ITEM 1. BUSINESS - - ----------------
(A) GENERAL DEVELOPMENT OF BUSINESS
Holdings is an exempt public utility holding company headquartered in Des Moines, Iowa, and incorporated in the state of Iowa. Holdings was formed in 1996 to hold the common stock of MidAmerican, and its principal subsidiaries. Effective December 1, 1996, Holdings became the parent company of MidAmerican, MidAmerican Capital and Midwest Capital pursuant to a share exchange between MidAmerican and Holdings. Prior to the effective date of the exchange, MidAmerican Capital and Midwest Capital were direct subsidiaries of MidAmerican. MidAmerican is a public utility and accounts for the predominant part of the Company's assets and earnings. MidAmerican Capital and Midwest Capital are the first-tier, nonregulated subsidiaries of the Company.
MidAmerican, an Iowa corporation, was formed on July 1, 1995, as a result of the merger of Iowa-Illinois, Midwest Resources and Midwest. MidAmerican Capital (then InterCoast) was a wholly owned nonregulated subsidiary of Iowa-Illinois. Midwest Resources was an exempt public utility holding company with two wholly owned subsidiaries: Midwest and Midwest Capital.
During 1996, the Company changed the name of its nonregulated subsidiary, InterCoast, to MidAmerican Capital. As part of the restructuring of that subsidiary, the Company formed a new subsidiary under MidAmerican Capital, named InterCoast Energy Company. The new InterCoast had as its subsidiaries the Company's wholesale nonregulated energy companies, including oil and gas exploration and development operations which were discontinued in 1996 and sold in January 1997.
The Company continued its strategic realignment of nonregulated investments in 1997. In the fourth quarter of 1997, the Company sold assets of its railcar leasing and repair businesses.
The electric utility industry is in the midst of significant regulatory change. Traditionally, prices charged by electric utility companies have been regulated by federal and state commissions and have been based on cost of service. In recent years, changes have occurred, and are expected to continue to occur, that move the electric utility industry toward a more competitive, market-based pricing environment. These changes will have a significant impact on the way MidAmerican does business. Refer to the discussion of competition in the "Operating Activities and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K.
In anticipation of changes in the electric utility industry, MidAmerican established in 1997 the framework for a new approach to managing its business. Beginning January 1, 1998, MidAmerican began operating as four distinct business units: generation, transmission, energy delivery and retail. Certain administrative functions are handled by a corporate services group which supports all of the business units. Although specific functions may be moved between business units as future circumstances warrant, the main focus of each business unit has been established. Presently, significant functions of the generation business unit include the production and purchase of energy and the sale of wholesale energy. The transmission business unit coordinates all activities related to MidAmerican's transmission facilities, including monitoring access to and assuring the reliability of the transmission system. Energy delivery includes the distribution of electricity and natural gas to end-users, and related activities. Retail includes marketing, customer service and related functions for core and complementary products and services.
The Company expects that, as the industry moves towards competition, generation and retail functions will not be rate-regulated and will be the business units through which most of MidAmerican's external revenues are derived. Energy delivery and transmission functions, though not unaffected by industry changes, are expected to remain rate-regulated by state and federal commissions.
The move to a competitive environment creates the need for new employee skills and knowledge and increased focus on certain aspects of the utility business. MidAmerican anticipates increases in the number of employees in its retail business unit in order to meet the increased emphasis on that area, while some areas will have decreases in employees as efficiencies are achieved or needs change.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information on the Company's and MidAmerican's segments of business is included under the respective Notes titled "Segment Information" in Notes to Consolidated Financial Statements included in Part IV, Item 14 of this Form 10-K.
(C) NARRATIVE DESCRIPTION OF BUSINESS
BUSINESS OF HOLDINGS --------------------
Holdings' strategy is to become the leading regional provider of energy and complementary services. Holdings' interests include 100% of the common stock of MidAmerican, MidAmerican Capital and Midwest Capital. MidAmerican is primarily engaged in the business of generating, transmitting, distributing and selling electric energy and in 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's service territory. In an effort that began in 1996, Holdings is continuing to redeploy investments that do not support its strategy.
For the year ended December 31, 1997, 86.5% of Holdings operating revenues were from MidAmerican, 13.4% were from MidAmerican Capital and 0.1% were from Midwest Capital.
BUSINESS OF MIDAMERICAN -----------------------
MidAmerican distributes electric energy 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 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 December 31, 1997, MidAmerican had 647,700 retail electric customers and 618,000 retail natural gas customers.
MidAmerican'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 has a residential, agricultural, commercial and diversified industrial customer group, in which no single industry or customer accounted for more than 3.8% (food and kindred products industry) of its total 1997 electric operating revenues or 3.7% (food and kindred products industry) of its total 1997 gas
operating margin. Among the primary industries served by MidAmerican 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, 1997, MidAmerican derived approximately 68% of its gross operating revenues from its electric business and 32% from its gas business. For 1996 and 1995, the corresponding percentages were 67% electric and 33% gas, and 70% electric and 30% gas, respectively.
Historical electric sales by customer class as a percent of total electric sales and retail electric sales data by state as a percent of total retail electric sales are shown below:
Total Electric Sales By Customer Class
1997 1996 1995 ------ ------ ----- Residential 20.9% 21.1% 23.2% Small General Service 16.5 16.2 19.1 Large General Service 27.4 27.6 26.1 Other 4.4 4.5 4.7 Sales for Resale 30.8 30.6 26.9 ----- ----- -----
Total 100.0% 100.0% 100.0% ===== ===== =====
Retail Electric Sales By State
1997 1996 1995 ----- ----- ----- Iowa 88.6% 88.7% 88.4% Illinois 10.7 10.6 11.0 South Dakota 0.7 0.7 0.6 ----- ----- -----
Total 100.0% 100.0% 100.0% ===== ===== =====
Historical gas sales, excluding transportation throughput, by customer class as a percent of total gas sales and by state as a percent of total retail gas sales are shown below:
Total Gas Sales By Customer Class
1997 1996 1995 ----- ----- ----- Residential 60.8% 61.1% 57.3% Small General Service 33.1 33.3 32.9 Large General Service 4.2 4.6 6.2 Sales for Resale and Other 1.9 1.0 3.6 ----- ----- -----
Total 100.0% 100.0% 100.0% ===== ===== =====
Retail Gas Sales By State
1997 1996 1995 ----- ----- ---- Iowa 79.1% 78.0% 77.1% Illinois 10.4 11.0 11.6 South Dakota 9.8 10.3 10.6 Nebraska 0.7 0.7 0.7 ----- ----- ----
Total 100.0% 100.0% 100.0% ===== ===== =====
There are seasonal variations in MidAmerican's electric and gas businesses which are principally related to the use of energy for air conditioning and heating. In 1997, 38% of MidAmerican'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's gas revenues were reported in the months of January, February, March and December, reflecting the use of gas for heating.
At December 31, 1997, MidAmerican had 3,467 full-time employees of which 1,657 are covered by union contracts. MidAmerican has eight separate contracts with locals of the International Brotherhood of Electrical Workers (IBEW), the United Association of Plumbers and Pipefitters and the United Paper Workers International Union. The contracts covering most union employees are as follows:
Employee Contract Union Local Members Expiration Date ----- ----- -------- ---------------
IBEW 109 442 7/31/97 IBEW 499 1,103 3/01/2000
Regarding IBEW Local 109, contract negotiations are in progress and the parties are currently operating under the terms of the expired contract. The Local 499 employees numbered above are covered under three separate contracts based on the location of the Local 499 of which they are a member.
ELECTRIC OPERATIONS
The annual hourly peak demand on MidAmerican's electric system occurs principally as a result of air conditioning use during the cooling season. MidAmerican's highest hourly peak demand in 1997 was 3,548 MW, which was 5 MW less than MidAmerican's record hourly peak of 3,553 MW set in 1995.
MidAmerican's accredited 1997 summer net generating capability was 4,293 MW. Accredited net generating capability represents the amount of Company-owned generation available to meet the requirements on MidAmerican's energy system, net of the effect of participation purchases and sales. The net generating capability at any time may be less due to regulatory restrictions, fuel restrictions and generating units being temporarily out of service for inspection, maintenance, refueling or modifications. Refer to Item 2, Properties, for detail of accredited summer 1997 net generating capability.
MidAmerican is interconnected with certain Iowa and 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 transmission system, serves as a power and energy market clearing house and is responsible for the safety and reliability of the bulk electric system.
Fuel Supply for Electric Operations - - -----------------------------------
MidAmerican's sources of fuel for electric generation were as follows for the periods shown:
Year Ended December 31, 1997 1996 1995 ---- ---- ---- Fuel Source: Coal 76.3% 75.6% 77.6% Nuclear 23.0 23.9 21.6 Gas 0.6 0.4 0.7 Oil 0.1 0.1 0.1 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
The average costs of fuels consumed (including transportation and handling costs) were as follows for the periods shown:
Year Ended December 31, 1997 1996 1995 ---- ---- ---- (Cents per million BTUs consumed) Fuel Source: Nuclear 48.92 44.85 44.19 Coal 90.60 92.45 95.14 Gas 338.71 318.80 226.92 Oil 455.22 412.13 422.80 Weighted Average 88.49 88.74 90.21
The average cost of coal received (including transportation) per ton for the years 1997, 1996 and 1995 was $14.77, $15.18 and $15.61, respectively.
Two rail shippers deliver coal from the mines to, or near, MidAmerican's electric generating stations. For the Louisa and Riverside generating stations, a third shipper transports the coal from a common connection point to each plant site. In November 1997, MidAmerican completed the construction of a 6.25 mile railway leading to its Council Bluffs Energy Center (CBEC). The new railway brings competition in coal transportation to the CBEC and is an important factor in reducing coal transportation costs for generating units at that station.
The Union Pacific Railroad (UP) provides service directly to MidAmerican's George Neal Station (Neal Station). Nationwide operational problems for the UP in 1997, and continuing in 1998, affected deliveries to the Neal Station during the fourth quarter of 1997 and reduced coal inventory below desirable levels at that site. The reduction in inventory did not prevent MidAmerican from meeting the electric energy needs of its retail customers. Following discussions between MidAmerican and the UP, increased deliveries have been made to the four units at the Neal Station.
MidAmerican has used spot market purchases of coal to manage inventory levels and take advantage of coal market opportunities. MidAmerican is continuing to satisfy its coal requirements with a combination of contract and spot purchases. MidAmerican believes its sources of low-sulfur, western coal for its coal-fired generating stations are and will continue to be satisfactory. Renewal of expiring contracts and negotiations of new agreements will be pursued as required. Additional information regarding MidAmerican's coal supply contracts is included in Note (4)(g) of Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form 10-K. Natural gas and oil are used for peak demand electric generation and for standby purposes. These sources are presently in adequate supply and available to meet MidAmerican's needs.
MidAmerican is a 25% joint owner of Quad Cities Station. MidAmerican has been advised by ComEd, the joint owner and operator of Quad Cities Station, that the majority of its uranium concentrate and uranium conversion requirements for Quad Cities Station for 1998 can be met under existing supplies or commitments. ComEd foresees no problem in obtaining the remaining requirements now or obtaining future requirements. ComEd further advises that all enrichment requirements have been contracted through 1999. Commitments for fuel fabrication have been obtained at least through 2000. ComEd does not anticipate that it will have difficulty in contracting for uranium concentrates for conversion, enrichment or fabrication of nuclear fuel needed to operate Quad Cities Station. Refer to the Nuclear Regulation section later in this discussion of the business of MidAmerican for comments on an outage at Quad Cities Station.
MidAmerican purchases one-half of the power and energy of Cooper through a long-term power purchase contract with NPPD. Approximately 30% of the fuel in the core at Cooper must be replaced every 18 months. The next refueling cycle is currently scheduled to begin in October 1998. NPPD has informed MidAmerican that it either has sufficient materials and services available to meet foreseeable Cooper requirements or that such materials and services are readily available from suppliers.
Under the NWPA, the DOE is responsible for the selection and development of repositories for, and the permanent disposal of, spent nuclear fuel and high-level radioactive wastes. ComEd and NPPD, as required by the NWPA, have signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste beginning not later than January 1998. The DOE did not begin receiving spent nuclear fuel on the scheduled date, and it is expected that the schedule will be significantly delayed. The costs incurred by the DOE for disposal activities are being financed by fees charged to owners and generators of the waste. ComEd has informed MidAmerican that there is on-site storage capability at the Quad Cities Station sufficient to permit such interim storage at least through 2006. NPPD has informed MidAmerican that there is on-site storage capability at the Cooper Station sufficient to permit such interim storage at least through 2004, the remaining term of the long-term power purchase contract. Meeting spent nuclear fuel storage requirements beyond such time could require modifications to the spent fuel storage pools or new and separate storage facilities. Industry activities are underway to utilize dry casks for the interim storage of high-level radioactive waste. This may provide an alternative for interim on-site storage of such waste.
NATURAL GAS OPERATIONS
MidAmerican is engaged in the procurement, transportation, storage and distribution of natural gas for utility and end-use customers in the Midwest. MidAmerican purchases natural gas from various suppliers, transports it from the production area to the Company's service territory under contracts with interstate pipelines, stores it in various storage facilities to manage fluctuations in system demand and seasonal pricing and distributes it to the customers through the Company's distribution system. MidAmerican also transports through its distribution system natural gas purchased independently by certain large users.
Fuel Supply and Capacity - - ------------------------
MidAmerican purchases the majority of its gas supplies from producers or third party marketers. To insure system reliability, a geographically diverse supply portfolio with varying terms and conditions is utilized for the gas supplies.
MidAmerican has rights to firm and interruptible pipeline capacity to transport gas to its service territory through the NNG, NGPL and ANR systems. Firm capacity in excess of MidAmerican's system needs, resulting from fluctuations in anticipated system demand, can be resold to other companies to achieve optimum use of the available capacity. Past IUB rulings have allowed MidAmerican to retain 30% of Iowa margins earned on the resold capacity and return 70% to customers through the purchased gas adjustment.
Changes in MidAmerican's cost of gas from the amount included in gas service rates is recovered from customers through a purchased gas adjustment clause. In 1995, the IUB approved MidAmerican's Incentive Gas Supply Procurement Program for a three-year test period. Under the program, MidAmerican is required to file with the IUB every six months a comparison of its gas procurement costs to an index-based reference price. If MidAmerican's cost of gas for the period are outside of the established tolerance band around the reference price, then MidAmerican shares a portion of the savings/cost with customers. Since the implementation of the program, MidAmerican has successfully achieved savings for its natural gas customers.
MidAmerican utilizes leased gas storage to meet peak day requirements and to manage the daily changes in demand due to changes in weather. The storage gas is typically replaced during the summer months. In addition, MidAmerican also utilizes three liquefied natural gas plants and three propane-air peak shaving plants to meet peak day demands.
On February 2, 1996, MidAmerican had its highest peak-day delivery of 1,143,026 MMBtus. This peak-day delivery included approximately 88% from traditional sales service customers and 12% from customer-owned gas transported through MidAmerican's system. MidAmerican's 1997/98 winter heating season peak-day delivery of 910,769 MMBtus was reached on January 13, 1998. This peak-day delivery included approximately 73% from traditional sales service customers and 27% from customer-owned gas transported through MidAmerican's system.
The supply sources utilized by MidAmerican to meet its 1997/98 peak-day deliveries to its sales service customers were:
Thousands Percent of of MMBtus Total
Underground Storage 282.5 42.5 Firm Supply 382.9 57.5 ----- ----- Total 665.4 100.0 ===== =====
MidAmerican does not anticipate difficulties in meeting its future demands through the use of its supply portfolio and pipeline interconnections for the foreseeable future.
CONSTRUCTION PROGRAM
The table below shows actual utility capital expenditures for 1997 and budgeted utility expenditures for 1998.
1997 1998 Actual Budgeted -------- -------- (Thousands of Dollars) Electric Property Production $ 16,229 $ 26,643 Transmission 25,062 31,391 Distribution 34,707 41,398 Gas 34,804 31,391 Administration and Other 40,507 56,916 -------- -------- Subtotal 151,309 187,739 Quad Cities Fuel 11,371 13,179 Cooper Additions 4,252 - -------- -------- Total $166,932 $200,918 ======== ========
The amounts shown above include allowance for funds used during construction. Of the $26.6 million of budgeted electric production expenditures for 1998, $8.1 million is for expenditures at the Quad Cities Station. In addition to the expenditures shown above, the Company contributes to external trusts for Quad Cities nuclear decommissioning. Refer to the Investing Activities and Plans section of MD&A, under "Nuclear Decommissioning" for further discussion.
REGULATION
General Utility Regulation - - --------------------------
MidAmerican is a public utility within the meaning of the Federal Power Act and a natural gas company within the meaning of the Natural Gas Act. Therefore, it is subject to regulation by FERC in regard to numerous activities, including the issuance of securities, accounting policies and practices, sales for resale rates, the establishment and regulation of electric interconnections and transmission services and replacement of certain gas utility property.
MidAmerican is regulated by the ICC as to retail rates, services, accounts, issuance of securities, affiliate transactions, construction, acquisition and sale of utility property, acquisition and sale of securities and in other respects as provided by the laws of Illinois. MidAmerican is regulated by the IUB as to retail rates, services, accounts, construction of utility property and in other respects as provided by the laws of Iowa. MidAmerican is also subject to regulation by the SDPUC as to electric and gas retail rates and service as provided by the laws of South Dakota.
Rate Regulation - - ---------------
Under Iowa law, temporary collection of higher rates can begin (subject to refund) 90 days after filing with the IUB for that portion of such higher rates approved by the IUB based on prior ratemaking principles and a rate of return on common equity previously approved. If the IUB has not issued a final order within ten months after the filing date, the temporary rates cease to be subject to refund and any balance of the requested
rate increase may then be collected subject to refund. Exceptions to the ten-month limitation provide for extensions due to a utility's lack of due diligence in the rate proceeding, judicial appeals and situations involving new generating units being placed in service. Prior to July 11, 1997, MidAmerican's Iowa electric tariffs contained a Uniform Electric Energy Adjustment Clause under which MidAmerican's billings reflected changes in the cost of all fuels used for electric generation, including nuclear fuel disposition costs and the net effect of energy transactions (other than capacity) with other utilities. Beginning July 11, 1997, MidAmerican no longer has an EAC in Iowa. Information regarding MidAmerican's 1997 rate settlement for its Iowa electric rates is included under the caption "Rate Matters" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A in Part IV, Item 14 of this Form 10-K. Changes in the cost of gas to MidAmerican are reflected in its Iowa gas rates through the Iowa Uniform Purchased Gas Adjustment Clause.
South Dakota law authorizes the SDPUC to suspend new rates for up to six months during the pendency of rate proceedings; however, the rates are permitted to be implemented after six months subject to refund pending a final order in the proceeding.
Under Illinois law, new rates may be put into effect by MidAmerican 45 days after filing with the ICC, or on such earlier date as the ICC may approve, subject to the power of the ICC to suspend the proposed new rates for a period not to exceed eleven months after filing, pending a hearing. Under Illinois electric tariffs, MidAmerican's Fuel Cost Adjustment Clause reflects changes in the cost of all fuels used for electric generation, including certain fuel transportation costs, nuclear fuel disposition costs and the effects of energy transactions (other than capacity and margins on interchange sales) with other utilities. Changes in the cost of gas to MidAmerican are reflected in its Illinois gas rates through the Illinois Uniform Purchased Gas Adjustment Clause.
In December 1997, Illinois enacted a new law to restructure Illinois' electric utility industry. The law changes how and what electric services are regulated by the ICC and transitions portions of the traditional electric services to a competitive environment. In general, the new law limits the ICC's regulatory authority over a utility's generation and also relaxes its regulatory authority over many corporate transactions, such as the transfer of generation assets to affiliates. Special authority and limitations of authority apply during the transition to a competitive marketplace. Bundled electric rates are generally frozen until 2005. Also, the law permits utilities to eliminate their fuel adjustment clauses.
Refer to the information under the caption "Legislative and Regulatory Evolution" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A in Part IV, Item 14 of this Form 10-K for additional discussion of matters affecting utility regulation.
New rules in Iowa became effective in June 1997, enhancing energy efficiency program flexibility, eliminating mandatory spending levels for energy efficiency programs, and allowing more timely recovery of energy efficiency expenditures. Previously, electric and gas utilities in Iowa were required to spend approximately 2.0% and 1.5%, respectively, of their annual Iowa jurisdictional revenues on energy efficiency activities. On September 29, 1997, MidAmerican received approval from the IUB, effective immediately, to begin recovery of deferred energy efficiency costs which were not previously approved for recovery. Under the prior rules, recovery of some of these costs would have been delayed several more years. The costs will be collected over a four-year period, along with a return. MidAmerican also received approval to recover current energy efficiency costs. The filing is subject to periodic prudence reviews by the IUB. Refer to the discussion under the caption "Energy Efficiency" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A in Part IV, Item 14 of this Form 10-K.
Nuclear Regulation - - ------------------
MidAmerican is subject to the jurisdiction of the NRC with respect to its license and 25% ownership interest in Quad Cities Station Units 1 and 2. ComEd is the operator of the Quad Cities Station and is under contract with MidAmerican to secure and keep in effect all necessary NRC licenses and authorizations.
Under the terms of a long-term power purchase agreement with NPPD, MidAmerican has contracted to purchase through September 21, 2004, one-half of the power and energy from Cooper which is located near Brownville, Nebraska. MidAmerican pays for one-half of the fixed and operating costs of Cooper (excluding depreciation but including debt service) and MidAmerican's share of fuel costs (including disposal costs) based upon energy delivered. MidAmerican is not subject to the jurisdiction of the NRC with respect to Cooper and the long-term power purchase contract with NPPD. NPPD, as the sole owner, licensee and operator of Cooper, is thereby the only entity subject to the jurisdiction of the NRC with respect to Cooper. Under the terms of the long-term power purchase contract, NPPD is required to assure that Cooper is in compliance with all of the NRC regulations.
The NRC regulations control the granting of permits and licenses for the construction and operation of nuclear generating stations and subject such stations to continuing review and regulation. The NRC review and regulatory process covers, among other things, operations, maintenance, and environmental and radiological aspects of such stations. The NRC may modify, suspend or revoke licenses and impose civil penalties for failure to comply with the Atomic Energy Act, the regulations under such Act or the terms of such licenses.
Federal regulations provide that any nuclear operating facility may be required to cease operation if the NRC determines there are deficiencies in state, local or utility emergency preparedness plans relating to such facility, and the deficiencies are not corrected. ComEd and NPPD have advised MidAmerican that emergency preparedness plans for the Quad Cities Station and Cooper, respectively, have been approved by the NRC. ComEd and NPPD have also advised MidAmerican that state and local plans relating to the Quad Cities Station and Cooper, respectively, have been approved by the Federal Emergency Management Agency.
In September 1997 ComEd, shut down Unit 2 and entered early a scheduled outage to address safety system concerns. In December 1997, Unit 1 was also taken off-line for the same reason. ComEd has indicated that the units may be unavailable until the first half of May 1998. During this time, it may be necessary for MidAmerican to forego off-system sales opportunities, operate more expensive units, and/or purchase more off-system energy. In January 1998, ComEd received a Confirmatory Action Letter (CAL) from the NRC. The CAL details actions that must be taken to correct the problems described above. Also in January, ComEd was informed by the NRC that the performance of Quad Cities Station is trending adversely. The Company cannot at this time predict the cost of these actions nor the impact on results of operations of the plant's outage.
In June 1988, the NRC adopted regulations with respect to the decommissioning of nuclear power plants. In 1996, the NRC enacted revisions to provide clarification of these regulations. Among other things, the regulations and amendments address the planning and funding for the eventual decommissioning of nuclear power plants. In response to these regulations, MidAmerican submitted a report to the NRC in July 1990 indicating that it will provide "reasonable assurance" that funds will be available to pay the costs of decommissioning its share of the Quad Cities Station. NPPD has advised MidAmerican that a report addressing decommissioning funding for Cooper has been submitted and approved by the NRC.
MidAmerican has established external trusts for the investment of funds collected for nuclear decommissioning associated with Quad Cities Station. NPPD maintains an internal account and an external trust for decommissioning funds associated with Cooper. MidAmerican makes contributions to NPPD related to decommissioning and reflects those contributions in MidAmerican's power purchase costs. Electric tariffs in effect for 1997 include provisions for annual decommissioning costs at Quad Cities Station and Cooper. MidAmerican's cost related to decommissioning funding in 1997 was $21.1 million. In Illinois, nuclear decommissioning costs are included in customer billings through a mechanism that permits annual adjustments. In Iowa, such costs are reflected in base rates.
Environmental Regulations - - -------------------------
MidAmerican is subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, land use aesthetics and atomic radiation.
State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (I) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of certain of MidAmerican's existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing MidAmerican's cost of waste disposal and (vi) possibly reducing the reliability of service provided by MidAmerican and the amount of energy available from MidAmerican's facilities. Any of such items could have a substantial impact on amounts required to be expended by MidAmerican in the future.
Air Quality
The CAAA were signed into law in November 1990. MidAmerican has five jointly owned and six wholly owned coal-fired generating units, which represent approximately 65% of MidAmerican's electric generating capability. Essentially all utility generating units are subject to the provisions of the CAAA which address continuous emissions monitoring, permit requirements and fees and emissions of certain substances. Under current regulations, MidAmerican does not anticipate its construction costs for the installation of emissions monitoring system upgrades through 2000 to be material.
Refer to the discussion under the caption "Environmental Matters" in the OPERATING ACTIVITIES AND OTHER MATTERS section of MD&A in Part IV, Item 14, of this Form 10-K for additional information regarding air quality regulation.
Water Quality
Under the Federal Water Pollution Control Act Amendments of 1972, as amended, MidAmerican is required to obtain NPDES permits to discharge effluents (including thermal discharges) from its properties into various waterways. All NPDES permits are subject to renewal after specified time periods not to exceed five years. MidAmerican has obtained all necessary NPDES permits for its generating stations, and when such permits are expected to expire, MidAmerican will file applications for renewal.
Hazardous Materials and Waste Management
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 26 properties which were, at one time, sites of MGP facilities in which it may be a potentially responsible party. MidAmerican's present estimate of probable remediation costs of these sites is $21 million. 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.
Additional information relating to the Company's MGP facilities is included under Note(4)(b) in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K.
Pursuant to the Toxic Substances Control Act, a federal law administered by the EPA, MidAmerican developed a comprehensive program for the use, handling, control and disposal of all PCBs contained in electrical equipment. The future use of equipment containing PCBs will be minimized. Capacitors, transformers and other miscellaneous equipment are being purchased with a non-PCB dielectric fluid. MidAmerican's exposure to PCB liability has been reduced through the orderly replacement of a number of such electrical devices with similar non-PCB electrical devices.
Other
A number of studies have examined the possibility of adverse health effects from EMFs without conclusive results. EMFs are produced by all devices carrying or using electricity, including transmission and distribution lines and home appliances. MidAmerican cannot predict the effect on construction costs of electric utility facilities or operating costs if EMF regulations were to be adopted. Although MidAmerican is not the subject of any suit involving EMFs, litigation has been filed in a number of jurisdictions against a variety of defendants alleging that EMFs had an adverse effect on health. If such litigation were successful, the impact on MidAmerican and on the electric utility industry in general could be significant.
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 percent below 1990 levels in the 2008- 2012 time frame. In order for the agreement to become binding upon the United States, ratification by the U.S. Senate is necessary. The cost to MidAmerican of reducing its CO2 emissions levels by 7 percent below 1990 levels would depend on available technology at the time, but could be material.
BUSINESS OF MIDAMERICAN CAPITAL COMPANY ---------------------------------------
MidAmerican Capital is a wholly owned nonregulated subsidiary of Holdings. The nonregulated activities emphasize energy and complementary service-related businesses, credit quality and liquidity. MidAmerican Capital manages these activities through its nonregulated investment and operating companies. Assets of MidAmerican Capital totaled $671 million as of December 31, 1997.
INVESTMENTS
MidAmerican Capital's investments totaled $600 million and $434 million at December 31, 1997 and 1996, respectively. A majority of the investment dollars relate to investment grade marketable securities and equipment leases, most of which are held by InterCoast Capital and MHC Investment Company. As discussed below, MidAmerican Capital and its subsidiaries also have investments in energy projects, technology development interests and venture capital funds.
MidAmerican Capital's marketable securities portfolio, totaling $477 million and $219 million at December 31, 1997 and 1996, respectively, consists substantially of a managed preferred stock portfolio and an investment in the common stock of McLeodUSA. The preferred stocks have been issued by companies having investment grade senior debt ratings by Moody's or Standard & Poor's. McLeodUSA is a regional telecommunications provider. As of December 31, 1997, the investment in McLeodUSA stock was recorded at a market value of $258 million. At the end of 1996, the investment in McLeodUSA was recorded at cost and was not included in marketable securities due to restrictions on the sale of the stock. In addition, MidAmerican Capital has investments in independently managed mutual funds and KCS warrants received in the disposition of oil and gas operations early in 1997.
MidAmerican Capital holds equity participations in equipment leases primarily for passenger and freight transport aircraft. Such investments totaled $74 million and $90 million at December 31, 1997 and 1996, respectively.
In addition, MidAmerican Capital and several of its subsidiaries have indirect investments in a variety of nonregulated energy production technologies including solar, hydroelectric, and natural gas and coal-fueled generation, equity investments in two developing companies which provide products and services for the electric and gas utility industries, an equity investment in a company constructing a digital radio network, and limited interests in special purpose funds that invest in venture capital.
OPERATING COMPANIES
Assets of MidAmerican Capital's operating companies totaled $16 million and $23 million, respectively at December 31, 1997 and 1996.
AmGas Inc. was organized in anticipation of new opportunities under Order 636. AmGas Inc. markets natural gas and energy management services to commercial and industrial clients in the Midwest. During 1997 AmGas Inc. sold 30 million MMBtu's of natural gas.
InterCoast Trade and Resources, Inc. (ITR) was established in 1995 to provide wholesale natural gas trading and marketing services. ITR's sales of natural gas totaled 52 million MMBtu's in 1997.
MidAmerican Capital acquired a majority, controlling interest in Diversified Electronics, Ltd. in 1996. Diversified Electronics operates as AAA Security Systems, Inc. (AAA Security), one of the largest residential and commercial security systems companies in the Midwest. During 1997, AAA Security acquired assets of two other midwestern security companies. With those acquisitions, AAA Security has more than 12,000 security customers in the Midwest.
MidAmerican Capital sold most of the assets of its rail services operations in the fourth quarter of 1997. The remaining rail services operations are managed through MidAmerican Rail Inc. which provides railcar leasing services to MidAmerican.
BUSINESS OF MIDWEST CAPITAL GROUP, INC. ---------------------------------------
Midwest Capital is a wholly owned nonregulated subsidiary of Holdings with total assets of $65 million as of December 31, 1997. Midwest Capital's primary activity is the management of utility service area investments to support economic development. Midwest Capital's principal interest is a 2,000-acre master planned residential and business community in southeastern South Dakota. The major construction phase of the planned community is complete, and the marketing phase to sell developed residential and commercial lots is in progress.
ITEM 2.
ITEM 2. PROPERTIES - - -------------------
MidAmerican's utility properties consist of physical assets necessary and appropriate to rendering electric and gas service in its service territories. Electric property consists primarily of generation, transmission and distribution facilities. Gas property consists primarily of distribution plant, including feeder lines to communities served from natural gas pipelines owned by others. It is the opinion of management that the principal depreciable properties owned by the Company's subsidiaries are in good operating condition and well maintained.
The net accredited generating capacity, along with the participation purchases and sales, net, and firm purchases and sales, net, are shown for summer 1997 accreditation.
Company's Share of Accredited Percent Generating Plant Ownership Fuel Capability (MW) --------------------------------- --------- ---- --------------- Steam Electric Generating Plants: Council Bluffs Energy Center Unit No. 1 100.0 Coal 43 Unit No. 2 100.0 Coal 88 Unit No. 3 79.1 Coal 534 George Neal Station Unit No. 1 100.0 Coal 135 Unit No. 2 100.0 Coal 300 Unit No. 3 72.0 Coal 371 Unit No. 4 40.6 Coal 253 Louisa Unit 88.0 Coal 616 Ottumwa Unit 52.0 Coal 372 Riverside Station Unit No. 3 100.0 Coal 5 Unit No. 5 100.0 Coal 130 ----- 2,847 ----- Combustion Turbines: Coralville - 1 unit 100.0 Gas/Oil 64 Electrifarm - 3 units 100.0 Gas/Oil 186 Moline - 4 units 100.0 Gas/Oil 64 Parr - 2 units 100.0 Gas/Oil 31 Pleasant Hill Energy Center - 3 units 100.0 Oil 148 River Hills Energy Center - 8 units 100.0 Gas/Oil 116 Sycamore Energy Center - 2 units 100.0 Gas/Oil 149 ----- ----- Nuclear: Cooper (1) (1) Nuclear 387 Quad-Cities Station Unit No. 1 25.0 Nuclear 192 Unit No. 2 25.0 Nuclear 191 ----- ----- Hydro: Moline - 4 units 100.0 Water 3 -----
Net Accredited Generating Capacity 4,378
Participation Purchases and Sales, Net (85) ----- Total Net Accredited Generating Capability 4,293
Firm Purchases and Sales, Net (47) ----- Adjusted Net Accredited Generating Capability 4,246 =====
(1) Cooper is owned by NPPD and the amount shown is MidAmerican's entitlement (50%) of Cooper's accredited capacity under a power purchase agreement extending to the year 2004.
The electric transmission system of MidAmerican at December 31, 1997, included 871 miles of 345-kV lines, 1,294 miles of 161-kV lines, 1,808 miles of 69-kV lines and 253 miles of 34.5-kV lines.
The gas distribution facilities of MidAmerican at December 31, 1997, included 19,161 miles of gas mains and services.
Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest electric utility property located in Iowa, or approximately 82% of gross utility plant, is pledged to secure mortgage bonds.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - - --------------------------
The Company and its subsidiaries have no material legal proceedings except for the following:
Environmental Matters - - ---------------------
Information on the Company's environmental matters is included in Item 1 - - - Business and under the Note "Environmental Matters" in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K.
Cooper Litigation - - -----------------
On July 23, 1997, NPPD filed a Complaint, in the United States District Court for the District of Nebraska, naming MidAmerican as the defendant and seeking declaratory judgment as to three issues under the parties' long-term power purchase agreement for Cooper capacity and energy. More specifically, NPPD seeks a declaratory judgment in the following respects: (1) that MidAmerican 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 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 a 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. On September 12, 1997, MidAmerican filed a "Motion to Dismiss or Transfer Venue" (the Motion). NPPD filed a brief in opposition to the Motion on October 16, 1997. After having unsuccessfully moved to dismiss or transfer venue, MidAmerican, on January 20, 1998, filed an Answer and Contingent Counterclaims for declaratory relief. Those contingent counterclaims seek the declaratory judgments establishing the contrary to the declaratory judgments sought by NPPD and also seek related declaratory relief. MidAmerican is vigorously defending the Company's interests in this declaratory judgment action.
North Star Steel Company - - ------------------------
On December 8, 1997, North Star Steel Company (NSS), a retail MidAmerican electric customer, filed a Complaint in the United States District Court for the Southern District of Iowa naming Holdings and MidAmerican as defendents. The Complaint alleges that MidAmerican's refusal to allow NSS to obtain retail electric service from an unspecified alternative energy company amounts to a violation of federal antitrust laws. NSS is seeking to recover an unspecified level of damages, and to require MidAmerican to provide retail wheeling service so that NSS can obtain electricity from an unnamed supplier. MidAmerican is vigorously defending its conduct.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - - ----------------------------------------------------------
None.
OTHER INFORMATION - - -----------------
EXECUTIVE OFFICERS OF HOLDINGS
The names, ages and positions of the executive officers of Holdings are listed below.
Name Age Positions Held ---- --- --------------
Stanley J. Bright 57 Chairman, President and CEO
Wayne O. Smith 54 Executive Vice President
Ronald W. Stepien 51 Executive Vice President
John J. Cappello 51 Senior Vice President
David J. Levy 43 Senior Vice President
John A. Rasmussen, Jr. 52 Senior Vice President and General Counsel
Alan L. Wells 38 Senior Vice President and Chief Financial Officer
Beverly A. Wharton 44 Senior Vice President
Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other person pursuant to which the officer was selected. Each of the officers has served in the above stated capacity since December 1, 1996, and has been employed by Holdings and/or its subsidiaries or predecessor companies for five or more years as an executive officer with the exception of Mssrs. Smith, Cappello and Wells. Refer to Part III, Item 10 (b), "Directors and Officers of the Registrant - Business Experience," of this document for a discussion of the business experience of each of these officers.
BUSINESS TRANSACTION POLICY STATEMENT
In response to the competitive forces and regulatory changes being faced by the Company, the Company has from time to time considered, and expects to continue to consider, various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate changes in its utility business. These strategies may include business combinations with other companies, internal restructuring involving the complete or partial separation of its wholesale and retail businesses, and additions to, or dispositions of, portions of its franchised service territories. The Company may from time to time be engaged in preliminary discussions, either internally or with third parties, regarding one or more of these potential strategies. No assurances can be given as to whether any potential transaction of the type described above may
actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of the Company.
The Company's management is mindful of the importance of informing investors about Company operations. Management must also pay heed to the legally sensitive nature of certain matters, and that is particularly true about any business transaction involving an acquisition, disposition or combination of businesses which the Company may be considering.
Therefore, the Company's management has adopted a policy to announce consideration of any such transaction only after it would enter into a definitive agreement or an agreement in principle describing the material terms of such a transaction.
Until that point, the Company would respond with "no comment" to any inquiry concerning any such transaction, whether or not the Company is considering, discussing or negotiating for any acquisitions, dispositions or combinations of businesses. The Company's management believes this policy is consistent both with investors' need for information and with the Company's concern for appropriate disclosure regarding legally sensitive matters.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED - - --------------------------------------------------------------- STOCKHOLDER MATTERS -------------------
Holdings' common stock has been listed on the New York Stock Exchange under the symbol "MEC" since December 1, 1996; and prior to such time, MidAmerican's common stock was listed under the symbol "MEC". The following table sets forth, for the periods indicated, the dividends declared per share of common stock and the high and low market prices of the common stock of Holdings since December 1, 1996, and of MidAmerican prior to that time, as reported in The Wall Street Journal for the New York Stock Exchange Composite Tape.
Price Range Dividends Declared High Low ------------------ ------- -------- 4th Quarter $0.30 $22 5/8 $17 3rd Quarter 0.30 17 5/8 16 5/16 2nd Quarter 0.30 17 7/16 16 3/8 1st Quarter 0.30 17 7/8 15 1/2
4th Quarter $0.30 $16 1/4 $14 3/4 3rd Quarter 0.30 17 3/4 15 3/8 2nd Quarter 0.30 17 7/8 16 1/4 1st Quarter 0.30 18 7/8 16 1/4
On February 20, 1998, there were approximately 59,000 shareholders of record of Holdings' common stock.
MidAmerican's outstanding common stock has been held entirely by Holdings since December 1, 1996, and is not publicly traded. On December 1, 1996, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. Cash dividends declared on common stock of MidAmerican are shown in the table below (in thousands).
1997 1996 -------- -------
4th Quarter $29,000 $30,176 3rd Quarter 20,000 30,154 2nd Quarter 40,000 30,218 1st Quarter 31,500 30,222
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - - --------------------------------
Reference is made to Part IV of this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Part IV of this report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. The Decommissioning Trust Fund and Investments are purchased to provide funds for the future decommissioning of the Quad Cities Station and to provide liquidity to the Company's nonregulated subsidiaries. Derivative financial instruments are purchased for hedging purposes. Put options are purchased as hedges to offset changes in market value of fixed rate preferred stock investments. All financial instruments shown in the tables in this section are settled and denominated in U.S. dollars. As of December 31, 1997, the Company's interest sensitive financial instruments included the following (amounts in thousands of dollars; amounts represent face value unless indicated otherwise):
The table below provides information about the Company's assets that are sensitive to commodity price changes. The Company's coal and fuel oil inventories are held at various generating stations for the production of electricity. Natural gas inventories are held at various storage sites to meet winter peak demands on the Company's's distribution system. As of December 31, 1997, the Company's assets that are sensitive to commodity price change included the following (in thousands):
Carrying Fair Amount Value -------- ----- ASSETS MIDAMERICAN Coal inventory $14,225 $12,963 Fuel oil inventory 2,344 2,551 Natural gas inventory 35,430 50,283 Propane gas inventory 874 465
Refer to Note (4)(g) in Notes to Consolidated Financial Statements included in Part IV, Item 14, of this Form 10-K for additional information regarding the Company's long-term coal and natural gas supply contracts.
The table below provides information about derivatives held by the Company that are sensitive to commodity price changes. The natural gas futures and swap contracts are not held for trading or speculative purposes. The contracts are used to reduce the volatility of charges to MidAmerican's regulated customers through purchase adjustment clauses and to align the pricing terms of natural gas supply contracts with the terms of sales contracts with the Company's nonregulated customers. All of the gas futures held by the Company mature in less than twelve months. As of December 31, 1997, the Company's commodity derivatives included the following:
COMMODITY HEDGING INSTRUMENTS: - - ------------------------------ 1998 Expected Maturity ---------------------- MIDAMERICAN Futures contracts (Short): Contract volumes (MMBtu) 1,500,000 Weighted average price (per MMBtu) $2.314 Contract amount (in thousands) $3,470 Weighted average fair value (12/31/97) price (per MMBtu) $2.309 Fair value at 12/31/97 (in thousands) $3,464
Futures contracts (Long): Contract volumes (MMBtu) 3,500,000 Weighted average price (per MMBtu) $2.390 Contract amount (in thousands) $8,364 Weighted average fair value (12/31/97) price (per MMBtu) $2.278 Fair value at 12/31/97 (in thousands) $7,971
1998 Expected Maturity ---------------------- MIDAMERICAN CAPITAL Futures contracts (Short): Contract volumes (MMBtu) 170,000 Weighted average price (per MMBtu) $2.208 Contract amount (in thousands) $375 Weighted average fair value (12/31/97) price (per MMBtu) $2.269 Fair value at 12/31/97 (in thousands) $386
Futures contracts (Long): Contract volumes (MMBtu) 170,000 Weighted average price (per MMBtu) $2.283 Contract amount (in thousands) $388 Weighted average fair value (12/31/97) price (per MMBtu) $2.269 Fair value at 12/31/97 (in thousands) $386
1998 Expected Maturity ---------------------- MIDAMERICAN CAPITAL Swap contracts (Variable to fixed): Contract volumes (MMBtu) 1,381,245 Average fixed pay price (per MMBtu) $2.852 Average variable receive price (per MMBtu) $3.816 Swap contracts (Fixed to variable) Contract volumes (MMBtu) 1,347,400 Average fixed receive price (per MMBtu) $3.949 Average variable pay price (per MMBtu) $2.911
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ------- -------------------------------------------
Reference is made to Part IV of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - - -------------------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------
The Company selected Coopers & Lybrand L.L.P. as its new independent public accountants on April 23, 1997. For further details, refer to the combined Form 8-K filed by Holdings and MidAmerican on April 25, 1997.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
HOLDINGS
The information required by Item 10 relating to directors who are nominees for election as directors at Holdings' 1998 Annual Meeting of Shareholders is set forth in Holdings' Proxy Statement filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934. Therefore, such information is incorporated herein by reference to the material appearing under the caption "ELECTION OF DIRECTORS" on pages 2 through 6 of the Proxy Statement. On the referenced pages of that proxy statement, the words "the Company" or "MidAmerican" and "MidAmerican Common Stock" refer to Holdings, and its common stock, respectively. Information required by Item 10 relating to Executive Officers of Holdings is set forth under a separate caption in Part I hereof.
MIDAMERICAN
Information concerning the current directors and executive officers of MidAmerican is as follows:
(A) IDENTIFICATION Served in Served as Present Present Director Name Age Position Position Since Since - - ---- --- -------- -------------- --------
Stanley J. Bright 57 Chairman, President and CEO 1996 1987
Wayne O. Smith 54 Executive Vice President 1997 1997
Ronald W. Stepien 51 Executive Vice President 1996 1996
John J. Cappello 51 Senior Vice President 1997
David J. Levy 43 Senior Vice President 1996 1996
John A. Rasmussen, Jr. 52 Senior Vice President and General Counsel 1996 1996
Alan L. Wells 38 Senior Vice President and Chief Financial Officer 1997
Beverly A. Wharton 44 Senior Vice President 1996 1996
Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other person pursuant to which the officer was selected.
(B) BUSINESS EXPERIENCE
STANLEY J. BRIGHT
Chairman of Holdings since June 1, 1997, and President and Chief Executive Officer since December 1, 1996. Chairman of MidAmerican since December 1, 1996, Chief Executive Officer since July 1, 1996, President since 1995 and President of the Office of the Chief Executive Officer from 1995 to July 1, 1996. Chairman, President and Chief Executive Officer of Iowa-Illinois from 1991 to 1995. Director of Norwest Bank Iowa, N.A. and Utilx Corporation.
WAYNE O. SMITH
Executive Vice President of MidAmerican since September 1, 1997. Executive Vice President and President and Chief Operating Officer - Specialty Chemicals at B. F. Goodrich Company from 1994 to 1997. Group Vice President - Gases Americas at The BOC Group, Ltd. from 1990 to 1993.
RONALD W. STEPIEN
Executive Vice President of Holdings since December 1, 1996. Executive Vice President of MidAmerican since November 1, 1996 and Group Vice President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from 1990 to 1995.
JOHN J. CAPPELLO
Senior Vice President of MidAmerican since August 1, 1997. Vice President of MidAmerican between August 1, 1996, and August 1, 1997. Prior to joining MidAmerican, he held various executive and officer positions at AT&T between 1968 and 1995.
DAVID J. LEVY
Senior Vice President of MidAmerican since November 1, 1996 and Vice President from 1995 to November 1, 1996. Vice President of Iowa-Illinois from 1993 to 1995.
JOHN A. RASMUSSEN, JR.
Senior Vice President and General Counsel of Holdings since December 1, 1996. Senior Vice President and General Counsel of MidAmerican since November 1, 1996 and Group Vice President and General Counsel from July 1, 1995 to November 1, 1996. Vice President and General Counsel of Midwest from 1991 to 1995.
ALAN L. WELLS
Senior Vice President and Chief Financial Officer of Holdings and MidAmerican since November 1, 1997, Vice President of MidAmerican from November 1, 1996, to November 1, 1997, and various executive and management positions with MidAmerican from 1993 to November 1, 1996.
BEVERLY A. WHARTON
Senior Vice President of MidAmerican since November 1, 1996 and President, Gas Division from 1995 to November 1, 1996. Group Vice President of Midwest from 1992 to 1995. Director of Security National Bank.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - - --------------------------------
HOLDINGS AND MIDAMERICAN
The information required by Item 11 is incorporated herein by reference to the material appearing under the caption "EXECUTIVE COMPENSATION" on pages 10 through 20 of Holdings' Proxy Statement filed with the SEC. On the referenced pages of that proxy statement, the words "the Company" or "MidAmerican" and "MidAmerican Common Stock" refer to Holdings, and its common stock, respectively.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - - ------------------------------------------------------------- MANAGEMENT ----------
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
HOLDINGS
To the Company's knowledge, no single entity has beneficial ownership of 5 percent or more of the outstanding common stock of Holdings.
MIDAMERICAN
Holdings owns 100 percent of the outstanding common stock of MidAmerican.
(B) SECURITY OWNERSHIP OF MANAGEMENT
HOLDINGS
Security ownership of management as outlined on pages 8 and 9 of the Company's Proxy Statement filed with the SEC under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference. On the referenced pages of that proxy statement, the words "the Company" or "MidAmerican" and "MidAmerican Common Stock" refer to Holdings, and its common stock, respectively.
MIDAMERICAN
The following table shows the beneficial ownership, reported to MidAmerican as of February 20, 1998, of Holdings Common Stock of each director, the chief executive officer and the four other most highly compensated executive officers and, as a group, directors and executive officers. No member of the group owned any of the preferred stock of MidAmerican. To MidAmerican's knowledge, no single entity owns of record or beneficially more than five percent of any class of the outstanding voting securities of Holdings.
Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership (1) Class - - ------------------------ ------------------------ ---------
Stanley J. Bright................... 100,480 (2) * David J. Levy....................... 9,707 (3) * John A. Rasmussen, Jr............... 17,055 (4) * Wayne O. Smith...................... 6,498 * Ronald W. Stepien................... 19,854 (5) * Beverly A. Wharton.................. 38,596 (6) * Phillip G. Lindner.................. 11,155 (7) * Directors and executive officers as a group (9) persons............... 214,274 (8) *
- - ----------------------------- * Less than one percent of the shares of Holdings Common Stock outstanding.
(1) Beneficial ownership of each of the shares of Holdings Common Stock listed in the foregoing table is comprised of sole voting power and sole investment power, unless otherwise noted.
(2) Includes 50,000 shares which Mr. Bright has the right to acquire within 60 days upon the exercise of stock options, 6,879 shares held in a Section 401(k) defined contribution plan as of December 31, 1997, and 1,697 shares beneficially owned by Mr. Bright and his spouse.
(3) Includes 47 shares held in a Section 401(k) defined contribution plan as of December 31, 1997, and 147 shares beneficially owned by Mr. Levy and his spouse.
(4) Includes 3,267 shares held in a Section 401(k) defined contribution plan as of December 31, 1997, and 2,700 shares beneficially owned by Mr. Rasmussen and his spouse.
(5) Includes 5,000 shares which Mr. Stepien has the right to acquire within 60 days upon the exercise of stock options and 1,679 shares held in a Section 401(k) defined contribution plan as of December 31, 1997.
(6) Includes 15,000 shares which Mrs. Wharton has the right to acquire within 60 days upon the exercise of stock options, 1,420 shares held in a Section 401(k) defined contribution plan as of December 31, 1997, 5,316 shares beneficially owned by Mrs. Wharton and her spouse and 986 shares beneficially owned in a custodial account for a minor child.
(7) Includes 138 shares beneficially owned by Mr. Lindner and his spouse. Mr. Lindner retired from the Company in January 1998.
(8) Includes 115,000 shares which the executive officers have the right to acquire within 60 days upon the exercise of stock options, shares held in defined contribution plans as of December 31, 1997, and shares beneficially owned jointly with and individually by family members of directors and executive officers.
(C) CHANGES IN CONTROL
There are no arrangements known to the registrants, the operation of which may at a subsequent date result in a change in control of Holdings or MidAmerican.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - --------------------------------------------------------
Effective with his retirement on May 31, 1997, as Chairman of the Company, Mr. Christiansen's employment agreement provides that his service in an advisory capacity to the Company would commence on June 1, 1997 and continue through June 1, 2000. Mr. Christiansen receives annual compensation of $50,000 for this service.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - - -------------------------------------------------------------------------- (A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN)
Page No. --------
Selected Consolidated Financial Data....................... 36 Management's Discussion and Analysis of Financial Condition And Results of Operations...................... 37
Index to Financial Statements: ------------------------------
MidAmerican Energy Holdings Company
Consolidated Statements of Income For the Year Ended December 31, 1997, 1996 and 1995...... 58 Consolidated Balance Sheets As of December 31, 1997 and 1996 ........................ 59 Consolidated Statements of Cash Flows For the Year Ended December 31, 1997, 1996 and 1995...... 60 Consolidated Statements of Capitalization As of December 31, 1997 and 1996 ........................ 61 Consolidated Statements of Retained Earnings For the Year Ended December 31, 1997, 1996 and 1995...... 62 Notes to Consolidated Financial Statements................. 63 Report of Management....................................... 90 Report of Independent Accountants.......................... 91
MidAmerican Energy Company
Consolidated Statements of Income For the Year Ended December 31, 1997, 1996 and 1995...... 92 Consolidated Balance Sheets As of December 31, 1997 and 1996 ........................ 93
Page No. --------
Consolidated Statements of Cash Flows For the Year Ended December 31, 1997, 1996 and 1995...... 94 Consolidated Statements of Capitalization As of December 31, 1997 and 1996 ........................ 95 Consolidated Statements of Retained Earnings For the Year Ended December 31, 1997, 1996 and 1995...... 96 Notes to Consolidated Financial Statements................. 97 Report of Management....................................... 111 Report of Independent Accountants.......................... 112
Index to Supplemental Information ---------------------------------
Five-Year Financial Statistics............................. 113 Five-Year Consolidated Statements of Income................ 114 Five-Year Consolidated Balance Sheets...................... 115 Five-Year Utility Statistics............................... 116
(A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN)
The following schedules should be read in conjunction with the aforementioned financial statements.
Page No. -------- MidAmerican Energy Holdings Company Consolidated Valuation and Qualifying Accounts (Schedule II) ........ 118 MidAmerican Energy Company Consolidated Valuation and Qualifying Accounts (Schedule II) .................. 119
Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(A)3. EXHIBITS
See Exhibit Index on page 123.
(B) REPORTS ON FORM 8-K
On December 8, 1997, Holdings and MidAmerican filed a combined report on Form 8-K, dated December 5, 1997. The report included an announcement by MidAmerican that coal delivery at some of its electric generating facilities continued to be impacted by the Union Pacific Railroad's nationwide slowdown of trains. The press release issued in conjunction with the announcement was filed as an Exhibit to the report.
SELECTED FINANCIAL DATA
(a) MidAmerican Energy Holdings Company (Holdings) 1995 operating income includes $33.4 million of costs related to a restructuring and work force reduction plan implemented and completed in 1995, and MidAmerican Energy Company (MidAmerican) operating income includes $31.9 million of such costs. (b) In 1997, Holdings recorded after-tax gains totalling $11.2 million for sales of assets of certain railcar businesses and a portion of a common stock investment that has appreciated significantly. Holdings recorded after-tax losses of approximately $9.4 million and $10.2 million for the write-down of certain nonregulated assets during 1996 and 1995, respectively. In 1993, MidAmerican recorded an $11.5 million after-tax gain on an exchange of natural gas service territories. (c) Includes amounts due within one year. (d) Post-1995 years include MidAmerican-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures. (e) 1996 reflects distribution of the capital stock of MidAmerican Capital Company and Midwest Capital Group, Inc. to Holdings. (f) Holdings' common equity increased in 1997 due to recording at market value an investment in McLeodUSA, Inc. common stock. Refer to Note (14) for further discussion. (g) Refer to Operating Activities and Other Matters in MD&A for discussion of industry restructuring, and rate matters.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION ------------
COMPANY STRUCTURE
MidAmerican Energy Holdings Company (Holdings or the Company) is an exempt public utility holding company headquartered in Des Moines, Iowa. Effective December 1, 1996, Holdings became the parent company of MidAmerican Energy Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). Prior to December 1, 1996, MidAmerican Capital and Midwest Capital were subsidiaries of MidAmerican.
MidAmerican was formed on July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric Company, Midwest Resources Inc. (Resources) and Midwest Power Systems Inc., the utility subsidiary of Resources.
MidAmerican is a public utility with electric and natural gas operations and is the principal subsidiary of Holdings. MidAmerican Capital and Midwest Capital are Holdings' nonregulated subsidiaries. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. MidAmerican Capital manages marketable securities and passive investment activities, nonregulated wholesale and retail natural gas businesses, security services and other energy-related, nonregulated activities.
DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
The MidAmerican merger was accounted for as a pooling-of-interests, and consolidated financial statements are presented as if the merger occurred as of the beginning of the earliest period presented. The consolidated financial statements of MidAmerican present amounts related to MidAmerican Capital and Midwest Capital as discontinued operations for all periods that include months prior to December 1, 1996, in order to reflect their transfer to Holdings in December 1996. Portions of the following discussion provide information related to material changes in the financial condition and results of operations of Holdings and MidAmerican for the periods presented based on the combined historical information of the predecessor companies. It is not necessarily indicative of what would have occurred had the predecessor companies actually merged at the beginning of the earliest period.
Management's Discussion and Analysis (MD&A) addresses the financial statements of Holdings and MidAmerican as presented in this joint filing. Information related to MidAmerican also relates to Holdings. Information related to MidAmerican Capital and Midwest Capital pertains only to the discussion of the financial condition and results of operations of Holdings. To the extent necessary, certain discussions have been segregated to allow the reader to identify information applicable only to Holdings.
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.
RESULTS OF OPERATIONS ---------------------
Holdings: - - ---------
The following tables provide a summary of the earnings contributions of the Company's operations for each of the periods presented:
MidAmerican: - - ------------
The following table provides a summary of the earnings contributions of MidAmerican's operations for each of the periods presented:
*1996 and 1995 include the income (loss) of MidAmerican Capital and Midwest Capital prior to their transfer to Holdings on December 1, 1996.
EARNINGS DISCUSSION
Earnings per share for 1997 and 1996 each increased 8 cents compared to their prior year. Some of the significant factors resulting in the increases are listed below, on a Holdings per-share basis. The discussion that follows addresses these factors as well as other items affecting the Company's results of operations.
The Company continued its strategic realignment of utility and nonregulated operations which began in 1996. Earnings of nonregulated subsidiaries have been significantly affected by such realignment. During 1997, the Company divested a number of its interests in nonregulated assets which did not align with the corporate vision of becoming the leading regional provider of energy and complementary services. Earnings for 1997 include 6 cents per share from the sale of assets of its railcar leasing and repair businesses. Losses from discontinued operations reduced earnings in 1996 and 1997, though to a lesser degree in 1997. Cash proceeds from the sale of discontinued operations allowed the Company to pay off long-term debt, significantly reducing its interest expense compared to 1996.
In addition, 1997 earnings include 5 cents per share from the sale of a portion of the Company's interest in McLeodUSA Incorporated (McLeodUSA).
Although utility earnings for 1997 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. Additionally, utility operating expenses increased as the Company continued strategic realignment which included strengthening its marketing and customer service capabilities and adding to its information technology resources.
In the past three years, the Company's evaluation of its nonregulated investments has resulted in write-downs of certain assets, primarily investments in alternative energy projects. The write-downs, which reflect declines in the value of those nonregulated investments, reduced earnings by approximately $2.0 million, or 2 cents per share, $9.4 million, or 9 cents per share, and $10.2 million, or 10 cents per share, in 1997, 1996 and 1995, respectively.
Discontinued Operations -
Holdings: - - ---------
During 1996, the Company 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, the Company and KCS Energy, Inc. (KCS) of Edison, New Jersey, signed a definitive agreement to sell a portion of the Company's nonregulated operations to KCS for $210 million in cash and warrants to purchase KCS common stock. The sale, which included the Company's oil and gas exploration and development operations, was completed in January 1997. The Company 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, the Company also divested a subsidiary that developed and operated a computerized information system which facilitated real-time exchange of power in the electric industry. The Company 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.
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 Holdings. 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 Holdings.
UTILITY GROSS MARGIN
A variety of factors contributed to the increase in MidAmerican's electric gross margin for 1997 compared to 1996. An increase in electric retail sales volumes, additional recovery of energy efficiency costs and an increase in transmission revenues all contributed to the improvement in gross margin. Rate reductions partially offset the increases.
Retail sales of electricity increased 2.6% compared to 1996 sales due primarily to a moderate but steady growth in the number of customers. The increase in sales resulting from customer growth contributed $11 million to the increase in electric gross margin. Also, compared to 1996, sales and gross margin improved due to the impact of temperatures in the Company's service territory. Although temperatures were milder than normal in both years, comparatively, margin for 1997 increased $2 million over 1996 margin due to the effect of weather. When compared to normal, the impact of temperatures resulted in a $13 million reduction in electric gross margin in 1997 compared to a $15 million reduction in the 1996 margin.
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 a new Iowa pricing plan. Previously, variations in revenues collected through the EACs did not affect gross margin or net income due to corresponding increases in energy costs. With the elimination of the Iowa EAC, fluctuations in energy costs now have an impact on gross margin and net income. Energy costs per unit since July 11, 1997, were below the amount recovered in rates under the new Iowa pricing plan and resulted in an increase to gross margin.
In October 1996, the Illinois Commerce Commission (ICC) ordered MidAmerican to reduce electric retail rates for its Illinois customers by 10%, or $13.1 million in annual revenues, effective November 3, 1996. A negotiated termination of the rate reduction proceeding left in place the initial $13.1 million annual reduction and included a second price reduction of $2.4 million annually effective on June 1, 1997. In Iowa, MidAmerican reduced its electric retail rates by $8.7 million effective November 1, 1996. The reduction lowered rates to levels proposed by MidAmerican in its pricing plan filed in June 1996. With implementation
of the approved settlement in July 1997, rates for Iowa residential customers were reduced an additional $10.0 million annually. The Iowa rate reductions are partially offset by a new tracking mechanism (Cooper Tracker) for capital improvement costs at the Cooper Nuclear Station (Cooper). Net of the effect of the Cooper Tracker, rate reductions reduced electric gross margin by $17.3 million compared to 1996. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information regarding the Iowa proceeding.
Beginning September 29, 1997, MidAmerican began collection of its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs. Including an allowed return on deferred costs, the annual increase in electric revenues is $36.1 million. The effect on earnings of this increase in revenues and gross margin is partially offset by a corresponding increase in other operating expenses of $31.1 million for deferred and current energy efficiency costs. Refer to "Energy Efficiency" in Liquidity and Capital Resources later in this discussion for further information.
Revenues and margin increased $6.2 million due to an increase in transmission revenues. In addition, a 3.9% increase in non-retail sales resulted in a $3.3 million increase in revenues.
Electric gross margin for 1996 was unchanged compared to 1995. Electric retail sales for 1996 increased nearly 2% compared to 1995 due to modest customer growth and an improvement in sales not dependent upon weather. Cooler weather conditions in the 1996 third quarter compared to the 1995 third quarter caused a significant decrease in weather-related sales. Colder weather during the 1996 heating seasons compared to the 1995 heating seasons helped to mitigate the impact of the mild cooling season in 1996. Sales to the more weather-sensitive customers have a higher margin per unit than sales to other customers. As a result, the decrease in sales to those customers had a greater impact on margin than increases in sales to other customers.
The net impact of increases and decreases in retail rates resulted in an overall decrease of $2.1 million in revenues and gross margin for 1996 compared to 1995. Rate decreases implemented in Iowa and Illinois in November 1996 were partially offset by an increase resulting from a filing made by one of MidAmerican's predecessor companies. Electric revenues in the first half of 1995 reflect a $13.6 million annual increase for interim rates in connection with that Iowa electric rate filing. Revenues for 1996 reflect the full-year effect of the final $20.3 million annual rate increase in the proceeding, which was effective in August 1995. Approximately $8 million of this increase relates to increased expenses for other postretirement employee benefit (OPEB) costs.
In August 1995, MidAmerican began collection of $5.7 million over a four-year period related to an energy efficiency cost recovery filing. At the same time, MidAmerican began amortization of the related energy efficiency costs that had previously been deferred and included on the Company's balance sheet. The amortization is included in other operating expenses.
Variations in gas gross margin are the result of changes in revenues due to price and sales volume variances. MidAmerican has been allowed to recover in revenues the cost of gas sold from most of its gas
utility customers through purchase gas adjustment clauses (PGAs). Variations in revenues collected through the PGAs, reflecting changes in the cost of gas per unit and volumes sold, do not affect gross margin or net income.
Gas gross margin for 1997 decreased $2 million compared to 1996 due to warmer temperatures during the 1997 heating seasons. Temperatures in 1997 were close to normal while temperatures in 1996 were colder than normal, contributing $8 million to the 1996 gas gross margin. The decrease in sales and gross margin due to weather was partially offset by the effect of a modest increase in natural gas retail customers. In total, retail sales of natural gas in 1997 decreased 7.1% compared to 1996 sales.
As discussed in the electric margin discussion, beginning September 29, 1997, MidAmerican began recovery of its energy efficiency costs not previously approved for recovery. Including an allowed return on deferred costs, the annual increase in gas revenues is $12.8 million. The effect on earnings of this increase in revenues and gross margin is partially offset by a corresponding increase in other operating expenses of approximately $11.1 million for deferred and current energy efficiency costs.
The average cost of gas per unit increased in 1997 compared to 1996 and is reflected in revenues and cost of gas sold.
Gas gross margin increased in 1996 compared to 1995. The increase was due both to price and sales volumes increases. Retail sales of natural gas increased 3.1% in 1996 compared to 1995 due in part to colder weather conditions in the first quarter of 1996 than during the first quarter of 1995.
Another cause of the increases in gas revenues and gross margin was an increase in gas retail service rates. Retail revenues in the first half of 1995 reflect interim rates from an $8.2 million increase in annual gas revenues in connection with an Iowa gas rate filing by one of MidAmerican's predecessor companies. MidAmerican began collecting the interim rates in October 1994. Gas revenues for 1996 reflect the full-year effect of the final rate increase of $10.6 million annually which was effective in August 1995. Approximately $2.5 million of the $10.6 million increase relates to increased expense for OPEB costs.
In August 1995, MidAmerican began collection of $12.9 million over a four-year period related to an energy efficiency cost recovery filing. At the same time, MidAmerican began amortization of the related energy efficiency costs that had previously been deferred and included on the Company's balance sheet. The amortization is included in other operating expenses.
Revenues and cost of gas sold each increased significantly in 1996 compared to 1995 due to an increase in the average cost of gas per unit in 1996.
UTILITY OPERATING EXPENSES
Utility other operating expenses increased for 1997 compared to 1996 due in part to an increase of $14.0 million in nuclear operating costs. Operating expenses related to Cooper increased in part due to the ratemaking treatment for Cooper capital improvements. As a result of 1996 and 1997 rate settlements, Cooper capital improvements are now expensed when incurred, instead of being capitalized. As mentioned previously in the Electric Gross Margin section, MidAmerican is now recovering on a current basis the Iowa portion of these costs from its Iowa electric customers. Recovery in Illinois is included in base rates. This change accounted for $4.5 million of the nuclear operating expense increase.
As mentioned in the gross margin discussions, 1997 reflects an increase in expense related to the increased recovery of certain energy efficiency costs beginning September 29, 1997. The 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.
Continued restructuring of the Company in preparation for a competitive industry has required additional expenses. MidAmerican has increased its emphasis in marketing-related efforts, as well as customer service operations, resulting in increases in consulting costs, advertising and other related expenses. In addition, 1997 reflects increases in uncollectible accounts expense, employee incentive compensation and certain employee benefits expenses. Other operating expenses for 1997 reflect an increase in transmission wheeling expense due in part to changes required by FERC Order Nos. 888 and 889.
For 1996, utility other operating expenses decreased compared to 1995 due primarily to $31.9 million of costs in 1995 for the Company's restructuring plan implemented as part of the merging of its predecessors. In addition, 1996 reflects cost savings resulting from the merger. Nuclear operations costs decreased $4.5 million in 1996 compared to 1995. Partially offsetting these decreases was a $4.2 million increase from the amortization of deferred energy efficiency costs. There were also increases in consulting services expenses and some general administrative costs for 1996 compared to 1995.
Maintenance expenses increased 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. In addition, the Company incurred $2.0 million in maintenance expenses for restoration following a snow storm in October 1997. Maintenance expenses at the Quad Cities Station decreased $2.5 million in 1997 compared to 1996. Refer to the discussion of Quad Cities Nuclear Station in the Liquidity and Capital Resources section of MD&A for information regarding the status of the plant.
Maintenance expenses increased for 1996 compared to 1995. The timing of power plant maintenance accounted for much of the variation between the periods. The increase in power plant maintenance for 1996 was partially offset by the inventory adjustment mentioned above. Maintenance expense for the Quad Cities Station increased $1.8 million for 1996 compared to 1995.
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
Holdings: - - ---------
Revenues of MidAmerican Capital and Midwest Capital increased a total of $22.8 million in 1997 compared to 1996. Revenues from the natural gas marketing subsidiaries increased $22.6 million due to an increase in the average price per unit, reflective of an increase in the cost of gas sold. Sales of natural gas decreased 3 million MMBtu's (4%) compared to 1996 sales.
Cost of sales includes expenses directly related to sales of natural gas. The increase in cost of sales for 1997 reflects a 15% increase in the average cost of gas per unit. Compared to 1996, total gross margin (total price less cost of gas) on nonregulated natural gas sales increased $1.0 million.
Revenues of MidAmerican Capital and Midwest Capital increased a total of $141.7 million for 1996 compared to 1995. The increase was due primarily to a $136.1 million increase in revenues from natural gas marketing subsidiaries, some of which did not exist in 1995. Sales volumes for the natural gas marketing firms increased 51 million MMBtu's (153%) for 1996 compared to 1995. In addition, the average price of natural gas increased in 1996.
Cost of sales for 1996 reflects the increases in gas sales volumes and cost per unit compared to 1995. Average margins on sales of natural gas decreased in 1996 compared to 1995 due in part to increased competition in the nonregulated natural gas industry. As a result, total 1996 gross margin on nonregulated natural gas sales decreased $2.5 million compared to 1995.
NON-OPERATING INCOME AND INTEREST EXPENSE
MidAmerican: - - ------------
Other, Net -
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.
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.
MidAmerican was awarded $4.9 million of pre-tax income in 1997 for its performance under its incentive gas procurement program during the May 1996 to April 1997 period. In the fourth quarter of 1996, MidAmerican recorded an award of $2.7 million of pre-tax income as a result of successful performance under its incentive gas procurement program during the 1995-1996 heating season.
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).
In addition, Other, Net includes the recognition of deferred income from energy efficiency programs totaling $5.0 million and $3.3 million for 1997 and 1996, respectively.
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 1995 includes $4.6 million of merger transaction costs related to the Company's 1995 merger and $3.1 million for recognition of deferred income from energy efficiency programs.
Interest Charges -
A decrease in the average amount of commercial paper outstanding compared to 1996 resulted in a decrease in other interest expense for 1997. The decrease was partially offset by interest expense related to IRS settlements in 1997.
Holdings: - - ---------
Dividend Income -
Dividend income decreased for 1997 periods due MidAmerican Capital's reduced holdings of preferred stock portfolios as discussed below.
Realized Gains and Losses on Securities, Net -
Net realized gains on securities for 1997 includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common stock. Excluding that gain, net realized gains decreased in 1997 compared to 1996 primarily from realized gains on the sales of certain common equity fund holdings which MidAmerican Capital began liquidating in 1996. Net realized gains on securities increased for 1996 compared to 1995 due to an increase in gains on the disposition of equity fund holdings and managed preferred stock portfolios.
Other, Net -
During 1997, the Company 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, as discussed in the Earnings Discussion section at the beginning of Results of Operations, decreased Other, Net by $3.4 million, $15.6 million and $18.0 million for 1997, 1996 and 1995, respectively. Income from equity investments decreased in 1997 due to the liquidation activity discussed above. Other, Net for 1996 reflects an increase in income from equity investments and special purpose funds compared to 1995. In 1995, the Company had pre-tax gains totaling $8.5 million on the sales of a partnership interest in a gas marketing organization and a telecommunication subsidiary.
Interest Charges -
MidAmerican Capital's interest on long-term debt decreased $10.1 million compared to 1996 expense due to the reduction of its long-term debt in early 1997.
INCOME TAXES
Holdings: - - ---------
During the second quarter of 1997, the Company contributed part of an appreciated common stock investment to its tax exempt foundation and realized $2.9 million of tax benefit.
LIQUIDITY AND CAPITAL RESOURCES -------------------------------
The Company has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements.
As of December 31, 1997, common equity represented 51.7% of the Company's total capitalization compared to 44.0% and 44.3% as of December 31, 1996 and 1995, respectively. Several factors other than earnings, dividends and scheduled maturities of debt affected the change. Recording an investment in McLeodUSA at market value and repurchases and retirement of debt prior to its scheduled maturity were major contributors to the move to a higher percentage of equity. The Company's common stock repurchase program reduced common equity during 1997. Each of these items is included in the discussion that follows.
MidAmerican's common equity as of December 31,1997, represented 47.2% of its capitalization compared to 43.8% as of December 31, 1996. A reduction of long-term debt was the primary cause of the change.
As reflected on the Consolidated Statements of Cash Flows, Holdings had net cash provided from operating activities of $392 million for 1997 compared to $321 million and $337 million in 1996 and 1995, respectively. MidAmerican's net cash provided from operating activities was $380 million for 1997 and $327 million and $333 million for 1996 and 1995, respectively.
INVESTING ACTIVITIES AND PLANS
MidAmerican: - - ------------
Utility Construction Expenditures -
MidAmerican's primary need for capital is utility construction expenditures. For 1997, utility construction expenditures totaled $167 million, including allowance for funds used during construction (AFUDC), Quad Cities Station nuclear fuel purchases and Cooper capital improvements. In addition, MidAmerican's nonregulated railway subsidiary had $6 million of construction expenditures in 1997. All such expenditures were met with cash generated from utility operations, net of dividends.
Beginning with July 1997 expenditures, Cooper capital improvements are no longer included in utility construction expenditures but are expensed when incurred in Other Operating Expenses. As part of the 1997 settlement of MidAmerican's pricing proposal, MidAmerican is recovering on a current basis the Iowa portion of Cooper capital improvements from its Iowa electric customers through a tracking mechanism.
Forecasted utility construction expenditures for 1998 are $201 million including AFUDC. 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 -
Operators of a nuclear facility are required to set aside funds to provide for costs of future decommissioning of their 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 $51 million during the period 1998 through 2002 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Historically, the funds were invested in investment grade municipal and U.S. Treasury bonds; however, in 1997 MidAmerican directed the trust to begin investing a portion of the funds in domestic corporate debt and common equity securities. Approximately 40% of the trust's funds are now invested in domestic corporate debt and common equity securities.
In addition, MidAmerican makes payments to 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 1998 through 2002. NPPD invests the funds predominantly in U.S. Treasury Bonds. 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.
MidAmerican currently recovers Quad Cities Station decommissioning costs charged to Illinois customers through a rate rider on customer billings. 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.
Holdings: - - ---------
Nonregulated Capital Expenditures -
Capital expenditures of MidAmerican Capital and Midwest Capital totaled $8 million in 1997. Capital expenditures of these subsidiaries depend primarily upon the availability of suitable investment opportunities which meet the Company's objectives. The Company continues to evaluate nonregulated investments and may redeploy certain assets in the next year. External financing may also be used to provide for nonregulated capital expenditures.
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.
Included in investments on the Consolidated Balance Sheets is the Company's investment in common stock of McLeodUSA. McLeodUSA common stock has been publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's initial public offering and subsequent merger with Consolidated Communications Inc. prohibit the Company from selling or otherwise disposing of any of the common stock of McLeodUSA prior to September 24, 1998, without the approval of McLeodUSA's board of directors. As
a result of the agreements, the Company's investment was considered restricted stock and, as such, was recorded at cost in all periods prior to September 1997. Beginning in September 1997, the investment is no longer considered restricted for accounting purposes and is recorded at fair value. At December 31, 1997, the cost and fair value of the McLeodUSA investment were $45.2 million and $257.9 million, respectively. The unrealized gain is recorded, net of income taxes, as a valuation allowance in common shareholders' equity. At December 31, 1997, the unrealized gain and deferred income taxes for this investment were $212.7 million and $74.4 million, respectively.
MidAmerican Capital received approximately $302 million in cash during 1997 from sales of investments primarily as part of its efforts to align them with the Company's strategy. A significant portion of the proceeds from these sales was used for retirement of MidAmerican Capital long-term debt and for dividends to Holdings for use in the repurchase of the Company's common stock.
FINANCING ACTIVITIES, PLANS AND AVAILABILITY
MidAmerican: - - ------------
MidAmerican currently has authority from the Federal Energy Regulatory Commission (FERC) to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of December 31, 1997, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit to provide short-term financing for utility operations. MidAmerican's commercial paper borrowings, which totaled $123 million at December 31, 1997, are supported by the revolving credit facility and the line of credit. MidAmerican also has a revolving credit facility which is dedicated to provide 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. 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 Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997, $130.0 million, net of reserves, was sold under the agreement.
During 1997, MidAmerican repurchased $42.4 million of first mortgage bonds with annual interest rates from 6.95% to 7.70%, excluding bonds which matured in 1997.
As of December 31, 1997, MidAmerican had $401 million of long-term debt maturities and sinking fund requirements for 1998 through 2002.
MidAmerican currently has regulatory authority to issue an additional $300 million of preferred securities and long-term debt, including issues under its medium-term note program. It is management's intent to refinance certain MidAmerican debt securities with additional issuances of unsecured debt and preferred securities of a subsidiary trust as market conditions allow.
Credit Ratings -
MidAmerican's access to external capital and its cost of capital are influenced by the credit ratings of its securities. MidAmerican's credit ratings as of January 31, 1998, are shown in the table below. The ratings reflect only the views of such rating agencies, and each rating should be evaluated independently of any other rating. Generally, rating agencies base their ratings on information furnished to them by the issuing company and on investigation, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if in the judgment of the rating agency circumstances so warrant. Such ratings are not a recommendation to buy, sell or hold securities.
The following is a summary of the meanings of the ratings shown above and the relative rank of MidAmerican's rating within each agency's classification system.
Moody's top four bond ratings (Aaa, Aa, A and Baa) are generally considered "investment grade." Obligations which are rated "A" possess many favorable investment attributes and are considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. A numerical modifier ranks the security within the category with a "1" indicating the high end, a "2" indicating the mid-range and a "3" indicating the low end of the category. Standard & Poor's top four bond ratings (AAA, AA, A and BBB) are considered "investment grade". Debt rated "AA" has a very strong capacity to meet its financial commitment and differs from the highest rated obligations only in small degree. Standard & Poor's may use a plus (+) or minus (-) sign after ratings to designate the relative position of a credit within the rating category.
Ratings of preferred stocks are an indication of a company's ability to pay the preferred dividend and any sinking fund obligations on a timely basis. Moody's top four preferred stock ratings (aaa, aa, a and baa) are generally considered "investment grade". Moody's "a" rating is considered to be an upper medium grade preferred stock. Earnings and asset protection are expected to be maintained at adequate levels in the foreseeable future. Standard & Poor's top four preferred stock ratings (AAA, AA, A and BBB) are considered "investment grade". Standard & Poor's "A" rating indicates adequate earnings and asset protection.
Moody's top three commercial paper ratings (P-1, P-2 and P-3) are generally considered "investment grade". Issuers rated "P-1" have a superior ability for repayment of senior short-term debt obligations and repayment ability is often evidenced by a conservative structure, broad margins in earnings coverage of fixed financial charges and well established access to a range of financial markets and assured sources of alternate liquidity. Standard & Poor's commercial paper ratings are a current assessment of the likelihood of timely payment of debt having an original maturity less than 365 days. The top three Standard & Poor's commercial paper ratings (A-1, A-2 and A-3) are considered "investment grade". Issues rated "A-1" indicate that the
degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety are denoted with a plus (+) sign designation.
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. Excluding these losses, preferred dividends increased for 1997 compared to 1996 due to the increase in preferred stock outstanding.
Holdings: - - ---------
As of December 31, 1997, Holdings had lines of credit totaling $120 million available to provide for short-term financing needs.
In addition, Holdings has the necessary authority to issue shares of its common stock through its Shareholder Options Plan (a dividend reinvestment and stock purchase plan). Since July 1, 1995, the Company has used open market purchases of its common stock rather than original issue shares to meet share obligations under its Employee Stock Purchase Plan and the Shareholder Options Plan. Holdings currently plans to continue using open market purchases to meet share obligations under these plans.
In March 1997, Holdings announced its plan to repurchase up to $200 million of the Company's common stock. The Company plans to purchase the shares from time to time as market conditions warrant, with the intent of completing the entire repurchase program by December 31, 1998. As of December 31, 1997, the Company had repurchased approximately 5.0 million shares for $89.2 million. The Company believes repurchasing Holding's common stock is the best investment of Company funds at this time. Repurchasing the common stock will reduce total common dividend requirements and aid in improving the Company's dividend payout ratio. In addition, a subsidiary of the Company holds approximately 437,000 shares of Holdings common stock which are also excluded from shares outstanding.
On January 28, 1998, Holdings' board of directors declared a quarterly dividend on common shares of $0.30 per share payable March 1, 1998. The dividend represents an annual rate of $1.20 per share.
Nonregulated Subsidiaries -
As of December 31, 1997, MidAmerican Capital had unsecured revolving credit facilities in the amount of $114 million with a zero balance outstanding under these facilities. In January 1997, MidAmerican Capital paid off the $90 million outstanding under the revolving credit facilities with proceeds from the sale transaction with KCS. Another $100 million revolving credit facility related to discontinued operations was terminated in January 1997, and the $84 million outstanding repaid. In addition, MidAmerican Capital terminated two $32 million floating-rate-to-fixed-interest-rate swaps related to amounts outstanding under one of the revolving credit facilities. MidAmerican Capital has $135 million of long-term debt maturities and sinking fund requirements for 1998 through 2002.
Midwest Capital currently has a $25 million line of credit with MidAmerican, of which $5 million was outstanding at December 31, 1997.
OPERATING ACTIVITIES AND OTHER MATTERS
Throughout the country, 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.
MidAmerican has been active in promoting and monitoring legislative and regulatory changes that affect the jurisdictions in which it operates. In order to successfully compete in the new environment, the Company believes it must become the leading regional provider of energy and complementary services. The Company is evaluating all aspects of its business to determine what adjustments are necessary to align them with this strategy. Aligning nonregulated businesses with the Company's strategy has resulted, and may continue to result in the next year, in negative impacts on Holdings' earnings in the form of write-downs for the sale, revaluation or discontinuance of nonregulated operations and investments. (Refer to the Results of Operations section of MD&A for comments on the earnings impact of such actions.) The following discussion further addresses changes affecting the industry and actions the Company is taking to implement its strategy.
Competition -
MidAmerican is subject to regulation by several utility regulatory agencies which significantly influences the operating environment and the recoverability of costs from utility customers. That regulatory environment has, in general, given MidAmerican an exclusive right to serve customers within its service territory and, in turn, the obligation to provide electric service to those 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. In order to lessen the impact of reduced margins, MidAmerican will continue to focus on controlling the cost of such services. In addition, MidAmerican is positioning itself to offer complementary products and services as expected opportunities become available in a competitive utility retail market. Additional products and services may provide avenues to replace margins lost on traditional electric services.
MidAmerican has been authorized in an order from the IUB approving the electric pricing settlement to enter into long-term electric contracts with industrial and commercial customers. MidAmerican is negotiating long-term contracts with various industrial and commercial customers. The Company believes these contracts will help stabilize margins in the future.
Legislative and Regulatory Evolution -
On December 16, 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market beginning October 1, 1999. The law is very complex, and MidAmerican continues to evaluate the impact of the law on its operations.
The law requires a 15% electric rate reduction for all Illinois residential customers in 1998. To satisfy its obligation, the law specifically permitted MidAmerican to receive credit for the $15.5 million, or approximately 13%, rate reductions implemented in Illinois in 1996 and 1997. MidAmerican is also 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 return on equity (ROE) to be shared equally between customers and MidAmerican beginning in April 2000. The ROE level at which MidAmerican will be required to share earnings is a multi-step calculation of average 30-year Treasury Bill rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the resulting average Treasury Bill rate approximated rates which existed in 1997, the ROE level above which sharing must occur would be approximately 12%.
Beginning October 1, 1999, larger non-residential customers and 33% of the remaining non-residential customers will be 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 also addresses charges to customers for transition costs based on a lost-revenue approach. These transition fees, designed to help utilities address stranded costs, will end December 31, 2006, subject to possible extension.
In Iowa, no legislation has yet been introduced to allow generation or retail service competition. Because energy costs are low in Iowa, industry restructuring has not been an issue aggressively pursued in the state to date. However, a group of industrial customers formed in the fall of 1997 has indicated that it may introduce retail competition legislation during the 1998 Iowa legislative session. MidAmerican's Iowa legislative priority for 1998 is property tax reform, a condition it considers precedent to industry restructuring.
In April 1996, the FERC issued Order Nos. 888 and 889 which require public utilities and other transmission providers and users to provide other companies the same transmission access, service and pricing that they provide themselves. In compliance with Order 888, which was effective July 9, 1996, MidAmerican has filed a pro forma open access transmission tariff and is currently operating under it. In May 1997, MidAmerican filed revisions to the tariff in accordance with Order No. 888-A which was issued in March 1997. In accordance with Order 889, which was effective January 3, 1997, MidAmerican has separated its electric wholesale marketing and transmission operation functions. Order 889 establishes standards of conduct for this functional separation and further requires transmission providers such as MidAmerican to either create or participate in an Open Access Same Time Information System (OASIS). MidAmerican is a long-time member of the Mid-Continent Area Power Pool (MAPP) and has elected to participate in the MAPP OASIS.
In October 1997, the IUB adopted rules to encourage gas transportation service for small volume customers starting in 1999. MidAmerican has until November 15, 1998, to file its own plan to unbundle service for its small volume customers. MidAmerican presently believes that these rules will not have a material impact on its results of operations.
Accounting Effects of Industry Restructuring -
A possible consequence of competition in the utility industry is that Statement of Financial Accounting Standards (SFAS) No. 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 restructuring legislation in Illinois. Thus, MidAmerican was required to write off those amounts of regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. These write-offs were not material. If other portions of its utility operations no longer meet the criteria of SFAS 71, MidAmerican would 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 December 31, 1997, MidAmerican had $339 million of regulatory assets in its Consolidated Balance Sheet. Refer to Note 1(c) for a list of the regulatory assets as of December 31, 1997.
Energy Efficiency -
MidAmerican's regulatory assets as of December 31, 1997, included $111.5 million of deferred energy efficiency costs. On September 29, 1997, MidAmerican received approval from the IUB, effective immediately, to begin recovery of deferred energy efficiency costs not previously approved. Accordingly, $95.1 million of such costs will be collected over a four-year period, along with a return of $26.6 million on those costs. MidAmerican also received approval to recover current energy efficiency costs, which are expected to be $18.5 million for the period May 1997 through April 1998. The projected $18.5 million of current costs, $5.3 million of which were deferred from May through September 1997, will be collected in the twelve-month period ending in September 1998. The filing is subject to periodic prudence reviews by the IUB. Deferred and current energy efficiency costs will be reflected in operating expenses over the related periods of recovery.
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.
On June 27, 1997, the IUB issued an order in a consolidated rate proceeding involving MidAmerican's pricing proposal and a filing by the Iowa Office of Consumer Advocate (OCA). The order approved a March 1997 settlement agreement between MidAmerican, the OCA and other parties to the proceeding. The agreement includes a number of characteristics of MidAmerican's pricing proposal. Prices for residential customers were reduced $8.5 million annually and $10.0 million annually, effective November 1, 1996, and July 11, 1997, respectively, and will be reduced an additional $5.0 million annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates for commercial and industrial customers will be reduced a total of $10 million annually by June 1, 1998, through pilot projects, negotiated rates with individual customers and, if needed, a base rate reduction effective June 1, 1998. The agreement includes a tracking mechanism to currently recover the cost of capital improvements required by the Cooper Nuclear Station Power Purchase Contract. The tracking mechanism will offset approximately $9 million of these reductions.
In addition, the agreement accepted MidAmerican's proposal to eliminate the energy adjustment clause (EAC) which was the mechanism through which fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC flowed the cost of fuel to customers on a current basis, and thus, fuel costs had little impact on net income. Beginning July 11, 1997, base rates for Iowa customers include a factor for recovery of a representative level of fuel costs. Earnings are now affected by variances in actual fuel costs from the factor included in rates. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary 15% above or below the factor included in base rates.
Under the agreement, if MidAmerican's annual return on common equity exceeds 12%, then an equal sharing between customers and shareholders of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of MidAmerican's share of those earnings will be used for accelerated recovery of certain regulatory assets. The agreement permits MidAmerican to file for increased rates if the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%.
The agreement also provides that MidAmerican will develop a pilot program for a market access service which allows customers with at least 4 MW of load to choose energy suppliers. The pilot program, which is subject to approval by the IUB and the FERC, is limited to 60 MW of participation the first year and can be expanded by 15 MW annually until the conclusion of the program. Any loss of revenues associated with the pilot program will be considered part of the $10 million annual reduction for commercial and industrial customers but may not be recovered from other customer classes. MidAmerican filed its proposed program with the IUB and the FERC in September 1997. MidAmerican anticipates that the necessary approvals will be received before the end of the second quarter of 1998.
In December 1997, an Iowa industrial customer located within MidAmerican's IUB-approved exclusive electric service territory, filed a lawsuit against Holdings and MidAmerican in the United States District Court for the District of Iowa alleging various violations of federal antitrust laws. The lawsuit stems from a claim that because the customer is not free to choose its retail energy, MidAmerican is engaging in illegal monopolistic behavior. In addition to damages, the customer is seeking the right to choose its electric retail supplier. MidAmerican maintains that its provision of retail electric service is in accordance with Iowa laws and regulations governing electric service territories, and all other applicable legal requirements. A ruling in favor of the plaintiff could have the effect of accelerating retail competition in MidAmerican's Iowa service territory.
Environmental Matters -
The United States Environmental Protection Agency (EPA) and 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.
The Company is evaluating 26 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 the Company has any responsibility for remedial action. The Company's present estimate of probable remediation costs for these sites is $21 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note 4(b) of Notes for further discussion of the Company's environmental activities related to manufactured gas plant sites and cost recovery.
Although the timing of potential incurred costs and recovery of such cost 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 the Company's financial position or results of operations.
On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout 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.
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. If MidAmerican's operations contribute to nonattainment and modifications to MidAmerican's operations or facilities are necessary, the cost of making emissions reductions to meet the air quality standards will be dependent upon the level of emissions reductions required and the available technology. MidAmerican will continue to evaluate the potential impact of the new regulations.
Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking (NOPR) which identified 22 states and the District of Columbia as making significant contribution to nonattainment of NAAQS for ozone. Iowa is not subject to these emissions reduction requirements as EPA's rule is currently drafted, and, as such, MidAmerican does not anticipate that its facilities will be subject to additional emissions reductions as a result of this initiative. The EPA anticipates issuing its final rules in September 1998. MidAmerican will continue to closely monitor this rulemaking proceeding.
Coal Deliveries -
A coal transportation provider of MidAmerican has been experiencing nationwide operational problems. Consequently, coal deliveries to MidAmerican's Neal station in the fourth quarter of 1997 were delayed resulting in reduced coal inventory at that site. The Neal Station represents approximately 37% of MidAmerican's coal-fired generating capacity. Following discussions between MidAmerican and the transportation provider, increased deliveries have been made to the four Neal units. In order to preserve coal inventories, MidAmerican reduced its sales of energy to other utilities, which reduced electric margins in the fourth quarter.
Quad Cities Nuclear Station Outage -
In September 1997, Commonwealth Edison Company (ComEd), operator and 75% owner of Quad Cities Station Units 1 and 2, shut down Unit 2 and entered early a scheduled outage to address safety system concerns. In December 1997, Unit 1 was also taken off-line for the same reason. ComEd has indicated that the units may be unavailable until the first half of May 1998. During this time, it may be necessary for MidAmerican to forego off-system sales opportunities, operate more expensive units, and/or purchase more off-system energy. In January 1998, ComEd received a Confirmatory Action Letter (CAL) from the Nuclear Regulatory Commission (NRC). The CAL details actions that must be taken to correct the problems described above. Also in January, ComEd was informed by the NRC that the performance of Quad Cities Station is trending adversely. The Company cannot at this time predict the cost of these actions nor the impact on results of operations of the plant's outage.
YEAR 2000
The Company has undertaken an extensive project to ensure the ability of its information technology systems, including hardware, software and applications programs, to perform correctly on January 1, 2000. The Company, in addition to its internal resources, has engaged independent contractors to assist with the conversion project. The project timetable specifies completion of all conversion work and testing sufficiently in advance of January 1, 2000, to identify any residual concerns. The Company estimates the remaining cost to remediate year 2000 flaws in its principal business systems to be approximately $5 million. Potential concerns regarding other systems used throughout the Company's operations continues to be evaluated. Although management believes that the project will be completed within the required time frame, unforeseen and other factors, including failure of the contractors to perform, could cause delays in the project, the results of which could be material to the Company.
ACCOUNTING ISSUES
The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry regarding the recognition, measurement and classification of nuclear decommissioning costs in the financial statements. In response to these questions, the FASB has issued an Exposure Draft, "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which addresses the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric utility industry accounting practices for such decommissioning are changed, the annual provision for decommissioning could increase relative to the current level, and the total estimated cost for decommissioning could be recorded as a liability with recognition of an increase in the cost of related nuclear power plant. Due to the continuing evolution of the exposure draft, the Company is uncertain as to the impact on its results of operations and financial position.
The Financial Accounting Standards Board has issued SFAS No. 130 addressing the issue of comprehensive income. SFAS 130 requires that all items required to be recognized as changes in equity during a period, except those resulting from investments by owners and distributions to owners, (i.e., comprehensive income), be reported in a financial statement that is displayed with the same prominence as the other financial statements. The display can be a separate statement or an addition to an existing statement. The material components of the Company's comprehensive income will include net income and the after-tax effect of changes in the fair value of investments classified as available for resale. SFAS 130 is effective for fiscal years beginning after December 15, 1997.
The accompanying notes are an integral part of these statements
The accompanying notes are an integral part of these statements
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MERGER AND FORMATION OF THE COMPANY:
MidAmerican Energy Holdings Company (Company or Holdings) is a holding company for MidAmerican Energy Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). 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.
MidAmerican was formed on July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc. (Midwest Resources) and its utility subsidiary, Midwest Power Systems Inc. (Midwest Power). Each outstanding share of preferred and preference stock of the predecessor companies was converted into one share of a similarly designated series of MidAmerican preferred stock, no par value. Each outstanding share of common stock of Midwest Resources and Iowa-Illinois was converted into one share and 1.47 shares, respectively, of MidAmerican common stock, no par value. The merger was accounted for as a pooling-of-interest and the financial statements included herein are presented as if the merger and the formation of the holding company had occurred as of the earliest period shown.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include the Company and its wholly owned subsidiaries, MidAmerican, MidAmerican Capital and Midwest Capital. 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 restructuring legislation in Illinois. Thus, MidAmerican was required to write off regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. The net amount of such write-off's were immaterial. If other utility operations no longer meet the criteria of SFAS 71, MidAmerican would 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):
(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 $80.2 million and $70.1 million at December 31, 1997 and 1996, respectively, and are included in Receivables on the Consolidated Balance Sheets.
MidAmerican's Illinois and South Dakota jurisdictional sales, or approximately 11% 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:
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) equal to the level of funding is included in depreciation expense. See Note 4(e) for additional information regarding decommissioning costs.
(F) INVESTMENTS:
Investments, managed primarily through the Company's nonregulated subsidiaries, include the following amounts as of December 31 (in thousands):
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 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.
Net cash provided (used) from changes in working capital, net of effects from discontinued operations was as follows (in thousands):
(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.
Capital improvement costs prior to July 11, 1997, including carrying costs, were deferred, 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, capital improvement costs are recovered currently from customers and are expensed as incurred.
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 valuation allowance 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, 1997 and 1996 was $1.9 million and $5.1 million, respectively. Realized gains and losses on the put options are included in Realized Gains and Losses on Securities, Net in the Consolidated Statements Income in the period the underlying hedged fixed rate preferred stocks are sold. At December 31, 1997, the Company held put options with a notional value of $3.2 million.
2) Gas Futures Contracts and Swaps:
The Company uses gas futures contracts and swap contracts to reduce its exposure to changes in the price of natural gas purchased to meet the needs of its customers and to manage margins on natural gas storage opportunities. Investments in natural gas futures contracts, which total $1.6 million and $0.8 million as of December 31, 1997 and 1996, 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, Other Net 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 $(0.4) million and $0.8 million as of December 31, 1997 and 1996, 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, 1997 the Company held the following hedging instruments:
(2) LONG-TERM DEBT:
The Company's sinking fund requirements and maturities of long-term debt for 1998 through 2002 are $145 million, $106 million, $134 million, $125 million and $25 million, respectively.
The interest rate on the Company's Adjustable Rate Series Mortgage Bonds is reset every two years at 160 basis points over the average yield to maturity of 10-year Treasury securities. The rate was reset in 1997.
The Company'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. The Company, 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 rates shown in the Consolidated Statements of Capitalization are the weighted average interest rates as of December 31, 1997 and 1996. The Company maintains dedicated revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues.
Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest Power electric utility property in Iowa, or approximately 82% of gross utility plant, is pledged to secure mortgage bonds.
MidAmerican Capital has $64 million and $50 million unsecured revolving credit facility agreements which mature in 1998. Borrowings under these agreements may be on a fixed rate, floating rate or competitive bid rate basis. All subsidiary long-term borrowings outstanding at December 31, 1997, are without recourse to Holdings.
(3) JOINTLY OWNED UTILITY PLANT:
Under joint plant ownership agreements with other utilities, MidAmerican had undivided interests at December 31, 1997, 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).
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1998 are estimated to be $201 million, including $13 million for Quad Cities nuclear fuel. Nonregulated capital expenditures depend upon the availability of investment opportunities and other factors. During 1998, such expenditures are estimated to be approximately $10 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 26 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 seventeen of the sites and has completed investigations at one of the sites. In addition, MidAmerican has completed removals at three of the 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 present estimate of probable remediation costs for the sites discussed above as of December 31, 1997 is $21 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:
On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout 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.
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. If MidAmerican's operations contribute to nonattainment and modifications to MidAmerican's operations or facilities are necessary, the cost of making emissions reductions to meet the air quality standards will be dependent upon the level of emissions reductions required and the available technology. MidAmerican will continue to evaluate the potential impact of the new regulations.
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 NAAQS for ozone. Iowa is not subject to these emissions reduction requirements as EPA's rule is currently drafted, and, as such, MidAmerican does not anticipate that its facilities will be subject to additional emissions reductions as a result of this initiative. The EPA anticipates issuing its final rules in September 1998. MidAmerican will continue to closely monitor this rulemaking proceeding.
(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 1998 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 $13.8 million, $14.5 million and $12.0 million and the net interest component was $3.8 million, $3.6 million and $4.6 million each for the years 1997, 1996 and 1995, 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 $14.4 million, $15.0 million, $15.8 million, $16.6 million, $17.4 million and $18.3 million for 1998 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, in 1997 dollars, is $247 million and $230 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, 1997, MidAmerican's share of funds set aside by NPPD in internal and external accounts for decommissioning was $78.2 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 $11.3 million, $9.9 million and $8.9 million for the years 1997, 1996, and 1995, 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 units. The total accrued balance as of December 31, 1997, was $93.3 million and is included in Other Liabilities and a like amount is reflected in Investments and represents the value of the assets held in the trusts.
MidAmerican's provision for depreciation included costs for Quad Cities nuclear decommissioning of $9.8 million, $8.6 million and $8.6 million for 1997, 1996 and 1995, 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 tariffs assumes decommissioning costs, related to the Quad Cities unit, will escalate at an annual rate of 5.3% and the assumed annual return on funds in the trust is 6.5%. The Quad Cities decommissioning funding component of MidAmerican's Iowa tariffs assumes decommissioning costs will escalate at an annual rate of 6.3% and the assumed annual return on funds in the trust is 6.5%. Earnings on the assets in the trust fund were $5.0 million, $3.5 million and $2.5 million for 1997, 1996 and 1995, respectively.
(F) NUCLEAR INSURANCE:
MidAmerican maintains financial protection against catastrophic loss associated with its interest in Quad Cites and Cooper through a combination of insurance purchased by NPPD (the owner and operator of Cooper) and Commonwealth Edison (the joint owner and operator of Quad Cities), insurance purchased directly by MidAmerican, and the mandatory industry-wide loss funding mechanism afforded under the Price-Anderson Amendments Act of 1988. The coverage falls into three categories: nuclear liability, property coverage and nuclear worker liability.
NPPD and Commonwealth Edison each purchase nuclear liability insurance 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 owners 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 maximum potential share of such an assessment is $79.3 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, Commonwealth Edison purchases primary and excess property insurance protection for the combined interest in Quad Cities totalling $2.1 billion. For Cooper, NPPD purchases primary property insurance in the amount of $500 million. Additionally, MidAmerican and NPPD separately purchase coverage for their respective obligation of $1.125 billion each in excess of the $500 million primary layer purchased by NPPD. This structure provides that both MidAmerican and NPPD are covered for their respective 50% obligation in the event of a loss totalling $2.75 billion. MidAmerican also directly purchases extra expense/business interruption coverage to cover the cost of replacement power and/or other continuing costs in the event of a covered accidental outage at Cooper or Quad Cities. The coverages purchased directly by MidAmerican, and the primary and excess property coverages purchased by Commonwealth Edison, 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 insurance companies for its obligations associated with Cooper and Quad Cities combined total $11.6 million.
The master nuclear worker liability coverage is an industry-wide 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 as a result of radiation exposure on or after January 1, 1988. MidAmerican's share, based on its interest in Cooper and Quad Cities, of a maximum potential share of a retrospective assessment under this program is $3.0 million.
(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 1998 to 2003, require minimum payments of $132.2 million, $88.8 million, $57.8 million, $26.3 million and $3.1 million and $3.1 million for the years 1998 through 2003, respectively. The Company expects to supplement these coal contracts with spot market purchases to fulfill its future fossil fuel needs.
The Company has entered into various natural gas supply and transportation contracts for its utility operations. The minimum commitments under these contracts are $88 million, $63 million, $37 million, $32 million and $16 million for the years 1998 through 2002, respectively, and $76 million for the total of the years thereafter. During 1993 FERC Order 636 became effective, requiring interstate pipelines to restructure their services. The pipeline will recover the transition costs related to Order 636 from the local distribution companies. The Company has recorded a liability and regulatory asset for the transition costs which are being recovered by the Company through the purchased gas adjustment clause. The unrecovered balance recorded by the Company as of December 31, 1997, was $9.3 million.
(5) COMMON SHAREHOLDERS' EQUITY:
Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands):
(6) RETIREMENT PLANS:
The Company has 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.
Net periodic pension cost includes the following components for the years ended December 31 (in thousands):
During 1995, the Company incurred a one-time charge of $15.7 million related to the early retirement portion of its restructuring plan. Of such cost, $3.0 million was charged to expense and the remaining amount was deferred for future recovery through the regulatory process.
The plan assets are stated at fair market value and are primarily comprised of insurance contracts, United States government debt and corporate equity securities. The plans in which accumulated benefits exceed assets consist entirely of nonqualified defined benefit plans. Although the plans have no assets, the Company purchases corporate owned life insurance to provide funding for the future cash requirements. The cash value of such insurance was $21.5 million and $17.3 million at December 31, 1997 and 1996,
respectively. The following table presents the funding status of the plans and amounts recognized in the Consolidated Balance Sheets as of December 31 (dollars in thousands):
The Company currently provides certain health care and life insurance 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.
In January 1993, the Company adopted SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The Company began expensing these costs on an accrual basis for its Illinois customers and certain of its Iowa customers in 1993 and including provisions for such costs in rates for these customers. For its remaining Iowa customers, the Company deferred the portion of these costs above the "pay-as-you-go" amount already included in rates until recovery on an accrual basis was established in 1995. The Company is currently amortizing the deferral, expensing the SFAS No. 106 accrual and including provisions for these costs in rates.
Net periodic postretirement benefit cost includes the following components for the year ended December 31 (in thousands):
During 1995, the Company recorded a one-time expense of $4.4 million related to the early retirement portion of its restructuring plan.
The Company has established external trust funds to meet its expected postretirement benefit obligations. The trust funds are comprised primarily of guaranteed rate investment accounts and money market investment accounts. A reconciliation of the funded status of the plan to the amounts realized as of December 31 is presented below (dollars in thousands):
For purposes of calculating the postretirement benefit obligation, it is assumed health care costs for covered individuals prior to age 65 will increase by 10.0% in 1998, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2003. For covered individuals age 65 and older, it is assumed health care costs will increase by 7.0% in 1998, and that the rate of increase thereafter will decline by 1.0% annually to an ultimate rate of 5.5% by the year 2000.
If the assumed health care trend rates used to measure the expected cost of benefits covered by the plans were increased by 1%, the total service and interest cost would increase by $1.8 million and the accumulated postretirement benefit obligation would increase by $15.4 million.
The Company sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. The Company's contributions to the plans, which are based on the participants' level of contribution and cannot exceed four percent of the participants' salaries or wages, were $4.6 million, $4.4 million and $3.7 million for 1997, 1996 and 1995, respectively.
(7) STOCK-BASED COMPENSATION PLANS:
The company has stock-based compensation arrangements 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 $1.3 million, $0.6 million, and $1.8 million for 1997, 1996, and 1995 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 $135.3 million, $130.9 million, and $122.6 million, while earnings per share would be $1.38, $1.30, and $1.22 for the years ended 1997, 1996, and 1995 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.
STOCK OPTIONS - Under the Plan, the Board of Directors have granted options to purchase shares of MidAmerican Holdings common stock (the "Options") at the fair market value of the shares on the date of the grant. The options vest over a 4-year period at a rate of 25% per year and expire ten years after the date of grant. Stock option activity for 1997, 1996, and 1995 is summarized as follows:
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:
The options outstanding at December 31, 1997 have an exercise price range of $14.50 to $17.785, with a weighted average contractual life of 8.25 years.
PERFORMANCE SHARES - Under the Plan, participants are granted contingent shares of 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:
In addition, the company has granted 800 restricted shares to each non-employee director in 1997, 1996 and 1995. 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.
EMPLOYEE STOCK OWNERSHIP PLAN - Employees of the Company are allowed to purchase company stock up to the lesser of 15% or $25,000 of their annual compensation at a 15% discount. The number of shares acquired by employees under the plan were 140,943, 150,899, and 182,707 in 1997, 1996 and 1995, respectively. The Company currently acquires 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):
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, 1997, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit and Holdings had lines of credit totaling $120 million. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit.
(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.
On June 27, 1997, the Iowa Utilities Board (IUB) issued an order in a consolidated rate proceeding involving MidAmerican's pricing proposal and a filing by the Iowa Office of Consumer Advocate (OCA). The order approved a March 1997 settlement agreement between MidAmerican, the OCA and other parties to the proceeding. The agreement includes a number of characteristics of MidAmerican's pricing proposal. Prices for residential customers were reduced $8.5 million annually and $10.0 million annually, effective November 1, 1996, and July 11, 1997, respectively, and will be reduced an additional $5.0 million annually on June 1, 1998, for a total annual decrease of $23.5 million. Rates for commercial and industrial customers will be reduced a total of $10 million annually by June 1, 1998, through pilot projects, negotiated rates with individual customers and, if needed, a base rate reduction effective June 1, 1998. The agreement includes a tracking mechanism to currently recover the cost of capital improvements required by the Cooper Nuclear Station Power Purchase Contract. The tracking mechanism will offset approximately $9 million of these reductions.
In addition, the agreement accepted MidAmerican's proposal to eliminate the Iowa energy adjustment clause (EAC) which was the mechanism through which fuel costs were collected from Iowa customers prior to July 11, 1997. The EAC flows the cost of fuel to customers on a current basis, and thus, fuel costs had little impact on net income. Prospectively, base rates for Iowa customers will include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings will be impacted. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary 15% above or below the factor included in base rates.
Under the agreement, if MidAmerican's annual Iowa electric jurisdictional return on common equity exceeds 12%, then an equal sharing between customers and shareholders of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of MidAmerican's share of those earnings will be used for accelerated recovery of certain regulatory assets. The agreement permits MidAmerican to file for increased rates if the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%.
The agreement also provides that MidAmerican will develop a pilot program for a market access service which allows customers with at least 4 MW of load to choose energy suppliers. The pilot program, which is subject to approval by the IUB and the Federal Energy Regulatory Commission (FERC), is limited to 60 MW of participation the first year and can be expanded by 15 MW annually until the conclusion of the program. Any loss of revenues associated with the pilot program will be considered part of the $10 million annual reduction for commercial and industrial customers as described above, but may not be recovered from other customer classes. The program was filed with the IUB and the FERC in September 1997. The Company anticipates that the necessary approvals will be received before the end of the second quarter of 1998.
(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 continues to operate 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. Net assets of the discontinued operations are separately presented on the Consolidated Balance Sheets as Investment in Discontinued Operations.
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):
(11) CONCENTRATION OF CREDIT RISK:
The Company's electric utility operations serve 560,000 customers in Iowa, 85,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. The Company's gas utility operations serve 486,000 customers in Iowa, 65,000 customers in western Illinois, 63,000 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, 1997, billed receivables from the Company's utility customers totalled $14.8 million. 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, 1997, the total cost of these investments was $96 million.
MidAmerican Capital has entered into leveraged lease agreements with companies in the airline industry. As of December 31, 1997, the receivables under these agreements totalled $35 million.
(12) PREFERRED SHARES:
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.
The $5.25 Series Preferred Shares, which are 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 $31.8 million. The aggregate total the holders of all preferred stock outstanding at December 31, 1997, are entitled to upon involuntary bankruptcy is $181.8 million plus accrued dividends. Annual dividend requirements for all preferred stock outstanding at December 31, 1997, total $12.9 million.
(13) SEGMENT INFORMATION:
Information related to segments of the Company's business is as follows for the years ended December 31 (in thousands):
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets.
(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 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.
The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
Included in investments on the Consolidated Balance Sheets is the Company's investment in common stock of McLeodUSA Incorporated (McLeodUSA). McLeodUSA common stock has been publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's initial public offering and subsequent merger with Consolidated Communications Inc. prohibit the Company from selling or otherwise disposing of any of the common stock of McLeodUSA prior to September 24, 1998, without approval of McLeodUSA's board of directors. As a result of the agreements, the Company's investment was considered restricted stock and as such, was recorded at cost in all periods prior to September 1997. Beginning in September 1997, the investment is no longer considered restricted for accounting purposes and is recorded at fair value. At December 31, 1997 the cost and fair value of the McLeodUSA investment were $45.2 million and $257.9 million, respectively. The unrealized gain is recorded, net of income taxes, as a valuation allowance in common shareholders' equity. At December 31, 1997, the net unrealized gain and deferred income taxes for this investment were $212.7 million and $74.4 million, respectively.
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):
At December 31, 1997, the debt securities held by the Company had the following maturities (in thousands):
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.
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):
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
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):
The following table is a reconciliation between the effective income tax rate, before preferred stock dividends of subsidiary, indicated by the Consolidated Statements of Income and the statutory federal income tax rate for the years ended December 31:
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
At December 31, 1997 prices, the current cost of gas in storage was $50.3 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.
(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. 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 Holdings' or MidAmerican's Consolidated Balance Sheets. At December 31, 1997, $130.0 million, 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):
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
The quarterly data reflect seasonal variations common in the utility industry.
(21) OTHER INFORMATION:
The Company completed a merger-related restructuring plan during 1995. Other operating expenses in the Consolidated Statements of Income for 1995 includes $33.4 million related to the restructuring plan.
Non-Operating - Other, Net, as shown on the Consolidated Statements of Income includes the following for the years ended December 31 (in thousands):
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial statements which have been prepared in conformity with generally accepted accounting principles. In the opinion of management, the financial position, results of operation and cash flows of the Company are reflected fairly in the statements. The statements have been audited by the Company's independent public accountants, Coopers & Lybrand L.L.P.
The Company maintains a system of internal controls which is designed to provide reasonable assurance, on a cost effective basis, that transactions are executed in accordance with management's authorization, the financial statements are reliable and the Company's assets are properly accounted for and safeguarded. The Company's internal auditors continually evaluate and test the system of internal controls and actions are taken when opportunities for improvement are identified. Management believes that the system of internal controls is effective.
The Audit Committee of the Board of Directors, the members of which are directors who are not employees of the Company, meets regularly with management, the internal auditors and Coopers & Lybrand L.L.P. to discuss accounting, auditing, internal control and financial reporting matters. The Company's independent public accountants are appointed annually by the Board of Directors on recommendation of the Audit Committee. The internal auditors and Coopers & Lybrand L.L.P. each have full access to the Audit Committee, without management representatives present.
/s/ Stanley J. Bright Stanley J. Bright Chairman, President and Chief Executive Officer
/s/ Alan L. Wells Alan L. Wells Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To MidAmerican Energy Holdings Company and Subsidiaries:
We have audited the accompanying consolidated financial statements and the financial statement schedule of MidAmerican Energy Holdings Company and subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial schedule 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 MidAmerican Energy Holdings Company and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Kansas City, Missouri January 23, 1998
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(A) MERGER AND FORMATION OF HOLDING COMPANY:
MidAmerican Energy Company (MidAmerican) was formed on July 1, 1995, as a result of the merger of Iowa-Illinois Gas and Electric Company (Iowa-Illinois), Midwest Resources Inc. (Resources) and its utility subsidiary, Midwest Power Systems Inc. (Midwest Power). Each outstanding share of preferred and preference stock of the predecessor companies was converted into one share of a similarly designated series of MidAmerican preferred stock, no par value. Each outstanding share of common stock of Resources and Iowa-Illinois was converted into one share and 1.47 shares, respectively, of MidAmerican common stock, no par value. The merger was accounted for as a pooling-of-interests and the financial statements included herein are presented as if the companies were merged as of the earliest period shown.
Prior to December 1, 1996, MidAmerican held the capital stock of MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). Effective December 1, 1996, each share of MidAmerican common stock was exchanged for one share of MidAmerican Energy Holdings Company (Holdings) common stock. As part of the transaction, MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. See Note (9) for additional information regarding the formation of the holding company.
(B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS:
The accompanying Consolidated Financial Statements include MidAmerican and its wholly owned subsidiaries. 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:
Refer to Note 1(c) of Holdings' Notes to Consolidated Financial Statements for information regarding the effects of regulation on the MidAmerican's accounting policy.
(D) REVENUE RECOGNITION:
Refer to Note 1(d) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's revenue recognition accounting policy.
(E) DEPRECIATION AND AMORTIZATION:
Refer to Note 1(e) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's depreciation and amortization accounting policy.
(F) INVESTMENTS:
Investments include the following amounts as of December 31 (in thousands):
Investments held by the nuclear decommissioning trust fund for the Quad Cities 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:
MidAmerican 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.
Net cash provided (used) from changes in working capital, net of effects from discontinued operations was as follows (in thousands):
MidAmerican distributed the capital stock of MidAmerican Capital and Midwest Capital to Holdings. See Note (10) for additional information.
(H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT:
Refer to Note 1(h) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's accounting for the Cooper Nuclear Station (Cooper) long-term power purchase contract .
(I) ACCOUNTING FOR DERIVATIVES:
1) Gas Futures Contracts and Swaps:
MidAmerican uses gas futures contracts and swap contracts to reduce its exposure to changes in the price of natural gas purchased to meet the needs of its customers and to manage margins on natural gas storage opportunities. Investments in natural gas futures contracts, which total $1.5 million and $0.1 million as of December 31, 1997 and 1996, 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, Other Net consistent with the expense for the physical commodity. Deferred net gains (losses) related to the Company's gas futures contracts are $(0.4) million and $0.1 million as of December 31, 1997 and 1996, respectively.
MidAmerican 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, 1997, MidAmerican held the following hedging instruments:
(2) LONG-TERM DEBT:
MidAmerican's sinking fund requirements and maturities of long-term debt for 1998 through 2002 are $125 million, $61 million, $111 million, $102 million and $2 million, respectively.
The interest rate on MidAmerican's Adjustable Rate Series Mortgage Bonds is reset every two years at 160 basis points over the average yield to maturity of 10-year Treasury securities. The rate was reset in 1997.
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 rates shown in the Consolidated Statements of
Capitalization are the weighted average interest rates as of December 31, 1997 and 1996. MidAmerican maintains dedicated revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues.
Substantially all the former Iowa-Illinois utility property and franchises, and substantially all of the former Midwest Power electric utility property in Iowa, or approximately 82% of gross utility property, is pledged to secure mortgage bonds.
(3) JOINTLY OWNED UTILITY PLANT:
Refer to Note 3 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's jointly owned utility plant.
(4) COMMITMENTS AND CONTINGENCIES:
(A) CAPITAL EXPENDITURES:
Utility construction expenditures for 1998 are estimated to be $201 million, including $13 million for Quad Cities nuclear fuel.
(B) MANUFACTURED GAS PLANT FACILITIES:
Refer to Note 4(b) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's Environmental Matters.
(C) CLEAN AIR ACT:
Refer to Note 4(c) of Holdings' Notes to Consolidated Financial Statements for information regarding the impact of the revisions to the clean air act on MidAmerican.
(D) LONG-TERM POWER PURCHASE CONTRACT:
Refer to Note 4(d) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under the Cooper long-term power purchase contract.
(E) DECOMMISSIONING COSTS:
Refer to Note 4(e) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment for decommissioning of nuclear facilities.
(F) NUCLEAR INSURANCE:
Refer to Note 4(f) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's nuclear insurance coverage and the potential assessments under such coverage.
(G) COAL AND NATURAL GAS CONTRACT COMMITMENTS:
Refer to Note 4(g) of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's commitment under various coal and natural gas supply and transportation contracts.
(5) COMMON SHAREHOLDER'S EQUITY:
Common shares outstanding changed during the years ended December 31 as shown in the table below (in thousands):
(6) RETIREMENT PLANS:
MidAmerican Energy has noncontributory defined benefit pension plans covering employees of MidAmerican and its affiliates, MidAmerican Capital and Midwest Capital. No detailed segregation of the data is available by subsidiary. Employees of MidAmerican represent approximately 95% of the payroll covered under these plans. Refer to Note 6 of Holdings' Notes to Consolidated Financial Statements for detailed information regarding net periodic pension cost and a schedule reconciling the funded status of the plan with the amount recorded on the consolidated financial statements of Holdings. MidAmerican's net periodic pension costs under the plans for its continuing operations was $4.5 million, $7.0 million and $11.4 million for 1997, 1996 and 1995, respectively.
MidAmerican provides certain health care and life insurance benefits for retired employees of MidAmerican and its affiliates, MidAmerican Capital and Midwest Capital. No detailed segregation of the data is available by subsidiary. Employees of MidAmerican represent approximately 99% of the participants covered under these plans. Refer to Note 6 of Holdings' Notes to Consolidated Financial Statements for detailed information regarding net periodic postretirement benefit cost and a schedule reconciling the funded status of the plan with the amount recorded on the consolidated financial statements of Holdings. MidAmerican Energy's net periodic postretirement benefit costs under the plans for its continuing operations was $19.5 million, $18.7 million and $21.1 million for 1997, 1996 and 1995, respectively.
(7) STOCK-BASED COMPENSATION PLANS:
Refer to Note 7 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's stock-based compensation plans.
(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):
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, 1997, MidAmerican had a $250 million revolving credit facility agreement and a $10 million line of credit. MidAmerican's commercial paper borrowings are supported by the revolving credit facility and the line of credit.
(9) RATE MATTERS:
Refer to Note 9 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's rate matters.
(10) DISCONTINUED OPERATIONS:
On April 24, 1996, MidAmerican shareholders approved a proposal to form Holdings as a holding company for MidAmerican and its subsidiaries. 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. The subsidiaries that were distributed to Holdings have been reflected as discontinued operations.
In the third quarter of 1996 MidAmerican 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, includes the reacquisition of preferred equity by the buyer and the settlement of reclamation reserves. Proceeds received from the settlement were $15 million.
Revenues from discontinued activities, as well as the results of discontinued operations for the years ended December 31 are as follows (in thousands):
(11) CONCENTRATION OF CREDIT RISK:
MidAmerican's electric utility operations serve 560,000 customers in Iowa, 85,000 customers in western Illinois and 3,000 customers in southeastern South Dakota. MidAmerican's gas utility operations serve 486,000 customers in Iowa, 65,000 customers in western Illinois, 63,000 customers in southeastern South Dakota and 4,000 customers in northeastern Nebraska. The largest communities served by MidAmerican 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. MidAmerican's utility operations grant unsecured credit to customers, substantially all of whom are local businesses and residents. As of December 31, 1997, billed receivables from MidAmerican's utility customers totalled $14.8 million. As described in Note 18, billed receivables related to utility services have been sold to a wholly owned unconsolidated subsidiary.
(12) PREFERRED SHARES:
Refer to Note 12 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's preferred shares.
(13) SEGMENT INFORMATION:
Information related to segments of the MidAmerican's business is as follows for the years ended December 31 (in thousands):
(a) Utility plant less accumulated provision for depreciation, receivables, inventories, nuclear decommissioning trust fund and regulatory assets.
(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 MidAmerican'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 MidAmerican'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 nuclear decommissioning trust fund - Fair value is based on quoted market prices of the investments held by the fund.
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 available to MidAmerican for debt of the same remaining maturities. The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
The amortized cost, gross unrealized gain and losses and estimated fair value of investments held in the Quad Cities nuclear decommissioning trust fund at December 31 are as follows (in thousands):
At December 31, 1997, the debt securities held in the Quad Cities nuclear decommissioning trust fund had the following maturities (in thousands):
The proceeds and the gross realized gains and losses on the disposition of investments held in the Quad Cities nuclear decommissioning trust fund for the years ended December 31, are as follows (in thousands):
(15) INCOME TAX EXPENSE:
Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands):
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):
The following table is a reconciliation between the effective income tax rate, before preferred stock dividends of subsidiary, indicated by the Consolidated Statements of Income and the statutory federal income tax rate for the years ended December 31:
(16) INVENTORIES:
Inventories include the following amounts as of December 31 (in thousands):
At December 31, 1997 prices, the current cost of gas in storage was $50.3 million.
(17) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MIDAMERICAN ENERGY FINANCING I:
Refer to Note 17 of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican-Obligated Mandatorily Redeemable Preferred Securities Of MidAmerican Energy Financing I.
(18) SALE OF ACCOUNTS RECEIVABLE:
Refer to Note 18 of Holdings' Notes to Consolidated Financial Statements for information regarding the sale of MidAmerican's accounts receivable to MidAmerican Energy Funding Corporation.
(19) AFFILIATED COMPANY TRANSACTIONS:
The companies identified as affiliates are wholly owned subsidiaries of Holdings. The basis for these charges is provided for in service agreements between MidAmerican and its affiliates. In the opinion of management, the expenses between entities are fair and reasonable.
During 1997, Holdings incurred charges which are of general benefit to all of its subsidiaries. These costs were for administrative and general salaries and expenses, outside services, director fees, pension, deferred compensation, and retirement costs, some of which originated at MidAmerican. MidAmerican was reimbursed for such charges in the amount of $4.1 million for 1997. MidAmerican's allocated share of such costs and their allocated share of costs which originated at Holdings were $13.8 million.
During 1997, MidAmerican was also reimbursed for charges incurred on behalf of its affiliates, MidAmerican Capital and Midwest Capital. The majority of these reimbursed expenses were for employee wages and benefits, insurance, building rental, computer costs, administrative services, travel expense, and general and administrative expense; including treasury, legal, shareholder relations and accounting functions. The amount of such expenses was $6.6 million.
Prior to 1997, MidAmerican, as the parent company, incurred costs of general benefit to itself and its subsidiaries. In addition, it incurred costs for employee wages and benefits, insurance, building rent, computer costs, administrative services, travel expense, and general and administrative expense; including treasury, legal, shareholder relations and accounting functions, on behalf of MidAmerican Capital and Midwest Capital. The total
of such costs charged to MidAmerican Capital and Midwest Capital were $9.3 million and $4.6 million for 1996 and 1995, respectively
MidAmerican leases office facilities and other properties from affiliates. Total lease payments were approximately $0.3 million, $0.3 million and $0.6 million for 1997, 1996 and 1995, respectively.
MidAmerican leases unit trains from an affiliate for the transportation of coal to MidAmerican's generating stations. Unit train costs, including maintenance, were approximately $2.8 million, $3.0 million and $3.0 million for 1997, 1996 and 1995, respectively.
MidAmerican purchased natural gas from Amgas, an affiliate. MidAmerican's costs of gas related to these transactions was $0.5 million, $0.2 million and $0.3 million for 1997, 1996 and 1995, respectively.
In 1997, MidAmerican purchased natural gas from InterCoast Trade and Resources, an affiliate, in the amount of $11.4 million and sold natural gas to InterCoast Trade and Resources in the amount of $6.1 million.
(20) UNAUDITED QUARTERLY OPERATING RESULTS:
The quarterly data reflect seasonal variations common in the utility industry.
(21) OTHER INFORMATION:
MidAmerican completed a merger-related restructuring plan during 1995. Other operating expenses in the Consolidated Statements of Income for 1995 includes $31.9 million related to the restructuring plan.
Non-Operating - Other, Net, as shown on the Consolidated Statements of Income includes the following for the years ended December 31 (in thousands):
REPORT OF MANAGEMENT
Management is responsible for the preparation of the accompanying financial statements which have been prepared in conformity with generally accepted accounting principles. In the opinion of management, the financial position, results of operation and cash flows of MidAmerican are reflected fairly in the statements. The statements have been audited by the MidAmerican's independent public accountants, Coopers & Lybrand L.L.P.
MidAmerican maintains a system of internal controls which is designed to provide reasonable assurance, on a cost effective basis, that transactions are executed in accordance with management's authorization, the financial statements are reliable and MidAmerican's assets are properly accounted for and safeguarded. MidAmerican's internal auditors continually evaluate and test the system of internal controls and actions are taken when opportunities for improvement are identified. Management believes that the system of internal controls is effective.
The MidAmerican Energy Holdings Company Board of Directors, through its Audit Committee comprised entirely of outside directors, meets regularly with management, the internal auditors and Coopers & Lybrand L.L.P. to discuss accounting, auditing, internal control and financial reporting matters. MidAmerican's independent public accountants are appointed annually by the Board of Directors on recommendation of the Audit Committee. The internal auditors and Coopers & Lybrand L.L.P. each have full access to the Audit Committee, without management representatives present.
/s/ Stanley J. Bright Stanley J. Bright Chairman, President and Chief Executive Officer
/s/ Alan L. Wells Alan L. Wells Senior Vice President and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
To MidAmerican Energy Company and Subsidiaries:
We have audited the accompanying consolidated financial statements and the financial statement schedule of MidAmerican Energy Company and subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial schedule 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 MidAmerican Energy Company and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Kansas City, Missouri January 23, 1998
SCHEDULE II
MIDAMERICAN ENERGY HOLDINGS COMPANY AND SUBSIDIARIES CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In Thousands)
Column A Column B Column C Column D Column E
Balance at Additions Balance at Beginning Charged End Description of Year to Income Deductions of Year - - ----------- ---------- --------- ---------- --------- Reserves Deducted From Assets To Which They Apply:
Reserve for uncollectible accounts:
Year ended 1997........... $2,093 $7,683 $(9,429) $ 347 ====== ====== ======= ======
Year ended 1996........... $2,296 $6,145 $(6,348) $2,093 ====== ====== ======= ======
Year ended 1995........... $2,099 $4,934 $(4,737) $2,296 ====== ====== ======= ======
Reserves Not Deducted From Assets:
Year ended 1997........... $4,267 $3,971 $(1,981) $6,257 ====== ====== ======= ======
Year ended 1996........... $3,177 $2,683 $(1,593) $4,267 ====== ====== ======= ======
Year ended 1995........... $4,574 $2,662 $(4,059) $3,177 ====== ====== ======= ======
SCHEDULE II
MIDAMERICAN ENERGY COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1997 (In Thousands)
Column A Column B Column C Column D Column E
Balance at Additions Balance at Beginning Charged End Description of Year to Income Deductions of Year - - ----------- ---------- --------- ---------- ---------- Reserves Deducted From Assets To Which They Apply:
Reserve for uncollectible accounts:
Year ended 1997.............. $1,845 $7,386 $(9,231) $ - ====== ====== ======= ======
Year ended 1996.............. $2,214 $5,854 $(6,223) $1,845 ====== ====== ======= ======
Year ended 1995.............. $2,008 $4,680 $(4,474) $2,214 ====== ====== ======= ======
Reserves Not Deducted From Assets:
Year ended 1997.............. $4,267 $2,971 $(1,981) $5,257 ====== ====== ======= ======
Year ended 1996.............. $3,177 $2,683 $(1,593) $4,267 ====== ====== ======= ======
Year ended 1995.............. $4,574 $2,662 $(4,059) $3,177 ====== ====== ======= ======
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MIDAMERICAN ENERGY HOLDINGS COMPANY MIDAMERICAN ENERGY COMPANY ----------------------------------- Registrants
Date: March 19, 1998 By /s/ Stanley J. Bright --------------------------------------------- (Stanley J. Bright) Chairman, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on the date indicated:
Signature Title Date --------- ----- ---- MidAmerican Energy Holdings Company
/s/ Stanley J. Bright Chairman, President and March 19, 1998 - - ------------------------------ Chief Executive Officer (Stanley J. Bright)
/s/ Alan L. Wells Senior Vice President and March 19, 1998 - - ------------------------------ Chief Financial Officer (Alan L. Wells)
/s/ John W. Aalfs Director March 19, 1998 - - ------------------------------ (John W. Aalfs)
/s/ Ross D. Christensen Director March 19, 1998 - - ------------------------------ (Ross D. Christensen)
/s/ Russell E. Christiansen Director March 19, 1998 - - ------------------------------ (Russell E. Christiansen)
/s/ John W. Colloton Director March 19, 1998 - - ------------------------------ (John W. Colloton)
/s/ Frank S. Cottrell Director March 19, 1998 - - ------------------------------ (Frank S. Cottrell)
/s/ Jack W. Eugster Director March 19, 1998 - - ------------------------------ (Jack W. Eugster)
/s/ Mel Foster, Jr. Director March 19, 1998 - - ------------------------------ (Mel Foster, Jr.)
/s/ Nolden Gentry Director March 19, 1998 - - ------------------------------ (Nolden Gentry)
/s/ James M. Hoak, Jr. Director March 19, 1998 - - ------------------------------ (James M. Hoak, Jr.)
/s/ Richard L. Lawson Director March 19, 1998 - - ------------------------------ (Richard L. Lawson)
/s/ Robert L. Peterson Director March 19, 1998 - - ------------------------------ (Robert L. Peterson)
/s/ Nancy L. Seifert Director March 19, 1998 - - ------------------------------ (Nancy L. Seifert)
/s/ W. Scott Tinsman Director March 19, 1998 - - ------------------------------ (W. Scott Tinsman)
/s/ Leonard L. Woodruff Director March 19, 1998 - - ------------------------------ (Leonard L. Woodruff)
MidAmerican Energy Company
/s/ Stanley J. Bright Chairman, President and March 19, 1998 - - ------------------------------ Chief Executive Officer (Stanley J. Bright)
/s/ Alan L. Wells Senior Vice President and March 19, 1998 - - ------------------------------ Chief Financial Officer (Alan L. Wells)
/s/ David J. Levy Director March 19, 1998 - - ------------------------------ (David J. Levy)
/s/ John A. Rasmussen, Jr. Director March 19, 1998 - - ------------------------------ (John A. Rasmussen, Jr.)
/s/ Wayne O. Smith Director March 19, 1998 - - ------------------------------ (Wayne O. Smith)
/s/ Ronald W. Stepien Director March 19, 1998 - - ------------------------------ (Ronald W. Stepien)
/s/ Beverly A. Wharton Director March 19, 1998 - - ------------------------------ (Beverly A. Wharton)
EXHIBIT INDEX
Exhibits Filed Herewith - - -----------------------
The exhibits filed herewith are attached to this combined Form 10-K in numerical order. They are listed below under the heading of the registrant or registrants to whom they apply.
Holdings
12.1 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
MidAmerican
3.3 Restated Articles of Incorporation of MidAmerican Energy Company, as amended December 22, 1997.
12.2 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements.
21.2 Subsidiaries of the Registrant.
23.3 Consent of Coopers & Lybrand L.L.P.
Exhibits Incorporated by Reference - - ---------------------------------- Holdings
3.1 Restated Articles of Incorporation of MidAmerican Energy Holdings Company, as amended December 19, 1996. (Filed as Exhibit 3.1 to Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-12459.)
3.2 Bylaws of MidAmerican Energy Holdings Company, as amended July 24, 1996. (Filed as Exhibit 3.2 to Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-12459.)
4.1 Shareholder Rights Agreement dated as of December 18, 1996 between Holding's and Continental Stock Transfer and Trust Company. (Filed as Exhibit 4 to Holdings' Current Report on Form 8-K dated December 18, 1996, Commission File No. 1-12459.)
10.39 Form of Indemnity Agreement between MidAmerican Energy Holdings Company and its directors and officers. (Filed as Exhibit 10.2 to Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-12459.)
10.40 Employment Agreement between Stanley J. Bright and MidAmerican Energy Holdings Company dated January 24, 1996. (Filed as Exhibit 10.3 to Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-12459.)
10.41 Employment Agreement between Russell E. Christiansen and MidAmerican Energy Holdings Company dated January 24, 1996, as amended January 29, 1997. (Filed as Exhibit 10.4 to Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-12459.)
MidAmerican Energy
3.4 Restated Bylaws of MidAmerican Energy Company, as amended July 24, 1996. (Filed as Exhibit 3.1 to MidAmerican's Quarterly Report on Form 10-Q for the period ended June 30, 1996, Commission File No. 1-11505.)
Holdings and MidAmerican Energy
4.2 General Mortgage Indenture and Deed of Trust dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.)
4.3 First Supplemental Indenture dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-2 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.)
4.4 Second Supplemental Indenture dated as of January 15, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.)
4.5 Third Supplemental Indenture dated as of May 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4.4 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.)
4.6 Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.)
4.7 Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.6 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.)
4.8 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947. (Filed by Iowa-Illinois as Exhibit 7B to Commission File No. 2-6922.)
4.9 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by Iowa-Illinois as Exhibit 2.08 to Commission File No. 2-28806.)
4.10 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the period ended June 30, 1982, Commission File No. 1-3573.)
4.11 Resignation and Appointment of successor Individual Trustee. (Filed by Iowa-Illinois as Exhibit 4.B.30 to Commission File No. 33-39211.)
4.13 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed as Exhibit 4.31.B to Iowa-Illinois' Current Report on Form 8-K dated May 21, 1992, Commission File No. 1-3573.)
4.14 Twenty-Ninth Supplemental Indenture dated as of March 15, 1993. (Filed as Exhibit 4.32.A to Iowa-Illinois' Current Report on Form 8-K dated March 24, 1993, Commission File No. 1-3573.)
4.15 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed as Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated October 7, 1993, Commission File No. 1-3573.)
4.16 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.15 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
4.17 Thirty-First Supplemental Indenture dated as of July 1, 1995, between Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.16 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.1 MidAmerican Energy Company Severance Plan For Specified Officers dated November 1, 1996. (Filed as Exhibit 10.1 to Holdings' and MidAmerican's respective Annual Reports on the combined Form 10-K for the year ended December 31, 1996, Commission File Nos. 1-12459 and 1-11505, respectively.)
10.2 MidAmerican Energy Company Deferred Compensation Plan for Directors. (Filed as Exhibit 10.1 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.3 MidAmerican Energy Company Deferred Compensation Plan for Executives. (Filed as Exhibit 10.2 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.4 MidAmerican Energy Company Supplemental Retirement Plan for Designated Officers. (Filed as Exhibit 10.3 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.5 MidAmerican Energy Company Key Employee Short-Term Incentive Plan. (Filed as Exhibit 10.4 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.6 Deferred Compensation Plan for Executives of Midwest Resources Inc. and Subsidiaries. (Filed as Exhibit 10.1 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654).
10.7 Deferred Compensation Plan for Board of Directors of Midwest Resources Inc. and Subsidiaries. (Filed as Exhibit 10.2 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654).
10.8 Midwest Resources Inc. Directors Retirement Plan. (Filed as Exhibit 10.3 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654.)
10.9 Non-Cash Bonus Award Plan for Executives of Midwest Resources Inc. (Filed as Exhibit 10.4 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1990, Commission File No. 1-10654).
10.10 Midwest Resources Inc. revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.5 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.)
10.11 Midwest Resources Inc. revised and amended Board of Directors Deferred Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.6 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.)
10.12 Midwest Resources Inc. revised and amended Executive Incentive Compensation Plan for IOR and Subsidiaries, dated January 29, 1992. (Filed as Exhibit 10.7 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.)
10.13 Midwest Resources Inc. and Participating Subsidiaries Long-Term Incentive Compensation Plan. (Filed as Exhibit 10.8 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.)
10.14 Midwest Power Group 1992 Key Executive Incentive Compensation Plan. (Filed as Exhibit 10.9 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1991, Commission File No. 1-10654.)
10.15 Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest Energy Company Supplemental Retirement Plan). (Filed as Exhibit 10.10 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.)
10.16 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 (IPR) Registration Statement, Registration No. 2-27681.)
10.17 Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District. (Filed as Exhibit 4-C-2a to IPR's Registration Statement, Registration No. 2-35624.)
10.18 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 IPR's Registration Statement, Registration No. 2-42191.)
10.19 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 IPR's Registration Statement, Registration No. 2-51540.)
10.20 Revised and amended Executive Compensation Plan for Iowa Resources Inc. and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.21 to Iowa Resources Inc.'s (IOR) Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.)
10.21 Revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22 to IOR's Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.)
10.22 Revised and amended Deferred Compensation Plan for Board of Directors of IOR and Subsidiaries, dated July 24, 1985. (Filed as Exhibit 10.22 to IOR's Annual Report on Form 10-K for the year ended December 31, 1985, Commission File No. 1-7830.)
10.23 Revised and amended Executive Compensation Plan for IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.14 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.)
10.24 Revised and amended Executive Deferred Compensation Plan for IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.15 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.)
10.25 Revised and amended Deferred Compensation Plan for Board of Directors of IOR and Subsidiaries, dated December 18, 1987. (Filed as Exhibit 10.16 to IOR's Annual Report on Form 10-K for the year ended December 31, 1987, Commission File No. 1-7830.)
10.27 Change in control agreement between Russell E. Christiansen and Midwest Energy Company dated as of May 5, 1989. (Filed as Exhibit 10(e) in MWE's Form 10-K for the year ended December 31, 1989, Commission File No. 1-8708.)
10.29 Amendments to Midwest Resources Executive Deferred Compensation Plans, dated October 30, 1992. (Filed as Exhibit 10(h) to Midwest Resource's Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.)
10.30 Midwest Power Systems 1993 Key Executive Incentive Compensation Plan. (Filed as Exhibit 10.30 in Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.)
10.31 Supplemental Retirement Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.)
10.32 Compensation Deferral Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.)
10.33 Board of Directors' Compensation Deferral Plan. (Filed as Exhibit 10.K.4 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-3573.)
10.34 Revised and amended Supplemental Retirement Income Plan for Iowa Resources Inc. and Subsidiaries dated October 24, 1984. (Filed as Exhibit 10.15 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.)
10.35 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.)
10.36 Deferred Compensation Plan of Midwest Energy Company and Subsidiary Corporations. (Filed as Exhibit 10.25 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.)
10.37 Form of Indemnity Agreement between MidAmerican Energy Company and its directors and officers. (Filed as Exhibit 10.37 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.)
10.38 MidAmerican Energy Company 1995 Long-Term Incentive Plan. (Filed as Exhibit 10(a) to Holdings' Registration Statement on Form S-4, File No. 333-01645.)
10.42 Amendment No. 5 dated September 2, 1997, to the Power Sales contract between MidAmerican Energy Company and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 10.2 to Holdings' and MidAmerican's respective Quarterly Reports on the combined Form 10-Q for the quarter ended September 30, 1997, Commission File Nos. 1-12459 and 1-11505, respectively.)
10.43 Amendment No. 1 dated October 29, 1997, to the MidAmerican Energy Company 1995 Long-Term Incentive Plan. (Filed as Exhibit 10.1 to Holdings' and MidAmerican's respective Quarterly Reports on the combined Form 10-Q for the quarter ended September 30, 1997, Commission File Nos. 1-12459 and 1-11505, respectively.)
Note: Pursuant to (b) (4) (iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt not being registered if the total amount of securities authorized thereunder does not exceed 10% of total assets of the Company but hereby agrees to furnish to the Commission on request any such instruments.