-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LaMxP0l+da0+/fygdIhRDWXcY5F6FjIwBC6lTlSAqR2jllAaQcBspBbtVhaynvE0 ZejuRhxgLirfte5i7zMzmA== 0001009526-98-000021.txt : 19990521 0001009526-98-000021.hdr.sgml : 19990521 ACCESSION NUMBER: 0001009526-98-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY HOLDINGS CO CENTRAL INDEX KEY: 0001009526 STANDARD INDUSTRIAL CLASSIFICATION: 4900 IRS NUMBER: 421451822 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12459 FILM NUMBER: 98748608 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: PO BOX 657 CITY: DES MOINES STATE: IA ZIP: 50303-0657 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDAMERICAN ENERGY CO CENTRAL INDEX KEY: 0000928576 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 421425214 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11505 FILM NUMBER: 98748609 BUSINESS ADDRESS: STREET 1: 666 GRAND AVE STREET 2: P O BOX 657 CITY: DES MOINES STATE: IA ZIP: 50306-9244 BUSINESS PHONE: 5152424300 MAIL ADDRESS: STREET 1: 666 GRAND AVENUE POST OFFICE BOX 9244 STREET 2: 666 GRAND AVENUE POST OFFICE BOX 9244 CITY: DES MOINES STATE: IA ZIP: 50306-9244 10-Q 1 MIDAMERICAN ENERGY HOLDINGS - JOINT 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period September 30, 1998 ---------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- -------------------- Commission Registrant, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. - - ----------- ----------------------------------- ------------------ 1-12459 MIDAMERICAN ENERGY HOLDINGS COMPANY 42-1451822 (An Iowa Corporation) 666 Grand Ave. PO Box 657 Des Moines, Iowa 50303 515-242-4300 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (An Iowa Corporation) 666 Grand Ave. PO Box 657 Des Moines, Iowa 50303 515-242-4300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuers' classes of common stock as of the latest practicable date. Registrant Class Shares Outstanding at October 30, 1998 - - ------------------ ----------------- -------------------------------------- MidAmerican Energy Common Stock 94,104,682 * Holdings Company without par value MidAmerican Energy Common Stock 70,980,203 (all of which were held by Company without par value MidAmerican Energy Holdings Company) * MidAmerican Energy Holdings Company common shares outstanding at October 30, 1998, exclude 437,131 shares which are held by a subsidiary. MIDAMERICAN ENERGY HOLDINGS COMPANY AND MIDAMERICAN ENERGY COMPANY This combined Form 10-Q is separately filed by MidAmerican Energy Holdings Company (Company or Holdings) and MidAmerican Energy Company (MidAmerican). Information herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, MidAmerican makes no representation as to information relating to any other subsidiary of Holdings. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Page No. MidAmerican Energy Holdings Company Consolidated Statements of Income.............................. 3 Consolidated Statements of Comprehensive Income................ 4 Consolidated Balance Sheets.................................... 5 Consolidated Statements of Cash Flows.......................... 6 Notes to Consolidated Financial Statements..................... 7 MidAmerican Energy Company Consolidated Statements of Income.............................. 12 Consolidated Balance Sheets.................................... 13 Consolidated Statements of Cash Flows.......................... 14 Notes to Consolidated Financial Statements..................... 15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 16 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..... 42 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ............................................. 42 ITEM 4. Submission of Matters to a Vote of Security Holders............ 43 ITEM 6. Exhibits and Reports on Form 8-K............................... 44 Signatures .............................................................. 45 -2-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS NINE MONTHS TWELVE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 ENDED SEPT. 30 1998 1997 1998 1997 1998 1997 --------- --------- ---------- ---------- ---------- ---------- OPERATING REVENUES Electric utility............................... $ 363,992 $ 334,336 $ 907,440 $ 850,453 $1,183,287 $1,109,438 Gas utility.................................... 63,156 60,208 303,644 352,686 487,264 534,933 Nonregulated................................... 85,562 40,701 166,577 197,528 228,724 295,168 --------- --------- ---------- ---------- ---------- ---------- 512,710 435,245 1,377,661 1,400,667 1,899,275 1,939,539 --------- --------- ---------- ---------- ---------- ---------- OPERATING EXPENSES Utility: Cost of fuel, energy and capacity........... 71,906 67,258 174,190 178,682 231,268 235,337 Cost of gas sold............................ 33,127 34,320 171,096 221,252 295,860 346,541 Other operating expenses.................... 118,291 98,686 336,814 290,984 475,624 381,032 Maintenance................................. 27,522 24,217 80,845 70,315 108,620 90,320 Depreciation and amortization............... 44,178 42,815 132,560 126,883 176,217 168,349 Property and other taxes.................... 24,370 26,139 74,135 76,482 98,970 97,324 --------- --------- ---------- ---------- ---------- ---------- 319,394 293,435 969,640 964,598 1,386,559 1,318,903 --------- --------- ---------- ---------- ---------- ---------- Nonregulated: Cost of sales............................... 49,851 37,112 113,084 183,325 169,941 277,084 Other....................................... 28,723 6,750 49,212 22,168 57,120 32,402 --------- --------- ---------- ---------- ---------- ---------- 78,574 43,862 162,296 205,493 227,061 309,486 --------- --------- ---------- ---------- ---------- ---------- Total operating expenses.................... 397,968 337,297 1,131,936 1,170,091 1,613,620 1,628,389 --------- --------- ---------- ---------- ---------- ---------- OPERATING INCOME.............................. 114,742 97,948 245,725 230,576 285,655 311,150 --------- --------- ---------- ---------- ---------- ---------- NON-OPERATING INCOME Interest income............................... 3,188 1,019 7,818 4,134 9,002 5,058 Dividend income............................... 2,340 3,252 7,792 10,507 11,077 14,411 Realized gains and losses on securities, net.. (2,249) (276) (230) 340 7,228 (969) Other, net.................................... (887) 5,573 5,548 12,837 14,822 8,276 --------- --------- ---------- ---------- ---------- ---------- 2,392 9,568 20,928 27,818 42,129 26,776 --------- --------- ---------- ---------- ---------- ---------- FIXED CHARGES Interest on long-term debt.................... 21,009 20,617 61,617 66,909 84,606 92,295 Other interest expense........................ 3,482 2,383 10,110 7,831 12,313 10,493 Preferred dividends of subsidiaries........... 3,234 3,234 9,699 11,234 12,933 15,175 Allowance for borrowed funds.................. (1,074) (620) (2,749) (1,932) (3,414) (2,858) --------- --------- ---------- ---------- ---------- ---------- 26,651 25,614 78,677 84,042 106,438 115,105 --------- --------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........................ 90,483 81,902 187,976 174,352 221,346 222,821 INCOME TAXES.................................. 36,861 32,197 74,621 66,297 76,714 85,057 --------- --------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS............. 53,622 49,705 113,355 108,055 144,632 137,764 --------- --------- ---------- ---------- ---------- ---------- DISCONTINUED OPERATIONS Income (loss) from operations (net of income taxes)....................... - 407 - 1,105 (1,223) 312 Loss on disposal (net of income taxes)........ - (3,200) - (3,724) (386) (4,192) --------- --------- ---------- ---------- ---------- ---------- - (2,793) - (2,619) (1,609) (3,880) --------- --------- ---------- ---------- ---------- ---------- NET INCOME.................................... $ 53,622 $ 46,912 $ 113,355 $ 105,436 $ 143,023 $ 133,884 ========= ========= ========== ========== ========== ========== AVERAGE COMMON SHARES OUTSTANDING............. 94,105 97,097 94,504 98,752 94,873 99,213 EARNINGS PER COMMON SHARE -BASIC AND DILUTED: Continuing operations......................... $ 0.57 $ 0.51 $ 1.20 $ 1.09 $ 1.52 $ 1.39 Discontinued operations....................... - (0.03) - (0.02) (0.01) (0.04) --------- ---------- ---------- ---------- ---------- ---------- Earnings per average common share............. $ 0.57 $ 0.48 $ 1.20 $ 1.07 $ 1.51 $ 1.35 ========= ========= ========== ========== ========== ========== DIVIDENDS DECLARED PER SHARE.................. $ 0.30 $ 0.30 $ 0.90 $ 0.90 $ 1.20 $ 1.20 ========= ========= ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -3-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In Thousands) THREE MONTHS NINE MONTHS TWELVE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 ENDED SEPT. 30 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- -------- -------- NET INCOME............................................ $ 53,622 $ 46,912 $113,355 $105,436 $143,023 $133,884 --------- --------- -------- -------- -------- -------- OTHER COMPREHENSIVE INCOME, NET Unrealized gains (losses) on securities: Unrealized holding gains (losses) during period....... (142,235) 285,706 (88,982) 288,728 (153,783) 291,965 Less reclassification adjustment for realized gains (losses) reflected in net income during period.... (2,249) (284) (230) 329 7,228 (993) ---------- --------- -------- -------- -------- -------- (139,986) 285,990 (88,752) 288,399 (161,011) 292,958 Income tax (benefit) expense.......................... (48,995) 100,357 (30,981) 101,146 (56,560) 102,741 --------- --------- -------- -------- -------- -------- (90,991) 185,633 (57,771) 187,253 (104,451) 190,217 --------- --------- -------- -------- -------- -------- COMPREHENSIVE INCOME.................................. $ (37,369) $ 232,545 $ 55,584 $292,689 $ 38,572 $324,101 ========= ========= ======== ======== ======== ========
The accompanying notes are an integral part of these statements. -4-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands) AS OF --------------------------------------------- SEPT. 30 DECEMBER 31 ---------------------------- ----------- 1998 1997 1997 ---------- ---------- ---------- (UNAUDITED) ASSETS UTILITY PLANT Electric.......................................................... $4,136,095 $4,062,408 $4,084,920 Gas............................................................... 774,482 746,173 756,874 ---------- ---------- ---------- 4,910,577 4,808,581 4,841,794 Less accumulated depreciation and amortization.................... 2,390,915 2,250,667 2,275,099 ---------- ---------- ---------- 2,519,662 2,557,914 2,566,695 Construction work in progress..................................... 87,442 53,236 55,418 ---------- ---------- ---------- 2,607,104 2,611,150 2,622,113 ---------- ---------- ---------- POWER PURCHASE CONTRACT........................................... 166,345 188,860 173,107 ---------- ---------- ---------- INVESTMENT IN DISCONTINUED OPERATIONS............................. - 6,655 - ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents......................................... 14,151 12,290 10,468 Receivables....................................................... 157,504 214,462 207,471 Inventories....................................................... 90,851 94,969 86,091 Other............................................................. 39,538 12,169 18,452 ---------- ---------- ---------- 302,044 333,890 322,482 ---------- ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET........................ 738,836 883,186 799,524 ---------- ---------- ---------- OTHER ASSETS...................................................... 408,611 376,814 360,865 ---------- ---------- ---------- TOTAL ASSETS...................................................... $4,222,940 $4,400,555 $4,278,091 ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholders' equity....................................... $1,245,883 $1,368,299 $1,301,286 MidAmerican preferred securities, not subject to mandatory redemption.......................................... 31,759 31,765 31,763 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities.............................. 50,000 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures.. 100,000 100,000 100,000 Long-term debt (excluding current portion)........................ 1,044,981 1,103,551 1,034,211 ---------- ---------- ---------- 2,472,623 2,653,615 2,517,260 ---------- ---------- ---------- CURRENT LIABILITIES Notes payable..................................................... 212,499 141,354 138,054 Current portion of long-term debt ................................ 69,631 77,727 144,558 Current portion of power purchase contract........................ 14,361 13,718 14,361 Accounts payable.................................................. 140,020 133,523 145,855 Taxes accrued..................................................... 115,227 72,739 92,629 Interest accrued.................................................. 20,075 20,503 22,355 Other............................................................. 52,966 53,630 38,766 ---------- ---------- ---------- 624,779 513,194 596,578 ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract........................................... 83,143 97,504 83,143 Deferred income taxes............................................. 720,658 809,287 761,795 Investment tax credit............................................. 78,847 84,556 83,127 Other ............................................................ 242,890 242,399 236,188 ---------- ---------- ---------- 1,125,538 1,233,746 1,164,253 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES.............................. $4,222,940 $4,400,555 $4,278,091 ========== ========== ==========
The accompanying notes are an integral part of these statements. -5-
MIDAMERICAN ENERGY HOLDINGS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 1998 1997 1998 1997 --------- -------- -------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income......................................................... $ 53,622 $ 46,912 $113,355 $ 105,436 Adjustments to reconcile net income to net cash provided: Depreciation and amortization................................... 52,243 51,118 150,303 147,100 Net decrease in deferred income taxes and investment tax credit, net................................... (4,418) (3,124) (14,539) (15,072) Amortization of other assets.................................... 11,624 5,773 30,969 18,247 Loss from discontinued operations............................... - 2,792 - 2,619 Loss (gain) on sale of securities, assets and other investments. 2,409 189 (6,186) (1,638) Other-than-temporary decline in value of investments............ - 3 110 255 Impact of changes in working capital, net of effects from discontinued operations.................................. (10,573) (2,406) 52,804 69,303 Other........................................................... (3,968) 7,993 12,392 8,039 --------- -------- -------- --------- Net cash provided............................................. 100,939 109,250 339,208 334,289 --------- -------- -------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures............................... (45,633) (49,815) (114,225) (113,844) Quad Cities Nuclear Power Station decommissioning trust fund.................................. (2,875) (2,779) (8,533) (7,060) Deferred energy efficiency expenditures......................... - (5,909) - (12,258) Nonregulated capital expenditures............................... (1,612) (2,498) (40,295) (9,500) Purchase of real estate brokerage companies..................... (26,500) - (105,485) - Purchase of securities.......................................... (35,713) (10,866) (134,067) (127,273) Proceeds from sale of securities................................ 44,934 36,168 149,751 168,217 Proceeds from sale of assets and other investments.............. 501 1,472 28,845 15,142 Investment in discontinued operations........................... - 96 - 145,289 Other investing activities, net................................. (454) (6,793) (467) (6,741) --------- -------- -------- --------- Net cash (used) provided .................................... (67,352) (40,924) (224,476) 51,972 --------- -------- -------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Common dividends paid........................................... (28,343) (29,122) (85,029) (88,845) Issuance of long-term debt, net of issuance cost................ - - 158,440 - Retirement of long-term debt, including reacquisition cost...... (157,882) (58,069) (233,304) (119,859) Reacquisition of preferred shares............................... (1) - (4) (4) Reacquisition of common shares.................................. - (21,311) (25,597) (67,876) Decrease in MidAmerican Capital Company unsecured revolving credit facility......................... - - - (174,500) Net increase (decrease) in notes payable........................ 45,070 (4,831) 74,445 (20,636) --------- -------- -------- --------- Net cash used............................................... (141,156) (113,333) (111,049) (471,720) --------- -------- -------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (107,569) (45,007) 3,683 (85,459) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 121,720 57,297 10,468 97,749 --------- -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 14,151 $ 12,290 $ 14,151 $ 12,290 ========= ======== ======== ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized....................... $ 22,755 $ 27,085 $ 66,754 $ 77,063 ========= ======== ======== ========= Income taxes paid............................................... $ 23,760 $ 25,349 $ 58,411 $ 102,102 ========= ======== ======== =========
The accompanying notes are an integral part of these statements. -6- MIDAMERICAN ENERGY HOLDINGS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A) GENERAL: The consolidated financial statements included herein have been prepared by Holdings, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, all adjustments have been made to present fairly the financial position, the results of operations, comprehensive income and the changes in cash flows for the periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. B) ENVIRONMENTAL MATTERS: 1) Manufactured Gas Plant Facilities: The United States Environmental Protection Agency (EPA) and the state environmental agencies have determined that contaminated wastes remaining at certain decommissioned manufactured gas plant (MGP) facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. MidAmerican is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether MidAmerican has any responsibility for remedial action. MidAmerican is currently conducting field investigations at 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 its responsibility, 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 September 30, 1998, is $24 million. This estimate has been recorded as a liability and a regulatory asset for future recovery. The Illinois Commerce Commission (ICC) has approved the use of a tariff rider which permits recovery of the actual costs of litigation, investigation and remediation relating to former MGP sites. MidAmerican's present rates in Iowa provide for a fixed annual recovery of MGP costs. MidAmerican intends to pursue recovery of the remediation costs from other PRPs and its insurance carriers. The estimate of probable remediation costs is established on a site specific basis. The costs are accumulated in a three-step process. First, a determination is made as to whether MidAmerican has potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at the site. Second, if potential legal liability exists, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. Finally, 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. -7- Although the timing of potential incurred costs and recovery of such costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican's financial position or results of operations. 2) Clean Air Act: Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making significant contribution to nonattainment of the ozone standard in downwind states in the eastern half of the United States. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MidAmerican's facilities are not subject to additional emissions reductions as a result of this initiative. On July 18, 1997, the EPA adopted revisions to the National Ambient Air Quality Standards (NAAQS) for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the EPA will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards through emission reductions or other means. In August 1998, the Iowa Environmental Protection Commission adopted by reference the NAAQS for ozone and fine particulate matter. The impact of the new standards on MidAmerican will depend on the attainment status of the areas surrounding MidAmerican's operations and MidAmerican's relative contribution to the nonattainment status. The attainment status of areas in the state of Iowa will not be known for two to three years. However, if MidAmerican's operations are determined to contribute to nonattainment, the installation of additional control equipment, such as scrubbers and/or selective catalytic reduction, on MidAmerican's units could be required. The cost to install such equipment could be significant. MidAmerican will continue to follow the attainment status of the areas in which it operates and evaluate the potential impact of the status of these areas on MidAmerican under the new regulations. C) RATE MATTERS: As a result of a negotiated settlement in Illinois, MidAmerican reduced its Illinois electric service rates by annual amounts of $13.1 million and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively. MidAmerican implemented an additional $0.9 million annual rate reduction for its Illinois residential customers, effective August 1, 1998, in connection with Illinois' electric utility restructuring law. On June 27, 1997, the Iowa Utilities Board (IUB) approved a March 1997 settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties. Six major components of the settlement and their status are as follows: 1) On an annualized basis, prices for residential customers were reduced $8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July 11, 1997, and June 1, 1998, respectively, for a total annual decrease of $23.5 million. 2) Rates for industrial customers will be reduced by $6 million annually and rates for commercial customers will be reduced by $4 million annually. MidAmerican has been given permission to implement these reductions through a retail access pilot project and through negotiated individual contracts. In the event that these contracts in the aggregate do not reduce rates by $6 million and $4 million, respectively, MidAmerican is required to apply any remaining amount to across-the-board rate reductions to customers who do not enter into contracts. The effective date for these rate reductions was set for June 1, 1998, in the IUB Order approving the settlement. However, the IUB approved a MidAmerican request to extend the deadlines until September 1, 1998, for industrial customers and December 31, 1998, for commercial customers. The delay in deadlines includes an obligation -8- to increase the amount of the reduction on a one-time basis to reflect the time value of money between June 1, 1998, and the new deadlines. MidAmerican estimates it will not have any interest obligation with respect to the industrial contracts, and will not incur any material interest obligation with respect to its commercial contracts. The negotiated contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $155 million. The IUB has recently considered the contracting process in two proceedings. Its decisions in those proceedings allowed the contracting efforts to continue. Contracts remain subject to IUB regulation. 3) A tracking mechanism (Cooper Tracker) is being used to currently recover costs for capital improvements required by the Cooper Nuclear Station Power Purchase Contract. Revenues from the Cooper Tracker will total approximately $6 million in 1998. Other operating expenses will include a comparable amount for currently expensing the related costs. 4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current basis through the EAC, and thus, fuel costs had little impact on net income. Since then, base rates for Iowa customers include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings are impacted. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary by more than 15% above or below the factor included in base rates. 5) 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 IUB is reviewing MidAmerican's calculation of its 1997 return as a result of an objection by the OCA. MidAmerican does not expect the ultimate outcome of this issue to have a material impact on its financial condition or results of operations. 6) MidAmerican has developed 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 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, which has approved it, and the Federal Energy Regulatory Commission (FERC). The Company anticipates FERC acceptance by year end. D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: 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, -9- 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-offs were immaterial. If other utility operations no longer meet the criteria of SFAS 71, MidAmerican could be required to write off the related regulatory assets and liabilities from its balance sheet and thus, a material adjustment to earnings in that period could result. As of September 30, 1998, MidAmerican had approximately $308 million of regulatory assets in its Consolidated Balance Sheet because these costs are expected to be recovered in future charges to utility customers. E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES: The MidAmerican Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely MidAmerican Junior Subordinated Debentures included in the Consolidated Balance Sheets were issued by MidAmerican Energy Financing I (the Trust), a wholly-owned statutory business trust of MidAmerican. The sole assets of the Trust are $103.1 million of MidAmerican 7.98% Series A Debentures due 2045. F) COMMON SHAREHOLDERS' EQUITY: In March 1997, Holdings announced its plan to repurchase up to $200 million of the Company's common stock. As of September 30, 1998, the Company had repurchased approximately 6.2 million shares for $114.8 million under the plan. In addition, a subsidiary holds 437,131 shares of Holdings common stock which are also excluded from shares outstanding. G) DETAIL OF OTHER COMPREHENSIVE INCOME - INCOME TAXES: For fiscal years beginning after December 15, 1997, full sets of general-purpose financial statements are required to display comprehensive income and its components in a financial statement that is displayed with the same prominence as the other financial statements. Comprehensive income refers, in general, to changes in the Company's equity, except those resulting from transactions with shareholders. "Unrealized holding gains (losses)" reflects the overall increase (decrease) in the market value of marketable securities held by the Company as available-for-sale. The "reclassification adjustment" removes any gains (losses) that have been realized from sales of those securities and reflected in the Company's Net Income. -10- The following table shows the income tax expense or benefit related to each component (in thousands):
Three Months Nine Months Twelve Months Ended Sept. 30 Ended Sept. 30 Ended Sept. 30 -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 --------- -------- -------- -------- ---------- -------- Unrealized holding gains/(losses) during period Before income taxes $(142,235) $285,706 $(88,982) $288,728 $(153,783) $291,965 Income tax benefit/(expense) 49,782 (100,257) 31,061 101,261 54,021 (102,393) --------- -------- -------- -------- --------- -------- (92,453) 185,449 (57,921) 187,467 (99,762) 189,572 --------- -------- -------- -------- --------- -------- Less reclassification adjustment for realized gains/(losses) reflected in net income during period Before income taxes (2,249) (284) (230) 329 7,228 (993) Income tax benefit/(expense) 787 100 80 (115) (2,539) 348 --------- -------- -------- -------- --------- -------- (1,462) (184) (150) 214 4,689 (645) --------- -------- -------- -------- --------- -------- Other Comprehensive Income, Net $ (90,991) $185,633 $(57,771) $187,253 $(104,451) $190,217 ========= ======== ======== ======== ========= ========
H) MCLEODUSA INCORPORATED INVESTMENT: 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. prohibited 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 September 30, 1998, the cost and fair value of the McLeodUSA investment were $45.2 million and $176.3 million, respectively. The unrealized gain is recorded, net of income taxes, as accumulated comprehensive income in common shareholders' equity. At September 30, 1998, the unrealized gain and deferred income taxes for this investment were $131.1 million and $45.9 million, respectively. I) PENDING MERGER: On August 11, 1998, a definitive merger agreement was entered into between the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy services. Under the terms of the agreement, the shareholders of the Company will receive $27.15 cash for each share of their common stock reflecting a 36 percent premium over the August 11, 1998 closing price. The Company and CalEnergy each held a special shareholder meeting on October 30, 1998, at which the shareholders of each respective company approved the agreement and plan of merger. Additionally, the pre-merger notification period under the Hart-Scott-Rodino Antitrust Improvements Act has expired. The companies have made filings with, and are awaiting favorable orders from, the FERC, the Nuclear Energy Regulatory Commission, and the IUB, which has the right to review the merger and to disapprove it only if found not in the public interest. State regulators in Illinois, Nebraska and South Dakota have been notified of the merger. Management believes completion of the merger could occur during the first quarter of 1999. -11-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS) THREE MONTHS NINE MONTHS TWELVE MONTHS ENDED SEPT. 30 ENDED SEPT. 30 ENDED SEPT. 30 1998 1997 1998 1997 1998 1997 -------- --------- ---------- ---------- ---------- ---------- OPERATING REVENUES Electric utility.......................... $363,992 $ 334,336 $ 907,440 $ 850,453 $1,183,287 $1,109,438 Gas utility............................... 63,156 60,208 303,644 352,686 487,264 534,933 -------- --------- ---------- ---------- ---------- ---------- 427,148 394,544 1,211,084 1,203,139 1,670,551 1,644,371 -------- --------- ---------- ---------- ----------- ---------- OPERATING EXPENSES Cost of fuel, energy and capacity......... 72,460 67,258 175,860 178,682 232,938 235,337 Cost of gas sold.......................... 33,127 34,320 171,096 221,252 295,860 346,541 Other operating expenses.................. 118,291 98,686 336,814 290,984 475,624 381,032 Maintenance............................... 27,522 24,217 80,845 70,315 108,620 90,320 Depreciation and amortization............. 44,178 42,815 132,560 126,883 176,217 168,349 Property and other taxes.................. 24,370 26,139 74,135 76,482 98,970 97,324 Income taxes.............................. 35,697 31,332 74,323 67,753 81,132 91,992 -------- --------- ---------- ---------- ---------- ---------- 355,645 324,767 1,045,633 1,032,351 1,469,361 1,410,895 -------- --------- ---------- ---------- ---------- ---------- OPERATING INCOME.......................... 71,503 69,777 165,451 170,788 201,190 233,476 -------- --------- ---------- ---------- ---------- ---------- NON-OPERATING INCOME Interest and dividend income.............. 1,695 358 5,089 1,685 5,736 2,273 Non-operating income taxes................ 649 (2,200) 2,139 (4,493) 4,877 (8,434) Other, net................................ (1,936) 4,727 (5,052) 9,066 (1,751) 18,751 -------- --------- ---------- ---------- ---------- ---------- 408 2,885 2,176 6,258 8,862 12,590 -------- --------- ---------- ---------- ---------- ---------- FIXED CHARGES Interest on long-term debt................ 18,280 18,650 53,425 57,868 73,677 77,655 Other interest expense.................... 3,166 2,382 9,863 7,824 12,066 10,486 Preferred dividends of subsidiary trust... 1,995 1,995 5,985 5,985 7,980 6,273 Allowance for borrowed funds.............. (1,074) (620) (2,749) (1,932) (3,414) (2,858) -------- --------- ---------- ---------- ---------- ---------- 22,367 22,407 66,524 69,745 90,309 91,556 -------- --------- ---------- ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS......... 49,544 50,255 101,103 107,301 119,743 154,510 LOSS FROM DISCONTINUED OPERATIONS......... - - - - - (1,584) -------- --------- ---------- ---------- ---------- ---------- NET INCOME................................ 49,544 50,255 101,103 107,301 119,743 152,926 PREFERRED DIVIDENDS....................... 1,239 1,239 3,714 5,249 4,953 8,902 -------- --------- ---------- ---------- ---------- ---------- EARNINGS ON COMMON STOCK.................. $ 48,305 $ 49,016 $ 97,389 $ 102,052 $ 114,790 $ 144,024 ======== ========= ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. -12-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) AS OF --------------------------------------------- SEPT. 30 DECEMBER 31 ----------------------------- ----------- 1998 1997 1997 ---------- ---------- ---------- (UNAUDITED) ASSETS UTILITY PLANT Electric............................................................... $4,139,099 $4,065,411 $4,087,924 Gas.................................................................... 774,482 746,173 756,874 ---------- ---------- ---------- 4,913,581 4,811,584 4,844,798 Less accumulated depreciation and amortization......................... 2,393,211 2,252,537 2,277,110 ---------- ---------- ---------- 2,520,370 2,559,047 2,567,688 Construction work in progress.......................................... 87,442 53,236 55,418 ---------- ---------- ---------- 2,607,812 2,612,283 2,623,106 ---------- ---------- ---------- POWER PURCHASE CONTRACT................................................ 166,345 188,860 173,107 ---------- ---------- ---------- CURRENT ASSETS Cash and cash equivalents.............................................. 12,502 7,065 9,318 Receivables............................................................ 128,700 192,574 184,153 Inventories............................................................ 88,726 93,142 84,298 Other.................................................................. 29,834 6,024 6,174 ---------- ---------- ---------- 259,762 298,805 283,943 ---------- ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET............................. 164,360 106,318 115,029 ---------- ---------- ---------- OTHER ASSETS........................................................... 312,874 361,807 347,122 ---------- ---------- ---------- TOTAL ASSETS........................................................... $3,511,153 $3,568,073 $3,542,307 ========== ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity............................................ $ 992,465 $ 997,342 $ 985,744 MidAmerican preferred securities, not subject to mandatory redemption................................................. 31,759 31,765 31,763 Preferred securities, subject to mandatory redemption: MidAmerican preferred securities..................................... 50,000 50,000 50,000 MidAmerican-obligated preferred securities of subsidiary trust holding solely MidAmerican junior subordinated debentures.......... 100,000 100,000 100,000 Long-term debt (excluding current portion)............................. 930,497 969,175 920,203 ---------- ---------- ---------- 2,104,721 2,148,282 2,087,710 ---------- ---------- ---------- CURRENT LIABILITIES Notes payable.......................................................... 73,600 131,100 122,500 Current portion of long-term debt ..................................... 49,628 77,730 124,460 Current portion of power purchase contract............................. 14,361 13,718 14,361 Accounts payable....................................................... 129,119 118,436 128,390 Taxes accrued.......................................................... 110,002 56,175 91,449 Interest accrued....................................................... 15,247 16,062 20,616 Other.................................................................. 30,069 26,438 22,598 ---------- ---------- ---------- 422,026 439,659 524,374 ---------- ---------- ---------- OTHER LIABILITIES Power purchase contract................................................ 83,143 97,504 83,143 Deferred income taxes.................................................. 588,284 615,589 592,840 Investment tax credit.................................................. 78,847 84,556 83,127 Other ................................................................. 234,132 182,483 171,113 ---------- ---------- ---------- 984,406 980,132 930,223 ---------- ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES................................... $3,511,153 $3,568,073 $3,542,307 ========== ========== ==========
The accompanying notes are an integral part of these statements. -13-
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 1998 1997 1998 1997 --------- -------- --------- -------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 49,544 $ 50,255 $ 101,103 $ 107,301 Adjustments to reconcile net income to net cash provided: Depreciation and amortization............................. 50,926 50,290 147,341 144,719 Net decrease in deferred income taxes and investment tax credit, net.............................. (2,951) (1,686) (8,836) (5,264) Amortization of other assets.............................. 11,162 5,635 30,195 17,727 Impact of changes in working capital...................... (24,268) (4,530) 48,750 23,947 Other..................................................... 23,188 14,877 24,747 (10,284) --------- -------- --------- --------- Net cash provided....................................... 107,601 114,841 343,300 278,146 --------- -------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures........................... (45,633) (49,815) (114,225) (113,844) Quad Cities Nuclear Power Station decommissioning trust fund................................ (2,875) (2,779) (8,533) (7,060) Deferred energy efficiency expenditures..................... - (5,909) - (12,258) Nonregulated capital expenditures........................... (153) (2,071) (20,307) (5,377) Proceeds from sale of assets and other investments.......... - - 19,854 - Other investing activities, net............................. 425 (176) 1,463 751 --------- -------- --------- --------- Net cash used ............................................ (48,236) (60,750) (121,748) (137,788) --------- -------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid.............................................. (34,738) (21,238) (94,414) (96,749) Issuance of long-term debt, net of issuance cost............ - - 158,440 - Retirement of long-term debt, including reacquisition cost.. (157,879) (28,102) (233,490) (90,155) Reacquisition of preferred shares........................... (1) - (4) (4) Net increase (decrease) in notes payable.................... 32,100 (13,200) (48,900) (30,600) --------- -------- --------- --------- Net cash used............................................. (160,518) (62,540) (218,368) (217,508) --------- -------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (101,153) (8,449) 3,184 (77,150) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 113,655 15,514 9,318 84,215 --------- -------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 12,502 $ 7,065 $ 12,502 $ 7,065 ========= ======== ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized................... $ 28,046 $ 25,525 $ 67,572 $ 68,188 ========= ======== ========= ========= Income taxes paid........................................... $ 19,194 $ 23,714 $ 52,630 $ 91,179 ========= ======== ========= =========
The accompanying notes are an integral part of these statements. -14- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A) GENERAL: The consolidated financial statements included herein have been prepared by MidAmerican, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican, all adjustments have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Although MidAmerican believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in MidAmerican's latest Annual Report on Form 10-K. B) ENVIRONMENTAL MATTERS: Refer to Note B of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's environmental matters. C) RATE MATTERS: Refer to Note C of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's rate matters. D) ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION: Refer to Note D of Holdings' Notes to Consolidated Financial Statements for information regarding MidAmerican's accounting for the effects of certain types of regulation. E) MIDAMERICAN-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES: Refer to Note E of Holdings' Notes to Consolidated Financial Statements for information regarding the MidAmerican-Obligated Mandatorily Redeemable Preferred Securities. F) STATEMENT OF COMPREHENSIVE INCOME: MidAmerican did not have other comprehensive income for the periods presented, and accordingly, a statement of comprehensive income has been omitted. MidAmerican's total comprehensive income is equal to its earnings on common stock for each period presented. G) PENDING MERGER: Refer to Note I of Holdings' Notes to Consolidated Financial Statements for information regarding the pending merger. -15- Item 2. 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 is a public utility with electric and natural gas operations and is the principal subsidiary of Holdings. MidAmerican Capital, Midwest Capital and MidAmerican Realty Services Company (MidAmerican Realty) are Holdings' nonregulated subsidiaries. MidAmerican Capital manages marketable securities and passive investment activities, nonregulated retail natural gas businesses, security services and other energy-related, nonregulated activities. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. MidAmerican Realty includes the Company's recently acquired real estate operations. In May 1998, MidAmerican Realty completed its purchase of AmerUs Home Services Inc. During the third quarter of 1998, the Company purchased HOME Real Estate (HOME) and CBS Real Estate Company (CBS), the No. 1 and No. 2 residential brokerage organizations in Omaha, Nebraska, and J. C. Nichols Real Estate, a market leader in residential brokerage in the Kansas City metropolitan area. HOME and CBS have combined and now operate as CBS HOME Real Estate. The acquired companies are now subsidiaries of MidAmerican Realty and include real estate operations in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and Wisconsin. On a consolidated basis, MidAmerican Realty has more than 1,150 employees and 4,500 sales agents and comprises the nation's second largest independent residential real estate brokerage organization. In addition to residential brokerage, MidAmerican Realty offers relocation, title, abstract and mortgage services. DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS Management's Discussion and Analysis (MD&A) addresses the financial statements of Holdings and MidAmerican as presented in this joint filing. Discussions related to MidAmerican also relate to Holdings. Information related to MidAmerican Capital, Midwest Capital and MidAmerican Realty 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. The consolidated financial statements of MidAmerican present amounts related to MidAmerican Capital and Midwest Capital as discontinued operations for the twelve months ended September 30, 1997, in order to reflect their transfer to Holdings in December 1996. -16- 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, fuel transportation, competitive factors, general economic conditions in the Company's service territory, interest rates, inflation and federal and state regulatory actions. MERGER ANNOUNCEMENT On August 11, 1998, a definitive merger agreement was entered into between the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy services. Under the terms of the agreement, the shareholders of the Company will receive $27.15 cash for each share of their common stock reflecting a 36 percent premium over the August 11, 1998, closing price. The Company and CalEnergy each held a special shareholders meeting on October 30, 1998, at which the shareholders of each respective company approved the agreement and plan of merger. Additionally, the pre-merger notification period under the Hart-Scott-Rodino Antitrust Improvements Act has expired. The companies have made filings with, and are awaiting favorable orders from, the Federal Energy Regulatory Commission (FERC), the Nuclear Energy Regulatory Commission (NRC), and the Iowa Utilities Board (IUB), which has the right to review the merger and to disapprove it only if found not in the public interest. State regulators in Illinois, Nebraska and South Dakota have been notified of the merger. Management believes completion of the merger could occur during the first quarter of 1999. -17- RESULTS OF OPERATION Holdings: - - --------- The following tables provide a summary of the earnings contributions of the Company's operations for each of the periods presented:
Periods Ended September 30 -------------------------- Three Months Nine Months Twelve Months --------------- --------------- ---------------- 1998 1997 1998 1997 1998 1997 ------ ------ ------ ------ ------ ------ Net Income (in millions) Continuing operations Utility $ 48.3 $ 49.0 $ 97.4 $102.0 $114.8 $145.6 Nonregulated operations 5.3 0.7 16.0 6.0 29.8 (7.8) Discontinued operations - (2.8) - (2.6) (1.6) (3.9) ------ ------ ------ ------ ------ ------ Consolidated earnings $ 53.6 $ 46.9 $113.4 $105.4 $143.0 $133.9 ====== ====== ====== ====== ====== ====== Earnings Per Common Share - Basic and Diluted Continuing operations Utility $ 0.51 $ 0.50 $ 1.03 $ 1.03 $ 1.21 $ 1.47 Nonregulated operations 0.06 0.01 0.17 0.06 0.31 (0.08) Discontinued operations - (0.03) - (0.02) (0.01) (0.04) ------ ------ ------ ------ ------ ------ Consolidated earnings $ 0.57 $ 0.48 $ 1.20 $ 1.07 $ 1.51 $ 1.35 ====== ====== ====== ====== ====== ======
MidAmerican: - - ------------ The following table provides a summary of the earnings contributions of MidAmerican's operations for each of the periods presented:
Periods Ended September 30 -------------------------- Three Months Nine Months Twelve Months -------------- -------------- ---------------- 1998 1997 1998 1997 1998 1997 ----- ----- ----- ----- ------ ------ (in millions) Earnings on Common Stock Continuing operations $48.3 $49.0 $97.4 $102.0 $114.8 $145.6 Discontinued operations* - - - - - (1.6) ----- ----- ----- ------ ------ ------ Consolidated earnings $48.3 $49.0 $97.4 $102.0 $114.8 $144.0 ===== ===== ===== ====== ====== ======
* Discontinued operations for twelve months ended September 30, 1997, includes the loss of MidAmerican Capital and Midwest Capital prior to their transfer to Holdings on December 1, 1996. EARNINGS DISCUSSION Below is a list of some of the significant factors resulting in the variances in earnings. The amounts represent the variance between the 1998 and 1997 periods. Therefore, a factor that had a negative impact on earnings in both periods, but which had less of a negative impact in the 1998 period than in the 1997 period, would be displayed as a positive factor for comparison purposes. The discussion that follows addresses these factors as well as other items affecting the Company's results of operations. -18- In the second half of 1997, MidAmerican began charging to expense additional amortization of deferred energy efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear Station costs consistent with ratemaking treatment. These items have had a significant impact on other operating expenses. In conjunction with expensing these items, MidAmerican began recovery of these costs from its customers, which is reflected in revenues. However, for purposes of the following table, these expenses are netted against the related revenues. As a result, the "Other O&M expenses" line does not reflect the impact of these items, and the net effect of the revenues and expenses is included on the "Other factors" line under gross margin. Approximate Net Income Variances: 1998 vs 1997 --------------------------------- ------------ For Periods Ended September 30 ------------------------------ Three Months Nine Months Twelve Months ------------ ----------- ------------- ($ In Millions) MidAmerican: Variation in electric and gas gross margin due to - Variation in the effect of weather $11.5 $ 2.0 $ 1.9 Customer growth 1.4 4.4 6.7 Electric retail rates and accruals (1.9) (4.4) (4.3) Off-system sales 5.2 7.4 8.0 Other factors (4.9) 8.9 9.4 Nuclear O&M expenses 1.3 2.5 2.2 1996 inventory adjustment - - (3.7) Storm repair expense (1.8) (2.1) (3.2) Other O&M expenses (7.3) (16.1) (37.0) Recognition of deferred energy efficiency income (0.9) (2.7) (3.0) 1996 gain on sale of storage gas - - (2.4) Utility nonregulated activities (0.6) (1.5) (2.5) 1997 settlement of NPPD lawsuit (1.3) (1.3) (1.3) Nonregulated subsidiaries: Write-downs of certain assets - - 7.4 Realized gain on sale of McLeodUSA Incorporated common stock - - 5.2 Donation of appreciated stock - (2.4) (2.4) Gains on sales of certain assets - 3.2 9.2 Income from a venture capital investment - 1.2 1.2 Realty operations 4.6 6.3 6.3 Reduction of interest on long-term debt - - 2.2 Discontinued operations 2.8 2.6 2.3 Average shares outstanding for 1997 period 97,097 98,752 99,213 Improved margins resulted in an increase in utility earnings for the third quarter of 1998. The increase was offset by expenses for repair of damage from storms in late June 1998 and by expenses for customer service, information technology and marketing in preparation for a competitive utility environment. -19- In the past two years, the Company's strategic realignment of operations has significantly affected earnings of nonregulated subsidiaries. During 1997 and the first quarter of 1998, 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 the twelve months ended September 30, 1998, include 6 cents per share from the sale of assets of railcar leasing and repair businesses in the fourth quarter of 1997. During the first nine months of 1998, the Company recorded earnings of 3 cents per share for the sale of its interest in a financial management company and the liquidation of a partnership that owned commercial office buildings. Losses from discontinued operations reduced earnings in each twelve-month period shown above, though to a lesser degree in 1998 than in the 1997 period. Although utility earnings for the current twelve-month period 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 its strategic realignment which included strengthening its marketing and customer service capabilities and adding to its information technology resources. The Company's evaluation of its nonregulated investments has resulted in write-downs of certain assets, primarily investments in alternative energy projects, during the past two years. 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, and $9.4 million, or 9 cents per share, in the twelve months ended September 30, 1998 and 1997, respectively. Discontinued Operations - Holdings: - - --------- During 1996, the Company discontinued some of its nonregulated operations. The Consolidated Statements of Income reflect the income or loss from those operations and the losses on disposal. Net assets of the discontinued operations are presented separately in the Consolidated Balance Sheets as Investment in Discontinued Operations. In January 1997, the Company completed the sale of a portion of its nonregulated operations, including its oil and gas exploration and development operations. The twelve months ended September 30, 1997, reflects a $1.0 million after-tax loss for the transaction. The original estimated loss was recorded in September 1996. 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 an anticipated after-tax loss on disposal of those operations in September 1996. An additional $3.2 million after-tax loss on disposal was recorded in September 1997 and is reflected in the twelve months ended September 30, 1997. -20- UTILITY GROSS MARGIN Electric Gross Margin: - - ----------------------
Periods Ended September 30 -------------------------- Three Months Nine Months Twelve Months ------------ ----------- ---------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ------ ------ (In millions) Operating revenues $364 $334 $907 $850 $1,183 $1,109 Cost of fuel, energy and capacity* 72 67 176 179 233 235 ---- ---- ---- ---- ------ ------ Electric gross margin $292 $267 $731 $671 $ 950 $ 874 ==== ==== ==== ==== ====== ======
*Amounts shown are from the MidAmerican Consolidated Statements of Income. The amounts on Holdings' Consolidated Statements of Income reflect an intercompany elimination. A variety of factors contributed to the increase in MidAmerican's electric gross margin for the 1998 periods compared to the 1997 periods. An increase in revenues from energy efficiency cost recovery accounted for $9.0 million, $26.9 million and $35.9 million of the increase in margin for the three-, nine- and twelve-month comparisons, respectively. Revenues from the Cooper Tracker (discussed below) contributed $0.1 million, $3.3 million and $5.3 million to the increases for the three, nine and twelve months ended September 30, 1998, respectively. The increases in revenues from these factors are substantially offset by increases in other operating expenses. Regarding the increase in energy efficiency revenues, on September 29, 1997, MidAmerican began collection of its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs. Including an allowed return on the deferred costs, the annual increase in electric revenues is approximately $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 approximately $31.1 million annually for currently incurred electric energy efficiency costs and amortization of previously incurred costs. The Cooper Tracker allows MidAmerican to collect on a current basis the Iowa portion of expenses for Cooper capital improvement advances. Prior to the Cooper Tracker, capital improvement advances were capitalized when incurred and amortized over future periods in accordance with ratemaking treatment. The effect of temperatures contributed $21 million to the increase in margin for the third quarter of 1998 compared to 1997. Compared to normal, 1998 third quarter temperatures resulted in an increase in gross margin of $14 million, while the 1997 third quarter was cooler than normal, resulting in a decrease in margin of $7 million. Moderate customer growth resulted in a $2.2 million increase in electric gross margin compared to the 1997 third quarter. Total retail sales of electricity increased 7.2%. A reduction in other usage factors and sales mix reduced gross margin compared to the 1997 quarter. The average cost of fuel, energy and capacity per unit in the third quarter of 1998 was above the 1997 level and resulted in a decrease to gross margin compared to the third quarter of 1997. Prior to July 11, 1997, MidAmerican was allowed to recover its energy costs from most of its electric utility customers through Energy Adjustment Clauses (EACs) included in revenues. Effective July 11, 1997, the EAC was eliminated for Iowa customers as part of a new Iowa pricing plan. Previously, variations in energy costs did not affect gross margin or net income due to corresponding changes in revenues collected through the EACs. With the elimination of the Iowa EAC, fluctuations in energy costs now have an impact on gross margin and net income. -21- Reductions of electric retail rates resulted in a $3.2 million decrease in revenues and gross margin compared to the third quarter of 1997. Sales for resale decreased 7.7% for the quarter comparison. However, margins on off-system sales, which account for most of MidAmerican's sales for resale, contributed $8.8 million more to gross margin in the 1998 quarter than the sales in the third quarter of 1997. Refer to the discussion of the energy market under "Competition" in the Operating Activities and Other Matters section of MD&A. For the comparison of the nine-month periods ended September 30, the variance in temperatures resulted in a $16 million increase in electric gross margin. Compared to normal, the 1998 temperatures resulted in an increase in gross margin of $6 million, while the 1997 period reflects a $10 million decrease in margin. An increase in sales not dependent on weather also contributed to the increase in margin. Moderate but steady customer growth improved gross margin by $6.2 million compared to the 1997 nine-month period. Total retail sales of electricity increased 4.1% compared to nine months ended September 30, 1997. Reductions of electric retail rates, including the effect of a 1997 accrual for a then potential refund, resulted in a $7.4 million decrease in revenues and gross margin compared to the first nine months of 1997. Year-to-date sales for resale decreased 9.0% compared to the nine months ended September 30, 1997. However, margins on off-system sales contributed $12.5 million more to gross margin in the 1998 period than the sales in the same period of 1997. For the twelve months ended September 30 comparison, the effect of temperatures increased gross margin by $19 million in the 1998 period compared to the 1997 period. When compared to normal, the impact of temperatures resulted in a $11 million increase in electric gross margin for the 1998 twelve-month period compared to an $8 million reduction in gross margin for the twelve months ended September 30, 1997. Moderate but steady growth in the number of customers increased gross margin $8.7 million compared to the 1997 period. An increase in sales that are not dependent on weather also contributed to the increase in gross margin. Electric retail sales increased 3.5% for the 1998 twelve-month period compared to the twelve months ended September 30, 1997. Retail rate reductions, including the effect of an accrual for a potential refund, reduced electric gross margin by approximately $7.3 million compared to the twelve months ended September 30, 1997. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information regarding the Iowa proceeding. Sales for resale decreased 9.1% for the twelve months ended September 30 comparison, while margins on the off-system sales increased approximately $13.6 million. Gas Gross Margin: - - ----------------- Periods Ended September 30 -------------------------- Three Months Nine Months Twelve Months ------------ ----------- ------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- (In millions) Operating revenues $63 $60 $304 $353 $487 $535 Cost of gas sold 33 34 171 221 296 347 --- --- ---- ---- ---- ---- Gas gross margin $30 $26 $133 $132 $191 $188 === === ==== ==== ==== ==== -22- Revenues include purchase gas adjustment clauses (PGAs) through which MidAmerican has been allowed to recover the cost of gas sold from most of its gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations in revenues from PGAs. A decrease in the per-unit cost of gas compared to 1997 reduced revenues and cost of gas sold in each of the 1998 periods shown above. MidAmerican recently made a filing with the IUB which would modify the use of the PGA beginning May 1, 2000. Refer to Small Volume Gas Transportation under the Operating Activities and Other Matters section of MD&A for further discussion. Recovery of gas energy efficiency costs resulted in a $3.1 million increase in revenues and gross margin for the quarter. As discussed in the electric gross margin section, on September 29, 1997, MidAmerican began recovery of its energy efficiency costs which had not previously been approved for recovery. Including an allowed return on deferred costs, the annual increase in gas revenues is approximately $12.8 million. The effect on earnings of this increase is partially offset by a corresponding increase in other operating expenses of approximately $11.1 million annually for deferred and ongoing gas energy efficiency costs. Temperatures in the third quarter of 1998 were warmer than normal resulting in a $2 million decrease in gas gross margin for the period, while temperatures in the third quarter of 1997 were close to normal. Energy efficiency revenues increased $9.3 million for the nine months ended September 30, 1998, compared to the same period in 1997, while customer growth accounted for $1.1 million of the increase in gas margin. The mix of sales also contributed to the increase compared to the 1997 period. The variance in temperatures between the 1998 and 1997 nine-month periods resulted in a $12 million decrease in gas margin. Temperatures in the nine months ended September 30, 1998, were 15.7% warmer than normal yielding in an $11 million decrease in gas gross margin for the period. Colder-than-normal temperatures in the nine months ended September 30, 1997, increased margin in that period by approximately $1 million. Retail sales in 1998 decreased 12.3% compared to the 1997 nine-month period. Mild temperatures resulted in a $16 million decrease in gas gross margin for the twelve months ended September 30, 1998, compared to the twelve months ended September 30, 1997. When compared to normal, the impact of temperatures resulted in an $12 million reduction in gas gross margin in the 1998 twelve-month period compared to a $4 million increase in gas gross margin for the twelve months ended September 30, 1997. The increase in recovery of gas energy efficiency costs for the twelve-month period recovered approximately $12.5 million of the loss in revenues and margin resulting from milder temperatures. Moderate customer growth, contributing $2.7 million to gross margin, and an increase from other usage factors also helped offset the decrease in gross margin due to the weather. UTILITY OPERATING EXPENSES Other Operating Expenses - Utility other operating expenses increased $19.6 million, $45.8 million and $94.6 million for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods in 1997. As mentioned in the gross margin discussions, on September 29, 1997, MidAmerican began additional recovery of deferred energy efficiency costs and current recovery of ongoing costs. As the deferred costs are recovered in revenues, they are amortized to expense. In addition, ongoing energy efficiency costs, which historically were deferred until future periods, are now charged to expense currently. The increase in energy efficiency costs accounted for $10.7 million, $32.2 million and $43.1 million of the increase in other operating -23- expenses for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods in 1997. In addition to the energy efficiency expense increase, operating expenses related to Cooper increased due in part 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 in the Electric Gross Margin section, MidAmerican is recovering on a current basis the Iowa portion of these costs from its Iowa electric customers through the Cooper Tracker. Recovery in Illinois is included in base rates. This change accounted for increases of $1.3 million and $3.1 million for the nine-month and twelve-month comparisons, respectively. Excluding these currently recovered Cooper costs, nuclear operations expenses decreased $4.7 million, $10.6 million and $6.9 million, respectively, for the three-month, nine-month and twelve-month comparisons due to reductions in expenses at the Quad Cities Station. Continued restructuring of the Company in preparation for a competitive industry has required additional expenses. MidAmerican has increased its emphasis on marketing-related efforts, as well as customer service operations, resulting in increases in consulting costs, advertising, employee incentive compensation and other related expenses. Increases in such expenses accounted for a majority of the remaining increases for the quarter and nine-month period comparisons. In addition, the 1998 twelve-month period reflects increases in certain employee benefits expenses, customer assistance and energy efficiency administrative costs, manufactured gas plant site clean-up costs and rent expense. Maintenance - Maintenance expenses increased $3.3 million and $10.5 million for the 1998 three-month and nine-month periods ended September 30 compared to the same periods ended September 30, 1997. Increased maintenance costs at the Quad Cities Station accounted for $2.5 million and $6.2 million of the three-month and nine-month increases, respectively. Additionally, the Company incurred repair costs for storms in June 1998, totalling $3.1 million and $3.5 million for the three months and nine months ended September 30, 1998, respectively. A decrease in other generation maintenance expenses partially offset the increases for the quarter. Maintenance expenses for the twelve months ended September 30, 1998, were $18.3 million greater than in the comparable 1997 period. In the fourth quarter of 1996, MidAmerican made an adjustment to align power plant inventory accounting of predecessor companies. That adjustment reduced expenses by $6.2 million for the twelve-month period ended September 30, 1997. In addition, the Company incurred $2.0 million in maintenance expenses for restoration following a snow storm in October 1997 and $3.5 million for costs related to the June 1998 storms. Maintenance expenses at the Quad Cities Station increased $3.1 million in the twelve-month period ended September 30, 1998, compared to the twelve months ended September 30, 1997. 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 Quad Cities Station. -24- NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Holdings: - - --------- Revenues of nonregulated subsidiaries increased $44.9 million for the three-month period ended September 30, 1998, and decreased $31.0 million and $66.4 million for the nine months and twelve months ended September 30, 1998, compared to their respective 1997 periods. Revenues from the natural gas marketing subsidiaries decreased $22.6 million, $111.7 million and $148.6 million for the 1998 three-month, nine-month and twelve-month periods, respectively. Related sales volumes decreased 8 million MMBtu's (61%), 35 million MMBtu's (55%) and 55 million MMBtu's (54%) compared to the sales volumes in the 1997 periods. The decrease in sales volumes is due primarily to the expiration of wholesale contracts which have not been replaced. Additionally, nonregulated retail sales volumes have decreased, but the remaining sales are at improved margin levels. A decrease in the average price per unit, reflective of a decrease in the cost of gas sold, also reduced revenues in each of the periods ended September 30, 1998. Cost of sales related to natural gas marketing for the 1998 periods reflects decreases in the average cost of gas per unit as well as the effect of reduced sales volumes. Total gross margin (total price less cost of gas) on nonregulated natural gas sales increased $1.7 million, $0.3 million and $1.0 million for the 1998 three, nine, and twelve months ended September 30, respectively, compared to the 1997 periods. The Company has acquired several real estate brokerage operations in 1998. Nonregulated revenues for the 1998 quarter reflect $69.5 million from the real estate brokerage operations. For the nine-month and twelve-month periods, real estate brokerage revenues totaled $87.8 million. Nonregulated cost of sales for the third quarter of 1998 includes $37.4 million related to the real estate brokerage companies. For the nine months and twelve months ended September 30, 1998, real estate brokerage cost of sales totaled $43.9 million. Other operating expenses for those operations were $23.7 million for the three-month period and $32.1 million for the nine- and twelve-month periods in 1998. Nonregulated other operating expenses for the 1998 twelve-month period reflect a decrease of approximately $4.0 million due primarily to administrative costs in the 1997 period which are no longer incurred because of the absence of operations the Company sold in early 1997. NON-OPERATING INCOME AND INTEREST EXPENSE MidAmerican: - - ------------ Interest and Dividend Income - Interest income increased in each 1998 comparative period due to an increase in temporary cash investments. Other, Net - In the fourth quarter of 1997, MidAmerican sold a portion of its accounts receivable. Other, Net for the quarter, nine months and twelve months ended September 30, 1998, includes deductions for discounts on receivables sold, net of related subservicer fees, totaling $1.4 million, $4.4 million and $4.7 million, respectively. Refer to the Financing Activities section of Liquidity and Capital Resources later in MD&A for a discussion of the receivables sale. -25- Recognition of deferred income from energy efficiency programs totaled zero, $0.2 million and $0.4 million for the 1998 three-month, nine-month and twelve-month periods ended September 30, respectively. The comparable 1997 periods reflect income of $1.5 million, $4.8 million and $5.4 million, respectively. The decrease is due to the additional recovery of energy efficiency costs begun September 29, 1997, as discussed in the Utility Gross Margin section of MD&A. Other, Net for the nine-month and twelve-month periods ended September 30, 1997, includes a reduction for net losses on reacquired long-term debt of $0.9 million and $0.2 million, respectively. In September 1997, MidAmerican received a $15 million cash payment from Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by MidAmerican against NPPD. Approximately $12 million was refunded to MidAmerican's customers. The remaining amount was retained by MidAmerican for recovery of litigation costs in the lawsuit. Other, Net for each 1997 period reflects $2.2 million of pre-tax income for recovery of litigation costs incurred in pre-1997 years. MidAmerican was awarded pre-tax income in each nine-month and twelve-month period presented for performance under its incentive gas procurement program. In the second quarter of 1998 and 1997, MidAmerican received $2.0 million and $1.7 million, respectively. Twelve months ended September 30, 1998 and 1997, reflect amounts of $5.3 million and $4.4 million, respectively. As part of its preparation for a competitive electric utility environment, the Company is investigating and developing new products to offer customers. The impact of these activities and other nonregulated activities reduced Other, Net by $1.1 million, $2.6 million and $4.3 million for the 1998 three, nine and twelve months ended September 30, 1998, respectively, compared to the 1997 periods. In the fourth quarter of 1996, MidAmerican recorded an initial pre-tax gain of $3.2 million on its sale of certain storage gas supplies which is reflected in the twelve months ended September 30, 1997. MidAmerican recorded an additional $0.8 million gain in the second quarter of 1997, which is also reflected in the twelve months ended September 30, 1997, after receiving favorable treatment on the transaction from the IUB. The twelve months ended September 30, 1997, also includes $2.2 million of income from the reversal of a reserve after successful resolution of a dispute with a vendor. Fixed Charges - Interest on long-term debt decreased for the nine months and twelve months ended September 30, 1998, due to long-term debt reduction and refinancing activities. Other interest expense increased due to short-term debt at Holdings, which resulted in interest being allocated to MidAmerican. Preferred securities of a subsidiary trust were issued in December 1996 resulting in the twelve months ended September 30, 1997, including only a partial year of dividends. MidAmerican preferred shares were reacquired at the same time, resulting in a decrease in other 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 2.7 million for the nine-month and twelve-month periods ended September 30, 1997, respectively. -26- Holdings: - - --------- Dividend Income - Dividend income decreased for each of the periods ended September 30, 1998, compared to the respective 1997 periods due to MidAmerican Capital's reduced holdings of preferred stock portfolios. Realized Gains and Losses on Securities, Net - Net realized gains on securities for twelve months ended September 30, 1998, includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common stock. Other, Net - The first nine months of 1998 includes $4.7 million from the divestment of nonregulated assets in the first quarter, including the sale of the Company's interest in a financial management company, the sale of a commercial office building and liquidation of a partnership interest concurrent with the sale of its commercial property. In addition, the Company recorded $2.1 million of income from an equity investment in a venture capital fund. In addition to the above items, the twelve months ended September 30 periods were affected by several additional factors. During the twelve months ended September 30, 1998, 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 and $15.6 million for the twelve-month periods ended September 30, 1998 and 1997, respectively. Interest Charges - Interest on long-term debt of nonregulated subsidiaries decreased $3.7 million for the twelve-month comparison due primarily to the reduction in MidAmerican Capital's 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. -27- 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 September 30, 1998, common equity represented 50.4% of the Company's total capitalization compared to 51.7% and 51.6% as of December 31, 1997, and September 30, 1997, respectively. A reduction in accumulated comprehensive income, reflective of a decrease in the market value of an investment in McLeodUSA common stock, and the Company's common stock repurchase program reduced common equity since September 30, 1997. As reflected on the Consolidated Statements of Cash Flows, Holdings had net cash provided from operating activities of $339 million for the first nine months of 1998 compared to $334 million for the same period in 1997. MidAmerican's net cash provided from operating activities was $343 million for the first nine months of 1998 and $278 million for the first nine months of 1997. INVESTING ACTIVITIES AND PLANS MidAmerican: - - ------------ Utility Construction Expenditures - MidAmerican's primary need for capital is utility construction expenditures. For the first nine months of 1998, utility construction expenditures totaled $114 million, including allowance for funds used during construction (AFUDC) and Quad Cities Station nuclear fuel purchases. All such expenditures were met with cash generated from utility operations, net of dividends. Beginning with July 1997 expenditures, advances for Cooper capital improvements are no longer included in utility construction expenditures but are expensed when incurred in other operating expenses. Previously, MidAmerican capitalized these expenses in accordance with then applicable rate regulation. As part of the 1997 settlement of MidAmerican's electric pricing proposal, MidAmerican is recovering on a current basis the Iowa portion of expenses for Cooper capital improvements advances from its Iowa electric customers through a tracking mechanism. Forecasted utility construction expenditures, including AFUDC, for 1998 are $201 million and $609 million for 1999 through 2002. 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. Deferred Energy Efficiency Expenditures - The Company stopped reflecting costs of its energy efficiency programs as an investing activity on its Consolidated Statement of Cash Flows following the IUB's approval in September 1997 of the current recovery of ongoing energy efficiency program costs. Under prior energy efficiency regulations, program costs were deferred for several years prior to beginning their recovery over a four-year period, and accordingly, the Company reflected them as an investing activity. -28- 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 $50 million during the period 1999 through 2003 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Approximately 55% of the trust's funds are now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. In addition, MidAmerican makes payments to NPPD related to decommissioning Cooper. These payments are reflected in other operating expenses in the Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay approximately $57 million to NPPD for Cooper decommissioning during the period 1999 through 2003. NPPD invests the funds predominately in U.S. Treasury Bonds. 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, Midwest Capital and MidAmerican Realty totaled $20 million for the first nine months of 1998. 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 future. External financing may also be used to provide for nonregulated capital expenditures. As discussed in the Introduction section of MD&A, the Company has purchased several residential real estate brokerage organizations in the second and third quarters of 1998 for a total of approximately $105 million. The acquired companies are now the subsidiaries of MidAmerican Realty. Total assets of MidAmerican Realty as of September 30, 1998, were $123 million. The line items significantly affected on the Company's Consolidated Balance Sheet as of September 30, 1998, are as follows ($ in millions): Receivables ($18.2); Nonutility Property and Investments ($19.0); Other Assets ($80.5); and Other Current Liabilities ($13.7). For the nine months ended September 30, 1998, the combined total closed buyer/seller transactions of all MidAmerican Realty companies, including transactions prior to their acquisition, was approximately 52,800 transactions. Many factors affect the residential real estate market, and there is no assurance that the same transaction volume, or the revenues thereon, will be achieved in the future. During the second quarter of 1998, the Company also acquired the assets of two security services companies in the Midwest. -29- 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. prohibited 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. As of September 30, 1998, the cost and fair value of the McLeodUSA investment were $45.2 million and $176.3 million, respectively. The unrealized gain is recorded, net of income taxes, as accumulated comprehensive income in common shareholders' equity. As of September 30, 1998, the unrealized gain and deferred income taxes for this investment were $131.1 million and $45.9 million, respectively. FINANCING ACTIVITIES, PLANS AND AVAILABILITY MidAmerican: - - ------------ MidAmerican currently has authority from the FERC to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of September 30, 1998, MidAmerican had a $250 million revolving credit facility agreement and a $5 million line of credit to provide short-term financing for utility operations. MidAmerican's commercial paper borrowings, which totaled $73.6 million at September 30, 1998, 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, as determined by Statement of Financial Accounting Standards (SFAS) No. 125, under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors. Therefore, the accounts receivable sold are not reflected on Holdings' or MidAmerican's Consolidated Balance Sheets. As of September 30, 1998, $106.8 million, net of reserves, was sold under the agreement. -30- The following table displays the 1998 long-term debt retirements and issuances of MidAmerican Energy. Repayment of the February and October maturities was funded with short-term debt and cash from operations.
Date Issue Principal Transaction -------- ---------------------------------------- ------------ ----------- 2-1-98 6.25% First Mortgage Bonds, due 2-1-98 $ 75,000,000 Matured 6-19-98 6.375% Medium Term Notes due 6-15-06 160,000,000 Issued 7-15-98 8.125% General Mortgage Bonds due 2-1-03 100,000,000 Called at 105.23 7-15-98 8% General Mortgage Bonds due 2-15-22 50,000,000 Called at 105.13 10-15-98 5.05% First Mortgage Bonds due 10-15-98 49,100,000 Matured
As of October 31, 1998, MidAmerican had $379 million of long-term debt maturities and sinking fund requirements for 1999 through 2003. MidAmerican recently received authorization from the FERC to issue up to $500 million in various forms of debt. MidAmerican will also need authorization from the Illinois Commerce Commission (ICC) prior to issuing any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican need only provide the ICC with an "informational statement" prior to the issuance which sets forth the type, amount and use of the proceeds of the securities to be issued. If less than 90% of the proceeds are used for refinancing, MidAmerican must file a comprehensive application seeking authorization prior to issuance. The ICC is required to hold a hearing before issuing its authorization. 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 October 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. Moody's Investors Standard Service* & Poor's * --------- ---------- Mortgage Bonds A2 AA- Unsecured Medium-Term Notes A3 A Preferred Stocks a3 A Commercial Paper P-1 A-1 *Following the announcement of the Company's merger with CalEnergy, Moody's Investors Service placed its ratings of MidAmerican securities under review for possible downgrade. Standard & Poor's placed its ratings of MidAmerican on CreditWatch with negative implications pending further analysis. Holdings: - - --------- As of September 30, 1998, Holdings had lines of credit totaling $140 million to provide for short-term financing needs, $136.6 million of which was outstanding. -31- In March 1997, Holdings announced its plan to repurchase up to $200 million of the Company's common stock. As of September 30, 1998, the Company had repurchased approximately 6.2 million shares for $114.8 million under the plan. Repurchasing the common stock reduced total common dividend requirements and aided 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 October 28, 1998, Holdings' board of directors declared a quarterly dividend on common shares of $0.30 per share payable December 1, 1998. The dividend represents an annual rate of $1.20 per share. Nonregulated Subsidiaries - As of September 30, 1998, MidAmerican Capital had unsecured revolving credit facilities in the amount of $114 million, under which no debt was outstanding. MidAmerican Capital has $115 million of long-term debt maturities and sinking fund requirements for 1999 through 2003 related to debt outstanding at September 30, 1998. In October 1998, MidAmerican Capital paid off $20 million of its long-term debt which was reflected in current maturities of long-term debt at September 30, 1998. Midwest Capital currently has a $25 million line of credit with MidAmerican, of which $5 million was outstanding at September 30, 1998. In November 1998, MidAmerican Realty obtained a $25 million revolving credit facility and issued $35 million of 7.12% notes due 2010 through a private placement. 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 and retail segments 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. Additionally, increased volatility in the energy marketplace can be expected. As evidence of this, in late June 1998, utility energy markets in the Midwest experienced substantial price volatility due to a number of factors. The market volatility did not have a material impact on MidAmerican's energy costs. As the industry moves into a competitive utility environment, the Company expects such volatility to continue. MidAmerican cannot predict the effect of that volatility on its future revenues, energy costs or net income. -32- 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 is expected to put pressure on margins for traditional electric services. In order to lessen the impact of reduced margins, MidAmerican will focus on controlling the cost of traditional services. As part of an electric pricing settlement approved by the IUB in 1997, MidAmerican reduced its prices for most of its Iowa electric retail customers. In the IUB order approving the settlement, MidAmerican was also authorized to enter into long-term contracts with industrial and commercial electric customers. Refer to "Rate Matters" later in this discussion for further information. 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. The Company anticipates its recently purchased real estate brokerage organizations to benefit its utility operations through the additional contact with customers and potential customers at times when the Company can meet a variety of their needs. 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 Southern District of Iowa (the Court) alleging various violations of federal antitrust laws. The lawsuit stemmed from a claim that because the customer is not free to choose its retail energy supplier, MidAmerican is engaging in illegal monopolistic behavior. In addition to damages, the customer sought 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. The Court issued a judgment in favor of MidAmerican. An Appeal filed by the customer is currently pending. A ruling in favor of the plaintiff could have the effect of accelerating retail competition in MidAmerican's Iowa service territory. 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. MidAmerican is presently participating in proceedings which detail the new competitive environment and continues to evaluate the impact of the law on its operations. The law required 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 -33- approximately 13%, rate reductions implemented in Illinois in 1996 and 1997. MidAmerican implemented an additional $0.9 million annual rate reduction for Illinois residential customers effective August 1, 1998. 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 Bond rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the resulting average Treasury Bond rate approximated rates which existed in 1997, the ROE level above which sharing must occur would be approximately 12%. The law allows for methods to mitigate the sharing of earnings above the threshold ROE which would reduce MidAmerican's earnings. MidAmerican continues to evaluate its strategy regarding the sharing mechanism. 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. Customer choice will create opportunities for MidAmerican to add customers who are currently served by other utilities. At the same time, it will introduce the risk of losing current MidAmerican customers to other energy providers. 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. MidAmerican's Iowa legislative priority for 1998 was utility property tax reform, a condition it considers precedent to utility industry restructuring. A bill to replace the current utility property tax system, which was supported by MidAmerican, was approved by the Iowa legislature and signed into law by the Governor. The legislation becomes effective on January 1, 1999. Because energy costs are relatively low in Iowa, industry restructuring has not been an issue aggressively pursued in the state to date. During the 1998 Iowa legislative session, a group of industrial customers introduced legislation to allow retail service competition, but it did not develop further. With resolution of the utility property tax issue, MidAmerican intends to pursue the adoption of restructuring legislation in the 1999 Iowa legislative session. Small Volume Gas Transportation - In October 1997, the IUB adopted rules to encourage gas transportation service for small volume customers starting in 1999. MidAmerican filed its plan to unbundle service for its small volume customers on October 30, 1998. Under the plan, all of MidAmerican's small volume natural gas customers in Iowa, including residential customers, would be allowed to choose their own natural gas supplier/marketer, which may be MidAmerican's retail business unit, beginning May 1, 2000. If a customer does not expressly choose a supplier/marketer, then MidAmerican will provide the customer with market-priced service. With implementation of customer choice, the PGA (refer to the Gas Margin discussion of Results of Operations) would be modified to recover only the costs incurred by MidAmerican, as the distribution system operator, to balance the system and maintain system integrity. -34- Residential and Commercial Pilot Project - On August 21, 1998, the IUB issued an Order approving, subject to the filing of appropriate compliance tariffs, MidAmerican's proposal to allow at least 15,000 Iowa families and 2,000 small businesses to have the opportunity to select among competing electricity providers. The two-year program will allow participating retail customers in the selected test area to choose among several electricity providers, including MidAmerican, and to have that energy delivered by MidAmerican. MidAmerican expects customers will begin choosing among electricity providers in the first half of 1999. Businesses in the test area will be eligible for the program if their annual peak demand is less than four megawatts. New suppliers participating in the program will have to be certified by the IUB and meet specified requirements. Accounting Effects of Industry Restructuring - A possible consequence of competition in the utility industry is that SFAS 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A majority of MidAmerican's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of 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 could be required to write off the related regulatory assets and liabilities from its balance sheet, and thus, a material adjustment to earnings in that period could result. As of September 30, 1998, MidAmerican had $308 million of regulatory assets in its Consolidated Balance Sheet. Energy Efficiency - MidAmerican's regulatory assets as of September 30, 1998, included $79.3 million of deferred energy efficiency costs. Based on the current level of recovery, MidAmerican expects to recover these costs by the end of 2001. MidAmerican is also allowed to recover its ongoing energy efficiency costs on a current basis. Recovery of these costs is being collected from customers based on projected annual costs of $16.8 million, which may be adjusted annually. Amortization of the deferred energy efficiency costs and current expenditures for energy efficiency costs will be reflected in other operating expenses over the related periods of recovery. The total of such costs for the years 1999, 2000 and 2001, is estimated to be $43 million, $40 million and $35 million, respectively. Rate Matters: Electric - 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 approved a March 1997 settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties. Six major components of the settlement and their status are as follows: 1) On an annualized basis, prices for residential customers were reduced $8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July 11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5 million. -35- 2) Rates for industrial customers will be reduced by $6 million annually and rates for commercial customers will be reduced by $4 million annually. MidAmerican has been given permission to implement these reductions through a retail access pilot project and through negotiated individual contracts. In the event that these contracts in the aggregate do not reduce rates by $6 million and $4 million, respectively, MidAmerican is required to apply any remaining amount to across-the-board rate reductions to customers who do not enter into contracts. The effective date for these rate reductions was set for June 1, 1998, in the IUB Order approving the settlement. However, the IUB approved a MidAmerican request to extend the deadlines until September 1, 1998, for industrial customers and December 31, 1998, for commercial customers. The delay in deadlines includes an obligation to increase the amount of the reduction on a one-time basis to reflect the time value of money between June 1, 1998, and the new deadlines. MidAmerican estimates it will not have any interest obligation with respect to the industrial contracts, and will not incur any material interest obligation with respect to its commercial contracts. The negotiated contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $155 million. The IUB has recently considered the contracting process in two proceedings. Its decisions in those proceedings allowed the contracting efforts to continue. Contracts remain subject to IUB regulation. 3) A tracking mechanism (Cooper Tracker) is being used to currently recover costs for capital improvements required by the Cooper Nuclear Station Power Purchase Contract. Revenues from the Cooper Tracker will total approximately $6 million in 1998. Other operating expenses will include a comparable amount for currently expensing the related costs. 4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current basis through the EAC, and thus, fuel costs had little impact on net income. Since then, base rates for Iowa customers include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings are impacted. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary by more than 15% above or below the factor included in base rates. 5) 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 IUB is reviewing MidAmerican's calculation of its 1997 return as a result of an objection by the OCA. MidAmerican does not expect the ultimate outcome of this issue to have a material impact on its financial condition or results of operations. -36- 6) MidAmerican has developed 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 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, which has approved it, and the FERC. The Company anticipates FERC acceptance by year end. Rate Matters: Gas - On October 27, 1998, MidAmerican made a filing with the IUB requesting a rate increase for its Iowa retail gas customers. The 4.5 percent increase represents approximately an $18.5 million increase in annual gas revenues. As part of the filing, MidAmerican requested an interim rate increase of approximately $16.3 million, annually. The IUB may adjust the requested interim amount and delay its implementation for up to ninety days. MidAmerican expects the final rates, which may differ from the requested amount, to be implemented in the summer of 1999. 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 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether the Company has any responsibility for remedial action. The Company's present estimate of probable remediation costs for these sites is $24 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note 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. Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making significant contribution to nonattainment of the ozone standard in downwind states in the eastern half of the United States. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MidAmerican's facilities are not subject to additional emissions reductions as a result of this initiative. On July 18, 1997, the EPA adopted revisions to the NAAQS for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout the states, the EPA will make a determination of whether the states have any areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). If a state has area(s) classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards -37- through emission reductions or other means. In August 1998, the Iowa Environmental Protection Commission adopted by reference the NAAQS for ozone and fine particulate matter. The impact of the new standards on MidAmerican will depend on the attainment status of the areas surrounding MidAmerican's operations and MidAmerican's relative contribution to the nonattainment status. The attainment status of areas in the state of Iowa will not be known for two to three years. However, if MidAmerican's operations are determined to contribute to nonattainment, the installation of additional control equipment, such as scrubbers and/or selective catalytic reduction, on MidAmerican's units could be required. The cost to install such equipment could be significant. MidAmerican will continue to follow the attainment status of the areas in which it operates and evaluate the potential impact of the status of these areas on MidAmerican under the new regulations. 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 the utility industry in general, and 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. Quad Cities Nuclear Power Station- Quad Cities Station, which is operated by and 75% owned by Commonwealth Edison Company (ComEd), began 1998 with Unit 1 and Unit 2 out of service under a Confirmatory Action Letter (CAL) addressing safety system concerns in the event of certain postulated fires. Also, in January, ComEd was informed by the Nuclear Regulatory Commission (NRC) that the performance of Quad Cities Station is trending adversely. The NRC lifted the CAL in May, and Unit 2 returned to service on May 26, 1998. On June 1, 1998, Unit 1 returned to service. During discussions with the NRC, ComEd made numerous commitments to the NRC with respect to additional long-term analysis and improvements related to those safety systems. ComEd has made significant changes in senior management positions in its nuclear program and at the Quad Cities Station since November 1997 in an effort to improve its nuclear operations. A refueling outage is scheduled for Quad Cities Unit 1 in November 1998. No refueling outage is scheduled for either unit in 1999. Coal Inventories - MidAmerican continues to manage its coal inventory levels, which are significantly higher than those in early 1998. MidAmerican expects the coal inventory at each generating plant to be at or near management's desired level by year end. Generating Capability - In July, 1998, customer usage of electricity caused an hourly peak demand of 3,643 megawatts (MW) on MidAmerican's energy system. MidAmerican's previous record peak demand was 3,553 MW set in 1995. MidAmerican is interconnected with certain Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool (MAPP). Each MAPP participant is -38- required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. MidAmerican's reserve margin for 1998 was approximately 20%. MidAmerican believes it has adequate electric capacity reserve and continues to manage its generating resources to ensure an adequate reserve in the future. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican's reserve to fall below the 15% minimum. If MidAmerican fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP. ACTIVITIES REGARDING YEAR 2000 DATE ISSUES The Company's discussion of year 2000 issues addresses the Company's plans to address technical problems relating to calculations, manipulations, storage and other uses of date data which could cause some computer-controlled systems, applications and processes (hereinafter referred to as "Systems") to incorrectly process critical financial and operational information, or stop processing altogether. The discussion contains by necessity many forward-looking statements. The Company wishes to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and in order to do so includes the following meaningful cautionary statements with regard to the forward looking statements of its year 2000 plans. The Company's intentions, expectations, and predictions relating to its year 2000 efforts are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by such statements. Such risks and uncertainties include, among others, the effects of weather, competitive factors, federal and state regulatory actions, and other matters, many of which are beyond the Company's control. Project Description - The Company has undertaken an extensive ongoing project to address its information technology (IT) and non-IT (including embedded technology) Systems potentially affected by the year 2000 date change. The Company's approach is based on a five-phase project methodology - inventory, assessment, planning, resolution and implementation - designed to result in the identification, evaluation of potential problems, and remediation of the Company's Systems. The Company generally defines the five phases as follows: 1. Inventory Phase - The purpose of the inventory phase is to identify and document Systems used by the Company that may have a date function. 2. Assessment Phase - The purpose of the assessment phase is to collect information about inventoried Systems, including the business and technical context in which individual Systems operate, to make an informed judgment concerning an appropriate plan to mitigate year 2000 related risks. 3. Planning Phase - The purpose of the planning phase is to develop strategic and tactical plans for Systems that require replacement, repairs, upgrades or other appropriate resolutions (collectively referred to as "remedial actions"). 4. Resolution Phase - The purpose of the resolution phase is to execute the plan developed during the preceding phases. Testing of Systems and/or components of Systems is commenced during this phase. 5. Implementation Phase - The purpose of the implementation phase is to perform integration testing and to verify that Systems will function properly in a production environment. The Company's preparedness goal is to ensure high- and medium-priority Systems are suitable for continued use into the year 2000 and will perform correctly all functions that require accurate processing of -39- date data ("year 2000 ready" or "year 2000 readiness") by June 30, 1999. The Company classifies all Systems ranging from low- to high-priority based on their importance to carrying out the Company's business mission. System priority is based on potential impacts resulting from year 2000 problems on public and employee safety, prolonged and widespread service outages, long-term shareholder value, and ability to comply with regulatory requirements. In the case of low-priority Systems, year 2000 readiness may be delayed beyond January 1, 2000, or perhaps indefinitely. The Company plans to use the last six months of 1999 to perform post-implementation testing, address selected lower priority Systems and conduct preparedness exercises. Vendors, customers and other third parties may affect the Company's ability to achieve year 2000 readiness. Because service reliability and financial stability are dependent on the Company's supply chain, a concerted effort is being made to investigate important third parties to assess their ability to continue to supply products or services to, or purchase products or services from, the Company. The investigation of third parties consists of documenting the nature of business relationships in correspondence and surveys to third parties and making determinations regarding their year 2000 readiness status based on the responses received. Ongoing communications with some third parties will be required for the Company to make such a determination. State of Readiness - Although it is difficult due to factors such as the overlapping nature of the project phases and the varying degree of complexity of the Systems being addressed to accurately determine the status of completion of a particular phase at any given point in time, the Company estimates that it has completed the process of inventorying over 90 percent of all Systems. The project is now generally in the assessment and planning phases with a focus on high- and medium-priority Systems. Detailed plans for remedial actions and testing for high- and medium-priority Systems will generally be completed by December 31, 1998. In the case of certain high-priority Systems, vendors have been retained to assist in the resolution phase, and certain high-priority Systems are currently in the implementation phase. An estimate of the actions required to be undertaken, a projected schedule regarding when those actions must be completed, and an updated estimate of the cost of resolving the year 2000 problems, including possible remedial actions with respect to such Systems, will be determined by December 31, 1998. By December 31, 1998, the Company intends to renovate several high priority Systems (management information, materials management information, work management information, and others). Certain other Systems (customer service, electric outage management, meter control and inventory, and others) will be replaced to gain enhanced functionalities prior to the end of the first quarter of 1999. The requirement to develop and install a new customer service system ("CSS") and related applications was an outcome of the merger which created MidAmerican in July of 1995. Although potential year 2000 problems existing in the predecessor companies' CSS products were recognized, the decision to implement the new CSS was primarily in response to technical difficulties associated with application integration and the need for additional application functionalities. The costs of the new CSS and related applications are not reported herein as their development and installation was not driven by potential year 2000 concerns. To date, the Company's investigation of third parties has focused primarily on vendors of Systems and System components. A large amount of valuable product information has been received in direct responses to the Company's inquiries, as well as indirectly through reference to Web sites hosted by vendors or representative associations such as the Electric Power Research Institute. However, information made available to the Company has not been uniform in terms of quality and quantity; i.e., information about products in which the Company has a specific interest has been definitive in some cases, while in other cases such information has been inconclusive. The Company will continue to pursue information about Systems and System components with the expectation of reaching decisions regarding the year 2000 status of all high- and medium-priority Systems by December 31, 1998, and to take appropriate corresponding actions. During the -40- fourth quarter of 1998, the Company will also focus substantial effort on the investigation of other third parties such as fuel suppliers, joint owners of generation and transmission facilities, rail transportation service providers, telecommunications service providers, wholesale (bulk power) customers, major retail customers, and companies that exchange electronic data with the Company, among others. Costs - To date, approximately $5.1 million in operating expenses have been incurred to carry out year 2000 activities. It is anticipated that an additional $8.6 million in operating expenses and $1.4 million in capital costs will need to be incurred to complete the project. Although additional unforeseen costs may be incurred, at this time the Company has not become aware of any material costs which may arise in order to achieve year 2000 readiness. Future progress toward achievement of year 2000 readiness could change this outlook. Contingency Plans - A comprehensive contingency plan identifying credible worst-case scenarios is being developed. The schedule for developing the plan is to complete the first draft by December 31, 1998, complete the second draft on or before June 30, 1999, and to have an operational plan in place no later than September 1, 1999. The contingency plan comprises both mitigation and recovery aspects. Mitigation entails planning to reduce the impact of unresolved year 2000 problems and recovery entails planning to recover from problems that may occur. The Company's approach to contingency planning includes the following steps: identify year 2000 operating risks; perform scenario risk analysis; develop risk management strategies; begin general preparations; implement power system operation planning; and implementation of year 2000 system operating plan. Risks - Despite the comprehensive nature of the Company's year 2000 project and the results the project is designed to produce, the Company may experience random, widespread and simultaneous failures in its generation, distribution and Systems during January 2000. Contingency plans for any known or reasonably anticipated risk of interruption to the generation or distribution of energy are being developed to plan for resources needed to be put in place to reduce the potential outage period to a minimum. Although the impact on future operations and revenues is unknown, failure of the Company's Systems to perform because of year 2000 implications could result in operating problems and costs material to the Company. Although management believes the project will be completed sufficiently in advance of January 1, 2000, unforeseen and other factors could cause delays in the project, the results of which could likely have a material effect on the Company's results of operations. In addition, there is no assurance that the Company will not be affected by year 2000 problems experienced by third parties. ACCOUNTING ISSUES In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. SFAS 133 requires an entity to recognize all of its derivatives as either assets or liabilities in its statement of financial position and measure those instruments at fair value. If certain conditions are met, such instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use in assessing the effectiveness of the -41- derivative. If the pronouncement was currently in effect, the Company believes it would not have a material impact on its results of operations or financial condition. The Company continues to analyze the pronouncement. PART I. (CONTINUED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - - ------ ---------------------------------------------------------- As of September 30, 1998, the Company's and MidAmerican's financial positions related to financial instruments and assets that are sensitive to changes in interest rates or commodity price changes have not changed materially since December 31, 1997. Refer to the Company's 1997 Annual Report on Form 10-K under Item 7A for the applicable information as of December 31, 1997. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - - ------- ----------------- The Company and its subsidiaries have no material legal proceedings except for the following: Environmental Matters - - --------------------- For information relating to the Company's Environmental Matters, reference is made to Part I, Note (B) of Holdings' Notes to Consolidated Financial Statements. 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. MidAmerican filed its answer and contingent counterclaims. The contingent counterclaims filed by MidAmerican are generally as follows: (1) that MidAmerican has no duty under the power purchase agreement to reimburse or pay 50% of the decommissioning costs unless certain conditions occur; (2) that NPPD has the equitable duty to repay all amounts that MidAmerican has prefunded for decommissioning in the event NPPD operates the plant after the term of the power purchase agreement; (3) that NPPD is equitably estopped from continuing to operate the plant after the term of the power purchase agreement; (4) that NPPD has granted MidAmerican an option to continue taking 50% of the power from the plant; (5) that the term "monthly power costs" as defined in the power purchase agreement does not include costs and expenses associated with decommissioning the plant; (6) that MidAmerican has no duty to pay for nuclear fuel, O&M projects or capital improvements that have useful lives after the term of the power purchase agreement; (7) that transition costs are not included in any decommissioning costs and expenses; (8) that NPPD has breached its duty to MidAmerican in making investments of certain funds; (9) that reserves in certain accounts are -42- excessive and should be refunded to MidAmerican; and (10) that NPPD must credit MidAmerican for certain payments by MidAmerican for low-level radioactive waste disposal. MidAmerican and NPPD are currently involved in discovery. The trial in this case is presently scheduled for November 1999. MidAmerican is vigorously defending and pursuing its interest in this proceeding. 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 defendants. 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 sought to recover an unspecified level of damages, and to require MidAmerican to provide retail wheeling service so that NSS could obtain electricity from an unnamed supplier. On June 23, 1998, the District Court issued an Order Granting Summary Judgment in favor of MidAmerican. On July 20, 1998, NSS appealed that decision to the United States Court of Appeals for the Eighth Circuit. That appeal is currently pending. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ------- --------------------------------------------------- At a special meeting held October 30, 1998, the holders of a majority of the outstanding shares of Company common stock approved the merger between the Company and CalEnergy. The results of the voting are as follows: For - 69,069,250 Against - 6,045,636 Abstain - 1,097,608 -43- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - - ------- -------------------------------- (A) EXHIBITS Exhibits Filed Herewith - - ----------------------- The exhibits filed herewith are attached to this combined Form 10-Q in numerical order. They are listed below under the heading of the registrant or registrants to whom they apply. Holdings Exhibit 12.1 - Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. MidAmerican Exhibit 3.3 - Restated Articles of Incorporation of MidAmerican Energy Company, as amended October 27, 1998. Exhibit 12.2 - Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements. Holdings and MidAmerican Exhibit 27 - Financial Data Schedules (for electronic filing only). (B) REPORTS ON FORM 8-K On August 12, 1998, Holdings filed a report on Form 8-K, dated August 11, 1998. The report included an announcement stating that Holdings' entered into an Agreement and Plan of Merger with CalEnergy Company, Inc. on August 11, 1998, and a copy of the related press release. -44- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN ENERGY HOLDINGS COMPANY MIDAMERICAN ENERGY COMPANY ----------------------------------- (Registrants) Date November 12, 1998 /s/ A. L. Wells - - ----------------------- ------------------------------------------------- A. L. Wells Senior Vice President and Chief Financial Officer -45- EX-3.(I).3 2 RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.3 RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 409.1007 of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Restated Articles of Incorporation ("Articles of Incorporation"): ARTICLE I The name of the corporation is "MidAmerican Energy Company" (hereinafter sometimes called the "Corporation") and its registered office shall be located at 666 Grand Avenue, Des Moines, Iowa 50306 with the right to establish and maintain branch offices at such other points within and without the State of Iowa as the Board of Directors of the Corporation may, from time to time, determine. The name of the Corporation's registered agent at such registered office is Paul J. Leighton, Vice President and Corporate Secretary. ARTICLE II The nature of the business or purposes to be conducted or promoted is to engage in any or all lawful act or activity for which a corporation may be incorporated under the Iowa Business Corporation Act. ARTICLE III A. The aggregate number of shares which the Corporation shall have authority to issue is 350,000,000 shares of Common Stock, no par value ("Common Stock"), and 100,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). B. The shares of authorized Common Stock shall be identical in all respects and shall have equal rights and privileges. For all purposes, each registered holder of Common Stock shall, at each meeting of shareholders, be entitled to one vote for each share of Common Stock held, either in person or by proxy duly authorized in writing. Except to the extent required by law or as permitted by these Articles of Incorporation, as amended from time to time, the registered holders of the shares of Common Stock shall have unlimited and exclusive voting rights. C. The Board of Directors, at any time or from time to time, may, and is hereby authorized to, issue and dispose of any of the authorized and unissued shares of Common Stock and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. The holders of Common Stock shall have no preemptive rights to acquire or subscribe to any shares, or securities convertible into shares, of Common Stock. D. The Board of Directors, at any time or from time to time may, and is hereby authorized to, divide the authorized and unissued shares of Preferred Stock into one or more classes or series and in connection with the creation of any class or series to determine, in whole or in part, to the full extent now or hereafter permitted by law, by adopting one or more articles of amendment to the Articles of Incorporation providing for the creation thereof, the designation, preferences, limitations and relative rights of such class or series, which may provide for special, conditional or limited voting rights, or no rights to vote at all, and to issue and dispose of any of such shares and any treasury shares for such kind and amount of consideration and to such persons, firms or corporations, as may be determined by the Board of Directors, subject to any provisions of law then applicable. E. The Board of Directors, at any time or from time to time may, and is hereby authorized to, create and issue, whether or not in connection with the issuance and sale of any shares of Common Stock, Preferred Stock or other securities of the Corporation, warrants, rights and/or options entitling the holders thereof to purchase from the Corporation any shares of Common Stock, Preferred Stock or other securities of the Corporation. Such warrants, rights or options shall be evidenced by such instrument or instruments as shall be approved by the Board of Directors of the Corporation. The terms upon which, the time or times (which may be limited or unlimited in duration) at or within which, and the price or prices (which shall be not less than the minimum amount prescribed by law, if any) at which any such shares or other securities may be purchased from the Corporation upon the exercise of any such warrant, right or option shall be fixed and stated in the resolution or resolutions of the Board of Directors providing for the creation and issuance of such warrants, rights or options. The Board of Directors is hereby authorized to create and issue any such warrants, rights or options from time to time for such consideration, if any, and to such persons, firms or corporations, as the Board of Directors may determine. F. The Corporation may authorize the issuance of some or all of the shares of any or all of the classes of its capital stock without certificates. G. The Corporation shall not be required to issue certificates representing any fraction or fractions of a share of stock of any class but may issue in lieu thereof one or more non-dividend bearing and non-voting scrip certificates in such form or forms as shall be approved by the Board of Directors, each scrip certificate representing a fractional interest in one share of stock of any class. Such scrip certificates upon presentation together with similar scrip certificates representing in the aggregate an interest in one or more full shares of stock of any class shall entitle the holders thereof to receive one or more full shares of stock of such class. Such scrip certificates may contain such 2 terms and conditions as shall be fixed by the Board of Directors and may become void and of no effect after a period to be determined by the Board of Directors and to be specified in such scrip certificates. H. The Corporation shall be entitled to treat the person in whose name any share of Common Stock or Preferred Stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any person, whether or not the Corporation shall have notice thereof except as may be expressly provided otherwise by the laws of the State of Iowa. ARTICLE IV The term of corporate existence of the Corporation shall be perpetual. ARTICLE V A. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors. The number of directors of the Corporation shall be fixed by the Bylaws but shall be no less than ten (10) and no greater than twenty-two (22), and such number may be increased or decreased from time to time in accordance with the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. Directors shall be elected by the shareholders at each annual meeting of the Corporation as specified herein and in the Bylaws. Directors need not be shareholders. B. Each director shall serve until his or her successor is elected and qualified or until his or her prior death, retirement, resignation or removal. Should a vacancy occur or be created, whether arising through death, resignation or removal of a director or through an increase in the number of directors, such vacancy shall be filled solely by a majority vote of the remaining directors though less than a quorum of the Board of Directors. A director so elected to fill a vacancy shall serve for the remainder of the then present term of office of the Board of Directors. C. Any director or the entire Board of Directors may be removed for cause as set forth in this paragraph C. Removal of a director for cause must be approved by the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, only at a meeting called for the purpose of removing the director and after notice stating that the purpose, or one of the purposes, of the meeting is removal of the director. Any action for removal of a director must be taken within one year of such cause. 3 D. The Board of Directors, by a vote of a majority of the entire Board of Directors, may appoint from the directors an executive committee and such other committees as they may deem judicious; and to such extent as shall be provided in the resolution of the Board of Directors or in the Bylaws, may delegate to such committees all or any of the powers of the Board of Directors which may be lawfully delegated, and such committees shall have and thereupon may exercise all or any of the powers so delegated to them. The Board of Directors or the Bylaws may provide the number of members necessary to constitute a quorum of any committee and the number of affirmative votes necessary for action by any committee. E. The Board of Directors shall elect such officers of the Corporation as specified in the Bylaws. All vacancies in the offices of the Corporation shall be filled by the Board of Directors. The Board of Directors shall also have authority to appoint such other managing officers as they may from time to time determine. ARTICLE VI Special meetings of shareholders of the Corporation may be called at any time by the Chairman of the Board of Directors or by the President on at least ten days' notice to each shareholder entitled to vote at the special meeting, by mail at such shareholder's last known post office address, specifying the time, place and purpose or purposes of the special meeting. ARTICLE VII The private property of the shareholders of the Corporation shall be exempt from all corporate debts. ARTICLE VIII A. In addition to any affirmative vote required by law or under any other provision of these Articles of Incorporation: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with or into any Other Entity (as hereinafter defined); or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Other Entity of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $25,000,000 or more; or 4 (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of related transactions) of any securities of the Corporation or any Subsidiary to any Other Entity in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $25,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation; or (v) any reclassification of securities (including any reverse stock split), recapitalization, reorganization, merger or consolidation of the Corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving any Other Entity) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Other Entity; or (vi) any direct or indirect purchase or other acquisition by the Corporation of any equity security (as defined in Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995) of any class from an Interested Securityholder (as hereinafter defined) who has beneficially owned such securities for less than two years prior to the date of such purchase or any agreement in respect thereof, shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% (excluding, in the case of (i) through (v) above, shares beneficially owned by a 25% Shareholder (as hereinafter defined), and, in the case of (vi) above, shares beneficially owned by such Interested Securityholder) of the votes of all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for the purpose of this Article VIII as one class ("Voting Shares"). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of paragraph A of this Article VIII shall not be applicable to any particular Business Combination (as hereinafter defined), and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Incorporation, if all of the conditions specified in either of the following subparagraphs 1 and 2 shall have been satisfied. 1. A majority of the Continuing Directors (as hereinafter defined) shall have approved the Business Combination (but only if a majority of the Board of Directors are Continuing Directors); or 5 2. All of the following conditions shall have been met: a. The ratio of: (i) the aggregate amount of the cash and the Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of a particular class or series of Voting Shares in such Business Combination to (ii) the Fair Market Value per share of such class or series of Voting Shares on the date of the first public announcement of such Business Combination or the date on which any 25% Shareholder became a 25% Shareholder, whichever is higher is at least as great as the ratio (which ratio shall equal the number one in the event that such 25% Shareholder has never beneficially owned any shares of such class or series of Voting Shares) of (x) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees) which such 25% Shareholder has theretofore paid for any share of such class or series of Voting Shares acquired by it to (y) the Fair Market Value per share of such class or series of Voting Shares on the date of the initial acquisition by such 25% Shareholder of any share of such class or series of Voting Shares; b. The aggregate amount of the cash and Fair Market Value as of the date of consummation of the Business Combination of other consideration to be received per share by holders of each class or series of Preferred Stock in such Business Combination is not less than the highest preferential amount per share to which holders of shares of such class or series of Preferred Stock would, respectively, be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, regardless of whether the Business Combination to be consummated constitutes such an event; 6 c. The consideration to be received by holders of a particular class or series of Voting Shares in such Business Combination shall be in cash or in the same form and of the same kind as the consideration paid by the 25% Shareholder in acquiring the shares of such class or series of Voting Shares already owned by it; d. After such 25% Shareholder has acquired ownership of not less than 25% of the then outstanding Voting Shares (a "25% Interest") and prior to the consummation of such Business Combination: (i) the 25% Shareholder shall have taken steps to ensure that the Corporation's Board of Directors includes at all times representation by Continuing Director(s) proportionate to the ratio that the Voting Shares which from time to time are owned by persons who are not 25% Shareholders ("Public Holders") bear to all Voting Shares outstanding at such respective times (with a Continuing Director to occupy any resulting fractional board position); (ii) there shall have been no reduction in the rate of distributions ("Dividends") payable on the Common Stock except as may have been approved by a majority vote of the Continuing Directors; (iii) such 25% Shareholder shall not have acquired any newly issued shares of stock, directly or indirectly, from the Corporation (except upon conversion of convertible securities acquired by it prior to obtaining a 25% Interest or as a result of a pro rata stock Dividend or stock split); and (iv) such 25% Shareholder shall not have acquired any additional Voting Shares or securities convertible into or exchangeable for Voting Shares except as a part of the transaction which resulted in such 25% Shareholder acquiring its 25% Interest; e. Prior to or upon the consummation of such Business Combination, such 25% Shareholder shall not have (i) received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation, or (ii) made any major change in the Corporation's business or equity capital structure without the unanimous approval of the entire Board of Directors; and f. A proxy statement responsive to the requirements of the Securities Exchange Act of 1934 and the General Rules and Regulations promulgated thereunder shall have been mailed to all holders of Voting Shares for the purpose of soliciting shareholders' approval of such Business Combination. Such proxy statement shall contain at the front thereof in a prominent place, any recommendations 7 as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors, or any of them, may have furnished in writing and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or lack of fairness) of the terms of such Business Combination, from a financial point of view, to the holders of Voting Shares other than any 25% Shareholder (such investment banking firm to be selected by a majority of the Continuing Directors, to be furnished with all information it reasonably requests and to be paid a reasonable fee for its services upon receipt by the Corporation of such opinion). C. For the purposes of this Article VIII: 1. The term "Business Combination" shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Article VIII; 2. The term "Other Entity" shall include (a) any 25% Shareholder and (b) any other person (whether or not itself a 25% Shareholder) which after any Business Combination, would be an Affiliate (as hereinafter defined) of any 25% Shareholder; 3. The term "person" shall mean any individual, firm, trust, partnership, association, corporation or other entity; 4. The term "25% Shareholder" shall mean, in respect to any Business Combination, any person (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such Business Combination, or immediately prior to the consummation of any such transactions, (a) is the beneficial owner, directly or indirectly, of not less than 25% of the Voting Shares, or (b) is an Affiliate of the Corporation and at any time within five years prior thereto was the beneficial owner, directly or indirectly, of not less than 25% of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of capital stock of the Corporation which were at any time within five years prior thereto beneficially owned by any 25% Shareholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; 8 5. A person shall be the beneficial owner of any Voting Shares (a) which such person or any of its Affiliates and Associates (as hereinafter defined) beneficially own, directly or indirectly, or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (c) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; 6. The outstanding Voting Shares shall include shares deemed owned through application of subparagraph 5 of this paragraph C above but shall not include any other Voting Shares which may be issuable pursuant to any agreement or upon exercise of conversion rights, warrants or options, or otherwise; 7. The term "Continuing Director" shall mean (a) a person who was a member of the Board of Directors elected by the Public Holders prior to the date as of which any 25% Shareholder acquired in excess of 10% of the then outstanding Voting Shares or (b) a person designated (before his or her initial election as a director) as a Continuing Director by a majority of the then Continuing Directors; 8. The term "other consideration to be received" shall include, without limitation, Voting Shares retained by Public Holders in the event of a Business Combination in which the Corporation is the surviving corporation; 9. The terms "Affiliate" and "Associate" shall have the respective meanings given those terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1995; 10. The term "Subsidiary" shall mean any corporation or other entity of which a majority of the outstanding voting securities or other equity interests having the power, under ordinary circumstances, to elect a majority of the directors or otherwise to direct the management and policies, of such corporation or other entity, is owned, directly or indirectly, by the Corporation; 11. The term "Interested Securityholder" shall mean, with respect to any transaction which is referred to in Clause (vi) of paragraph A of this Article VIII, any person 9 (other than the Corporation or any Subsidiary) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such transaction, or immediately prior to the consummation of any such transaction, (a) is the beneficial owner, directly or indirectly, of not less than five percent of the Voting Shares, or (b) is an Affiliate of the Corporation and at any time within two years prior thereto was the beneficial owner, directly or indirectly, of not less than five percent of the then outstanding Voting Shares, or (c) is an assignee of or has otherwise succeeded to any shares of the class of securities to be acquired which were at any time within two years prior thereto beneficially owned by an Interested Securityholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933; and 12. The term "Fair Market Value" shall mean (i) in the case of capital stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such capital stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such capital stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such capital stock is not listed on such exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such capital stock is listed, or, if such capital stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such capital stock during the 30- day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available the fair market value on the date in question of a share of such capital stock as determined by a majority of the Continuing Directors in good faith; and (ii) in the case of property other than cash or capital stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors; provided that any such determination by the Continuing Directors shall only be effective if made at a meeting at which a majority of Continuing Directors is present. D. A majority of the Continuing Directors shall have the power and duty to determine for purposes of this Article VIII, on the basis of information known to them, (i) the number of Voting Shares beneficially owned by any person, (ii) whether a person is an Affiliate or Associate of another, (iii) whether a person has an agreement, arrangement or understanding with another as to the matters referred to in subparagraph 4 of paragraph C, (iv) whether the assets subject to any Business Combination have an aggregate Fair Market Value of $25,000,000 or more, and (v) such other matters with respect to which a determination is required under this Article VIII. 10 E. Nothing contained in this Article VIII shall be construed to relieve any 25% Shareholder from any fiduciary obligation imposed by law. ARTICLE IX Any amendment, alteration, change or repeal of Article VA, VB and VC, Article VIII or this Article IX of these Articles of Incorporation shall require the affirmative vote of the holders of shares of capital stock of the Corporation having at least 75% of the votes of all outstanding Voting Shares (as defined in Article VIII), excluding from such affirmative vote shares beneficially owned by any 25% Shareholder or by any Interested Securityholder in the case of an amendment of the provisions of paragraph A of Article VIII that exclude from an affirmative vote required pursuant to such paragraph A shares beneficially owned by 25% Shareholders or shares beneficially owned by Interested Security holders, as the case may be. ARTICLE X The Board of Directors may make Bylaws and from time to time may alter, amend or repeal any Bylaws; but any Bylaws made by the Board of Directors may be altered or repealed by the shareholders entitled to vote generally at any annual meeting or at any special meeting provided notice of such proposed alteration or repeal be included in the notice of meeting. ARTICLE XI A. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; or (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) for any transaction from which the director derives an improper personal benefit; or (iv) under Section 490.833, or a successor provision, of the Iowa Business Corporation Act. B. If, after the date these Articles of Incorporation are filed with the Secretary of State of the State of Iowa, the Iowa Business Corporation Act is amended to authorize corporate action 11 further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be deemed eliminated or limited to the fullest extent permitted by the Iowa Business Corporation Act, as so amended. Any repeal or modification of Section A or Section B of this Article XI, by the shareholders of the Corporation shall be prospective only and shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE XII A. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative, investigative, or arbitration and whether formal or informal ("proceeding"), by reasons of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Iowa Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the Iowa Business Corporation Act permitted the Corporation to provide prior to such amendment), against all reasonable expenses, liability and loss (including, without limitation, attorneys' fees, all costs, judgments, fines, Employee Retirement Income Security Act excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Such right shall be a contract right and shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that the payment of such expenses incurred by a director, officer or employee in his or her capacity as a director, officer or employee (and not in any other capacity in which service was or is rendered by such person while a director, officer or employee including, without limitation, service to an employee benefit plan) in advance of the final disposition of such proceeding, shall be made only upon delivery to the Corporation of (i) a written undertaking, by or on behalf of such director, officer or employee, to repay all amounts so advanced if it should be determined ultimately that such director, officer or employee is not entitled to be indemnified under this Article XII or otherwise, or (ii) a written affirmation by or on behalf of such director, officer or employee that, in such person's good faith belief, such person has met the standards of conduct set forth in the Iowa Business Corporation Act. B. If a claim under Section A is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to also be paid the expenses of prosecuting such claim. It shall be a defense to any such action that the claimant has not met the standards of conduct which 12 make it permissible under the Iowa Business Corporation Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. The failure of the Corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Iowa Business Corporation Act, shall not be a defense to the action or create a presumption that the claimant had not met the applicable standard of conduct. C. Indemnification provided hereunder shall, in the case of the death of the person entitled to indemnification, inure to the benefit of such person's heirs, executors or other lawful representatives. The invalidity or unenforceability of any provision of this Article XII shall not affect the validity or enforceability of any other provision of this Article XII. D. Any action taken or omitted to be taken by (i) any director, officer or employee in good faith and in compliance with or pursuant to any order, determination, approval or permission made or given by a commission, board, official or other agency of the United States or of any state or other governmental authority with respect to the property or affairs of the Corporation or any such business corporation, not-for-profit corporation, joint venture, trade association or other entity over which such commission, board, official or agency has jurisdiction or authority or purports to have jurisdiction or authority or (ii) by any director of the Corporation pursuant to Section D of Article VIII shall be presumed to be in compliance with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act whether or not, in the case of clause (i), it may thereafter be determined that such order, determination, approval or permission was unauthorized, erroneous, unlawful or otherwise improper. E. Unless finally determined, the termination of any litigation, whether by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that the action taken or omitted to be taken by the person seeking indemnification did not comply with the standard of conduct set forth in Section 490.851 (or any successor provision) of the Iowa Business Corporation Act. F. The rights conferred on any person by this Article XII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or disinterested directors or otherwise. G. The Corporation may maintain insurance, at its expense, to protect itself and any such director, officer or employee of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Iowa Business Corporation Act. 13 The duly adopted Restated Articles of Incorporation supersede the original Articles of Incorporation and all amendments thereto. The Restated Articles of Incorporation amend the Articles of Incorporation requiring shareholder approval. The Restated Articles of Incorporation were approved by the shareholders. The designation, number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the Restated Articles of Incorporation, and the number of votes of each voting group indisputably represented are as follows: Votes Entitled Designation Shares To Be Cast On Votes Represented Of Group Outstanding Restated Articles at Meeting ----------- ----------- ----------------- ----------------- Common Stock 1,000 1,000 1,000 The total number of undisputed votes cast for and against the Restated Articles of Incorporation by each voting group entitled to vote separately on the Restated Articles of Incorporation are as follows: Voting Group Votes For Votes Against ------------ --------- ------------- Common Stock 1,000 0 The number of votes cast for the Restated Articles of Incorporation by each voting group was sufficient for approval by that voting group. These Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ PAUL J. LEIGHTON ---------------------------------- Paul J. Leighton, Vice President and Secretary MER-141.rev 06/22/95 14 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of June 30, 1995, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation ("Articles of Incorporation") of the Corporation, determining certain terms of its class of shares designated in Article III of its Articles of Incorporation as Preferred Stock, no par value ("Preferred Stock"), and creating and determining the terms of the ten series of Preferred Stock (collectively, the "Merger Series") to be issued on the date on which the merger ("Merger") of Midwest Resources Inc., an Iowa corporation ("Midwest Resources"), Midwest Power Systems Inc., an Iowa corporation ("Midwest Power"), and Iowa-Illinois Gas and Electric Company, an Illinois corporation ("Iowa-Illinois"), with and into the Corporation becomes effective ("Effective Date of the Merger"), upon the conversion of (i) all shares of each series of Midwest Power Preferred Stock, no par value ("Midwest Power Preferred Stock"), into shares of a particular series of Preferred Stock, and (ii) all shares of each series of Iowa-Illinois Preference Shares, without par value ("Iowa-Illinois Preference Stock"), into shares of a particular series of Preferred Stock, including the certain preferences, limitations and relative rights of holders of shares of Preferred Stock, and the designation, preferences, limitations and relative rights of each Merger Series. 3. The text of the Amendment determining the terms of the Preferred Stock and the terms of each Merger Series, is as follows: A. Designations. Each Merger Series is given one of the following distinguishing designations: $1.7375 Series $3.30 Series $3.75 Series $3.90 Series $4.20 Series $4.35 Series $4.40 Series $4.80 Series $5.25 Series $7.80 Series B. Number of Shares. Each Merger Series shall consist of the following number of shares of Preferred Stock: Series Number of Shares -------------- ---------------- $1.7375 Series 2,400,000 $3.30 Series 49,622 $3.75 Series 38,320 $3.90 Series 32,630 $4.20 Series 47,369 $4.35 Series 49,950 $4.40 Series 50,000 $4.80 Series 49,898 $5.25 Series 100,000 $7.80 Series 400,000 C. Distributions ("Dividends"). (1) The holders of the shares of each Merger Series in preference to the holders of Common Stock and the holders of any other shares of the Corporation which rank junior to the Preferred Stock, shall be entitled to receive, but only when and as declared by the Board of Directors, out of any assets legally available therefor, Dividends in lawful money of the United States of America, in the amount per annum set forth in the designation of such Merger Series in these Articles of Amendment creating such Merger Series, and no more. (2) Dividends on the Merger Series shares shall be payable quarterly on the first day of each of the months of March, June, September and December ("Dividend Payment Date") with respect to the quarterly Dividend period ending on the date preceding each such Dividend Payment Date, to shareholders of record as of a date to be fixed by the Board of Directors, not exceeding thirty (30) 2 days and not less than ten (10) days preceding such Dividend Payment Dates; provided, however, that the first Dividend payable on the $5.25 Series and the $7.80 Series shall be paid as follows: (a) if a regular Dividend Payment Date for the shares of Iowa-Illinois Preference Stock which were converted into shares of such Merger Series in the merger of Midwest Resources, Midwest Power and Iowa-Illinois with and into the Corporation ("Iowa-Illinois Payment Date"), occurs after the Effective Date of the Merger but before the first Dividend Payment Date after the Effective Date of the Merger ("First Dividend Payment Date"), then (i) a Dividend shall be paid on the shares of such Merger Series on the Iowa-Illinois Payment Date in the regular quarterly amount, and (ii) a Dividend shall be paid on the shares of such Merger Series on the First Dividend Payment Date, but only in the amount obtained by multiplying the regular quarterly amount of such Dividend by a fraction (A) the numerator of which is the number of days in the period commencing on the Iowa-Illinois Payment Date and ending on and including the day prior to the First Dividend Payment Date, and (B) the denominator of which is the number of days in the period commencing on the Dividend Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date; or (b) if the First Dividend Payment Date occurs before an Iowa-Illinois Payment Date, a Dividend shall be paid on the shares of such Merger Series on the First Dividend Payment Date, but only in the amount obtained by multiplying the regular quarterly amount of such Dividend by a fraction (i) the numerator of which is the number of days in the period commencing on the Iowa-Illinois Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date, and (ii) the denominator of which is the number of days in the period commencing on the Dividend Payment Date preceding the Effective Date of the Merger and ending on and including the day prior to the First Dividend Payment Date. 3 (3) Except as provided in Section C (2), Dividends on each Merger Series share shall be cumulative from the Dividend Payment Date preceding the Effective Date of the Merger. Accumulations of Dividends shall not bear interest. (4) Except as provided in Section C (2), no Dividend shall be paid upon, or declared and set apart for, any Merger Series share for any quarterly period or portion thereof unless (i) at the same time a like proportionate Dividend for the same quarterly period or portion thereof shall be paid upon, or declared and set aside, for all Merger Series shares and all other shares of Preferred Stock on which Dividends are payable on a Dividend Payment Date and (ii) no Dividends on any other shares of Preferred Stock are accrued and unpaid. (5) So long as any Merger Series shares are outstanding, the Corporation shall not (i) pay or declare or set aside any Dividend or other distribution on any shares of Common Stock or on any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, Dividends or other distributions or upon Liquidation or (ii) purchase, redeem or otherwise acquire for value any shares of Common Stock or such junior shares, in each case unless and until full Dividends have been declared and paid upon or set apart for payment on all shares of Preferred Stock, with respect to all Dividend periods and the Dividend period which includes the date of such Dividend or distribution on Common Stock or such junior shares; provided, however, that the foregoing terms of this Section C (5) shall not apply to the declaration and payment of Dividends or other distributions on any shares of Common Stock or such junior shares if payable solely in shares of Common Stock or such junior shares, nor to the acquisition of shares of Common Stock or such junior shares in exchange for, or through the application of the proceeds of the sale of, any shares of Common Stock or such junior shares. D. Redemption. (1) Subject to the limitations set forth in Section F, the outstanding shares of each Merger Series may be redeemed by the Corporation, at its option, by action of its Board of Directors, as a whole at any time or in part from time to time, by paying in cash on a redemption date specified by the Board of Directors, the following redemption prices, in each case plus an amount equal to accrued and unpaid Dividends thereon to such redemption date: 4 $1.7375 Series: $26.3900 per share on December 1, 1994 through November 30, 1995 $26.0425 per share on December 1, 1995 through November 30, 1996 $25.6950 per share on December 1, 1996 through November 30, 1997 $25.3475 per share on December 1, 1997 through November 30, 1998 $25.000 per share on or after December 1, 1998 $3.30 Series: $101.50 per share $3.75 Series: $102.75 per share $3.90 Series: $105.00 per share $4.20 Series: $103.439 per share $4.35 Series: $102.00 per share $4.40 Series: $101.50 per share $4.80 Series: $102.70 per share $5.25 Series: $101.97 per share on November 1, 1998 through October 31, 1999 $101.31 per share on November 1, 1999 through October 31, 2000 $100.66 per share on November 1, 2000 through October 31, 2001 $100.00 per share on or after November 1, 2001 $7.80 Series: $107.80 per share on May 1, 1996 through April 30, 2001 $103.90 per share on May 1, 2001 through April 30, 2002 $101.95 per share on or after May 1, 2002 provided, however, that (i) prior to December 1, 1998, no shares of the $1.7375 Series may be redeemed through a refunding, directly or indirectly, by or in anticipation of the incurring of any debt which has an interest cost, or the issuance of stock ranking equally with or prior to the $1.7375 Series as to Dividends or assets which has a Dividend cost to the Corporation (computed in accordance with generally accepted financial practice), of less that 7.15% per annum, (ii) prior 5 to November 1, 1998, no shares of the $5.25 Series may be redeemed at the option of the Corporation, and (iii) prior to May 1, 1996, no shares of the $7.80 Series may be redeemed at the option of the Corporation. (2) Subject to the limitations set forth in Section F, the Corporation shall on November 1, 2003 redeem all shares of the $5.25 Series then outstanding at $100.00 per share, plus accrued and unpaid Dividends thereon through October 31, 2003. (3) "Accrued and unpaid Dividends" as used in this Amendment with respect to any Merger Series share means the amount, if any, by which the applicable amount of Dividend per annum from the date after which Dividends on such share become cumulative to the date in question, exceeds the Dividends actually paid or declared and set aside for payment thereon. (4) Notice of any proposed redemption of any Merger Series shares shall be given by the Corporation by mailing a copy of such notice not more than sixty (60) nor less than thirty (30) days prior to the date fixed for such redemption to the holders of record of such shares to be redeemed, at their respective addresses then appearing on the books of the Corporation; but no failure to mail such notice or any defect therein, or in the mailing thereof, shall affect the validity of the proceedings for the redemption of any Merger Series shares so to be redeemed. (5) In case of redemption of only a part of the shares of any Merger Series at the time outstanding, the shares of such Merger Series to be redeemed shall be selected by lot in such manner as the Board of Directors may determine. (6) On the redemption date specified in the notice of such redemption the Corporation shall, and at any time within sixty (60) days prior to such redemption date may, deposit in trust, for the account of the holders of the Merger Series shares to be redeemed, funds necessary for such redemption with a bank or trust company in good standing, organized under the laws of the United State of America or of the State of Iowa, doing business in the City of Des Moines, Iowa, having combined capital, surplus and undivided profits of at least $2,500,000 and designated in such notice of redemption. (7) Notice having been given and funds necessary for such redemption having been deposited, all as provided in this Section D, all Merger Series shares with respect to the redemption of which such notice shall be given and deposit made, shall thenceforth, whether or not the date fixed for such redemption shall have yet occurred, or the certificates for such shares shall have been 6 surrendered for cancellation, be deemed no longer to be outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate except only the right of the holders of the certificates for such shares to receive, out of the funds so deposited in trust, upon or after the redemption date (unless an earlier date is fixed by the Board of Directors), the redemption funds, without interest, to which they are entitled upon endorsement, if required, and surrender of their certificates for such shares. (8) At the expiration of six (6) years after the redemption date such trust shall terminate and any such moneys then remaining on deposit with such bank or trust company which are unclaimed by the holders of the certificates for the Merger Series shares which have been so redeemed, plus interest thereon, if any, shall be paid by such bank or trust company to the Corporation, free of trust, and thereafter the holders of the certificates for such shares shall have no claim against such bank or trust company but only claims as unsecured creditors against the Corporation for the amount payable upon the redemption thereof, without interest. (9) Any interest on or other accretions to funds deposited with such bank or trust company pursuant to this Section D shall belong to the Corporation. E. Sinking Fund. Subject to the limitations set forth in Section F, while any shares of the $7.80 Series shall remain outstanding, the Corporation shall on or before May 1, 2001, and on or before May 1 of each year thereafter to and including May 1, 2005 (each such May 1 being hereinafter in this Section E called a "Sinking Fund Redemption Date"), set aside, separate and apart from its other funds, an amount equal to $6,660,000 (or such lesser amount as may be sufficient to redeem all of the shares of the $7.80 Series then outstanding) as a mandatory sinking fund payment for the exclusive benefit of shares of the $7.80 Series, plus such further amount as shall equal the accrued and unpaid Dividends on the shares of the $7.80 Series to be redeemed out of such payment (as hereinafter in this Section E provided) through the day preceding the applicable Sinking Fund Redemption Date. The obligation of the Corporation to make such payments shall be cumulative, so that if for any reason the full amount thereof shall not be set aside for any year, the amount of the deficiency from time to time shall be added to the amount due from the Corporation on subsequent Sinking Fund Redemption Dates until the deficiency shall have been fully satisfied. The Corporation shall be entitled to credit against any such mandatory sinking fund payment shares of the $7.80 Series redeemed, purchased or otherwise acquired by the Corporation, except through application of any sinking fund payment (whether mandatory or optional), and not theretofore so credited, at the sinking fund redemption price hereinafter specified in this Section E. 7 In addition to the mandatory sinking fund payments required by the immediately preceding paragraph, the Corporation may at its option, in respect of any Sinking Fund Redemption Date, set aside, separate and apart from its other funds, an amount not in excess of $6,660,000 as an optional sinking fund payment for the exclusive benefit of shares of the $7.80 Series, plus such further amount as shall equal the accrued and unpaid Dividends on the shares of the $7.80 Series to be redeemed out of such payment (as hereinafter in this Section E provided) through the day preceding the applicable Sinking Fund Redemption Date. The privilege of making such payments shall not be cumulative, and no such payment shall relieve the Corporation to any extent from its obligation to make any subsequent mandatory sinking fund payment. Any amounts set aside by the Corporation pursuant to this Section E shall be applied on the date of such setting aside if a Sinking Fund Redemption Date or otherwise on the first Sinking Fund Redemption Date occurring thereafter to the redemption of shares of the $7.80 Series at $100.00 per share, plus accrued and unpaid Dividends through the day preceding the applicable Sinking Fund Redemption Date, in the manner and upon the notice provided in Section D. If any Sinking Fund Redemption Date shall be a Saturday, Sunday or other day on which banking institutions in Chicago, Illinois or New York, New York are authorized or obligated to remain closed, such term shall be construed to refer to the next preceding business day. Subject to the limitations stated in Section F, the Corporation shall on May 1, 2006 redeem any shares of the $7.80 Series then outstanding at $100.00 per share, plus accrued and unpaid Dividends through April 30, 2006. F. Repurchase. (1) The Corporation may from time to time purchase or otherwise acquire Merger Series shares at a price not exceeding the amount at the time payable in the event of redemption thereof otherwise than through the operation of the applicable sinking fund, if any. (2) If and so long as the Corporation shall be in default in the payment of any quarterly Dividend on any Merger Series shares, or shall be in default in the payment of funds into or the setting aside of funds for any sinking fund created for any Merger Series shares, the Corporation shall not (other than by the use of unapplied funds, if any, paid into or set aside for a sinking fund or funds prior to such default): (a) redeem any Merger Series shares, unless all Merger Series shares are redeemed, or 8 (b) purchase or otherwise acquire for a valuable consideration any Merger Series shares, except pursuant to offers of sale made by the holders of Merger Series shares in response to an invitation for tenders given by mail by the Corporation simultaneously to the holders of record of all Merger Series shares then outstanding, at their respective addresses then appearing on the books of the Corporation. G. Preference on Liquidation. (1) Before any distribution of any assets of the Corporation shall be made to the holders of any Common Stock or any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, Dividends or other distributions: (a) in the event of any liquidation, dissolution or winding up ("Liquidation") of the Corporation which is voluntary: (i) the holders of the shares of the $1.7375 Series, $3.30, Series, $3.75 Series, $4.35 Series, $4.40 Series, $4.80 Series, $5.25 Series and $7.80 Series shall be entitled to receive an amount per share equal to the amount which would then be payable upon such share in the event of redemption thereof in accordance with Section D(1), except that prior to November 1, 1998, the holders of the shares of the $5.25 Series shall be entitled to receive $105.25 per share and prior to May 1, 2001, the holders of the shares of the $7.80 Series shall be entitled to receive $107.80 per share, and no more; and (ii) the holders of the shares of the $3.90 Series and $4.20 Series shall be entitled to receive the amount of one hundred dollars ($100) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more. (b) in the event of any Liquidation of the Corporation which is involuntary: (i) the holders of the shares of the $3.30 Series, $3.75 Series, $3.90 Series, $4.20 Series, $4.35 Series, $4.40 Series, $4.80 Series, $5.25 Series and $7.80 Series shall be entitled to receive the amount of one hundred dollars ($100) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more; and 9 (ii) the holders of the shares of the $1.7375 Series shall be entitled to receive the amount of twenty-five dollars ($25.00) per share plus accrued and unpaid Dividends to the date of payment of such amount, and no more. (2) If upon any Liquidation the assets distributable among the holders of the shares of Preferred Stock shall be insufficient to permit the payment of the full preferential amounts to which they shall be entitled, then the entire assets of the Corporation to be distributed shall be distributed among the holders of the shares of Preferred Stock then outstanding ratably in proportion to the amounts to which such holders are respectively entitled. (3) If upon any Liquidation the holders of the shares of Preferred Stock shall receive the full preferential amounts to which they shall be entitled, the remaining assets and funds of the Corporation shall be distributed among the holders of the shares of Common Stock and of any other junior shares of the Corporation which rank below the Preferred Stock with respect to any assets, or Dividends or other distributions, according to their respective rights and preferences and according to their respective shares. (4) Neither a consolidation nor a merger of the Corporation, nor a sale or transfer of substantially all its assets as an entirety, nor a redemption or a purchase or other acquisition by the Corporation of less than all of its shares of any class at the time outstanding, shall be regarded as a Liquidation within the meaning of this Section G. H. Voting Rights. (1) Except to the extent required by law or as permitted by this Section H, the holders of Merger Series shares shall have no voting rights. (2) If at any time Dividends on any Preferred Stock shall be accrued and unpaid in an amount equivalent to six or more full quarterly Dividends, the holders of all shares of Preferred Stock, voting together as a single class for such purpose, shall be entitled until, but only until, all Dividends accrued and unpaid on all shares of Preferred Stock shall have been paid (or deposited in trust for payment on or before the next succeeding Dividend Payment Date with respect to Merger Series shares, and on or before the next succeeding date or dates upon which Dividends are payable on other series of Preferred Stock), to elect two (2) Directors of the Corporation. 10 (3) While the holders of the shares of Preferred Stock remain entitled to elect two (2) Directors of the Corporation, the payment of Dividends on Preferred Stock, including accrued an unpaid Dividends, shall not be unreasonably withheld if the financial condition of the Corporation permits payment thereof. (4) The right of the holders of the shares of Preferred Stock under this Section H to elect two (2) Directors of the Corporation may be exercised at any annual meeting of shareholders or, within the limitations of this Section H, at a special meeting of shareholders held for such purpose; whenever such right shall have become vested, upon request signed by any holder of record of shares of Preferred Stock and delivered to the Corporation at its principal office not less than ninety (90) days prior to the date for the annual meeting next following the date of such vesting, the President of the Corporation shall call a special meeting of shareholders, to be held within sixty (60) days after the receipt of such request, for the purpose of electing a new Board of Directors, of which two (2) shall, subject to the provisions of this Section H, be elected by a vote of the holders of the Preferred Stock to serve until the next annual meeting or until their successors shall be elected and shall qualify. (5) No such special meeting shall be required to be held within 120 days after such a prior special meeting, and the term of office of each Director of the Corporation shall terminate at the time of any such special meeting or adjournment thereof, notwithstanding that the term for which such Director had been elected shall not then have expired, and provided that the successor of such Director is duly elected and qualified. (6) In the event that at any special meeting at which the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors of the Corporation, a quorum of the holders of the shares of Preferred Stock shall not be present in person or by proxy, the holders of Common Stock, if a quorum thereof be present in person or by proxy, shall temporarily elect the Directors of the Corporation, which holders of the shares of Preferred Stock were entitled but failed to elect, such Directors to be designated as having been so elected and their respective terms of office to expire at such times thereafter as their successors shall be elected by holders of the shares of Preferred Stock as provided in this Section H. 11 (7) Whenever the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, any holder of record of a share of Preferred Stock shall have the right, during regular business hours, in person or by a duly authorized representative, to examine the Corporation stock records of the Preferred Stock for the purpose of communicating with other holders of Preferred Stock with respect to the exercise of such right of election, and to make a list of such holders. (8) Whenever, under the terms of this Section H, the holders of the shares of Preferred Stock shall be divested of the right to elect two (2) Directors, upon request signed by any holder of record of Common Stock and delivered to the Corporation at its principal office not less than ninety (90) days prior to the date for the annual meeting next following the date of such divesting, the President of the Corporation shall call a special meeting of the holders of Common Stock to be held within sixty (60) days after the receipt of such request for the purpose of electing a new Board of Directors to serve until the next annual meeting or until their respective successors shall be elected and shall qualify. (9) The term of office of each Director of the Corporation shall terminate at the time of any such special meeting or adjournment thereof at which a quorum of holders of Common Stock shall be present in person or by proxy, notwithstanding that the term for which such Director had been elected shall not then have expired, and provided that the successor to such Director is duly elected and qualified. (10) If, during any interval between annual meetings of shareholders for the election of Directors and while the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, a Director in office who has been elected by the holders of the shares of Preferred Stock, shall, by reason of resignation, death or removal, cease to be a Director, (a) the vacancy or vacancies shall be filled by vote of the remaining Director then in office who was elected by the holders of the shares of Preferred Stock or who succeeded to a Director so elected, and (b) if any vacancy which occurred more than six months prior to the date of the next ensuing annual meeting is not so filled within forty (40) days after the occurrence thereof, the President of the Corporation shall call a special meeting of the holders of the shares of Preferred Stock and such vacancy shall be filled at such special meeting. (11) A Director elected by holders of the shares of Preferred Stock may be removed from office only by vote of the holders of a majority of the votes of the outstanding shares of Preferred Stock. 12 (12) At any annual or special meeting of the shareholders held for any purpose, including the purpose of electing Directors when the holders of the shares of Preferred Stock shall be entitled to elect two (2) Directors, the presence in person or by proxy of holders of a majority of the votes of the outstanding shares of Preferred Stock shall be required to constitute a quorum of the holders of the shares of Preferred Stock. (13) At any meeting of shareholders at which the holders of the shares of Preferred Stock are required to vote by law or are permitted to vote by any articles of amendment to the Articles of Incorporation, each holder of Merger Series shares shall have one vote for each such Merger Series share except the holders of $1.7375 Series shares, which shall have 1/4 vote for each such $1.7375 Series share, and each holder of shares of each other series of Preferred Stock shall have the number or fraction of votes set forth for each such share in the articles of amendment to the Articles of Incorporation in which the terms of such series are determined, in each case standing in the name of such holder on the books of the Corporation on the record date fixed for such purpose, or, if no record date is fixed, on the date on which such vote is taken. (14) The holders of shares of Preferred Stock shall not be entitled to receive notice of any meeting at which they are not entitled to vote. I. No Preemptive Rights. No holder of Merger Series shares as such shall have any preemptive or preferential right to purchase or subscribe for any shares of stock or rights or options to purchase stock or any other securities of the Corporation of any kind whatsoever whether now or hereafter authorized. 13 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-142 06/22/95 14 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of December 13, 1995, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, cancelling the following Preferred Stock: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 7 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,615 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-145 12/21/1995 ARTICLES OF CORRECTION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to section 124 of the Iowa Business Corporation Act, the undersigned corporation adopts the following articles of correction. 1. The name of the corporation is MidAmerican Energy Company. 2. The document to be corrected is the Articles of Amendment to the Restated Articles of Incorporation of MidAmerican Energy Company. 3. The document to be corrected was filed by the secretary of state on December 28, 1995. 4. The incorrect statements in the document to be corrected are as follows: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 7 Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,615 5. The reason that the document is incorrect is due to the fact that the 7 should have been 99 and the 49,615 should have been 49,523. 6. The corrected statement is as follows: Series Number of Shares Cancelled ------ -------------------------- $3.30 Series 99 Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,523 MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-145a 01/18/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of April 23, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, cancelling the following Preferred Stock: Series Number of Shares Cancelled ------ -------------------------- $1.7375 Series 350,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 2,050,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-146.wpd 04/23/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of July 24, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following Preferred Stock: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 119,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 1,931,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Secretary MER-147.wpd 07/18/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. As of October 30, 1996, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following Preferred Stock: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 43,000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 1,888,000 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-148.wpd 10/11/1996 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On January 22, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $1.7375 Series 1,888,0000 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $1.7375 Series 0 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. LEIGHTON ---------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-149.wpd 01.30.97 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. Article VA of the Restated Articles of Incorporation, as amended, is hereby amended by deleting the second sentence thereof in its entirety and substituting the following sentence therefor: The number of directors of the Corporation shall be fixed by the Bylaws but shall be no less than three (3) and no greater than twenty-two (22), and such number may be increased or decreased from time to time in accordance with the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. 3. The date of adoption of the amendment was April 17, 1997. 4A. The amendment was approved by the shareholders. The designation, number of outstanding shares, number of votes entitled to be cast by each voting group entitled to vote separately on the amendment, and the number of votes of each voting group indisputably represented is as follows: Votes Entitled Designation Shares To Be Cast Votes of Group Outstanding On Amendment Represented ----------- ----------- -------------- ----------- Common Stock 100,751,713 100,751,713 100,751,713 4B. The total number of undisputed votes cast for and against the amendment by each voting group entitled to vote separately on the amendment are as follows: Voting Group Votes For Votes Against ------------ ----------- ------------- Common Stock 100,751,713 0 The number of votes cast for the amendment by each voting group was sufficient for approval by that voting group. These Articles of Amendment to the Restated Articles of Incorporation, as amended, are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD41797 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On May 8, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------------ ------------------------- $3.30 Series 33 $4.35 Series 5 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------------ -------------------------- $3.30 Series 49,490 $4.35 Series 49,945 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary MER-150.wpd 05.08.97 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On August 7, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------------ ------------------------- $3.30 Series 5 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------------ -------------------------- $3.30 Series 49,485 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD8797 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On October 27, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ----------- ------------------------- $3.75 Series 10 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------------ -------------------------- $3.75 Series 38,310 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD1097 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On November 7, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------------ ------------------------- $3.30 Series 3 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------------ -------------------------- $3.30 Series 49,482 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD1197 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On December 22, 1997, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $3.30 Series 1 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,481 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD1297 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On April 27, 1998, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $3.30 Series 4 $3.75 Series 5 $4.20 Series 7 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,467 $3.75 Series 38,305 $4.20 Series 47,362 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY /s/ P. J. Leighton ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD0498 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On July 27, 1998, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $3.30 Series 4 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,463 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD0798 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On August 5, 1998, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following series of Preferred Stock of the Corporation in its entirety: Series Number of Shares Canceled ------ ------------------------- $3.30 Series 5 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,458 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD0898 ARTICLES OF AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION OF MIDAMERICAN ENERGY COMPANY TO THE SECRETARY OF STATE OF THE STATE OF IOWA: Pursuant to the provisions of Section 490.601, and in accordance with Section 490.602(4), of the Iowa Business Corporation Act, the undersigned corporation hereby adopts the following Articles of Amendment to the corporation's Restated Articles of Incorporation. 1. The name of the corporation is: MidAmerican Energy Company 2. On October 27, 1998, the Board of Directors of MidAmerican Energy Company, an Iowa corporation ("Corporation"), duly adopted the following Articles of Amendment to the Restated Articles of Incorporation of the Corporation, as amended, canceling the following shares of Preferred Stock of the Corporation: Series Number of Shares Canceled ------ ------------------------- $3.30 Series 7 3. The total number of authorized Preferred Stock for the following Series, is remaining after the cancellation: Series Number of Shares Remaining ------ -------------------------- $3.30 Series 49,451 The Articles of Amendment to the Restated Articles of Incorporation were adopted by the Board of Directors without action by the shareholders. These Articles of Amendment to the Restated Articles of Incorporation are to be effective when filed by the Secretary of State. MIDAMERICAN ENERGY COMPANY ----------------------------------- P. J. Leighton, Vice President and Corporate Secretary AMD1098 EX-12.1 3 EXH. 12.1 - COMPUTATION OF RATIOS - MEC HOLDINGS EXHIBIT 12.1
MIDAMERICAN ENERGY HOLDINGS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (IN THOUSANDS) (UNAUDITED) TWELVE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30, 1998 DECEMBER 31,1997 ---------------------------- ---------------------------- Supplemental (a) Supplemental (a) -------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $144,632 $ - $144,632 $139,332 $ - $139,332 Pre-tax (gain) loss of less than 50% owned persons .......... (1,301) - (1,301) 2,234 - 2,234 -------- ------ -------- -------- ------ -------- 143,331 - 143,331 141,566 - 141,566 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 76,714 - 76,714 68,390 - 68,390 Interest on long-term debt .................................. 84,606 3,171 87,777 89,898 3,760 93,658 Other interest charges ...................................... 12,313 - 12,313 10,034 - 10,034 Preferred stock dividends of subsidiary...................... 4,953 - 4,953 6,488 - 6,488 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 7,980 - 7,980 Interest on leases .......................................... 222 - 222 268 - 268 -------- ------ -------- -------- ------ -------- 186,788 3,171 189,959 183,058 3,760 186,818 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 330,119 3,171 333,290 324,624 3,760 328,384 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 84,606 3,171 87,777 89,898 3,760 93,658 Other interest charges ...................................... 12,313 - 12,313 10,034 - 10,034 Preferred stock dividends of subsidiary trust................ 7,980 - 7,980 7,980 - 7,980 Interest on leases .......................................... 222 - 222 268 - 268 -------- ------ -------- -------- ------ -------- Total fixed charges ....................................... 105,121 3,171 108,292 108,180 3,760 111,940 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.14 - 3.08 3.00 - 2.93 ======== ====== ======== ======== ====== ======== Preferred stock dividends of subsidiary ..................... $ 4,953 $ - $ 4,953 $ 6,488 $ - $ 6,488 Ratio of net income before income taxes to net income ....... 1.5128 - 1.5128 1.4690 - 1.4690 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 7,493 - 7,493 9,531 - 9,531 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 112,614 3,171 115,785 117,711 3,760 121,471 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.93 - 2.88 2.76 - 2.70 ======== ====== ======== ======== ====== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -1- EXHIBIT 12.1
MIDAMERICAN ENERGY HOLDINGS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (IN THOUSANDS) (UNAUDITED) TWELVE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31,1996 DECEMBER 31,1995 ------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $143,761 $ - $143,761 $119,705 $ - $119,705 Pre-tax (gain) loss of less than 50% owned persons .......... (698) - (698) 9,079 - 9,079 -------- ------ -------- -------- ------ -------- 143,063 - 143,063 128,784 - 128,784 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 98,422 - 98,422 66,803 - 66,803 Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 - 10,941 9,449 - 9,449 Preferred stock dividends of subsidiary...................... 10,401 - 10,401 8,059 - 8,059 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ -------- 223,336 3,615 226,951 190,949 4,595 195,544 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ...................... 366,399 3,615 370,014 319,733 4,595 324,328 -------- ------ --------- -------- ------ -------- Fixed Charges: Interest on long-term debt .................................. 102,909 3,615 106,524 105,550 4,595 110,145 Other interest charges ...................................... 10,941 - 10,941 9,449 - 9,449 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ --------- -------- ------ -------- Total fixed charges ....................................... 114,513 3,615 118,128 116,087 4,595 120,682 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 3.20 - 3.13 2.75 - 2.69 ======== ====== ========= ======== ====== ======== Preferred stock dividends of subsidiary ..................... $ 10,401 $ - $ 10,401 $ 8,059 $ - $ 8,059 Ratio of net income before income taxes to net income ....... 1.6384 - 1.6384 1.5229 - 1.5229 -------- ------ --------- -------- ------ -------- Preferred stock dividend requirements before income tax ..... 17,041 - 17,041 12,273 - 12,273 -------- ------ --------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .... 131,554 3,615 135,169 128,360 4,595 132,955 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 2.79 - 2.74 2.49 - 2.44 ======== ====== ========= ======== ====== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -2- EXHIBIT 12.1
MIDAMERICAN ENERGY HOLDINGS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (IN THOUSANDS) (UNAUDITED) TWELVE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31,1994 DECEMBER 31,1993 ------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- -------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- --------- ---------- -------- Income from continuing operations .......................... $123,098 $ - $123,098 $134,325 $ - $134,325 Pre-tax (gain) loss of less than 50% owned persons ......... (270) - (270) (597) - (597) -------- ------ -------- -------- ------ -------- 122,828 - 122,828 133,728 - 133,728 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes ......................................... 60,457 - 60,457 67,485 - 67,485 Interest on long-term debt ................................. 101,267 5,428 106,695 107,044 5,678 112,722 Other interest charges ..................................... 6,446 - 6,446 5,066 - 5,066 Preferred stock dividends of subsidiary..................... 10,551 - 10,551 8,367 - 8,367 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ -------- 179,932 5,428 185,360 189,838 5,678 195,516 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges ..................... 302,760 5,428 308,188 323,566 5,678 329,244 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt ................................. 101,267 5,428 106,695 107,044 5,678 112,722 Other interest charges ..................................... 6,446 - 6,446 5,066 - 5,066 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ --------- -------- ------ -------- Total fixed charges ...................................... 108,924 5,428 114,352 113,986 5,678 119,664 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges ......................... 2.78 - 2.70 2.84 - 2.75 ======== ====== ========= ======== ====== ======== Preferred stock dividends of subsidiary .................... $ 10,551 $ - $ 10,551 $ 8,367 $ - $ 8,367 Ratio of net income before income taxes to net income ...... 1.4524 - 1.4524 1.4729 - 1.4729 -------- ------ --------- -------- ------ -------- Preferred stock dividend requirements before income tax .... 15,324 - 15,324 12,324 - 12,324 -------- ------ --------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements ... 124,248 5,428 129,676 126,310 5,678 131,988 -------- ------ --------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............. 2.44 - 2.38 2.56 - 2.49 ======== ====== ========= ======== ====== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -3- EX-12.2 4 EXH 12.2 - COMPUTATION OF RATIOS - MEC EXHIBIT 12.2
MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (IN THOUSANDS) (UNAUDITED) TWELVE MONTHS ENDED TWELVE MONTHS ENDED SEPTEMBER 30,1998 DECEMBER 31,1997 -------------------------------- -------------------------------- Supplemental (a) Supplemental (a) --------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ......................... $119,743 $ - $119,743 $125,941 $ - $125,941 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes ........................................ 76,255 - 76,255 76,317 - 76,317 Interest on long-term debt ................................ 73,677 3,171 76,848 78,120 3,760 81,880 Other interest charges .................................... 12,066 - 12,066 10,027 - 10,027 Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980 Interest on leases ........................................ 222 - 222 268 - 268 -------- ------ -------- -------- ------ -------- 170,200 3,171 173,371 172,712 3,760 176,472 -------- ------ -------- -------- ------ -------- Earnings available for fixed charges .................... 289,943 3,171 293,114 298,653 3,760 302,413 -------- ------ -------- -------- ------ -------- Fixed Charges: Interest on long-term debt ................................ 73,677 3,171 76,848 78,120 3,760 81,880 Other interest charges .................................... 12,066 - 12,066 10,027 - 10,027 Preferred stock dividends of subsidiary trust.............. 7,980 - 7,980 7,980 - 7,980 Interest on leases ........................................ 222 - 222 268 - 268 -------- ------ -------- -------- ------ -------- Total fixed charges...................................... 93,945 3,171 97,116 96,395 3,760 100,155 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges ........................ 3.09 - 3.02 3.10 - 3.02 ======== ====== ======== ======== ====== ======== Preferred stock dividends ................................. $ 4,953 $ - $ 4,953 $ 6,488 $ - $ 6,488 Ratio of net income before income taxes to net income ..... 1.6368 - 1.6368 1.6060 - 1.6060 -------- ------ -------- -------- ------ -------- Preferred stock dividend requirements before income tax ... 8,107 - 8,107 10,420 - 10,420 -------- ------ -------- -------- ------ -------- Fixed charges plus preferred stock dividend requirements .. 102,052 3,171 105,223 106,815 3,760 110,575 -------- ------ -------- -------- ------ -------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............ 2.84 - 2.79 2.80 - 2.73 ======== ====== ======== ======== ====== ========
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station. -1- EXHIBIT 12.2
MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (In Thousands) (Unaudited) TWELVE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31,1996 DECEMBER 31,1995 ------------------------------ -------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations ........................... $165,132 $ - $165,132 $132,489 $ - $132,489 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes .......................................... 112,927 - 112,927 84,098 - 84,098 Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ ------- 203,866 3,615 207,481 174,715 4,595 179,310 -------- ------ -------- -------- ------ ------- Earnings available for fixed charges ...................... 368,998 3,615 372,613 307,204 4,595 311,799 -------- ------ -------- -------- ------ ------- Fixed Charges: Interest on long-term debt .................................. 79,434 3,615 83,049 80,133 4,595 84,728 Other interest charges ...................................... 10,842 - 10,842 9,396 - 9,396 Preferred stock dividends of subsidiary trust................ 288 - 288 - - - Interest on leases .......................................... 375 - 375 1,088 - 1,088 -------- ------ -------- -------- ------ ------- Total fixed charges 90,939 3,615 94,554 90,617 4,595 95,212 -------- ------ ------- -------- ------ -------- Ratio of earnings to fixed charges .......................... 4.06 - 3.94 3.39 - 3.27 ======== ====== ======== ======== ====== ======= Preferred stock dividends ................................... $ 10,401 $ - $ 10,401 $ 8,059 $ - $ 8,059 Ratio of net income before income taxes to net income ....... 1.6839 - 1.6839 1.6348 - 1.6348 -------- ------ -------- -------- ------ ------- Preferred stock dividend requirements before income tax ..... 17,514 - 17,514 13,175 - 13,175 -------- ------ -------- -------- ------ ------- Fixed charges plus preferred stock dividend requirements .... 108,453 3,615 112,068 103,792 4,595 108,387 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) .............. 3.40 - 3.32 2.96 - 2.88 ======== ====== ======== ======== ====== =======
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station -2- EXHIBIT 12.2
MIDAMERICAN ENERGY COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (In Thousands) (Unaudited) TWELVE MONTHS ENDED TWELVE MONTHS ENDED DECEMBER 31,1994 DECEMBER 31,1993 ------------------------------ -------------------------------- Supplemental (a) Supplemental (a) -------------------- --------------------- As As Adjustment Adjusted Adjustment Adjusted ---------- -------- ---------- -------- Income from continuing operations .......................... $121,145 $ - $121,145 $133,888 $ - $133,888 -------- ------ -------- -------- ------ -------- Add (Deduct): Total income taxes ......................................... 66,759 - 66,759 75,917 - 75,917 Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320 Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ ------- 148,531 5,428 153,959 163,503 5,678 169,181 -------- ------ -------- -------- ------ ------- Earnings available for fixed charges ..................... 269,676 5,428 275,104 297,391 5,678 303,069 -------- ------ -------- -------- ------ ------- Fixed Charges: Interest on long-term debt ................................. 73,922 5,428 79,350 80,642 5,678 86,320 Other interest charges ..................................... 6,639 - 6,639 5,068 - 5,068 Preferred stock dividends of subsidiary trust............... - - - - - - Interest on leases ......................................... 1,211 - 1,211 1,876 - 1,876 -------- ------ -------- -------- ------ ------- Total fixed charges 81,772 5,428 87,200 87,586 5,678 93,264 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges ......................... 3.30 - 3.15 3.40 - 3.25 ======== ====== ======== ======== ====== ======= Preferred stock dividends .................................. $ 10,551 $ - $ 10,551 $ 8,367 $ - $ 8,367 Ratio of net income before income taxes to net income ...... 1.5511 - 1.5511 1.5670 - 1.5670 -------- ------ -------- -------- ------ ------- Preferred stock dividend requirements before income tax .... 16,366 - 16,366 13,111 - 13,111 -------- ------ -------- -------- ------ ------- Fixed charges plus preferred stock dividend requirements ... 98,138 5,428 103,566 100,697 5,678 106,375 -------- ------ -------- -------- ------ ------- Ratio of earnings to fixed charges plus preferred stock dividend requirements (pre-income tax basis) ............. 2.75 - 2.66 2.95 - 2.85 ======== ====== ======== ======== ====== =======
Note: (a) Amounts in the supplemental columns are to reflect the Company's portion of the net interest component of payments to Nebraska Public Power District under a long-term purchase agreement for one-half of the plant capacity from Cooper Nuclear Station -3- EX-27.1 5 RESTATED FDS -- MEC HOLDINGS COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Holdings Company as of September 30, 1997, and the related consolidated statements of income and cash flows for the nine months ended September 30, 1997, and is qualified in its entirety by reference to such financial statemens. 0001009526 MIDAMERICAN ENERGY HOLDINGS COMPANY 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 2,611,150 889,841 333,890 376,814 188,860 4,400,555 762,443 0 421,059 1,368,299 150,000 31,765 1,103,551 0 0 141,354 77,727 0 0 0 1,527,859 4,400,555 1,400,667 66,297 1,170,091 1,170,091 230,576 25,199 255,775 84,042 105,436 0 105,436 88,845 57,868 334,289 1.07 1.07 Tag 37 includes operating and nonoperating income taxes and is excluded from operating expenses in Tag 39 and on the Consolidated Statement of Income. Tag 41 includes $2,619,000 of loss from Discontinued Operations, net of income taxes.
EX-27.2 6 FDS -- MIDAMERICAN ENERGY COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Company as of September 30, 1998, and the related consolidated statements of income and cash flows for the nine months ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000928576 MIDAMERICAN ENERGY COMPANY 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 2,607,812 164,360 259,762 312,874 166,345 3,511,153 560,595 0 431,870 992,465 150,000 31,759 930,497 0 0 73,600 49,628 0 0 0 1,283,204 3,511,153 1,211,084 74,323 971,310 1,045,633 165,451 2,176 167,627 66,524 101,103 3,714 97,389 90,700 53,425 343,300 0 0
EX-27.3 7 FDS -- MIDAMERICAN ENERGY HOLDINGS COMPANY
UT This schedule contains summary financial information extracted from the consolidated balance sheet of MidAmerican Energy Holdings Company as of September 30, 1998, and the related consolidated statements of income and cash flows for the nine months ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 0001009526 MIDAMERICAN ENERGY HOLDINGS COMPANY 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 2,607,104 738,836 302,044 408,611 166,345 4,222,940 741,447 0 421,619 1,245,883 150,000 31,759 1,044,981 0 0 212,499 69,631 0 0 0 1,468,187 4,222,940 1,377,661 74,621 1,131,936 1,131,936 245,725 20,928 266,653 78,677 113,355 0 113,355 85,029 53,425 339,208 1.20 1.20 Tag 37, Income Tax Expense, includes operating and nonoperating income taxes and is excluded from total operating expenses in Tag 39 and on the Consolidated Statement of Income.
-----END PRIVACY-ENHANCED MESSAGE-----