABLE INFORMATION
Notwithstanding that the Companywe may not be required to be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, from and after the
date of effectiveness of the registration statement required to be
filed by the registration rights agreement, the Companyof which this prospectus is
a part, we will file or cause to be filed with the SECSecurities and Exchange
Commission and provide the trustee with the information, documents and other
reports, or copies of suchthe portions of any of the foregoing as the SECSecurities
and Exchange Commission may by rules and regulations prescribe, with respect to
the Companyus specified in Sections 13 and 15(d) of the Exchange Act. If the Company iswe are subject to
the reporting requirements of Sections 13 or 15(d) of the Exchange Act, itwe will
also provide suchthe information, documents or reports described above to the
Holdersholders of the Securities.securities. Prior to the effective date of thatthe registration
statement, the Company shallwe will provide, upon written request of the Holdersholders of the
Securitiessecurities or prospective Holdersholders of the Securitiessecurities who are qualified
institutional buyers and are designated by existing Holders,holders, with a copy to the
trustee, suchthe information with respect to the Companyus as is required by Rule 144A to
enable resales of the Securitiessecurities to be made pursuant tounder Rule 144A. The
CompanyWe also will
comply with the other provisions of Section 314(a) of the Trust Indenture Act.
CONSOLIDATION, MERGER, CONVEYANCE, SALE OR LEASE
The CompanyWe may not consolidate with or merge with or into any other Person,person, or
convey, transfer or lease itsour consolidated properties and assets substantially
as an entirety, in one transaction or in a series of related transactions, to
any Person,person, or permit any Personperson to merge into or consolidate with the Company,us, unless:
(1) (x) the Companywe will be the surviving or continuing Personperson or (y) if other
than the Company,us, the surviving or continuing Personperson or purchaser or lessee will be
a corporation incorporated under the laws of the United States of America,
one of the States thereof or the District of Columbia or Canada and expressly
assumes by supplemental indenture the Company'sour obligations under the Securitiessecurities and
the indenture;
65
(2) immediately after giving effect to suchthe transaction, no Event of
Default shallwill have occurred and be continuing; and
(3) the Companywe or suchthe other surviving or continuing Person,person, as applicable, shallwill
continue to have a valid, perfected, first priority interest in the
Collateral.collateral for the securities.
LIMITATION ON DISTRIBUTIONS
The indenture provides that the Company shallwe will only declare, recommend, make or pay
any Distribution to any of itsour shareholders if there exists no Event of Default
and no Event of Default will result from making thatthe Distribution, and either:
67
(1) at the time and as a result of that Distribution, the
Company'sour Leverage Ratio
does not exceed 0.67:1 and the
Company'sour Interest Coverage Ratio is not less than
2.2:1; or
(2) if it iswe are not in compliance with the foregoing ratios, at suchthe time
itsour senior secured long term debt rating is at least BBB, or its then
equivalent, with S&PStandard & Poor's and DCRDuff & Phelps and Baa2, or its then
equivalent, with Moody's.
This "Limitation on Distributions" covenant will cease to be in effect if
the Rating Agencies confirm in writing that, without this covenant, the
Company'sour senior
secured long term debt would still be rated at least BBB+, or its then
equivalent, from each of S&PStandard & Poor's and DCRDuff & Phelps and Baa1, or its
then equivalent, from Moody's. If the restriction on Distributions ceases to be
in effect, the
Companywe will be under no obligation to reinstate suchthe restriction or
otherwise observe its terms if suchour ratings are thereafter lowered or withdrawn.
In order to obtain the release of the restriction on Distributions, the
Company shallwe
will deliver to the trustee written confirmation from each Rating Agency of the
ratings conditions described in the preceding paragraph.
LIMITATION ON INDEBTEDNESS OF THE COMPANYMIDAMERICAN FUNDING AND OF MHC
The indenture provides that the Companywe will not incur any Indebtedness other than
(1) as part of the Company'sour permitted businesses and activities described under the
caption "--Limitation on Business Activities" below and (2) other Indebtedness
incurred subsequent to receipt of written confirmation from the Rating Agencies
that suchthe incurrence would not result in a Ratings Downgrade.downgrade of the existing ratings for
the securities.
The indenture further provides that the Companywe will not permit MHC to incur any
Indebtedness other than Indebtedness outstanding on the date of original issue
of the Securitiessecurities under MHC's agreements then in existence and extensions of
suchthis Indebtedness.
LIMITATION ON LIENS
The indenture permits the Companyus to incur certain unsecured indebtedness as described
above and does not in any way restrict or prevent any Subsidiary other than MHC
from incurring unsecured indebtedness. With respect to secured indebtedness,
however, the indenture provides that neither the Companywe nor any Significant Subsidiary
will issue, assume or guarantee any Indebtedness secured by a Lien upon any of
our property or assets, (otherother than cash or cash equivalents)equivalents, or any property or
assets of the
Company or suchany Significant Subsidiary, as applicable, without effectively
providing that the outstanding Securitiessecurities (together with, if the Companywe so determines,determine,
any other indebtedness or obligation then existing or thereafter created
ranking equally with the Securities) shallsecurities) will be secured equally and ratably with
(or prior to) suchthe new Indebtedness so long as suchthe new Indebtedness shall
beis so
secured. The foregoing restriction on Liens will not, however, apply to the
following "Permitted Liens":
(1) Liens in existence on the date of original issue of the Securities;
66
securities;
(2) any Lien created or arising over any property which is acquired,
constructed or created by the Companyus or any of itsour Significant Subsidiaries, but
only if (A) suchthe Lien secures only principal amounts (not exceeding the cost
of suchthe acquisition, construction or creation) raised for the purposes of
suchthe acquisition, construction or creation, together with any costs,
expenses, interest and fees incurred in relation theretoto, or a guarantee given
in respect thereof,of, the acquisition, construction or creation, (B) suchthe Lien is
created or arises on or before 180 days after the completion of suchthe
acquisition, construction or creation and (C) suchthe Lien is confined solely
to the property so acquired, constructed or created;
(3) any Lien securing amounts not more than 180 days overdue or otherwise
being contested in good faith;
(4) (a) rights of financial institutions to offset credit balances in
connection with the operation of cash management programs established for
our benefit and/or the benefit of the Company and/or a Significant Subsidiary or in connection
with the issuance of letters of credit for our benefit and/or the benefit
of the Company and/or a Significant Subsidiary;
68
(b) any Lien securing Indebtedness of the Companyus and/or a Significant
Subsidiary incurred in connection with the financing of accounts
receivable;
(c) any Lien incurred or deposits made in the ordinary course of
business, including, but not limited to, (A) any mechanics', materialmen's,
carriers', workmen's, vendors' and other like Liens and (B) any Liens
securing amounts in connection with workers' compensation, unemployment
insurance and other types of social security;
(d) any Lien upon specific items of inventory or other goods and
proceeds of the Companyus and/or a Significant Subsidiary securing obligations of the Companyus
and/or a Significant Subsidiary in respect of bankers' acceptances issued
or created for the account of such
person to facilitate the purchase, shipment or storage of suchthe inventory
or other goods;
(e) any Lien incurred or deposits made securing the performance of
tenders, bids, leases, trade contracts (other than for borrowed money),
statutory obligations, surety bonds, appeal bonds, government contracts,
performance bonds, return-of-money bonds, letters of credit not securing
borrowings and other obligations of like nature incurred in the ordinary
course of business;
(f) any Lien created by the Companyus or a Significant Subsidiary under or in
connection with or arising out of any transactions or arrangements entered
into in connection with the hedging or management of risks relating to the
electricity or natural gas distribution industry;
(g) any Lien constituted by a right of set off or right over a margin
call account or any form of cash or cash collateral or any similar
arrangement for obligations incurred in respect of Currency, Interest Rate
or Commodity Agreements;
(h) any Lien arising out of title retention or like provisions in
connection with the purchase of goods and equipment in the ordinary course
of business;
(i) any Lien securing reimbursement obligations under letters of
credit, guaranties and other forms of credit enhancement given in
connection with the purchase of goods and equipment in the ordinary course
of business; and
(j) any Lien securing obligations under Currency, Interest Rate or
Commodity Agreements;
(5) Liens in favor of the Companyus or a Subsidiary;
67
(6) (a) Liens on any property or assets acquired from a corporation which
is merged with or into the Companyus or a Significant Subsidiary, or any Liens on the
property or assets of any corporation or other entity existing at the time
suchthe corporation or other entity becomes a subsidiary of the Companyus and, in either such
case, is not created in anticipation of any suchthe transaction, unless suchthe Lien
was created to secure or provide for the payment of any part of the
purchase price of suchthe corporation;
(b) any Lien on any property or assets existing at the time of
acquisition thereofof the property or assets and which is not created in
anticipation of suchthe acquisition, unless suchthe Lien was created to secure or
provide for the payment of any part of the purchase price of suchthe property
or assets; and
(c) any Lien created or outstanding on or over any asset of any company
which becomes a Significant Subsidiary on or after the date of the issuance
of the Securitiessecurities where suchthe Lien is created before the date on which suchthe
company becomes a Significant Subsidiary;
(7) (a) Liens required by any contract, statute or regulation in order to
permit the Companyus or a Significant Subsidiary to perform any contract or
subcontract made by us or it with or at the request of a governmental
entity or any department, agency or instrumentality thereof,of a governmental
entity, or to secure partial, progress, advance or any other payments by the Companyus
or a Significant Subsidiary to suchthe governmental unit pursuant tounder the provisions
of any contract, statute or regulation;
69
(b) any Lien securing industrial revenue, development, pollution
control or similar bonds issued by or for the benefit of the Companyus or a
Significant Subsidiary, provided that suchso long as the industrial revenue, development,
pollution control or similar bonds do not provide recourse generally to the Companyus
and/or suchthe Significant Subsidiary; and
(c) any Lien securing taxes or assessments or other applicable
governmental charges or levies;
(8) (a) any Lien which arises pursuant tounder any order of attachment, distraint or
similar legal process arising in connection with court proceedings and any
Lien which secures the reimbursement obligation for any bond obtained in
connection with an appeal taken in any court proceeding, so long as the
execution or other enforcement of suchthe Lien arising pursuant to suchbecause of the legal
process is effectively stayed and the claims secured therebyby the Lien are being
contested in good faith and, if appropriate, by appropriate legal
proceedings, and any Lien in favor of a plaintiff or defendant in any
action before a court or tribunal as security for costs and/or expenses;
and
(b) any Lien arising by operation of law or by order of a court or
tribunal or any lienLien arising by an agreement of similar effect, including,
without limitation, judgment Liens;
(9) any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any Liens referred to
in the foregoing clauses, for amounts not exceeding the principal amount of
the Indebtedness secured by the Lien so extended, renewed or replaced, provided that suchso
long as the extension, renewal or replacement Lien is limited to all or a
part of the same property or assets that were covered by the Lien extended,
renewed or replaced, (plusplus improvements on suchthe property or assets);assets;
(10) any Lien created in connection with Project Finance Debt;
(11) any Lien created by MidAmerican Energy that is then permitted to be
created under the terms of its then existing mortgages and indentures on
the terms in effect at the time of creation of the Lien;
(12) any Lien created in connection with the securitization of some or
all of the assets of MidAmerican Energy and the associated issuance of
Indebtedness as authorized by applicable state or federal law in connection
with the restructuring of jurisdictional electric or gas businesses; and
68
(13) any Lien on stock created in connection with a mandatorily
convertible or exchangeable stock or debt financing, provided that
any suchbut the financing may
not be secured by or otherwise involve the creation of a Lien on any
capital stock of MHC or MidAmerican Energy or any successor thereto.to MHC or
MidAmerican Energy.
Notwithstanding the foregoing, the Companywe and/or a Significant Subsidiary may
create Liens over any of our or their respective properties or assets so long
as the aggregate amount of Indebtedness secured by all such Liens, excluding the
amount of Indebtedness secured by Liens described in clauses (1) through (13)
above, does not exceed 10% of Consolidated Net Tangible Assets in the aggregate
calculated as of the date of creation of suchthe Liens, based upon the Consolidated
Net Tangible Assets appearing on the most recently available balance sheet for
the most recently concluded calendar quarter.
LIMITATION ON BUSINESS ACTIVITIES
The indenture provides that the Companywe will not enter into any business operations
other than:
(1) the transactions contemplated by the indenture, the Escrow
Agreement,escrow agreement,
the registration rights agreement and the Merger Agreement,merger agreement,
(2) activities related to the acquisition, management and ownership of
MHC,
(3) entering into and performing any agreements to accomplish the
foregoing, and
(4) exercising any corporate powers that are incidental to or necessary,
suitable or convenient for the accomplishment of the foregoing;
provided, that the Company70
However, we may enter into additional business operations from time to time in
the future if, prior to doing so, it obtainswe obtain written confirmation from the
Rating Agencies that the entering into of suchthe new businesses will not result in
a Ratings Downgrade.downgrade of the existing ratings for the securities.
The indenture further provides that the Companywe will cause itsour Significant
Subsidiaries to engage only in:
(1) those types of businesses and other activities in which the
Companywe or MHC or
any of its direct or indirect subsidiaries or controlled partnerships or
joint ventures (collectively, "MidAmerican Group") are engaged in on the date of original issuance of the
Securities,securities, including, without limitation, any geographic or other
expansion of suchthese businesses or activities, and
(2) any other business or activity which is deemed necessary, useful or
desirable in connection with such existing businesses andthe activities or
any such permitted additional geographic or other expansions of such
businesses and activities.described in clause (1) above.
OPERATIONAL COVENANTS
The indenture contains additional affirmative covenants (which are
collectively referred to in this prospectus as the "Operational Covenants")
requiring the Companyus and itsour Significant Subsidiaries to:
(1) comply with specified Project Documents (as defined in the indenture)
and maintain all utility facilities that are operated by the
Companyus or any
Significant Subsidiary in accordance with reasonably prudent utility
practices;
(2) obtain and maintain necessary governmental approvals and other
approvals and consents required in connection with all utility facilities
which are operated by the Companyus or any Significant Subsidiaries for so long as suchthe
facilities remain in operation;
69
(3) preserve and maintain good title or valid leasehold rights in the
real property owned or leased by us or them from time to time and the
personal property owned by us or them from time to time, subject to
Permitted Liens;
(4) comply with all applicable laws and governmental approvals;
(5) obtain and maintain customary insurance, subject to reasonable
availability and costs;
(6) pay and discharge all material taxes, assessments, charges and
claims, other than those which are the subject of a good faith contest and
for which adequate reserves have been established; and
(7) if a casualty or condemnation shall occuroccurs in respect of facilities which
are operated and controlled by the Companyus or itsour Significant Subsidiaries,
diligently pursue all rights to compensation;
in each case subject to an exception for any noncompliance or other failure
that would not reasonably be expected to have a material adverse effect on theour
ability of the Company to perform itsour regularly scheduled payment obligations under the
Securities.securities. The Operational Covenants will no longer be applicable to the
Securities,securities, and the failure to comply with suchthese covenants, restrictions and
other provisions will no longer constitute a default or an Event of Default
under the indenture, following the first date upon which:which all of the following
three conditions exist:
(1) MidAmerican Holdings' senior secured long termlong-term debt securities (the "Reference Securities") are
rated (x) Baa3 or better by Moody's and BBB- or better by each of S&PStandard
& Poor's and DCR (or, inDuff & Phelps, or (y) if any case, if such personof these rating agencies ceases
to rate such Reference SecuritiesMidAmerican Holdings' senior secured long-term debt securities for
reasons outside theour control, of the
Company, the equivalent investment grade credit rating
from any other "nationally recognized statistical rating organization,"
within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the Securities
Exchange Act of 1934, selected by the Companyus as a replacement rating agency), and providedagency;
(2) no Event of Default or event which with notice or passage of time
would constitute an Event of Default shall existexists on such date,that date; and
(2)(3) MidAmerican Holdings has redeemed, repurchased or defeased, by way of
covenant defeasance or other defeasance, all of its 9-1/9 1/2% Senior Notes due
2006 issued pursuant to the terms ofunder the indenture, dated as of September 20, 1996, between
MidAmerican Holdings and IBJ Schroder Bank & Trust Company.
71
MODIFICATION OF THE INDENTURE
The indenture contains provisions permitting the Companyus and the trustee to modify
the indenture or any supplemental indenture or the rights of the Holdersholders of
Securitiessecurities of each series to be affected with the consent of the Holdersholders of a
majority in aggregate principal amount of the then outstanding Securitiessecurities of
each series to be affected, subject to the same conditions described below
under the caption "--Modification or Waiver of Certain Covenants."
The indenture also contains provisions permitting the Companyus and the trustee to
amend the indenture by entering into one or more supplemental indentures
in certain circumstances without the consent of the Holdersholders of any Securities:securities:
(1) to cure any ambiguity,
(2) to correct or supplement any provision in the indenture which may be
defective or inconsistent with any other provision in the indenture,
(3) to evidence the merger of the Companyus or the replacement of the trustee, and
(4) to make any other changes that do not materially adversely affect the
rights of any Holdersholders of Securities.
70
securities.
EVENTS OF DEFAULT
An Event of Default with respect to the Securitiessecurities is defined in the
indenture as:
(1) default for 30 days in the payment of any interest on the
Securities;securities;
(2) default for three days in the payment of principal of or any premium
on the Securitiessecurities at maturity, upon redemption, upon required purchase,
upon acceleration or otherwise;
(3) material default in the performance, or breach, of any of our
material covenantcovenants or obligation of the Companyobligations in the indenture (which shalldoes not include,
among other things, the Operational Covenants) and continuance of suchthe
material default or breach for a period of 90 days after written notice
specifying suchthe default is given to the Companyus by the trustee or to the Companyus and the
trustee by the Holdersholders of at least a majority in aggregate principal amount
of the Securities;securities;
(4) default in the performance, or breach, of any of the Operational
Covenants (if then effective) which would reasonably be expected to result
in a material adverse effect on our financial condition and the financial
condition of the Company and
itsour Subsidiaries, taken as a whole, and continuance of suchthe
default or breach for a period of 90 days after written notice specifying
suchthe default is given to the Companyus by the trustee or to the Companyus and the trustee by the
Holdersholders of at least a majority in aggregate principal amount of the
Securities,securities, subject to various cure and ratings confirmation exceptions in
the case of defaults involving the Project Document covenants;
(5) the trustee fails to have a perfected security interest in the
pledged capital stock of MHC for a period of 10 days;
(6) default in the payment ofof:
o the principal of any bond, debenture, note or other evidence of
indebtedness in each case for money borrowed,borrowed; or
in the payment of principal undero any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any
Indebtedness for Borrowed Money of the Companyincurred by us or any Significant
Subsidiary if such Indebtedness for Borrowed Moneythat is not Project Finance Debt and which provides for
recourse generally to us;
if:
o the Company,
which default for payment ofunpaid principal is in an aggregate principal amount
exceedingexceeds $75,000,000 when such indebtednessit becomes due and
payable, whether at maturity, upon redemption or acceleration or
otherwise, if suchotherwise; and
72
o the default shall continuecontinues unremedied or unwaived for more than 30
Business
Daysbusiness days and the time for payment of such amount has not been expressly
extended, until such time as such payment default is remedied, cured or
waived;extended; and
(7) the failureany of the Companyfollowing occurs:
o we or aany of our Significant SubsidiarySubsidiaries fail generally to pay our
or its debts as they become due, or the admissionadmit in writing ofour or its
inability to pay our or its debts generally, orgenerally;
o the making of a general assignment for the benefit of its creditors,our or our
Significant Subsidiaries' creditors;
o the institution of any proceeding by or against the Companyus or a Significant
Subsidiary (other
than any such proceeding brought againstwhich does either of the Company or a Significant
Subsidiary thatfollowing and which is not
dismissed within 180 days from the commencement
thereof) seekingdays:
o seeks to adjudicate itus or the Significant Subsidiary bankrupt or
insolvent, or
seekingo seeks a liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition (in each case,
other than a solvent liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition) of
itus or the Significant Subsidiary or our or its debts under any
law relating to bankruptcy, insolvency, reorganization,
moratorium or relief of debtors, or seekingdebtors;
o the entry of an order for relief or appointment of an
administrator, receiver, trustee, intervenor or other similar
official for itus or a Significant Subsidiary or for any substantial
part of our or its property,property; or
o the taking of any action by the Companyus or a Significant Subsidiary to
authorize or consent to any of the actions described in this
subparagraph (7).
The CompanyWe will give the trustee notice by facsimile or other written
communication satisfactory to the trustee of any Event of Default within five
days after the occurrence of that Event of Default becoming known to the
Company,us, and of
the measures it iswe are taking to remedy that Event of Default.
71
If an Event of Default with respect to the Securities shall occursecurities occurs and
be continuing,continues, either the trustee or the relevant percentage of holders described
in (x) inor (y) below may declare the caseprincipal amount of an Event of Default
described under clause (1) or (2) under "Events of Default" above, the Holderssecurities, and any
interest accrued thereon, to be due and payable immediately:
(x) holders of at least 33% in aggregate principal amount of the
Securities, or (y)securities in the case of any otheran Event of Default described in clause
(1) or (2) under "Events of Default" above; or
(y) the Holdersholders of a majority in aggregate principal amount of the
Securities, may declaresecurities in the principal amountcase of the
Securities, and any interest accrued thereon, to be due and payable immediately.other Event of Default.
At any time after sucha declaration of acceleration has been made, but before
a judgment or decree for payment of money has been obtained, if all Events of
Default have been cured or waived (other than the non-payment of principal of
the Securitiessecurities which has become due solely by reason of suchthe declaration of
acceleration), then and in every such case, the Holdersholders of a majority in aggregate principal amount of
the outstanding Securitiessecurities may, by written notice to the Companyus and to the trustee,
rescind and annul suchthe declaration and its consequences on behalf of all of the
Holders, butholders. However, no such rescission or annulment shallwill extend to or affect any
subsequent default or impair any right consequent thereon.on any subsequent default.
No Holderholder of the Securitiessecurities of a series shallwill have any right to institute
any proceeding, judicial or otherwise, with respect to the indenture, or for
the appointment of a receiver or trustee, or for any other remedy under the
indenture, unless:
(a) such Holderthe holder has previously given written notice to the trustee of a
continuing Event of Default with respect to the Securities;securities;
(b) the Holdersholders of not less than 33% or a majority, as applicable, in
principal amount of the Securities shall havesecurities has made written request to the trustee
to institute proceedings in respect of suchthe Event of Default in its own name
as trustee;
73
(c) such Holderthe holder or Holdersholders have offered the trustee indemnity
satisfactory to the trustee against the costs, expenses and liabilities to
be incurred in compliance with suchthe request;
(d) the trustee, for 90 days after its receipt of suchthe notice, request
and offer of indemnity, has failed to institute any such
proceeding; and
(e) no direction inconsistent with suchthe written request has been given to
the trustee during that 90-day period by the Holdersholders of a majority in
principal amount of the outstanding Securities.securities.
As noted above, actions to be taken by the Holdersholders of the Securitiessecurities with
respect to an Event of Default, including giving notice to the Companyus and the trustee
of an Event of Default, declaring an acceleration of the Securities,securities, rescinding
a declaration of acceleration, exercising remedies with respect to the
Collateralcollateral for the securities and instituting and controlling proceedings
following an Event of Default, may be taken by the holders of the specified
percentages of the aggregate principal amount of Securitiessecurities outstanding. For
purposes of voting on modifications to the indenture or supplemental indentures
or the rights of Holdersholders of the Securities,securities, the consent of a majority in
aggregate principal amount of the outstanding Securitiessecurities of each series to be
affected is required. For these purposes, each of the Notes due 2001, the Notes
thedue 2009 Notes and the Bonds due 2029 will be treated as a separate series of
Securitiessecurities under the indenture. However, as a result of voting together as one
class with respect to matters involving an Event of Default, holders of one or
two series of the Securitiessecurities will likely be able to control the actions taken
with respect to an Event of Default without obtaining the consent of holders of
the other series of Securities.securities.
OPTIONAL REDEMPTION
GENERAL
The Securitiessecurities of each series will be redeemable in whole or in part, at
theour option of the Company at any time, at a redemption price equal to the greater of:
(1) 100% of the principal amount of the series of Securitiessecurities being
redeemed; or
72
(2) the sum of the present values of the remaining scheduled payments of
principal of and interest on the series of Securitiessecurities being redeemed
discounted to the date of redemption on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months) at a discount rate equal
to (x) the Treasury Yield, in the case of the Notes due 2001, Notes,(y) the
Treasury Yield plus 15 basis points, in the case of the Notes due 2009, Notes and
(z) the Treasury Yield plus 25 basis points, in the case of the Bonds due
2029,
plus, for (1) or (2) above, whichever is applicable, accrued interest on such
Securitiesthe
securities to be redeemed to the date of redemption.
Notice of redemption shallwill be given not less than 30 days nor more than 60
days prior to the date of redemption. If fewer than all the Securitiessecurities are to
be redeemed, selection of Securitiessecurities of a series for redemption will be made by
the trustee in any manner the trustee deems fair and appropriate.
Unless the Company defaultswe default in payment of the Redemption Price (as defined below),
from and after the Redemption Date,redemption date, the Securitiessecurities or portions of Securitiessecurities
called for redemption will cease to bear interest, and the holders of those
Securitiessecurities will have no right in respect of those Securitiessecurities except the right
to receive the applicable Redemption Price.
OPTIONAL REDEMPTION PROVISIONS
Under the procedures described above, the price payable upon the optional
redemption at any time of a Securitysecurity (the "Redemption Price") is determined by
calculating the present value (the "Present Value") at suchthe time of redemption
of each remaining payment of principal of or interest on such Securitythe security to be
redeemed and then totaling those Present Values. If the sum of those Present
Values is equal to or less than 100% of the principal amount of such Security, the security to
be redeemed, the
74
Redemption Price of such Securitythe security will be 100% of its principal amount
(redemption at par). If the sum of those Present Values is greater than 100% of
the principal amount of such
Security,the security, the Redemption Price of such Securitythe security will
be suchthe greater amount (redemption at a premium). In no event may a Securitysecurity be
redeemed optionally at less than 100% of its principal amount.
The Present Value at any time of a payment of principal of or interest on
a Securitysecurity is calculated by applying to suchthe payment the discount rate (the
"Discount Rate") applicable to suchthe payment. The Discount Rate applicable at any
time to a payment of principal of or interest on a Securitysecurity equals the
equivalent yield to maturity at suchthat time of a fixed rate United States
treasury security having a maturity comparable to the maturity of suchthe subject
payment plus 0 basis points (in the case of the 2001 Notes)Notes due 2001), 15 basis
points (in the case of the 2009 Notes)Notes due 2009) and 25 basis points (in the case of
the Bonds)Bonds due 2029), suchwith the yield being calculated on the basis of the
interest rate borne by suchthe applicable United States treasury security and the
price at suchthat time of suchthe treasury security. The United States treasury
security employed in the calculation of a Discount Rate (a "Relevant Security") as well as the price
and equivalent yield to maturity of such Relevant Securitythe relevant treasury security will be
selected or determined by an Independent
Investment Banker.independent investment banking institution of
international standing appointed by us.
Whether the sum of the Present Values of the remaining payments of
principal of and interest on a Securitysecurity to be redeemed optionally will or will
not exceed 100% of its principal amount and, accordingly, whether such Securitythe security
will be redeemed at par or at a premium will depend on the Discount Rate used
to calculate suchthe Present Values. SuchThe Discount Rate, in turn, will depend upon
the equivalent yield to maturity of a Relevant Security,the treasury security used in the
calculation of the Discount Rate, which yield will itself depend on the
interest rate borne by, and the price of, the Relevant
Security.relevant treasury security. While
the interest rate borne by the Relevant Securityrelevant treasury security is fixed, the price
of the Relevant Securityrelevant treasury security tends to vary with interest rate levels
prevailing from time to time. In general, if at a particular time the
prevailing level of interest rates for a newly issued United States treasury
security having a maturity comparable to that of a Relevant Securitythe treasury security used in
the calculation of the Discount Rate is higher than the level of interest rates
for newly issued United States treasury securities having a maturity comparable
to such Relevant Securitythe relevant treasury security prevailing at the time the Relevant Securityrelevant treasury
security was issued, the price of the Relevant Securityrelevant treasury security will be lower
than its issue price. Conversely, if at a particular time the prevailing level
of interest rates for a newly issued United States treasury security having a
maturity comparable to that of a Relevant Securitythe treasury security used in the calculation of
the Discount Rate is lower than the level of interest rates prevailing for
newly issued United States treasury securities having a maturity comparable to
the Relevant Securityrelevant treasury security at the time the Relevant Securityrelevant treasury security was
issued, the price of the Relevant Securityrelevant treasury security will be higher than its
issue price.
73
Because the equivalent yield to maturity on a Relevant Securitythe treasury security used in
the calculation of the Discount Rate depends on the interest rate it bears and
its price, an increase or a decrease in the level of interest rates for newly
issued United States treasury securities with a maturity comparable to that of
a Relevant Securitythe relevant treasury security above or below the levels of interest rates for
newly issued United States treasury securities having a maturity comparable to
the Relevant Securityrelevant treasury security prevailing at the time of issue of the Relevant Securityrelevant
treasury security will generally result in an increase or a decrease,
respectively, in the Discount Rate used to determine the Present Value of a
payment of principal of or interest on a Security.security. An increase or a decrease in
the Discount Rate, and therefore an increase or a decrease in the levels of
interest rates for newly issued United States treasury securities having a
maturity comparable to the Relevant Security,relevant treasury security, will result in a
decrease or an increase, respectively, of the Present Value of a payment of
principal of or interest on a Security.security. In other words, the Redemption Price
varies inversely with the levels of interest rates for newly issued United
States treasury securities having a maturity comparable to the Comparable
Treasury Issue. As noted above, however, if the sum of the Present Values of
the remaining payments of principal of and interest on a Securitysecurity proposed to
be redeemed is less than its principal amount, such Securitythe security may only be
redeemed at par.
75
DEFEASANCE AND COVENANT DEFEASANCE
The Company,We, at itsour option, may elect (a)elect:
o to be discharged from any and all obligations in respect of a series of
Securitiessecurities ("Defeasance") (except in
each case, except for the obligations to, among other
things, register the transfer or exchange of such Securities,the securities of that
Series, replace stolen, lost or mutilated Securities,securities, maintain paying
agencies, hold moneys for payment in trust and pay when due all principal
and interest solely out of moneys held in trust)trust; or
(b)o not to comply with certain covenants ("Covenant Defeasance") ofcontained in the
indenture with respect to a series of Securitiessecurities described above under
the captions "Consolidation, Merger, Conveyance, Sale or Lease,"Lease",
"Limitation on Distributions", "Limitation on Indebtedness of the CompanyMidAmerican
Funding and MHC", "Limitation on Liens", "Limitation on Business
Activities" and "Operational Covenants";
if, in either case, the
Companywe irrevocably depositsdeposit with the trustee, as trust
funds in trust specifically pledged as security for, and dedicated solely to,
the benefit of the Holderholder or Holdersholders of such Securitiesthe securities of such series,that series:
(1) money ormoney;
(2) U.S. Government Obligations which through the payment of interest and
principal in
respect thereof in accordance with their terms will provide, not later than
one day before the due date of any payment, money,money; or
(3) a combination thereof,of money and the U.S. Government Obligations described
in clause (2);
in each case in an amount sufficient, in the opinion of a nationally
recognized firm of independent accountants, to pay and discharge the principal
of and premium and interest on the outstanding Securitiessecurities of suchthat series (x) on
the dates
such payments are due in accordance with the terms of the Securitiessecurities of
suchthat series, or (y) if the Company haswe have designated a Redemption Date pursuant toredemption date as described in the
next paragraph, to and including the Redemption Dateredemption date so designated by the Company.us.
Other conditions precedent to effecting Defeasance or Covenant Defeasance
include:
(1) that the Securitiessecurities will not be delisted by any securities exchange
on which they are then traded as a result of the deposit of trust funds in
trust;
(2) no Event of Default, or event which with notice or lapse of time
would become an Event of Default (including by reason of suchthe deposit), with
respect to the Securitiessecurities of suchthe series shall have occurredto be defeased will exist and be
continuing on the date of suchthe deposit; and
(3) suchthe Defeasance or Covenant Defeasance shallwill not result in the breach
or violation of, or constitute a default under, any other material
agreement or instrument by which the Company iswe are bound.
To exercise any such option, the Company isOf these options, we are required to deliver to the trustee:
(a) an opinion of independent counsel of recognized standing to the
effect that the Holdersholders will not recognize income, gain or loss for U.S.United
States federal income tax purposes as a result of suchthe defeasance deposit,
which in the case of Defeasance must be based on a change in law or a
ruling by the U.S.United States Internal Revenue Service, and
(b) an officer's certificate as to compliance with all conditions
precedent provided for in the indenture relating to the satisfaction and
discharge of the Securitiessecurities of such series.
74
the series to be defeased.
If the Company wisheswe wish to deposit or cause to be deposited money or U.S. Government
Obligations to pay or discharge the principal of and interest, if any, on the
outstanding Securitiessecurities of a series to and including a Redemption
Dateredemption date on which
all of the outstanding Securitiessecurities of suchthat series are to be redeemed, such Redemption Date shallthe
redemption date will be irrevocably designated by a board resolution delivered
to the trustee on or before the date of deposit of suchthe money or U.S. Government
Obligations, and suchthe board resolution shallwill be accompanied by an irrevocable
Company request from us that the trustee give notice of suchthe redemption in theour name and
at theour expense of the Company not less than 30 nor more than 60 days prior to such Redemption Datethe redemption
date in accordance with the indenture.
76
If the trustee or the paying agent is unable to apply any moneys deposited
in trust to effect a Defeasance or Covenant Defeasance by reason of any order
or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting suchthis application, then any obligations from which the
Companywe had
been discharged or released shallwill be revived and reinstated as though no such deposit
of moneys in trust had occurred, until suchthe time as the trustee or paying agent
is permitted so to apply all of suchthe moneys deposited in trust.
MODIFICATION OR WAIVER OF CERTAIN COVENANTS
The CompanyWe may omit in any particular instance to comply with any term, provision
or condition in the indenture with respect to the Securitiessecurities of a series if
before the time for such compliance the Holdersholders of at least a majority in aggregate
principal amount of the outstanding Securitiessecurities of that series, shall, by act of such Holders,those
holders, either modify the covenant or waive such
compliance in suchthat specific
instance or generally waive compliance with suchthe particular term, provision or
condition; provided thatcondition. However, no such modification shall,will, without the consent of each Holderholder of
Securitiessecurities of that series:
(1) change the stated maturity upon which the principal of or the
interest on the Securitiessecurities of that series is due and payable;
(2) reduce the principal amount or redemption price of the Securitiessecurities of
that series or the rate of interest on the Securitiessecurities of that series;
(3) change any place of payment or the currency in which the Securitiessecurities
of that series or any premium or the interest on the Securitiessecurities of that
series is payable;
(4) impair the right to institute suit for the enforcement of any such payment
on or after the stated maturity of those Securitiessecurities (or, in the case of
redemption, on or after the Redemption Dateredemption date for those Securities)securities); or
(5) reduce the percentage in principal amount of the outstanding
Securitiessecurities of that series, the consent of Holdersholders of which is required for
any waiver of compliance with certain provisions ofcovenants contained in the indenture or
certain
defaults under the indenture and their consequences provided for
in the indenture.consequences.
The Securitiessecurities owned by the Companyus or any of itsour affiliates shallwill be deemed not to be
outstanding for, among other purposes, consenting to any such
modification.of the modifications
described above.
TRANSFER
The Securitiessecurities will be issued in registered form and will be transferable
only upon the surrender of the Securitiessecurities being transferred for registration of
transfer. The CompanyWe may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers
and exchanges. See "--Book-Entry, Delivery and Form."
75
exchanges of securities.
CONCERNING THE TRUSTEE
The Bank of New York, as successor to IBJ Whitehall Bank & Trust Company,
is the trustee under the indenture and has been appointed by the Companyus as registrar
and paying agent with respect to the Securities.securities.
GOVERNING LAW
The indenture and the Securitiessecurities will be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.by those principles.
77
BOOK-ENTRY, DELIVERY AND FORM
GENERAL
Except as described below, the Securitiessecurities will be issued in the form of
one or more fully registered Securitiessecurities in global form ("Global Notes").form. The Global Notesglobal securities
will be deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of the DepositaryThe Depository Trust Company or its nominee.
Securities sold to "institutional accredited investors," as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act, will be delivered as
definitive fully registered certificates.
Upon issuance of the Global Notes, the Depositaryglobal securities, DTC or its nominee will credit, on
its book-entry registration and transfer system, the principal amount of
Securitiessecurities sold to qualified institutional buyers pursuant tounder Rule 144A represented
by such Global Notesthe global securities to the account of institutions that have accounts with
the DepositaryDTC or its nominee participants (the "DTC
Participants") and Euroclear will credit on its book-entry
registration and transfer system the number of Securitiessecurities sold to certainnon-U.S.
persons in offshore transactions in reliance on Regulation S under the
Securities Act also represented by Global Notesglobal securities to the account of
institutions that have accounts with Euroclear or its nominee participants (the "Euroclear Participants" and,
collectively with the DTC Participants, the "Participants").participants.
Ownership of beneficial interests in the Global Notesglobal securities will be limited to
ParticipantsDTC and Euroclear participants or persons that may hold interests through Participants.DTC
and Euroclear participants. Ownership of beneficial interests in the Global Notesglobal
securities will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the DepositaryDTC or its nominee (with respect
to the Participants'DTC and Euroclear participants' interests) for such Global
Notes,the global securities, or
by ParticipantsDTC and Euroclear participants or persons that hold interests through ParticipantsDTC
and Euroclear participants (with respect to beneficial interests of persons
other than Participants)DTC and Euroclear participants). The laws of some jurisdictions may
require that certain purchasers of securities take physical delivery of those
securities in definitive form. SuchThese laws may impair the ability to transfer or
pledge beneficial interests in the Global
Notes.global securities.
So long as the DepositaryDTC or its nominee is the registered holder of any Global Notes, the Depositaryglobal
securities, DTC or its nominee, as the case may be, will be considered the sole
legal owner of such Securitiesthe securities represented by the global securities for all
purposes under the indenture and the Securities.securities. Except as described below,
owners of beneficial interests in Global Notesglobal securities will not be entitled to
have those Global Notesglobal securities registered in their names, will not receive or be
entitled to receive physical delivery in exchange for those Global Notesglobal securities
and will not be considered to be the owners or holders of those Global Notesglobal
securities for any purpose under the indenture or the Securities. The Company understandssecurities. We understand
that under existing industry practice, if an owner of a beneficial interest in
a Global Noteglobal security desires to take any action that the Depositary,DTC, as the holder of that
Global Note,global security, is entitled to take, the DepositaryDTC would authorize the ParticipantsDTC and Euroclear
participants to take suchthe action, and that the ParticipantsDTC and Euroclear participants
would authorize beneficial owners owning through such
Participantsthe DTC and Euroclear
participants to take suchthe action or would otherwise act upon the instructions of
beneficial owners owning through them.
The CompanyWe will make available to the trustee by the applicable interest payment
date or maturity date any payment of principal or interest due on the
Securities.securities. As soon as practicable thereafter, the trustee will make such
payments
to the DepositaryDTC or its nominee, as the case may be, as the registered owner of the
Global Notesglobal securities representing such Securitiesthe securities in accordance with existing
arrangements between the trustee and the Depositary.
76
The Company expectsDTC.
We expect that the DepositaryDTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Notes,global securities, will credit
immediately the accounts of the related ParticipantsDTC and Euroclear participants with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Notethe global securities as shown on the records of the Depositary. The
CompanyDTC.
We also expectsexpect that payments by ParticipantsDTC and Euroclear participants to owners of
beneficial interests in the Global Notesglobal securities held through such Participantsthe DTC and
Euroclear participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participants.the DTC and Euroclear participants.
None of the Company,us, the trustee or any payment agent for the Global
Notesglobal securities
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial
78
ownership interests in any of the Global Notesglobal securities or for maintaining,
supervising or reviewing any records relating to suchthese beneficial ownership
interests or for other aspects of the relationship between the DepositaryDTC and its
Participantsparticipants or the relationship between such Participantsthese participants and the owners of
beneficial interests in the Global Notesglobal securities owning through such Participants.the DTC
participants.
Unless and until exchanged in whole or in part for Securitiessecurities in
definitive form in accordance with the terms of the Securities,securities, the Global
Notesglobal
securities may not be transferred except as a whole by the DepositaryDTC to a nominee of the DepositaryDTC
or by a nominee of the DepositaryDTC to the DepositaryDTC or another nominee of the DepositaryDTC or by the DepositaryDTC or any
nominee of any such nomineeDTC to a successor of the DepositaryDTC or a nominee of eachthe successor.
Although the DepositaryDTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notesglobal securities among Participants of the
Depositary,its participants, it is
under no obligation to perform or continue to perform suchthese procedures, and suchthe
procedures may be discontinued at any time. Neither the trustee nor the Companywe will
have any responsibility for the performance by the
DepositaryDTC or its Participantsparticipants or
indirect Participantsparticipants of their respective obligations under the rules and
procedures governing their operations. The
CompanyWe and the trustee may conclusively rely
on, and shallwill be protected in relying on, instructions from the DepositaryDTC for all
purposes.
CERTIFICATED NOTES
Securities that are originally issued to institutional "accredited
investors" who are not qualified institutional buyers will be issued in
certificated form.
The Global Notes shallglobal securities will be exchangeable for corresponding certificated
Securitiessecurities registered in the name of persons other than the DepositaryDTC or its nominee only
if:
(1) the DepositaryDTC notifies the Companyus that it is unwilling or unable to continue as
Depositary for any of the Global Notesglobal securities or at any time ceases to be a
clearing agency registered under the Exchange Act;
(2) there shall have occurredoccurs and be continuingcontinues an Event of Default with respect to the
applicable Securities;securities; or
(3) the Company executeswe execute and deliversdeliver to the trustee an order that the Global Notes shallglobal
securities will be so exchangeable.
Any certificated Securitiessecurities will be issued only in fully registered form, and
shallwill be issued without coupons in denominations of $1,000 and integral
multiples of $1,000. Any certificated Securitiessecurities issued will be registered in
the names and in the denominations requested by the Depositary.DTC.
THE CLEARING SYSTEM
The DepositaryDTC has advised the Companyus as follows: The DepositaryDTC is limited-purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing 77
corporation" within the meaning of the New York
Uniform Commercial Code, and "a clearing agency" registered pursuant to the provisions ofunder Section 17A
of the Exchange Act. The DepositaryDTC was created to hold securities of institutions that
have accounts with the DepositaryDTC and to facilitate the clearance and settlement of
securities transactions among it Participantsits participants in suchthose securities through
electronic book-entry changes in accounts of Participants,these participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's ParticipantsDTC's
participants include securities brokers and dealers, bank,banks, trust companies,
clearing corporations and certain other similar organizations. Access to the
Depositary'sDTC's
book-entry system is also available to others such asincluding banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant,participant, whether directly or indirectly.
CERTAIN DEFINITIONS OF TERMS USED IN THE INDENTURE
The following is a summary of some of the defined terms used in the
indenture. We refer you to the indenture for the full definition of all these
terms, as well as any other terms used in this prospectus for which no
definition is provided.
"Capitalized Lease Obligations" means all lease obligations of the Companyus and itsour
Subsidiaries which, under GAAP, are or will be required to be capitalized, in
each case taken at the amount thereofof the lease obligations accounted for as
indebtedness in conformity with such principles.GAAP.
79
"Comparable Treasury Issue" means, in the case of the Notes due 2001, the
Notes thedue 2009
Notes and the Bonds due 2029, the United States Treasury security
selected by an Independent Investment Bankerindependent investment banking institution of international
standing appointed by us as having a maturity comparable to the remaining term
of such Securitiesthe securities to be redeemed that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining
term of the Securities.securities to be redeemed.
"Comparable Treasury Price" means, with respect to any Redemption Date,redemption date,
(1) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
Business Daybusiness day preceding such Redemption Date,the redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities"securities" or (2) if suchthat release (or any successor release) is not
published or does not contain suchthe appropriate prices on such Business Day,that business day, the
Reference Treasury Dealer Quotation for such Redemption Date.the redemption date.
"Consolidated Current Liabilities" means the consolidated current
liabilities of the Companyus and itsour Subsidiaries, but excluding the current portion of
long term Indebtedness which would otherwise be included therein,in long term
Indebtedness, as determined on a consolidated basis in accordance with GAAP.
"Consolidated Debt" means, at any time, the sum of the aggregate
outstanding principal amount of all Indebtedness for Borrowed Money (including,
without limitation, the principal component of Capitalized Lease Obligations,
but excluding Currency, Interest Rate or Commodity Agreements and all
Consolidated Current Liabilities and Project Finance Debt) of the Companyus and itsour
Subsidiaries, as determined on a consolidated basis in conformity with GAAP.
"Consolidated EBITDA" means, for any period, the sum of the following
amounts for suchthe period, of the Company'sdetermined on a consolidated basis in conformity with
GAAP:
(1) our Consolidated Net Operating Income,Income;
(2) our Consolidated Interest Expense,Expense;
(3) our income taxes and deferred taxes, (otherother than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains
or losses or sales of assets),assets;
(4) our depreciation expense,expense;
(5) our amortization expenseexpense; and
(6) all other non-cash items reducing our Consolidated Net Operating
Income, less all non-cash items increasing our Consolidated Net Operating
Income, all as determined on a consolidated basis in conformity with GAAP; provided that,GAAP.
However, to the extent that the Company haswe have any Subsidiary that is not a
wholly ownedwholly-owned Subsidiary, Consolidated EBITDA shallwill be reduced by an amount equal
to theto:
(a) that Subsidiary's Consolidated Net Operating Income, of such Subsidiary
multiplied by
(b) the quotient of (A)of:
(x) the number of shares of outstanding common stock of suchthat
Subsidiary not owned on the last day of suchthe period by the
Companyus or any 78
Subsidiary of the Companyour
Subsidiaries, divided by
(B)(y) the total number of shares of outstanding common stock of suchthe
Subsidiary on the last day of suchthe period.
"Consolidated Interest Expense" means, for any period, clause (1) below
minus clause (2) below:
(1) the aggregate amount of the following which is paid, accrued or
scheduled to be paid or accrued by us and each of our Subsidiaries during
the relevant period:
o interest in respect of Indebtedness for Borrowed Money, (includingincluding
(x) amortization of original issue discount on any Indebtedness and
the interest portion of any deferred
80
payment obligation, calculated in accordance with the effective
interest method of accounting; andaccounting, but excluding (y) the interest of
any Subsidiary whose net operating income (or loss) is excluded
from the calculation of Consolidated Net Operating Income as
described in clause (2) of the definition of Consolidated Net
Operating Income, to the extent the net operating income (or loss)
of the Subsidiary is excluded;
o all commissions, discounts and other fees and charges owed with
respect to bankers' acceptance financing) andfinancing;
o the net costs associated with Interest Rate AgreementsAgreements; and
o all but the principal component of rentals in respect of
Capitalized Lease Obligations,
paid, accrued or scheduled to be paid or to be accrued by the Company and each
of its Subsidiaries during such period, excluding, however, any amount of such
interest of any Subsidiary of the Company if the net operating income (or loss)
of such Subsidiary is excluded from the calculation of Consolidated Net
Operating Income for such Subsidiary pursuant to clauseObligations.
(2) of the definition
thereof (but only in the same proportion as the net operating income (or loss)
of such Subsidiary is excluded), less consolidated interest income, all as
determined on a consolidated basis in conformity with GAAP; provided that,income.
However, to the extent that the Company haswe have any Subsidiary that is not a
wholly ownedwholly-owned Subsidiary, Consolidated Interest Expense shallwill be reduced by an
amount equal to such(x) the interest expense of suchthat Subsidiary multiplied by (y)
the quotient of clause (A) below divided by clause (B) below:
(A) the number of shares of outstanding common stock of suchthe Subsidiary
not owned on the last day of suchthe relevant period by the Companyus or any Subsidiary of the Company
divided byour
Subsidiaries;
(B) the total number of shares of outstanding common stock of suchthe
Subsidiary on the last day of suchthe relevant period.
"Consolidated Net Operating Income" means, for any period, the aggregate
of the net operating income (or loss) of the Companyus and itsour Subsidiaries for suchthe
applicable period, as determined on a consolidated basis in conformity with
GAAP;
provided thatGAAP. However, the following items shallwill be excluded from any calculation of
Consolidated Net Operating Income (without duplication):Income:
(1) the net operating income (or loss) of any person (other than a
Subsidiary) in which any other person has a joint interest, except to the
extent of the amount of dividends or other distributions actually paid to
the Companyus or another Subsidiaryone of our Subsidiaries during the Company during suchapplicable period;
(2) the net operating income (or loss) of any Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by
suchthe Subsidiary of suchthe net operating income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation or
license; and
(3) all extraordinary gains and extraordinary losses.
"Consolidated Net Tangible Assets" means at any time, the total of all
assets (including revaluations thereofof assets as a result of commercial appraisals,
price level restatement or otherwise) appearing on the most recently available
consolidated balance sheet of the Companyus and itsour Subsidiaries (provided that
such(so long as the balance
sheet is of a date not more than 60 days prior to a Measurement
Date)the record date for any
Distribution) prepared in accordance with GAAP, net of applicable reserves and
deductions, but excluding goodwill, trade names, trademarks, patents,
unamortized debt discount and all other like intangible assets (which term shallwill
not be construed to include suchthe revaluations), less the aggregate of the
Consolidated Current Liabilities of the Companyus appearing on suchour balance sheet.
"Currency, Interest Rate or Commodity Agreements" means an agreement or
transaction involving any currency, interest rate or energy price or volumetric
swap, cap or collar arrangement, forward exchange transaction, option, warrant,
forward rate agreement, futures contract or other derivative instrument of any
kind for the hedging or management of foreign exchange, interest rate or energy
price or volumetric risks, it is being understood, for purposes of this
definition, that the term "energy" shall include, without limitation, coal,
gas, oil and electricity.
"DCR" means Duff & Phelps Credit Rating Co., and any of its Subsidiaries
or successors.
79
"Distribution" means any dividend, distribution or payment (including by
way of redemption, repurchase, retirement, return or repayment) in respect of
shares of our capital stock of the Company.
"Escrow Agreement" means the Escrow Agreement dated as of March 11, 1999,
between the Company and IBJ Whitehall Bank & Trust Company, as escrow agent
thereunder.stock.
81
"Excluded Subsidiary" means any Subsidiary of the Company:our Subsidiaries:
(1) in respect of which neither the Companywe nor any Subsidiary of the
Companyour Subsidiaries (other
than another Excluded Subsidiary) has undertaken any legal obligation to
give any guarantee for the benefit of the holders of any Indebtedness for
Borrowed Money (other than to another memberus or one of the
Group)our Subsidiaries) other than in
respect of any statutory obligation and the Subsidiaries of which are all
Excluded Subsidiaries; and
(2) which has been designated as suchan Excluded Subsidiary by the Companyus by written
notice to the trustee; provided that the Companytrustee.
We may give written notice to the trustee at any time that any Excluded
Subsidiary is no longer an Excluded Subsidiary whereupon it shallwill cease to be an
Excluded Subsidiary.
"Existing Rating" means, for any Rating Agency on any date of
determination, the Rating assigned to the Securities by such Rating Agency as
of such date.
"GAAP" means generally accepted accounting principles in the United
States as in effect from time to time.
"Group" means the Company and its Subsidiaries and "member of the Group"
shall be construed accordingly.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume or guarantee suchthe subject Indebtedness.
"Indebtedness" means, with respect to the Companyus or any of any itsour Subsidiaries at
any date of determination (without duplication):determination:
(1) all Indebtedness for Borrowed Money;
(2) all obligations in respect of letters of credit or other similar
instruments, (includingincluding reimbursement obligations with respect thereto);obligations;
(3) all obligations to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months
after the date of placing suchthe property in service or taking delivery and
title theretoto the property or the completion of suchthe services, except trade
payables;
(4) all Capitalized Lease Obligations;
(5) all indebtedness of other persons secured by a mortgage, charge,
lien, pledge or other security interest on any asset of the Companyus or any of itsour
Subsidiaries, whether or not suchthe indebtedness is assumed; provided
that theassumed. The amount of
suchthis Indebtedness shallwill be the lesser of (A) the fair market value of suchthe
subject asset at suchthe date of determination and (B) the amount of the
secured indebtedness;
(6) all indebtedness of other persons of the types specified in the
preceding clauses (1) through (5), to the extent suchthe indebtedness is
guaranteed by the Companyus or any of itsour Subsidiaries; and
(7) to the extent not otherwise included in this definition, obligations
under Currency, Interest Rate or Commodity Agreements.
80
The amount of Indebtedness at any date shallwill be the current outstanding balance at such
date
of all unconditional obligations as described above and, upon the occurrence of
the contingency giving rise to the obligation, the current maximum liability of
any contingent obligations of the types specified in the preceding clauses (1)
through (7) at such date; provided that. However, the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of suchthe Indebtedness less
the current remaining unamortized portion of the original issue discount of suchthe
Indebtedness at such time as determined in conformity with GAAP.
"Indebtedness For Borrowed Money" means any indebtedness, (whetherwhether being
principal, premium, interest or other amounts)amounts, for:
(1) money borrowed;
(2) payment obligations under or in respect of any trade acceptance or
trade acceptance credit; or
(3) any notes, bonds, debentures, debenture stock, loan stock or other
debt securities offered, issued or distributed whether by way of public
offer, private placement, acquisition consideration or otherwise and
whether issued for cash or in whole or in part for a consideration other
than cash;
provided, however, in each case, that such82
However, the term shall"Indebtedness for Borrowed Money" will exclude:
(a) any indebtedness relating to any accounts receivable securitizations, (x)securitizations;
(b) any Indebtedness of the type permitted to be secured by Liens
pursuant todescribed in clause (13) under the caption "--Limitation on Liens"
containedappearing earlier in this prospectus above;
(b)prospectus;
(c) any Trust Preferred Securitiestrust preferred securities or related debt or guaranties which
are issued and outstanding on the date of original issue of the Securitiessecurities
or any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, of any suchof these existing
Trust Preferred Securities,trust preferred securities or related debt or guaranties, for amounts not
exceeding the principal amount or liquidation preference of the Trust Preferred Securitiestrust
preferred securities or related debt or guaranties so extended, renewed or
replaced,replaced; and
(c)(d) any Trust Preferred Securitiestrust preferred securities or related debt or guaranties issued
in replacement or in connection with a refinancing of any preferred
securities or preferred stock which is issued and outstanding on the date
of original issue of the Securities,securities, for amounts not exceeding the
liquidation preference of the preferred securities or preferred stock so
replaced or refinanced.
"Independent Investment Banker" means an independent investment banking
institution of international standing appointed by the Company.
"Independent Manager" means an individual who is not, at time of his or
her appointment or any time thereafter, and was not at any time during the
preceding five years:
(1) a direct or indirect legal or beneficial owner of any shares of the
capital stock of, or membership interests in, the Company, CalEnergyus, MidAmerican Holdings or
any of CalEnergy'sMidAmerican Holdings' subsidiaries, except that an Independent
Manager may own shares of the capital stock of, or membership interests in,
CalEnergyMidAmerican Holdings or any of its direct or indirect subsidiaries having a
value, at all times during which suchthe subject person is the Independent
Manager, not exceeding 1% of suchthat person's assets;
(2) a director, officer, employee, manager, trustee, partner, affiliate,
family member, major supplier, major contractor or major creditor of the Companyus or
of any of the Company'sour affiliates (except solely by virtue of serving as anour
Independent Manager of the Company)Manager); or
81
(3) a person who, directly or indirectly, controls (except solely by
virtue of serving as anour Independent Manager of the Company)Manager) (A) the
Company,us, (B) any affiliate of the Companyour
affiliates or (C) any person or entity set
forthdescribed in clause (2) above.
The term "major supplier" means a person or entity to which the Companywe or itsour
affiliates, as applicable, has outstanding indebtedness for borrowed money in a
sum sufficiently large as would reasonably be expected to influence the
judgment of the proposed Independent Manager adversely to the interests of the
Companyus
and itsour creditors. The term "major contractor" means a person or entity that
has contracts with the Companyus in a sum sufficiently large as would reasonably be
expected to influence the judgment of the proposed Independent Manager
adversely to the interests of the Companyus and itsour creditors. The term "major creditor"
means a person or entity to which the Companywe or itsour affiliates, as applicable, has
outstanding indebtedness for borrowed money in a sum sufficiently large as
would reasonably be expected to influence the judgment of the proposed
Independent Manager adversely to the interests of the
Companyus or itsour other creditors.
The term "family member" means any child, stepchild, grandchild, parent,
grandparent, spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law or sister-in-law, and shall includeincludes
adoptive relationships. The term "affiliate" means any person or entity
controlling, controlled by, or under common control with the Company,us, whether by virtue
of the holding of voting securities, the election of members of the Boardour board of
Directorsmanagers or another governing body or otherwise.
"Interest Coverage Ratio" means, with respect to us on the Company onrecord date for
any Measurement Date,Distribution, the ratio of (1) the aggregate amount of our Consolidated
EBITDA
of the Company for the four fiscal quarters for which financial information in
respect thereof is
available immediately prior to such Measurement Datethe record date to (2) the aggregate
Consolidated Interest Expense during suchthat four fiscal quarters.
"Investments" in any Personperson means any loan or advance to, any net payment
on a guarantee of, any acquisition of capital stock, equity interest,
obligation or other security of, or capital contribution or other investment
in, such Person.that person. Investments exclude advances to customers and suppliers in the
ordinary course of business.
83
"Leverage Ratio" means the ratio of Consolidated Debt to Total Capital,
calculated on the basis of theour most recently available consolidated balance
sheet of(so long as the Company and its consolidated Subsidiaries (provided that such balance sheet is as of a date not more than 60 days prior
to a Measurement
Date)the record date for any Distribution) prepared in accordance with GAAP.
"Lien" means any mortgage, lien, pledge, security interest or other
encumbrance; provided, however, thatencumbrance. However, the term "Lien" shalldoes not mean any easements,
rights-of-way, restrictions and other similar encumbrances and encumbrances
consisting of zoning restrictions, leases, subleases, restrictions on the use
of property or defects in the title thereto.
"Measurement Date" means the record date for any Distribution.
"MidAmerican Merger" means the consummation of the transactions
contemplated by the MidAmerican Merger Agreement, as a result of which MHC
becomes a direct wholly-owned Subsidiary of the Company.
"Moody's" means Moody's Investors Service, Inc., and any of its
Subsidiaries or successors.to property.
"Project Finance Debt" means:
(1) any Indebtedness to finance or refinance the ownership, acquisition,
development, design, engineering, procurement, construction, servicing,
management and/or operation of any project or asset which is incurred by an
Excluded Subsidiary;
(2) any Indebtedness to finance or refinance the ownership, acquisition,
development, design, engineering, procurement, construction, servicing,
management and/or operation of any project or asset in respect 82
of which the
person or persons to whom any suchthe Indebtedness is or may be owed by the relevant
borrower (whether or not a memberthe borrower is us or one of the Group)our Subsidiaries) has or
have no recourse whatsoever to any member of the Groupus or our Subsidiaries (other than an Excluded
Subsidiary) for the repayment thereofof the Indebtedness other than:
(a) recourse to such memberus and/or one or more of the Groupour Subsidiaries for amounts
limited to the cash flow or net cash flow (other than historic cash flow or
historic net cash flow) from, or ownership interests or other investments
in, suchthe relevant project or asset; and/or
(b) recourse to such memberus and/or one or more of the Groupour Subsidiaries for the purpose
only of enabling amounts to be claimed in respect of suchthe Indebtedness in an
enforcement of any encumbrance given by such memberus and/or one or more of our
Subsidiaries over the Group over
suchrelevant project or asset or the income, cash flow or
other proceeds deriving therefrom (or given by any shareholder or the like,
or other investor in, the borrower or in the owner of suchthe project or asset
over its shares or the like in the capital of, or other investment in, the
borrower or in the owner of suchthe project or asset) to secure suchthe
Indebtedness, provided thatso long as the extent of such recourse to such
memberus and/or one or more of
the Groupour Subsidiaries is limited solely to the amount of any recoveries made on
any suchthe enforcement; and/or
(c) recourse to suchthe borrower generally, or directly or indirectly to a memberus
and/or one or more of the Group,our Subsidiaries, under any form of assurance,
indemnity, undertaking or support, which recourse is limited to a claim for
damages (other than liquidated damages and damages required to be
calculated in a specified way) for breach of an obligation (not being a
payment obligation or an obligation to procure payment by another or an
indemnity in respect thereofof a payment obligation or any obligation to comply or
to procure compliance by another with any financial ratios or other tests
of financial condition) by the person against which such recourse is available;
and
(3) any Indebtedness which is issued by MidAmerican Realty Services
Company other than any such Indebtedness incurred after the Effective Date which is
guaranteed by the Company,us, MHC or MidAmerican Energy.
"Rating" means, for each Rating Agency, the credit rating assigned to the
Securities by such Rating Agency.
"Rating Agency" means (1) S&P,Standard & Poor's, (2) Moody's and (3) DCR,Duff &
Phelps, and any of their respective Subsidiaries or successors, or, in any
case, if such personany of these rating agencies ceases to rate any series of Securitiessecurities
for reasons outside theour control, of the
Company, any other "nationally recognized statistical
rating organization" (within the meaning of Rule 15c3-l(c)(2)(vi)(F) under the
Securitiessecurities Exchange Act of 1934, as amended) selected by the Companyus as a replacement
Rating Agency.
"Rating Downgrade" means a lowering by any Rating Agency of the Existing
Rating assigned to the Securities by such Rating Agency.
"Redemption Date" means any date on which the Company redeems all or any
portion of the Securities in accordance with the terms of the indenture.
"Reference Treasury Dealer" means a primary U.S.United States government
securities dealer in New York City appointed by the Company.us.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any Redemption Date,redemption date, the average, as determined by the
Company,us, of
the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount and quoted in writing to the Companyus by suchthe
Reference Treasury Dealer at 5:00 p.m. on the third Business Daybusiness day preceding such Redemption Date)the
redemption date).
"S&P" means Standard & Poor's Ratings Group, and any of its Subsidiaries
or successors.
8384
"Significant Subsidiary" means, at any particular time, any Subsidiary of the Companyour
Subsidiaries whose gross assets or gross revenues (having regard to the
Company'sour direct
and/or indirect beneficial interest in the shares, or the like, of that
Subsidiary) represent at least 25% of theour consolidated gross assets or, as the
case may be, our consolidated gross revenues of the Company.revenues.
"Subsidiary" means, with respect to any specified person, any corporation,
association, partnership, limited liability company or other business entity of
which 50% or more of the total voting power of shares of capital stock or other
interests (including partnership interests) entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereofof the business entity is at the time owned, directly or
indirectly, by (1) suchthe specified person, (2) suchthat person and one or more
Subsidiaries of suchthat person or (3) one or more Subsidiaries of suchthat person.
"Total Capital" of any Personperson is defined to mean, as of any date, the sum
(without duplication)
of (a) Indebtedness for Borrowed Money, (b) consolidated stockholder's equity
of such Personthat person and its consolidated Subsidiaries (excluding any preferred stock
in stockholder's equity) and (c) preferred stock and Trust Preferred Securitiestrust preferred securities
or related debt or guaranties of such Personthat person and its consolidated Subsidiaries.
"Treasury Yield" means, with respect to any Redemption Date,redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed
as a percentage of its principal amount) equal to the Comparable Treasury Price
for such Redemption Date.
"Trust Preferred Securities" shall mean (without duplication) any trust
preferred securities or related debt or guaranties.the redemption date.
"U.S. Government Obligation" means:
(1) any security which is (a) a direct obligation of the United States for
the payment of which the full faith and credit of the United States is pledged
or (b) an obligation of a person controlled or supervised by and acting as an
agency or instrumentality of the United States the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States, which, in theeach case, of clause (a) or (b), is not callable or redeemable at the option of the
issuer thereof;of the security; and
(2) any depositary receipt issued by a bank (as defined in the Securities
Act) as custodian with respect to any security specified in clause (1) above
and held by suchthat bank for the account of the holder of suchthe depositary receipt
or with respect to any specific payment of principal of or interest on any suchthat
type of security held by any sucha bank provided that (except(as defined in the Securities Act), so long as,
except as required by law) suchlaw, the custodian is not authorized to make any
deduction from the amount payable to the holder of suchthe depository receipt from
any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by suchthe depository receipt.
8485
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange Securitiessecurities for its own account
as a result of market-making activities or other trading activities in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange Securities.securities. This
prospectus, as it may be amended or supplemented from time to time, may be used
by participating broker-dealers during the period referred to below in
connection with resales of exchange Securitiessecurities received in exchange for initial
Securitiessecurities if the initial Securitiessecurities were acquired by the participating
broker-dealers for their own accounts as a result of their market-making or
other trading activities. We have agreed that this prospectus, as it may be
amended or supplemented from time to time, may be used by a participating
broker-dealer in connection with resales of exchange Securitiessecurities for a period
ending 120 days after the registration statement of which this prospectus is a
part has been declared effective (subject to extension) or, if earlier, when
all exchange Securities have been disposed of by the participating
broker-dealer.
We will not receive any proceeds from the issuance of the exchange
Securitiessecurities offered by this prospectus. Exchange Securitiessecurities received by
broker-dealers for their own accounts in connection with the exchange offer may
be sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
exchange Securitiessecurities or a combination of these methods of resale, at market
prices prevailing at the time of resale, at prices related to prevailing market
prices or at negotiated prices. Any resale may be made directly to purchasers
or to or through brokers or dealers and/or the purchasers of any exchange
Securities.securities. Any broker-dealer that resells exchange Securitiessecurities that were
received by it for its own account in connection with the exchange offer and
any broker-dealer that participates in a distribution of exchange Securitiessecurities
may be deemed to be an "underwriter" within the meaning of the Securitiessecurities Act,
and any profit on any resale of exchange Securitiessecurities and any commissions or
concessions received by any of those persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that by
acknowledging that it will deliver, and by delivering, a prospectus, a
broker-dealer will not be deemed to admit that it is a "underwriter" within the
meaning of the Securities Act.
8586
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FOR UNITED STATES HOLDERS
The following discussion is the opinion of Latham & Watkins, our counsel,
as to the material federal income tax consequences expected to result to you if
you exchange your initial Securitiessecurities for exchange Securitiessecurities in the exchange
offer. This opinion is based on:
[]o the facts described in the registration statement of which this
prospectus is a part;
[]o the Internal Revenue Code of 1986, as amended;
[]o current, temporary and proposed treasury regulations promulgated under
the Internal Revenue Code;
[]o the legislative history of the Internal Revenue Code;
[]o current administrative interpretations and practices of the Internal
Revenue Service; and
[]o court decisions.
all as of the date of this prospectus. In addition, the administrative
interpretations and practices of the Internal Revenue Service include its
practices and policies as expressed in private letter rulings that are not
binding on the Internal Revenue Service, except with respect to the particular
taxpayers who requested and received those rulings. Future legislation,
treasury regulations, administrative interpretations and practices and/or court
decisions may adversely affect, perhaps retroactively, the tax considerations
contained in this discussion. Any change could apply retroactively to
transactions preceding the date of the change. The tax considerations contained
in this discussion may be challenged by the Internal Revenue Service and may
not be sustained by a court if challenged by the Internal Revenue Service, and
we have not requested, and do not plan to request, any rulings from the
Internal Revenue Service concerning the tax treatment of the exchange of
initial Securitiessecurities for exchange Securities.
Certainsecurities.
Some holders may be subject to special rules not discussed below,
including, without limitation:
[]o insurance companies;
[]o financial institutions or broker-dealers;
[]o tax-exempt organizations;
[]o stockholders holding securities as part of a conversion transaction, or
a hedge or hedging transaction or as a position in a straddle for tax
purposes;
[]o foreign corporations or partnerships; and
[]o persons who are not citizens or residents of the United States.
YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF
EXCHANGING INITIAL SECURITIES FOR EXCHANGE SECURITIES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of initial Securitiessecurities for exchange Securitiessecurities will be treated
as a "non-event" for federal income tax purposes, because the exchange
Securitiessecurities will not be considered to differ materially in kind or extent from
the initial Securities.securities. Therefore, no material federal income tax consequences
will result to you from exchanging initial Securitiessecurities for exchange Securities.
86securities.
87
LEGAL MATTERS
The validity of the exchange Securitiessecurities will be passed upon for us by
Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022.
EXPERTS
Our consolidated financial statements as of December 31, 1998 and 1997,
and the related consolidated statements of operations and cash flows for each
of the three years in the period ended December 31, 1998, included in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
auditors, as stated in their report appearing in this prospectus, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
Our consolidated balance sheet and statement of capitalization as of
September 30, 1999 included in this prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing in this
prospectus, and are included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
With respect to the unaudited interim financial information of MidAmerican
Energy for the periods ended March 31, 1999, June 30, 1999 and September 30,
1999 which are incorporated in this prospectus by reference, Deloitte & Touche
LLP have applied limited procedures in accordance with professional standards
for a review of such information. However, as stated in their reports included
in the MidAmerican Energy Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999, June 30, 1999 and September 30, 1999 and incorporated by
reference in this prospectus, they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their reports on that information should be restricted in light of
the limited nature of the review procedures applied. Deloitte & Touche LLP are
not subject to the liability provisions of Section 11 of the Securities Act of
1933 for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of the registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Act.
INCORPORATION BY REFERENCE
This prospectus incorporates documents by reference which are not
presented in, or delivered with, this prospectus. We will provide without
charge copies (without exhibits, except those specifically incorporated by
reference) of these documents to each person to whom this prospectus has been
delivered upon request.
The following documents, previously filed by MidAmerican Energy with the
Securities and Exchange Commission pursuant tounder the Exchange Act (File No. 1-11505),
are hereby incorporated by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1998;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and JuneSeptember 30, 1999.
3. Current Report on Form 8-K dated March 12, 1999.
The information regarding MidAmerican Energy contained in this prospectus
should be read together with the information in the documents incorporated by
reference. Any statement contained in a document incorporated by reference will
be deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus modifies or supersedes the
statement in the document incorporated by reference. Any statement so modified
or superseded will not be deemed, except as so modified or superseded, to be a
part of this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-4 with the Securities and
Exchange Commission pursuant tounder the Securities Act with respect to our offering of
the exchange Securities.securities. This prospectus does not contain all of the
information in the registration statement. You will find additional information
88
about us and the exchange Securitiessecurities in the registration statement. Any
statement made in this prospectus concerning the provisions of legal documents
are not necessarily complete and you should read the documents that are filed
as exhibits to the registration statement.
We are subject to the informational requirements of the Exchange Act and
file periodic reports, registration statements, proxy statements and other
information with the Securities and Exchange Commission. You may inspect and
copy the registration statement, including exhibits, and our periodic reports,
registration statements, proxy statements and other information we file with
the Securities and Exchange Commission at the Public Reference Section of the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Securities and Exchange Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materialthese materials can be obtained from the
Public Reference Section of the Securities and Exchange Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Securities and Exchange Commission maintains a web site
that contains reports, proxy and information statements and other materials
that are filed through the Securities and Exchange Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. This Web site can be accessed
at http://www.sec.gov.
8789
INDEX TO FINANCIAL STATEMENTS
MHC INC.
Page
----
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996.......... F-2
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996.......... F-3
Consolidated Balance Sheets
As of December 31, 1998 and 1997.............................. F-4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996.......... F-5
Consolidated Statements of Capitalization
As of December 31, 1998 and 1997.............................. F-6
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 1998, 1997 and 1996.......... F-7
Notes to Consolidated Financial Statements......................... F-8
Report of Independent Accountants.................................. F-36
MIDAMERICAN FUNDING, LLC AND MHC INC. (PREDECESSOR)
Interim Consolidated Statements of Income
For the nine months ended September 30, 1999 and 1998 ... F-37
Interim Consolidated Statements of Comprehensive Income
For the nine months ended September 30, 1999 and 1998 .... F-38
Interim Consolidated Balance Sheets
As of September 30, 1999 and 1998 ........................ F-39
Interim Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 .... F-40
Notes to Interim Consolidated Financial Statements................. F-41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION... F-47
PAGE
----
MHC INC.
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996 .................... F-2
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996 .................... F-3
Consolidated Balance Sheets
As of December 31, 1998 and 1997 ........................................ F-4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996 .................... F-5
Consolidated Statements of Capitalization
As of December 31, 1998 and 1997 ........................................ F-7
Consolidated Statements of Retained Earnings
For the Years Ended December 31, 1998, 1997 and 1996 .................... F-8
Notes to Consolidated Financial Statements ............................... F-9
Report of Independent Accountants ........................................ F-38
MIDAMERICAN FUNDING, LLC AND MHC INC. (PREDECESSOR)
Interim Consolidated Statements of Income
For the nine months ended September 30, 1999 and 1998 ................... F-39
Interim Consolidated Statements of Comprehensive Income
For the nine months ended September 30, 1999 and 1998 ................... F-40
Interim Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998 ................... F-42
Notes to Interim Consolidated Financial Statements ....................... F-43
Consolidated Balance Sheet as of September 30, 1999 ...................... F-49
Consolidated Statement of Capitalization as of September 30, 1999 ........ F-50
Notes to Consolidated Financial Statements ............................... F-52
Report of Independent Accountants ........................................ F-68
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION ......... F-69
F-1
MHC INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
1998 1997 1996
---- ---- ----------------- ------------- -------------
OPERATING REVENUES
Regulated electric............................................electric ........................................ $1,169,810 $1,126,300 $1,099,008
Regulated gas.................................................gas ............................................. 429,870 536,306 536,753
Nonregulated..................................................Nonregulated .............................................. 176,244 306,931 275,443
---------- ---------- ----------
1,775,924 1,969,537 1,911,204
---------- ---------- ----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity.........................capacity ........................ 225,736 235,760 234,317
Cost of gas sold..........................................sold ......................................... 243,451 346,016 345,014
Other operating expenses..................................expenses ................................. 470,328 438,007 358,579
Maintenance...............................................Maintenance .............................................. 110,387 100,543 91,131
Depreciation and amortization.............................amortization ............................ 182,211 170,540 164,592
Property and other taxes..................................taxes ................................. 87,276 90,651 81,715
---------- ---------- ----------
1,319,389 1,381,517 1,275,348
---------- ---------- ----------
Nonregulated:
Cost of sales.............................................sales ............................................ 144,417 276,711 249,453
Other.....................................................Other .................................................... 40,706 34,583 37,004
---------- ---------- ----------
185,213185,123 311,294 286,457
---------- ---------- ----------
Total operating expenses..................................expenses ................................. 1,504,512 1,692,811 1,561,805
---------- ---------- ----------
OPERATING INCOME..............................................INCOME .......................................... 271,412 276,726 349,399
---------- ---------- ----------
NON-OPERATING INCOME
Interest income...............................................income ........................................... 9,262 5,318 4,012
Dividend income...............................................income ........................................... 10,251 13,792 16,985
Realized gains and losses on securities, net..................net .............. 11,204 7,798 1,895
Other, net....................................................net ................................................ 5,096 15,891 (9,781)
---------- ---------- ----------
35,813 42,799 13,111
---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt....................................debt ................................ 80,908 89,898 102,909
Other interest expense........................................expense .................................... 12,682 10,034 10,941
Preferred dividends of subsidiaries...........................subsidiaries ....................... 12,932 14,468 10,689
Allowance for borrowed funds..................................funds .............................. (3,377) (2,597) (4,212)
103,145 111,803 120,327
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ..... 204,080 207,722 242,183
INCOME TAXES..................................................TAXES .............................................. 76,926 68,390 98,422
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.............................OPERATIONS ......................... 127,154 139,332 143,761
---------- ---------- ----------
DISCONTINUED OPERATIONS
Income (Loss) from operations (net of income taxes)........... ....... 4,164 (118) 2,117
Loss on disposal (net of income taxes)........................ .................... - (4,110) (14,832)
---------- ---------- ----------
4,164 (4,228) (12,715)
---------- ---------- ----------
NET INCOME....................................................INCOME ................................................ $ 131,318 $ 135,104 $ 131,046
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING.............................OUTSTANDING ......................... 94,038 98,058 100,752
EARNINGS PER COMMON SHARE --- BASIC:
Continuing operations.........................................operations ..................................... $ 1.35 $ 1.42 $ 1.43
Discontinued operations.......................................operations ................................... 0.05 (0.04) (0.13)
---------- ---------- ----------
Earnings per average common share.............................share ......................... $ 1.40 $ 1.38 $ 1.30
========== ========== ==========
EARNINGS PER COMMON SHARE --- DILUTED:
Continuing operations.........................................operations ..................................... $ 1.35 $ 1.42 $ 1.43
Discontinued operations.......................................operations ................................... 0.04 (0.04) (0.13)
---------- ---------- ----------
Earnings per average common share.............................share ......................... $ 1.39 $ 1.38 $ 1.30
========== ========== ==========
DIVIDENDS DECLARED PER SHARE..................................SHARE .............................. $ 1.20 $ 1.20 $ 1.20
========== ========== ==========
The accompanying notes are an integral part of these statements.
F-2
MHC INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1998 1997 1996
---- ---- --------------- ----------- -----------
Net Income....................................................NET INCOME .................................................. $ 131,318 $ 135,104 $ 131,046$135,104 $131,046
--------- --------- ---------
Other Comprehensive Income, Net-------- --------
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period...............period ............. (14,743) 223,927 1,501
Less reclassification adjustment for realized gains (losses)
reflected in net income during period.........period .................... 11,204 7,787 (4,612)
--------- --------- ----------------- --------
(25,947) 216,140 6,113
Income tax expense (benefit).................................. ................................ (9,002) 75,567 2,468
--------- --------- ----------------- --------
Other comprehensive income (loss), net....................net ..................... (16,945) 140,573 3,645
--------- --------- ---------
Comprehensive Income..........................................-------- --------
COMPREHENSIVE INCOME ........................................ $ 114,373 $ 275,677 $ 134,691$275,677 $134,691
========= ========= ================= ========
The accompanying notes are an integral part of these statements.
F-3
MHC INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31
----------------------------------------------
1998 1997
---- ----------------- -------------
ASSETS
UTILITY PLANT
Electric..........................................................Electric .............................................................. $4,255,058 $4,084,920
Gas ................................................................................................................................ 786,169 756,874
---------- ----------
5,041,227 4,841,794
Less accumulated depreciation and amortization....................amortization ........................ 2,426,564 2,275,099
---------- ----------
2,614,663 2,566,695
Construction work in progress.....................................progress ......................................... 26,369 55,418
---------- ----------
2,641,032 2,622,113
---------- ----------
POWER PURCHASE CONTRACT...........................................CONTRACT ............................................... 150,401 173,107
---------- ----------
CURRENT ASSETS
Cash and cash equivalents.........................................equivalents ............................................. 6,107 10,468
Receivables, less reserves of $503 and $347, respectively.........respectively.............. 181,817 207,471
Inventories.......................................................Inventories ........................................................... 94,771 86,091
Other............................................................. 40,430Prepaid taxes ......................................................... 22,889 --
Other ................................................................. 17,541 18,452
---------- ----------
323,125 322,482
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET........................NET ............................ 762,060 799,524
---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS.............................OPERATIONS ................................. 43,907 ---
---------- ----------
OTHER ASSETS......................................................ASSETS .......................................................... 323,811 360,865
---------- ----------
TOTAL ASSETS......................................................ASSETS .......................................................... $4,244,336 $4,278,091
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity.......................................equity ........................................... $1,200,950 $1,301,286
MidAmerican Energy preferred securities, not subject to mandatory
redemption...........................................redemption ........................................................... 31,759 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities...............................securities .............................. 50,000 50,000
MidAmerican-obligatedMidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures....debentures ... 100,000 100,000
Long-term debt (excluding current portion)........................ ............................ 939,553 1,034,211
---------- ----------
2,322,262 2,517,260
---------- ----------
CURRENT LIABILITIES
Notes payable.....................................................payable ......................................................... 339,826 138,054
Current portion of long-term debt.................................debt ..................................... 105,995 144,558
Current portion of power purchase contract........................contract ............................ 15,034 14,361
Accounts payable..................................................payable ...................................................... 167,348 145,855
Taxes accrued.....................................................accrued ......................................................... 107,332 92,629
Interest accrued..................................................accrued ...................................................... 15,533 22,355
Other.............................................................Other ................................................................. 51,316 43,641
---------- ----------
802,384 601,453
---------- ----------
Other LiabilitiesOTHER LIABILITIES
Power purchase contract...........................................contract ............................................... 68,093 83,143
Deferred income taxes.............................................taxes ................................................. 733,448 756,920
Investment tax credit.............................................credit ................................................. 77,421 83,127
Other.............................................................Other ................................................................. 240,728 236,188
---------- ----------
1,119,690 1,159,378
---------- ----------
Total Capitalization and Liabilities..............................TOTAL CAPITALIZATION AND LIABILITIES .................................. $4,244,336 $4,278,091
========== ==========
The accompanying notes are an integral part of these statements.
F-4
MHC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------
1998 1997 1996
---- ---- ------------------- --------------- ---------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income.....................................................income ......................................................... $ 131,318 $ 135,104 $ 131,046
(Income)/loss from discontinued operations ........................ (4,164) 4,228 12,715
--------- --------- ------------
Income from continuing operations ................................. 127,154 139,332 143,761
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization...............................amortization ..................................... 200,920 197,454 190,511
Net decrease in deferred income taxes and investment tax
credit, net................................net ..................................................... (24,800) (71,191) (7,894)
Amortization of other assets................................assets ...................................... 40,264 33,761 20,541
(Gain)/loss from discontinued operations.................... (4,164) 4,228 12,715
Gain on sale of securities, assets and other investments....investments .......... (24,629) (9,996) (10,132)
Other-than-temporary decline in value of investments........investments .............. 273 3,795 15,566
Cash inflows (outflows) of accounts receivable securitization ..... (10,000) 70,000 ---
Impact of changes in working capital, net of effects from
discontinued operations..............................operations ......................................... 42,046 32,973 (53,752)
Other.......................................................Other ............................................................. (17,092) (3,883) 22,786
--------- --------- ---------------------
Net cash provided.........................................provided by continuing operations ...................... 334,136 392,245 321,387
--------- --------- ---------------------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures..............................expenditures .................................. (193,354) (166,932) (154,198)
Quad Cities Nuclear Power Station decommissioning trust fund...fund........ (11,409) (9,819) (8,607)
Deferred energy efficiency expenditures........................ -expenditures ............................ -- (12,258) (20,390)
Nonregulated capital expenditures..............................expenditures .................................. (45,466) (14,066) (55,788)
Purchase of securities......................................... (143,324) (159,770)securities
Available for sale ................................................ (142,963) (159,190) (198,947)
Held to maturity .................................................. (361) (580) --
Proceeds from sale of securities............................... 217,459 180,890 243,290securities
Available for sale ................................................ 213,563 180,570 238,988
Held to maturity .................................................. 3,896 320 4,302
Proceeds from sale of assets and other investments.............investments ................. 38,162 57,433 33,285
Investment in discontinued operations.......................... (39,743) 181,321 (5,984)
Other investing activities, net................................net .................................... (3,618) (1,360) 8,308
--------- --------- ---------------------
Net cash provided (used) ................................... (181,293) 55,439 (159,031)........................................ (141,550) (125,882) (153,047)
--------- --------- ---------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid..........................................paid .............................................. (113,144) (117,605) (120,770)
Issuance of long-term debt, net of issuance cost...............cost ................... 158,414 --- 99,500
Retirement of long-term debt, including reacquisition cost.....cost ......... (302,477) (122,300) (136,616)
Reacquisition of preferred shares..............................shares .................................. (4) (6) (58,176)
Reacquisition of common shares.................................shares ..................................... (101,765) (96,618) ---
Issuance of preferred shares, net of issuance cost............. - -cost ................. -- -- 96,850
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility......................... - (174,500) 44,500facility ............................... 51,000 7,900 1,218,100
Repayment of MidAmerican Capital Company unsecured
revolving credit facility ......................................... (16,400) (182,400) (1,173,600)
Net increase (decrease) in notes payable....................... 201,772payable ........................... 167,172 (23,936) (22,810)
--------- --------- ---------------------
Net cash used...............................................used ................................................... (157,204) (534,965) (97,522)
--------- --------- ---------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (4,361) (87,281) 64,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 10,468 97,749 32,915FLOWS FROM DISCONTINUED OPERATIONS
Proceeds from sales of discontinued operations .................... -- 202,045 15,300
Investments in discontinued operations............................. (37,990) -- --
Operating activities .............................................. (1,753) (20,724) (21,284)
--------- --------- ------------
Net cash provided (used) ........................................ (39,743) 181,321 (5,984)
--------- CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $ 6,107 $ 10,468 $ 97,749
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized...................... $ 90,801 $ 96,805 $ 107,179
========= ========= =========
Income taxes paid.............................................. $ 100,917 $ 130,521 $ 85,894
========= ========= =========--------- ------------
The accompanying notes are an integral part of these statements.
F-5
MHC INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATIONCASH FLOWS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)THOUSANDS)
AS OFYEARS ENDED DECEMBER 31
----------------------------------------------------------
1998 1997 ---- ----1996
------------ ------------- ----------
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
91,201,582 and 95,300,882 shares outstanding, respectively.........NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......... $ 724,778(4,361) $ 753,873
Retained earnings...................................................... 355,000 409,296
Accumulated other comprehensive income, net............................ 121,172 138,117
---------- ----------
1,200,950 51.7% 1,301,286 51.7%
---------- ----- ---------- -----
MIDAMERICAN PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative
shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,451 and 49,481 shares, respectively............... 4,945 4,948
$3.75 Series, 38,305 and 38,310 shares, respectively............... 3,831 3,831
$3.90 Series, 32,630 shares ....................................... 3,263 3,263
$4.20 Series, 47,362 and 47,369 shares, respectively............... 4,736 4,737
$4.35 Series, 49,945............................................... 4,994 4,994
$4.40 Series, 50,000 shares........................................ 5,000 5,000
$4.80 Series, 49,898 shares........................................ 4,990 4,990
---------- ----------
31,759 1.4% 31,763 1.2%
---------- ----- ---------- -----
Cumulative shares outstanding; subject to mandatory redemption:
$5.25 Series, 100,000 shares....................................... 10,000 10,000
$7.80 Series, 400,000 shares....................................... 40,000 40,000
---------- ----------
50,000 2.1% 50,000 2.0%
---------- ----- ---------- -----
MIDAMERICAN-OBLIGATED PREFERRED SECURITIES
MidAmerican-obligated mandatorily redeemable cumulative
preferred securities(87,281) $ 64,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 10,468 97,749 32,915
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 6,107 $ 10,468 $ 97,749
======== ========= ========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of subsidiary trust holding solely
MidAmerican junior subordinated debentures:
7.98% Series, 4,000,000 shares.................................... 100,000 4.3% 100,000 4.0%
---------- ----- ---------- -----
LONG-TERM DEBT MidAmerican mortgage bonds:
7.875% Series, due 1999........................................... - 60,000
6% Series, due 2000............................................... 35,000 35,000
6.75% Series, due 2000............................................ 75,000 75,000
7.125% Series, due 2003........................................... 100,000 100,000
7.70% Series, due 2004............................................ 55,630 55,630
7% Series, due 2005............................................... 90,500 90,500
7.375% Series, due 2008........................................... 75,000 75,000
8% Series, due 2022............................................... - 50,000
7.45% Series, due 2023............................................ 6,940 6,940
8.125% Series, due 2023........................................... - 100,000
6.95% Series, due 2025............................................ 12,500 12,500
MidAmerican pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003.............. 7,704 8,064
5.95% Series, due 2023 (secured by general mortgage bonds)........ 29,030 29,030amounts capitalized .................... $ 90,801 $ 96,805 $107,179
======== ========= ========
Income taxes paid ............................................ $100,917 $ 130,521 $ 85,894
======== ========= ========
The accompanying notes are an integral part of these statements.
F-6
MHC INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
----------------------------------------------------------------------
1998 1997
------------------------- -------------------------
COMMON SHAREHOLDERS' EQUITY
Common shares, no par; 350,000,000 shares authorized;
91,201,582 and 95,300,882 shares outstanding,
respectively ................................................. $ 724,778 $ 753,873
Retained earnings ............................................. 355,000 409,296
Accumulated other comprehensive income, net ................... 121,172 138,117
--------- ---------
1,200,950 51.7% 1,301,286 51.7%
--------- ---- --------- ----
MIDAMERICAN ENERGY PREFERRED SECURITIES (100,000,000 SHARES
AUTHORIZED)
Cumulative shares outstanding not subject to mandatory
redemption:
$3.30 Series, 49,451 and 49,481 shares, respectively ......... 4,945 4,948
$3.75 Series, 38,305 and 38,310 shares, respectively ......... 3,831 3,831
$3.90 Series, 32,630 shares .................................. 3,263 3,263
$4.20 Series, 47,362 and 47,369 shares, respectively ......... 4,736 4,737
$4.35 Series, 49,945 ......................................... 4,994 4,994
$4.40 Series, 50,000 shares .................................. 5,000 5,000
$4.80 Series, 49,898 shares................................... 4,990 4,990
--------- ---------
31,759 1.4% 31,763 1.2%
--------- ---- --------- ----
Cumulative shares outstanding; subject to mandatory
redemption:
$5.25 Series, 100,000 shares ................................. 10,000 10,000
$7.80 Series, 400,000 shares.................................. 40,000 40,000
--------- ---------
50,000 2.1% 50,000 2.0%
--------- ---- --------- ----
MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES
MidAmerican Energy-obligated mandatorily redeemable
cumulative preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated
debentures:
7.98% Series, 4,000,000 shares ............................... 100,000 4.3% 100,000 4.0%
--------- ---- --------- ----
LONG-TERM DEBT
MidAmerican Energy mortgage bonds:
7.875% Series, due 1999 ...................................... -- 60,000
6% Series, due 2000 .......................................... 35,000 35,000
6.75% Series, due 2000 ....................................... 75,000 75,000
7.125% Series, due 2003 ...................................... 100,000 100,000
7.70% Series, due 2004 ....................................... 55,630 55,630
7% Series, due 2005 .......................................... 90,500 90,500
7.375% Series, due 2008 ...................................... 75,000 75,000
8% Series, due 2022 .......................................... -- 50,000
7.45% Series, due 2023 ....................................... 6,940 6,940
8.125% Series, due 2023 ...................................... -- 100,000
6.95% Series, due 2025 ....................................... 12,500 12,500
MidAmerican Energy pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003 ......... 7,704 8,064
5.95% Series, due 2023 (secured by general mortgage
bonds) ..................................................... 29,030 29,030
The accompanying notes are an integral part of these statements.
F-7
MHC INC.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31
--------------------------------------------------------
1998 1997
--------------------------- --------------------------
LONG-TERM DEBT (CONTINUED)
Variable rate series -
Due 2016 and 2017, 3.7%........................................ ............................... $ 37,600 $ 37,600
Due 2023 (secured by general mortgage bonds, 3.7%).................. 28,295 28,295
Due 2023, 3.7%................................................. ........................................ 6,850 6,850
Due 2024, 3.7%................................................. ........................................ 34,900 34,900
Due 2025, 3.7%................................................. ........................................ 12,750 12,750
MidAmerican Energy notes:
8.75% Series, due 2002............................................2002 .................................. 240 240
6.5% Series, due 2001.............................................2001 ................................... 100,000 100,000
6.375% Series, due 2006...........................................2006 ................................. 160,000 ---
6.4% Series, due 2003 through 2007................................2007 ...................... 2,000 2,000
Obligation under capital lease........................................lease ........................... 1,539 2,104
Unamortized debt premium and discount, net............................net ............... (1,925) (3,192)
---------- ----------
Total utility..................................................utility ......................................... 869,553 919,211
---------- ----------
Nonregulated subsidiaries notes:
7.76% Series, due 1999............................................ -1999 .................................. -- 45,000
8.52% Series, due 2000 through 2002...............................2002 ..................... 70,000 70,000
---------- ----------
Total nonregulated subsidiaries................................subsidiaries ....................... 70,000 115,000
---------- ----------
939,553 40.5% 1,034,211 41.1%
---------- ----- ---------- -----
Total Capitalization..................................................TOTAL CAPITALIZATION ..................................... $2,322,262 100.0% $2,517,260 100.0%
========== ===== ========== =====
MHC INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1998 1997 1996
---- ---- --------------- ----------- -----------
BEGINNING OF YEAR.................................................... $ 409,296 $ 440,971 $ 430,589
--------- --------- ---------YEAR ................................... $409,296 $440,971 $430,589
-------- -------- --------
NET INCOME...........................................................INCOME .......................................... 131,318 135,104 131,046
--------- --------- ----------------- -------- --------
DEDUCT (ADD):
Loss on repurchase of common shares..................................shares ................. 72,470 49,174 ---
Dividends declared on common shares of $1.20.........................$1.20......... 113,144 117,605 120,770
Other................................................................ - -Other ............................................... -- -- (106)
--------- --------- ----------------- -------- --------
185,614 166,779 120,664
--------- --------- ----------------- -------- --------
END OF YEAR.......................................................... $ 355,000 $ 409,296 $ 440,971
========= ========= =========YEAR ......................................... $355,000 $409,296 $440,971
======== ======== ========
The accompanying notes are an integral part of these statements.
F-7F-8
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a)(A) COMPANY STRUCTURE:
MHC Inc. (Company or MHC), formerly known as MidAmerican Energy Holdings Company, is a
holding company for MidAmerican Energy Company, (MidAmerican),
MidAmerican Capital Company, (MidAmerican Capital),
Midwest Capital Group, Inc. (Midwest Capital) and MidAmerican Realty Services Company (MidAmerican Realty).Company. Effective
March 12, 1999, MHC is a wholly owned subsidiary of MidAmerican Funding LLC,
which in turn is a wholly owned subsidiary of MidAmerican Energy Holdings
Company, formerly known as CalEnergy Company, Inc. Prior to December 1, 1996,
MidAmerican held the capital stock of MidAmerican Capital and Midwest Capital.
Effective December 1, 1996, each share of MidAmerican common stock was exchanged
for one share of Holdings common stock. As part of the transaction, MidAmerican
distributed the capital stock of MidAmerican Capital and Midwest Capital to
Holdings.
(b)(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the CompanyMHC and its
subsidiaries. For 1998, certainsome of the nonregulated operations of MidAmerican
Energy, which were previously included in Other, Net in the income statements,
are presented in nonregulated operations lines. Prior year amounts have been
reclassified accordingly. Amounts related to MidAmerican Realty are reflected as
discontinued operations. (Refer to Note 25). All significant intercompany
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
(c)(C) REGULATION:
MidAmerican'sMidAmerican Energy's utility operations are subject to the regulation of
the Iowa Utilities Board, (IUB), the Illinois Commerce Commission, (ICC), the South
Dakota Public Utilities Commission, and the Federal Energy Regulatory Commission
(FERC). MidAmerican'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.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria.criteria set
forth in SFAS 71. For operations that meet the criteria, SFAS 71 allows, among
other things, the deferral of costs that would otherwise be expensed when
incurred. A possible consequence of the changes in the utility industry is the
discontinued applicability of SFAS 71. The majority of MidAmerican's electric
and gas utility operations currently meet the criteria of SFAS 71, but its
applicability is periodically reexamined. On December 16, 1997, MidAmerican's
generation operations serving Illinois were no longer subject to the provisions
of SFAS 71 due to passage of industry restructuring legislation in Illinois.
Thus, in 1997, MidAmerican was required to write off the regulatory assets and
liabilities from its balance sheet related to its Illinois generation
operations. The net amount of suchthese write-offs was not material. If other
portions of its utility operations no longer meet the criteria of SFAS 71,
MidAmerican 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. The following regulatory assets, primarily
included in Other
F-9
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets in the Consolidated Balance Sheets, represent probable future revenue to
MidAmerican Energy because these costs are expected to be recovered in charges
to utility customers (in thousands):
F-8
.
1998 1997
---- --------------- -----------
Deferred income taxes........................taxes .......................... $148,036 $143,851
Energy efficiency costs......................costs ........................ 74,509 111,471
Debt refinancing costs.......................costs ......................... 40,233 34,923
FERC Order 636 transition costs.............. -costs ................ -- 9,279
Environmental costs..........................costs ............................ 23,427 20,417
Enrichment facilities decommissioning........decommissioning .......... 8,659 8,781
Unamortized costs of retired plant ....................... 3,537 5,771
Other........................................Other .......................................... 7,088 4,796
-------- --------
Total....................................Total ........................................ $305,489 $339,289
======== ========
(d)A return is generally not earned on the regulatory assets in setting
rates, but the amortization of the assets is recoverable over periods ranging
from one year up to the remaining life of MidAmerican Energy's plant in service.
(D) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
Energy records unbilled revenues, and related energy costs, representing the
estimated amount customers will be billed for services rendered between the
meter-reading dates in a particular month and the end of suchthat month. Accrued
unbilled revenues were $79.8 million and $80.2 million at December 31, 1998 and
1997, respectively, and are included in Receivables on the Consolidated Balance
Sheets.
MidAmerican'sMidAmerican Energy's Illinois and South Dakota jurisdictional sales, or
approximately 12% of total retail electric sales, and the majority of its total
retail gas sales are subject to adjustment clauses. These clauses allow
MidAmerican Energy to adjust the amounts charged for electric and gas service as
the costs of gas, fuel for generation or purchased power change. The costs
recovered in revenues through use of the adjustment clauses are charged to
expense in the same period.
(e)(E) DEPRECIATION AND AMORTIZATION:
MidAmerican'sMidAmerican Energy's provisions for depreciation and amortization for its
utility operations are based on straight-line composite rates. The average
depreciation and amortization rates for the years ended December 31 were as
follows:
1998 1997 1996
---- ---- ----
Electric.......................... 3.9% 3.8% 3.8%
Gas...............................
1998 1997 1996
--------- --------- ---------
Electric .......... 3.9% 3.8% 3.8%
Gas ............... 3.4% 3.4% 3.7%
Utility plant is stated at original cost which includes overhead costs,
administrative costs and an allowance for funds used during construction.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to plant
accounts. The cost of depreciable units of utility plant retired or disposed of
in the normal course of business is eliminated from the utility plant accounts
and such cost, plus net removal cost, is charged to accumulated depreciation. An
allowance for the estimated annual decommissioning costs of the Quad Cities
Nuclear Power Station (Quad Cities Station) equal to the level of funding is included in depreciation
expense. See Note 4(e) for additional information regarding decommissioning
costs.
(f)F-10
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(F) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments, managed primarily through the Company'sMHC's nonregulated subsidiaries,
and nonregulated property, net include the following amounts as of December 31
(in thousands):
F-9
1998 1997
---- --------------- -----------
Marketable securities............................securities ....................... $393,554 $467,207
Equipment leases.................................leases ............................ 72,068 73,928
Nuclear decommissioning trust fund...............fund .......... 116,973 93,251
Energy projects..................................projects ............................. 17,891 21,180
Special-purpose funds............................funds ....................... 9,069 10,057
Real estate......................................estate ................................. 42,413 42,424
Corporate owned life insurance...................insurance .............. 43,945 33,471
Coal transportation property.....................property ................ 12,538 14,516
Communications...................................Communications .............................. 19,750 10,000
Security ............................................................................ 9,664 8,551
Other............................................Other ....................................... 24,195 24,939
-------- --------
Total.......................................... $762,050Total ..................................... $762,060 $799,524
======== ========
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital. Investments in marketable
securities classified as available-for-sale are reported at fair value (see
Note (14)) with net unrealized gains and losses reported as a net of tax amount
in Common Shareholders' Equity until realized. Investments in marketable
securities that are classified as held-to-maturity are reported at amortized
cost. An other-than-temporary decline in the value of a marketable security is
recognized through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities Station units are classified as available-for-sale and are reported at
fair value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
(g)(G) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The CompanyMHC considers all cash and highly liquid debt instruments purchased with a
remaining maturity of three months or less to be cash and cash equivalents for
purposes of the Consolidated Statements of Cash Flows.
F-10
Net cash provided (used) from changes in working capital, net of effects
from discontinued operations was as follows (in thousands):
1998 1997 1996
---- ---- ---------------- ------------ -------------
Receivables...............................Receivables ........................ $ 35,654 $ 34,544 $(84,802)
Inventories...............................$ (84,802)
Inventories ........................ (8,680) 4,773 (5,629)
Prepaid taxes ...................... (22,889) -- --
Other current assets ..................... (21,978)............... 911 (7,421) 6,732
Accounts payable..........................payable ................... 21,493 (23,950) 47,751
Taxes accrued.............................accrued ...................... 14,703 10,375 356
Interest accrued..........................accrued ................... (6,821) (6,158) (2,122)
Other current liabilities.................liabilities .......... 7,675 20,810 (16,038)
-------- -------- --------
Total...................................--------- --------- ---------
Total ............................ $ 42,046 $ 32,973 $(53,752)
======== ======== ========$ (53,752)
========= ========= =========
(h)F-11
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Under a long-term power purchase contract with Nebraska Public Power
District, (NPPD), expiring in 2004, MidAmerican Energy purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican'sMidAmerican Energy's fixed obligation to pay 50%
of NPPD'sthe Nebraska Public Power District's Nuclear Facility Revenue Bonds and other
fixed liabilities. A like amount representing MidAmerican'sMidAmerican Energy's right to
purchase power is shown as an asset.
Cooper capital improvement costs prior to 1997, including carrying costs,
were deferred in accordance with then applicable rate regulation and are being
amortized and recovered in rates over either a five-year period or the term of
the NPPDNebraska Public Power District contract. Beginning July 11, 1997, the Iowa
portion of capital improvement costs is recovered currently from customers and
is expensed as incurred. MidAmerican Energy began charging the remaining Cooper
capital improvement costs to expense for jurisdictions other than Iowa as
incurred in January 1997.
The fuel cost portion of the power purchase contract is included in Cost of
Fuel, Energy and Capacity on the Consolidated Statements of Income. All other
costs MidAmerican Energy incurs in relation to its long-term power purchase
contract with NPPDNebraska Public Power District are included in Other Operating
Expenses on the Consolidated Statements of Income.
See Notes 4(d), 4(e) and 4(f) for additional information regarding the
power purchase contract.
(i)(I) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The CompanyMHC is exposed to market value risk from changes in interest rates for certain
fixed rate sinking fund preferred and perpetual preferred stocks (fixed rate
preferred stocks) included in Investments on the Consolidated Balance Sheets.
The CompanyMHC reviews the interest rate sensitivity of these securities and purchases put
options on U.S. Treasury securities (put options) to reduce interest rate risk
on preferred stocks. The CompanyMHC does not purchase or sell put options for speculative
purposes. The Company'sMHC's intent is to substantially offset any change in market value of
the fixed rate preferred stocks due to a change in interest rates with a change
in market value of the put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a part of Accumulated
Other Comprehensive Income, Net in shareholders' equity. Unrealized gains and
losses on the associated put options are included in the determination of the
fair value of the preferred stocks. The fair value of the put options,
including unrealized gains and losses, included in the determination of the
fair value of the preferred securities as of December 31, 1998 and 1997, was
$2.9 million and $1.9 million, respectively. Realized gains and losses on the
put options are included in Realized Gains and Losses on Securities, Net in the
Consolidated F-11
Statements of Income in the period the underlying hedged fixed
rate preferred stocks are sold. At December 31, 1998 the Companyand 1997, MHC held put
options with a notional value of $89.1 million.million and $98.2 million, respectively.
2) Gas Futures Contracts and Swaps:
The CompanyMHC uses gas futures contracts and swap contracts to reduce the volatility
in the price of natural gas purchased to meet the needs of its customers.
Investments in natural gas futures contracts, which total $0.3 million and $1.6
million as of December 31, 1998 and 1997, respectively, are included in
Receivables on the Consolidated Balance Sheets. Gains and losses on gas futures
contracts that qualify for hedge accounting are deferred and reflected as
adjustments to the carrying value of the hedged item or included in Other
Assets on the Consolidated Balance Sheets until the underlying physical
transaction is recorded if the instrument is used to hedge an anticipated
future transaction. The net gain or loss on gas futures contracts is included
in the determination of income in the same period as the expense for the
physical delivery of the natural gas. Realized gains and losses on gas
F-12
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
futures contracts and the net amounts exchanged or accrued under the natural
gas swap contracts are included in Cost of Gas Sold or Nonregulated Costs of
Sales consistent with the expense for the physical commodity. Deferred net
gains (losses) related to the Company'sMHC's gas futures contracts are $(1.9) million and
$(0.4) million as of December 31, 1998 and 1997, respectively.
The CompanyMHC periodically evaluates the effectiveness of its natural gas hedging
programs. If a high degree of correlation between prices for the hedging
instruments and prices for the physical delivery is not achieved, the contracts
are recorded at fair value and the gains or losses are included in the
determination of income. At December 31 1998, the CompanyMHC held the following hedging
instruments:
Weighted Average
Notional Volume Market Value
(MMBtu) (Per MMBtu)
--------------- ------------1998 1997
-------------------------------- --------------------------------
NOTIONAL VOLUME MARKET VALUE NOTIONAL VOLUMES MARKET VALUE
(MMBTU) (PER MMBTU) (MMBTU) (PER MMBTU)
----------------- -------------- ------------------ -------------
Natural Gas Futures (Long).................... 6,970,000 $1.857$ 1.857 3,670,000 $ 2.385
Natural Gas Futures (Short)................... 7,320,000 $1.854$ 1.854 1,670,000 $ 2.302
Natural Gas Swaps (Variable to Fixed)......... 16,322,181 7,200,052
Natural Gas Swaps (Fixed to Variable) ......... 2,497,400
Weighted average variable price...... $1.922Average Variable Price .............. $ 1.922 $ 2.535
Weighted average fixed price......... $2.098Average Fixed Price ................. $ 2.098 $ 2.631
3) New Accounting Pronouncement:
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments and
for hedging activities. SFAS 133 is effective for the CompanyMHC on January 1, 2000. SFAS
133 requires an entity to recognize all of its derivatives as either assets or
liabilities in its statement of financial position and measure those
instruments at fair value. If certainthe conditions specified in SFAS 133 are met,
suchthose instruments may be designated as hedges. Changes in the value of hedge
instruments would not impact earnings, except to the extent that the instrument
is not perfectly effective as a hedge. An entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use in assessing the effectiveness of the derivative. The CompanyMHC is in the
process of evaluating the impact of this accounting pronouncement.
F-12
(j)(J) GOODWILL:
The Company'sMHC's Consolidated Balance Sheets include goodwill related to various
acquisitions. The following schedule summarizes the goodwill, net of
accumulated amortization, remaining on the Consolidated Balance Sheets as of
December 31 (in thousands):
1998 1997
---- ----
Natural gas utility operations....................... $13,925 $14,723
Natural gas marketing companies...................... 3,736 4,107
Security companies...................................
AMORTIZATION
PERIOD 1998 1997
------------- ---------- ----------
Natural gas utility operations .......... 27.2 years $13,925 $14,723
Natural gas marketing companies ......... 15 years 3,736 4,107
Security companies ...................... 25 years 8,816 7,763
------- -------
$26,477 $26,593
======= =======
Goodwill is amortized using the straight-line method. Amortization expense
included in the Company'sMHC's Consolidated Statements of Income totaled $1.5 million, $1.4
million and $1.1 million for 1998, 1997 and 1996, respectively. The weighted average remaining life of goodwill as of December 31, 1998,Goodwill
relating to natural gas utility operations is 18
years.
(k)recoverable in rates.
(K) DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES:
For fiscal years beginning after December 15, 1997, full sets of
general-purpose financial statements are required to display comprehensive
income and its components in a financial statement that is displayed with the
same prominence as the other financial statements. Comprehensive income refers,
in general, to changes in the Company'sMHC's equity, except those resulting from
transactions with
F-13
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shareholders. "Unrealized holding gains (losses)" reflects the overall increase
(decrease) in the market value of marketable securities held by the CompanyMHC as
available-for-sale. The "reclassification adjustment" removes any gains
(losses) that have been realized from sales of those securities and reflected
in the Company'sMHC's Net Income. The following table shows the income tax expense or
benefit related to each component (in thousands):
1998 1997 1996
---- ---- ----------------- ----------- -----------
Unrealized holding gains (losses) during period
Before income taxes............................... $(14,743) $223,927taxes .............................. $ (14,743) $ 223,927 $ 1,501
Income tax (expense)/benefit......................benefit ..................... 5,081 (78,289) (525)
-------- ----------------- --------- --------
(9,662) 145,638 976
-------- ----------------- --------- --------
Less reclassification adjustment for realized gains
(losses) reflected in net income during period
Before income taxes...............................taxes .............................. 11,204 7,787 (4,612)
Income tax (expense)/benefit......................benefit ..................... (3,921) (2,722) 1,943
-------- ----------------- --------- --------
7,283 5,065 (2,669)
-------- ----------------- --------- --------
Other Comprehensive Income............................ $(16,945) $140,573Income ........................ $ (16,945) $ 140,573 $ 3,645
========= ========= ======== ======== =======
(2) LONG-TERM DEBT:
The Company'sMHC's sinking fund requirements and maturities of long-term debt for 1999
through 2003 are $106 million, $134 million, $125 million, $25 million and $105
million, respectively.
MidAmerican'sMidAmerican Energy's Variable Rate Pollution Control Revenue Obligations
bear interest at rates that are periodically established through remarketing of
the bonds in the short-term tax-exempt market. MidAmerican Energy, at its
option, may change the mode of interest calculation for these bonds by selecting
from among several alternative floating or fixed rate modes. The interest rate
shown in the Consolidated Statements of Capitalization is the weighted average
interest rate as of December 31, 1998 and 1997. MidAmerican Energy maintains
dedicated revolving credit facility agreements or renewable lines of credit to
provide liquidity for holders of these issues.
F-13
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of gross utility plant, is pledged to
secure mortgage bonds.
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican
Energy had undivided interests at December 31, 1998, in jointly owned generating
plants as shown in the table below.
The dollar amounts below represent MidAmerican'sMidAmerican Energy's share in each
jointly owned unit. Each participant has provided financing for its share of
each unit. Operating Expenses on the Consolidated Statements of Income include
MidAmerican'sMidAmerican Energy's share of the expenses of these units (dollars in millions).
Nuclear Coal fired
----------- -----------------------------------------------------
Council
Quad Cities Neal Bluffs Neal Ottumwa Louisa
Units Unit Unit Unit Unit Unit
No. 1NUCLEAR COAL FIRED
------------- -------------------------------------------------------------
COUNCIL
QUAD CITIES NEAL BLUFFS NEAL OTTUMWA LOUISA
UNITS UNITS UNIT UNIT UNIT UNIT
NO.1 & 2 No.NO. 3 No.NO. 3 No.NO. 4 No.NO. 1 No.NO. 1
----------- ---- ------ ---- ------- ------------------- ---------- ---------- ---------- --------- ----------
In service date .................. 1972 1975 1978 1979 1981 1983
Utility plant in service $242 $127 $298 $161 $210 $530......... $ 242 $ 127 $ 298 $ 161 $ 210 $ 530
Accumulated depreciation ......... $ 98 $ 82 $175$ 175 $ 92 $109 $252$ 109 $ 252
Unit capacity-MW ................. 1,529 515 675 624 716 700
Percent ownership ................ 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
F-14
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES:
(a)(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1999 are estimated to be $194
million, including $9 million for Quad Cities Station nuclear fuel.
Nonregulated capital expenditures depend upon the availability of investment
opportunities and other factors. During 1999, suchthese expenditures are estimated
to be approximately $9 million.
(b)(B) MANUFACTURED GAS PLANT FACILITIES:
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain
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 is evaluating 27 properties which were, at one time,
sites of gas manufacturing plants in which it may be a potentially responsible
party
(PRP).party. The purpose of these evaluations is to determine whether waste materials
are present, whether such 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 eighteen
sites and has conducted interim removal actions at fivesix of the eighteen sites. In
addition, MidAmerican Energy has completed investigations and removals at four
sites. MidAmerican Energy is continuing to evaluate several of the sites to
determine the future liability, if any, for conducting site investigations or
other site activity.
F-14
MidAmerican's estimateMidAmerican Energy estimates the range of probablepossible costs for investigation,
remediation costsand monitoring for the sites discussed above to be $21 million to
$69 million. MidAmerican Energy's estimate of the probable cost for these sites
as of December 31, 1998,September 30, 1999 was $24$29 million. The estimate consists of $3 million
for investigation costs, $10 million for remediation costs, $14 million for
monitoring costs and $2 million for closure and administrative costs. This
estimate has been recorded as a liability and a regulatory asset for future
recovery. The ICC has
approvedMHC projects that these amounts will be paid or incurred over the use of a tariff rider which permits recovery of the actual costs of
litigation, investigation and remediation relating to former MGP sites.
MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP
costs. MidAmerican intends to pursue recovery of the remediation costs from
other PRPs and its insurance carriers.next
10 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 remedial
action is required, the best estimate of remediationremedial costs is accrued. If
necessary, the estimate is revised when a consent order is issued. 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. In addition,
insurance recoveries for some or all of the costs may be possible, but the
liabilities recorded have not been reduced by any estimate of such recoveries.
The Illinois Commerce Commission has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs. MidAmerican Energy intends to pursue recovery of
the remediation costs from other potentially responsible parties and its
insurance carriers.
F-15
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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's financial position or results of operations.
(c)(C) CLEAN AIR ACT:
Following recommendations provided by the Ozone Transport Assessment Group,
the EPA, in November 1997, issued a Notice of Proposed Rulemaking which
identified 22 states and the District of Columbia as making a significant
contribution to nonattainment of the ozone standard in downwind states in the
eastern half of the United States. In September 1998, the EPA issued its final
rules in this proceeding. Iowa is not subject to the emissions reduction
requirements in the final rules, and, as such, MidAmerican's facilities are not
currently subject to additional emissions reductions as a result of this
initiative.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards (NAAQS) 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). If a state has
area(s) classified as nonattainment area(s), the state is required to submit a
State Implementation Plan specifying how it will reach attainment of the
standards through emission reductions or other means. In August 1998, the Iowa
Environmental Protection Commission adopted by reference the NAAQSNational Ambient
Air Quality Standards for ozone and fine particulate matter.
In May 1999, the United States District Court of Appeals for the District
of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA
indicating the EPA had not expressed sufficient justification for the basis of
establishing the standards and ruling that the EPA has exceeded its
constitutionally-delegated authority in setting the standards. The EPA's appeal
of the court's ruling to the full panel of the United States District Court of
Appeals for the District of Columbia was denied. As a result of the court's
initial decision and the current status of the standards, the impact of theany new
standards on MidAmerican will depend onEnergy is currently unknown. If the EPA successfully
appeals the court's decision, however, and the new standards are implemented,
then MidAmerican Energy's fossil fuel generating stations may be subject to
emission reductions if the stations are located in nonattainment areas. As part
of an overall state plan to achieve attainment status of the areas surrounding MidAmerican's operations and
MidAmerican'sstandards, MidAmerican
Energy could be required to install control equipment on its fossil fuel
generating stations or decrease the number of hours during whch these stations
operate. The degree to which MidAmerican Energy may be required to install
control equipment or decrease operating hours under a nonattainment scenario
will be determined by the state's assessment of MidAmerican Energy's relative
contribution, along with other emission sources, to the nonattainment status.
The attainment
statusinstallation of areascontrol equipment would result in increased costs to
MidAmerican Energy. A decrease in the statenumber of Iowa will not be known for twohours during which the affected
stations operate would decrease the revenues of MidAmerican Energy. An increase
in costs incurred by MidAmerican Energy or a decrease in the revenues earned by
MidAmerican Energy would decrease the amount of funds MidAmerican Energy has
available to three years.
However, if MidAmerican's operations are determinedmake distributions to contributeMidAmerican Funding. This decrease would
have a corresponding decrease in the amount of funds available to nonattainment,MidAmerican
Funding to make payments on the installation of additional control equipment, such as
scrubbers and/or selective catalytic reduction, on MidAmerican's units could be
required. The cost to install such equipment could be significant. MidAmerican
will continue to follow the attainment status of the areas in which it operates
and evaluate the potential impact of the status of these areas on MidAmerican
under the new regulations.
F-15
(d)securities.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPDthe Nebraska Public Power District cover one-half of the fixed
and operating costs of Cooper (excluding depreciation but including debt
service) and MidAmerican'sMidAmerican Energy's share of nuclear fuel cost (including nuclear
fuel disposal) based on energy delivered. The debt service portion is
approximately $1.5 million per month for 1999 and is not contingent upon the
plant being in service. In addition, MidAmerican Energy pays one-half of NPPD'sthe
Nebraska Public Power District's decommissioning funding related to Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican'sMidAmerican Energy's payments
to NPPDthe Nebraska Public Power District were $14.4 million, $13.8 million and
$14.5 million and the net interest component was $2.9 million, $3.8 million and
$3.6 million each for the years 1998, 1997 and 1996, respectively.
MidAmerican'sMidAmerican Energy's payments for the debt principal portion of the power
purchase contract obligation and the DOE enrichment plant decontamination and
decommissioning payments are $15.0 million, $15.8 million, $16.6 million, $17.4
million and $18.3 million for 1999 through 2003, respectively.
(e)F-16
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(E) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican'sMidAmerican Energy's share of expected decommissioning costs for Cooper and Quad
Cities Station, in 1998 dollars, is $256 million and $242 million,
respectively. In Illinois, nuclear decommissioning costs are included in
customer billings through a mechanism that permits annual adjustments. SuchThese
costs are reflected as base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPDthe
Nebraska Public Power District assumes that decommissioning costs will escalate
at an annual rate of 4.0%. Although Cooper's operating license expires in 2014,
the funding plan assumes decommissioning will start in 2004, the anticipated
plant shutdown date.
As of December 31, 1998, MidAmerican'sMidAmerican Energy's share of funds set aside by
NPPDthe Nebraska Public Power District in internal and external accounts for
decommissioning was $97.5 million. In addition, the funding plan also assumes
various funds and reserves currently held to satisfy NPPDthe Nebraska Public Power
District bond resolution requirements will be available for plant
decommissioning costs after the bonds are retired in early 2004. The funding
schedule assumes a long-term return on funds in the trust of 6.75% annually.
Certain funds will be required to be invested on a short-term basis when
decommissioning begins and are assumed to earn at a rate of 4.0% annually. NPPDThe
Nebraska Public Power District is recognizing decommissioning costs over the
life of the power sales contract. MidAmerican Energy makes payments to NPPDthe
Nebraska Public Power District related to decommissioning Cooper. These payments
are included in MidAmerican'sMidAmerican Energy's power purchase costs. The Cooper
decommissioning component of MidAmerican'sMidAmerican Energy's payments to NPPDthe Nebraska
Public Power District was $7.9 million, $11.3 million and $9.9 million for the
years 1998, 1997, and 1996, respectively, and is included in Other Operating
Expenses in the Consolidated Statements of Income. Earnings from the internal
and external trust funds, which are recognized by NPPDthe Nebraska Public Power
District as the owner of the plant, are tax exempt and serve to reduce future
funding requirements.
External trusts have been established for the investment of funds for
decommissioning the Quad Cities Station. The total accrued balance as of
December 31, 1998, was $117.0 million and is included in Other Liabilities and a
like amount is reflected in Investments and represents the fair value of the
assets held in the trusts.
MidAmerican'sMidAmerican Energy's provision for depreciation included costs for Quad
Cities Station nuclear decommissioning of $11.4 million, $9.8 million and $8.6
million for 1998, 1997 and 1996, respectively. The provision charged to expense
is equal to the funding that is being collected in rates. The decommissioning
funding component of MidAmerican'sMidAmerican Energy's Illinois and Iowa tariffs assumes
decommissioning costs, related to the Quad Cities Station, will escalate at an
annual rate of 4.9% and the assumed annual return on funds in the trust is 6.9%.
Earnings, net of investment fees, on the assets in the trust fund were $1.7
million, $4.5 million and $3.2 million for 1998, 1997 and 1996, respectively.
See Note (14) for information regarding unrealized gains and losses.
F-16
(f)(F) NUCLEAR INSURANCE:
MidAmerican Energy maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station and Cooper through a
combination of insurance purchased by NPPDthe Nebraska Public Power District (the
owner and operator of Cooper) and Commonwealth Edison (ComEd, theComEd (the joint owner and operator of Quad
Cities Station), insurance purchased directly by MidAmerican Energy, and the
mandatory industry-wide loss funding mechanism afforded under the Price-Anderson
Amendments Act of 1988. The general types of coverage are: nuclear liability,
property coverage and nuclear worker liability.
NPPDThe Nebraska Public Power District and ComEd each purchase nuclear
liability insurance for Cooper and Quad Cities Station, respectively, in the
maximum available amount of $200 million. In
F-17
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the Price-Anderson Amendments Act of 1988, excess liability
protection above that amount is provided by a mandatory industry-wide program
under which the licensees of nuclear generating facilities could be assessed for
liability incurred due to a serious nuclear incident at any commercial nuclear
reactor in the United States. Currently, MidAmerican'sMidAmerican Energy's aggregate maximum
potential share of such an assessment for Cooper and Quad Cities Station combined is
$88.1 million per incident, payable in installments not to exceed $10 million
annually.
The property coverage provides for property damage, stabilization and
decontamination of the facility, disposal of the decontaminated material and
premature decommissioning. For Quad Cities Station, ComEd purchases primary and
excess property insurance protection for the combined interests in Quad Cities,
with coverage limits totaling $2.1 billion. For Cooper, MidAmerican Energy and
NPPDthe Nebraska Public Power District separately purchase primary and excess
property insurance protection for their respective obligations, with coverage
limits of $1.375 billion each. This structure provides that both MidAmerican
Energy and NPPDthe Nebraska Public Power District are covered for their respective
50% obligation in the event of a loss totaling up to $2.75 billion. MidAmerican
Energy also directly purchases extra expense/business interruption coverage for
its share of replacement power and/or other extra expenses in the event of a
covered accidental outage at Cooper or Quad Cities Station. The coverages
purchased directly by MidAmerican Energy, and the property coverages purchased
by ComEd, which includes the interests of MidAmerican Energy, are underwritten
by an industry mutual insurance company and contain provisions for retrospective
premium assessments should two or more full policy-limit losses occur in one
policy year. Currently, the maximum retrospective amounts that could be assessed
against MidAmerican Energy from industry mutual policies for its obligations
associated with Cooper and Quad Cities Station combined, total $11.2 million.
The master nuclear worker liability coverage, which is purchased by NPPDthe
Nebraska Public Power District and ComEd for Cooper and Quad Cities Station,
respectively, is an industry-wide guaranteed-cost policy with an aggregate
limit of $200 million for the nuclear industry as a whole, which is in effect
to cover tort claims of workers in nuclear-related industries as a result of
radiation exposure.
(g)(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican Energy has entered into supply and related transportation
contracts for its fossil fueled generating stations. The contracts, with
expiration dates ranging from 1999 to 2003, require minimum payments of $110.2
million, $75.8 million, $28.0 million, $8.1 million and $2.6 million for the
years 1999 through 2003, respectively. The CompanyMHC expects to supplement these coal
contracts with spot market purchases to fulfill its future fossil fuel needs.
MidAmerican Energy has entered into various natural gas supply and
transportation contracts for its utility operations. The minimum commitments
under these contracts are $57.4 million, $40.1 million, $33.3 million, $18.7
million and $13.7 million for the years 1999 through 2003, respectively, and
$60.7 million for the total of the years thereafter.
(h)(H) OPERATING LEASE COMMITMENTS:
The CompanyMHC has entered into various operating lease agreements covering
facilities, computer and transportation equipment. Rental payments on operating
leases were $23.7 million for 1998, $20.8 million for 1997, and $21.3 million
for 1996. The approximate future minimum annual commitments under all operating
leases are $13.6 F-17
million, $12.0 million, $7.4 million, $5.7 million and $3.9
million for the years 1999 through 2003, respectively, and $9.7 million for the
total of the years thereafter.
F-18
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as
shown in the table below (in thousands):
1998 1997 1996
---------------- --------------- -----------------
Amount Shares Amount Shares Amount Shares
------ ------ ------ ------ ------ ----------------------------- ----------------------- ----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- ----------- ----------
Balance, beginning of year............ $753,873year .......... $ 753,873 95,301 $801,431$ 801,431 100,752 $801,227 100,752
Changes due to:
Repurchase of common shares.......shares ........ (29,295) (4,099) (47,444) (5,451) - --- --
Stock options.....................options ...................... (168) --- 210 --- 623 ---
Capital stock expense ......................... 368 --- (289) --- (419) -
Other............................. - ---
Other .............................. -- -- (35) - - -
---------- -- --
--------- ------ -------- --------------- ------- -------- -------
Balance, end of year.................. $724,778year ................ $ 724,778 91,202 $753,873$ 753,873 95,301 $801,431 100,752
================= ====== ======== =============== ======= ======== =======
(6) RETIREMENT PLANS:
The CompanyMHC has primarily noncontributory defined benefit pension plans covering
substantially all employees. Benefits under the plans are based on
participants' compensation, years of service and age at retirement. Funding is
based upon the actuarially determined costs of the plans and the requirements
of the Internal Revenue Code and the Employee Retirement Income Security Act.
MidAmerican has been allowed to recover funding contributions in rates.
The CompanyMHC currently provides certain health care and life insurance (postretirement)
benefits for retired employees. Under the plans, substantially all of the Company'sMHC's
employees may become eligible for these benefits if they reach retirement age
while working for the Company.MHC. However, the CompanyMHC retains the right to change these benefits
anytime at its discretion. MidAmericanMHC expenses postretirement benefit costs on
an accrual basis and includes provisions for suchthese costs in rates.
The CompanyMHC also maintains noncontributory, nonqualified supplemental executive
retirement plans for active and retired participants.
Net periodic pension, supplemental retirement and postretirement benefit
costs includes the following components for the years ended December 31 (in
thousands):
Pension Cost Postretirement CostPENSION COST POSTRETIREMENT COST
------------------------------------------ ---------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---------------- ------------ ------------ ----------- ----------- -----------
Service cost................................cost ........................... $ 11,284 $ 10,092 $ 12,323 $ 3,558 $ 2,680 $ 2,118
Interest cost...............................cost .......................... 29,941 29,623 31,109 9,344 8,822 8,341
Expected return on plan assets..............assets ......... (42,578) (37,617) (33,635) (3,651) (2,573) (1,895)
Amortization of net transition
obligation...obligation ............................ (2,591) (2,591) (2,591) 5,291 5,291 5,291
Amortization of prior service cost..........cost ..... 1,871 1,871 3,183 650 650 ---
Amortization of prior year (gain)
loss......loss .................................. (2,802) (1,797) 806 --- (298) ---
Regulatory deferral of incurred
cost........ -cost .................................. -- 5,423 568 --- 4,888 5,112
----------------- --------- --------- -------- ------- ------- --------------- --------
Net periodic (benefit) cost.................cost ............ $ (4,875) $ 5,004 $ 11,763 $15,192 $19,460 $18,967
========$ 15,192 $ 19,460 $ 18,967
========= ========= ========= ======== ======= ======= =============== ========
The pension plan assets are in external trusts and are comprised of
corporate equity securities, United States government debt, corporate bonds,
and insurance contracts. Postretirement benefit plans
F-19
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets are in external trusts
F-18
and are comprised primarily of corporate equity
securities, corporate bonds, money market investment accounts and municipal
bonds.
Although the supplemental executive retirement plans had no assets as of
December 31, 1998, the CompanyMHC had Rabbi trusts which held corporate-owned life
insurance to provide funding for the future cash requirements. Because these
plans are nonqualified, the fair value of these assets is not included in the
following table. The cash value of the life insurance policies was $27.2
million and $21.5 million at December 31, 1998 and 1997, respectively.
The projected benefit obligation and accumulated benefit obligation for
the supplemental executive plans were $55.1 million and $49.9 million,
respectively, as of December 31, 1998, and $48.6 million and $40.3 million,
respectively, as of December 31, 1997.
F-20
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents a reconciliation of the beginning and ending
balances of the benefit obligation, fair value of plan assets and the funded
status of the aforementioned plans to the net amounts recognized in the
Company'sMHC's
Consolidated Balance Sheets as of December 31 (dollars in thousands):
Pension Benefits Postretirement Benefits
--------------------- -----------------------PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------------------- -------------- ----------- -----------
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ...................... $ 430,043 $ 428,713 $ 127,347 $ 116,505
Service cost ............................................................................ 11,285 10,091 3,558 2,680
Interest cost .......................................................................... 29,941 29,623 9,344 8,822
Participant contributions .................................................. 127 125 1,404 1,704
Plan amendments ...................................................................... -- (16,211) (21,607) 8,927
Actuarial (gain) loss .......................................................... 15,793 8,088 9,463 (3,025)
Benefits paid .......................................................................... (30,714) (30,386) (9,321) (8,266)
--------- ------------------- ---------- --------- ---------
Benefit obligation at end of year ............................. 456,475 430,043 120,188 127,347
--------- ------------------- ---------- --------- ---------
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year . ..... 483,668 427,828 52,174 36,783
Employer contributions ........................................................ 3,445 6,362 10,095 19,668
Participant contributions .................................................. 127 125 1,404 1,704
Actual return on plan assets ............................................ 67,982 79,739 8,741 2,285
Benefits paid .......................................................................... (30,714) (30,386) (9,321) (8,266)
--------- ------------------- ---------- --------- ---------
Fair value of plan assets at end of year ............... 524,508 483,668 63,093 52,174
--------- ------------------- ---------- --------- ---------
Funded status .......................................................................... 68,033 53,625 (57,095) (75,173)
Unrecognized net loss (gain) ............................................ (101,860) (95,051) (6,873) (11,248)
Unrecognized prior service cost ...................................... 19,868 21,739 2,555 8,277
Unrecognized net transition obligation (asset) ........ (13,748) (16,339) 57,543 79,370
--------- ------------------- ---------- --------- ---------
Net amount recognized in MHC's
Consolidated Balance sheets .................................... $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= =================== ========== ========= =========
Amounts recognized in the Consolidated
Balance Sheets of MHC consist of:
Prepaid benefit cost ............................................................ $ 4,350 $ -- $ -- $ 1,226
Accrued benefit liability .................................................. (49,874) (47,591) (3,870) --
Intangible asset .................................................................... 17,817 11,565 -- --
--------- ------------------- ---------- --------- ---------
Net amount recognized ..................................................... $ (27,707) $ (36,026) $ (3,870) $ 1,226
========= =================== ========== ========= =========
F-19
Pension and Postretirement
Assumptions
--------------------------PENSION AND
POSTRETIREMENT
ASSUMPTIONS
----------------------
1998 1997
---------- --------- ------------
Assumptions used were:
Discount rate......................................rate ........................................................ 6.75% 7.0%
Rate of increase in compensation levels............levels .............................. 5.0% 5.0%
Weighted average expected long-term rate of return on assets.......................assets ......... 9.0% 9.0%
F-21
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The postretirement plan was amended on January 1, 1999, increasing the
retiree co-payment for prescription drugs. This decrease in benefit obligation
is reflected for December 31, 1998.
For purposes of calculating the postretirement benefit obligation, it is
assumed health care costs for covered individuals prior to age 65 will increase
by 8.4% in 1999 and that the rate of increase thereafter will decline by 1.0%
annually to an ultimate rate of 5.25% by the year 2003. For covered individuals
age 65 and older, it is assumed health care costs will increase by 6.0% in 1999
and 5.5% in 2000.
If the assumed health care trend rates used to measure the expected cost
of benefits covered by the plans were increased by 1.0%, the total service and
interest cost for 1998 would increase by $2.4 million, and the postretirement
benefit obligation at December 31, 1998, would increase by $18.3 million. If
the assumed health care trend rates were to decrease by 1.0%, the total service
and interest cost for 1998 would decrease by $1.9 million and the
postretirement benefit obligation at December 31, 1998, would decrease by $15.3
million.
The CompanyMHC sponsors defined contribution pension plans (401(k) plans) covering
substantially all employees. The Company'sMHC's contributions vary depending on the plan,
but are based primarily on each participant's level of contribution and cannot
exceed the maximum allowable for tax purposes. The Company'sMHC's total contributions were
$5.6 million, $4.6 million and $4.4 million for 1998, 1997 and 1996,
respectively.
(7) STOCK-BASED COMPENSATION PLANS:
The CompanyMHC has stock-based compensation arrangements for employees and directors
as described below. The CompanyMHC accounts for these plans under Accounting Principles
Board Opinion No. 25 and the related interpretations. The total compensation
cost recognized in income for stock-based compensation awards was $0.3 million,
$1.3 million, and $0.6 million for 1998, 1997, and 1996, respectively. Had the CompanyMHC
used Statement of Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), pro-forma net income for common stock would be $130.9
million, $135.3 million, and $130.9 million, while earnings per share would be
$1.39, $1.38, and $1.30 for the years ended 1998, 1997, and 1996 respectively.
Stock options and performance share awards have been granted pursuant
tounder the
MidAmerican Energy Company 1995 Long-Term Incentive Plan (the Plan). Up to four
million shares are authorized to be granted under the Plan.
F-20
Stock Options - UnderOptions--Under the Plan, the Board of Directors granted options to
purchase shares of the Company'sMHC's common stock (the Options) at the fair market value of
the shares on the date of the grant. The options granted in 1998 and 1997 vest
over a 3-year period at a rate of 33.3% per year and options granted in 1995
and 1996 vest over a 4-year period at a rate of 25% per year. Under the plan,
F-22
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
all options expire ten years after the date of grant. Stock option activity for
1998, 1997, and 1996 is summarized as follows:
1998 1997 1996
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- ------ -------- ------ ------- --------------------------------- -------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
------------ ---------- ------------- ---------- --------- -----------
Outstanding, beginning of year.............year..... 566,666 $15.12$ 15.12 800,000 $14.66$ 14.66 700,000 $14.50$ 14.50
Granted ............................................................. 289,000 $25.25$ 25.25 46,666 $17.36$ 17.36 100,000 $15.75
Exercised..................................$ 15.75
Exercised ......................... (70,000) $14.50$ 14.50 (165,000) $14.58 - -
Forfeited..................................$ 14.58 -- --
Forfeited ......................... (10,000) $17.38$ 17.38 (115,000) $14.93 - -$ 14.93 -- --
------- ------ ------- -------------- ------- ------------- -------
Outstanding, end of year...................year .......... 775,666 $18.72$ 18.72 566,666 $15.12$ 15.12 800,000 $14.66$ 14.66
======= ====== ======= ============== ======= ============= =======
Exercisable, end of year...................year .......... 369,710 $14.70$ 14.70 315,000 $14.54$ 14.54 175,000 $14.50$ 14.50
======= ====== ======= ============== ======= ============= =======
Weighted average fair value of
options granted during year.............. $3.21 $1.66 $1.48year ...... $ 3.21 $ 1.66 $ 1.48
The fair value of the options granted were estimated as of the date of the
grant using the Black-Scholes option pricing model. The model assumed:
1998 1997 1996
--------- --------- ------------------------ -------------- --------------
Dividend rate per share....................share .......... $ 1.20 $ 1.20 $ 1.20
Expected volatility........................volatility .............. 17.52% 16.55% 17.62%
Expected life..............................life .................... 10 Years 10 Years 10 Years
Risk free interest rate....................rate .......... 5.27% 6.14% 6.53%
The options outstanding at December 31, 1998, have an exercise price range
of $14.50 to $25.25, with a weighted average contractual life of 8.27 years.
Performance Shares - UnderShares--Under the Plan, participants were granted contingent
shares of MHC common stock. The shares are contingent upon the attainment of
specified performance measures within a 3-year performance period.period, over which
compensation cost is recognized. During the performance period, the participant
is entitled to receive dividends and vote the stock. The stock is vested upon
achievement of the performance measures. If the specified criteria is not met
within the 3-year performance period, the shares are forfeited. The following
table provides certain
information regarding contingent performance incentive shares
granted under the Plan:
1998 1997 1996
---------- ---------- ----------------------- ------------- -------------
Number of performance shares granted.................granted ................ 77,441 77,105 68,189
Fair value at date of grant (in thousands)........... .......... $ 1,645 $ 1,335 $ 1,176
Weighted average per share amount.................... $21.2372amount ................... $ 21.2372 $ 17.3125 $ 17.2500
End of performance period............................period ........................... 6/30/01 6/30/00 6/30/99
F-21
In addition, the CompanyMHC granted 1,200 restricted shares to each non-employee
director in 1998 and 800 restricted shares to each non-employee director in
1997 and 1996, respectively. Non-employee directors are restricted from
disposing of granted shares until such time as they cease to be a director of the company.MHC. The
following table provides certain information regarding the directors restricted shares
granted under the Plan.
1998 1997 1996
-------- -------- --------------------- ------------- -------------
Number of shares granted ............................................. 14,400 11,200 12,000
Fair value at date of grant (in thousands) .......... $ 295 $ 194 $ 207
Weighted average price per share amounts . $20.4658 $17.3125 $17.2500.......... $ 20.4658 $ 17.3125 $ 17.2500
F-23
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Ownership Plan - EmployeesPlan--Employees of the CompanyMHC are allowed to purchase
CompanyMHC stock up to the lesser of 15% of their annual compensation or $25,000 at a
15% discount. The number of shares acquired by employees under the plan were
146,299, 140,943, and 150,899 in 1998, 1997 and 1996, respectively. The CompanyMHC
acquired shares in the open market for this plan. Participants who purchase
shares under the Plan are required to hold purchased shares for 180 days.
(8) SHORT-TERM BORROWING:
Interim financing of working capital needs and the construction program
may be obtained from the sale of commercial paper or short-term borrowing from
banks. Information regarding short-term debt follows (dollars in thousands):
1998 1997 1996
-------- -------- --------------------- ------------- -------------
Balance at year-end.......................................... $339,826 $138,054 $161,990year-end ......................................... $ 339,826 $ 138,054 $ 161,990
Weighted average interest rate on year-end balance......................................balance .......... 6.0% 5.9% 5.4%
Average daily amount outstanding during the year.......................................... $187,466 $117,482 $151,318year ............ $ 187,466 $ 117,482 $ 151,318
Weighted average interest rate on average daily
amount outstanding during the year.......................year ......................... 5.6% 5.7% 5.5%
MidAmerican Energy has authority from FERC to issue short-term debt in the
form of commercial paper and bank notes aggregating $400 million. As of December
31, 1998, MidAmerican Energy had a $250 million revolving credit facility and
lines of credit totaling $90 million and MHC had lines of credit totaling $145
million. MidAmerican'sMidAmerican Energy's commercial paper borrowings are supported by the
revolving credit facility and the line of credit. As of December 31, 1998,
commercial paper and bank notes totaled $206.2 million and $99.1 million for
MidAmerican Energy and MHC, respectively.
MidAmerican Capital has two unsecured revolving credit facility agreements
totaling $114 million which mature March 31, 1999. Borrowings under these
agreements may be on a fixed rate, floating rate or competitive bid rate basis.
As of December 31, 1998, $34.6 million was borrowed under these facilities. All
subsidiary long-term borrowings outstanding at December 31, 1998, are without
recourse to MHC.
F-22
(9) RATE MATTERS:
As a result of a negotiated settlement in Illinois, MidAmerican Energy
reduced its Illinois electric service rates by annual amounts of $13.1 million
and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively.
MidAmerican Energy implemented an additional $0.9 million annual rate reduction
for its Illinois residential customers, effective August 1, 1998, in connection
with Illinois' electric utility restructuring law.
On June 27, 1997, the IUB approved a March 1997 settlement agreement
between MidAmerican Energy, the Iowa Office of Consumer Advocate (OCA) and other
parties. Four major components of the settlement and their status are as
follows:
1) On an annualized basis, prices for residential customers were reduced
$8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July
11, 1997, and June 1, 1998, respectively, for a total annual decrease of $23.5
million.
2) Prices for industrial customers were reduced by $6 million annually and
prices for commercial customers were reduced by $4 million annually. MidAmerican
Energy was given permission to implement these reductions through a retail
access pilot project, negotiated individual contracts and tariffed rate
reductions. On January 1, 1999, MidAmerican Energy reduced base rates for
certainselected non-contract commercial customers by approximately $1.5 million
annually, subject to IUBIowa Utilities
F-24
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Board approval. Additionally, MidAmerican Energy will make a one-time refund for
reductions that were not in place by the June 1, 1998, deadline. The remainder
of the commercial and industrial price reductions were achieved through
negotiated contracts and a retail access pilot project.
The negotiated contracts have differing terms and conditions as well as
prices. The contracts range in length from five to ten years, and some have
price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to 10-year contracts. Prices are set
as fixed prices; however, many contracts allow for potential price adjustments
with respect to environmental costs, government imposed public purpose
programs, tax changes, and transition costs. While the contract prices are
fixed (except for the potential adjustment elements), the costs MidAmerican
Energy incurs to fulfill these contracts will vary. On an aggregate basis the
annual revenues under contract are approximately $180 million.
3) The Iowa energy adjustment clause (EAC) was eliminated. Prior to July 11,
1997, MidAmerican collected fuel costs from Iowa customers on a current basis
through the EAC,energy adjustment clause, and thus, fuel costs had little impact on
net income. Since then, base rates for Iowa customers include a factor for
recovery of a representative level of fuel costs. If the actual per-unit fuel
cost varies from that factor, pre-tax earnings are affected. The fuel cost
factor was to be reviewed in February 1999 and adjusted prospectively if the
actual 1998 fuel cost per unit varied by more than 15% above or below the
factor included in base rates. Based on 1998 actual fuel costs, MidAmerican
Energy will reduce the fuel cost recovery factor in 1999 base rates. The
estimated annual reduction in revenues associated with this adjustment is $1.1
million.
4) If MidAmerican'sMidAmerican Energy's annual Iowa electric jurisdictional return on
common equity exceeds 12%, an equal sharing between customers and shareholders
of earnings above the 12% level begins; if it exceeds 14%, two-thirds of
MidAmerican'sMidAmerican Energy's share of those earnings will be used for accelerated
recovery of certain regulatory assets. The agreement precludes MidAmerican Energy from
filing for increased rates prior to 2001 unless the return on common equity
falls below 9%. Other parties signing the agreement are prohibited from filing
for reduced rates prior to 2001 unless the return on common equity, after
reflecting credits to customers, exceeds 14%.
Under a restructuring law enacted in 1997, a similar sharing mechanism is
in place for Illinois operations. Two-year average ROE'sreturns on common equity
greater than a two-year average benchmark will trigger an equal sharing of
earnings on the excess. The benchmark is a calculation of average 30-year
Treasury Bond rates plus 5.5% for 1998 and 1999 and 6.5% for 2000 through 2004.
The initial calculation, due March 31, 2000, will be based on 1998 and 1999
results.
F-23
(10) DISCONTINUED OPERATIONS:
In the third quarter of 1996, the CompanyMHC announced the discontinuation of certain
nonstrategic businesses in support of its strategy of becoming the leading
regional energy and complementary services provider. In November of 1996, the CompanyMHC
signed a definitive agreement with KCS Energy, Inc. (KCS) to sell an oil and gas
exploration and development subsidiary and completed the sale on January 3,
1997. The CompanyMHC recorded an after-tax loss of $7.1 million for the disposition in
1996 and an additional $0.9 million in 1997. In October 1997, the CompanyMHC sold its
subsidiary that developed and operated a computerized information system
facilitating the real-time exchange of power in the electric industry. The CompanyMHC
recorded a $4.0 million estimated after-tax loss on disposal in the third
quarter of 1996 and an additional $3.2 million in September 1997. In addition,
in the third quarter of 1996 the CompanyMHC received a final settlement from the sale of a
coal mining subsidiary which was reflected
as a discontinued operation by a predecessor company in 1982.subsidiary. The final settlement which resulted in an after-tax loss of $3.3 million, included reacquisition by the
reacquisitionbuyer of preferred equity by the buyerissued to MidAmerican Energy and the settlement of
reclamation reserves.obligations. MidAmerican Energy recorded an after-tax loss on
disposal of $3.3 million for the transaction in September 1996, representing
the after-tax difference between proceeds received and the carrying value of
the assets.
F-25
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds received from the disposition of the oil and gas subsidiary
included $210 million in cash and 870,000 warrants, after a stock split in
1997, to purchase KCS Energy common stock. The warrants were valued at $6
million.million using a Black-Scholes pricing model. Proceeds received from the
disposition of the subsidiary that operates a computerized information system
for the exchange of power in the electric industry included an unsecured note
receivable for $0.7 million and warrants to purchase twenty percent of the
acquirer which have been valued at zero. Proceeds received from the disposition
of the coal mining subsidiary settlement were $15 million.
On October 6, 1999, the CompanyMHC distributed its holding in the capital stock of
MidAmerican Realty to MidAmerican Energy Holdings Company. The operations are
the result of several acquisitions beginning in May 1998. Refer to Note (22),
"Acquisitions."
Revenues from discontinued activities, as well as the results of
operations and the estimated loss on the disposal of discontinued operations
for the years ended December 31 are as follows (in thousands):
1998 1997 1996
----------- -------------- --------------
Operating Revenues .............. $ 164,226........................ $164,226 $ -- $ 233,952
========= ========= ================= ========== ==========
Income from Operations
Income (loss) before income taxes ......... $ 7,251 $ (200) $ 1,638
Income tax benefit (expense) .................. (3,087) 82 479
--------- --------- ----------------- ---------- ----------
Income (loss) from Operations ................ $ 4,164 $ (118) $ 2,117
========= ========= ================= ========== ==========
Loss on Disposal
Income (loss) before income taxes ......... $ -- $ (10,106) $ 9,047
Income tax benefit (expense) .................. -- 5,996 (23,879)
--------- --------- ----------------- ---------- ----------
Loss on disposal .......................................... $ -- $ (4,110) $ (14,832)
========= ========= ================= ========== ==========
The income tax expense recognized on the disposal for 1996 significantly
exceeds the amount of income generated from the disposal of the segment due to
book/tax basis differences associated with the stock of the companies disposed.
The deferred income taxes associated with these differences were recorded in
the deferred tax accounts of the companies sold and were therefore reflected in
the book basis of the companies.
Investment in Discontinued Operations on the balance sheet is made up of
the following at December 31, 1998 (in thousands):
Cash ...................... $ 3,114
Receivables ............... 30,010
Property .................. 20,311
Other assets .............. 80,656
Long-term debt ............ (36,953)
Notes payable ............. (25,435)
Other liabilities ......... (27,796)
---------
$ 43,907
(11) CONCENTRATION OF CREDIT RISK:
The Company'sMHC's electric utility operations serve 565,000 customers in Iowa, 85,000
customers in western Illinois and 3,000 customers in southeastern South Dakota.
The Company'sMHC's gas utility operations serve 489,000
F-26
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
customers in Iowa, 65,000 customers in western Illinois, 64,000 customers in
southeastern South Dakota and 4,000 customers in northeastern Nebraska. The
largest communities served by the CompanyMHC are the Iowa and Illinois Quad-Cities; Des
Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa;
and Sioux Falls, South Dakota. The Company'sMHC's utility operations grant unsecured credit
to customers, substantially all of whom are local businesses and residents. As
of December 31, 1998, billed receivables from the Company'sMHC's utility customers totaled
$20.1 million.
F-24
As described in Note 18, billed receivables related to utility services
have been sold to a wholly owned unconsolidated subsidiary.
MidAmerican Capital has investments in preferred stocks of companies in
the utility industry. As of December 31, 1998, the total cost of these
investments was $54 million.million and they were valued at $57 million on the Balance
Sheet. MidAmerican Capital has an investment in the common stock of McLeodUSA
Incorporated, the total cost of which was $44 million at December 31, 1998.1998 and
was valued at $239 million on the Balance Sheet.
MidAmerican Capital has entered into leveraged lease agreements with
companies in the airline industry. As of December 31, 1998, the receivables
under these agreements totaled $33 million.
(12) PREFERRED SHARES:
The $5.25 Series Preferred Shares, which were not redeemable prior to
November 1, 1998, for any purpose, are subject to mandatory redemption on
November 1, 2003 at $100 per share. The $7.80 Series Preferred Shares have
sinking fund requirements under which 66,600 shares will be redeemed at $100
per share each May 1, beginning in 2001 through May 1, 2006.
The total outstanding cumulative preferred stock of MidAmerican Energy not
subject to mandatory redemption requirements may be redeemed at the option of
the CompanyMidAmerican Energy at prices which, in the aggregate, total $32.2 million. The
aggregate total the holders of all preferred stock outstanding at December 31,
1998, are entitled to upon involuntary bankruptcy is $181.8 million plus accrued
dividends. Annual dividend requirements for all preferred stock outstanding at
December 31, 1998, total $12.9 million.
During 1996, MidAmerican Energy redeemed all shares of the $1.7375 Series
of preferred stock. The redemptions were made at a premium, which resulted in a
charge to net income of $1.6 million.
(13) SEGMENT INFORMATION:
In 1998, the CompanyMHC adopted SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information."
The CompanyMHC has two reportable operating segments: electric and gas. The electric
segment derives most of its revenue from retail sales of regulated electricity
to residential, commercial and industrial customers, and sales to other
utilities; whereas the gas segment derives most of its revenue from retail
sales of regulated natural gas to residential, commercial and industrial
customers. The gas segment also earns significant revenues by transporting gas
owned by others through its distribution systems. Pricing for electric and gas
sales are established separately by regulated agencies; therefore, management
also reviews each segment separately to make decisions regarding allocation of
resources and in evaluating performance. Common operating costs, interest
income, interest expense, income tax expense, and equity in the net loss of
investees are allocated to each segment.
F-25F-27
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide certain CompanyMHC information on an operating segment basis
as of and for the years ended December 31 (in thousands):
SEGMENT PROFIT INFORMATION
1998 1997 1996
---------- ---------- ------------NONREGULATED INTERSEGMENT CONSOLIDATED
ELECTRIC GAS AND OTHER(A) ELIMINATIONS TOTALS
------------- ----------- -------------- -------------- -------------
SEGMENT PROFIT INFORMATION
Electric:
Revenues......................................... $1,169,810 $1,126,300 $1,099,008
1998
Revenues .................................... 1,169,810 429,870 176,244 1,755,924
Depreciation and amortization expense........................... 156,546 145,931 140,93925,665 3,086 (3,086) 182,211
Interest income..................................income ............................. 4,945 1,820 1,3601,169 3,148 9,262
Interest expense.................................expense ............................ 66,784 71,138 72,48414,011 9,418 90,213
Income tax expense...............................expense .......................... 75,831 64,017 90,544(800) 1,895 76,926
Equity in the net loss of investees..............investees ......... (219) (161) -(45) 6,039 5,775
Net income.......................................income .................................. 109,539 101,534 119,583
GAS:
Revenues......................................... 429,870(435) 22,760 (546) 131,318
1997
Revenues .................................... 1,126,300 536,306 536,753306,931 1,969,537
Depreciation and amortization expense............ 25,665............... 145,931 24,609 23,6533,436 (3,436) 170,540
Interest income.................................. 1,169income ............................. 1,820 501 2372,997 5,318
Interest expense................................. 14,011expense ............................ 71,138 14,412 13,58011,785 97,335
Income tax expense (benefit)..................... (800).......................... 64,017 9,698 20,023(5,325) 68,390
Equity in the net loss of investee............... (45)investees ......... (161) (32) -1,273 1,080
Net income....................................... (435)income .................................. 101,534 14,177 28,460
NONREGULATED AND OTHER (a):
Revenues........................................... 176,244 306,93119,784 (391) 135,104
1996
Revenues .................................... 1,099,008 536,753 275,443 1,911,204
Depreciation and amortization...................... 3,086 3,436amortization ............... 140,939 23,653 4,854 (4,854) 164,592
Interest income.................................... 3,148 2,997income ............................. 1,360 237 2,415 4,012
Interest expense................................... 9,418 11,785expense ............................ 72,484 13,580 23,574 109,638
Income tax expense (benefit)....................... 1,895 (5,325).......................... 90,544 20,023 (12,145) 98,422
Equity in the net incomeloss of investees.................. 6,039 1,273investees ......... -- -- 2,510 2,510
Net income......................................... 22,760 19,784income .................................. 119,583 28,460 (16,997) -- 131,046
SEGMENT ASSET INFORMATION
ELECTRIC:1998
Total assets....................................... $2,891,646 $2,833,256 $3,031,287assets ................................ 2,891,646 670,862 681,828 4,244,336
Capital expenditures...............................expenditures ........................ 158,596 128,544 116,24334,758 45,466 238,820
Investment in equity method
investments............investments ............................... 1,388 1,292 -
GAS:256 10,171 11,815
1997
Total assets....................................... 670,862assets ................................ 2,833,256 681,649 730,575763,186 4,278,091
Capital expenditures............................... 34,758expenditures ........................ 128,544 38,388 37,95514,066 180,998
Investment in equity method
investments............ 256investments ............................... 1,292 615 -
Nonregulated and other (a):10,212 12,119
1996
Total assets....................................... 681,828 763,186assets ................................ 3,031,287 730,575 759,986 4,521,848
Capital expenditures............................... 45,466 14,066expenditures ........................ 116,243 37,955 55,788 209,986
Investment in equity method
investments............ 10,171 10,212investments ............................... -- -- 17,613 17,613
- ----------
(a) "Nonregulated and Other" consists of MidAmerican Capital, Midwest Capital,
CBEC Railway and other nonregulated operations and holding company net
loss and corporate assets.
F-26F-28
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividend income related to MHC common stock held by MidAmerican Capital of
$0.5 and $0.4 million for 1998 and 1997, respectively, is included in
Nonregulated and Other Net Income above but has been eliminated in Net Income
in the Consolidated Statements of Income. In addition, a realized gain of $4.2
million from MidAmerican Capital's sale of suchthe common stock to MHC in 1998 has
also been eliminated in Net Income in the Consolidated Statements of Income.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. Tariffs for the Company'sMHC's utility services are
established based on historical cost ratemaking. Therefore, the impact of any
realized gains or losses related to financial instruments applicable to the Company'sMHC's
utility operations is dependent on the treatment authorized under future
ratemaking proceedings.
Cash and cash equivalents - Theequivalents--The carrying amount approximates fair value due
to the short maturity of these instruments.
Quad Cities Station nuclear decommissioning trust fund - Fairfund--Fair value is
based on quoted market prices of the investments held by the fund.
Marketable securities - Fairsecurities--Fair value is based on quoted market prices.
Debt securities - Fairsecurities--Fair value is based on the discounted value of the future
cash flows expected to be received from suchthese investments.
Equity investments carried at cost - Faircost--Fair value is based on an estimate of
the Company'sMHC's share of partnership equity, offers from unrelated third parties or the
discounted value of the future cash flows expected to be received from suchthese
investments.
Notes payable - Fairpayable--Fair value is estimated to be the carrying amount due to
the short maturity of these issues.
Preferred shares - Fairshares--Fair value of preferred shares with mandatory redemption
provisions is estimated based on the quoted market prices for similar issues.
Long-term debt - Fairdebt--Fair value of long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the CompanyMHC for debt of the same remaining maturities.
F-27Preferred Stock Hedge Instruments--Fair value is determined using quoted
market prices. See note 1(i) for additional discussion of fair value.
Gas Futures Contracts and Swaps--Fair value of the futures contracts are
based on quoted market prices and generally have maturities of one year or
less. The fair value of the swaps is estimated based on quotes from the market
makers of these instruments and represents the estimated amounts that MHC would
expect to receive or pay to terminate the agreements. See note 1(i) for
additional discussion of fair value.
F-29
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the carrying amount and estimated fair value
of certainthe named financial instruments as of December 31 (in thousands):
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ---------- ---------------------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
Financial Instruments Owned by the Company:MHC:
Equity investments carried at cost .......................... $ 27,464 $ 27,372 $ 29,707 $ 32,209
Financial Instruments Issued by the Company:MHC:
MidAmerican preferred securities; subject to
mandatory redemption ............................................... $ 50,000 $ 53,317 $ 50,000 $ 53,650
MidAmerican-obligated preferred securities;
subject to mandatory redemption ............................ $ 100,000 $ 102,500 $ 100,000 $ 104,250
Long-term debt, including current portion . ......... $1,045,548 $1,088,650 $1,178,769 $1,214,951
The amortized cost, gross unrealized gain and losses and estimated fair
value of investments in debt and equity securities at December 31 are as
follows (in thousands):
1998
-----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ---------------- -----------
Available-for-sale:
Equity securities ........ $ 225,836 $ 214,927.................. $225,836 $214,927 $ (15,789) $ 424,974$424,974
Municipal bonds .............................. 28,645 2,037 (8) 30,674
U.S. Government securities ......... 15,411 1,410 -- 16,821
Corporate securities .................... 28,051 698 (4) 28,745
Cash equivalents ............................ 6,470 -- -- 6,470
--------- --------- --------- ---------
$ 304,413 $ 219,072-------- -------- ----------- --------
$304,413 $219,072 $ (15,801) $ 507,684
========= ========= ========= =========$507,684
======== ======== =========== ========
Held-to-maturity:
EquityMandatorily redeemable preferred
securities ................................. $ 2,843 $ -- $ -- $ 2,843
Debt securities .............................. 11,837 -- -- 11,837
--------- --------- --------- ----------------- -------- ----------- --------
$ 14,680 $ -- $ -- $ 14,680
========= ========= ========= ================= ======== =========== ========
F-28
1997
-----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- --------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ---------------- -----------
Available-for-sale:
Equity securities ......... $ 257,316 $ 226,747................... $257,316 $226,747 $ (10,522) $ 473,541$473,541
Municipal bonds ................................ 35,217 2,116 (1) 37,332
U. S. Government securities ......... 18,753 800 (4) 19,549
Corporate securities ...................... 13,579 222 (3) 13,798
Cash equivalents .............................. 9,862 -- -- 9,862
--------- --------- --------- ---------
$ 334,727 $ 229,885-------- -------- ----------- --------
$334,727 $229,885 $ (10,530) $ 554,082
========= ========= ========= =========$554,082
======== ======== =========== ========
Held-to-maturity:
EquityMandatorily redeemable preferred
securities .................................. $ 6,376 $ -- $ -- $ 6,376
Debt securities ................................ 4,567 345 -- 4,912
--------- --------- --------- ----------------- -------- ----------- --------
$ 10,943 $ 345 $ -- $ 11,288
========= ========= ========= ================= ======== =========== ========
F-30
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1998, the debt securities held by the CompanyMHC had the following
maturities (in thousands):
Available for Sale Held to MaturityAVAILABLE FOR SALE HELD TO MATURITY
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost ValueAMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- --------- --------------------- ---------
Within 1 year...............................year .............. $ 1,397 $ 1,397 $9,757 $9,757
1 through 5 years...........................years .......... 21,793 22,852 11 11
5 through 10 years..........................years ......... 14,595 15,820 2,069 2,069
Over 10 years............................... 14,891 16,387 - -years .............. 34,322 36,171 -- --
The proceeds and the gross realized gains and losses on the disposition of
investments, determined by specific identification, held by the CompanyMHC for the years
ended December 31, are as follows (in thousands):
1998 1997 1996
-------- --------- -------------------- ----------- -----------
Proceeds from sales....................... $230,804sales ............ $ 246,838 $211,691 $250,772$247,396
Gross realized gains...................... 23,050gains ........... 27,973 14,320 9,92010,237
Gross realized losses.....................losses .......... (14,199) (6,480) (7,950)
During 1996, the CompanyMHC sold a portion of its held-to-maturity securities due to
a significant deterioration in the issuer's credit worthiness. SuchThese securities
had a carrying value of $4.8 million and proceeds from the sale were $4.3
million.
F-29
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for
the years ended December 31 (in thousands):
1998 1997 1996
-------- -------- -------------------- ------------ ----------
Current
Federal...............................Federal ........................... $ 80,837 $ 91,627 $ 80,165
State.................................State ............................. 20,736 21,619 22,100
-------- ----------------- --------- --------
101,573 113,246 102,265
-------- ----------------- --------- --------
Deferred
Federal...............................Federal ........................... (11,861) (29,257) 2,627
State.................................State ............................. (5,633) (8,242) (264)
-------- ----------------- --------- --------
(17,494) (37,499) 2,363
-------- ----------------- --------- --------
Investment tax credit, net................net ......... (7,153) (7,357) (6,206)
--------- --------- --------
-------- --------
Total.................................Total .............................. $ 76,926 $ 68,390 $ 98,422
======== ================= ========= ========
F-31
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in Deferred Income Taxes in the Consolidated Balance Sheets as of
December 31 are deferred tax assets and deferred tax liabilities as follows (in
thousands):
1998 1997
------------ ---------- -----------
Deferred tax assets related to:
Investment tax credits........................credits ................................ $ 52,139 $ 55,998
Unrealized losses.............................losses ..................................... 7,391 7,880
Pensions......................................Pensions .............................................. 15,677 17,339
Nuclear reserves and decommissioning..........decommissioning .................. 17,715 15,287
Other.........................................Other ................................................. 5,360 6,464
-------- --------
Total......................................Total ................................................ $ 98,282 $102,968
======== ========
Deferred tax liabilities related to:
Depreciable property..........................property .................................. $496,295 $504,594
Income taxes recoverable through future rates........................rates ......... 198,364 197,877
Unrealized gains..............................gains ...................................... 75,070 81,501
Energy efficiency.............................efficiency ..................................... 27,186 40,902
Reacquired debt...............................debt ....................................... 16,385 15,346
FERC Order 636................................636 ........................................ (941) 2,857
Other.........................................Other ................................................. 19,371 16,811
-------- --------
Total......................................Total ................................................ $831,730 $859,888
======== ========
F-30
The following table is a reconciliation between the effective income tax
rate, before preferred stock dividends of a subsidiary trust, indicated by the
Consolidated Statements of Income and the statutory federal income tax rate for
the years ended December 31:
1998 1997 1996
---- ---- ------------- --------- ---------
Effective federal and state income tax rate..............................rate .................. 36% 31% 39%
Amortization of investment tax credit..........credit ........................ 3 3 2
State income tax, net of federal income tax benefit..................................benefit .......... (5) (4) (6)
Dividends received deduction...................deduction ................................. 2 2 2
Other..........................................Other ........................................................ (1) 3 (2)
Statutory federal income tax rate..............rate ............................ 35% 35% 35%
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in
thousands):
1998 1997
------- ------------------ ----------
Materials and supplies, at average cost........cost .......... $30,914 $31,425
Coal stocks, at average cost...................cost ..................... 22,266 14,225
Gas in storage, at LIFO cost...................cost ..................... 37,306 35,430
Fuel oil, at average cost......................cost ........................ 1,294 2,344
Other ..................................................................................... 2,991 2,667
Total........................................Total .......................................... $94,771 $86,091
At December 31, 1998 prices, the current cost of gas in storage was $43.0
million.
F-32
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) MIDAMERICAN-OBLIGATEDMIDAMERICAN ENERGY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF MIDAMERICAN ENERGY FINANCING I:
In December 1996, MidAmerican Energy Financing I (the Trust), a wholly
owned statutory business trust of MidAmerican Energy, issued 4,000,000 shares of
7.98% Series MidAmerican-obligatedMidAmerican Energy-obligated mandatorily redeemable preferred
securities (the Preferred Securities)securities). The sole assets of the Trust are $103.1
million of MidAmerican Energy 7.98% Series A Debentures due 2045 (the
Debentures). There is a full and unconditional guarantee by MidAmerican Energy
of the Trust's obligations under the Preferred Securities.securities. MidAmerican Energy
has the right to defer payments of interest on the Debentures by extending the
interest payment period for up to 20 consecutive quarters. If interest payments
on the Debentures are deferred, distributions on the Preferred Securitiessecurities will
also be deferred. During any deferral, distributions will continue to accrue
with interest thereon, and MidAmerican Energy may not declare or pay any
dividend or other distribution on, or redeem or purchase, any of its capital
stock.
The Debentures may be redeemed by MidAmerican Energy on or after December
18, 2001, or at an earlier time if there is more than an insubstantial risk that
interest paid on the Debentures will not be deductible for federal income tax
purposes. If the Debentures, or a portion thereof,of the Debentures, are redeemed, the
Trust must redeem a like amount of the Preferred Securities.securities. If a termination
of the Trust occurs, the Trust will distribute to the holders of the Preferred
Securitiessecurities a like amount of the Debentures unless such athe distribution is
determined not to be practicable. If sucha determination is made, the holders of
the Preferred Securitiessecurities will be entitled to receive, out of the assets of the
trust after satisfaction of its liabilities, a liquidation amount of $25 for
each Preferred Security held plus accrued and unpaid distributions.
F-31
(18) SALE OF ACCOUNTS RECEIVABLE:
In 1997 MidAmerican Energy entered into a revolving agreement, which
expires in 2002, to sell all of its right, title and interest in the majority of
its billed accounts receivable to MidAmerican Energy Funding Corporation
(Funding Corp.), a special purpose entity established to purchase accounts
receivable from MidAmerican.MidAmerican Energy. Funding Corp. in turn has sold receivable
interests to outside investors. In consideration of the sale, MidAmerican Energy
received $70 million in cash and the remaining balance in the form of a
subordinated note from Funding Corp. In 1998, the revolving balance was reduced
to $60 million due to a decline in accounts receivable available for sale. The
agreement is structured as a true sale under which the creditors of Funding
Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior
to any value being returned to MidAmerican Energy or its creditors and, as such,
the accounts receivable sold are not reflected on MHC's Consolidated Balance
Sheets. At December 31, 1998, $97.4 million of accounts receivable, net of
reserves, was sold under the agreement.
F-33
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) EARNINGS PER SHARE
Reconciliation for the Income and Shares of the Basic and Diluted per
share computations for income from continuing operations for the years ended
December 31 are as follows (in thousands, except per share amounts):
1998 1997
--------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount------------------------------------ -----------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- -------- ----------- ----------- -------- --------- -------- --------- ----------
Income from Continuing Operations..........................Operations ......... $127,154 $139,332
-------- --------
Basic EPS
Income Available to Common
Shareholders........................Shareholders ............................. $127,154 94,038 $1.35$ 1.35 $139,332 98,058 $1.42
===== =====$ 1.42
Effect of Dilutive Securities
Stock Options...........................Options .......... -- 171 -- 107
-------- ------ -------- ------
Diluted EPS
Income Available to Common
Shareholders........................Shareholders ............................. $127,154 94,209 $1.35$ 1.35 $139,332 98,165 $1.42$ 1.42
======== ====== =========== ======== ====== ===========
F-32
1996
-----------------------------------
Per Share
Income Shares Amount
-------- --------------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------- --------- ----------
Income from Continuing Operations......................Operations ............... $143,761
--------
Basic EPS
Income Available to Common Shareholders........................................Shareholders ......... $143,761 100,752 $1.43
=====$ 1.43
======
Effect of Dilutive Securities
Stock Options ......................................................... -- 89
-------- -------
Diluted EPS
Income Available to Common Shareholders........................................Shareholders ......... $143,761 100,841 $1.43$ 1.43
======== ======= ===========
F-34
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1998
--------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
----------- ----------- -----------
(In thousands, except per share amounts)(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues ........................................................ $ 488,148 $ 389,352 $ 455,964 $ 442,460$442,460
Operating income ............................................................ 77,285 52,210 105,877 36,040
Income from continuing operations .......................... 38,733 19,326 49,046 20,049
Income (loss) from discontinued operations ......... -- 1,674 4,576 (2,086)
Earnings on common stock ............................................ 38,733 21,000 53,622 17,963
Earnings per average common share and
earnings per average common share assuming
dilution:
Income from continuing operations .......................... $ 0.41 $ 0.20 $ 0.52 $ 0.21
Income (loss) from discontinued operations ......... -- 0.02 0.05 (0.02)
--------- --------- --------- -----------------
$ 0.41 $ 0.22 $ 0.57 $ 0.19
========= ========= ========= =================
F-33
1997
--------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter------------------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------- ------------- ------------- ------------
----------- ----------- -----------
(In thousands, except per share amounts)(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating revenues ....................... $ 589,045................................. $589,045 $ 395,580 $ 446,207 $ 538,705$446,207 $538,705
Operating income ............................................................ 78,487 57,442 99,315 41,482
Income from continuing operations .......................... 34,174 24,176 49,705 31,277
Income (loss)from discontinued operations .......... (234) 408 (2,793) (1,609)
Earnings on common stock ............................................ 33,940 24,584 46,912 29,668
Earnings per average common share and
Earnings per average common share assuming
dilution:
Income from continuing operations .......................... $ 0.34 $ 0.24 $ 0.51 $ 0.33
Income (loss) from discontinued operations ......... -- 0.01 (0.03) (0.02)
-------- --------- --------- --------- ----------------- --------
$ 0.34 $ 0.25 $ 0.48 $ 0.31
======== ========= ========= ========= ================= ========
The quarterly data reflect seasonal variations common in the utility
industry.
F-35
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) OTHER INFORMATION:
Non-Operating - Other,Non-Operating--Other, Net, as shown on the Consolidated Statements of
Income includes the following for the years ended December 31 (in thousands):
1998 1997 1996
--------- ------- ----------- ---------- -------------
Gain on sale of assets, net.............................net ............................. $ 7,409 $10,213$ 10,213 $ 974
Discount on sold receivables.......................receivables ............................ (8,716) (439) ---
Subservice fee from Funding Corp........................Corp ........................ 1,714 153 ---
Merger costs............................................costs ............................................ (4,243) --- (8,689)
Income from equity method investments...................investments ................... 3,765 1,273 2,510
Special purpose fund income.............................income ............................. 2,088 1,989 3,301
Other-than-temporary declines in value of
investments and other assets..................... -assets ........................... -- (3,443) (15,566)
Energy efficiency carrying charges......................charges ...................... 197 4,993 3,255
Gain on sale of cushion gas............................. -gas ............................. -- 855 3,182
Gain (loss) on reacquisition of long-term debt.......... -debt .......... -- (923) 1,105
NPPD settlement......................................... -Nebraska Public Power District settlement ............... -- 2,248 -
Other...................................................--
Other ................................................... 2,882 (1,028) 147
-------- ------- -------- Total...................................................---------
Total ................................................... $ 5,096 $15,891$ 15,891 $ (9,781)
======== ======= ======== =========
(22) ACQUISITIONS:ACQUISITIONS AND DISPOSITIONS:
In 1998, the CompanyMHC established MidAmerican Realty as a holding company for its
real estate brokerage operations. The Company,MHC, through MidAmerican Realty, then
acquired several real estate brokerage operations and related businesses.
The CompanyMHC purchased all of the outstanding capital stock of the following
companies: Iowa Realty Co. Inc., Edina Financial Services, Inc., Home Real
Estate Company of Omaha and CBS Real Estate Company. Additionally, the
CompanyMHC
purchased all assets of J.C. Nichols Residential, Inc. and Nebraska Land Title
& Abstract Company. The aggregate cost of these acquisitions was $108 million.
F-34
Each acquisition was accounted for as a purchase business combination. All
identifiable assets acquired and liabilities assumed were assigned a portion of
the acquisition price equal to their fair value at the date of acquisition.
The Company'sMHC's Consolidated Income Statements reflect the results of operations of the
acquired businesses from the date of their respective acquisition dates, which
range from May 27, 1998, through September 1, 1998, except for a minor
acquisition in December 1998.
In November 1998, a subsidiary of MHC sold 425,000 shares of its holdings
in McLeodUSA common stock. Proceeds from the sale totaled $14.0 million and a
$9.1 million gain was realized which is reflected in Realized gains and losses
on securities, net on the Consolidated Statements of Income. Other gains on the
sale of nonregulated investments during 1998 totaled $6.6 million and are
included in Other, net on the Consolidated Statements of Income. These gains
include the sale of MHC's interest in a small trust company, the sale of
railcars, and gains from the sale of a venture capital fund.
In 1997 MHC sold its interest in its railcar management and repair
businesses. Proceeds from these sales totaled $7.5 million, resulting in a $1.6
million gain which is reflected in Other, net on the Consolidated Statements of
Income.
As discussed in Note (10), the CompanyMHC distributed its holding in the capital
stock of MidAmerican Realty to MidAmerican Energy Holdings Company in October
1999 and has reflected these operations as discontinued operations.
F-36
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(23) SUBSEQUENT EVENTS (UNAUDITED):
On August 11, 1998, a definitive merger agreement was entered into between
the CompanyMHC and CalEnergy Company, Inc. (CalEnergy), a global provider of energy
services. On March 12, 1999, the merger transaction was completed, and the CompanyMHC
became an indirect wholly owned subsidiary of CalEnergy, which subsequently
changed its name to MidAmerican Energy Holdings Company. In accordance with the
merger agreement, each outstanding share of the Company'sMHC's common stock was converted to
the right to receive $27.15 in cash.
On October 25, 1999, an investor group including Berkshire Hathaway, Inc. (Berkshire)
reached a definitive agreement to acquire the new MidAmerican Energy Holdings
Company for $35.05 per share in cash, along with the assumption of debt.
Berkshire will invest approximately $1.25 billion in common stock and a
non-dividend-paying convertible preferred stock of the surviving corporation,
giving Berkshire an approximate 75% interest in the Company'sMHC's parent on a fully diluted
basis. Berkshire will also invest $800 million in non-transferable trust preferred stock.securities.
The other investors, who in total will invest approximately $300 million are
Walter Scott, former chairman of Peter Kiewit Sons' Inc. and a Board Member of
the new MidAmerican Energy Holdings Company, and David L. Sokol, the Chairman
and Chief Executive Officer of the same.
F-35F-37
REPORT OF INDEPENDENT ACCOUNTANTS
To MHC Inc.andInc. and Subsidiaries:
We have audited the accompanying consolidated financial statements of MHC Inc.
(formerly MidAmerican Energy Holdings Company) and subsidiaries listed in the
accompanying index on page 1. These financial statements are the responsibility
of the Company'sMHC Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MHC Inc. and
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ PricewaterhouseCoopers LLP
------------------------------------------------------------
PricewaterhouseCoopers LLP
Kansas City, Missouri
January 22, 1999, except with respect to the
third paragraph in Note (10) and related
information, as to which the date is
October 6, 1999.
F-36F-38
MIDAMERICAN FUNDING, LLC
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
MIDAMERICAN FUNDING MHC (PREDECESSOR)
------------------------------------- --------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
------------------------------------- ----------------- --------------
OPERATING REVENUES
Regulated electric .......................................................................... $685,376 $ 208,963 $ 907,440
Regulated gas .................................................................................... 164,967 139,564 303,644
Nonregulated ............................................. 111,542......................................... 93,231 34,539 122,380
-------- --------- ----------
961,885943,574 383,066 1,333,464
-------- --------- ----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity .......................................... 125,396 40,232 174,190
Cost of gas sold ............................................................................ 85,019 79,910 171,096
Other operating expenses ............................................................ 232,420 93,940 343,072
Maintenance ...................................................................................... 67,138 18,302 82,509
Depreciation and amortization .................................................. 107,535 39,417 132,560
Property and other taxes ............................................................ 42,785 15,758 66,213
-------- --------- ----------
660,293 287,559 969,640
-------- --------- ----------
Nonregulated:
Cost of sales ........................................... 97,659....................................... 79,348 30,188 105,460
Other .................................................................................................. 37,070 6,421 22,992
-------- --------- ----------
134,729116,418 36,609 128,452
-------- --------- ----------
Total operating expenses ................................ 795,022............................ 776,711 324,168 1,098,092
-------- --------- ----------
OPERATING INCOME .............................................................................. 166,863 58,898 235,372
-------- --------- ----------
NON-OPERATING INCOME
Interest income ................................................................................ 14,638 1,411 7,517
Dividend income ................................................................................ 3,159 1,331 7,792
Realized gains and losses on securities, net ...................... 78,066 15,214 (230)
Other, net .......................................................................................... (445) (18,133) 4,466
-------- --------- ----------
95,418 (177) 19,545
-------- --------- ----------
FIXED CHARGES
Interest on long-term debt .......................................................... 65,174 14,814 61,617
Other interest expense .................................................................. 5,486 3,145 9,073
Preferred dividends of subsidiaries ........................................ 6,327 2,831 9,699
Allowance for borrowed funds ...................................................... (682) (235) (2,749)
-------- --------- ----------
76,305 20,555 77,640
-------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES ................................................... 185,976 38,166 177,277
INCOME TAXES ...................................................................................... 77,348 21,377 70,172
-------- --------- ----------
INCOME FROM CONTINUING OPERATIONS ............................................ 108,628 16,789 107,105
INCOME FROM DISCONTINUED OPERATIONS ........................................ 11,258 421 6,250
-------- --------- ----------
NET INCOME .......................................................................................... $119,886 $ 17,210 $ 113,355
======== ========= ==========
The accompanying notes are an integral part of these statements.
F-37F-39
MIDAMERICAN FUNDING, LLC
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS) (UNAUDITED)
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
---------------- --------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
---------------- ----------------- --------------
NET INCOME ...................................................... $119,886 $17,210 $ 113,355
-------- ------- ---------
OTHER COMPREHENSIVE INCOME, NET
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period ................ 80,252 79,236 (88,982)
Less reclassification adjustment for realized gains (losses)
reflected in net income during period ........................ 78,066 15,214 (230)
-------- ------- ---------
2,186 64,022 (88,752)
Income tax expense (benefit) .................................... 450 22,408 (30,981)
-------- ------- ---------
Other comprehensive income (loss), net ......................... 1,736 41,614 (57,771)
-------- ------- ---------
COMPREHENSIVE INCOME ............................................ $121,622 $58,824 $ 55,584
======== ======= =========
The accompanying notes are an integral part of these statements.
F-38F-40
MIDAMERICAN FUNDING, LLC
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) (UNAUDITED)
AS OF
SEPTEMBER 30, 1999
-------------------
ASSETS
UTILITY PLANT
Electric ..................................................................... $2,038,514
Gas .......................................................................... 477,745
----------
2,516,259
Less accumulated depreciation and amortization ............................... 69,171
----------
2,447,088
Construction work in progress ................................................ 31,330
----------
2,478,418
----------
POWER PURCHASE CONTRACT ...................................................... 102,677
----------
CURRENT ASSETS
Cash and cash equivalents .................................................... 1,651
Receivables .................................................................. 136,025
Inventories .................................................................. 109,180
Other ........................................................................ 39,726
----------
286,582
----------
INVESTMENTS AND NONREGULATED PROPERTY, NET ................................... 586,532
----------
INVESTMENT IN DISCONTINUED OPERATIONS ........................................ 53,283
----------
OTHER ASSETS ................................................................. 1,757,078
----------
TOTAL ASSETS ................................................................. $5,264,570
==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity .................................................. $1,836,163
MidAmerican Energy preferred securities, not subject to mandatory redemption . 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ..................................... 50,000
MidAmerican Energy-obligated preferred securities of subsidiary trust holding
solely MidAmerican Energy junior subordinated debentures .................. 101,598
Long-term debt (excluding current portion) ................................... 1,532,425
----------
3,551,945
----------
CURRENT LIABILITIES
Notes payable ................................................................ 89,115
Current portion of long-term debt ............................................ 215,635
Current portion of power purchase contract ................................... 15,034
Accounts payable ............................................................. 182,895
Taxes accrued ................................................................ 97,167
Interest accrued ............................................................. 21,921
Other ........................................................................ 62,288
----------
684,055
----------
OTHER LIABILITIES
Power purchase contract ...................................................... 68,093
Deferred income taxes ........................................................ 553,851
Investment tax credit ........................................................ 73,173
Other ........................................................................ 333,453
----------
1,028,570
----------
TOTAL CAPITALIZATION AND LIABILITIES ......................................... $5,264,570
==========
The accompanying notes are an integral part of these statements.
F-39
MIDAMERICAN FUNDING, LLC CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
MIDAMERICAN
FUNDING MHC (PREDECESSOR)
---------------- --------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
---------------- ----------------- --------------
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ......................................................... $ 119,886 $ 17,210 $ 113,355
Income from discontinued operations ............................... (11,258) (421) (6,250)
------------ ---------- ----------
Income from continuing operations ................................. 108,628 16,789 107,105
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization ..................................... 123,050 40,329 149,014
Net increase (decrease) in deferred income taxes and
investment tax credit, net ...................................... (99,036) 1,228 (14,539)
Amortization of other assets ...................................... 25,503 8,053 30,336
Gain on sale of securities, assets and other investments .......... (79,191) (15,478) (6,346)
Other-than-temporary decline in value of investments .............. -- -- 110
Loss (income) from discontinued operations ........................ (11,258) (421) (6,250)
Cash inflows (outflows) of accounts receivable securitization ....................................................... (4,357) 10,000 --
Impact of changes in working capital, net of effects from
discontinued operations ......................................... (59,477) 41,707 43,628(7,521)
Other ............................................................. 32,391 (3,822) 2,945
------------ ---------- ----------
Net cash provided ...............................................by continuing operations ...................... 47,511 98,806 312,253261,104
------------ ---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures .................................. (99,072) (16,924) (114,225)
Quad Cities Nuclear Power Station decommissioning trust fund ..................................................................... (6,089) (2,188) (8,533)
Nonregulated capital expenditures .................................. (15,913) (6,058) (39,482)
Purchase of assets and long term investments ....................... (788) (140) --
Purchase of securities
.............................................Available for sale ................................................ (62,015) (12,307) (134,067)(133,754)
Held to maturity .................................................. -- -- (313)
Proceeds from sale of securities
...................................Available for sale ................................................ 447,988 75,452 149,75172,468 145,872
Held to maturity .................................................. -- 2,984 3,879
Proceeds from sale of assets and other investments ................. 2,116 1,097 28,842
Purchase of MidAmerican Energy Holdings ............................MHC .................................................... (2,441,962) -- --
Investment in discontinued operations .............................. 2,797 (493) (28,990)
Other investing activities, net .................................... 5,063 (1,044) (467)
------------ ---------- ----------
Net cash provided (used) .......................................... (2,167,875) 37,395 (147,171)(2,170,672) 37,888 (118,181)
------------ ---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid .............................................. -- (31,598) (85,029)
Issuance of long-term debt, net of issuance cost ................... 702,969 167 158,440
Retirement of long-term debt, including reacquisition cost ......... (735) (127) (233,304)
Reacquisition of preferred shares .................................. -- -- (4)
Reacquisition of common shares ..................................... -- (50,629) (25,597)
Equity contribution of parent ...................................... 1,708,913 -- --
Notes receivable from affiliate .................................... (88,295) -- --
Repayment of MidAmerican Capital Company unsecured
revolving credit facility ......................................... -- (34,600) --
Net increase (decrease) in notes payable ........................... (200,837) (49,874) 21,018(15,274) 72,167
------------ ---------- -----------
Net cash provided (used) .......................................... 2,122,015 (132,061) (164,476)(113,327)
------------ ---------- -----------
NET CASH FLOWS FROM DISCONTINUED OPERATIONS
Investment in discontinued operations ............................. (7,751) -- (28,990)
Operating activities .............................................. 10,548 (493) --
------------ ---------- -----------
Net cash provided (used) ........................................ 2,797 (493) (28,990)
------------ ---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 1,651 4,140 606
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................... -- 6,107 10,468
------------ ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................... $ 1,651 $ 10,247 $ 11,074
============ ========== ===========
ADDITIONAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized .......................... $ 60,767 $ --15,458 $ 66,754
============ ========== ===========
Income taxes paid .................................................. $ 156,478 $ 1498,401 $ 58,411
============ ========== ===========
The accompanying notes are an integral part of these statements.
F-40F-41
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
MidAmerican Funding, LLC (Company)(MidAmerican Funding) is an Iowa limited
liability company and a direct wholly owned subsidiary of MidAmerican Energy
Holdings Company. The Company'sMidAmerican Funding's direct wholly owned subsidiary is MHC
Inc. (MHC), a public utility holding company. MHC's principal subsidiary is
MidAmerican Energy Company (MidAmerican), a public utility with electric and
natural gas operations.
The current corporate structure is the result of a merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy
Holdings Company) and CalEnergy Company, Inc. (CalEnergy). CalEnergy, through a
reincorporation transaction, was renamed MidAmerican Energy Holdings Company
(Holdings). Holdings is an exempt public utility holding company headquartered
in Des Moines, Iowa.
In conjunction with the transaction, the CompanyMidAmerican Funding paid $27.15 in
cash for each outstanding share of MHC common stock for a total of
approximately $2.42 billion in a merger pursuant toin which MHC became a direct wholly
owned subsidiary of the Company.MidAmerican Funding. The MidAmerican Merger has been
accounted for as a purchase business combination and as such the results of
operations of the
CompanyMidAmerican Funding include the results of MHC beginning March
12, 1999. The purchase price has been allocated to assets acquired and
liabilities assumed based on preliminary valuations and the CompanyMidAmerican Funding is
awaiting final valuations. The
CompanyMidAmerican Funding recorded goodwill of
approximately $1.5 billion which is being amortized using the straight line
method over a 40 year period.
On March 11, 1999, MidAmerican Funding LLC, a wholly owned subsidiary of
the Company, issued $200 million of 5.85% Senior
Secured Notes due 2001, $175 million of 6.339% Senior Secured Notes due 2009,
and $325 million of 6.927% Senior Secured Bonds due 2029. The proceeds from the
offering were used to complete the MidAmerican Merger. MidAmerican Funding
received approximately $13.6 million from three separate rate swap arrangements
of $125 million each, which effectively locked in interest rates for $375
million, two months prior to the offering. MidAmerican Funding also incurred
$7.0 million of underwriter discounts and other offering costs. The net amount
of the rate swap arrangements and the offering costs are being amortized using
the effective interest method over the life of each of the three tranches.
The Notes due 2001 mature on March 1, 2001, the Notes due 2009 mature on
March 1, 2009 and the Bonds due 2029 mature on March 1, 2029. All of the Notes
and Bonds are secured by a pledge of the common stock of MHC. The Notes and
Bonds:
o are the direct senior secured obligations of MidAmerican Funding;
o rank on an equal basis with all of MidAmerican Funding's other existing
and future senior obligations;
o rank senior to all of MidAmerican Funding's existing and future
subordinated indebtedness; and
o effectively rank junior to all indebtedness and other liabilities,
including preferred stock, of the direct and indirect subsidiaries of
MidAmerican Funding, to the extent of the assets of these subsidiaries.
MidAmerican Funding may redeem any series of the Notes and Bonds in whole
or in part at any time at a redemption price equal to the sum of:
o the greater of the following:
(1) 100% of the principal amount of the series of the Notes or Bonds
being redeemed, and
F-42
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) the sum of the present values of the remaining scheduled payments of
principal of and interest on the series of Notes or Bonds being redeemed,
discounted to the date of redemption on a semiannual basis at the treasury
yield plus (x) 15 basis points in the case of the Notes due 2009, or (y) 25
basis points in the case of the Bonds due 2029, plus
o accrued and unpaid interest on the Notes or Bonds being redeemed to the
date of redemption.
MidAmerican Funding uses distributions that it receives from its
subsidiaries to make payments on the Notes and Bonds. These subsidiaries must
make payments on their own indebtedness before making distributions to
MidAmerican Funding. The distributions are also subject to utility regulatory
restrictions agreed to by MidAmerican in March 1999 whereby it committed to the
Iowa Utilities Board to use commercially reasonable efforts to maintain an
investment grade rating on its long-term debt and to maintain its common equity
level above 42% of total capitalization unless circumstances beyond its control
result in the common equity level decreasing to below 39% of total
capitalization. MHC must seek the approval of the Iowa Utilities Board of a
reasonable utility capital structure if MidAmerican Energy's common equity level
decreases below 42% of total capitalization, unless the decrease is beyond the
control of MHC. MHC is also required to seek the approval of the Iowa Utilities
Board if MidAmerican Energy's equity level decreases to below 39%, even if the
decrease is due to circumstances beyond the control of MHC.
Unaudited pro forma consolidated revenue and net income of the CompanyMidAmerican
Funding and MHC for the nine months ended September 30, 1999 and 1998, as if
the acquisition had occurred at the beginning of the year after giving effect
to certain pro forma adjustments related to the acquisition, including the senior
secured notes and bonds, were $1.34$1.33 billion and $142.9$142.2 million respectively,
compared to $1.33 billion and $86.6$85.5 million respectively, for the same period
last year.
The interim consolidated financial statements included hereinin this prospectus
have been prepared by the Company,MidAmerican Funding, without audit, pursuant tounder the rules and
regulations of the Securities and Exchange Commission. CertainSome of the information
and disclosures which is normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to suchin accordance with these rules and regulations. In the opinion of
the Company,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.
The financial statements reflect operations of the
Company'sMidAmerican Funding's real
estate brokerage subsidiary as discontinued operations. Refer to Note H for
further information. Prior year amounts have been reclassified to a basis
consistent with the current year presentation. All significant intercompany
transactions have been eliminated. Although the CompanyMidAmerican 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
audited consolidated financial statements of MHC and the notes theretoto the financial
statements included elsewhere in this registration statement.
B. ENVIRONMENTAL MATTERS:
(1) MANUFACTURED GAS PLANT FACILITIES--
The United States Environmental Protection Agency (EPA) and the state
environmental agencies have determined that contaminated wastes remaining at
certain decommissioned manufactured gas F-41
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
plant (MGP) facilities may pose a threat to the
public health or the environment if suchthese contaminants are in sufficient
quantities and at suchsufficient concentrations as to warrant remedial action.
MidAmerican is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP).party.
The purpose of these evaluations is to determine whether waste materials are
present, whether such materials constitute an environmental or
F-43
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
health risk, and whether MidAmerican has any responsibility for remedial action.
MidAmerican is currently conducting field investigations at eighteen sites and
has conducted interim removal actions at six of the eighteen sites. In addition,
MidAmerican has completed investigations and removals at four sites. MidAmerican
is continuing to evaluate several of the sites to determine the future
liability, if any, for conducting site investigations or other site activity.
MidAmerican's estimateMidAmerican Energy estimates the range of probablepossible costs for investigation,
remediation costsand monitoring for the sites discussed above to be $21 million to
$69 million. MidAmerican Energy's estimate of the probable total cost for these
sites as of September 30, 1999 was $21$29 million. The estimate consists of $3
million for investigation costs, $10 million for remediation costs, $14 million
for monitoring costs and $2 million for closure and administrative costs. This
estimate has been recorded as a liability and a regulatory asset for future
recovery. The
Illinois Commerce Commission (ICC) has approvedMidAmerican Funding projects that these amounts will be paid or
incurred over the use of a tariff rider which
permits recovery of the actual costs of litigation, investigation and
remediation relating to former MGP sites. MidAmerican's present rates in Iowa
provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue
recovery of the remediation costs from other PRPs and its insurance carriers.next 10 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 remedial
action is required, the best estimate of remedial costs is accrued. If
necessary, the estimate is revised when a consent order is issued. 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. In addition,
insurance recoveries for some or all of the costs may be possible, but the
liabilities recorded have not been reduced by any estimate of such recoveries.
The Illinois Commerce Commission has approved the use of a tariff rider
which permits recovery of the actual costs of litigation, investigation and
remediation relating to former manufactured gas plant sites. MidAmerican
Energy's present rates in Iowa provide for a fixed annual recovery of
manufactured gas plant costs. MidAmerican Energy intends to pursue recovery of
the remediation costs from other potentially responsible parties and its
insurance carriers.
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.
(2) CLEAN AIR ACT--
On July 18, 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). If a state has
area(s) classified as nonattainment area(s), the state is required to submit a
State Implementation Plan specifying how it will reach attainment of the
standards through emission reductions or other means.
In May 1999, the United States District Court of Appeals for the District
of Columbia Circuit remanded the standards adopted in July 1997 back to the EPA
indicating the EPA had not expressed sufficient justification for the basis of
establishing the standards and ruling that the EPA has exceeded its
constitutionally-delegated authority in setting the standards. The EPA's appeal
of the court's ruling
F-44
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to the full panel of the United States District Court of Appeals for the
District of Columbia was denied. As a result of the court's initial decision and
the current status of the standards, the impact of any new standards on
MidAmerican Energy is currently unknown. If the EPA successfully appeals the
court's decision, however, and the new standards are implemented, then
MidAmerican Energy's fossil fuel generating stations may be subject to emission
reductions if the stations are located in nonattainment areas. As part of an
overall state plan to achieve attainment of the standards, MidAmerican Energy
could be required to install control equipment on its fossil fuel generating
stations or decrease the number of hours during whch these stations operate. The
degree to which MidAmerican Energy may be required to install control equipment
or decrease operating hours under a nonattainment scenario will be determined by
the state's assessment of MidAmerican Energy's relative contribution, along with
other emission sources, to the nonattainment status. The installation of control
equipment would result in increased costs to MidAmerican Energy. A decrease in
the number of hours during which the affected stations operate would decrease
the revenues of MidAmerican Energy. An increase in costs incurred by MidAmerican
Energy or a decrease in the revenues earned by MidAmerican Energy would decrease
the amount of funds MidAmerican Energy has available to make distributions to
MidAmerican Funding. This decrease would have a corresponding decrease in the
amount of funds available to MidAmerican Funding to make payments on the
securities.
C. RATE MATTERS:
(1) ELECTRIC--
In Iowa on June 1, 1998, prices for electric residential customers were
reduced by an amount which will have a $5.0 million annual impact on revenues.
The decrease was the last of three for Iowa residential customers as a result
of a 1997 settlement agreement.
Through several steps from mid-1997 to the end of 1998, electric prices
for Iowa industrial customers were reduced by an amount which will have a $6
million annual impact on revenues, and electric prices for Iowa commercial
customers were reduced by an amount which will have a $4 million annual impact
on revenues. The reductions were achieved through a retail access pilot
project, negotiated individual electric contracts and a $1.5 million tariffed
rate reduction for selected non-contract commercial customers.
The negotiated electric contracts have differing terms and conditions as
well as prices. The contracts range in length from five to ten years, and some
have price renegotiation and early termination provisions exercisable by either
party. The vast majority of the contracts are for terms of seven years or less,
although, some large customers have agreed to ten-year contracts. Prices are
set as fixed prices; however, many contracts allow for potential price
adjustments with respect to environmental costs, government imposed public
purpose programs, tax changes, and transition costs. While the contract prices
are fixed (except for the potential adjustment elements), the costs MidAmerican
incurs to fulfill these contracts will vary. On an aggregate basis the annual
revenues under contract are approximately $180 million.
Under a 1997 pricing plan settlement agreement, if MidAmerican's annual
Iowa electric jurisdictional return on common equity exceeds 12%, then earnings
above the 12% level will be shared equally between customers and MidAmerican;
if the return on common equity exceeds 14%, two-thirds of MidAmerican's share
of those earnings above the 14% level will be used for accelerated recovery of
regulatory assets. The 1997 pricing plan settlement agreement precludes
MidAmerican from filing for increased rates prior to 2001 unless the return on
common equity falls below 9%. Other parties signing the agreement are
prohibited from filing for reduced rates prior to 2001 unless the return on
F-45
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common equity after reflecting credits to customers, exceeds 14%. On April 14,
1999, the Iowa Utilities Board (IUB) approved, subject to additional refund,
MidAmerican's 1998 return on common equity calculation. During the second
quarter of 1999, MidAmerican refunded $2.2 million to its Iowa non-contract
customers related to the return on common equity calculation for 1998, $1.4
million and $0.8 million of which was expensed in 1999 and 1998, respectively.
Under an Illinois restructuring law enacted in 1997, a similar sharing
mechanism is in place for MidAmerican's Illinois electric operations. Two-year
average returns on common equity greater than a two-year average benchmark will
trigger an equal sharing of earnings on the excess. The benchmark is a
calculation of average 30-year Treasury Bond rates plus 5.5% for 1998 and 1999.
Legislation passed in July 1999 increases the benchmark for 2000 through 2004 to
8.5% above the 30-year Treasury bond rate. The initial calculation, which is
still being defined and is due March 31, 2000, will be based on 1998 and 1999
results.
(2) GAS--
In October 1998, MidAmerican made a filing with the IUB requesting a rate
increase for its Iowa retail gas customers. An interim rate increase of
approximately $6.7 million annually was approved by the IUB on January 22,
1999, effective immediately. On April 23, 1999, the IUB issued an order
approving a settlement agreement between MidAmerican, the Iowa Office of
Consumer Advocate (OCA) and other parties which provides for an annual increase
of $13.9 million. The new rates were implemented May 27, 1999.
In November 1998, MidAmerican filed with the South Dakota Public Utilities
Commission (SDPUC) requesting a rate increase for its South Dakota retail gas
customers. The SDPUC, on April 23, 1999, issued an order approving a rate
increase of $2.4 million annually, effective May 1, 1999.
D. ACCOUNTING FOR THE EFFECTS OF REGULATION:
MidAmerican's utility operations are subject to the regulation of the IUB,
the ICC, the SDPUC, and the Federal Energy Regulatory Commission (FERC).
MidAmerican'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.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet criteria
specified in SFAS 71. For operations that meet the criteria, SFAS 71 allows,
among other things, the deferral of costs that would otherwise be expensed when
incurred. A possible consequence of the changes in the utility industry is the
discontinued applicability of SFAS 71. The majority of MidAmerican's electric
and gas utility operations currently meet the criteria of SFAS 71, but its
applicability is periodically reexamined. On December 16, 1997, MidAmerican's
generation operations serving Illinois were no longer subject to the provisions
of SFAS 71 due to passage of industry restructuring legislation in Illinois.
Thus in 1997, MidAmerican was required to write off the regulatory assets and
liabilities from its balance sheet related to its Illinois generation
operations. The net amount of these write-offs was not material. If other
portions of its utility operations no longer meet the criteria of SFAS 71,
MidAmerican 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.
E. MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES:
The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures
included in the Consolidated Balance Sheets were issued by MidAmerican Energy
Financing I (the Trust), a wholly owned statutory business trust of
MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican
7.98% Series A Debentures due 2045.
F-46
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. SEGMENT INFORMATION:
MidAmerican Funding has two reportable operating segments: electric and
gas. The electric segment derives most of its revenue from retail sales of
regulated electricity to residential, commercial, and industrial customers and
sales to other utilities; whereas the gas segment derives most of its revenue
from retail sales of regulated natural gas to residential, commercial, and
industrial customers. The gas segment also earns significant revenues by
transporting gas owned by others through its distribution systems. Pricing for
electric and gas sales are established separately by regulatory agencies;
therefore, management also reviews each segment separately to make decisions
regarding allocation of resources and to evaluate performance. Common operating
costs are allocated to each segment.
The following tables provide MidAmerican information on an operating
segment basis (in thousands):
MIDAMERICAN
FUNDING MHC
---------------- ----------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
---------------- ----------------- --------------
Electric:
Revenues ...................................... $ 685,376 $208,963 $907,440
Operating income .............................. 198,249 38,886 233,638
Gas:
Revenues ...................................... 164,967 139,564 303,644
Operating income (loss) ....................... (8,199) 22,082 6,269
Nonregulated and other (a):
Revenues ...................................... 93,231 34,539 122,380
Operating income (loss) ....................... (23,187) (2,070) (4,535)
SEPTEMBER 30,
1999
-------------
Total Assets:
Electric ...................................... $ 2,685,075
Gas ........................................... 657,934
Nonregulated and other (a) .................... 1,876,278
Investment in discontinued operations ......... 53,283
(a) "Nonregulated and other" consists of MidAmerican Capital, Midwest Capital,
CBEC Railway and other nonregulated MidAmerican activities, and holding company
net loss and corporate assets.
G. DETAIL OF OTHER COMPREHENSIVE INCOME--INCOME TAXES:
Comprehensive income refers, in general, to changes in MidAmerican
Funding's equity, except those resulting from transactions with shareholders.
"Unrealized holding gains (losses)" reflects the overall increase (decrease) in
the market value of marketable securities held by MidAmerican Funding as
available-for-sale. The "reclassification adjustment" removes any gains
(losses) that have been realized from sales of those securities and reflected
in MidAmerican Funding's Net Income. The following table shows the income tax
expense or benefit related to each component (in thousands):
F-47
MIDAMERICAN FUNDING, LLC
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MIDAMERICAN
FUNDING MHC
---------------- ----------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
---------------- ----------------- --------------
Unrealized holding gains (losses) during period,
Before income taxes .............................. $ 80,252 $ 79,236 $ (88,982)
Income tax (expense)/benefit ..................... (31,504) (27,733) 31,061
--------- --------- ----------
48,748 51,503 (57,921)
--------- --------- ----------
Less reclassification adjustment for realized gains
(losses) reflected in net income during period
Before income taxes .............................. 78,066 15,214 (230)
Income tax (expense)/benefit ..................... (31,054) (5,325) 80
--------- --------- ----------
47,012 9,889 (150)
--------- --------- ----------
Other Comprehensive Income ........................ $ 1,736 $ 41,614 $ (57,771)
========= ========= ==========
H. DISCONTINUED OPERATIONS:
On October 6, 1999, MidAmerican Funding distributed its investment in the
capital stock of its real estate brokerage subsidiary to Holdings, MidAmerican
Funding's parent. Accordingly, the financial statements reflect those
operations as discontinued operations. The operations are the result of several
acquisitions beginning in May 1998. Revenues from discontinued operations, as
well as the results of these operations are as follows (in thousands):
MIDAMERICAN
FUNDING MHC
---------------- ----------------------------------
MARCH 12, 1999 JANUARY 1, 1999 NINE MONTHS
THROUGH THROUGH ENDED
SEPTEMBER 30, MARCH 11, SEPTEMBER 30,
1999 1999 1998
---------------- ----------------- --------------
OPERATING REVENUES ................. $254,901 $58,047 $87,770
======== ======= =======
INCOME FROM OPERATIONS
Income before income taxes ......... $ 19,025 $ 648 $10,699
Income tax expenses ................ 7,767 227 4,449
-------- ------- -------
$ 11,258 $ 421 $ 6,250
======== ======= =======
I. REALIZED GAINS AND LOSSES ON SECURITIES, NET:
In May 1999, MidAmerican Funding sold most of its investment in the common
stock of McLeodUSA, Inc. Realized gains and losses on securities, net, reflects
a $78.2 million gain on the sale of 6,741,116 shares in the March 12, 1999
through September 30, 1999 period. Income taxes on the transaction totaled
$31.1 million, resulting in an after-tax gain of $47.1 million.
J. SUBSEQUENT EVENT:
On October 25, 1999, an investor group including Berkshire Hathaway, Inc.
(Berkshire) reached a definitive agreement to acquire MidAmerican Energy
Holdings Company for $35.05 per share in cash, along with the assumption of
debt. Berkshire will invest approximately $1.25 billion in common stock and a
non-dividend-paying convertible preferred stock of the surviving corporation,
giving Berkshire an approximate 75% interest in Holdings, on a fully diluted
basis. Berkshire will also invest $800 million in trust preferred securities.
The other investors, who in total will invest approximately $300 million are
Walter Scott, former chairman of Peter Kiewit Sons' Inc. and a board member of
Holdings, and David L. Sokol, the Chairman and Chief Executive Officer of
Holdings.
F-48
MIDAMERICAN FUNDING, LLC CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
AS OF SEPTEMBER 30, 1999
-------------------------
ASSETS
UTILITY PLANT:
Electric ..................................................................... $ 2,038,514
Gas .......................................................................... 477,745
-----------
2,516,259
Less accumulated depreciation and amortization ............................... 69,171
-----------
2,447,088
Construction work in progress ................................................ 31,330
-----------
2,478,418
-----------
POWER PURCHASE CONTRACT ...................................................... 102,677
-----------
CURRENT ASSETS:
Cash and cash equivalents .................................................... 1,651
Receivables .................................................................. 136,025
Inventories .................................................................. 109,180
Prepaid taxes ................................................................ 22,889
Other ........................................................................ 16,837
-----------
286,582
INVESTMENTS AND NONREGULATED PROPERTY, NET ................................... 586,532
INVESTMENT IN DISCONTINUED OPERATIONS ........................................ 53,283
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET ................... 1,477,440
OTHER ASSETS ................................................................. 287,638
-----------
TOTAL ASSETS ................................................................. $ 5,272,570
===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Member's equity............................................................... $ 1,836,163
MidAmerican Energy preferred securities, not subject to mandatory redemption . 31,759
Preferred securities, subject to mandatory redemption:
MidAmerican Energy preferred securities ..................................... 50,000
MidAmerican Energy-obligated preferred securities of subsidiary trust
holding solely MidAmerican Energy junior subordinated debentures .......... 101,598
Long-term debt (excluding current portion) ................................... 1,532,425
-----------
3,551,945
-----------
CURRENT LIABILITIES:
Notes payable ................................................................ 89,115
Current portion of long-term debt ............................................ 215,635
Current portion of power purchase contract ................................... 15,034
Accounts payable ............................................................. 182,895
Taxes accrued ................................................................ 97,167
Interest accrued ............................................................. 21,921
Other ........................................................................ 62,288
-----------
684,055
-----------
OTHER LIABILITIES:
Power purchase contract ...................................................... 68,093
Deferred income taxes ........................................................ 553,851
Investment tax credit ........................................................ 73,173
Other ........................................................................ 341,453
-----------
1,028,570
-----------
Total capitalization and liabilities ......................................... $ 5,272,570
===========
See notes to consolidated financial statements.
F-49
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF SEPTEMBER 30, 1999
---------------------------
MEMBER'S EQUITY:
Paid-in capital ....................................................... $ 1,716,612
Retained earnings ..................................................... 119,887
Accumulated other comprehensive income, net ........................... (336)
-----------
1,836,163 51.7%
----------- ----
MIDAMERICAN ENERGY PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding not subject to mandatory redemption:
$3.30 Series, 49,451 shares........................................... 4,945
$3.75 Series, 38,305 shares........................................... 3,831
$3.90 Series, 32,630 shares .......................................... 4,736
$4.20 Series, 47,362 shares........................................... 3,263
$4.35 Series, 49,945 shares........................................... 4,994
$4.40 Series, 50,000 shares........................................... 5,000
$4.80 Series, 49,898 shares........................................... 4,990
-----------
31,759 0.9%
----------- ----
Cumulative Shares Outstanding; Subject to Mandatory Redemption:
$5.25 Series, 100,000 shares.......................................... 10,000
$7.80 Series, 400,000 shares.......................................... 40,000
-----------
50,000 1.4%
----------- ----
MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES:
MidAmerican Energy-obligated mandatorily redeemable cumulative
preferred securities of subsidiary trust holding solely MidAmerican
Energy junior subordinated debentures:
7.98% Series, 4,000,000 shares ....................................... 101,598 2.9%
----------- ----
LONG TERM DEBT
MidAmerican Energy mortgage bonds:
7.125% Series, due 2003 .............................................. 100,000
7.70% Series, due 2004 ............................................... 55,630
7% Series, due 2005 .................................................. 90,500
7.375% Series, due 2008 .............................................. 75,000
7.45% Series, due 2023 ............................................... 6,940
6.95% Series, due 2025 ............................................... 12,500
MidAmerican Energy pollution control revenue obligations:
5.15% to 5.75% Series, due periodically through 2003 ................. 7,200
5.95% Series, due 2023 (secured by general mortgage bonds) ........... 29,030
Variable rate series:
Due 2016 and 2017, 3.7% ............................................ 37,600
Due 2023 (secured by general mortgage bonds, 3.7%) ................. 28,295
Due 2023, 3.7% ..................................................... 6,850
Due 2024, 3.7% ..................................................... 34,900
Due 2025, 3.7% ..................................................... 12,750
See notes to consolidated financial statements.
F-50
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF SEPTEMBER 30, 1999
----------------------------
LONG-TERM DEBT (CONTINUED)
MidAmerican Energy notes:
8.75% Series, due 2002 ............................ 240
6.5% Series, due 2001 ............................. 100,000
6.375% Series, due 2006 ........................... 160,000
6.4% Series, due 2003 through 2007 ................ 2,000
Obligation under capital lease ..................... 1,844
Unamortized debt premium and discount, net ......... (1,596)
-------
Total utility ................................... 759,683
-------
Nonregulated subsidiaries notes:
8.52% Series, due 2000 through 2002 ............... 70,000
-------
Total nonregulated subsidiaries ................. 70,000
-------
MidAmerican Funding Parent Debt ....................
5.85% Senior Secured Notes due 2001 ............... 200,000
6.339% Senior Secured Notes due 2009 .............. 175,000
6.927% Senior Secured Notes due 2029 .............. 325,000
Fair value adjustments to subsidiary debt ......... 2,742
-------
Total MidAmerican Funding Parent ................ 702,742
-------
1,532,425 43.1%
--------- -----
TOTAL CAPITALIZATION ............................... $ 3,551,945 100.0%
=========== =====
See notes to consolidated financial statements.
F-51
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY STRUCTURE -- MidAmerican Funding, LLC is an Iowa limited liability
company and a direct wholly-owned subsidiary of MidAmerican Energy Holdings
Company. MidAmerican Funding's direct wholly-owned subsidiary is MHC Inc., a
public utility holding company. MHC's principal subsidiary is MidAmerican Energy
Company, a public utility with electric and natural gas operations. Other
significant wholly-owned subsidiaries of MHC include MidAmerican Capital,
Midwest Capital and MidAmerican Realty.
The current corporate structure is the result of a merger transaction
completed on March 12, 1999, involving MHC (formerly MidAmerican Energy
Holdings Company) and CalEnergy Company, Inc. CalEnergy, through a
reincorporation transaction, was renamed MidAmerican Energy Holdings Company.
MidAmerican Holdings is an exempt public utility holding company headquartered
in Des Moines, Iowa.
On March 11, 1999, MidAmerican Funding, a wholly-owned subsidiary of
MidAmerican Holdings, issued $200 million of 5.85% Senior Secured Notes due
2001, $175 million of 6.339% Senior Secured Notes due 2009, and $325 million of
6.925% Senior Secured Bonds due 2029. The proceeds from the offering were used
to complete the merger.
In conjunction with the transaction, MidAmerican Funding paid $27.15 in
cash for each outstanding share of MHC common stock for a total of
approximately $2.42 billion in a merger pursuant to which MHC became a direct
wholly-owned subsidiary of MidAmerican Funding. The merger has been accounted
for as a purchase business combination. The purchase price has been allocated
to assets acquired and liabilities assumed based on preliminary valuations and
MidAmerican Funding is awaiting final valuations. The final purchase price
allocation report has not yet been completed; however, MidAmerican Funding does
not anticipate any material changes based on currently available information.
MidAmerican Funding recorded the estimated excess of cost over fair value of
net assets acquired of approximately $1.5 billion which is being amortized
using the straight-line method over a 40 year period.
CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS -- The
accompanying consolidated financial statements includes MidAmerican Funding and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
REGULATION -- MidAmerican Energy's utility operations are subject to the
regulation of the Iowa Utilities Board (IUB), the Illinois Commerce Commission
(ICC), the South Dakota Public Utilities Commission, and the Federal Energy
Regulatory Commission (FERC). 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.
Statement of Financial Accounting Standards (SFAS) No. 71 sets forth
accounting principles for operations that are regulated and meet certain
criteria. For operations that meet the criteria, SFAS 71 allows, among other
things, the deferral of costs that would otherwise be expensed when incurred. A
possible consequence of the changes in the utility industry is the discontinued
applicability of SFAS 71. The majority of MidAmerican Energy's electric and gas
utility operations currently meet the criteria of SFAS 71, but its applicability
is periodically reexamined. On December 16, 1997,
F-52
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF SEPTEMBER 30, 1999
MidAmerican Energy's generation operations serving Illinois were no longer
subject to the provisions of SFAS 71 due to passage of industry restructuring
legislation in Illinois. Thus, in 1997, MidAmerican Energy was required to write
off the regulatory assets and liabilities from its balance sheet related to its
Illinois generation operations. The net amount of such write-offs was not
material. If other portions of its utility operations no longer meet the
criteria of SFAS 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. The following
regulatory assets, primarily included in Other Assets in the Consolidated
Balance Sheet, represent probable future revenue to MidAmerican Energy because
these costs are expected to be recovered in charges to utility customers (in
thousands):
SEPTEMBER 30,
1999
--------------
Deferred income taxes ......................... $ 148,036
Energy efficiency costs ....................... 47,891
Debt refinancing costs ........................ 36,043
Environmental costs ........................... 28,874
Enrichment facilities decommissioning ......... 7,976
Unamortized costs of retired plant ............ 1,862
Other ......................................... 2,841
---------
Total ........................................ $ 273,523
=========
DEPRECIATION AND AMORTIZATION -- MidAmerican Energy's provisions for
depreciation and amortization for its utility operations are based on
straight-line composite rates. Utility plant is stated at original cost which
includes overhead costs, administrative costs and capitalized interest.
The cost of repairs and minor replacements is charged to maintenance
expense. Property additions and major property replacements are charged to
plant accounts. The cost of depreciable units of utility plant retired or
disposed of in the normal course of business is eliminated from the utility
plant accounts and such cost, plus net removal cost, is charged to accumulated
depreciation.
INVESTMENTS AND NONREGULATED PROPERTY, NET -- Investments and nonregulated
property, net include the following amounts (in thousands):
SEPTEMBER 30,
1999
--------------
Marketable securities .................................. $ 100,178
Notes with MidAmerican Energy Holdings Company ......... 172,842
Equipment leases ....................................... 49,629
Nuclear decommissioning trust fund ..................... 133,536
Energy projects ........................................ 9,938
Special-purpose funds .................................. 9,731
Real estate ............................................ 12,655
Corporate owned life insurance ......................... 59,238
Coal transportation property ........................... 11,175
Communications ......................................... 9,750
Other .................................................. 17,860
---------
Total ................................................. $ 586,532
=========
Marketable securities generally consist of preferred stocks, common stocks
and mutual funds held by MidAmerican Capital, a non-regulated subsidiary of
MidAmerican Funding. Investments in
F-53
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF SEPTEMBER 30, 1999
marketable securities classified as available-for-sale are reported at fair
value (see Note 13) with net unrealized gains and losses reported as a net of
tax amount in Common Shareholder's Equity until realized. Investments in
marketable securities that are classified as held-to-maturity are reported at
amortized cost. An other-than-temporary decline in the value of a marketable
security is recognized through a write-down of the investment to earnings.
Investments held by the nuclear decommissioning trust fund for the Quad
Cities Station are classified as available-for-sale and are reported at fair
value with net unrealized gains and losses reported as adjustments to the
accumulated provision for nuclear decommissioning.
ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT -- Under a long-term
power purchase contract with Nebraska Public Power District, expiring in 2004,
MidAmerican Energy purchases one-half of the output of the 778-megawatt Cooper
Nuclear Station (Cooper). The consolidated balance sheet at September 30, 1999
includes a liability for MidAmerican Energy's fixed obligation to pay 50% of
Nebraska Public Power District's Nuclear Facility Revenue Bonds and other fixed
liabilities. A like amount representing MidAmerican Energy's right to purchase
power is shown as an asset.
Cooper capital improvement costs prior to 1997, including carrying costs,
were deferred in accordance with then applicable rate regulation and are being
amortized and recovered in rates over either a five-year period or the term of
the Nebraska Public Power District contract. Beginning July 11, 1997, the Iowa
portion of capital improvement costs is recovered currently from customers and
is expensed as incurred. MidAmerican Energy began charging the remaining Cooper
capital improvement costs to expense for jurisdictions other than Iowa as
incurred in January 1997.
See Note 4 for additional information regarding the power purchase
contract.
ACCOUNTING FOR DERIVATIVES:
Preferred Stock Hedge Instruments -- MidAmerican Funding is exposed to
market value risk from changes in interest rates for certain fixed rate sinking
fund preferred and perpetual preferred stocks (fixed rate preferred stocks)
included in investments on the consolidated balance sheet at September 30,
1999. MidAmerican Funding reviews the interest rate sensitivity of these
securities and purchases put options on U.S. Treasury securities (put options)
to reduce interest rate risk on preferred stocks. MidAmerican Funding does not
purchase or sell put options for speculative purposes. MidAmerican Funding's
intent is to substantially offset any change in market value of the fixed rate
preferred stocks due to a change in interest rates with a change in market
value of the put options.
The preferred stocks are publicly traded securities and, as such, changes
in their fair value are reported, net of income taxes, as a part of Accumulated
Other Comprehensive Income, Net in Member's Equity. Unrealized gains and losses
on the associated put options are included in the determination of the fair
value of the preferred stocks. The fair value of the put options, including
unrealized gains and losses, included in the determination of the fair value of
the preferred securities as of September 30, 1999, was $2.8 million. At
September 30, 1999, MidAmerican Funding held put options with a notional value
of $72.9 million.
Gas Futures Contracts and Swaps -- MidAmerican Funding uses gas futures
contracts and swap contracts to reduce the volatility in the price of natural
gas purchased to meet the needs of its customers. Investments in natural gas
futures contracts, which total $0.7 million as of September 30, 1999 are
included in receivables on the consolidated balance sheet. Gains and losses on
gas futures contracts that qualify for hedge accounting are deferred and
reflected as adjustments to the carrying value of the hedged item or included
in Other Assets on the Consolidated Balance Sheet until the underlying physical
transaction is recorded if the instrument is used to hedge an anticipated
future transaction. Deferred net gains (losses) related to MidAmerican
Funding's gas futures contracts are $(0.6) million as of September 30, 1999.
F-54
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF SEPTEMBER 30, 1999
MidAmerican Funding periodically evaluates the effectiveness of its
natural gas hedging programs. If a high degree of correlation between prices
for the hedging instruments and prices for the physical delivery is not
achieved, the contracts are recorded at fair value and the gains or losses are
included in the determination of income. At September 30, 1999, MidAmerican
Funding held the following hedging instruments:
WEIGHTED
NOTIONAL AVERAGE
VOLUME MARKET VALUE
(MMBTU) (PER MMBTU)
----------- -------------
Natural Gas Futures (Long) .................... 7,640,000 $ 2.716
Natural Gas Futures (Short) ................... 7,590,000 $ 2.715
Natural Gas Swaps (Variable to Fixed) ......... 3,318,000
Weighted average variable price .............. $ 2.782
Weighted average fixed price ................. $ 2.432
New Accounting Pronouncement -- In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, which established accounting and reporting standards
for derivative instruments and for hedging activities. SFAS 133 is effective
for MidAmerican Funding on January 1, 2001. SFAS 133 requires an entity to
recognize all of its derivatives as either assets or liabilities in its
statement of financial position and measure those instruments at fair value. If
the conditions specified in SFAS 133 are met, those instruments may be
designated as hedges. Changes in the value of hedge instruments would not impact
earnings, except to the extent that the instrument is not perfectly effective as
a hedge. An entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use in assessing the
effectiveness of the derivative. MidAmerican Funding is in the process of
evaluating the impact of this accounting pronouncement.
DETAIL OF ACCUMULATED OTHER COMPREHENSIVE INCOME, NET -- Comprehensive
income refers, in general, to changes in MidAmerican Funding's equity, except
those resulting from transactions with shareholders. "Unrealized holding gains
(losses)" reflects the overall increase (decrease) in the market value of
marketable securities held by MidAmerican Funding as available-for-sale.
SEPTEMBER 30, 1999
(000'S)
-------------------
Unrealized holding gains (losses):
Before income taxes ........................... $ (517)
Income tax (expense)/benefit .................. 181
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Accumulated other comprehensive income ......... $ (336)
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2. LONG-TERM DEBT
MidAmerican Funding's sinking fund requirements and maturities of
long-term debt for the remainder of 1999 through 2004 are $105.0 million,
$133.8 million, $324.8 million, $25.0 million, $105.3 million and $55.6
million, respectively.
F-55
MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF SEPTEMBER 30, 1999
MidAmerican Energy's Variable Rate Pollution Control Revenue Obligations
bear interest at rates that are periodically established through remarketing of
the bonds in the short-term tax-exempt market. MidAmerican Energy at its option,
may change the mode of interest calculation for these bonds by selecting from
among several alternative floating or fixed rate modes. The interest rate shown
in the Consolidated Statements of Capitalization is the weighted average
interest rate as of September 30, 1999. MidAmerican Energy maintains dedicated
revolving credit facility agreements or renewable lines of credit to provide
liquidity for holders of these issues.
Substantially all of the former Iowa-Illinois Gas and Electric Company, a
predecessor company, utility property and franchises, and substantially all of
the former Midwest Power Systems Inc., a predecessor company, electric utility
property in Iowa, or approximately 80% of gross utility plant, is pledged to
secure mortgage bonds.
3. JOINTLY OWNED UTILITY PLANT
Under joint plant ownership agreements with other utilities, MidAmerican
Energy had undivided interests at September 30, 1999, in jointly owned
generating plants as shown in the table below.
The dollar amounts below represent MidAmerican Energy's share in each
jointly owned unit. Each participant has provided financing for its share of
each unit.
NUCLEAR COAL FIRED
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COUNCIL
QUAD CITIES NEAL BLUFFS NEAL OTTUMWA LOUISA
UNITS UNIT UNIT UNIT UNIT UNIT
NO. 1 & 2 NO. 3 NO. 3 NO. 4 NO. 1 NO. 1
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