AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1999
REGISTRATION NO. 333-______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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) 242-4000
(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. [ ]
------------------------------------------
CALCULATION OF REGISTRATION FEE
Proposed
Offering Proposed Amount of
Title of Each Class of Amount to be Price Aggregate Registration
Securities to be Registered Registered per Security(1) Offering Price(1) Fee
- ------------------------------------------------------------------------ --------------- ------------------ -------------------
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 $90,350
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
-----------------------------------------
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, 1999
PROSPECTUS
MIDAMERICAN FUNDING, LLC
Exchange Offer for
5.85% Senior Secured Notes due 2001
6.339% Senior Secured Notes due 2009
6.927% Senior 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 _____________, unless we extend it.
You must tender the 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 __________, 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.......................................... 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.
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 (formerly
CalEnergy Company, Inc.) of MHC Inc. (formerly MidAmerican Energy Holdings
Company). We refer to this acquisition as the merger throughout this
prospectus. 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 as 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.
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. From time to time, MidAmerican Energy supplies electricity to
other utilities in major energy markets in the midwestern United States, such
as 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% | 100%
--------------------------------MHC-------------------------------
| | |
MIDAMERICAN 100% | 100% MIDAMERICAN
CAPITAL ----------------------- SERVICES
| |
MIDAMERICAN MIDWEST
ENERGY CAPITAL
2
THE MERGER
On March 12, 1999 our subsidiary, MAVH Inc., was merged with and into MHC
pursuant to 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 Securities and the initial
Securities are identical in all material respects, except that transfer
restrictions and registration rights applicable to the initial Securities do not
apply to the exchange Securities. The exchange Securities will evidence the same
debt as the initial Securities 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.
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 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;
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
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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
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 thereto appearing elsewhere in this prospectus.
SEPTEMBER 30, 1999
(UNAUDITED)
---------------------
Common Shareholders' Equity:..................... $1,836,163
MidAmerican Enery 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:
MidAmerican Funding .......................... 702,742
MidAmerican Energy long-term debt............. 759,683
Nonregulated subsidiaries notes............... 70,000
Notes payable.................................... 89,115
Current portion of long-term debt................ 215,635
----------
Total 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 thereto included and incorporated by reference in this
registration statement.
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 Securities and the merger, using proceeds
from the offering and the equity contributions from MidAmerican Holdings. In
each case, the information is presented as if such transactions had occurred at
the beginning of the period presented, 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 merger and the related financing transactions in fact occurred on
the assumed dates, 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 the related notes
thereto appearing elsewhere in this registration statement.
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 | $961,885
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............... 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 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.................. $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....... 137,809 125,729 111,222 97,504 83,127 | 83,127
Short-term borrowings......... 124,500 184,800 161,990 138,054 339,826 | 89,115
Preferred stock: |
Not subject to 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)........................ 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. 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 (whether expensed or capitalized),
amortization of deferred financing and bank fees, and the portion of
rentals considered to be representative of the interest factor (one-third
of lease 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 junior
subordinated debentures.
28
(6) Common equity increased in 1997 primarily due to recording the market
value 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.
29
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). CalEnergy, through a reincorporation transaction,
was renamed MidAmerican Energy Holdings Company (Holdings). Funding, a
wholly-owned subsidiary of Holdings, acquired all of the outstanding common
stock of MHC. 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). 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 MHC
common stock. As part of the transaction, MidAmerican distributed the capital
stock of MidAmerican Capital and Midwest Capital to MHC.
In October 1999, MHC distributed its investment in MidAmerican Realty to
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 Funding and MHC. The financial statements of Funding include the
results of MHC beginning March 12, 1999. Due to its significance, the results
for MidAmerican are described specifically in the "Results of Operations"
section of MD&A. Information related to MidAmerican 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 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 Company 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 Company or any of its subsidiaries individually. These
forward-looking statements may include, among others, statements concerning
revenue and cost trends, cost recovery, cost reduction strategies and
anticipated outcomes, pricing strategies, changes in the utility industry,
planned capital expenditures, financing needs and availability, statements of
the Company'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 such statements are not a guarantee of future performance of
the Company and that such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in, or implied by, such 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's service
territory, interest rates, inflation and federal and state regulatory actions.
30
RESULTS OF OPERATIONS - 1996-1998
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:
The following table provides a summary of the earnings contributions of
MidAmerican'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
====== ====== ======
* 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 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'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 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 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 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.
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
Statements of Income. 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 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
Holdings in conjunction with an initial public offering of common stock of
HomeServices.Com, a successor company to MidAmerican Realty.
MIDAMERICAN:
MidAmerican 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's predecessors. The final settlement
included reacquisition by the buyer of preferred equity issued to MidAmerican
and the settlement of reclamation reserves. MidAmerican recorded an after-tax
loss on disposal of $3.3 million for the transaction in September 1996. This
transaction is included in discontinued operations in the consolidated
financial statements of MidAmerican as well as MHC. Discontinued operations of
MidAmerican 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 vs 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) 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 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 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 period from the date collection begins. Approximately $44.4 million
of MidAmerican'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 in the "Operating
Activities and Other Matters" section of MD&A for further discussion.
The Cooper Tracker allows MidAmerican 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-normal during the heating seasons and
hotter-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 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 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 EAC was
eliminated for Iowa customers as part of MidAmerican'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.
With the elimination of the Iowa EAC, fluctuations in energy costs now may have
an impact on gross margin and net income.
Under the Iowa pricing settlement, revenues from off-system sales are
considered a component of total energy costs. Accordingly, electric margin in
1998 reflects MidAmerican's strong performance in the off-system market
relative to 1997. Margins on off-system sales, which account for most of
MidAmerican'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 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'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 EAC 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 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 reduced its electric retail prices by $8.7 million
effective November 1, 1996. This was the first reduction related to
MidAmerican'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 vs. 1997 -
MidAmerican'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 1998
per-unit cost of gas compared to 1997 reduced revenues and cost of gas sold by
approximately $59 million. MidAmerican recently made a filing with the IUB that
would modify the use of the PGA beginning May 1, 2000. Refer to Small Volume
Gas Transportation 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 Gross Margin" section, on September 29, 1997, MidAmerican
began recovery of its deferred energy efficiency costs that had not previously
been approved for recovery. Approximately $17.5 million of MidAmerican'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.
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 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 Gross Margin" section. Cooper capital improvement advances are now
expensed when incurred. MidAmerican 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 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, IT
consulting costs, advertising costs and other related expenses. Increases in
such 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's efforts to improve its customer service and reliability
resulted in increases in consulting costs, advertising 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 transmission
wheeling expense due in part to changes required by FERC 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 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 align power plant
inventory accounting of predecessor companies which reduced 1996 expense by $6.2
million. Restoration costs for the 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 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 certain taxes are assessed in Illinois. The changes resulted in a
decrease in MidAmerican'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'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:
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. A decrease in the average price per unit, reflective
of a lower cost of gas per unit, partially offset the effect of increased
sales. 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 (total price less cost of 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 that operates rail services on a section of railroad
track it owns. MidAmerican'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'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 to an increase in sales
volumes of 7 million MMBtus (51%). In addition, the average price per unit
increased, reflecting an increase in the average cost of gas per unit. 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'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 customers, costs of appliance services and costs of initiatives for
new products and services in preparation for deregulation.
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 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. Accordingly, nonregulated cost of gas sold decreased significantly in
1998 from 1997.
Nonregulated other operating expenses for 1998 a decrease of
approximately $5.7 million due primarily to administrative costs in 1997 which
are no longer incurred because of the absence of operations MHC sold in 1997.
NON-OPERATING INCOME AND INTEREST EXPENSE
MIDAMERICAN:
Interest and Dividend Income-
In December 1997, MidAmerican 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 for
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 the accounts. The net discount reduced
Other, Net by $7.0 million and $0.3 million in 1998 and 1997, respectively.
In September 1997, MidAmerican received a $15 million cash payment from
Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by
MidAmerican against NPPD. Approximately $12 million was refunded to
MidAmerican's customers. The remaining amount was retained by MidAmerican 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 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 recorded an initial pre-tax gain of $3.2 million on
its sale of the certain storage gas supplies. MidAmerican 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).
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 for its merger proposal to IES Industries Inc. in
1996.
Fixed Charges -
During 1998, MidAmerican 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 decrease in other interest expense for 1998.
Preferred securities of MidAmerican's subsidiary trust were issued in
December 1996. MidAmerican 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 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 a $2.7 million gain on the sale of
railcars and a $2.9 million gas 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-downs of nonregulated investments decreased Other, net by
$15.6 million in 1996.
RESULTS OF OPERATION -- 1999
The following is a discussion of the historical unaudited interim results
for Funding and its predecessor MHC for the year to date periods ending
September 30, 1999 and 1998. Results for Funding include the results from MHC
beginning March 12, 1999, in conjunction with the MidAmerican merger. Certain
impacts of the MidAmerican merger are reflected in Funding's results of
operations, predominantly interest costs on debt issued by Funding to complete
the merger 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 results of operations are not included in
the results of operations of Funding for all of 1999, management believes that
discussion of trends in the ongoing operations that now comprise Funding
provides meaningful information.
REGULATED ELECTRIC GROSS MARGIN:
MidAmerican's electric gross margin for the nine-month period ended
September 30, 1999, decreased $5 million from the comparable period in 1998.
The impact 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 revenues from energy efficiency cost recovery are substantially
offset by corresponding changes 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.
Revenues and gross margin for the 1999 periods reflect price reductions
which were not in effect, or were only partially in effect, during 1998. In
June 1998, revenues from Iowa residential customers were reduced $5 million
annually. Since July 1997, MidAmerican 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 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, 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 offsetting 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 of Quad Cities Nuclear Station in
1999. Additionally, favorable sales prices during the hot temperatures in July
1999 contributed 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 the energy consumer instead of through the utility.
Accordingly, MidAmerican's electric revenues and electric margin reflect
reductions this tax collection change.
REGULATED GAS GROSS MARGIN:
MidAmerican'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 gas for the nine-months ended September 30, 1999 reduced
revenues and cost of gas compared to the same period in 1998.
Recovery of gas energy efficiency program costs decreased for the 1999
nine-month period compared to the same period in 1998. Again, changes in
revenues from energy efficiency cost recovery are substantially offset by
corresponding changes 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 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 1999 were cooler than 1998,
resulting in an increase 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
REGULATED OPERATING EXPENSES
Other operating expenses decreased for the nine months ended September 30,
1999, compared to the same period in 1998.
As mentioned in the gross margin discussions, the recovery of one phase of
deferred energy efficiency 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-related
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 compared to the same period 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 in 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 for the nine months ended
September 30, 1999 compared to the same period in 1998 primarily due to
increased sales of wholesale natural gas. 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.
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.
Increased nonregulated operating costs at MidAmerican related to nonregulated
marketing initiatives.
40
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 months ended
September 30, 1999 compared to the same period in 1998, primarily due to costs
related to the MidAmerican merger accrued at MHC. Additionally, in gains on the
sale of nonregulated investments are included in 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 to
interest on $700 million in debt issued by Funding in conjuction with the
MidAmerican merger, partially offset by a decrease in interest expense
resulting from debt maturities at MHC in 1999.
41
LIQUIDITY AND CAPITAL RESOURCES
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 Statements of Cash Flows, 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 Funding had net cash
provided from operating activities of $47.5 million.
INVESTING ACTIVITIES AND PLANS
UTILITY CONSTRUCTION EXPENDITURES
MidAmerican's primary need for capital is utility construction
expenditures. For the first nine months of 1999, utility construction
expenditures totaled $116 million, including allowance for funds used during
construction (AFUDC) and Quad Cities Station nuclear fuel purchases. All such
expenditures were met with cash generated from utility operations, net of
dividends.
Forecasted utility construction expenditures, including AFUDC, for 1999
are $179 million and $720 million for 2000 through 2003. Capital expenditure
needs are reviewed regularly by MidAmerican's management and may change
significantly as a result of such reviews. MidAmerican 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 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 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. Treasury
bonds.
In addition, MidAmerican makes payments to Nebraska Public Power
District (NPPD) related to decommissioning Cooper. These payments are reflected
in other operating expenses in the Consolidated Statements of Income. NPPD
estimates call for MidAmerican to pay approximately $57 million to NPPD for
Cooper decommissioning during the period 1999 through 2003. NPPD invests the
funds predominately in U.S. Treasury Bonds and other U.S. Government securities.
Approximately 20% was invested in domestic corporate debt. MidAmerican's
obligation for Cooper decommissioning may be affected by the actual plant
shutdown date and the status of the power purchase contract at that time. In
July 1997, NPPD filed a lawsuit in United States District Court for the District
of Nebraska naming MidAmerican as the defendant and seeking a declaration of
MidAmerican'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 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 Statements of Cash
Flows, the lines Purchase of Securities and Proceeds from Sale of Securities
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
MidAmerican currently has authority from the FERC to issue short-term debt
in the form of commercial paper and bank notes aggregating $400 million. As of
September 30, 1999, MidAmerican had a $250 million revolving credit facility
agreement and a $5 million bank line of credit. MidAmerican's commercial paper
borrowings are supported by the revolving credit facility and the line of
credit. MidAmerican 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 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. Funding Corp. in turn sold receivable interests to outside
investors. In consideration for the sale, MidAmerican received $70 million in
cash and the remaining balance in the form of a subordinated note from 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. The agreement is structured as a true sale, as determined by
Statement of Financial Accounting Standards (SFAS) No. 125, 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 or its
creditors. Therefore, the accounts receivable sold are not reflected on
MidAmerican's Consolidated Balance Sheets. As of September 30, 1999, $98.6
million of accounts receivable, net of reserves, were sold under the agreement.
MidAmerican has authorization from the FERC to issue up to an additional
$500 million in various forms of long-term debt. MidAmerican will also need
authorization from the ICC prior to issuing any securities. If 90% or more of
the proceeds from a securities issuance are used for refinancing purposes,
MidAmerican need only provide the ICC with an "informational statement" prior
to the issuance which sets forth the type, amount and use of the proceeds of
the securities to be issued. If less than 90% of the proceeds are used for
refinancing, MidAmerican must file a comprehensive application seeking
authorization prior to issuance. The ICC is required to hold a hearing before
issuing its authorization.
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.
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, of which $5 million was outstanding at December 31, 1998.
43
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'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. MidAmerican 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'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 is exposed to movements in energy prices. Although
MidAmerican has sufficient low cost generation under typical operating
conditions for its retail electric needs, a loss of adequate generation by
MidAmerican at a time of high market prices could subject MidAmerican 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 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 is exempted from the requirement to join an independent
system operator (ISO) or to form an in-state ISO.
In addition, the law provides for Illinois earnings above a certain level
of ROE to be shared equally between customers and MidAmerican beginning in
April 2000. MidAmerican's ROE level will be based on a rolling two-year
average, with the first determination being based on an average of 1998 and
1999. The ROE level at which MidAmerican will be required to share earnings is
a multi-step calculation of average 30-year Treasury Bond 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 Bond rate were equal to the December 1998 30-year Treasury
Bond rate, the ROE 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 to mitigate the sharing of earnings above the threshold ROE through
accelerated cost recognition that would reduce MidAmerican's earnings.
MidAmerican 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 continues its involvement in proceedings which detail
the new competitive environment and 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, 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 is pursuing the
adoption of electric utility industry restructuring legislation. Progress was
made during the 1999 Iowa legislative session, and MidAmerican continues
working toward adoption of new legislation in a future session.
RESIDENTIAL AND COMMERCIAL PILOT PROJECT
On August 21, 1998, the IUB issued an Order approving MidAmerican'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, and to have that energy delivered by MidAmerican. 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 IUB 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. 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'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'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 such 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. As of September 30, 1999, MidAmerican had $266
million of regulatory assets on its Consolidated Balance Sheet.
ENERGY EFFICIENCY
MidAmerican'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 expects to recover these costs by the end of 2001.
MidAmerican is also allowed to recover its ongoing energy efficiency costs on a
current basis. Recovery of these costs is being collected from customers 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 such 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
certain 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.
If MidAmerican's annual Iowa electric jurisdictional ROE exceeds 12%, then
earnings above the 12% level will be shared equally between customers and
MidAmerican; if the ROE exceeds 14%, then two-thirds of MidAmerican's share of
those earnings above the 12% level will be used for accelerated recovery of
certain regulatory assets. A 1997 pricing plan settlement agreement precludes
MidAmerican from filing for increased rates prior to 2001 unless the ROE falls
below 9%. Other parties signing the agreement are prohibited from filing for
reduced rates prior to 2001 unless the ROE, after reflecting credits to
customers, exceeds 14%. On April 14, 1999, the IUB approved, subject to
additional refund, MidAmerican's 1998 ROE calculation. During the second
quarter of 1999, MidAmerican refunded $2.2 million to its Iowa non-contract
customers related to the ROE calculation for 1998. The agreement also
eliminated MidAmerican'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 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 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 in April 1999 approved a rate increase of $2.4 million
annually, effective May 1, 1999.
On September 1, 1999, MidAmerican filed with the ICC requesting a rate
increase totaling $3.2 million annually for its Illinois retail gas customers.
An ICC decision is anticipated prior to August 2000.
ENVIRONMENTAL MATTERS
The EPA and state environmental agencies have determined that contaminated
wastes remaining at certain decommissioned MGP 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 is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a PRP. 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
has any responsibility for remedial action. MidAmerican's estimate of probable
remediation costs for these sites as of September 30, 1999, was $21 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) of Notes to
Consolidated Financial Statements for further discussion of MidAmerican's
environmental activities related to MGP 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'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 NAAQS 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. 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
appealed the court's ruling to the full panel of the U.S. District Court of
Appeals for the District of Columbia Circuit. Argument in the appeal proceeding
is scheduled for the fall of 1999. As a result of the court's decision and the
current status of the standards, the impact of any new standards on MidAmerican
is currently unknown.
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's
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 CO2 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. Senate is necessary. The cost
to the utility industry in general, and to MidAmerican, of reducing its CO2
emissions levels by 7% below 1990 levels would depend on available technology
at the time, but could be material.
QUAD CITIES NUCLEAR POWER STATION
Quad Cities Station is operated by, and 75% owned by, Commonwealth Edison
Company (ComEd). On May 6, 1999, the Nuclear Regulatory Commission (NRC)
advised ComEd that it had classified Quad Cities Station in the NRC's Routine
Oversight category (the best of the NRC'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 MW on MidAmerican's energy system. MidAmerican 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). Each MAPP participant is required to maintain for emergency purposes a
net generating capability reserve of at least 15% above
47
its system peak demand. MidAmerican 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 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-normal temperatures during the
cooling season could cause MidAmerican's reserve to fall below the 15% minimum.
If MidAmerican fails to maintain the appropriate reserve, significant penalties
could be contractually imposed by MAPP.
ACTIVITIES REGARDING YEAR 2000 DATE ISSUES
The following discussion of year 2000 issues describes MidAmerican'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 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'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,
such statements. Such risks and uncertainties include, among others, the
effects of weather, federal and state regulatory actions, and other matters,
many of which are beyond MidAmerican's control. In addition, MidAmerican claims
the full protections established by the Year 2000 Information and Readiness
Disclosure Act for Year 2000 Statements and Year 2000 Readiness Disclosure.
PROJECT DESCRIPTION
MidAmerican has undertaken an extensive ongoing project to address its
information technology (IT) and non-IT (including embedded technology) Systems
potentially affected by the year 2000 date change. MidAmerican's approach is
based on a five-phase project methodology - inventory, assessment, planning,
resolution and implementation - designed to result in the identification and
evaluation of potential problems, and remediation of MidAmerican's Systems.
MidAmerican generally defines the five phases as follows:
1. Inventory Phase - The purpose of the inventory phase is to identify and
document Systems used by MidAmerican that may have a date-sensitive function.
2. Assessment Phase - The purpose of the assessment phase is to collect
information about inventoried Systems, including the business and technical
context in which individual Systems 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 Systems 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 Systems and/or
components of 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 Systems 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 classifies all Systems ranging from low- to high-priority
based on their importance to carrying out MidAmerican'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, year 2000 readiness may be
delayed beyond January 1, 2000, or perhaps indefinitely. MidAmerican plans to
use the last two months of 1999 to perform post-implementation testing, address
selected lower priority Systems and conduct preparedness exercises.
Vendors, customers and other third parties may affect MidAmerican's
ability to achieve year 2000 readiness. Because service reliability and
financial stability are dependent on MidAmerican'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.
STATE OF READINESS
Due to factors such as the overlapping nature of the project phases and
the varying degree of complexity of the Systems 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 uses three methods
to measure the status of project completion:
1. As an entity with public utility operations, MidAmerican must comply
with certain year 2000 regulatory requirements imposed by the North
American Electric Reliability Council (NERC). NERC reporting data is
limited primarily to Systems 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, telecommunications systems,
substation controls and system protection, and IT business
information systems. MidAmerican reported in its July compliance
filing with NERC that it is "100% Y2K Ready" on systems considered
mission-critical by NERC definition.
2. A "checklist" approach is used to monitor the completion status of
each System 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.
All Systems 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 System in
total or percentage of completion of any particular phase of the
project. As of September 30, 1999, there were 5,554 separate Systems
in MidAmerican's inventory. Of these, over 99% had been completed.
3. MidAmerican'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 Systems are included in the status of completion
calculation. The data related to Systems that could impact grid
stability pertains only to those Systems that directly affect
MidAmerican's customers. Also, progress toward completion is measured.
As of September 30, 1999, MidAmerican as a whole is generally in the
resolution phase. Percentage of completion for six areas of business
operations is a 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 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 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 intends to maintain ongoing communications with some
third parties through the few months of 1999. MidAmerican will also continue
monitoring information about specific products in MidAmerican's inventory.
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 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 has renovated or replaced several high-priority Systems
(e.g., management information, materials management information, work management
information, customer service, 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 in July of
1995. Although potential year 2000 problems existing in the predecessor
companies' CSS products were recognized, the decision to implement the new CSS
was primarily in response to integration difficulties and the need for
additional application functionalities. The costs of these renovations and
replacements are not reported herein 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'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 participated in contingency planning drills coordinated by
NERC 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 those drills, MidAmerican did not experience any
unexpected results.
RISKS
Despite the comprehensive nature of MidAmerican's year 2000 project and
the results the project is designed to produce, MidAmerican may experience
random, widespread and simultaneous failures in its generation, distribution and
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 Systems to perform
because of year 2000 implications could result in operating problems and costs
material to MidAmerican.
50
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's
results of operations. In addition, there is no assurance that MidAmerican 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 Company is in the process of evaluating the
impact of this accounting standard.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MidAmerican is exposed to market risk, including changes in the market
price of certain commodities. To manage the price volatility relating to these
exposures, MidAmerican enters into various financial derivative instruments. A
Risk Management Committee governs the overall direction, structure, conduct and
control of the Company's risk management activities, including the use of
financial derivative instruments. Responsibilities of the Risk 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 uses hedge accounting for commodity-related instruments
pertaining to its natural gas purchasing operations.
COMMODITY PRICE RISK
Regulated Natural Gas Operations-
Under the current regulatory framework, MidAmerican 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). MidAmerican derived
approximately 94% of its regulated gas revenues from such customers in 1998.
Since the majority of MidAmerican's firm natural gas supply contracts contain
pricing provisions based on a daily or monthly market index, MidAmerican's
regulated gas customers, although ensured of the availability of gas supplies,
retain the risk associated with market price volatility.
MidAmerican 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. 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 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-
MidAmerican 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 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, MidAmerican 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'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-
At December 31, 1997, MidAmerican 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 Company is exposed to market value risk from changes in interest rates on
its preferred stock investments. The Company reviews the interest rate
sensitivity of these securities and purchases put options and enters into
"short" positions in futures contracts on U.S. Treasury securities for other
than trading purposes in order to reduce related interest rate risk. The
Company'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
Company 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: (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
- --------------------------- ----------------- -------------------- --------------------- --------------------
200 basis pt decrease $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)
- --------------------------- ----------------- -------------------- --------------------- --------------------
200 basis pt increase 120.9 17.3 138.2 (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
using futures and/or options. The notional amount of the Company'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.
- ----------------------- --------------------- -------------------- --------------------- --------------------
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's financial
exposure through its use of these hedging instruments. The Company is exposed
only to the initial purchase price of the put options and to changes in the
market value of the futures contracts.
53
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 Securities and facilitate the merger. 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 Securities 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. MHC's interests include:
[] 100% of the common stock of MidAmerican Energy;
[] 100% of the common stock of MidAmerican Capital;
[] 100% of the common stock of Midwest Capital; and
[] 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% of MHC's operating
revenues (excluding MidAmerican Realty Services) were from MidAmerican Energy,
4% were from MidAmerican Capital and 3% were from Midwest Capital. For the year
ended December 31, 1998, 95% of MHC's operating revenues (excluding MidAmerican
Realty 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 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:
[] Generation--Significant functions of the generation business unit
include the production and purchase of energy and the sale of
wholesale energy.
[] 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.
[] Energy Delivery--Energy delivery includes the distribution of
electricity and natural gas to end-users, and related activities.
[] 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 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:
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%
====== ===== =====
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.............................. 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 (except for the
potential adjustment 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%
====== ===== =====
56
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....................................... 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 on 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 utilities and is involved in an electric power pooling agreement
known as MAPP. MAPP 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. MAPP 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 MAPP 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. 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
57
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
===============
ENVIRONMENTAL MATTERS
For information relating to MidAmerican Energy's environmental matters,
reference is made to Note B to our consolidated financial statements appearing
elsewhere in this prospectus.
LITIGATION
COOPER LITIGATION
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. More
specifically, NPPD 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 NPPD 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 occur; (2)
that NPPD has the duty to repay all amounts that MidAmerican Energy has
prefunded for decommissioning in the event NPPD operates the plant after the
term of the power purchase agreement; (3) that NPPD is equitably estopped from
continuing to operate the plant after the term of the power purchase agreement;
(4) that NPPD 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 NPPD has breached its duty to MidAmerican Energy in making investments of
certain funds; (9) that reserves in certain accounts are excessive and should be
refunded to MidAmerican Energy; and (10) that NPPD must credit MidAmerican
Energy for certain payments by MidAmerican for low-level radioactive waste
disposal.
On October 6, 1999, the Court rendered summary judgment for NPPD on the
above-mentioned issue concerning liability for decommissioning (issue one in the
first paragraph above) and the related contingent counterclaims filed by
MidAmerican Energy (issues one, two, three and five in the second paragraph
above). The Court referred all remaining issues in the case to mediation, and
cancelled the November 1999 trial date. MidAmerican Energy plans to appeal the
Court's summary judgment ruling and will participate in mediation in an attempt
to resolve the remaining issues. MidAmerican Energy and NPPD are currently
involved in discovery.
LITIGATION
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 wheeling
service so that North Star could obtain electricity from an unnamed supplier. On
June 23, 1998, the District Court issued an Order 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. 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 matter North Star unsuccessfully appealed to the Iowa District Court an
Iowa Utilities Board declaratory ruling that was favorable to MidAmerican
Energy.
59
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......... 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
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.
PARTRICK J. GOODMAN, 32, 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 thereto 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.
Our articles of organization require the unanimous affirmative vote or
consent of our Board of Managers, including the Independent Manager, to (1)
institute bankruptcy or insolvency proceedings, (2) consent to the institution
of such proceedings against us, (3) dissolve or liquidate, make assignments for
the benefit of creditors, (4) take other similar actions, (5) change our form
of organization or jurisdiction of formation or (6) amend various provisions of
our articles of organization. In all such matters, our Board of Managers will
owe their fiduciary obligations to us and our creditors.
None of our managers or executive officers receive 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................... Chairman and Chief Executive Officer/Chairman....... MHC/MidAmerican Energy
Gregory E. Abel.................. President/Chief Executive Officer................... MHC/MidAmerican Energy
Ronald W. Stepien................ President........................................... MidAmerican Energy
Jack L. Alexander................ Senior Vice President............................... MidAmerican Energy
Patrick J. Goodman............... Senior Vice President and Chief Financial MHC and MidAmerican Energy
Officer..........................................
Keith D. Hartje.................. Senior Vice President............................... MidAmerican Energy
Steven A. McArthur............... Senior Vice President............................... MHC and MidAmerican Energy
John A. Rasmussen, Jr............ Senior Vice President and General Counsel........... MHC and MidAmerican 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.
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. 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.
For information regarding Messrs. Sokol, Abel, Goodman, McArthur and
Rasmussen see the description of our Board of Managers and executive officers
above.
61
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 Securities will be issued under and governed by an indenture, as
supplemented by a First Supplemental Indenture, dated as of March 11, 1999,
between the Company and Bank of New York, as trustee. The following summary of
the material terms contained in the indenture and the Securities 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, 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. 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 Securities and the initial Securities
are identical in all material respects, except that transfer restrictions and
registration rights applicable to the initial Securities do not apply to the
exchange Securities. The exchange Securities will evidence the same debt as the
initial Securities 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 2001 Notes will mature, and shall 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 2009 Notes will mature, and
shall 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 will mature, and shall be
repaid at their principal amount, on March 1, 2029.
Each Security 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 Securities 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 Securities
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 Securities is declared effective by December 7,
1999, the interest rate on each series of the Securities will increase by 0.5%
from and including such date, 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, such increase in interest rates will become permanent.
63
Any 2001 Notes that remain outstanding after the consummation of the
exchange offer, together with all 2001 Exchange Notes issued in connection with
the exchange offer, will be treated as a single class of securities under the
indenture. Any 2009 Notes 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 Bonds issued in connection with the
exchange offer, will be treated as a single class of securities under the
indenture.
RANKING
The Securities will be senior secured obligations of the Company ranking
on an equal basis with all other existing and future senior obligations of the
Company. The Securities will rank senior to all existing and future
subordinated indebtedness of the Company. The Securities will effectively rank
junior to all indebtedness and other liabilities, including preferred stock, of
the Company's Subsidiaries, to the extent of the assets of such Subsidiaries.
The indenture contains restrictions on 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's Subsidiaries,
other than MHC, may incur. In addition, the indenture permits each of the
Company's Subsidiaries, other than MHC, to incur significant additional amounts
of secured indebtedness.
Prior to the initial offering of the Securities in March 1999, the Company
did not have any debt obligations. The Company conducts its operations
predominantly through MHC, its wholly owned subsidiary, and substantially all
of the Company's consolidated assets relating to operations are held by MHC and
its Subsidiaries, including MidAmerican Energy. Because the Company is a
holding company, its rights and the rights of its creditors, including Holders
of the Securities, in respect of claims on the assets of each of the Company's
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 Company may itself be a creditor with recognized claims against
such 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.
The ability of the Company to pay interest on the Securities is, to a
large extent, dependent upon the receipt by it of dividends and other
distributions from its direct and indirect Subsidiaries, and from MidAmerican
Energy in particular. The Company believes that such payments, which will be
funded by cash flows generated through MidAmerican Energy's operations, will be
sufficient to enable the Company to meet all of its obligations as they become
due, including the Company's obligations under the Securities. The availability
of distributions from the Company's 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 Securities will be secured by a pledge of all of the capital stock of
MHC.
Unless there is an Event of Default, the Company will be able to vote, as
it sees fit in its sole discretion, the pledged shares of capital stock.
If the Company meets the conditions to its defeasance option or its
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 Company without any further action by the trustee or any
other person.
The proceeds of any sale of the collateral securing the Securities (the
"Collateral") following an Event of Default might not be sufficient to satisfy
the payments due on the Securities. If an Event of Default occurs under the
64
indenture, the trustee, on behalf of the holders of the Securities, in addition
to any rights or remedies available to it under the indenture, may take such
action as it deems advisable to protect and enforce its right in the
Collateral, 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.
COVENANTS
Except as otherwise described under "--Defeasance and Covenant Defeasance"
below, for so long as any Securities remain outstanding or any amount remains
unpaid on any of the Securities, the Company will comply with the terms of the
covenants described below.
PAYMENT OF PRINCIPAL AND INTEREST
The Company will duly and punctually pay the principal of and interest on
the Securities in accordance with the terms of the Securities and the
indenture.
MAINTENANCE OF OFFICE OR AGENCY
The Company will maintain in the Borough of Manhattan, The City of New
York, (1) an office or agency of a paying agent where the Securities may be
paid and notices and demands to or upon the Company in respect of the
Securities and the indenture may be served and (2) an office or agency of a
registrar where Securities may be surrendered for registration of transfer and
exchange. The Company 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 fails to maintain any required office or agency or fails
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 Company 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 Company will file or cause to
be filed with the SEC and provide the trustee with the information, documents
and other reports, or copies of such portions of any of the foregoing as the
SEC may by rules and regulations prescribe, with respect to the Company
specified in Sections 13 and 15(d) of the Exchange Act. If the Company is
subject to the reporting requirements of Sections 13 or 15(d) of the Exchange
Act, it will also provide such information, documents or reports to the Holders
of the Securities. Prior to the effective date of that registration statement,
the Company shall provide, upon written request of the Holders of the
Securities or prospective Holders of the Securities who are qualified
institutional buyers and are designated by existing Holders, with a copy to the
trustee, such information with respect to the Company as is required by Rule
144A to enable resales of the Securities to be made pursuant to Rule 144A. The
Company also will comply with the other provisions of Section 314(a) of the
Trust Indenture Act.
CONSOLIDATION, MERGER, CONVEYANCE, SALE OR LEASE
The Company may not consolidate with or merge with or into any other
Person, or convey, transfer or lease its consolidated properties and assets
substantially as an entirety, in one transaction or in a series of related
transactions, to any Person, or permit any Person to merge into or consolidate
with the Company, unless:
(1) (x) the Company will be the surviving or continuing Person or (y)
if other than the Company, the surviving or continuing Person 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's
obligations under the Securities and the indenture;
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(2) immediately after giving effect to such transaction, no Event of
Default shall have occurred and be continuing; and
(3) the Company or such other surviving or continuing Person, as
applicable, shall continue to have a valid, perfected, first priority
interest in the Collateral.
LIMITATION ON DISTRIBUTIONS
The indenture provides that the Company shall only declare, recommend,
make or pay any Distribution to any of its shareholders if there exists no Event
of Default and no Event of Default will result from making that Distribution,
and either:
(1) at the time and as a result of that Distribution, the
Company's Leverage Ratio does not exceed 0.67:1 and the
Company's Interest Coverage Ratio is not less than 2.2:1; or
(2) if it is not in compliance with the foregoing ratios,
at such time its senior secured long term debt rating is at
least BBB, or its then equivalent, with S&P and DCR 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's senior secured long term debt would still be rated at least BBB+, or
its then equivalent, from each of S&P and DCR and Baa1, or its then equivalent,
from Moody's. If the restriction on Distributions ceases to be in effect, the
Company will be under no obligation to reinstate such restriction or otherwise
observe its terms if such ratings are thereafter lowered or withdrawn.
In order to obtain the release of the restriction on Distributions, the
Company shall deliver to the trustee written confirmation from each Rating
Agency of the ratings conditions described in the preceding paragraph.
LIMITATION ON INDEBTEDNESS OF THE COMPANY AND OF MHC
The indenture provides that the Company will not incur any Indebtedness
other than (1) as part of the Company's permitted businesses and activities
described under "--Limitation on Business Activities" below and (2) other
Indebtedness incurred subsequent to receipt of written confirmation from the
Rating Agencies that such incurrence would not result in a Ratings Downgrade.
The indenture further provides that the Company will not permit MHC to
incur any Indebtedness other than Indebtedness outstanding on the date of
original issue of the Securities under MHC's agreements then in existence and
extensions of such Indebtedness.
LIMITATION ON LIENS
The indenture permits the Company to incur certain unsecured indebtedness
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 Company nor any Significant
Subsidiary will issue, assume or guarantee any Indebtedness secured by a Lien
upon any property or assets (other than cash or cash equivalents) of the
Company or such Significant Subsidiary, as applicable, without effectively
providing that the outstanding Securities (together with, if the Company so
determines, any other indebtedness or obligation then existing or thereafter
created ranking equally with the Securities) shall be secured equally and
ratably with (or prior to) such Indebtedness so long as such Indebtedness shall
be 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;
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(2) any Lien created or arising over any property which is acquired,
constructed or created by the Company or any of its Significant
Subsidiaries, but only if (A) such Lien secures only principal
amounts (not exceeding the cost of such acquisition, construction or
creation) raised for the purposes of such acquisition, construction
or creation, together with any costs, expenses, interest and fees
incurred in relation thereto or a guarantee given in respect thereof,
(B) such Lien is created or arises on or before 180 days after the
completion of such acquisition, construction or creation and (C) such
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 the benefit of the Company and/or a Significant Subsidiary or in
connection with the issuance of letters of credit for the benefit of
the Company and/or a Significant Subsidiary;
(b) any Lien securing Indebtedness of the Company 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 Company and/or a Significant Subsidiary securing
obligations of the Company 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 such
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 Company 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 Company or a Subsidiary;
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(6) (a) Liens on any property or assets acquired from a corporation which
is merged with or into the Company or a Significant Subsidiary, or
any Liens on the property or assets of any corporation or other
entity existing at the time such corporation or other entity becomes
a subsidiary of the Company and, in either such case, is not created
in anticipation of any such transaction, unless such Lien was created
to secure or provide for the payment of any part of the purchase
price of such corporation;
(b) any Lien on any property or assets existing at the time of
acquisition thereof and which is not created in anticipation of such
acquisition, unless such Lien was created to secure or provide for
the payment of any part of the purchase price of such 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 Securities where such Lien is created before
the date on which such company becomes a Significant Subsidiary;
(7) (a) Liens required by any contract, statute or regulation in order to
permit the Company or a Significant Subsidiary to perform any
contract or subcontract made by it with or at the request of a
governmental entity or any department, agency or instrumentality
thereof, or to secure partial, progress, advance or any other
payments by the Company or a Significant Subsidiary to such
governmental unit pursuant to the provisions of any contract, statute
or regulation;
(b) any Lien securing industrial revenue, development, pollution
control or similar bonds issued by or for the benefit of the Company
or a Significant Subsidiary, provided that such industrial revenue,
development, pollution control or similar bonds do not provide
recourse generally to the Company and/or such Significant Subsidiary;
and
(c) any Lien securing taxes or assessments or other applicable
governmental charges or levies;
(8) (a) any Lien which arises pursuant to 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 such
Lien arising pursuant to such legal process is effectively stayed and
the claims secured thereby 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 lien 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 such 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
(plus improvements on such property or 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
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(13) any Lien on stock created in connection with a mandatorily
convertible or exchangeable stock or debt financing, provided that
any such 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.
Notwithstanding the foregoing, the Company and/or a Significant Subsidiary
may create Liens over any of 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 such 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 Company will not enter into any business
operations other than:
(1) the transactions contemplated by the indenture, the Escrow
Agreement, the registration rights agreement and the 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 Company may enter into additional business operations from
time to time in the future if, prior to doing so, it obtains written
confirmation from the Rating Agencies that the entering into of such new
businesses will not result in a Ratings Downgrade.
The indenture further provides that the Company will cause its Significant
Subsidiaries to engage only in:
(1) those types of businesses and other activities in which the
Company 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, including,
without limitation, any geographic or other expansion of such businesses
or activities, and
(2) any other business or activity which is deemed necessary, useful
or desirable in connection with such existing businesses and activities or
any such permitted additional geographic or other expansions of such
businesses and activities.
OPERATIONAL COVENANTS
The indenture contains additional affirmative covenants (which are
collectively referred to in this prospectus as the "Operational Covenants")
requiring the Company and its Significant Subsidiaries to:
(1) comply with specified Project Documents (as defined in the
indenture) and maintain all utility facilities that are operated by the
Company 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 Company or any Significant Subsidiaries for so
long as such facilities remain in operation;
69
(3) preserve and maintain good title or valid leasehold rights in the
real property owned or leased by them from time to time and the personal
property owned by 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 occur in respect of
facilities which are operated and controlled by the Company or its
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 the
ability of the Company to perform its regularly scheduled payment obligations
under the Securities. The Operational Covenants will no longer be applicable to
the Securities, and the failure to comply with such 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:
(1) MidAmerican Holdings' senior secured long term debt securities
(the "Reference Securities") are rated Baa3 or better by Moody's and BBB-
or better by each of S&P and DCR (or, in any case, if such person ceases to
rate such Reference Securities for reasons outside the 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 Company as a replacement rating agency), and provided no
Event of Default or event which with notice or passage of time would
constitute an Event of Default shall exist on such date, and
(2) MidAmerican Holdings has redeemed, repurchased or defeased, by way
of covenant defeasance or other defeasance, all of its 9-1/2% Senior Notes
due 2006 issued pursuant to the terms of the indenture, dated as of
September 20, 1996, between MidAmerican Holdings and IBJ Schroder Bank &
Trust Company.
MODIFICATION OF THE INDENTURE
The indenture contains provisions permitting the Company and the trustee
to modify the indenture or any supplemental indenture or the rights of the
Holders of Securities of each series to be affected with the consent of the
Holders of a majority in aggregate principal amount of the then outstanding
Securities of each series to be affected, subject to the same conditions
described below under "--Modification or Waiver of Certain Covenants."
The indenture also contains provisions permitting the Company and the
trustee to amend the indenture by entering into one or more supplemental
indentures in certain circumstances without the consent of the Holders of any
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 Company or the replacement of the
trustee and
(4) to make any other changes that do not materially adversely affect
the rights of any Holders of Securities.
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EVENTS OF DEFAULT
An Event of Default with respect to the Securities is defined in the
indenture as:
(1) default for 30 days in the payment of any interest on the
Securities;
(2) default for three days in the payment of principal of or any
premium on the Securities at maturity, upon redemption, upon required
purchase, upon acceleration or otherwise;
(3) material default in the performance, or breach, of any material
covenant or obligation of the Company in the indenture (which shall not
include, among other things, the Operational Covenants) and continuance of
such material default or breach for a period of 90 days after written
notice specifying such default is given to the Company by the trustee or
to the Company and the trustee by the Holders of at least a majority in
aggregate principal amount of the 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 the financial condition of the Company and
its Subsidiaries, taken as a whole, and continuance of such default or
breach for a period of 90 days after written notice specifying such
default is given to the Company by the trustee or to the Company and the
trustee by the Holders of at least a majority in aggregate principal
amount of the 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 of the principal of any bond, debenture,
note or other evidence of indebtedness, in each case for money borrowed,
or in the payment of principal under 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 Company or any
Significant Subsidiary if such Indebtedness for Borrowed Money is not
Project Finance Debt and provides for recourse generally to the Company,
which default for payment of principal is in an aggregate principal amount
exceeding $75,000,000 when such indebtedness becomes due and payable,
whether at maturity, upon redemption or acceleration or otherwise, if such
default shall continue unremedied or unwaived for more than 30 Business
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; and
(7) the failure of the Company or a Significant Subsidiary generally
to pay its debts as they become due, or the admission in writing of its
inability to pay its debts generally, or the making of a general
assignment for the benefit of its creditors, or the institution of any
proceeding by or against the Company or a Significant Subsidiary (other
than any such proceeding brought against the Company or a Significant
Subsidiary that is dismissed within 180 days from the commencement
thereof) seeking to adjudicate it bankrupt or insolvent, or seeking
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 it or its debts under any law
relating to bankruptcy, insolvency, reorganization, moratorium or relief
of debtors, or seeking the entry of an order for relief or appointment of
an administrator, receiver, trustee, intervenor or other similar official
for it or for any substantial part of its property, or the taking of any
action by the Company or a Significant Subsidiary to authorize or consent
to any of the actions described in this subparagraph (7).
The Company 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, and of the measures it is taking to remedy that Event of Default.
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If an Event of Default with respect to the Securities shall occur and
be continuing, either the trustee or (x) in the case of an Event of Default
described under clause (1) or (2) under "Events of Default" above, the Holders
of at least 33% in aggregate principal amount of the Securities, or (y) in the
case of any other Event of Default, the Holders of a majority in aggregate
principal amount of the Securities, may declare the principal amount of the
Securities, and any interest accrued thereon, to be due and payable immediately.
At any time after such 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 Securities which has become due solely by reason of such declaration of
acceleration), then, and in every such case, the Holders of a majority in
aggregate principal amount of the outstanding Securities may, by written notice
to the Company and to the trustee, rescind and annul such declaration and its
consequences on behalf of all of the Holders, but no such rescission or
annulment shall extend to or affect any subsequent default or impair any right
consequent thereon.
No Holder of the Securities of a series shall 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 Holder has previously given written notice to the trustee of
a continuing Event of Default with respect to the Securities;
(b) the Holders of not less than 33% or a majority, as applicable, in
principal amount of the Securities shall have made written request to the
trustee to institute proceedings in respect of such Event of Default in
its own name as trustee;
(c) such Holder or Holders have offered the trustee indemnity
satisfactory to the trustee against the costs, expenses and liabilities to
be incurred in compliance with such request;
(d) the trustee, for 90 days after its receipt of such notice,
request and offer of indemnity, has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the trustee during that 90-day period by the Holders of a
majority in principal amount of the outstanding Securities.
As noted above, actions to be taken by the Holders of the Securities with
respect to an Event of Default, including giving notice to the Company and the
trustee of an Event of Default, declaring an acceleration of the Securities,
rescinding a declaration of acceleration, exercising remedies with respect to
the Collateral 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 Securities outstanding. For purposes of voting on
modifications to the indenture or supplemental indentures or the rights of
Holders of the Securities, the consent of a majority in aggregate principal
amount of the outstanding Securities of each series to be affected is required.
For these purposes, each of the 2001 Notes, the 2009 Notes and the Bonds will
be treated as a separate series of Securities 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 Securities 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.
OPTIONAL REDEMPTION
GENERAL
The Securities of each series will be redeemable in whole or in part, at
the 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 Securities being
redeemed; or
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(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 (assuming a
360-day year consisting of twelve 30-day months) at a discount rate equal
to the Treasury Yield, in the case of the 2001 Notes, the Treasury Yield
plus 15 basis points, in the case of the 2009 Notes and the Treasury Yield
plus 25 basis points, in the case of the Bonds,
plus, for (1) or (2) above, whichever is applicable, accrued interest on such
Securities to the date of redemption.
Notice of redemption shall be given not less than 30 days nor more than 60
days prior to the date of redemption. If fewer than all the Securities are to
be redeemed, selection of Securities of a series for redemption will be made by
the trustee in any manner the trustee deems fair and appropriate.
Unless the Company defaults in payment of the Redemption Price (as defined
below), from and after the Redemption Date, the Securities or portions of
Securities called for redemption will cease to bear interest, and the holders
of those Securities will have no right in respect of those Securities 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 Security (the "Redemption Price") is
determined by calculating the present value (the "Present Value") at such time
of each remaining payment of principal of or interest on such Security 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 Redemption Price of
such 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 Redemption Price of such Security will be such greater amount
(redemption at a premium). In no event may a Security 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 Security is calculated by applying to such payment the discount rate (the
"Discount Rate") applicable to such payment. The Discount Rate applicable at
any time to payment of principal of or interest on a Security equals the
equivalent yield to maturity at such time of a fixed rate United States
treasury security having a maturity comparable to the maturity of such payment
plus 0 basis points (in the case of the 2001 Notes), 15 basis points (in the
case of the 2009 Notes) and 25 basis points (in the case of the Bonds), such
yield being calculated on the basis of the interest rate borne by such United
States treasury security and the price at such time of such 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 Security will be selected or determined by an Independent
Investment Banker.
Whether the sum of the Present Values of the remaining payments of
principal of and interest on a Security to be redeemed optionally will or will
not exceed 100% of its principal amount and, accordingly, whether such Security
will be redeemed at par or at a premium will depend on the Discount Rate used
to calculate such Present Values. Such Discount Rate, in turn, will depend upon
the equivalent yield to maturity of a Relevant Security, which yield will
itself depend on the interest rate borne by, and the price of, the Relevant
Security. While the interest rate borne by the Relevant Security is fixed, the
price of the Relevant 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 Security is higher
than the level of interest rates for newly issued United States treasury
securities having a maturity comparable to such Relevant Security prevailing at
the time the Relevant Security was issued, the price of the Relevant 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 Security is lower
than the level of interest rates prevailing for newly issued United States
treasury securities having a maturity comparable to the Relevant Security at
the time the Relevant Security was issued, the price of the Relevant Security
will be higher than its issue price.
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Because the equivalent yield to maturity on a Relevant Security 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 Security above or below the levels
of interest rates for newly issued United States treasury securities having a
maturity comparable to the Relevant Security prevailing at the time of issue of
the Relevant 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. 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, will result in a decrease or an
increase, respectively, of the Present Value of a payment of principal of or
interest on a 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 Security proposed to be redeemed is
less than its principal amount, such Security may only be redeemed at par.
DEFEASANCE AND COVENANT DEFEASANCE
The Company, at its option, may elect (a) to be discharged from any and
all obligations in respect of a series of Securities ("Defeasance") (except in
each case for the obligations to, among other things, register the transfer or
exchange of such Securities, replace stolen, lost or mutilated 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) or (b) not to comply
with certain covenants ("Covenant Defeasance") of the indenture with respect to
a series of Securities described above under "Consolidation, Merger,
Conveyance, Sale or Lease," "Limitation on Distributions", "Limitation on
Indebtedness of the Company and MHC", "Limitation on Liens", "Limitation on
Business Activities" and "Operational Covenants"; if, in either case, the
Company irrevocably deposits with the trustee, as trust funds in trust
specifically pledged as security for, and dedicated solely to, the benefit of
the Holder or Holders of such Securities of such series, (1) money or (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, or (3) a combination thereof, 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 Securities of such series on the dates
such payments are due in accordance with the terms of the Securities of such
series, or if the Company has designated a Redemption Date pursuant to the next
paragraph, to and including the Redemption Date so designated by the Company.
Other conditions precedent to effecting Defeasance or Covenant Defeasance
include:
(1) that the Securities 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 such deposit)
with respect to the Securities of such series shall have occurred and be
continuing on the date of such deposit; and
(3) such Defeasance or Covenant Defeasance shall not result in the
breach or violation of, or constitute a default under, any other material
agreement or instrument by which the Company is bound.
To exercise any such option, the Company is required to deliver to the
trustee:
(a) an opinion of independent counsel of recognized standing to the
effect that the Holders will not recognize income, gain or loss for U.S.
federal income tax purposes as a result of such deposit, which in the case
of Defeasance must be based on a change in law or a ruling by the U.S.
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 Securities of such series.
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If the Company wishes 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 Securities of a series to and including a Redemption
Date on which all of the outstanding Securities of such series are to be
redeemed, such Redemption Date shall be irrevocably designated by a board
resolution delivered to the trustee on or before the date of deposit of such
money or U.S. Government Obligations, and such board resolution shall be
accompanied by an irrevocable Company request that the trustee give notice of
such redemption in the name and at the expense of the Company not less than 30
nor more than 60 days prior to such Redemption Date in accordance with the
indenture.
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 such application, then any obligations from which the
Company had been discharged or released shall be revived and reinstated as
though no such deposit of moneys in trust had occurred, until such time as the
trustee or paying agent is permitted so to apply all of such moneys deposited
in trust.
MODIFICATION OR WAIVER OF CERTAIN COVENANTS
The Company may omit in any particular instance to comply with any term,
provision or condition in the indenture with respect to the Securities of a
series if before the time for such compliance the Holders of at least a
majority in aggregate principal amount of the outstanding Securities of that
series shall, by act of such Holders, either modify the covenant or waive such
compliance in such instance or generally waive compliance with such term,
provision or condition; provided that no such modification shall, without the
consent of each Holder of Securities of that series:
(1) change the stated maturity upon which the principal of or the
interest on the Securities of that series is due and payable;
(2) reduce the principal amount or redemption price of the Securities
of that series or the rate of interest on the Securities of that series;
(3) change any place of payment or the currency in which the
Securities of that series or any premium or the interest on the Securities
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 Securities (or, in
the case of redemption, on or after the Redemption Date for those
Securities); or
(5) reduce the percentage in principal amount of the outstanding
Securities of that series, the consent of Holders of which is required for
any waiver of compliance with certain provisions of the indenture or
certain defaults under the indenture and their consequences provided for
in the indenture.
The Securities owned by the Company or any of its affiliates shall be deemed
not to be outstanding for, among other purposes, consenting to any such
modification.
TRANSFER
The Securities will be issued in registered form and will be transferable
only upon the surrender of the Securities being transferred for registration of
transfer. The Company 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."
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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 Company as
registrar and paying agent with respect to the Securities.
GOVERNING LAW
The indenture and the Securities 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.
BOOK-ENTRY, DELIVERY AND FORM
GENERAL
Except as described below, the Securities will be issued in the form of
one or more fully registered Securities in global form ("Global Notes"). The
Global Notes will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of the Depositary 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 Depositary or its nominee will
credit, on its book-entry registration and transfer system, the principal
amount of Securities sold to qualified institutional buyers pursuant to Rule
144A represented by such Global Notes to the account of institutions that have
accounts with the Depositary or its nominee participants (the "DTC
Participants") and Euroclear will credit on its book-entry registration and
transfer system the number of Securities sold to certain persons in offshore
transactions in reliance on Regulation S under the Securities Act also
represented by Global Notes 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"). Ownership of
beneficial interests in the Global Notes will be limited to Participants or
persons that may hold interests through Participants. Ownership of beneficial
interests in the Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depositary
or its nominee (with respect to the Participants' interests) for such Global
Notes, or by Participants or persons that hold interests through Participants
(with respect to beneficial interests of persons other than Participants). The
laws of some jurisdictions may require that certain purchasers of securities
take physical delivery of those securities in definitive form. Such laws may
impair the ability to transfer or pledge beneficial interests in the Global
Notes.
So long as the Depositary or its nominee is the registered holder of any
Global Notes, the Depositary or its nominee, as the case may be, will be
considered the sole legal owner of such Securities for all purposes under the
indenture and the Securities. Except as described below, owners of beneficial
interests in Global Notes will not be entitled to have those Global Notes
registered in their names, will not receive or be entitled to receive physical
delivery in exchange for those Global Notes and will not be considered to be
the owners or holders of those Global Notes for any purpose under the indenture
or the Securities. The Company understands that under existing industry
practice, if an owner of a beneficial interest in a Global Note desires to take
any action that the Depositary, as the holder of that Global Note, is entitled
to take, the Depositary would authorize the Participants to take such action,
and that the Participants would authorize beneficial owners owning through such
Participants to take such action or would otherwise act upon the instructions
of beneficial owners owning through them.
The Company 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. As soon as practicable thereafter, the trustee will make such
payments to the Depositary or its nominee, as the case may be, as the
registered owner of the Global Notes representing such Securities in accordance
with existing arrangements between the trustee and the Depositary.
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The Company expects that the Depositary or its nominee, upon receipt of
any payment of principal or interest in respect of the Global Notes, will
credit immediately the accounts of the related Participants with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Note as shown on the records of the Depositary. The
Company also expects that payments by Participants to owners of beneficial
interests in the Global Notes held through such 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.
None of the Company, the trustee, or any payment agent for the Global
Notes will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
any of the Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for other aspects of
the relationship between the Depositary and its Participants or the
relationship between such Participants and the owners of beneficial interests
in the Global Notes owning through such Participants.
Unless and until exchanged in whole or in part for Securities in
definitive form in accordance with the terms of the Securities, the Global
Notes may not be transferred except as a whole by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary of any such nominee to a
successor of the Depositary or a nominee of each successor.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among Participants of the
Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
trustee nor the Company will have any responsibility for the performance by the
Depositary or its Participants or indirect Participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the trustee may conclusively rely on, and shall be protected in
relying on, instructions from the Depositary 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 shall be exchangeable for corresponding certificated
Securities registered in the name of persons other than the Depositary or its
nominee only if:
(1) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for any of the Global Notes or at any
time ceases to be a clearing agency registered under the Exchange Act;
(2) there shall have occurred and be continuing an Event of Default
with respect to the applicable Securities; or
(3) the Company executes and delivers to the trustee, an order that
the Global Notes shall be so exchangeable.
Any certificated Securities will be issued only in fully registered form, and
shall be issued without coupons in denominations of $1,000 and integral
multiples of $1,000. Any certificated Securities issued will be registered in
the names and in the denominations requested by the Depositary.
THE CLEARING SYSTEM
The Depositary has advised the Company as follows: The Depositary 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 of Section 17A of the
Exchange Act. The Depositary was created to hold securities of institutions
that have accounts with the Depositary and to facilitate the clearance and
settlement of securities transactions among it Participants in such securities
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's Participants include securities brokers and dealers, bank, trust
companies, clearing corporations and certain other organizations. Access to the
Depositary's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, whether directly or indirectly.
CERTAIN DEFINITIONS
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 Company
and its Subsidiaries which, under GAAP, are or will be required to be
capitalized, in each case taken at the amount thereof accounted for as
indebtedness in conformity with such principles.
"Comparable Treasury Issue" means, in the case of the 2001 Notes, the 2009
Notes and the Bonds, the United States Treasury security selected by an
Independent Investment Banker as having a maturity comparable to the remaining
term of such 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.
"Comparable Treasury Price" means, with respect to any 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 Day preceding such 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" or (2) if such release (or any successor release) is not
published or does not contain such prices on such Business Day, the Reference
Treasury Dealer Quotation for such Redemption Date.
"Consolidated Current Liabilities" means the consolidated current
liabilities of the Company and its Subsidiaries, but excluding the current
portion of long term Indebtedness which would otherwise be included therein, 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 Company and
its Subsidiaries, as determined on a consolidated basis in conformity with
GAAP.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of the Company's (1) Consolidated Net Operating Income, (2)
Consolidated Interest Expense, (3) income taxes and deferred taxes (other than
income taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (4) depreciation expense,
(5) amortization expense and (6) all other non-cash items reducing Consolidated
Net Operating Income, less all non-cash items increasing Consolidated Net
Operating Income, all as determined on a consolidated basis in conformity with
GAAP; provided that, to the extent that the Company has any Subsidiary that is
not a wholly owned Subsidiary, Consolidated EBITDA shall be reduced by an
amount equal to the Consolidated Net Operating Income of such Subsidiary
multiplied by the quotient of (A) the number of shares of outstanding common
stock of such Subsidiary not owned on the last day of such period by the
Company or any
78
Subsidiary of the Company divided by (B) the total number of shares of
outstanding common stock of such Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness for Borrowed Money (including
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; and all commissions, discounts and
other fees and charges owed with respect to bankers' acceptance financing) and
the net costs associated with Interest Rate Agreements and 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 clause (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, to
the extent that the Company has any Subsidiary that is not a wholly owned
Subsidiary, Consolidated Interest Expense shall be reduced by an amount equal
to such interest expense of such Subsidiary multiplied by the quotient of (A)
the number of shares of outstanding common stock of such Subsidiary not owned
on the last day of such period by the Company or any Subsidiary of the Company
divided by (B) the total number of shares of outstanding common stock of such
Subsidiary on the last day of such period.
"Consolidated Net Operating Income" means, for any period, the aggregate
of the net operating income (or loss) of the Company and its Subsidiaries for
such period, as determined on a consolidated basis in conformity with GAAP;
provided that the following items shall be excluded from any calculation of
Consolidated Net Operating Income (without duplication):
(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 Company or another Subsidiary of the Company during such 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 such Subsidiary of such 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 thereof as a result of commercial appraisals,
price level restatement or otherwise) appearing on the most recently available
consolidated balance sheet of the Company and its Subsidiaries (provided that
such balance sheet is of a date not more than 60 days prior to a Measurement
Date) 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
shall not be construed to include such revaluations), less the aggregate of the
Consolidated Current Liabilities of the Company appearing on such 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.
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"Distribution" means any dividend, distribution or payment (including by
way of redemption, repurchase, retirement, return or repayment) in respect of
shares of 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.
"Excluded Subsidiary" means any Subsidiary of the Company:
(1) in respect of which neither the Company nor any Subsidiary of the
Company (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 member of the
Group) other than in respect of any statutory obligation and the
Subsidiaries of which are all Excluded Subsidiaries; and
(2) which has been designated as such by the Company by written
notice to the trustee; provided that the Company may give written notice
to the trustee at any time that any Excluded Subsidiary is no longer an
Excluded Subsidiary whereupon it shall 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 such Indebtedness.
"Indebtedness" means, with respect to the Company or any of any its
Subsidiaries at any date of determination (without duplication):
(1) all Indebtedness for Borrowed Money;
(2) all obligations in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto);
(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 such property in service or taking delivery and
title thereto or the completion of such 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 Company or any
of its Subsidiaries, whether or not such indebtedness is assumed; provided
that the amount of such Indebtedness shall be the lesser of (A) the fair
market value of such asset at such 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 such indebtedness is
guaranteed by the Company or any of its Subsidiaries; and
(7) to the extent not otherwise included in this definition,
obligations under Currency, Interest Rate or Commodity Agreements.
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The amount of Indebtedness at any date shall be the 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 maximum
liability of any contingent obligations of the types specified in the preceding
clauses (1) through (7) at such date; provided that the amount outstanding at
any time of any Indebtedness issued with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Indebtedness For Borrowed Money" means any indebtedness (whether being
principal, premium, interest or other 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 such term shall exclude:
(a) any indebtedness relating to any accounts receivable
securitizations, (x) any Indebtedness of the type permitted to be secured
by Liens pursuant to clause (13) under the caption "--Limitation on Liens"
contained in this prospectus above;
(b) any Trust Preferred Securities which are issued and outstanding
on the date of original issue of the Securities or any extension, renewal
or replacement (or successive extensions, renewals or replacements), as a
whole or in part, of any such existing Trust Preferred Securities, for
amounts not exceeding the principal amount or liquidation preference of
the Trust Preferred Securities so extended, renewed or replaced, and
(c) any Trust Preferred Securities 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, 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, CalEnergy
or any of CalEnergy's subsidiaries, except that an Independent Manager may
own shares of the capital stock of, or membership interests in, CalEnergy
or any of its direct or indirect subsidiaries having a value, at all times
during which such person is the Independent Manager, not exceeding 1% of
such person's assets;
(2) a director, officer, employee, manager, trustee, partner,
affiliate, family member, major supplier, major contractor or major
creditor of the Company or of any of the Company's affiliates (except
solely by virtue of serving as an Independent Manager of the Company); or
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(3) a person who, directly or indirectly, controls (except solely by
virtue of serving as an Independent Manager of the Company) (A) the
Company, (B) any affiliate of the Company or (C) any person or entity set
forth in clause (2) above.
The term "major supplier" means a person or entity to which the Company or its
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
Company and its creditors. The term "major contractor" means a person or entity
that has contracts with the Company 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 Company and its creditors. The term
"major creditor" means a person or entity to which the Company or its
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
Company or its 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 include adoptive relationships. The term "affiliate"
means any person or entity controlling, controlled by, or under common control
with the Company, whether by virtue of the holding of voting securities, the
election of members of the Board of Directors or another governing body or
otherwise.
"Interest Coverage Ratio" means, with respect to the Company on any
Measurement Date, the ratio of (1) the aggregate amount of Consolidated EBITDA
of the Company for the four fiscal quarters for which financial information in
respect thereof is available immediately prior to such Measurement Date to (2)
the aggregate Consolidated Interest Expense during such four fiscal quarters.
"Investments" in any Person 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. Investments exclude advances to customers and suppliers in the
ordinary course of business.
"Leverage Ratio" means the ratio of Consolidated Debt to Total Capital,
calculated on the basis of the most recently available consolidated balance
sheet of 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) prepared in accordance with GAAP.
"Lien" means any mortgage, lien, pledge, security interest or other
encumbrance; provided, however, that the term "Lien" shall 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.
"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
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of which the person or persons to whom any such Indebtedness is or may be owed
by the relevant borrower (whether or not a member of the Group) has or have no
recourse whatsoever to any member of the Group (other than an Excluded
Subsidiary) for the repayment thereof other than:
(a) recourse to such member of the Group 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, such project or asset; and/or
(b) recourse to such member of the Group for the purpose only of
enabling amounts to be claimed in respect of such Indebtedness in an
enforcement of any encumbrance given by such member of the Group over
such 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 such project or asset
over its shares or the like in the capital of, or other investment
in, the borrower or in the owner of such project or asset) to secure
such Indebtedness, provided that the extent of such recourse to such
member of the Group is limited solely to the amount of any recoveries
made on any such enforcement; and/or
(c) recourse to such borrower generally, or directly or
indirectly to a member of the Group, 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 thereof 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, 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, (2) Moody's and (3) DCR, and any of their
respective Subsidiaries or successors, or, in any case, if such person ceases
to rate any series of Securities for reasons outside the control of the
Company, any other "nationally recognized statistical rating organization"
(within the meaning of Rule 15c3-l(c)(2)(vi)(F) under the Securities Exchange
Act of 1934, as amended) selected by the Company 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. government securities
dealer in New York City appointed by the Company.
"Reference Treasury Dealer Quotation" means, with respect to the Reference
Treasury Dealer and any Redemption Date, the average, as determined by the
Company, 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 Company by such Reference Treasury Dealer at 5:00 p.m. on the
third Business Day preceding such Redemption Date).
"S&P" means Standard & Poor's Ratings Group, and any of its Subsidiaries
or successors.
83
"Significant Subsidiary" means, at any particular time, any Subsidiary of
the Company whose gross assets or gross revenues (having regard to the
Company's direct and/or indirect beneficial interest in the shares, or the
like, of that Subsidiary) represent at least 25% of the consolidated gross
assets or, as the case may be, consolidated gross revenues of the Company.
"Subsidiary" means, with respect to any 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 thereof is at the time owned, directly or indirectly, by (1) such
person, (2) such person and one or more Subsidiaries of such person or (3) one
or more Subsidiaries of such person.
"Total Capital" of any Person 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 Person and its consolidated Subsidiaries
(excluding any preferred stock in stockholder's equity) and (c) preferred stock
and Trust Preferred Securities of such Person and its consolidated
Subsidiaries.
"Treasury Yield" means, with respect to any 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.
"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 the case of clause (a) or (b), is not callable or redeemable
at the option of the issuer thereof; 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 such bank for the account of the holder of such depositary receipt
or with respect to any specific payment of principal of or interest on any such
security held by any such bank, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such 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 such
depository receipt.
84
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange Securities 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. 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 Securities received in exchange for initial
Securities if the initial Securities 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 Securities 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
Securities offered by this prospectus. Exchange Securities 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 Securities 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. Any broker-dealer that resells exchange Securities 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 Securities
may be deemed to be an "underwriter" within the meaning of the Securities Act,
and any profit on any resale of exchange Securities 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.
85
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 Securities for exchange Securities in the exchange
offer. This opinion is based on:
[] the facts described in the registration statement of which this
prospectus is a part;
[] the Internal Revenue Code of 1986, as amended;
[] current, temporary and proposed treasury regulations promulgated
under the Internal Revenue Code;
[] the legislative history of the Internal Revenue Code;
[] current administrative interpretations and practices of the Internal
Revenue Service; and
[] 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 Securities for exchange Securities.
Certain holders may be subject to special rules not discussed below,
including, without limitation:
[] insurance companies;
[] financial institutions or broker-dealers;
[] tax-exempt organizations;
[] 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;
[] foreign corporations or partnerships; and
[] 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 Securities for exchange Securities will be treated
as a "non-event" for federal income tax purposes, because the exchange
Securities will not be considered to differ materially in kind or extent from
the initial Securities. Therefore, no material federal income tax consequences
will result to you from exchanging initial Securities for exchange Securities.
86
LEGAL MATTERS
The validity of the exchange Securities 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.
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 to 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
and June 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 to Securities Act with respect to our offering of
the exchange Securities. This prospectus does not contain all of the
information in the registration statement. You will find additional information
about us and the exchange Securities 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 material 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.
87
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
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............................................ $1,169,810 $1,126,300 $1,099,008
Regulated gas................................................. 429,870 536,306 536,753
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......................... 225,736 235,760 234,317
Cost of gas sold.......................................... 243,451 346,016 345,014
Other operating expenses.................................. 470,328 438,007 358,579
Maintenance............................................... 110,387 100,543 91,131
Depreciation and amortization............................. 182,211 170,540 164,592
Property and other taxes.................................. 87,276 90,651 81,715
---------- ---------- ----------
1,319,389 1,381,517 1,275,348
---------- ---------- ----------
Nonregulated:
Cost of sales............................................. 144,417 276,711 249,453
Other..................................................... 40,706 34,583 37,004
---------- ---------- ----------
185,213 311,294 286,457
---------- ---------- ----------
Total operating expenses.................................. 1,504,512 1,692,811 1,561,805
---------- ---------- ----------
OPERATING INCOME.............................................. 271,412 276,726 349,399
---------- ---------- ----------
NON-OPERATING INCOME
Interest income............................................... 9,262 5,318 4,012
Dividend income............................................... 10,251 13,792 16,985
Realized gains and losses on securities, net.................. 11,204 7,798 1,895
Other, net.................................................... 5,096 15,891 (9,781)
---------- ---------- ----------
35,813 42,799 13,111
---------- ---------- ----------
FIXED CHARGES
Interest on long-term debt.................................... 80,908 89,898 102,909
Other interest expense........................................ 12,682 10,034 10,941
Preferred dividends of subsidiaries........................... 12,932 14,468 10,689
Allowance for borrowed 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.................................................. 76,926 68,390 98,422
---------- ---------- ----------
INCOME FROM CONTINUING 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.................................................... $ 131,318 $ 135,104 $ 131,046
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING............................. 94,038 98,058 100,752
EARNINGS PER COMMON SHARE - BASIC:
Continuing operations......................................... $ 1.35 $ 1.42 $ 1.43
Discontinued operations....................................... 0.05 (0.04) (0.13)
---------- ---------- ----------
Earnings per average common share............................. $ 1.40 $ 1.38 $ 1.30
========== ========== ==========
EARNINGS PER COMMON SHARE - DILUTED:
Continuing operations......................................... $ 1.35 $ 1.42 $ 1.43
Discontinued operations....................................... 0.04 (0.04) (0.13)
---------- ---------- ----------
Earnings per average common share............................. $ 1.39 $ 1.38 $ 1.30
========== ========== ==========
DIVIDENDS DECLARED PER 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.................................................... $ 131,318 $ 135,104 $ 131,046
--------- --------- ---------
Other Comprehensive Income, Net
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during period............... (14,743) 223,927 1,501
Less reclassification adjustment for realized gains
(losses) reflected in net income during 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.................... (16,945) 140,573 3,645
--------- --------- ---------
Comprehensive Income.......................................... $ 114,373 $ 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.......................................................... $4,255,058 $4,084,920
Gas ............................................................. 786,169 756,874
---------- ----------
5,041,227 4,841,794
Less accumulated depreciation and amortization.................... 2,426,564 2,275,099
---------- ----------
2,614,663 2,566,695
Construction work in progress..................................... 26,369 55,418
---------- ----------
2,641,032 2,622,113
---------- ----------
POWER PURCHASE CONTRACT........................................... 150,401 173,107
---------- ----------
CURRENT ASSETS
Cash and cash equivalents......................................... 6,107 10,468
Receivables, less reserves of $503 and $347, respectively......... 181,817 207,471
Inventories....................................................... 94,771 86,091
Other............................................................. 40,430 18,452
---------- ----------
323,125 322,482
---------- ----------
INVESTMENTS AND NONREGULATED PROPERTY, NET........................ 762,060 799,524
---------- ----------
INVESTMENT IN DISCONTINUED OPERATIONS............................. 43,907 -
---------- ----------
OTHER ASSETS...................................................... 323,811 360,865
---------- ----------
TOTAL ASSETS...................................................... $4,244,336 $4,278,091
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders' equity....................................... $1,200,950 $1,301,286
MidAmerican preferred securities, not subject to
mandatory redemption........................................... 31,759 31,763
Preferred securities, subject to mandatory redemption:
MidAmerican preferred securities............................... 50,000 50,000
MidAmerican-obligated preferred securities of subsidiary trust
holding solely MidAmerican junior subordinated 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..................................................... 339,826 138,054
Current portion of long-term debt................................. 105,995 144,558
Current portion of power purchase contract........................ 15,034 14,361
Accounts payable.................................................. 167,348 145,855
Taxes accrued..................................................... 107,332 92,629
Interest accrued.................................................. 15,533 22,355
Other............................................................. 51,316 43,641
---------- ----------
802,384 601,453
---------- ----------
Other Liabilities
Power purchase contract........................................... 68,093 83,143
Deferred income taxes............................................. 733,448 756,920
Investment tax credit............................................. 77,421 83,127
Other............................................................. 240,728 236,188
---------- ----------
1,119,690 1,159,378
---------- ----------
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..................................................... $ 131,318 $ 135,104 $ 131,046
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization............................... 200,920 197,454 190,511
Net decrease in deferred income taxes and
investment tax credit, net................................ (24,800) (71,191) (7,894)
Amortization of other 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.... (24,629) (9,996) (10,132)
Other-than-temporary decline in value of 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.............................. 42,046 32,973 (53,752)
Other....................................................... (17,092) (3,883) 22,786
--------- --------- ---------
Net cash provided......................................... 334,136 392,245 321,387
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures.............................. (193,354) (166,932) (154,198)
Quad Cities Nuclear Power Station decommissioning trust fund... (11,409) (9,819) (8,607)
Deferred energy efficiency expenditures........................ - (12,258) (20,390)
Nonregulated capital expenditures.............................. (45,466) (14,066) (55,788)
Purchase of securities......................................... (143,324) (159,770) (198,947)
Proceeds from sale of securities............................... 217,459 180,890 243,290
Proceeds from sale of assets and other investments............. 38,162 57,433 33,285
Investment in discontinued operations.......................... (39,743) 181,321 (5,984)
Other investing activities, net................................ (3,618) (1,360) 8,308
--------- --------- ---------
Net cash provided (used) ................................... (181,293) 55,439 (159,031)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid.......................................... (113,144) (117,605) (120,770)
Issuance of long-term debt, net of issuance cost............... 158,414 - 99,500
Retirement of long-term debt, including reacquisition cost..... (302,477) (122,300) (136,616)
Reacquisition of preferred shares.............................. (4) (6) (58,176)
Reacquisition of common shares................................. (101,765) (96,618) -
Issuance of preferred shares, net of issuance cost............. - - 96,850
Increase (decrease) in MidAmerican Capital Company
unsecured revolving credit facility......................... - (174,500) 44,500
Net increase (decrease) in notes payable....................... 201,772 (23,936) (22,810)
--------- --------- ---------
Net cash 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 32,915
--------- --------- ---------
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 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 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 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 29,030
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
---- ----
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 notes:
8.75% Series, due 2002............................................ 240 240
6.5% Series, due 2001............................................. 100,000 100,000
6.375% Series, due 2006........................................... 160,000 -
6.4% Series, due 2003 through 2007................................ 2,000 2,000
Obligation under capital lease........................................ 1,539 2,104
Unamortized debt premium and discount, net............................ (1,925) (3,192)
---------- ----------
Total utility.................................................. 869,553 919,211
---------- ----------
Nonregulated subsidiaries notes:
7.76% Series, due 1999............................................ - 45,000
8.52% Series, due 2000 through 2002............................... 70,000 70,000
---------- ----------
Total nonregulated subsidiaries................................ 70,000 115,000
---------- ----------
939,553 40.5% 1,034,211 41.1%
---------- ----- ---------- -----
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
--------- --------- ---------
NET INCOME........................................................... 131,318 135,104 131,046
--------- --------- ---------
DEDUCT (ADD):
Loss on repurchase of common shares.................................. 72,470 49,174 -
Dividends declared on common shares of $1.20......................... 113,144 117,605 120,770
Other................................................................ - - (106)
--------- --------- ---------
185,614 166,779 120,664
--------- --------- ---------
END OF YEAR.......................................................... $ 355,000 $ 409,296 $ 440,971
========= ========= =========
The accompanying notes are an integral part of these statements.
F-7
MHC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(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).
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) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and
its subsidiaries. For 1998, certain nonregulated operations of MidAmerican,
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) REGULATION:
MidAmerican'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. 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 such 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 Assets in the
Consolidated Balance Sheets, represent probable future revenue to MidAmerican
because these costs are expected to be recovered in charges to utility customers
(in thousands):
F-8
1998 1997
---- ----
Deferred income taxes........................ $148,036 $143,851
Energy efficiency costs...................... 74,509 111,471
Debt refinancing costs....................... 40,233 34,923
FERC Order 636 transition costs.............. - 9,279
Environmental costs.......................... 23,427 20,417
Enrichment facilities decommissioning........ 8,659 8,781
Unamortized costs of retired plant .......... 3,537 5,771
Other........................................ 7,088 4,796
-------- --------
Total.................................... $305,489 $339,289
======== ========
(d) REVENUE RECOGNITION:
Revenues are recorded as services are rendered to customers. MidAmerican
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 such 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'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 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) DEPRECIATION AND AMORTIZATION:
MidAmerican'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............................... 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) INVESTMENTS AND NONREGULATED PROPERTY, NET:
Investments, managed primarily through the Company's nonregulated
subsidiaries, and nonregulated property, net include the following amounts as of
December 31 (in thousands):
F-9
1998 1997
---- ----
Marketable securities............................ $393,554 $467,207
Equipment leases................................. 72,068 73,928
Nuclear decommissioning trust fund............... 116,973 93,251
Energy projects.................................. 17,891 21,180
Special-purpose funds............................ 9,069 10,057
Real estate...................................... 42,413 42,424
Corporate owned life insurance................... 43,945 33,471
Coal transportation property..................... 12,538 14,516
Communications................................... 19,750 10,000
Security ........................................ 9,664 8,551
Other............................................ 24,195 24,939
-------- --------
Total.......................................... $762,050 $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 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) CONSOLIDATED STATEMENTS OF CASH FLOWS:
The Company 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............................... $ 35,654 $ 34,544 $(84,802)
Inventories............................... (8,680) 4,773 (5,629)
Other current assets ..................... (21,978) (7,421) 6,732
Accounts payable.......................... 21,493 (23,950) 47,751
Taxes accrued............................. 14,703 10,375 356
Interest accrued.......................... (6,821) (6,158) (2,122)
Other current liabilities................. 7,675 20,810 (16,038)
-------- -------- --------
Total................................... $ 42,046 $ 32,973 $(53,752)
======== ======== ========
(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 purchases one-half of the output
of the 778-megawatt Cooper Nuclear Station (Cooper). The Consolidated Balance
Sheets include a liability for MidAmerican's fixed obligation to pay 50% of
NPPD's Nuclear Facility Revenue Bonds and other fixed liabilities. A like amount
representing MidAmerican'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 NPPD contract. Beginning July 11, 1997, the Iowa portion of capital
improvement costs is recovered currently from customers and is expensed as
incurred. MidAmerican began charging the remaining Cooper capital improvement
costs to expense 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 incurs in relation to its long-term power purchase contract
with NPPD 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) ACCOUNTING FOR DERIVATIVES:
1) Preferred Stock Hedge Instruments:
The Company 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 Company 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 Company does not purchase
or sell put options for speculative purposes. The Company'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 Company held put options with a
notional value of $89.1 million.
2) Gas Futures Contracts and Swaps:
The Company 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 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's gas futures contracts are $(1.9) million and $(0.4) million as of
December 31, 1998 and 1997, respectively.
The Company 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 Company held the following
hedging instruments:
Weighted Average
Notional Volume Market Value
(MMBtu) (Per MMBtu)
--------------- ------------
Natural Gas Futures (Long).................... 6,970,000 $1.857
Natural Gas Futures (Short)................... 7,320,000 $1.854
Natural Gas Swaps (Variable to Fixed)......... 16,322,181
Weighted average variable price...... $1.922
Weighted average fixed price......... $2.098
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 Company 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 certain conditions are met, such 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 Company is in the process of
evaluating the impact of this accounting pronouncement.
F-12
(j) GOODWILL:
The Company'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................................... 8,816 7,763
------- -------
$26,477 $26,593
======= =======
Goodwill is amortized using the straight-line method. Amortization expense
included in the Company'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, is 18
years.
(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'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
the Company 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'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) $223,927 $ 1,501
Income tax (expense)/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............................... 11,204 7,787 (4,612)
Income tax (expense)/benefit...................... (3,921) (2,722) 1,943
-------- -------- --------
7,283 5,065 (2,669)
-------- -------- --------
Other Comprehensive Income............................ $(16,945) $140,573 $ 3,645
======== ======== =======
(2) LONG-TERM DEBT:
The Company'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'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, 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 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
had undivided interests at December 31, 1998, in jointly owned generating plants
as shown in the table below.
The dollar amounts below represent MidAmerican'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'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. 1 & 2 No. 3 No. 3 No. 4 No. 1 No. 1
----------- ---- ------ ---- ------- ------
In service date 1972 1975 1978 1979 1981 1983
Utility plant in service $242 $127 $298 $161 $210 $530
Accumulated depreciation $ 98 $ 82 $175 $ 92 $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%
(4) COMMITMENTS AND CONTINGENCIES:
(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, such expenditures are estimated to be
approximately $9 million.
(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 is evaluating 27 properties which were, at one time, sites of
gas manufacturing plants in which it may be a potentially responsible party
(PRP). 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 has any responsibility for remedial action. MidAmerican
is currently conducting field investigations at eighteen sites and has conducted
interim removal actions at five 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.
F-14
MidAmerican's estimate of probable remediation costs for the sites
discussed above as of December 31, 1998, was $24 million. This estimate has been
recorded as a liability and a regulatory asset for future recovery. The ICC has
approved 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.
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 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 remediation 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.
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) 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 NAAQS for ozone and
fine particulate matter.
The impact of the new standards on MidAmerican will depend on the
attainment status of the areas surrounding MidAmerican's operations and
MidAmerican's relative contribution to the nonattainment status. The attainment
status of areas in the state of Iowa will not be known for two to three years.
However, if MidAmerican's operations are determined to contribute to
nonattainment, 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) LONG-TERM POWER PURCHASE CONTRACT:
Payments to NPPD cover one-half of the fixed and operating costs of Cooper
(excluding depreciation but including debt service) and MidAmerican'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 pays
one-half of NPPD's decommissioning funding related to Cooper.
The debt amortization and Department of Energy (DOE) enrichment plant
decontamination and decommissioning component of MidAmerican's payments to NPPD
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'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) DECOMMISSIONING COSTS:
Based on site-specific decommissioning studies that include
decontamination, dismantling, site restoration and dry fuel storage cost,
MidAmerican'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. Such costs are reflected as
base rates in Iowa tariffs.
For purposes of developing a decommissioning funding plan for Cooper, NPPD
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's share of funds set aside by NPPD 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 NPPD 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. NPPD
is recognizing decommissioning costs over the life of the power sales contract.
MidAmerican makes payments to NPPD related to decommissioning Cooper. These
payments are included in MidAmerican's power purchase costs. The Cooper
decommissioning component of MidAmerican's payments to NPPD 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 NPPD 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'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'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) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss
associated with its interest in Quad Cities Station and Cooper through a
combination of insurance purchased by NPPD (the owner and operator of Cooper)
and Commonwealth Edison (ComEd, the joint owner and operator of Quad Cities
Station), insurance purchased directly by MidAmerican, 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.
NPPD and ComEd each purchase nuclear liability insurance for Cooper and
Quad Cities Station, respectively, in the maximum available amount of $200
million. In 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'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 and NPPD
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 and NPPD are covered for their
respective 50% obligation in the event of a loss totaling up to $2.75 billion.
MidAmerican 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, and the property coverages purchased by
ComEd, which includes the interests of MidAmerican, 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 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 NPPD
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) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
MidAmerican 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 Company expects to supplement these coal contracts with
spot market purchases to fulfill its future fossil fuel needs.
MidAmerican 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) OPERATING LEASE COMMITMENTS:
The Company 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.
(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
------ ------ ------ ------ ------ ------
Balance, beginning of year............ $753,873 95,301 $801,431 100,752 $801,227 100,752
Changes due to:
Repurchase of common shares....... (29,295) (4,099) (47,444) (5,451) - -
Stock options..................... (168) - 210 - 623 -
Capital stock expense ........... 368 - (289) - (419) -
Other............................. - - (35) - - -
-------- ------ -------- ------ -------- -------
Balance, end of year.................. $724,778 91,202 $753,873 95,301 $801,431 100,752
======== ====== ======== ====== ======== =======
(6) RETIREMENT PLANS:
The Company 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 Company currently provides certain health care and life insurance
(postretirement) benefits for retired employees. Under the plans, substantially
all of the Company's employees may become eligible for these benefits if they
reach retirement age while working for the Company. However, the Company retains
the right to change these benefits anytime at its discretion. MidAmerican
expenses postretirement benefit costs on an accrual basis and includes
provisions for such costs in rates.
The Company 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 Cost
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Service cost................................ $ 11,284 $ 10,092 $ 12,323 $ 3,558 $ 2,680 $ 2,118
Interest cost............................... 29,941 29,623 31,109 9,344 8,822 8,341
Expected return on plan assets.............. (42,578) (37,617) (33,635) (3,651) (2,573) (1,895)
Amortization of net transition obligation... (2,591) (2,591) (2,591) 5,291 5,291 5,291
Amortization of prior service cost.......... 1,871 1,871 3,183 650 650 -
Amortization of prior year (gain) loss...... (2,802) (1,797) 806 - (298) -
Regulatory deferral of incurred cost........ - 5,423 568 - 4,888 5,112
-------- --------- -------- ------- ------- -------
Net periodic (benefit) cost................. $ (4,875) $ 5,004 $ 11,763 $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 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 Company 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.
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's Consolidated Balance Sheets as of December 31 (dollars in thousands):
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
--------------------------
1998 1997
--------- ------------
Assumptions used were:
Discount rate...................................... 6.75% 7.0%
Rate of increase in compensation levels............ 5.0% 5.0%
Weighted average expected long-term
rate of return on assets....................... 9.0% 9.0%
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 Company sponsors defined contribution pension plans (401(k) plans)
covering substantially all employees. The Company'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'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 Company has stock-based compensation arrangements for employees and
directors as described below. The Company 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 Company 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
to 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 - Under the Plan, the Board of Directors granted options
to purchase shares of the Company'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, 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
------- ------ -------- ------ ------- --------
Outstanding, beginning of year............. 566,666 $15.12 800,000 $14.66 700,000 $14.50
Granted .................................. 289,000 $25.25 46,666 $17.36 100,000 $15.75
Exercised.................................. (70,000) $14.50 (165,000) $14.58 - -
Forfeited.................................. (10,000) $17.38 (115,000) $14.93 - -
------- ------ ------- ------ ------- ------
Outstanding, end of year................... 775,666 $18.72 566,666 $15.12 800,000 $14.66
======= ====== ======= ====== ======= ======
Exercisable, end of year................... 369,710 $14.70 315,000 $14.54 175,000 $14.50
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted during year.............. $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.................... $ 1.20 $ 1.20 $ 1.20
Expected volatility........................ 17.52% 16.55% 17.62%
Expected life.............................. 10 Years 10 Years 10 Years
Risk free interest 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 - 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.
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................. 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.................... $21.2372 $ 17.3125 $ 17.2500
End of performance period............................ 6/30/01 6/30/00 6/30/99
F-21
In addition, the Company 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. 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
Employee Stock Ownership Plan - Employees of the Company are allowed to
purchase Company 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 Company 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 $161,990
Weighted average interest rate
on year-end balance...................................... 6.0% 5.9% 5.4%
Average daily amount outstanding
during the year.......................................... $187,466 $117,482 $151,318
Weighted average interest rate on average daily
amount outstanding during the year....................... 5.6% 5.7% 5.5%
MidAmerican 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 had a $250 million revolving credit facility and lines of
credit totaling $90 million and MHC had lines of credit totaling $145 million.
MidAmerican'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 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
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 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, 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 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 reduced base rates for certain
non-contract commercial customers by approximately $1.5 million annually,
subject to IUB approval. Additionally, MidAmerican 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 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, 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 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'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's share of those earnings will be used for accelerated recovery of
certain regulatory assets. The 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 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's 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 Company 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 Company 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 Company 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 Company sold its subsidiary that developed and operated a computerized
information system facilitating the real-time exchange of power in the electric
industry. The Company 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 Company 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. The final
settlement, which resulted in an after-tax loss of $3.3 million, included the
reacquisition of preferred equity by the buyer and the settlement of reclamation
reserves.
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 common stock. The warrants were valued at $6 million. 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 Company 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 $ -- $ 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)
========= ========= =========
(11) CONCENTRATION OF CREDIT RISK:
The Company'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's gas utility operations serve 489,000 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 Company 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'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'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. MidAmerican Capital has an investment in the common
stock of McLeodUSA Incorporated, the total cost of which was $44 million at
December 31, 1998.
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 not
subject to mandatory redemption requirements may be redeemed at the option of
the Company 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 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 Company adopted SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information."
The Company 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-25
The following tables provide certain Company information on an
operating segment basis as of and for the years ended December 31 (in
thousands):
1998 1997 1996
---------- ---------- ------------
SEGMENT PROFIT INFORMATION
Electric:
Revenues......................................... $1,169,810 $1,126,300 $1,099,008
Depreciation and amortization expense............ 156,546 145,931 140,939
Interest income.................................. 4,945 1,820 1,360
Interest expense................................. 66,784 71,138 72,484
Income tax expense............................... 75,831 64,017 90,544
Equity in the net loss of investees.............. (219) (161) -
Net income....................................... 109,539 101,534 119,583
GAS:
Revenues......................................... 429,870 536,306 536,753
Depreciation and amortization expense............ 25,665 24,609 23,653
Interest income.................................. 1,169 501 237
Interest expense................................. 14,011 14,412 13,580
Income tax expense (benefit)..................... (800) 9,698 20,023
Equity in the net loss of investee............... (45) (32) -
Net income....................................... (435) 14,177 28,460
NONREGULATED AND OTHER (a):
Revenues........................................... 176,244 306,931 275,443
Depreciation and amortization...................... 3,086 3,436 4,854
Interest income.................................... 3,148 2,997 2,415
Interest expense................................... 9,418 11,785 23,574
Income tax expense (benefit)....................... 1,895 (5,325) (12,145)
Equity in net income of investees.................. 6,039 1,273 2,510
Net income......................................... 22,760 19,784 (16,997)
SEGMENT ASSET INFORMATION
ELECTRIC:
Total assets....................................... $2,891,646 $2,833,256 $3,031,287
Capital expenditures............................... 158,596 128,544 116,243
Investment in equity method investments............ 1,388 1,292 -
GAS:
Total assets....................................... 670,862 681,649 730,575
Capital expenditures............................... 34,758 38,388 37,955
Investment in equity method investments............ 256 615 -
Nonregulated and other (a):
Total assets....................................... 681,828 763,186 759,986
Capital expenditures............................... 45,466 14,066 55,788
Investment in equity method investments............ 10,171 10,212 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-26
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 such 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'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's utility operations is dependent on the treatment
authorized under future ratemaking proceedings.
Cash and cash equivalents - The carrying amount approximates fair value
due to the short maturity of these instruments.
Quad Cities Station nuclear decommissioning trust fund - Fair value is
based on quoted market prices of the investments held by the fund.
Marketable securities - Fair value is based on quoted market prices.
Debt securities - Fair value is based on the discounted value of the
future cash flows expected to be received from such investments.
Equity investments carried at cost - Fair value is based on an estimate
of the Company's share of partnership equity, offers from unrelated third
parties or the discounted value of the future cash flows expected to be received
from such investments.
Notes payable - Fair value is estimated to be the carrying amount due
to the short maturity of these issues.
Preferred shares - Fair value of preferred shares with mandatory
redemption provisions is estimated based on the quoted market prices for similar
issues.
Long-term debt - 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 Company for debt of the same remaining maturities.
F-27
The following table presents the carrying amount and estimated fair
value of certain financial instruments as of December 31 (in thousands):
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ---------- -----------
Financial Instruments Owned by the Company:
Equity investments carried at cost ........ $ 27,464 $ 27,372 $ 29,707 $ 32,209
Financial Instruments Issued by the Company:
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
--------- ---------- ---------- ---------
Available-for-sale:
Equity securities ........ $ 225,836 $ 214,927 $ (15,789) $ 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 $ (15,801) $ 507,684
========= ========= ========= =========
Held-to-maturity:
Equity 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
---------- ---------- ---------- ---------
Available-for-sale:
Equity securities ......... $ 257,316 $ 226,747 $ (10,522) $ 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 $ (10,530) $ 554,082
========= ========= ========= =========
Held-to-maturity:
Equity securities ......... $ 6,376 $ -- $ -- $ 6,376
Debt securities ........... 4,567 345 -- 4,912
--------- --------- --------- ---------
$ 10,943 $ 345 $ -- $ 11,288
========= ========= ========= =========
At December 31, 1998, the debt securities held by the Company had the
following maturities (in thousands):
Available for Sale Held to Maturity
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- ---------- ---------
Within 1 year............................... $ 1,397 $ 1,397 $9,757 $9,757
1 through 5 years........................... 21,793 22,852 11 11
5 through 10 years.......................... 14,595 15,820 2,069 2,069
Over 10 years............................... 14,891 16,387 - -
The proceeds and the gross realized gains and losses on the disposition
of investments held by the Company for the years ended December 31, are as
follows (in thousands):
1998 1997 1996
-------- --------- ---------
Proceeds from sales....................... $230,804 $211,691 $250,772
Gross realized gains...................... 23,050 14,320 9,920
Gross realized losses..................... (14,199) (6,480) (7,950)
During 1996, the Company sold a portion of its held-to-maturity
securities due to a significant deterioration in the issuer's credit worthiness.
Such 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............................... $ 80,837 $ 91,627 $ 80,165
State................................. 20,736 21,619 22,100
-------- -------- --------
101,573 113,246 102,265
-------- -------- --------
Deferred
Federal............................... (11,861) (29,257) 2,627
State................................. (5,633) (8,242) (264)
-------- -------- --------
(17,494) (37,499) 2,363
-------- -------- --------
Investment tax credit, net................ (7,153) (7,357) (6,206)
-------- -------- --------
Total................................. $ 76,926 $ 68,390 $ 98,422
======== ======== ========
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........................ $ 52,139 $ 55,998
Unrealized losses............................. 7,391 7,880
Pensions...................................... 15,677 17,339
Nuclear reserves and decommissioning.......... 17,715 15,287
Other......................................... 5,360 6,464
-------- --------
Total...................................... $ 98,282 $102,968
======== ========
Deferred tax liabilities
related to:
Depreciable property.......................... $496,295 $504,594
Income taxes recoverable
through future rates........................ 198,364 197,877
Unrealized gains.............................. 75,070 81,501
Energy efficiency............................. 27,186 40,902
Reacquired debt............................... 16,385 15,346
FERC Order 636................................ (941) 2,857
Other......................................... 19,371 16,811
-------- --------
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.............................. 36% 31% 39%
Amortization of investment tax credit.......... 3 3 2
State income tax, net of federal income
tax benefit.................................. (5) (4) (6)
Dividends received deduction................... 2 2 2
Other.......................................... (1) 3 (2)
Statutory federal income tax 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........ $30,914 $31,425
Coal stocks, at average cost................... 22,266 14,225
Gas in storage, at LIFO cost................... 37,306 35,430
Fuel oil, at average cost...................... 1,294 2,344
Other ......................................... 2,991 2,667
Total........................................ $94,771 $86,091
At December 31, 1998 prices, the current cost of gas in storage was
$43.0 million.
(17) MIDAMERICAN-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, issued 4,000,000 shares of 7.98%
Series MidAmerican-obligated mandatorily redeemable preferred securities (the
Preferred Securities). The sole assets of the Trust are $103.1 million of
MidAmerican 7.98% Series A Debentures due 2045 (the Debentures). There is a full
and unconditional guarantee by MidAmerican of the Trust's obligations under the
Preferred Securities. MidAmerican 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 Securities will also be deferred. During any deferral,
distributions will continue to accrue with interest thereon, and MidAmerican 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 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, are redeemed, the Trust must
redeem a like amount of the Preferred Securities. If a termination of the Trust
occurs, the Trust will distribute to the holders of the Preferred Securities a
like amount of the Debentures unless such a distribution is determined not to be
practicable. If such determination is made, the holders of the Preferred
Securities 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 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. Funding Corp. in turn has sold receivable interests to outside
investors. In consideration of the sale, MidAmerican 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 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.
(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
-------- -------- --------- -------- --------- ----------
Income from Continuing
Operations.......................... $127,154 $139,332
-------- --------
Basic EPS
Income Available to Common
Shareholders........................ $127,154 94,038 $1.35 $139,332 98,058 $1.42
===== =====
Effect of Dilutive Securities
Stock Options........................... -- 171 -- 107
-------- ------ -------- ------
Diluted EPS
Income Available to Common
Shareholders........................ $127,154 94,209 $1.35 $139,332 98,165 $1.42
======== ====== ===== ======== ====== =====
F-32
1996
-----------------------------------
Per Share
Income Shares Amount
-------- -------- ---------
Income from Continuing Operations...................... $143,761
--------
Basic EPS
Income Available to Common
Shareholders........................................ $143,761 100,752 $1.43
=====
Effect of Dilutive Securities
Stock Options ......................................... -- 89
-------- -------
Diluted EPS
Income Available to Common
Shareholders........................................ $143,761 100,841 $1.43
======== ======= =====
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
1998
--------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------ ----------- ----------- -----------
(In thousands, except per share amounts)
Operating revenues ....................... $ 488,148 $ 389,352 $ 455,964 $ 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
------------ ----------- ----------- -----------
(In thousands, except per share amounts)
Operating revenues ....................... $ 589,045 $ 395,580 $ 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.
(21) OTHER INFORMATION:
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............................. $ 7,409 $10,213 $ 974
Discount on sold receivables....................... (8,716) (439) -
Subservice fee from Funding Corp........................ 1,714 153 -
Merger costs............................................ (4,243) - (8,689)
Income from equity method investments................... 3,765 1,273 2,510
Special purpose fund income............................. 2,088 1,989 3,301
Other-than-temporary declines in value
of investments and other assets..................... - (3,443) (15,566)
Energy efficiency carrying charges...................... 197 4,993 3,255
Gain on sale of cushion gas............................. - 855 3,182
Gain (loss) on reacquisition of long-term debt.......... - (923) 1,105
NPPD settlement......................................... - 2,248 -
Other................................................... 2,882 (1,028) 147
-------- ------- --------
Total................................................... $ 5,096 $15,891 $ (9,781)
======== ======= ========
(22) ACQUISITIONS:
In 1998, the Company established MidAmerican Realty as a holding
company for its real estate brokerage operations. The Company, through
MidAmerican Realty, then acquired several real estate brokerage operations and
related businesses.
The Company 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
Company 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'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.
As discussed in Note (10), the Company 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.
(23) SUBSEQUENT EVENTS (UNAUDITED):
On August 11, 1998, a definitive merger agreement was entered into
between the Company and CalEnergy Company, Inc. (CalEnergy), a global provider
of energy services. On March 12, 1999, the merger transaction was completed, and
the Company 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'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's parent on a fully
diluted basis. Berkshire will also invest $800 million in non-transferable trust
preferred stock. 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-35
REPORT OF INDEPENDENT ACCOUNTANTS
To MHC Inc.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'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-36
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 34,539 122,380
-------- --------- ----------
961,885 383,066 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 30,188 105,460
Other ................................................... 37,070 6,421 22,992
-------- --------- ----------
134,729 36,609 128,452
-------- --------- ----------
Total operating expenses ................................ 795,022 324,168 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-37
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-38
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
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
Other ............................................................. 32,391 (3,822) 2,945
------------ ---------- ----------
Net cash provided ............................................... 47,511 98,806 312,253
------------ ---------- ----------
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 ............................................. (62,015) (12,307) (134,067)
Proceeds from sale of securities ................................... 447,988 75,452 149,751
Proceeds from sale of assets and other investments ................. 2,116 1,097 28,842
Purchase of MidAmerican Energy Holdings ............................ (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)
------------ ---------- ----------
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) -- --
Net increase (decrease) in notes payable ........................... (200,837) (49,874) 21,018
------------ ---------- -----------
Net cash provided (used) .......................................... 2,122,015 (132,061) (164,476)
------------ ---------- -----------
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 .......................... $ $ -- $ 66,754
============ ========== ===========
Income taxes paid .................................................. $ $ 149 $ 58,411
============ ========== ===========
The accompanying notes are an integral part of these statements.
F-40
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:
MidAmerican Funding, LLC (Company) is an Iowa limited liability company
and a direct wholly owned subsidiary of MidAmerican Energy Holdings Company.
The Company'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 Company 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 the Company. The MidAmerican Merger has been accounted for as a
purchase business combination and as such the results of operations of the
Company 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 Company is awaiting final valuations. The
Company 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.
Unaudited pro forma consolidated revenue and net income of the Company 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 billion and $142.9 million respectively, compared to $1.33
billion and $86.6 million respectively, for the same period last year.
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company, 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'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 Company believes
that the disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the audited consolidated financial statements of MHC and the
notes thereto 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 such contaminants are in sufficient quantities and at such
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). 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 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 estimate of probable remediation costs for the sites
discussed above as of September 30, 1999, was $21 million. This estimate has
been recorded as a liability and a regulatory asset for future recovery. The
Illinois Commerce Commission (ICC) has approved 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.
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 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 remediation 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.
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.
(2) 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. 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 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
F-42
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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
appealed the court's ruling to the full panel of the U.S. District Court of
Appeals for the District of Columbia Circuit. Argument in the appeal proceeding
is scheduled for the fall of 1999. As a result of the court's decision and the
current status of the standards, the impact of any new standards on MidAmerican
is currently unknown.
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 certain 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.
If MidAmerican's annual Iowa electric jurisdictional return on common
equity (ROE) exceeds 12%, then earnings above the 12% level will be shared
equally between customers and MidAmerican; if the ROE exceeds 14%, two-thirds
of MidAmerican's share of those earnings above the 12% level will be used for
accelerated recovery of certain regulatory assets. The 1997 pricing plan
settlement agreement precludes MidAmerican from filing for increased rates
prior to 2001 unless the ROE falls below 9%. Other parties signing the
agreement are prohibited from filing for reduced rates prior to 2001 unless the
ROE after reflecting credits to customers, exceeds 14%. On April 14, 1999, the
Iowa Utilities Board (IUB) approved, subject to additional refund,
MidAmerican's 1998 ROE calculation. During the second quarter of 1999,
MidAmerican refunded $2.2 million to its Iowa non-contract customers related to
the ROE calculation for 1998.
Under an Illinois restructuring law enacted in 1997, a similar sharing
mechanism is in place for MidAmerican's Illinois electric operations. Two-year
average ROEs 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.
F-43
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 CERTAIN TYPES 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 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'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 such 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. SEGMENT INFORMATION:
The Company 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.
F-44
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables provide certain 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 ...................................... 111,542 34,539 122,380
Operating income (loss) ....................... (23,187) (2,070) (4,535)
SEPTEMBER 30,
1999
------------
Total Assets:
Electric ...................................... $2,685,075
Gas ........................................... 649,934
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 the Company'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 the Company 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's Net
Income. The following table shows the income tax expense or benefit related to
each component (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
---------------- ----------------- --------------
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)
========= ========= =========
F-45
MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. DISCONTINUED OPERATIONS:
On October 6, 1999, the Company distributed its investment in the capital
stock of its real estate brokerage subsidiary to Holdings, the Company'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 such 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 ................. $220,265 $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, the Company 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 non-transferable trust
preferred stock. 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-46
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements are based on the historical consolidated financial statements of
MidAmerican Funding and MHC, combined and adjusted to give effect on a pro
forma basis to the Offering and on a pro forma as adjusted basis to the
Offering and the MidAmerican Merger and the transactions contemplated thereby,
as described in the notes thereto. MidAmerican Funding had no results of
operations prior to the Offering and the MidAmerican Merger. These statements
should be read in conjunction with the historical financial statements and
notes of MHC which are included and incorporated by reference in this
registration statement. See "Incorporation by Reference."
The unaudited pro forma condensed consolidated statements of income for
the year ended December 31, 1998, and for the nine months ended September 30,
1999, present the results of operations for MidAmerican Funding as if the
Offering and the MidAmerican Merger had occurred at the beginning of the period
presented. In addition, the statements of income do not reflect discontinued
operations. A pro forma balance sheet is not required as of September 30, 1999,
since both the Offering and the MidAmerican Merger are reflected in the
historical balance sheet of MidAmerican Funding as of that date which is
included elsewhere in this registration statement.
The pro forma adjustments are estimates based upon information currently
available and certain assumptions that management believes are reasonable under
the circumstances. MidAmerican Funding's actual consolidated financial
statements reflect the effects of the MidAmerican Merger on and after the
effective time of the MidAmerican Merger rather than the dates indicated above.
The unaudited pro forma condensed consolidated financial statements neither
purport to represent what the combined results of operations or financial
condition actually would have been had the MidAmerican Merger and related
transactions in fact occurred on the assumed dates, nor to project MidAmerican
Funding's results of operations and financial position for any future period.
F-47
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MIDAMERICAN MHC
FUNDING (PREDECESSOR)
---------------- ----------------
MARCH 12, 1999 JAN. 1, 1999 OFFERING
THROUGH THROUGH AND MERGER
SEPT. 30, 1999 MARCH 11, 1999 ADJUSTMENTS PRO FORMA
---------------- ---------------- ----------------- ------------
(NOTE 1) (NOTE 2) (NOTES 3, 4 & 5)
OPERATING REVENUES
Regulated electric .................................. $685,376 $ 208,963 $ -- $ 894,339
Regulated gas ....................................... 164,967 139,564 -- 304,531
Nonregulated ........................................ 111,542 34,539 -- 146,081
-------- --------- -------- ----------
961,885 383,066 -- 1,344,951
-------- --------- -------- ----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity .................. 125,396 40,232 (759) 164,869
Cost of gas sold ................................... 85,019 79,910 -- 164,929
Other operating expenses ........................... 232,420 93,940 (124) 326,236
Maintenance ........................................ 67,138 18,302 -- 85,440
Depreciation and amortization ...................... 107,535 39,417 -- 146,952
Property and other taxes ........................... 42,785 15,758 -- 58,543
-------- --------- -------- ----------
660,293 287,559 (883) 946,969
-------- --------- -------- ----------
Nonregulated:
Cost of sales ...................................... 97,659 30,188 (345) 127,502
Other .............................................. 37,070 6,421 7,264 50,755
-------- --------- -------- ----------
134,729 36,609 6,919 178,257
-------- --------- -------- ----------
Total operating expenses ........................... 795,022 324,168 6,036 1,125,226
-------- --------- -------- ----------
OPERATING INCOME .................................... 166,863 58,898 (6,036) 219,725
-------- --------- -------- ----------
NON-OPERATING INCOME
Interest income ..................................... 14,638 1,411 -- 16,049
Dividend income ..................................... 3,159 1,331 -- 4,490
Realized gains and losses on securities, net ........ 78,066 15,214 -- 93,280
Other, net .......................................... (445) (18,133) 19,709 1,131
-------- --------- -------- ----------
95,418 (177) 19,709 114,950
-------- --------- -------- ----------
FIXED CHARGES
Interest on long-term debt .......................... 65,174 14,814 8,046 88,034
Other interest expense .............................. 5,486 3,145 -- 8,631
Preferred dividends of subsidiaries ................. 6,327 2,831 543 9,701
Allowance for borrowed funds ........................ (682) (235) -- (917)
-------- --------- -------- ----------
76,305 20,555 8,589 105,449
-------- --------- -------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ....................................... 185,976 38,166 5,084 229,226
INCOME TAXES ........................................ 77,348 21,377 (128) 98,598
-------- --------- -------- ----------
INCOME FROM CONTINUING OPERATIONS ................... $108,628 $ 16,789 $ 5,212 $ 130,628
======== ========= ======== ==========
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
F-48
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
MIDAMERICAN AFTER MHC MERGER
FUNDING OFFERING (PREDECESSOR) ADJUSTMENTS PRO FORMA
------------- ------------ --------------- ------------- -------------
(NOTE 3) (NOTE 2) (NOTES 4 & 5)
OPERATING REVENUES
Regulated electric ............................ $ -- $ -- $1,169,810 $ -- $1,169,810
Regulated gas ................................. -- -- 429,870 -- 429,870
Nonregulated .................................. -- -- 176,244 -- 176,244
---- --------- ---------- --------- ----------
-- -- 1,775,924 -- 1,775,924
---- --------- ---------- --------- ----------
OPERATING EXPENSES
Regulated:
Cost of fuel, energy and capacity ............ -- -- 225,736 (3,828) 221,908
Cost of gas sold ............................. -- -- 243,451 -- 243,451
Other operating expenses ..................... -- -- 470,328 (625) 469,703
Maintenance .................................. -- -- 110,387 -- 110,387
Depreciation and amortization ................ -- -- 182,211 -- 182,211
Property and other taxes ..................... -- -- 87,276 -- 87,276
---- --------- ---------- --------- ----------
-- -- 1,319,389 (4,453) 1,314,936
---- --------- ---------- --------- ----------
Nonregulated:
Cost of sales ................................ -- -- 144,417 (1,757) 142,660
Other ........................................ -- -- 40,706 36,569 77,275
---- --------- ---------- --------- ----------
-- -- 185,123 34,812 219,935
---- --------- ---------- --------- ----------
Total operating expenses ..................... -- -- 1,504,512 30,359 1,534,871
---- --------- ---------- --------- ----------
OPERATING INCOME .............................. -- -- 271,412 (30,359) 241,053
---- --------- ---------- --------- ----------
NON-OPERATING INCOME
Interest income ............................... -- -- 9,262 -- 9,262
Dividend income ............................... -- -- 10,251 -- 10,251
Realized gains and losses on securities, net -- -- 11,204 -- 11,204
Other, net .................................... -- -- 5,096 8,550 13,646
---- --------- ---------- --------- ----------
-- -- 35,813 8,550 44,363
---- --------- ---------- --------- ----------
FIXED CHARGES .................................
Interest on long-term debt .................... -- 44,100 80,908 (2,613) 122,395
Other interest expense ........................ -- -- 12,682 -- 12,682
Preferred dividends of subsidiaries ........... -- -- 12,932 -- 12,932
Allowance for borrowed funds .................. -- -- (3,377) -- (3,377)
---- --------- ---------- --------- ----------
-- 44,100 103,145 (2,613) 144,632
---- --------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .......................... -- (44,100) 204,080 (19,196) 140,784
INCOME TAXES .................................. -- (17,640) 76,926 5,399 64,685
---- --------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS ............. $ -- $ (26,460) $ 127,154 $ (24,595) $ 76,099
==== ========= ========== ========= ==========
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
F-49
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Reflects the historical results of MidAmerican Funding subsequent to the
MidAmerican Merger.
2. Reflects the historical results of MHC prior to the MidAmerican merger.
3. Immediately prior to the MidAmerican Merger, MidAmerican Funding issued $700
million of senior debt at a weighted average interest rate of 6.5%. The
adjustments to interest on long-term debt are net of the amortization of
related deferred debt issue costs and credits from a rate swap arrangement.
4. On March 12, 1999, MidAmerican Funding purchased MHC for $2,439.8 million,
including transaction costs. The transaction was accounted for as a purchase
business combination. The pro forma statements of income reflect amortization
of balance sheet adjustments made to reflect the effect of the MidAmerican
Merger on MHC's assets and liabilities. Adjustments made to the assets and
liabilities were as follows (in thousands):
Goodwill .............................................................. $1,477,440
Other current assets .................................................. (16,674)
Power purchase contract ............................................... (34,295)
Other non-current assets .............................................. (217,340)
Other non-current liabilities ......................................... (61,034)
Long-term debt ........................................................ (5,782)
Deferred taxes ........................................................ 120,038
MidAmerican-obligated preferred securities of subsidiary trust ........ (543)
----------
$1,261,810
==========
A. The adjustment to power purchase contract was to reflect MHC's long-term
power purchase contract at fair value based on the estimated market prices
for similar purchases with similar remaining maturities.
B. The adjustment to other non-current assets was to reflect the fair value
of MHC's investments in Quad Cities Nuclear Power Station, real estate and
certain other investments.
C. The other non-current liabilities adjustment was to reflect MHC's
compensation obligations and to reflect MHC's long-term fuel contracts at
fair value based on the estimated market prices for similar purchases with
similar remaining maturities.
D. Goodwill is amortized using the straight line method over 40 years and is
reflected in nonregulated other operating expenses.
E. Other purchase accounting adjustments are being amortized using the
straight line or other applicable method over the remaining estimated
lives of the related assets and liabilities.
F. Income tax expense for the effects of the pro forma adjustments which
affect taxable income is at an effective rate of 40%.
5. Other, net includes an adjustment to add back MHC merger transaction costs
totaling $19.2 million for the nine months ended September 30, 1999, and $4.2
million for the year ended December 31, 1998.
F-50
CONTACT INFORMATION FOR THE EXCHANGE AGENT
By Registered or Certified Mail By Hand Delivery:
or Overnight Delivery:
The Bank of New York
The Bank of New York 101 Barclay Street
101 Barclay Street New York, New York 10286
New York, New York 10286 Attention: [____________]
Attention: [____________]
By Facsimile
(for Eligible Institutions Only):
([ ]) [ ]
--- -------
For Information or
Confirmation by Telephone:
([ ]) [ ]
--- -------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MidAmerican Funding, LLC, an Iowa limited liability company, is
organized under the Limited Liability Company Act of the State of Iowa, and,
pursuant to Section 242 of such Act and in accordance with the limitations set
forth therein, its Articles of Organization provide for the indemnification of
any person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any threatened, pending or completed action, suit or proceeding in which
such person is made a party by reason of his being or having been a manager,
officer or employee of MidAmerican Funding, LLC. The Operating Agreement of
MidAmerican Funding, LLC, dated as of March 9, 1999, by MidAmerican Energy
Holdings Company (formerly CalEnergy Company, Inc.), provides for
indemnification of the managers, officers and employees of MidAmerican Funding,
LLC to the full extent permitted by the Articles of Organization and the Limited
Liability Company Act.
MidAmerican Energy Holdings Company maintains an insurance policy
providing for indemnification of the officers and directors of its subsidiaries
against liabilities and expenses incurred by any of them in certain stated
proceedings and under stated conditions.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 Articles of Organization of MidAmerican Funding, LLC
3.2 Operating Agreement of MidAmerican Funding, LLC
4.1 Indenture, dated as of March 11, 1999, by and between MidAmerican Funding, LLC and IBJ
Whitehall Bank & Trust Company, as Trustee
4.2 First Supplemental Indenture, dated as of March 11, 1999,
by and between MidAmerican Funding, LLC and IBJ Whitehall
Bank & Trust Company, as Trustee
4.3 Form of Specimen Certificate of 5.85% Senior Secured Exchange Note due 2001
4.4 Form of Specimen Certificate of 6.339% Senior Secured Exchange Note due 2009
4.5 Form of Specimen Certificate of 6.927% Senior Secured Exchange Bond due 2029
4.6 Registration Rights Agreement, dated March 9, 1999, by and among MidAmerican Funding, LLC,
Credit Suisse First Boston Corporation, Lehman Brothers, Inc., Goldman Sachs & Co. and
Merrill Lynch & Co.
5.1 Opinion of Latham & Watkins regarding the validity of the exchange Securities
10.1 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District,
dated September 22, 1967 (Filed as Exhibit 4-C-2 to Iowa Power Inc.'s Registration
Statement, Registration No. 2-27681)
10.2 Amendments No. 1 and 2 to Power Sales Contract between Iowa Power Inc. and
Nebraska Public Power District (Filed as Exhibit 4-C-2a to Iowa Power Inc.'s Registration
Statement, Registration No. 2-35624)
10.3 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 5-C-2-b
to Iowa Power Inc.'s Registration Statement, Registration No. 2-42191)
10.4 Amendment No. 4 dated March 28, 1974 to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 5-C-2-c
to Iowa Power Inc.'s Registration Statement, Registration No. 2-51540)
10.5 Amendment No. 5 dated September 2, 1997 to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 10.2
to MidAmerican Holdings' and MidAmerican Energy's respective Quarterly Reports on
combined Form 10-Q for the quarter ended September 30, 1997, Commission
File Nos. 1-12459 and 1-11505, respectively)
12.1 Computation of Ratio of Earnings to Fixed Charges
II-1
21 Subsidiaries of MidAmerican Funding, LLC
23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939 of The Bank of New York
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal to tender 5.85% Senior
Secured Notes due 2001, 6.339% Senior Secured Notes due
2009 and 6.927% Senior Secured Bonds due 2029 of
MidAmerican Funding, LLC
99.2 Form of Letter to Registered Holders and DTC Participants from MidAmerican Funding, LLC
regarding the exchange offer
99.3 Form of Instruction to Registered Holder or DTC Participant from Beneficial Owner of 5.85%
Senior Secured Notes due 2001, 6.339% Senior Secured Notes due 2009 and/or 6.927% Senior
Secured Bonds due 2029 of MidAmerican Funding, LLC
99.4 Form of Letter to Clients from Registered Holder or DTC Participant regarding the exchange
offer
99.5 Form of Notice of Guaranteed Delivery
(b) Financial Statement Schedules
Financial statement schedules are not included because the required
information is inapplicable or is presented in the financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
II-2
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes as follows: prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the application form.
The undersigned registrant hereby undertakes that every prospectus (i)
that is filed pursuant to the immediately preceding paragraph or (ii) that
purports to meet the requirements of Section l0(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment will be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time will be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
the issue.
The undersigned registrant hereby undertakes to file an application of
the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Securities and Exchange Commission under
section 305(b)(2) of the Trust Indenture Act.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Omaha,
State of Nebraska, on November 8, 1999.
MIDAMERICAN FUNDING, LLC
By: /s/ Steven A. McArthur
---------------------------
Name: Steven A. McArthur
Title: Vice President and Secretary
II-4
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Steven A. McArthur his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this registration statement (including
post-effective amendments), and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities, as of the dates indicated.
Signature Title Date
/s/ David L. Sokol Chairman and Chief Executive November 8, 1999
- -------------------------------------- Officer; Manager
David L. Sokol
/s/ Gregory E. Abel President and Chief Operating Officer November 8, 1999
- --------------------------------------
Gregory E. Abel
/s/ Patrick J. Goodman Vice President November 8, 1999
- -------------------------------------- (principal financial officer and
Patrick J. Goodman principal accounting officer)
/s/ Steven A. McArthur Vice President and Secretary; Manager November 8, 1999
- --------------------------------------
Steven A. McArthur
/s/ John A. Rasmussen, Jr. Vice President and General Counsel November 8, 1999
- --------------------------------------
John A. Rasmussen, Jr.
II-5
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 Articles of Organization of MidAmerican Funding, LLC
3.2 Operating Agreement of MidAmerican Funding, LLC
4.1 Indenture, dated as of March 11, 1999, by and between MidAmerican Funding, LLC and IBJ
Whitehall Bank & Trust Company, as Trustee
4.2 First Supplemental Indenture, dated as of March 11, 1999, by
and between MidAmerican Funding, LLC and IBJ Whitehall Bank &
Trust Company, as Trustee
4.3 Form of Specimen Certificate of 5.85% Senior Secured Exchange Note due 2001
4.4 Form of Specimen Certificate of 6.339% Senior Secured Exchange Note due 2009
4.5 Form of Specimen Certificate of 6.927% Senior Secured Exchange Bond due 2029
4.6 Registration Rights Agreement, dated March 9, 1999, by and among MidAmerican Funding, LLC,
Credit Suisse First Boston Corporation, Lehman Brothers, Inc., Goldman Sachs & Co. and
Merrill Lynch & Co.
5.1 Opinion of Latham & Watkins regarding the validity of the exchange Securities
10.1 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District,
dated September 22, 1967 (Filed as Exhibit 4-C-2 to Iowa Power Inc.'s Registration
Statement, Registration No. 2-27681)
10.2 Amendments No. 1 and 2 to Power Sales Contract between Iowa Power Inc. and
Nebraska Public Power District (Filed as Exhibit 4-C-2a to Iowa Power Inc.'s Registration
Statement, Registration No. 2-35624)
10.3 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 5-C-2-b
to Iowa Power Inc.'s Registration Statement, Registration No. 2-42191)
10.4 Amendment No. 4 dated March 28, 1974 to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 5-C-2-c
to Iowa Power Inc.'s Registration Statement, Registration No. 2-51540)
10.5 Amendment No. 5 dated September 2, 1997 to the Power Sales Contract between Iowa Power Inc.
and Nebraska Public Power District, dated September 22, 1967 (Filed as Exhibit 10.2
to MidAmerican Holdings' and MidAmerican Energy's respective Quarterly Reports on
combined Form 10-Q for the quarter ended September 30, 1997, Commission
File Nos. 1-12459 and 1-11505, respectively)
12.1 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of MidAmerican Funding, LLC
23.1 Consent of Latham & Watkins (included in their opinion filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
25.1 Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of 1939
of The Bank of New York
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal to tender 5.85% Senior Secured
Notes due 2001, 6.339% Senior Secured Notes due 2009 and
6.927% Senior Secured Bonds due 2029 of MidAmerican Funding,
LLC
99.2 Form of Letter to Registered Holders and DTC Participants from MidAmerican Funding, LLC
regarding the exchange offer
99.3 Form of Instruction to Registered Holder or DTC Participant from Beneficial Owner of 5.85%
Senior Secured Notes due 2001, 6.339% Senior Secured Notes due 2009 and/or 6.927% Senior
Secured Bonds due 2029 of MidAmerican Funding, LLC
99.4 Form of Letter to Clients from Registered Holder or DTC Participant regarding the exchange
offer
99.5 Form of Notice of Guaranteed Delivery