10-K405 1 mec2001form10-k.txt MIDAMERICAN ENERGY COMPANY - 2001 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 ----------------- Commission Registrant's Name, State of Incorporation, IRS Employer File Number Address and Telephone Number Identification No. ----------- ---------------------------- ------------------ 1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214 (AN IOWA CORPORATION) 666 GRAND AVE. PO BOX 657 DES MOINES, IOWA 50303 515-242-4300 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Preferred Stock, $3.30 Series, no par value Preferred Stock, $3.75 Series, no par value Preferred Stock, $3.90 Series, no par value Preferred Stock, $4.20 Series, no par value Preferred Stock, $4.35 Series, no par value Preferred Stock, $4.40 Series, no par value Preferred Stock, $4.80 Series, no par value Preferred Stock, $7.80 Series, no par value Title of each Class 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. All common stock of MidAmerican Energy Company is held by MHC Inc. As of March 20, 2002, 70,980,203 shares of common stock, without par value, were outstanding. MidAmerican Energy Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K. MIDAMERICAN ENERGY COMPANY 2001 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Part I Page Item 1 Business General Overview............................................... 3 Financial Information About Industry Segments.................. 3 Description of Business........................................ 3 Regulated Electric Operations ............................... 5 Regulated Natural Gas Operations............................. 8 Nonregulated Operations...................................... 10 Regulation................................................... 11 Item 2 Properties....................................................... 15 Item 3 Legal Proceedings................................................ 17 Item 4 Submission of Matters to a Vote of Security Holders.............. 17 Part II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters.................................... 18 Item 6 Selected Financial Data.......................................... 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 18 Item 8 Financial Statements and Supplementary Data...................... 18 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 18 Part III Item 10 Directors and Executive Officers of the Registrant............... 19 Item 11 Executive Compensation........................................... 20 Item 12 Security Ownership of Certain Beneficial Owners and Management................................................. 20 Item 13 Certain Relationships and Related Transactions................... 20 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 21 Signatures ................................................................ 75 Exhibit Index.............................................................. 76 -2- PART I ITEM 1. BUSINESS (A) GENERAL OVERVIEW MidAmerican Energy Company is a public utility company headquartered in Des Moines, Iowa, and incorporated in the state of Iowa. MidAmerican Energy is a wholly owned subsidiary of MHC Inc., formerly known as MidAmerican Energy Holdings Company. On March 12, 1999, CalEnergy Company, Inc. acquired MHC. As a part of this transaction, the former CalEnergy, a Delaware corporation, was reincorporated as an Iowa corporation and changed its name to MidAmerican Energy Holdings Company. As a result, all direct and indirect subsidiaries of MHC, including MidAmerican Energy, each became an indirect subsidiary of MidAmerican Energy Holdings. MHC is a wholly owned subsidiary of MidAmerican Funding, LLC, whose sole member is MidAmerican Energy Holdings. On March 14, 2000, an investor group including Berkshire Hathaway Inc., Walter Scott, Jr., David L. Sokol and Gregory E. Abel completed its acquisition of MidAmerican Energy Holdings in accordance with a previously disclosed agreement and plan of merger, dated October 24, 1999, among MidAmerican Energy Holdings, Teton Formation L.L.C. and Teton Acquisition Corp. Mr. Scott is an Omaha, Nebraska businessman and a director of MidAmerican Energy Holdings, Mr. Sokol is Chairman and Chief Executive Officer of MidAmerican Energy Holdings, and Mr. Abel is Chief Operating Officer of MidAmerican Energy Holdings. In accordance with the merger agreement, Teton Acquisition was merged with and into MidAmerican Energy Holdings, maintaining the name MidAmerican Energy Holdings Company. With the completion of the transaction, MidAmerican Energy Holdings is now a privately owned company with publicly traded fixed-income securities. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Financial information on MidAmerican Energy's segments of business is included under the Note titled "Segment Information" in Notes to Consolidated Financial Statements included in Part IV, Item 14 of this Form 10-K. (C) DESCRIPTION OF BUSINESS MidAmerican Energy is the largest energy company headquartered in Iowa, with assets as of December 31, 2001, and revenues for 2001 totaling $3.6 billion and $2.7 billion, respectively. MidAmerican Energy is principally engaged in the business of generating, transmitting, distributing and selling electric energy and in distributing, selling and transporting natural gas. MidAmerican Energy distributes electricity at retail in Council Bluffs, Des Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities (Davenport and Bettendorf, Iowa and Rock Island, Moline and East Moline, Illinois); and a number of adjacent communities and areas. It also distributes natural gas at retail in Cedar Rapids, Des Moines, Fort Dodge, Iowa City, Sioux City and Waterloo, Iowa; the Quad Cities; Sioux Falls, South Dakota; and a number of adjacent communities and areas. As of December 31, 2001, MidAmerican Energy had 673,000 retail electric customers and 652,000 retail natural gas customers. In addition to retail sales, MidAmerican Energy sells electric energy and natural gas to other utilities, marketers and municipalities outside of MidAmerican Energy's delivery system. These sales are referred to as wholesale sales. It also transports natural gas through its distribution system for a number of end-use customers who have independently secured their supply of natural gas. -3- MidAmerican Energy's regulated electric and gas operations are conducted under franchises, certificates, permits and licenses obtained from state and local authorities. The franchises, with various expiration dates, are typically for 25-year terms. MidAmerican Energy has a residential, agricultural, commercial and diversified industrial customer group, in which no single industry or customer accounted for more than 4% of its total 2001 electric operating revenues or 4% of its total 2001 gas operating margin. Among the primary industries served by MidAmerican Energy are those which are concerned with food products, the manufacturing, processing and fabrication of primary metals, real estate, farm and other non-electrical machinery, and cement and gypsum products. MidAmerican Energy also conducts a number of nonregulated business activities, including natural gas marketing. Refer to the "Nonregulated Operations" section later in Part I for further discussion. For the year ended December 31, 2001, MidAmerican Energy derived approximately 48% of its gross operating revenues from its regulated electric business, 32% from its regulated gas business and 20% from its nonregulated business activities. For 2000 and 1999, the corresponding percentages were 48% electric, 37% gas and 15% nonregulated; and 63% electric, 30% gas and 7% nonregulated, respectively. The change in revenue mix is principally driven by an increase in natural gas prices and in nonregulated natural gas sales activity. The following tables present historical regulated electric sales data related to customer class and jurisdictions. Total Regulated Electric Sales By Customer Class 2001 2000 1999 ---- ---- ---- Residential 20.6% 20.7% 21.0% Small General Service 15.3 15.9 16.7 Large General Service 25.8 28.6 26.9 Other 7.3 5.4 4.5 Sales for Resale 31.0 29.4 30.9 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Regulated Retail Electric Sales By State 2001 2000 1999 ---- ---- ---- Iowa 88.6% 89.3% 88.9% Illinois 10.6 10.0 10.4 South Dakota 0.8 0.7 0.7 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== -4- The following tables present historical regulated gas sales data, excluding transportation throughput, related to customer class and jurisdictions. Total Regulated Gas Sales By Customer Class 2001 2000 1999 ---- ---- ---- Residential 34.5% 34.9% 39.1% Small General Service 18.2 17.4 19.8 Large General Service 1.5 2.2 2.4 Other 1.7 1.2 1.7 Sales for resale 44.1 44.3 37.0 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== Regulated Retail Gas Sales By State 2001 2000 1999 ---- ---- ---- Iowa 78.9% 78.0% 78.8% Illinois 9.8 10.2 10.3 South Dakota 10.5 11.0 10.1 Nebraska 0.8 0.8 0.8 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== ===== There are seasonal variations in MidAmerican Energy's electric and gas businesses which are principally related to the use of energy for air conditioning and heating. In 2001, 38% of MidAmerican Energy's regulated electric revenues were reported in the months of June, July, August and September, and 59% of MidAmerican Energy's regulated gas revenues were reported in the months of January, February, March and December. At December 31, 2001, MidAmerican Energy had 3,768 full-time employees of which 1,756 were covered by union contracts. MidAmerican Energy has five separate contracts with locals of the International Brotherhood of Electrical Workers (IBEW), the United Association of Plumbers and Pipefitters and the United Paper Workers International Union. One contract with IBEW locals 109 and 499 expires February 29, 2004, and covers 1,675 employee members. REGULATED ELECTRIC OPERATIONS The annual hourly peak demand on MidAmerican Energy's electric system occurs principally as a result of air conditioning use during the cooling season. In August 2001, MidAmerican Energy recorded an hourly peak demand of 3,758 MW, which was 75 MW less than MidAmerican Energy's record hourly peak of 3,833 MW set in July 1999. MidAmerican Energy's accredited net generating capability in the summer of 2001 was 4,735 MW. Accredited net generating capability represents the amount of generation available to meet the requirements on MidAmerican Energy's system, net of the effect of capacity purchases and sales, and consists of MidAmerican Energy-owned generation and generation under power purchase contracts. The net generating capability at any time may be less than it would otherwise be due to regulatory restrictions, -5- fuel restrictions and generating units being temporarily out of service for inspection, maintenance, refueling or modifications. Refer to Item 2, Properties, for detail of the accredited net generating capability for the summer of 2001. MidAmerican Energy is interconnected with Iowa utilities and utilities in neighboring states and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool (MAPP). MAPP is a voluntary association of electric utilities doing business in Minnesota, Nebraska, North Dakota and the Canadian provinces of Saskatchewan and Manitoba and portions of Iowa, Montana, South Dakota and Wisconsin. Its membership also includes power marketers, regulatory agencies and independent power producers. MAPP facilitates operation of the transmission system and is responsible for the safety and reliability of the bulk electric system. In November 2001, MAPPCOR, the contractor to MAPP, sold its transmission-related assets to the Midwest Independent Transmission System Operator, Inc. (Midwest ISO). The Midwest ISO now has responsibility for administration of MAPP's Open-Access Transmission Tariff. Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. If a participant's capability reserve falls below the 15% minimum, significant penalties could be contractually imposed by MAPP. MidAmerican Energy's reserve margin at peak demand for 2001 was approximately 25%. MidAmerican Energy's transmission system connects its generating facilities with distribution substations and interconnects with 14 other transmission providers in Iowa and five adjacent states. Under normal operating conditions, MidAmerican Energy's transmission system is unconstrained and has adequate capacity to deliver energy to MidAmerican Energy's distribution system and to export and import energy with other interconnected systems. Refer to Item 2, Properties, for detail of transmission lines. In December 1999, the Federal Energy Regulatory Commission (FERC) issued Order No. 2000 establishing, among other things, minimum characteristics and functions for regional transmission organizations. Public utilities that were not a member of an independent system operator at the time of the order were required to submit a plan by which its transmission facilities would be transferred to a regional transmission organization. On September 28, 2001 MidAmerican Energy and five other electric utilities filed with the FERC a plan to create TRANSLink Transmission Company LLC and to integrate their electric transmission systems into a single, coordinated system operating as a for-profit independent transmission company in conjunction with a FERC-approved regional transmission organization. FERC approval of the plan is pending. Transferring operation and control of MidAmerican Energy's transmission assets to other entities could increase costs for MidAmerican Energy; however, the actual impact of TRANSLink on MidAmerican Energy's future transmission costs is not yet known. -6- Fuel Supply for Electric Operations ----------------------------------- MidAmerican Energy's sources of fuel for electric generation were as follows for the periods shown: Year Ended December 31, 2001 2000 1999 ----- ----- ----- Coal 74.4% 75.9% 70.9% Nuclear* 24.3 23.6 28.2 Gas* 1.2 0.3 0.7 Oil/Hydro 0.1 0.2 0.2 ----- ------ ------- Total 100.0% 100.0% 100.0% ===== ===== ===== *Nuclear and gas include generation purchased through power purchase contracts with Nebraska Public Power District and Cordova Energy Company LLC, respectively. Refer to Item 2, Properties, for detail of generating facilities. MidAmerican Energy is no longer allowed to recover through energy adjustment clauses a portion of its energy costs relating to retail sales. Accordingly, fluctuations in energy costs now affect MidAmerican Energy's earnings. All of the coal-fired generating stations operated by MidAmerican Energy are fueled by low-sulfur, western coal from the Powder River Basin and Hanna Basin mines. MidAmerican Energy's coal supply portfolio includes multiple suppliers and mines under agreements of varying term and quantity flexibility. MidAmerican Energy regularly monitors the western coal market, looking for opportunities to improve its coal supply portfolio. MidAmerican Energy believes its sources of coal supply are, and will continue to be, satisfactory. Additional information regarding MidAmerican Energy's coal supply contracts is included in Note (4)(h) of Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form 10-K. MidAmerican Energy can use both Union Pacific Railroad and Burlington Northern and Santa Fe Railway as originating carriers of its coal supply. Coal is delivered directly to Neal Energy Center by Union Pacific and to Council Bluffs Energy Center by Union Pacific or Burlington Northern. Coal for MidAmerican Energy's Louisa and Riverside Energy Centers is delivered to an interchange point by either Burlington Northern or Union Pacific for transportation to its destination by the I&M Rail Link. MidAmerican Energy believes its coal transportation arrangements are adequate to meet its coal delivery needs. MidAmerican Energy uses natural gas and oil as fuel for intermediate and peak demand electric generation, igniter fuel, transmission support and standby purposes. These sources are presently in adequate supply and available to meet MidAmerican Energy's needs. MidAmerican Energy has an agreement with Cordova Energy Company LLC, a subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and energy from a gas-fired combined cycle generation plant which started commercial operation in June 2001. The agreement, which terminates in May 2004, provides for MidAmerican Energy to purchase up to 50% of the net capacity of the plant and to supply the fuel stock required to generate the energy purchased. -7- MidAmerican Energy is a 25% joint owner of Quad Cities Generating Station, a nuclear power plant. Exelon Generation Company, LLC, the other joint owner and the operator of Quad Cities Station is a subsidiary of Exelon Corporation. Approximately one-third of the nuclear fuel assemblies in the core at Quad Cities Station Units 1 and 2 is replaced every 24 months. Unit 2 began a refueling outage in February 2002 and Unit 1 is scheduled for the fall of 2002. MidAmerican Energy has been advised by Exelon Generation that the majority of its uranium concentrate and uranium conversion requirements for Quad Cities Station through 2002 can be met under existing supplies or commitments. Exelon Generation foresees no problem in obtaining the remaining requirements now or obtaining future requirements. Exelon Generation further advises that enrichment services contracted through 2007 provide flexibility as to the quantity purchased. Commitments for fuel fabrication have been obtained at least through 2007. Exelon Generation does not anticipate that it will have difficulty in contracting for uranium concentrates for conversion, enrichment or fabrication of nuclear fuel needed to operate Quad Cities Station. MidAmerican Energy purchases one-half of the power and energy of Cooper Nuclear Station through a long-term power purchase contract with Nebraska Public Power District. Approximately 25% of the fuel in the core at Cooper must be replaced approximately every 18 months. A refueling outage was completed in early January 2002. Nebraska Public Power District has informed MidAmerican Energy that it either has sufficient materials and services available to meet foreseeable Cooper requirements or that such materials and services are readily available from suppliers. Under the Nuclear Waste Policy Act of 1982, the U.S. Department of Energy is responsible for the selection and development of repositories for, and the permanent disposal of, spent nuclear fuel and high-level radioactive wastes. Exelon Generation and Nebraska Public Power District, as required by the Nuclear Waste Act, each signed a contract with the Department of Energy to provide for the disposal of spent nuclear fuel and high-level radioactive waste beginning not later than January 1998. The Department of Energy did not begin receiving spent nuclear fuel on the scheduled date, and it is expected that the schedule will be significantly delayed. The costs incurred by the Department of Energy for disposal activities are being financed by fees charged to owners and generators of the waste. The Nebraska Public Power District has informed MidAmerican Energy that there is on-site storage capability at Cooper sufficient to permit such interim storage at least through 2004, the remaining term of the long-term power purchase contract. Exelon Generation has informed MidAmerican Energy that existing on-site storage capability at Quad Cities Station is sufficient to permit interim storage into 2005. For Quad Cities Station, Exelon Generation has informed MidAmerican Energy that they plan to develop interim spent fuel storage installation at Quad Cities Station to store additional spent nuclear fuel in dry casks. Exelon Generation expects the bulk of the construction work will be done in 2004. REGULATED NATURAL GAS OPERATIONS MidAmerican Energy is engaged in the procurement, transportation, storage and distribution of natural gas for utility and end-use customers in the Midwest. MidAmerican Energy purchases natural gas from various suppliers, transports it from the production area to MidAmerican Energy's service territory under contracts with interstate pipelines, stores it in various storage facilities to manage fluctuations in system demand and seasonal pricing, and distributes it to customers through MidAmerican Energy's distribution system. -8- MidAmerican Energy also transports through its distribution system natural gas purchased independently by a number of end-use customers. During 2001, approximately 31% of total gas delivered through MidAmerican Energy's system was under gas transportation service. Fuel Supply and Capacity ------------------------ MidAmerican Energy purchases gas supplies from producers and third party marketers. To ensure system reliability, a geographically diverse supply portfolio with varying terms and contract conditions is utilized for the gas supplies. MidAmerican Energy has rights to firm pipeline capacity to transport gas to its service territory through direct interconnects to the pipeline systems of Northern Natural Gas, Natural Gas Pipeline Company of America, Northern Border Pipeline Company and ANR Pipeline Company. Firm capacity in excess of MidAmerican Energy's system needs, resulting from differences between the capacity portfolio and seasonal system demand, can be resold to other companies to achieve optimum use of the available capacity. Past Iowa Utilities Board and South Dakota Public Utility Commission rulings have allowed MidAmerican Energy to retain 30% of Iowa and South Dakota margins, respectively, earned on the resold capacity, with the remaining 70% being returned to customers through the purchased gas adjustment clause. MidAmerican Energy's cost of gas is recovered from customers through purchased gas adjustment clauses. In 1995, the Iowa Utilities Board gave initial approval of MidAmerican Energy's Incentive Gas Supply Procurement Program, which currently has been extended through 2002. Under the program, as amended, MidAmerican Energy is required to file with the Iowa Utilities Board every six months a comparison of its gas procurement costs to an index-based reference price. If MidAmerican Energy's cost of gas for the period is less or greater than an established tolerance band around the reference price, then MidAmerican Energy shares a portion of the savings or costs with customers. A similar program is in effect in South Dakota. Since the implementation of the program, MidAmerican Energy has successfully achieved and shared savings with its natural gas customers. MidAmerican Energy utilizes leased gas storage to meet peak day requirements and to manage the daily changes in demand due to changes in weather. The storage gas is typically replaced during the summer months. In addition, MidAmerican Energy also utilizes three liquefied natural gas plants and two propane-air plants to meet peak day demands. On February 2, 1996, MidAmerican Energy had its highest peak-day delivery of 1,143,026 MMBtus. This peak-day delivery consisted of approximately 88% traditional sales service and 12% transportation service of customer-owned gas. MidAmerican Energy's 2001/2002 winter heating season peak-day delivery of 932,615 MMBtus was reached on March 3, 2002. This peak-day delivery included approximately 73% traditional sales service and 27% transportation service. The supply sources utilized by MidAmerican Energy to meet its 2001/2002 peak-day deliveries to its traditional sales service customers were: Thousands Percent of of MMBtus Total --------- ------- Leased Storage and Peak Shaving Plants 260.3 38.4% Firm Supply 418.1 61.6 ----- ----- Total 678.4 100.0% ===== ===== -9- MidAmerican Energy has strategically built multiple pipeline interconnections into several of its larger communities. MidAmerican Energy operates interconnects with Northern Natural Gas, Natural Gas Pipeline, Northern Border, and ANR Pipeline Company into the Quad Cities; with Northern Natural Gas, Natural Gas Pipeline, and Northern Border into Cedar Rapids/Iowa City; and with Northern Natural Gas and Natural Gas Pipeline into Des Moines. Multiple pipeline interconnects create competition among pipeline suppliers for transportation capacity to serve those communities, thus reducing costs. In addition, multiple pipeline interconnects give MidAmerican Energy the ability to optimize delivery of the lowest cost supply from the various pipeline supply basins into these communities and increase delivery reliability. Benefits to MidAmerican Energy's system customers are shared with all jurisdictions through a consolidated purchased gas adjustment clause. MidAmerican Energy does not anticipate difficulties in meeting its future demands through the use of its supply portfolio and pipeline interconnections for the foreseeable future. NONREGULATED OPERATIONS MidAmerican Energy's nonregulated operations include a variety of activities outside of the traditional regulated electric and gas services. A majority of MidAmerican Energy's nonregulated revenue is generated by its nonregulated natural gas marketing services. MidAmerican Energy purchases gas from producers and third party marketers and sells it to wholesalers and end-users. MidAmerican Energy's nonregulated natural gas marketing services currently operate in Iowa, Illinois, Kansas, Ohio, South Dakota and other states to a lesser extent. In addition, MidAmerican Energy manages gas supplies for a number of commercial end-users and sells these customers gas to meet their supply requirements. Sales volumes for these nonregulated gas marketing services totaled 124 million MMBtus, 78 million MMBtus, and 43 million MMBtus for 2001, 2000 and 1999, respectively. As of December 31, 2000, all non-residential customers in Illinois had been phased in to allow them to select their provider of electric supply services. Residential customers all receive the opportunity to select their electric supplier beginning May 1, 2002. MidAmerican Energy's nonregulated revenues include agency fees and other revenues related to these supply services. Nonregulated revenues of MidAmerican Energy also include awards received for successful performance under its Incentive Gas Supply Procurement Plan discussed in the "Regulated Natural Gas Operations" section. Historical nonregulated revenues for MidAmerican Energy are shown below (in millions): 2001 2000 1999 ---- ---- ---- Nonregulated wholesale gas $400 $282 $100 Nonregulated retail gas 118 71 1 Nonregulated retail electric 10 17 11 Other 16 20 10 ---- ---- ---- $544 $390 $122 ==== ==== ==== -10- REGULATION General Utility Regulation -------------------------- MidAmerican Energy is a public utility within the meaning of the Federal Power Act and a natural gas company within the meaning of the Natural Gas Act. Therefore, it is subject to regulation by the FERC in regard to numerous activities, including the issuance of securities, accounting policies and practices, electricity sales for resale rates, the establishment and regulation of electric interconnections and transmission services and replacement of certain gas utility property. MidAmerican Energy is regulated by the Illinois Commerce Commission as to bundled retail rates, unbundled delivery services, services that have not been declared to be competitive, issuance of securities, affiliate transactions, construction, acquisition and sale of utility property, acquisition and sale of securities and in other respects as provided by the laws of Illinois. MidAmerican Energy is regulated by the Iowa Utilities Board as to retail rates, services, construction of utility property and in other respects as provided by the laws of Iowa. MidAmerican Energy is also subject to regulation by the South Dakota Public Utility Commission as to electric and gas retail rates and service as provided by the laws of South Dakota. Rate Regulation --------------- Under Iowa law, temporary collection of higher rates can begin, subject to refund, 90 days after filing with the Iowa Utilities Board for that portion of such higher rates approved by the Iowa Utilities Board based on prior ratemaking principles and a rate of return on common equity previously approved. If the Iowa Utilities Board has not issued a final order within ten months after the filing date, the temporary rates cease to be subject to refund and any balance of the requested rate increase may then be collected subject to refund. Exceptions to the ten-month limitation provide for extensions due to a utility's lack of due diligence in the rate proceeding, judicial appeals and situations involving new generating units being placed in service. MidAmerican Energy's cost of gas is reflected in its Iowa gas rates through the Iowa Uniform Purchased Gas Adjustment Clause. South Dakota law authorizes its Public Utility Commission to suspend new rates for up to six months during the pendency of rate proceedings; however, the rates are permitted to be implemented after six months subject to refund pending a final order in the proceeding. Under Illinois law, new rates may become effective 45 days after filing with the Illinois Commerce Commission, or on such earlier date as the Illinois Commerce Commission may approve, subject to its authority to suspend the proposed new rates, subject to hearing, for a period not to exceed approximately eleven months after filing. Under Illinois electric tariffs, MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in the cost of all fuels used for electric generation, including certain fuel transportation costs, nuclear fuel disposition costs and the effects of energy transactions (other than capacity and margins on interchange sales) with other utilities. MidAmerican Energy's cost of gas is reflected in its Illinois gas rates through the Illinois Uniform Purchased Gas Adjustment Clause. In December 1997, Illinois enacted a law to restructure Illinois' electric utility industry. The law changes how and what electric services are regulated by the Illinois Commerce Commission and transitions portions of the traditional electric services to a competitive environment. In general, the law limits the Illinois Commerce Commission's regulatory authority over a utility's generation and also relaxes its regulatory authority over many corporate transactions, such as the transfer of generation assets to affiliates. Special authority and limitations of authority apply during the transition to a competitive marketplace. Also, the law permits utilities to eliminate their fuel adjustment clauses and incorporates provisions by -11- which earnings in excess of allowed amounts are either partially refunded to customers or are used to accelerate a company's regulatory asset cost recovery. Electric rates are frozen, subject to certain exceptions allowing for increases, until 2005. The FERC regulates MidAmerican Energy's rates charged to wholesale customers. Refer to the information under the caption "Legislative and Regulatory Evolution" in the "Operating Activities and Other Matters" section of MD&A in Part IV, Item 14 of this Form 10-K for additional discussion of matters affecting utility regulation. Nuclear Regulation ------------------ MidAmerican Energy is subject to the jurisdiction of the Nuclear Regulatory Commission with respect to its license and 25% ownership interest in Quad Cities Station Units 1 and 2. Exelon Generation is the operator of Quad Cities Station and is under contract with MidAmerican Energy to secure and keep in effect all necessary Nuclear Regulatory Commission licenses and authorizations. Under the terms of a long-term power purchase contract with Nebraska Public Power District, MidAmerican Energy has contracted to purchase through September 21, 2004, one-half of the power and energy from Cooper, which is located near Brownville, Nebraska. MidAmerican Energy pays for one-half of the fixed and operating costs of Cooper (excluding depreciation but including debt service) and MidAmerican Energy's share of fuel costs (including the Department of Energy disposal fee) based upon energy delivered. MidAmerican Energy is not subject to the jurisdiction of the Nuclear Regulatory Commission with respect to Cooper and the long-term power purchase contract with Nebraska Public Power District. Nebraska Public Power District, as the sole owner, licensee and operator of Cooper, is thereby the only entity subject to the jurisdiction of the Nuclear Regulatory Commission with respect to Cooper. Under the terms of the long-term power purchase contract, Nebraska Public Power District is required to assure that Cooper is in compliance with all of the Nuclear Regulatory Commission regulations. The Nuclear Regulatory Commission's regulations control the granting of permits and licenses for the construction and operation of nuclear generating stations and subject such stations to continuing review and regulation. The Nuclear Regulatory Commission review and regulatory process covers, among other things, operations, maintenance, and environmental and radiological aspects of such stations. The Nuclear Regulatory Commission may modify, suspend or revoke licenses and impose civil penalties for failure to comply with the Atomic Energy Act, the regulations under such Act or the terms of such licenses. Federal regulations provide that any nuclear operating facility may be required to cease operation if the Nuclear Regulatory Commission determines there are deficiencies in state, local or utility emergency preparedness plans relating to such facility, and the deficiencies are not corrected. Exelon Generation and Nebraska Public Power District have advised MidAmerican Energy that emergency preparedness plans for Quad Cities Station and Cooper, respectively, have been approved by the Nuclear Regulatory Commission. Exelon Generation and Nebraska Public Power District have also advised MidAmerican Energy that state and local plans relating to Quad Cities Station and Cooper, respectively, have been approved by the Federal Emergency Management Agency. The Nuclear Regulatory Commission also regulates the decommissioning of nuclear power plants including the planning and funding for the eventual decommissioning of the plants. In response to these regulations, MidAmerican Energy submitted a report to the Nuclear Regulatory Commission in July 1990, and every two years thereafter, providing "reasonable assurance" that funds will be available to pay the -12- costs of decommissioning its share of Quad Cities Station. Nebraska Public Power District has advised MidAmerican Energy that a report addressing decommissioning funding for Cooper has been submitted to the Nuclear Regulatory Commission. MidAmerican Energy has established external trusts for the investment of funds collected for nuclear decommissioning associated with Quad Cities Station. Nebraska Public Power District maintains an internal account and an external trust for decommissioning funds associated with Cooper to which MidAmerican Energy has made contributions in the past. MidAmerican Energy is currently accumulating funds in a separate MidAmerican Energy bank account. Electric tariffs currently in effect include provisions for annualized collection of estimated decommissioning costs at Quad Cities Station and Cooper. In Illinois, Cooper nuclear decommissioning costs are included in customer billings through a mechanism that permits annual adjustments. In Iowa, Quad Cities Station and Cooper decommissioning costs are reflected in base rates. MidAmerican Energy's cost related to decommissioning funding in 2001 was $19.9 million. Refer to Note (4)(g) - Cooper Litigation, in Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K for discussion of a proceeding related to Cooper. Environmental Regulations ------------------------- MidAmerican Energy is subject to numerous legislative and regulatory environmental protection requirements involving air and water pollution, waste management, hazardous chemical use, noise abatement, land use aesthetics and atomic radiation. State and federal environmental laws and regulations currently have, and future modifications may have, the effect of (i) increasing the lead time for the construction of new facilities, (ii) significantly increasing the total cost of new facilities, (iii) requiring modification of MidAmerican Energy's existing facilities, (iv) increasing the risk of delay on construction projects, (v) increasing MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of service provided by MidAmerican Energy and the amount of energy available from MidAmerican Energy's facilities. Any of such items could have a substantial impact on amounts required to be expended by MidAmerican Energy in the future. Air Quality - Essentially all utility generating units are subject to the provisions of the Clean Air Act Amendments of 1990 which address continuous emissions monitoring, permit requirements and fees and emissions of certain substances. MidAmerican Energy has five jointly owned and six wholly owned coal-fired generating units, which represent approximately 60% of MidAmerican Energy's electric generating capability. MidAmerican Energy's generating units meet all requirements under Title IV of the Clean Air Act Amendments of 1990. Title IV, which is also known as the Acid Rain Program, sets forth requirements for the emission of sulfur dioxide and nitrogen oxides at electric utility generating stations. In accordance with the requirements of Section 112 of the Clean Air Act Amendments of 1990, the EPA has performed a study of the hazards to public health reasonably anticipated to occur as a result of emissions of hazardous air pollutants by electric utility steam generating units. In February 1998, EPA issued its Final Report to Congress, indicating that mercury is the hazardous air pollutant of greatest potential concern from coal-fired generating units and that additional research and monitoring are necessary. As such the EPA issued a request under Section 114 of the Clean Air Act Amendments of 1990 requiring all electric utilities to provide information that will allow the EPA to calculate the annual mercury emissions from each coal-fired generating unit for the calendar year 1999. In December 2000, the EPA concluded that it is appropriate and necessary to regulate mercury emissions from coal-fired generating units. It is anticipated that rules will be developed to regulate these emissions in 2003 or 2004. -13- The cost to MidAmerican Energy of reducing its mercury emissions would depend on available technology at the time, but could be material. Refer to Note (4)(c) in Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form 10-K for additional information regarding air quality regulation. Hazardous Materials and Waste Management - The U.S. Environmental Protection Agency, or 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. MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for these sites to be $22 million to $68 million. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which MidAmerican Energy may be a potentially responsible party. MidAmerican Energy's estimate of the probable cost for these sites as of December 31, 2001, was $22 million. The Illinois Commerce Commission has approved the use of a tariff rider that permits recovery of the actual costs of litigation, investigation and remediation relating to former manufactured gas plant sites. MidAmerican Energy's present rates in Iowa provide for a fixed annual recovery of manufactured gas plant costs. Additional information relating to MidAmerican Energy's manufactured gas plant facilities is included under Note (4)(b) in Notes to Consolidated Financial Statements in Part IV, Item 14, of this Form 10-K. Pursuant to the Toxic Substances Control Act, a federal law administered by the EPA, MidAmerican Energy developed a comprehensive program for the use, handling, control and disposal of all polychlorinated biphenyls, referred to herein as PCBs, contained in electrical equipment. The future use of equipment containing PCBs will be minimized. Capacitors, transformers and other miscellaneous equipment are being purchased with a non-PCB dielectric fluid. MidAmerican Energy's exposure to PCB liability has been reduced through the orderly replacement of a number of such electrical devices with similar non-PCB electrical devices. -14- ITEM 2. PROPERTIES ------------------ MidAmerican Energy's utility properties consist of physical assets necessary and appropriate to render electric and gas service in its service territories. Electric property consists primarily of generation, transmission and distribution facilities. Gas property consists primarily of distribution plant, including feeder lines to communities served from natural gas pipelines owned by others. It is the opinion of management that the principal depreciable properties owned by MidAmerican Energy are in good operating condition and well maintained. -15- The net accredited generating capacity of MidAmerican Energy, along with participation purchases and sales, net, are shown for summer 2001 accreditation.
Company's Share of Percent Accredited Generating Plant Ownership Fuel Capability (MW) ------------------------------------------ --------- ---- ---------------------- Steam Electric Generating Plants: Council Bluffs Energy Center Unit No. 1 100.0 Coal 43 Unit No. 2 100.0 Coal 88 Unit No. 3 79.1 Coal 534 George Neal Station Unit No. 1 100.0 Coal 135 Unit No. 2 100.0 Coal 300 Unit No. 3 72.0 Coal 371 Unit No. 4 40.6 Coal 261 Louisa Unit 88.0 Coal 616 Ottumwa Unit 52.0 Coal 368 Riverside Station Unit No. 3 100.0 Coal 5 Unit No. 5 100.0 Coal 130 ----- 2,851 ----- Combustion Turbines: Coralville - 4 units 100.0 Gas/Oil 64 Electrifarm - 3 units 100.0 Gas/Oil 200 Moline - 4 units 100.0 Gas/Oil 64 Parr - 2 units 100.0 Gas/Oil 32 Pleasant Hill Energy Center - 3 units 100.0 Oil 160 River Hills Energy Center - 8 units 100.0 Gas/Oil 120 Sycamore Energy Center - 2 units 100.0 Gas/Oil 149 ----- 789 ----- Nuclear: Cooper (1) Nuclear 379 Quad Cities Station Unit No. 1 25.0 Nuclear 190 Unit No. 2 25.0 Nuclear 193 ----- 762 ----- Combined Cycle: Cordova Energy Center (2) Gas 250 Hydro: Moline - 4 units 100.0 Water 3 Portable Power Modules - 28 units 100.0 Oil 56 ----- Net Accredited Generating Capacity 4,711 Participation Purchases and Sales, Net 24 ----- Total Net Accredited Generating Capability 4,735 =====
(1) Cooper is owned by the Nebraska Public Power District and the amount shown is MidAmerican Energy's entitlement (50%) of Cooper's accredited capacity under a power purchase contract extending to September 2004. (2) Cordova is owned by Cordova Energy Company LLC, a subsidiary of MidAmerican Energy Holdings. The amount shown above is MidAmerican Energy's entitlement (50%) of Cordova's net accredited capacity under a purchase power contract extending to May 2004. -16- The electric transmission system of MidAmerican Energy at December 31, 2001, included 897 miles of 345-kV lines and 1,122 miles of 161-kV lines. The gas distribution facilities of MidAmerican Energy at December 31, 2001, included 20,561 miles of gas mains and services. Substantially all the former Iowa-Illinois Gas and Electric Company utility property and franchises, and substantially all of the former Midwest Power Systems electric utility property located in Iowa, or approximately 79% of gross utility plant, is pledged to secure mortgage bonds. ITEM 3. LEGAL PROCEEDINGS ------------------------- MidAmerican Energy and its subsidiaries have no material legal proceedings except for the following: Environmental Matters --------------------- Information on MidAmerican Energy's environmental matters is included in Item 1 - Business and under "Environmental Matters" within "Operating Activities and Other Matters" in Management's Discussion and Analysis in Part IV, Item 14 of this Form 10-K. Cooper Litigation ----------------- Information on MidAmerican Energy's litigation with Nebraska Public Power District regarding Cooper Nuclear Station is included in Note (4)(g) of Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS --------------------------------------------------------- None. -17- PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED -------------------------------------------------------------- STOCKHOLDER MATTERS ------------------- MidAmerican Energy's outstanding common stock is held entirely by MHC and is not publicly traded. ITEM 6. SELECTED FINANCIAL DATA Reference is made to Part IV of this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- Reference is made to Part IV of this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------------------------------------------------------------------ Reference is made to Note (1)(i) - "Accounting for Derivatives" in Notes to Consolidated Financial Statements in Part IV, Item 14, of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- Reference is made to Part IV of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING -------------------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ None. -18- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------------------------------ Information concerning the current directors and executive officers of MidAmerican Energy is as follows: (A) IDENTIFICATION Served in Served as Present Present Director Name Age Position Position Since Since ---- --- -------- -------------- --------- David L. Sokol 45 Chairman and Director 1999 1999 Gregory E. Abel 39 President, Chief Executive Officer and Director 2002 1999 Jack L. Alexander 54 Senior Vice President 1998 Douglas L. Anderson 44 Senior Vice President 2001 2001 Patrick J. Goodman 35 Senior Vice President, Chief Financial Officer and Director 1999 1999 Keith D. Hartje 52 Senior Vice President 1999 Todd M. Raba 45 Senior Vice President 2001 Officers are elected annually by the Board of Directors. There are no family relationships among these officers, nor any arrangements or understanding between any officer and any other person pursuant to which the officer was selected. (B) BUSINESS EXPERIENCE DAVID L. SOKOL Chairman and Director of MidAmerican Energy since March 1999. Mr. Sokol has been Chief Executive Officer of MidAmerican Energy Holdings since April 19, 1993 and served as President of MidAmerican Energy Holdings from April 19, 1993 until January 21, 1995. He has been Chairman of the Board of Directors of MidAmerican Energy Holdings since May 1994 and a director since March 1991. Formerly, among other positions held in the independent power industry, Mr. Sokol served as President and Chief Executive Officer of Kiewit Energy Company and Ogden Projects, Inc. GREGORY E. ABEL Chief Executive Officer and Director of MidAmerican Energy since March 1999 and President since January 1, 2002. Mr. Abel joined MidAmerican Energy Holdings in 1992. Mr. Abel is a Chartered Accountant and from 1984 to 1992 he was employed by PriceWaterhouse. As a Manager in the San Francisco office of PriceWaterhouse, he was responsible for clients in the energy industry. -19- JACK L. ALEXANDER Senior Vice President of MidAmerican Energy since November 1, 1998. Mr. Alexander served as Vice President of MidAmerican Energy from November 1, 1996, to October 31, 1998, and held various executive and management positions with MidAmerican Energy and its predecessors for more than five years prior thereto. DOUGLAS L. ANDERSON Senior Vice President and Director of MidAmerican Energy since May 2001. Mr. Anderson joined MidAmerican Energy Holdings in 1993 and has served in various legal positions including General Counsel of MidAmerican Energy Holdings' independent power affiliates. From 1990 to 1993, Mr. Anderson was a corporate attorney with Fraser, Stryker. Prior to that, Mr. Anderson was a principal in the firm Anderson and Anderson. PATRICK J. GOODMAN Senior Vice President, Chief Financial Officer and Director of MidAmerican Energy since April 1999. Mr. Goodman joined MidAmerican Energy Holdings in June 1995, and served in various accounting positions including Senior Vice President and Chief Accounting Officer. Prior to joining MidAmerican Energy Holdings, Mr. Goodman was a financial manager for National Indemnity Company and a senior associate at Coopers & Lybrand. KEITH D. HARTJE Senior Vice President of MidAmerican Energy since March 1999. Mr. Hartje served as Vice President of MidAmerican Energy from 1996 to March 1999, and held various executive and management positions with MidAmerican Energy and its predecessors for more than five years prior thereto. TODD M. RABA Senior Vice President of MidAmerican Energy since July 2001. Mr. Raba joined MidAmerican Energy in 1997 as Vice President. Prior to joining MidAmerican Energy, he was employed for 13 years with Rollins Environmental Services. ITEM 11. EXECUTIVE COMPENSATION --------------------------------- Information required by Item 11 is omitted pursuant to General Instruction I(2)(c) to Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------------------------------------------------------------------------ Information required by Item 12 is omitted pursuant to General Instruction I(2)(c) to Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------- Information required by Item 13 is omitted pursuant to General Instruction I(2)(c)to Form 10-K. -20- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------------------ FORM 8-K -------- (A)1. FINANCIAL STATEMENTS (INCLUDED HEREIN) Page No. -------- Selected Consolidated Financial Data........................... 22 Management's Discussion and Analysis of Financial Condition And Results of Operations.................................... 23 Consolidated Statements of Income For the Years Ended December 31, 2001, 2000 and 1999......... 39 Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2001, 2000 and 1999......... 40 Consolidated Balance Sheets As of December 31, 2001 and 2000 ............................ 41 Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999......... 42 Consolidated Statements of Capitalization As of December 31, 2001 and 2000 ............................ 43 Consolidated Statements of Retained Earnings For the Years Ended December 31, 2001, 2000 and 1999......... 44 Notes to Consolidated Financial Statements..................... 45 Independent Auditors' Report................................... 73 (A)2. FINANCIAL STATEMENT SCHEDULES (INCLUDED HEREIN) The following schedule should be read in conjunction with the aforementioned financial statements. Page No. -------- MidAmerican Energy Company Consolidated Valuation and Qualifying Accounts (Schedule II) ......................... 74 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (A)3. EXHIBITS See Exhibit Index on page 76. (B) REPORTS ON FORM 8-K None. -21- MIDAMERICAN ENERGY COMPANY SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS)
DECEMBER 31 -------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Revenues .............................. $2,731,073 $2,532,359 $1,860,274 $1,744,978 $1,748,459 Operating income ...................... 333,574 338,756 300,064 280,920 287,309 Net income from continuing operations . 152,778 165,456 127,331 115,593 125,941 Earnings on common from continuing operations ............. 148,234 160,501 122,376 110,641 119,453 BALANCE SHEET DATA: Total assets .......................... $3,577,892 $3,823,566 $3,609,591 $3,585,530 $3,542,307 Long-term debt (a) .................... 820,594 921,682 870,499 930,966 1,044,663 Power purchase obligation (a) ......... 25,867 52,282 68,049 83,127 97,504 Short-term borrowings ................. 89,350 81,600 204,000 206,221 122,500 Preferred stock: Not subject to mandatory redemption 31,759 31,759 31,759 31,759 31,763 Subject to mandatory redemption (b) 126,680 150,000 150,000 150,000 150,000 Common shareholder's equity ........... 1,219,057 1,161,968 1,057,855 972,278 985,744
(a) Includes amounts due within one year. (b) Includes MidAmerican Energy-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely MidAmerican Energy junior subordinated debentures. -22- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION ------------ MidAmerican Energy Company is a public utility company headquartered in Des Moines, Iowa, and incorporated in the state of Iowa. On December 1, 1996, MidAmerican Energy became, through a corporate reorganization, a wholly owned subsidiary of MHC Inc., formerly known as MidAmerican Energy Holdings Company. On March 12, 1999, CalEnergy Company, Inc. acquired MHC. As a part of this transaction, the former CalEnergy, a Delaware corporation, was reincorporated as an Iowa corporation and changed its name to MidAmerican Energy Holdings Company. As a result, all direct and indirect subsidiaries of MHC, including MidAmerican Energy, each became an indirect subsidiary of MidAmerican Energy Holdings. MHC is a wholly owned subsidiary of MidAmerican Funding, LLC, whose sole member is MidAmerican Energy Holdings. FORWARD-LOOKING STATEMENTS From time to time, MidAmerican Energy may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond its control. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of MidAmerican Energy's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. These type of forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results and performance of MidAmerican Energy to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statements. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, MidAmerican Energy has identified important factors that could cause actual results to differ materially from those expectations, including weather effects on sales and revenues, fuel prices, fuel transportation and other operating uncertainties, acquisition uncertainty, uncertainties relating to economic and political conditions and uncertainties regarding the impact of regulations, changes in government policy, utility industry deregulation and competition. MidAmerican Energy assumes no responsibility to update forward-looking information contained herein. RESULTS OF OPERATIONS --------------------- Following is a discussion of the various factors affecting MidAmerican Energy's results of operations. -23- REGULATED GROSS MARGIN Regulated Electric Gross Margin: -------------------------------- 2001 2000 1999 ------ ------ ------ (In millions) Operating revenues $1,318 $1,212 $1,179 Cost of fuel, energy and capacity 276 249 223 ------ ------ ------ Electric gross margin $1,042 $ 963 $ 956 ====== ====== ====== 2001 vs. 2000 Electric gross margin for 2001, increased $79 million compared to 2000 due principally to an improvement in wholesale sales margins. MidAmerican Energy's margins on wholesale sales increased $63.5 million compared to 2000. The increase was due to an increase in the average margin per unit sold and an 11.7% increase in related sales volumes compared to 2000. Wholesale sales are the delivery of energy to other utilities, municipalities and marketers outside of MidAmerican Energy's delivery system. Additionally, electric margin for 2001 increased $21.6 million compared to 2000 due to a refund accrual in 2000 that reduced electric margin. The refund accrual was for a revenue sharing arrangement in Iowa that terminated December 31, 2000. Refer to "Rate Matters" in the "Operating Activities and Other Matters" section of MD&A for a discussion of the current arrangement. The impact of temperatures increased electric gross margin approximately $2 million compared to 2000. Temperature conditions during the cooling season in 2001 were slightly hotter than 2000 while temperatures during the heating season in 2001 were slightly milder than in 2000. Other usage factors not dependent on weather increased electric margin by $9.7 million compared to 2000. In total, retail sales of electricity increased 3.2% in 2001. In 2001, MidAmerican Energy recorded gains from the sales of emission allowances which improved electric margin by $3.3 million compared to 2000. Revenues from transmission services increased $4.0 million compared to 2000 due to additional revenues from the Mid-Continent Area Power Pool. An increase in the average cost of energy per unit sold for Iowa retail sales reduced electric gross margin by $20.3 million compared to 2000. The increase in the average cost of energy per unit sold was due in part to increased coal costs and increased use of combustion turbines and combined cycle plants. Electric revenues from the recovery of energy efficiency program costs decreased $6.0 million compared to 2000. Changes in these revenues are substantially matched with corresponding changes in other operating expenses. MidAmerican Energy began recovering from customers its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs on September 29, 1997. Deferred energy efficiency costs are costs previously incurred by MidAmerican Energy, which, in accordance with rate treatment, were not charged to expense until recovery from customers began. Recovery of deferred energy efficiency costs occurred over a four-year period from the date collection began for each phase. The decrease in 2001 of the recovery of energy efficiency program costs is due to completion in 2001 of the final recovery phase. Approximately $28.8 million of MidAmerican Energy's 2001 electric revenues were from the recovery of energy efficiency program costs compared to $34.8 million in 2000. -24- 2000 vs. 1999 Electric gross margin for 2000, increased $7 million compared to 1999 due principally to an improvement in wholesale sales margins. MidAmerican Energy's margins on wholesale sales increased $13.4 million compared to 1999. An increase in the average margin per unit sold more than offset a 3.2% decrease in sales volumes compared to 1999. The impact of temperatures increased electric gross margin approximately $5 million compared to 1999. Although temperatures during the first nine months of 2000 were more moderate than the comparable period in 1999, temperatures during fourth quarter of 2000 were significantly colder than temperatures in the fourth quarter of 1999, resulting in the overall positive effect on electric margin. Other usage factors not dependent on weather increased electric margin by $3.5 million compared to 1999. In total, retail sales of electricity increased 4.2% in 2000. Revenues from electric transmission services increased $1.3 million in 2000 compared to 1999 due to additional revenues from Mid-Continent Area Power Pool. A refund accrual for a revenue sharing arrangement in Iowa was $5.2 million greater in 2000 than in 1999, resulting in a decrease in electric margin. An increase in the cost of energy per unit sold reduced electric gross margin by $6.2 million compared to 1999. Electric revenues from the recovery of energy efficiency program costs decreased $2.3 million compared to 1999. Changes in these revenues are substantially matched with corresponding changes in other operating expenses. The decrease in 2000 of the recovery of energy efficiency program costs is due to completion in 1999 of two of the recovery phases. One phase remains and will be completed in 2001. Approximately $34.8 million of MidAmerican Energy's 2000 electric revenues were from the recovery of energy efficiency program costs compared to $37.1 million in 1999. Additionally, electric revenues from recovery mechanisms related to Cooper Nuclear Station costs, decommissioning costs and manufactured gas plant costs decreased $2.1 million compared to 1999. The decreases relate principally to corresponding decreases in costs for which the recovery mechanisms were established. Regulated Gas Gross Margin: --------------------------- 2001 2000 1999 ----- ----- ---- (In millions) Operating revenues $ 869 $ 930 $ 560 Cost of gas sold 675 721 364 ----- ----- ----- Gas gross margin $ 194 $ 209 $ 196 ===== ===== ===== 2001 vs. 2000 Regulated gas revenues include purchase gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations from purchase gas adjustment clauses. -25- Warmer temperature conditions in the second and fourth quarters of 2001 compared to the same quarters in 2000 and conservation by customers due to higher prices in early 2001 resulted in approximately a $9 million decrease in gas margin compared to 2000. Other usage factors not dependent on weather resulted in a $4.7 million decrease in gas margin compared to 2000. In total, retail sales of natural gas decreased 7.2% compared to 2000. The decrease in gas margin due to warmer temperature conditions was partially mitigated by a $1.7 million gain on a weather derivative financial instrument. Recovery of gas energy efficiency costs decreased $1.2 million for 2001 compared to 2000 due to the completion of the final four-year recovery phase. Consistent with electric revenues, changes in gas revenues from energy efficiency cost recovery are substantially offset by corresponding changes in other operating expenses. Additionally, margin on gas transported decreased $1.1 million. 2000 vs. 1999 In 2000, MidAmerican Energy's per-unit cost of gas increased compared to 1999, which resulted in a $285 million increase in revenues and cost of gas sold for 2000. Colder temperatures in 2000 compared to 1999, due primarily to the fourth quarter of 2000, resulted in a $5 million increase in gas margin compared to 1999. Customer growth and other usage factors not dependent on weather resulted in a $4.2 million increase in gas margin compared to 1999. In total, retail sales of natural gas increased 5.8% compared to 1999. Changes in retail gas rates increased gas margin by approximately $4.3 million compared to 1999. On January 22, 1999, the Iowa Utilities Board approved a $6.7 million annual interim increase in gas rates for Iowa retail customers. An additional increase was implemented on May 27, 1999, as a result of the Iowa Utilities Board's approval of a final rate increase of $13.9 million annually. Rates for South Dakota customers increased $2.4 million annually effective May 1, 1999. On July 11, 2000, the Illinois Commerce Commission issued an order approving a gas rate increase totaling $2.1 million annually effective July 18, 2000. Recovery of gas energy efficiency costs decreased $2.5 million for 2000 compared to 1999. Consistent with electric revenues, changes in gas revenues from energy efficiency cost recovery are substantially offset by corresponding changes in other operating expenses. REGULATED OPERATING EXPENSES Other Operating Expenses - Regulated other operating expenses increased $15.2 million for 2001 compared to 2000. Increases include a $15.9 million increase in pension and other post-employment benefits costs, a $6.7 million increase in the allowance for uncollectible accounts, a $5.5 million increase in Cooper Nuclear Station costs and a $4.2 million increase in electric distribution expense. The increases were partially offset by a $7.3 million reduction in Quad Cities Station operating expenses, a $4.5 million reduction in energy efficiency amortization and program costs and decreases in various other costs. Other operating expenses decreased $26.8 million for 2000 compared to 1999. Information technology expenses were $8.5 million lower for 2000 due principally to consulting and other costs in 1999 to support newly implemented systems and for Y2K preparation. During 1999, MidAmerican Energy incurred transition costs related to MHC's March 1999 merger. The absence of similar costs in 2000 resulted in a $13.7 million reduction of other operating expenses in 2000 compared to 1999. Energy -26- efficiency costs decreased $3.8 million compared to 1999 due to the completion of two recovery phases in 1999. Other factors contributing to the decrease in other operating expenses were reductions in employee incentive plan costs and injuries and damages costs and an increase in 2000 of a reserve distribution from an insurance fund compared to the distribution in 1999. Maintenance - Maintenance expenses for 2001 compared to 2000 increased $11.3 million. Fossil fuel generating plant maintenance expenses increased $8.6 million, while maintenance costs for Quad Cities Station (nuclear) decreased $5.7 million. Electric distribution system maintenance increased $5.4 million in part due to a more aggressive tree-trimming program. Gas distribution maintenance expenses increased $3.0 million. Maintenance expenses for 2000 increased $11.0 million compared to 1999 due to reliability maintenance at generating plants and an increase in forestry service costs and related overhead distribution maintenance. Depreciation and Amortization - Depreciation and amortization expense increased $53.2 million in 2001 compared to 2000. During 2001, MidAmerican Energy recorded $47.1 million of amortization expense related to the establishment of a regulatory liability for a revenue sharing arrangement in Iowa. The Iowa Utilities Board approved a settlement agreement, which includes the revenue sharing arrangement, in December 2001. Refer to "Rate Matters" in the "Operating Activities and Other Matters" section of MD&A for further discussion. In addition, utility plant depreciation expense increased as a result of an increase in depreciation rates in 2001 and an increase in utility plant. Depreciation and amortization expense increased $6.6 million in 2000 compared to 1999. Utility plant depreciation expense increased as a result of an increase in utility plant. Amortization of regulatory assets for MidAmerican Energy's Iowa operations increased in accordance with an Iowa revenue sharing plan. Depreciation expense related to nuclear decommissioning funding for MidAmerican Energy's Illinois operations decreased for 2000 compared to 1999. Property and Other Taxes - Property and other taxes decreased for 2001 and 2000 compared to the respective prior years due principally to a reduction in MidAmerican Energy's Iowa property tax assessed values. NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES Nonregulated Gas Gross Margin - 2001 2000 1999 ------ ------ ------ (In millions) Operating revenues.... $518.3 $353.0 $100.4 Cost of gas sold...... 509.7 349.9 99.1 ------ ------ ------ Gross margin........ $ 8.6 $ 3.1 $ 1.3 ====== ====== ====== The nonregulated natural gas marketing operations include wholesale and retail activities. Approximately 77% of the nonregulated natural gas revenues for 2001 are from wholesale sales. Gross margin for the nonregulated natural gas operations increased $5.5 million to $8.6 million for -27- 2001 compared to 2000. The improvement in gross margin reflects an increase in margin per unit and sales volumes. Revenues from nonregulated natural gas operations increased $165.3 million compared to 2000. Sales volumes increased 47 million MMBtus (60%) resulting in a $212.0 million increase in revenues. A decrease in the average price per unit sold, reflective of a 9% decrease in the average cost of gas, partially offset the increase due to sales volumes, reducing revenues by $46.7 million. Related cost of sales increased $159.8 million for 2001 due to the increase in sales volumes, offset partially by the decrease in the average cost of gas. Revenues from nonregulated natural gas marketing operations increased $252.6 million for 2000 compared to 1999. An increase in the average price per unit sold, reflective of a 95% increase in the average cost of gas, accounted for $171.2 million of the increase in revenues. Sales volumes increased 35 million MMBtus (81%) resulting in an $81.4 million increase in revenues. The increase in sales volumes was driven principally by the addition of larger-use wholesale customers and the addition of retail customer activity. The $250.8 million increase in related cost of sales reflects the increases in cost per unit sold and sales volumes. Other Nonregulated Revenues and Cost of Sales - As of December 31, 2000, all non-residential customers in Illinois had been phased in to allow them to select their electric power supplier. For 2001 compared to 2000, gross margin related to these sales increased $4.4 million to $4.5 million. No revenues or cost of sales were incurred in 1999 related to these activities. Nonregulated revenues for 2001 include $6.2 million from MidAmerican Energy's market access service project, compared to $17.9 million in 2000; the related cost of sales totaled $5.4 million for 2001 and $16.9 million for 2000. The pilot project, which concluded in May 2001, allowed larger Iowa customers that were participating in the project to choose their electric power supplier. MidAmerican Energy's revenues from project participants related to non-supply services, such as distribution and transmission, are reflected in regulated electric revenues. In 1999, revenues and cost of sales related to the market access service project totaled $10.9 million and $9.7 million, respectively. MidAmerican Energy's nonregulated revenues also include pre-tax income from awards for successful performance under its incentive gas procurement program. Under the program, if MidAmerican Energy's cost of gas varies from an established reference price range, then the savings or cost is shared between customers and shareholders. The awards totaled $4.1 million, $3.9 million and $1.6 million in 2001, 2000 and 1999, respectively. MidAmerican Energy performs work for its customers that is not regulated, including distribution maintenance. In mid-2000, an affiliated company began doing most of this work. Accordingly, nonregulated revenues and costs related to these activities decreased for MidAmerican Energy in 2001 compared to 2000. Increased efforts in these services in 2000 contributed to the increase in nonregulated revenues for 2000 compared to 1999. -28- Nonregulated Operating Expenses: Other - Other operating expenses for MidAmerican Energy's nonregulated services decreased $2.3 million in 2001 compared to 2000 and increased $3.5 million for 2000 compared to 1999. The variances were due principally to costs related to nonregulated distribution services performed for customers, which, beginning in mid-2000, were performed by an affiliate of MidAmerican Energy. NON-OPERATING INCOME AND INTEREST EXPENSE Interest and Dividend Income- Interest income and dividend income decreased $2.4 million for 2001 compared to 2000. A decrease in interest from a joint plant operator for funds held by it reduced interest income by approximately $2.3 million, while interest related to income tax refunds decreased $6.1 million. A reduction in interest rates also reduced interest income for 2001. Interest income increased $5.4 million compared to 2000 for interest income on a note receivable related to MidAmerican Energy's accounts receivable sold. The increase in the note receivable is a result of the increased balance in receivables sold. The increase in interest income for 2000 compared to 1999 was due to $6.1 million of interest income from income tax refunds, $2.9 million of interest from a joint plant operator for funds held by it and a $2.5 million increase in interest on a note receivable related to sold accounts receivable. Additionally, MidAmerican Energy had a more favorable cash position from August to December 2000. Other, Net - Other, Net, which includes a number of non-operating income and deduction items, decreased Non-Operating Income by $5.8 million, $1.5 million and $3.7 million in 2001, 2000 and 1999, respectively. Other, Net includes a discount on sold accounts receivable, net of a subservicer fee charged to MidAmerican Energy Funding Corporation for servicing the accounts. The discount is designed to cover the expenses of MidAmerican Energy Funding Corporation, including bad debt expense, subservicer fees, monthly administrative costs and interest. The discount is recorded in Other, Net because it is not reflected in utility cost of service for regulatory purposes. The discount, net of the subservicer fee, reduced Other, Net by $13.1 million, $8.3 million and $7.9 million in 2001, 2000 and 1999, respectively. Income related to the cash surrender value of corporate-owned life insurance policies totaled $5.3 million, $9.3 million and $0.3 million for 2001, 2000 and 1999, respectively. The income for 2001 includes a gain from common stock received as a result of an initial stock offering by one of the insurance providers. Income for 2000 includes $7.4 million related to benefits paid on several policies. Other, Net for 2001 reflects $1.6 million of income for an allowance for equity funds used during construction. As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the Federal Energy Regulatory Commission. In 1999, MidAmerican Energy recorded a $5.4 million pre-tax gain from the sale of rail cars which are used to service its coal-fired generating plants and $1.5 million of costs related to potential business opportunities. -29- Fixed Charges and Preferred Dividends - MidAmerican Energy's interest on long-term debt decreased in 2001 and 2000 compared to their respective prior years due to long-term debt maturities in each year and, for 2001 compared to 2000, a reduction in interest rates on variable rate debt. The decreases for 2001 were partially offset by an increase resulting from the issuance of $162 million of medium-term notes in July 2000. Preferred dividends decreased due to the reacquisition of preferred shares in April and November 2001. A loss of $0.2 million on those acquisitions is reflected in preferred dividends. -30- LIQUIDITY AND CAPITAL RESOURCES MidAmerican Energy has available a variety of sources of liquidity and capital resources, both internal and external. These resources provide funds required for current operations, construction expenditures, dividends, debt retirement and other capital requirements. As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy's net cash provided from operating activities was $476 million, $359 million and $330 million in 2001, 2000 and 1999, respectively. INVESTING ACTIVITIES AND PLANS Utility Construction Expenditures - MidAmerican Energy's primary need for capital is utility construction expenditures. For the year ended December 31, 2001, utility construction expenditures totaled $250 million, including allowance for funds used during construction, or capitalized financing costs, and Quad Cities Station nuclear fuel purchases. All such expenditures were met with cash generated from utility operations, net of dividends. Forecasted utility construction expenditures, including allowance for funds used during construction are $332 million for 2002 and $1.614 billion for 2003 through 2006. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. Through 2007, MidAmerican Energy plans to develop and construct two electric generating plants in Iowa, requiring an investment of approximately $1.8 billion. Participation by others in a portion of the second plant is being discussed. The two plants will provide approximately 1,400 megawatts of generating capacity. The first project is a 540-megawatt natural gas-fired combined cycle unit with an estimated cost of $416 million. MidAmerican Energy expects to begin construction on the first project in Spring 2002 following receipt of all regulatory approvals. It is anticipated that the first phase of the project will be completed in 2003 with the remainder being completed in 2005. MidAmerican Energy presently expects that all utility construction expenditures for the next five years will be met with the issuance of long-term debt and cash generated from utility operations, net of dividends. The actual level of cash generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions. Nuclear Decommissioning - Each licensee of a nuclear facility is required to provide financial assurance for the cost of decommissioning its licensed nuclear facility. In general, decommissioning of a nuclear facility means to safely remove the facility from service and restore the property to a condition allowing unrestricted use by the operator. Based on information presently available, MidAmerican Energy expects to contribute approximately $41 million during the period 2002 through 2006 to external trusts established for the investment of funds for decommissioning Quad Cities Station. Approximately 60% of the fair value of the trusts' funds is now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is reflected in Depreciation and Amortization in the Consolidated Statements of Income. Based on information presently available and assuming a September 2004 shutdown of Cooper, MidAmerican Energy expects to accrue approximately $54 million for Cooper decommissioning during the period 2002 through 2004. Amounts related to Cooper decommissioning are reflected in Other Operating Expenses in the Consolidated Statements of Income. MidAmerican Energy's obligation, if any, -31- for Cooper decommissioning will be affected by the actual plant shutdown date. In July 1997, the Nebraska Public Power District filed a lawsuit in United States District Court for the District of Nebraska naming MidAmerican Energy as the defendant and seeking a declaration of MidAmerican Energy's rights and obligations in connection with Cooper nuclear decommissioning funding. Refer to Note (4)(g) of Notes to Consolidated Financial Statements in Part IV, Item 14 of this Form 10-K for further discussion of the litigation. 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. Cooper decommissioning costs charged to Illinois customers are recovered through a rate rider on customer billings. Contractual Obligations and Commercial Commitments - MidAmerican Energy has various contractual obligations and commercial commitments. Following is a table summarizing, as of December 31, 2001, the material cash obligations of MidAmerican Energy (in millions).
Period Payments are Due ------------------------------------ 2003 - 2005 - After Total 2002 2004 2006 2006 -------- ------ ------ ------ ------ Type of Obligation: ------------------- Long-term debt, excluding unamortized debt premium and discount, net $ 821.6 $163.9 $161.3 $251.0 $245.4 Mandatorily redeemable preferred securities 26.7 6.7 13.3 6.7 - Mandatorily redeemable preferred securities of subsidiary trust (1) 100.0 - - - 100.0 Operating leases (2) 12.9 5.5 5.7 1.2 0.5 Power purchase contract 25.9 17.4 8.5 - - Coal, electricity and natural gas contract commitments (2) 531.2 182.2 240.8 67.9 40.3 -------- ------ ------ ------ ------ Total $1,518.3 $375.7 $429.6 $326.8 $386.2 ======== ====== ====== ====== ======
(1) The mandatorily redeemable preferred securities of subsidiary trust were redeemed on March 11, 2002. (2) The operating leases and fuel and energy commitments are not reflected on the Consolidated Balance Sheets. Refer to Note (4)(h) in Notes to Consolidated Financial Statements for a discussion of these commitments. The above table includes MidAmerican Energy's unconditional purchase obligations. MidAmerican Energy has other types of commitments that are subject to change and relate primarily to the following: - Construction expenditures (see Note (4)(a) in Notes to Consolidated Financial Statements) - Manufactured gas plant facilities (see Note (4)(b) in Notes to Consolidated Financial Statements) - Nuclear decommissioning costs (see Note (4)(e) in Notes to Consolidated Financial Statements) -32- FINANCING ACTIVITIES, PLANS AND AVAILABILITY Debt Authorizations and Credit Facilities - MidAmerican Energy currently has authority from the Federal Energy Regulatory Commission to issue short-term debt in the form of commercial paper and bank notes aggregating $500 million. MidAmerican Energy currently has in place a $370.4 million revolving credit facility which supports its $250 million commercial paper program and its variable rate pollution control revenue obligations. In addition, MidAmerican Energy has a $5 million line of credit. On February 8, 2002, MidAmerican Energy issued $400 million of 6.75% medium-term notes due in 2031. The proceeds will be used to refinance existing debt and preferred securities and for other corporate purposes. On March 11, 2002, MidAmerican Energy redeemed all of its MidAmerican-obligated preferred securities of subsidiary trust at 100% of the principal amount plus accrued interest. MidAmerican Energy has on file with the Securities and Exchange Commission a registration statement for $500 million in various forms of senior and subordinated, unsecured long-term debt and preferred securities, $100 million of which remains available following the issuance of the $400 million of medium-term notes discussed above. MidAmerican Energy has authorization from the Federal Energy Regulatory Commission to issue up to an additional $100 million in various forms of long-term debt following the issuance of the $400 million of medium-term notes discussed above. MidAmerican Energy will also need authorization from the Illinois Commerce Commission prior to issuing any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican Energy need only provide the Illinois Commerce Commission 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 Illinois Commerce Commission is required to hold a hearing before issuing its authorization. Accounts Receivable Sold - In 1997, MidAmerican Energy entered into a revolving agreement, which expires in October 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation, a special purpose entity established to purchase accounts receivable from MidAmerican Energy. MidAmerican Energy Funding Corporation in turn sells receivable interests to outside investors. In consideration for the sale, MidAmerican Energy received cash and a subordinated note, bearing interest at 8%, from MidAmerican Energy Funding Corporation. As of December 31, 2001, the revolving cash balance was $44 million, down $26 million from December 31, 2000, and the amount outstanding under the subordinated note was $28.7 million. The agreement is structured as a true sale, under which the creditors of MidAmerican Energy Funding Corporation will be entitled to be satisfied out of the assets of MidAmerican Energy Funding Corporation prior to any value being returned to MidAmerican Energy or its creditors. Therefore, the accounts receivable sold are not reflected on MidAmerican Energy's Consolidated Balance Sheets. As of December 31, 2001, $71.5 million of accounts receivable, net of reserves, was sold under the agreement. -33- OPERATING ACTIVITIES AND OTHER MATTERS Legislative and Regulatory Evolution - In December 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market. Under the law, larger non-residential customers in Illinois and 33% of the remaining non-residential Illinois customers were allowed to select their provider of electric supply services beginning October 1, 1999. Starting December 31, 2000, all other non-residential customers were allowed supplier choice. Residential customers all receive the opportunity to select their electric supplier beginning May 1, 2002. The law also provides for Illinois earnings above a computed level of return on common equity to be shared equally between customers and MidAmerican Energy. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the 30-year Treasury Bond rates plus a premium of 5.5% for 1998 and 1999 and a premium of 8.5% for 2000 through 2004. The two-year average above which sharing must occur for 2001 was 14.34%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of regulatory assets. The energy crisis and related events in California has heightened concerns nationally about deregulation of the electric utility industry. Accordingly, the pace of deregulation in Iowa and elsewhere has slowed considerably. MidAmerican Energy will continue to work with regulators and legislators on deregulation issues. In December 1999, the Federal Energy Regulatory Commission (FERC) issued Order No. 2000 establishing, among other things, minimum characteristics and functions for regional transmission organizations. Public utilities that were not a member of an independent system operator at the time of the order were required to submit a plan by which its transmission facilities would be transferred to a regional transmission organization. On September 28, 2001, MidAmerican Energy and five other electric utilities filed with the FERC a plan to create TRANSLink Transmission Company LLC and to integrate their electric transmission systems into a single, coordinated system operating as a for-profit independent transmission company in conjunction with a FERC-approved regional transmission organization. FERC approval of the plan is pending. Transferring the operation and control of MidAmerican Energy's transmission assets to other entities could increase costs for MidAmerican Energy; however, the actual impact of TRANSLink on MidAmerican Energy's future transmission costs is not yet known. Critical Accounting Policies - Accounting for Regulatory Entities ---------------------------------- MidAmerican Energy's significant accounting policies are described in Note (1) of Notes to Consolidated Financial Statements. MidAmerican Energy's most critical accounting policy is the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." A possible consequence of deregulation in the utility industry is that SFAS No. 71 may no longer apply. SFAS No. 71 sets forth accounting principles for operations that are regulated and meet the stated criteria. For operations that meet the criteria, SFAS No. 71 allows, among other things, the deferral of expense or income that would otherwise be recognized when incurred. MidAmerican Energy's electric and gas utility operations currently meet the criteria required by SFAS No. 71, but its applicability is -34- periodically reexamined. If portions of its utility operations no longer meet the criteria of SFAS No. 71, MidAmerican Energy could be required to write off the related regulatory assets and liabilities from its balance sheet, and thus, a material adjustment to earnings in that period could result if regulatory assets are not recovered in transition provisions of any deregulation legislation. As of December 31, 2001, MidAmerican Energy had $221.1 million of regulatory assets and $62.4 million of regulatory liabilities on its Consolidated Balance Sheet. Other accounting policies that MidAmerican Energy believes are critical include the following: Revenue Recognition ------------------- Revenues are recorded as services are rendered to customers. MidAmerican Energy records unbilled revenues representing the estimated amount customers will be billed for services rendered between the meter-reading dates in a particular month and the end of that month. Accounting for Derivatives and Energy Trading Activities -------------------------------------------------------- MidAmerican Energy accounts for its energy trading activities in accordance with Emerging Issues Task Force (EITF) Issue No. 98-10 and SFAS No. 133, as amended and interpreted, which require certain energy trading and energy derivative contracts to be accounted for at fair value. EITF 98-10 also allows two methods of recognizing energy trading contracts in the income statement. The "gross" method provides that energy trading contracts are recorded at their full value in revenues and expenses. The other method is the "net" method in which revenues and expenses are netted and only the trading margin is reflected in revenues. MidAmerican Energy uses the gross method for those energy trading contracts for which they have a choice. Accounting for derivatives continues to evolve through guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting Standards Board (FASB). To the extent that changes by the DIG modify current guidance, including the normal purchases and normal sales determination, the accounting treatment for derivatives may change. See Note (1)(i) in Notes to Consolidated Financial Statements for further discussion related to accounting for derivatives. Contingent Liabilities ---------------------- MidAmerican Energy establishes reserves for estimated loss contingencies when it is management's assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in income in the period in which different facts or information become known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon management's assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required. New Accounting Pronouncements - In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets" which establish accounting and reporting for business -35- combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001, to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized but will be tested for impairment on an annual basis. These standards were effective for MidAmerican Energy beginning on January 1, 2002. MidAmerican Energy does not anticipate any impact on its results of operations, cash flows or financial condition as a result of these standards. In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. MidAmerican Energy is evaluating the impact of this pronouncement on its balance sheet, but does not believe adoption will have a material impact on its results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This standard was effective for MidAmerican Energy on January 1, 2002. MidAmerican Energy does not anticipate any impact on its results of operations, cash flows or financial condition as a result of implementing this standard. Rate Matters - In 1997, pursuant to a rate proceeding before the Iowa Utilities Board, MidAmerican Energy, the Office of Consumer Advocate and other parties entered into a pricing plan settlement agreement establishing MidAmerican Energy's Iowa retail electric rates. That settlement agreement expired on December 31, 2000. On March 14, 2001, the Office of the Consumer Advocate filed a petition with the Iowa Utilities Board to reduce Iowa retail electric rates by approximately $77 million annually. On June 11, 2001, MidAmerican Energy responded to that petition by filing a request with the Iowa Utilities Board to increase MidAmerican Energy's Iowa retail electric rates by $51 million annually. On December 21, 2001, the Iowa Utilities Board approved a settlement agreement that freezes the rates in effect on December 31, 2000, through December 31, 2005, and, with modifications, reinstates the revenue sharing provisions of the 1997 pricing plan settlement agreement. Under the 2001 settlement agreement, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year will be recorded as a regulatory liability to be used to offset a portion of the cost of future generating plant investments. An amount equal to the regulatory liability will be recorded as depreciation expense. As of December 31, 2001, MidAmerican Energy has recorded a $47.1 million regulatory liability that is reflected in Regulatory Liabilities on the Consolidated Balance Sheet. On September 21, 2001, MidAmerican Energy filed a petition with the South Dakota Public Utilities Commission (SDPUC) to increase its South Dakota natural gas rates. On February 20, 2002, the SDPUC approved a settlement agreement allowing increased rates of $3.1 million annually. On October 19, 2001, MidAmerican Energy filed a petition with the Illinois Commerce Commission to increase its Illinois natural gas rates by $3.2 million annually. A final decision on the petition is required within eleven months of the date of filing. -36- On March 15, 2002, MidAmerican Energy made a filing with the Iowa Utilities Board requesting an increase in rates of approximately $26.6 million for its Iowa retail natural gas customers. As part of the filing, MidAmerican Energy requested an interim rate increase of approximately $20.4 million annually. The Iowa Utilities Board may adjust the requested interim amount and delay its implementation for up to ninety days. MidAmerican Energy expects the final rates, which may differ from the requested amount, to be implemented in the fourth quarter of 2002. Environmental Matters - The U.S. Environmental Protection Agency, or EPA, and state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if these contaminants are in sufficient quantities and at sufficient concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. MidAmerican Energy's estimate of the probable costs for these sites as of December 31, 2001, was $22 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note (4)(b) of Notes to Consolidated Financial Statements for further discussion of MidAmerican Energy's environmental activities related to manufactured gas plant sites and cost recovery. Although the timing of potential incurred costs and recovery of costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position or results of operations. In July 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. In February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the EPA. The impact of the new standards on MidAmerican Energy is currently unknown. MidAmerican Energy could incur increased costs and a decrease in wholesale electric revenues if its generating stations are located in nonattainment areas. Refer to Note (4)(c) of Notes to Consolidated Financial Statements for further discussion of this issue. Generating Capability MidAmerican Energy is interconnected with Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool (MAPP). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. MidAmerican Energy believes it has adequate electric capacity reserve through 2003 and continues to manage its generating resources to ensure an adequate reserve in the future. MidAmerican Energy has announced plans to add a 540-megawatt natural gas-fired combined cycle unit to be completed in two phases between 2003 and 2005. An additional 900 megawatts of coal-fired generation is expected to be operational later this decade. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican Energy's reserve to fall below the 15% minimum. If -37- MidAmerican Energy fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP. MidAmerican Energy is financially exposed to movements in energy prices since it no longer recovers fluctuations in its energy costs through an energy adjustment clause in Iowa. Although MidAmerican Energy believes it has sufficient generation under typical operating conditions for its retail electric needs, a loss of adequate generation by MidAmerican Energy requiring the purchase of replacement power at a time of high market prices could subject MidAmerican Energy to losses on its energy sales. MidAmerican Energy has been able to maintain its capacity reserve requirement and has not been adversely affected by seasonal price variations in the wholesale market. Cooper Nuclear Station Under a long-term power purchase contract with the Nebraska Public Power District, MidAmerican Energy purchases one-half of the output of Cooper. The Nuclear Regulatory Commission (NRC) has notified the Nebraska Public Power District that, effective April 1, 2002, it will place Cooper in its "Multiple Repetitive Degraded Cornerstone" category of the NRC's Reactor Oversight Process Action Matrix. As a result, the NRC will conduct extensive diagnostic inspections at Cooper, which are currently anticipated to be completed during the month of June 2002. MidAmerican Energy cannot, at this time, predict the outcome of the NRC inspections and their impact on the operation of Cooper. The Nebraska Public Power District has informed MidAmerican Energy that it is currently developing an improvement plan which it believes will address the issues that caused Cooper to be placed into this category. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MidAmerican Energy is exposed to market risk, including changes in the market price of certain commodities and interest rates. To manage the price volatility relating to these exposures, MidAmerican Energy enters into various financial derivative instruments. Senior management provides the overall direction, structure, conduct and control of MidAmerican Energy's risk management activities, including the use of financial derivative instruments, authorization and communication of risk management policies and procedures, strategic hedging program guidelines, appropriate market and credit risk limits, and appropriate systems for recording, monitoring and reporting the results of transactional and risk management activities. MidAmerican Energy regularly performs sensitivity analysis of its outstanding positions and adheres to strict value-at-risk parameters. MidAmerican Energy uses hedge accounting for derivative instruments pertaining to its natural gas purchasing, wholesale electricity activities and financing activities. Refer to Note (1)(i) in Notes to Consolidated Financial Statements for further discussion of price risk and the accounting for derivative instruments. Energy Trading Activities - MidAmerican Energy's net assets associated with energy trading activities outstanding at December 31, 2001, totaled $1.8 million. Of the open positions at December 31, 2001, 96% are scheduled to be realized within twelve months. Refer to Note (1)(i) for a discussion of derivatives, including derivative instruments used for trading purposes. -38- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- OPERATING REVENUES Regulated electric .................... $ 1,318,129 $ 1,212,411 $ 1,178,702 Regulated gas ......................... 869,132 929,555 559,957 Nonregulated .......................... 543,812 390,393 121,615 ----------- ----------- ----------- 2,731,073 2,532,359 1,860,274 ----------- ----------- ----------- OPERATING EXPENSES Regulated: Cost of fuel, energy and capacity . 275,904 249,045 223,215 Cost of gas sold .................. 674,883 721,395 364,112 Other operating expenses .......... 449,328 434,125 460,883 Maintenance ....................... 138,343 127,076 116,089 Depreciation and amortization ..... 250,315 197,144 190,547 Property and other taxes .......... 71,705 74,778 77,017 ----------- ----------- ----------- 1,860,478 1,803,563 1,431,863 ----------- ----------- ----------- Nonregulated: Cost of sales ..................... 518,272 369,005 110,782 Other ............................. 18,749 21,035 17,565 ----------- ----------- ----------- 537,021 390,040 128,347 ----------- ----------- ----------- Total operating expenses .......... 2,397,499 2,193,603 1,560,210 ----------- ----------- ----------- OPERATING INCOME ...................... 333,574 338,756 300,064 ----------- ----------- ----------- NON-OPERATING INCOME Interest and dividend income .......... 13,069 15,499 3,040 Other, net ............................ (5,813) (1,455) (3,699) ----------- ----------- ----------- 7,256 14,044 (659) ----------- ----------- ----------- FIXED CHARGES Interest on long-term debt ............ 60,880 61,120 65,649 Other interest expense ................ 8,401 9,056 11,249 Preferred dividends of subsidiary trust 7,980 7,980 7,980 Allowance for borrowed funds .......... (1,661) (1,273) (1,257) ----------- ----------- ----------- 75,600 76,883 83,621 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES ............ 265,230 275,917 215,784 INCOME TAXES .......................... 112,452 110,461 88,453 ----------- ----------- ----------- NET INCOME ............................ 152,778 165,456 127,331 PREFERRED DIVIDENDS ................... 4,544 4,955 4,955 ----------- ----------- ----------- EARNINGS ON COMMON STOCK .............. $ 148,234 $ 160,501 $ 122,376 =========== =========== ===========
The accompanying notes are an integral part of these statements. -39- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 2001 2000 1999 --------- --------- --------- EARNINGS ON COMMON STOCK ................................ $ 148,234 $ 160,501 $ 122,376 --------- --------- --------- OTHER COMPREHENSIVE INCOME (LOSS), NET Unrealized gains (losses) on cash flow hedges: Unrealized net gains during period- Before income taxes ................................. 7,690 -- -- Income tax expense, net ............................. (3,197) -- -- --------- --------- --------- 4,493 -- -- --------- --------- --------- Less reclassification adjustment for realized net gains reflected in net income during period- Before income taxes ................................. 1,757 -- -- Income tax expense, net ............................. (731) -- -- --------- --------- --------- 1,026 -- -- --------- --------- --------- Net unrealized gains .............................. 3,467 -- -- --------- --------- --------- Minimum pension liability adjustment: Before income tax benefit ............................. (8,295) (4,087) -- Income tax benefit .................................... 3,448 1,699 -- --------- --------- --------- (4,847) (2,388) -- --------- --------- --------- Other comprehensive income (loss), net................... (1,380) (2,388) -- --------- --------- --------- COMPREHENSIVE INCOME .................................... $ 146,854 $ 158,113 $ 122,376 ========= ========= =========
The accompanying notes are an integral part of these statements. -40- MIDAMERICAN ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
AS OF DECEMBER 31, ----------------------- 2001 2000 ---------- ---------- ASSETS UTILITY PLANT Electric ......................................................... $4,598,372 $4,471,839 Gas .............................................................. 867,277 831,203 ---------- ---------- 5,465,649 5,303,042 Less accumulated depreciation and amortization ................... 2,847,979 2,680,420 ---------- ---------- 2,617,670 2,622,622 Construction work in progress .................................... 80,276 38,584 ---------- ---------- 2,697,946 2,661,206 ---------- ---------- POWER PURCHASE CONTRACT .......................................... 48,185 82,231 ---------- ---------- CURRENT ASSETS Cash and cash equivalents ........................................ 20,020 9,677 Receivables, less reserves of $627 and $102, respectively ........ 119,740 422,661 Inventories ...................................................... 83,339 69,130 Prepaid taxes .................................................... 23,956 22,889 Other ............................................................ 10,962 9,789 ---------- ---------- 258,017 534,146 ---------- ---------- INVESTMENTS AND NONREGULATED PROPERTY, NET ....................... 272,230 256,053 REGULATORY ASSETS ................................................ 221,120 240,934 OTHER ASSETS ..................................................... 80,394 48,996 ---------- ---------- TOTAL ASSETS ..................................................... $3,577,892 $3,823,566 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common shareholder's equity ...................................... $1,219,057 $1,161,968 MidAmerican Energy preferred securities, not subject to mandatory redemption ..................................................... 31,759 31,759 Preferred securities, subject to mandatory redemption: MidAmerican Energy preferred securities ........................ 26,680 50,000 MidAmerican Energy-obligated preferred securities of subsidiary trust holding solely MidAmerican Energy junior subordinated debentures ................................................... 100,000 100,000 Long-term debt (excluding current portion) ....................... 656,740 820,082 ---------- ---------- 2,034,236 2,163,809 ---------- ---------- CURRENT LIABILITIES Notes payable .................................................... 89,350 81,600 Current portion of long-term debt ................................ 163,854 101,600 Current portion of power purchase contract ....................... 17,398 16,554 Accounts payable ................................................. 171,535 308,784 Taxes accrued .................................................... 54,175 124,493 Interest accrued ................................................. 11,709 12,016 Other ............................................................ 43,184 34,667 ---------- ---------- 551,205 679,714 ---------- ---------- OTHER LIABILITIES Power purchase contract .......................................... 8,469 35,728 Deferred income taxes ............................................ 513,978 540,608 Investment tax credit ............................................ 61,292 66,209 Quad Cities Station decommissioning .............................. 158,349 153,100 Regulatory liabilities ........................................... 62,378 9,787 Other ............................................................ 187,985 174,611 ---------- ---------- 992,451 980,043 ---------- ---------- TOTAL CAPITALIZATION AND LIABILITIES ............................. $3,577,892 $3,823,566 ========== ==========
The accompanying notes are an integral part of these statements. -41- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 2001 2000 1999 --------- --------- --------- NET CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................................... $ 152,778 $ 165,456 $ 127,331 Adjustments to reconcile net income to net cash provided: Depreciation and amortization ............................... 251,099 197,438 190,112 Deferred income taxes and investment tax credit, net ........ (32,550) (27,743) (37,067) Amortization of other assets ................................ 44,963 48,650 61,036 Net change in accrued customer rate credits ................. (21,531) 6,724 13,559 Cash inflows (outflows) of accounts receivable securitization (26,000) 12,877 (2,877) Impact of changes in working capital ........................ 113,115 (39,507) (16,688) Other ....................................................... (5,392) (4,468) (5,377) --------- --------- --------- Net cash provided ......................................... 476,482 359,427 330,029 --------- --------- --------- NET CASH FLOWS FROM INVESTING ACTIVITIES Utility construction expenditures ............................. (250,073) (215,727) (203,575) Quad Cities Station decommissioning trust fund ................ (8,299) (8,302) (10,370) Nonregulated capital expenditures ............................. (2,221) (1,075) (540) Other investing activities, net ............................... 6,168 1,411 (10,968) --------- --------- --------- Net cash used ............................................... (254,425) (223,693) (225,453) --------- --------- --------- NET CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ................................................ (94,544) (58,955) (41,661) Issuance of long-term debt, net of issuance cost .............. -- 160,992 -- Retirement of long-term debt, including reacquisition cost .... (101,600) (110,861) (60,897) Reacquisition of preferred shares ............................. (23,320) -- -- Net increase (decrease) in notes payable ...................... 7,750 (122,400) (2,221) --------- --------- --------- Net cash used ............................................... (211,714) (131,224) (104,779) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......... 10,343 4,510 (203) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................ 9,677 5,167 5,370 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 20,020 $ 9,677 $ 5,167 ========= ========= ========= ADDITIONAL CASH FLOW INFORMATION: Interest paid, net of amounts capitalized ..................... $ 61,344 $ 63,420 $ 69,412 ========= ========= ========= Income taxes paid ............................................. $ 217,140 $ 133,176 $ 96,711 ========= ========= =========
The accompanying notes are an integral part of these statements. -42- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31, -------------------------------------------- 2001 2000 ------------------- -------------------- COMMON SHAREHOLDER'S EQUITY Common shares, no par; 350,000,000 shares authorized; 70,980,203 shares outstanding...................................... $ 560,798 $ 560,563 Retained earnings.................................................... 662,027 603,793 Accumulated other comprehensive (income) loss, net: Unrealized gain on cash flow hedges................................ 3,467 - Minimum pension liability adjustment............................... (7,235) (2,388) ----------- ----------- 1,219,057 59.9% 1,161,968 53.7% ----------- ----- ----------- ----- PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED) Cumulative shares outstanding; not subject to mandatory redemption: $3.30 Series, 49,451 shares........................................ 4,945 4,945 $3.75 Series, 38,305 shares........................................ 3,831 3,831 $3.90 Series, 32,630 shares........................................ 3,263 3,263 $4.20 Series, 47,362 shares........................................ 4,736 4,736 $4.35 Series, 49,945 shares........................................ 4,994 4,994 $4.40 Series, 50,000 shares........................................ 5,000 5,000 $4.80 Series, 49,898 shares........................................ 4,990 4,990 ----------- ----------- 31,759 1.6% 31,759 1.5% ----------- ----- ----------- ---- Cumulative shares outstanding; subject to mandatory redemption: $5.25 Series, zero and 100,000 shares, respectively................ - 10,000 $7.80 Series, 266,800 and 400,000 shares, respectively............. 26,680 40,000 ----------- ----------- 26,680 1.3% 50,000 2.3% ----------- ----- ----------- ----- MIDAMERICAN ENERGY-OBLIGATED PREFERRED SECURITIES MidAmerican Energy-obligated mandatorily redeemable cumulative preferred securities of subsidiary trust holding solely MidAmerican Energy junior subordinated debentures: 7.98% series, 4,000,000 shares outstanding.................... 100,000 4.9% 100,000 4.6% ----------- ----- ----------- ----- LONG-TERM DEBT Mortgage bonds: 7.125% Series, due 2003............................................ 100,000 100,000 7.70% Series, due 2004............................................. 55,630 55,630 7% Series, due 2005................................................ 90,500 90,500 7.375% Series, due 2008............................................ 75,000 75,000 7.45% Series, due 2023............................................. 6,940 6,940 6.95% Series, due 2025............................................. 12,500 12,500 Pollution control revenue obligations: 5.75% Series, due periodically through 2003........................ 4,320 5,760 6.7 % Series due 2003.............................................. 1,000 1,000 6.1% Series due 2007............................................... 1,000 1,000 5.95% Series, due 2023 (secured by general mortgage bonds)......... 29,030 29,030
The accompanying notes are an integral part of these statements. -43- MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF DECEMBER 31, ------------------------------------------- 2001 2000 ---------- ---------- LONG-TERM DEBT (CONTINUED) Variable rate series - Due 2016 and 2017, 1.77% and 4.56%, respectively............... $ 37,600 $ 37,600 Due 2023 (secured by general mortgage bond) 1.77% and 4.56%, respectively................................ 28,295 28,295 Due 2023, 1.77% and 4.56%, respectively........................ 6,850 6,850 Due 2024, 1.77% and 4.56%, respectively........................ 34,900 34,900 Due 2025, 1.77% and 4.56%, respectively........................ 12,750 12,750 Notes: 8.75% Series, due 2002........................................... - 240 7.375% Series, due 2002.......................................... - 162,000 6.375% Series, due 2006.......................................... 160,000 160,000 Obligation under capital lease..................................... 1,364 1,538 Unamortized debt premium and discount, net......................... (939) (1,451) ---------- ---------- 656,740 32.3% 820,082 37.9% ---------- ------ ---------- ------ TOTAL CAPITALIZATION................................................. $2,034,236 100.0% $2,163,809 100.0% ========== ====== ========== ======
MIDAMERICAN ENERGY COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- BEGINNING OF YEAR................................................. $ 603,793 $ 497,292 $ 411,622 --------- --------- --------- NET INCOME........................................................ 152,778 165,456 127,331 --------- --------- --------- DEDUCT: Loss on reacquisition of preferred shares......................... 235 - - Dividends declared on preferred shares............................ 4,309 4,955 4,955 Dividends declared on common shares............................... 90,000 54,000 36,706 --------- --------- --------- 94,544 58,955 41,661 --------- --------- --------- END OF YEAR....................................................... $ 662,027 $ 603,793 $ 497,292 ========= ========= =========
The accompanying notes are an integral part of these statements. -44- MIDAMERICAN ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (A) COMPANY STRUCTURE: MidAmerican Energy Company is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. MHC has the following nonregulated subsidiaries: MidAmerican Capital Company, MidAmerican Services Company, Midwest Capital Group, Inc. and MEC Construction Services Co. MHC is a wholly owned subsidiary of MidAmerican Funding, LLC, whose sole member is MidAmerican Energy Holdings Company. The current corporate structure is the result of the merger transaction completed on March 12, 1999, involving MHC (formerly MidAmerican Energy Holdings Company) and CalEnergy Company, Inc. CalEnergy was reincorporated as an Iowa corporation and changed its name to MidAmerican Energy Holdings Company. MHC, MidAmerican Funding and MidAmerican Energy Holdings are exempt public utility holding companies headquartered in Des Moines, Iowa. (B) CONSOLIDATION POLICY AND PREPARATION OF FINANCIAL STATEMENTS: The accompanying Consolidated Financial Statements include MidAmerican Energy and subsidiaries under its control. All significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Certain classifications of amounts for 2001 are different than that of prior years. Accordingly, historical amounts have been reclassified. (C) REGULATION: MidAmerican Energy's utility operations are subject to the regulation of the Iowa Utilities Board, the Illinois Commerce Commission, the South Dakota Public Utilities Commission, and the Federal Energy Regulatory Commission. MidAmerican Energy's accounting policies and the accompanying Consolidated Financial Statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process. A possible consequence of deregulation in the utility industry is that Statement of Financial Accounting Standards (SFAS) No. 71 may no longer apply. SFAS No. 71 sets forth accounting principles for operations that are regulated and meet the stated criteria. For operations that meet the criteria, SFAS No. 71 allows, among other things, the deferral of expense or income that would otherwise be recognized when incurred. MidAmerican Energy's electric and gas utility operations currently meet the criteria of SFAS No. 71, but its applicability is periodically reexamined. If portions of its utility operations no longer meet the criteria of SFAS No. 71, MidAmerican Energy could be required to write off the related regulatory assets and liabilities from its balance sheet, and thus, a material adjustment to earnings in that period could result if regulatory assets are not recovered in transition provisions of any deregulation legislation. The following regulatory assets represent costs that are expected to be recovered in future charges to utility customers. The regulatory liabilities represent income to be recognized or returned to customers in future periods. -45-
Weighted Average Future Recovery As of December 31, Period 2001 2000 ---------------- -------- -------- (In thousands) Regulatory Assets ----------------- Deferred income taxes, net .......... 13 years $145,271 $143,287 Debt refinancing costs .............. 5 years 24,252 29,416 Environmental costs ................. 10 years 21,878 24,001 Energy efficiency costs ............. -- 200 22,846 Nuclear generation assets ........... 4 years 10,284 14,675 Enrichment facilities decommissioning 4 years 1,687 1,930 Other ............................... Various 17,548 4,779 -------- -------- Total .......................... $221,120 $240,934 ======== ======== Regulatory Liabilities ---------------------- Environmental insurance recovery .... 10 years $ 8,850 $ 9,787 Iowa electric settlement reserve .... 5 years 47,125 -- Energy efficiency ................... 4 years 3,883 -- Coal contracts ...................... 1 year 2,520 -- -------- -------- $ 62,378 $ 9,787 ======== ========
A return is generally not earned on the regulatory assets in setting rates due to the fact that a cash outlay was not required for amounts listed as income taxes, environmental costs and enrichment facilities decommissioning. The amortization of the assets is recoverable over periods shown above. For a discussion of the Iowa electric settlement reserve, refer to Note (7) - Rate Matters. (D) REVENUE RECOGNITION: Revenues are recorded as services are rendered to customers. MidAmerican Energy records unbilled revenues representing the estimated amount customers will be billed for services rendered between the meter-reading dates in a particular month and the end of that month. Accrued unbilled revenues were $16.6 million and $191.8 million at December 31, 2001 and 2000, respectively, and are included in Receivables on the Consolidated Balance Sheets. Electric operating revenues for 2000 and 1999 include provisions for rate refunds related to a revenue sharing arrangement in Iowa that terminated December 31, 2000. The provisions reduced revenues for 2000 and 1999 by $21.6 million and $16.5 million, respectively. Under the current revenue sharing arrangement in Iowa, the provision related to revenue sharing is charged to depreciation expense. Refer to Note (7) - Rate Matters for further discussion. MidAmerican Energy's Illinois and South Dakota jurisdictional sales, or approximately 11% of total retail electric sales, and all of its retail gas sales are subject to adjustment clauses. These clauses allow MidAmerican Energy to adjust the amounts charged for electric and gas service as the costs of gas, fuel for generation or purchased power change. The costs recovered in revenues through use of the adjustment clauses are charged to expense in the same period. -46- (E) DEPRECIATION AND AMORTIZATION: MidAmerican Energy's provisions for depreciation and amortization for its utility operations are based on straight-line composite rates. The average depreciation and amortization rates for the years ended December 31 were as follows: 2001 2000 1999 ---- ---- ---- Electric 4.2% 4.0% 4.0% Gas .... 3.5% 3.5% 3.5% Utility plant is stated at original cost which includes overhead costs, administrative costs and an allowance for funds used during construction. The cost of repairs and minor replacements is charged to maintenance expense. Property additions and major property replacements are charged to plant accounts. The cost of depreciable units of utility plant retired or disposed of in the normal course of business are eliminated from the utility plant accounts and such cost, plus net removal cost, is charged to accumulated depreciation. Depreciation and amortization expense for 2001 includes a $47.1 million regulatory charge pursuant to the terms of an electric rate settlement in Iowa. Refer to Note (7)-Rate Matters for a discussion of the settlement. An allowance for the estimated annual decommissioning costs of the Quad Cities Generating Station equal to the level of funding is included in depreciation expense. See Note 4(e) for additional information regarding decommissioning costs. (F) INVESTMENTS AND NONREGULATED PROPERTY, NET: Investments and Nonregulated Property, Net includes the following amounts as of December 31 (in thousands): 2001 2000 -------- -------- Nuclear decommissioning trust fund................. $158,349 $153,100 Corporate-owned life insurance ... 85,958 77,029 Coal transportation property, net of accumulated depreciation of $1,396 and $1,097, respectively.. 10,523 10,824 Other, net of accumulated depreciation of $1,087 and $602, respectively........................... 17,400 15,100 -------- -------- Total ......................................... $272,230 $256,053 ======== ======== Investments held by the nuclear decommissioning trust fund for the Quad Cities Station units are classified as available-for-sale and are reported at fair value with net unrealized gains and losses reported as adjustments to the accumulated provision for nuclear decommissioning, which is reflected in Other Liabilities - Quad Cities Station Decommissioning on the Consolidated Balance Sheets. Funds are invested in accordance with applicable federal investment guidelines and are restricted for use as reimbursement for costs of decommissioning MidAmerican Energy's Quad Cities Station. The investment in corporate-owned life insurance represents the cash value of life insurance policies on certain key executives and other related investments. -47- (G) CONSOLIDATED STATEMENTS OF CASH FLOWS: MidAmerican Energy considers all cash and highly liquid debt instruments purchased with a remaining maturity of three months or less to be cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. Net cash provided (used) from changes in working capital was as follows (in thousands): 2001 2000 1999 --------- --------- --------- Receivables ............. $ 328,921 $(244,552) $ (19,345) Inventories ............. (14,209) 11,519 12,096 Prepaid taxes ........... (1,067) -- -- Other current assets .... (1,173) 566 (1,118) Accounts payable ........ (137,249) 177,598 (28,234) Taxes accrued ........... (70,318) 11,830 21,637 Interest accrued ........ (307) (909) (548) Other current liabilities 8,517 4,441 (1,176) --------- --------- --------- Total ................. $ 113,115 $ (39,507) $ (16,688) ========= ========= ========= (H) ACCOUNTING FOR LONG-TERM POWER PURCHASE CONTRACT: Under a long-term power purchase contract with Nebraska Public Power District, expiring in 2004, MidAmerican Energy purchases one-half of the output of the Cooper Nuclear Station, a 776-megawatt nuclear power plant, based on the maximum capability rating for the November 2001 through October 2002 period. The Consolidated Balance Sheets include a liability for MidAmerican Energy's fixed obligation to pay 50% of Nebraska Public Power District's Nuclear Facility Revenue Bonds and other fixed liabilities. A like amount representing MidAmerican Energy's right to purchase power is shown as an asset. Cooper capital improvement costs prior to 1997, including carrying costs, were deferred in accordance with then applicable rate regulation, and are being amortized and recovered in rates over either a five-year period or the remaining term of the power purchase contract. Beginning July 11, 1997, the Iowa portion of capital improvement costs is recovered currently from customers and is expensed as incurred. For jurisdictions other than Iowa, MidAmerican Energy began charging Cooper capital improvement costs to expense, as incurred in January 1997. The fuel cost portion of the power purchase contract is included in Cost of Fuel, Energy and Capacity on the Consolidated Statements of Income. All other costs MidAmerican Energy incurs in relation to its long-term power purchase contract with Nebraska Public Power District are included in Other Operating Expenses on the Consolidated Statements of Income. See Notes 4(d), 4(e), 4(f) and 4(g) for additional information regarding the power purchase contract. (I) ACCOUNTING FOR DERIVATIVES: MidAmerican Energy is exposed to market risk, including changes in the market price of certain commodities and interest rates. To manage the price volatility relating to these exposures, MidAmerican Energy enters into various financial derivative instruments. Senior management provides the overall direction, structure, conduct and control of MidAmerican Energy's risk management activities, including the use of financial derivative instruments, authorization and communication of risk management policies and procedures, strategic hedging -48- program guidelines, appropriate market and credit risk limits, and appropriate systems for recording, monitoring and reporting the results of transactional and risk management activities. MidAmerican Energy uses hedge accounting for derivative instruments pertaining to its natural gas purchasing, wholesale electricity activities and financing activities. On January 1, 2001, MidAmerican Energy adopted SFAS Nos. 133 and 138 pertaining to the accounting for derivative instruments and hedging activities. SFAS Nos. 133/138 requires an entity to recognize all of its derivatives as either assets or liabilities in its statement of financial position and measure those instruments at fair value. If the conditions specified in SFAS Nos. 133/138 are met, those instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. At January 1, 2001, MidAmerican Energy recognized $21.8 million and $4.9 million of energy-related assets and liabilities, respectively, as being subject to fair value accounting pursuant to SFAS Nos. 133/138, all of which were accounted for as hedges. Due to the relative immateriality of the adoption of SFAS Nos. 133/138, a cumulative-effect presentation is not reflected in the Consolidated Statement of Income or the Consolidated Statement of Comprehensive Income for 2001. Commodity Price Risk - Under the current regulatory framework, MidAmerican Energy is allowed to recover in revenues the cost of gas sold from all of its regulated gas customers through a purchased gas adjustment clause. Because the majority of MidAmerican Energy's firm natural gas supply contracts contain pricing provisions based on a daily or monthly market index, MidAmerican Energy's regulated gas customers, although ensured of the availability of gas supplies, retain the risk associated with market price volatility. MidAmerican Energy enters into natural gas futures and swap agreements to mitigate a portion of the market risk retained by its regulated gas customers through the purchased gas adjustment clause. These financial derivative activities are recorded as hedge accounting transactions, with net amounts exchanged or accrued under swap agreements and realized gains or losses on futures contracts included in the cost of gas sold and recovered in revenues from regulated gas customers. MidAmerican Energy also derives revenues from nonregulated sales of natural gas. Pricing provisions are individually negotiated with these customers and may include fixed prices or prices based on a daily or monthly market index. MidAmerican Energy enters into natural gas futures and swap agreements to offset the financial impact of variations in natural gas commodity prices for physical delivery to nonregulated customers. These financial derivative activities are also recorded as hedge accounting transactions. MidAmerican Energy uses natural gas derivative instruments for trading purposes pursuant to EITF 98-10 under strict value-at-risk guidelines outlined by senior management. Derivative instruments held for trading purposes are recorded at fair value and any unrealized gains or losses are reported in earnings. Trading revenues and costs are reported gross on the Consolidated Statements of Income. MidAmerican Energy is exposed to variations in the price of fuel for generation and the price of purchased power in its Iowa jurisdiction comprising 89% of 2001 electric operating revenues. Fuel price risk is mitigated through forward contracts. Under typical operating conditions, MidAmerican Energy has sufficient generation to supply its retail electric needs. A loss of such generation at a time of high market prices could subject MidAmerican Energy to losses on its energy sales. MidAmerican Energy uses electricity forward contracts to hedge anticipated sales of wholesale electric power. -49- MidAmerican Energy and its customers are exposed to the effect of variations in weather conditions on sales and purchases, respectively, of electricity and natural gas. For the 2001-2002 heating season, MidAmerican Energy entered into several degree day swaps to offset a portion of the financial impact of those variations on MidAmerican Energy and its customers. MidAmerican Energy had the following financial derivative instruments for its natural gas and electric operations as of December 31: Derivative instruments used for other than trading purposes- ------------------------------------------------------------ 2001 2000 ---------------- ---------------- Natural Gas Futures Contracts - NYMEX: Net Contract Volumes - Long (Short) (600,000) MMBtu 1,460,000 MMBtu Unrealized Gain, in thousands $40 $7,554 Weighted Average Settlement Price $(6.77) $9.42 Natural Gas Swap Contracts: Contract Volumes - Pay Fixed 7,853,052 MMBtu 13,496,239 MMBtu Contract Volumes - Receive Fixed 900,000 MMBtu 10,610,741 MMBtu Unrealized Gain (Loss), in thousands $(7,643) $8,055 Weighted Average Pay Fixed Price $(0.97) $0.89 Weighted Average Receive Fixed Price $0.04 $(0.37) Natural Gas Options: Contract Volumes - Long 2,300,000 MMBtu 1,790,280 MMBtu Unrealized Gain (Loss), in thousands $(1,212) $953 Degree Day Swap Contracts: Contract Volumes 20,000 $/Degree day - $/Degree Day Unrealized (Loss), in thousands $(3,486) $ - Electric Forward Contracts: Contract Volumes - (Short) (728,800) MWh (139,200) MWh Unrealized Gain (Loss), in thousands $6,313 $(4,731) A $1.00 decrease in underlying natural gas prices would decrease unrealized gains on the futures contracts held at December 31, 2001, by approximately $0.6 million and would increase unrealized losses on the above swap contracts by approximately $7.0 million. A $5.00 increase in underlying electricity prices would decrease unrealized gains on the forward contracts held at December 31, 2001, by approximately $3.6 million. The weighted average maturity for all derivative instruments used for hedging purposes is under one year. Unrealized gains and losses on cash flow hedges of future transactions are recorded in other comprehensive income. Only hedges that are highly effective in offsetting the risk of variability in future cash flows are accounted for in this manner. Future transactions include purchases of gas for resale to regulated and nonregulated customers, purchases of gas for storage, and purchases and sales of wholesale electric energy. When the associated hedged future transaction occurs or if a hedging relationship is no longer appropriate, the unrealized gains and losses are reversed from other comprehensive income and recognized in net income. Realized gains on cash flow hedges are recorded in Cost of Gas Sold, Regulated Cost of Fuel, Energy and Capacity or Nonregulated Operating Revenues, depending upon the nature of the physical transaction being hedged. -50- For 2001, a net loss of $408,000 and a net gain of $36,000, representing the ineffectiveness of cash flow hedges, are reflected in Cost of Gas Sold and Regulated Cost of Fuel, Energy and Capacity, respectively. During the twelve months beginning January 1, 2002, it is anticipated that $3.4 million of the $3.5 million after-tax, net unrealized gains on cash flow hedges presently recorded as accumulated other comprehensive income will be realized and recorded in earnings. MidAmerican Energy has hedged a portion of its exposure to the variability of cash flows for future transactions through December 2003. Unrealized gains and losses on fair value hedges are recognized in income as either Nonregulated Operating Revenues or Cost of Gas Sold depending upon the nature of the item being hedged. Purchase and sales commitments hedged by fair value hedges are recorded at fair value, with the changes in values also recognized in income and substantially offsetting the impact of the hedges on earnings. For 2001, a net pre-tax gain of $18,000, representing the ineffectiveness of fair value hedges, is included in Nonregulated Operating Revenues. Derivative instruments used for trading purposes - -------------------------------------------------- 2001 2000 --------------- -------------- Natural Gas Futures Contracts - NYMEX: Net Contract Volumes - Long (Short) 120,000 MMBtu (20,000) MMBtu Unrealized (Loss), in thousands $(224) $(79) Weighted Average Settlement Price $1.69 $(15.92) Natural Gas Swap Contracts: Contract Volumes - Pay Fixed 17,519,581 MMBtu 1,000,000 MMBtu Contract Volumes - Receive Fixed 17,850,372 MMBtu 1,010,000 MMBtu Unrealized Gain (Loss), in thousands $2,045 $(261) Weighted Average Pay Fixed Price $(0.99) $0.92 Weighted Average Receive Fixed Price $1.09 $(1.17) A change in underlying natural gas prices would not materially affect unrealized losses on the above future and swap contracts. Interest Rate Risk - At December 31, 2001, MidAmerican Energy had fixed-rate long-term debt and mandatorily redeemable preferred securities and preferred securities of subsidiary trust totaling $826 million with a fair value of $850 million. These instruments are fixed-rate and therefore do not expose MidAmerican Energy to the risk of earnings loss due to changes in market interest rates. However, the fair value of these instruments would decrease by approximately $24 million if interest rates were to increase by 10% from their levels at December 31, 2001. In general, such a decrease in fair value would impact earnings and cash flows only if MidAmerican Energy were to reacquire all or a portion of these instruments prior to their maturity. At December 31, 2001, MidAmerican Energy had long-term floating rate obligations totaling $120 million and short-term floating rate obligations totaling $89 million which expose MidAmerican Energy to risk of increased interest expense in the event of increases in short-term interest rates. This market risk is not hedged. The carrying value of the long-term and short-term floating rate obligations at December 31, 2001, approximated fair value. If the floating interest rates were to increase by 10% from December 31, 2001, levels, MidAmerican Energy's interest expense for the floating rate obligations would increase by approximately $0.4 million annually based on December 31, 2001, principal balances. -51- MidAmerican Energy has entered into a two-year, $162 million fixed-to-floating interest rate swap agreement in conjunction with its $162 million, 7.375% series of medium-term notes due August 1, 2002. The floating rate of the swap is based on a three-month LIBOR rate. As of December 31, 2001, the fair value of this swap was $9.1 million. (2) LONG-TERM DEBT: MidAmerican Energy's sinking fund requirements and maturities of long-term debt for 2002 through 2006 are $164 million, $106 million, $56 million, $91 million and $160 million, respectively. MidAmerican Energy's Variable Rate Pollution Control Revenue Obligations bear interest at rates that are periodically established through remarketing of the bonds in the short-term tax-exempt market. MidAmerican Energy, at its option, may change the mode of interest calculation for these bonds by selecting from among several alternative floating or fixed rate modes. The interest rates shown in the Consolidated Statements of Capitalization are the weighted average interest rates as of December 31, 2001 and 2000. MidAmerican Energy maintains revolving credit facility agreements or renewable lines of credit to provide liquidity for holders of these issues. Substantially all of the former Iowa-Illinois Gas and Electric Company, a predecessor company, utility property and franchises and substantially all of the former Midwest Power Systems Inc., a predecessor company, electric utility property in Iowa, or approximately 79% of gross utility property, is pledged to secure mortgage bonds. (3) JOINTLY OWNED UTILITY PLANT: Under joint plant ownership agreements with other utilities, MidAmerican Energy had undivided interests at December 31, 2001, in jointly owned generating plants as shown in the table below. The dollar amounts below represent MidAmerican Energy's share in each jointly owned unit. Each participant has provided financing for its share of each unit. Operating Expenses on the Consolidated Statements of Income include MidAmerican Energy's share of the expenses of these units (dollars in millions).
Nuclear Coal fired ----------- ------------------------------------------ Council Quad Cities Neal Bluffs Neal Ottumwa Louisa Units Unit Unit Unit Unit Unit No. 1 & 2 No. 3 No. 3 No. 4 No. 1 No. 1 ----------- ----- ------ ------ ------- ------ In service date............ 1972 1975 1978 1979 1981 1983 Utility plant in service... $227 $143 $295 $175 $210 $539 Accumulated depreciation... $103 $ 95 $199 $112 $127 $303 Unit capacity-MW (100%).... 1,541 515 675 644 715 700 Percent ownership.......... 25.0% 72.0% 79.1% 40.6% 52.0% 88.0%
-52- (4) COMMITMENTS AND CONTINGENCIES: (A) CAPITAL EXPENDITURES: MidAmerican Energy's construction expenditures for 2002 are estimated to be $332 million, including $116 million for the recently announced Greater Des Moines Energy Center, a 540-megawatt natural gas-fired combined cycle unit. (B) MANUFACTURED GAS PLANT FACILITIES: The United States Environmental Protection Agency and the state environmental agencies have determined that contaminated wastes remaining at decommissioned manufactured gas plant facilities may pose a threat to the public health or the environment if such contaminants are in sufficient quantities and at such concentrations as to warrant remedial action. MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. MidAmerican Energy is currently conducting field investigations at eighteen sites and has conducted interim removal actions at six of the eighteen sites. In addition, MidAmerican Energy has completed investigations and removals at four sites. MidAmerican Energy is continuing to evaluate several of the sites to determine the future liability, if any, for conducting site investigations or other site activity. MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be $22 million to $68 million. MidAmerican Energy's estimate of the probable cost for these sites as of December 31, 2001 was $22 million. The estimate consists of $2 million for investigation costs, $7 million for remediation costs, $11 million for ground water treatment and monitoring costs and $2 million for closure and administrative costs. This estimate has been recorded as a liability and a regulatory asset for future recovery. MidAmerican Energy projects that these amounts will be paid or incurred over the next 10 years. The estimate of probable remediation costs is established on a site-specific basis. The costs are accumulated in a three-step process. First, a determination is made as to whether MidAmerican Energy has potential legal liability for the site and whether information exists to indicate that contaminated wastes remain at the site. If so, the costs of performing a preliminary investigation and the costs of removing known contaminated soil are accrued. As the investigation is performed and if it is determined remedial action is required, the best estimate of remedial costs is accrued. If necessary, the estimate is revised when a consent order is issued. The estimated recorded liabilities for these properties include incremental direct costs of the remediation effort, costs for future monitoring at sites and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. Insurance recoveries have been received for some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board, and are recorded as a regulatory liability. The Illinois Commerce Commission has approved the use of a tariff rider that permits recovery of the actual costs of litigation, investigation and remediation relating to former manufactured gas plant sites. MidAmerican Energy's present rates in Iowa provide for a fixed annual recovery of manufactured gas plant costs. -53- MidAmerican Energy intends to pursue recovery of the remediation costs from other potentially responsible parties and its insurance carriers. Although the timing of potential incurred costs and recovery of such costs in rates may affect the results of operations in individual periods, management believes that the outcome of these issues will not have a material adverse effect on MidAmerican Energy's financial position or results of operations. (C) AIR QUALITY: Essentially all of MidAmerican Energy's generating units are subject to the Clean Air Acts Amendments of 1990. Currently, MidAmerican Energy's generating units meet all requirements under Title IV of the Clean Air Act Amendments of 1990, which sets forth requirements for the emission of sulfur dioxide and nitrogen oxides at electric utility generating stations. In July 1997, the Environmental Protection Agency adopted revisions to the National Ambient Air Quality Standards for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout each state, the Environmental Protection Agency will determine which states have areas that do not meet the air quality standards (i.e., areas that are classified as nonattainment). The standards were subjected to legal proceedings, and in February 2001, the United States Supreme Court upheld the constitutionality of the standards, though remanding the issue of implementation of the ozone standard to the Environmental Protection Agency. The Environmental Protection Agency is moving forward with analyzing existing monitored data and determining attainment status. The impact of the new standards on MidAmerican Energy is currently unknown. MidAmerican Energy's fossil fuel generating stations may be subject to emission reductions if the stations are located in nonattainment areas. As part of an overall state plan to achieve attainment of the standards, MidAmerican Energy could be required to install control equipment on its fossil fuel generating stations or decrease the number of hours during which these stations operate. The degree to which MidAmerican Energy may be required to install control equipment or decrease operating hours under a nonattainment scenario will be determined by the state's assessment of MidAmerican Energy's relative contribution, along with other emission sources, to the nonattainment status. The installation of control equipment would result in increased costs to MidAmerican Energy. A decrease in the number of hours during which the affected stations operate would increase operating costs and decrease wholesale electric revenues of MidAmerican Energy. (D) LONG-TERM POWER PURCHASE CONTRACT: Payments to the Nebraska Public Power District cover one-half of the fixed and operating costs of Cooper (excluding depreciation but including debt service) and MidAmerican Energy's share of nuclear fuel cost (including DOE disposal fees) based on energy delivered. The debt service portion is approximately $1.5 million per month for 2002 and is not contingent upon the plant being in service. In addition, prior to December 2000, MidAmerican Energy contributed toward payment of one-half of Cooper's projected decommissioning costs based on an assumed September 2004 shutdown of Cooper. The debt amortization and Department of Energy enrichment plant decontamination and decommissioning component of MidAmerican Energy's payments to the Nebraska Public Power District were $16.6 million, $15.8 million and $15.1 million and the net interest component, which is included in Other Operating Expenses in the Consolidated Statements of Income, was $1.5 million, $1.6 million and $2.5 million each for the years 2001, 2000 and 1999, respectively. -54- MidAmerican Energy's payments for the debt principal portion of the power purchase contract obligation and the Department of Energy enrichment plant decontamination and decommissioning payments are $17.4 million, $8.5 million and zero for 2002 through 2004, respectively. (E) NUCLEAR DECOMMISSIONING COSTS: Expected decommissioning costs for Quad Cities Station and Cooper have been developed based on site-specific decommissioning studies that include decontamination, dismantling, site restoration, dry fuel storage cost and assumed shutdown dates. In Illinois, Cooper nuclear decommissioning costs are recovered through a rate rider on customer billings that permits annual adjustments. Quad Cities Station and Cooper decommissioning costs are reflected as base rates in Iowa tariffs. MidAmerican Energy's share of expected decommissioning costs for Quad Cities Station, in 2001 dollars, is $278 million. MidAmerican Energy has established external trusts for the investment of funds for decommissioning the Quad Cities Station. The total accrued balance as of December 31, 2001, was $158.3 million and is included in Other Liabilities - Quad Cities Station Decommissioning, and a like amount is reflected in Investments and Nonregulated Property, Net and represents the fair value of the assets held in the trusts. MidAmerican Energy's depreciation expense included costs for Quad Cities Station nuclear decommissioning of $8.3 million, $8.3 million, and $10.4 million for 2001, 2000 and 1999, respectively. The provision charged to depreciation expense is equal to the funding that is being collected in rates. The decommissioning funding component of MidAmerican Energy's Illinois and Iowa tariffs assumes decommissioning costs, related to the Quad Cities Station, will escalate at an annual rate of 4.5% and the assumed annual return on funds in the trust is 6.9%. Realized income (loss), net of investment fees, on the assets in the trust fund was $(0.6) million, $1.9 million and $1.9 million for 2001, 2000 and 1999, respectively. MidAmerican Energy's contributions toward payment of Cooper's projected decommissioning costs have been based on the Nebraska Public Power District decommissioning funding plan for Cooper. Total expected decommissioning costs for Cooper, in 2001 dollars, are $577 million. For purposes of developing a decommissioning funding plan for Cooper, the Nebraska Public Power District assumes that decommissioning costs will escalate at an annual rate of 4.0%. Although Cooper's operating license expires in 2014, the funding plan assumes decommissioning will start in 2004, the anticipated plant shutdown date. As of December 31, 2001, funds set aside in the internal and external accounts for Cooper decommissioning that are maintained by the Nebraska Public Power District totaled $291.3 million. In addition, the funding plan for Cooper also assumes various funds and reserves currently held to satisfy the Nebraska Public Power District bond resolution requirements will be available for plant decommissioning, which is to begin with the assumed plant shutdown in September 2004. The funding schedule assumes a long-term return on funds in the trust of 6.75% annually. Certain funds will be required to be invested on a short-term basis when decommissioning begins and are assumed to earn at a rate of 4.0% annually. Earnings from the internal account and external trust fund, which are recognized by the Nebraska Public Power District as the owner of the plant, are tax exempt and serve to reduce future funding requirements. Beginning in December 2000, MidAmerican Energy ceased contributing to the accounts maintained by the Nebraska Public Power District and began contributing funds to a separate MidAmerican Energy bank account based on the Nebraska Public Power District decommissioning funding plan for Cooper. A liability equal to the amount of funds contributed, plus the earnings on those funds, is reflected in Other Liabilities on the Consolidated Balance Sheets. MidAmerican Energy records expense equal to the funds contributed to the separate account, plus investment manager fees paid to the Nebraska Public Power District for funds in the accounts they maintain. MidAmerican Energy's expense for Cooper decommissioning was $11.6 million, $11.5 million and $11.3 million -55- for the years 2001, 2000 and 1999, respectively, and is included in Other Operating Expenses in the Consolidated Statements of Income. MidAmerican Energy is currently involved in litigation with Nebraska Public Power District in part related to the determination of MidAmerican Energy's obligation, if any, for costs of decommissioning Cooper. Refer to Note (4)(g) for a discussion of the proceedings. (F) NUCLEAR INSURANCE: MidAmerican Energy maintains financial protection against catastrophic loss associated with its interest in Quad Cities Station and Cooper through a combination of insurance purchased by the Nebraska Public Power District (the owner and operator of Cooper) and Exelon Generation Company, LLC (the operator and joint owner of Quad Cities Station), insurance purchased directly by MidAmerican Energy, and the mandatory industry-wide loss funding mechanism afforded under the Price-Anderson Amendments Act of 1988. The general types of coverage are: nuclear liability, property coverage and nuclear worker liability. The Nebraska Public Power District and Exelon Generation each purchase nuclear liability insurance for Cooper and Quad Cities Station, respectively, in the maximum available amount of $200 million. In accordance with the Price-Anderson Amendments Act of 1988, excess liability protection above that amount is provided by a mandatory industry-wide program under which the licensees of nuclear generating facilities could be assessed for liability incurred due to a serious nuclear incident at any commercial nuclear reactor in the United States. Currently, MidAmerican Energy's aggregate maximum potential share of an assessment for Cooper and Quad Cities Station combined is $88.1 million per incident, payable in installments not to exceed $10 million annually. The property coverage provides for property damage, stabilization and decontamination of the facility, disposal of the decontaminated material and premature decommissioning. For Quad Cities Station, Exelon Generation purchases primary and excess property insurance protection for the combined interests in Quad Cities Station, with coverage limits totaling $2.1 billion. For Cooper, MidAmerican Energy and the Nebraska Public Power District separately purchase primary and excess property insurance protection for their respective obligations, with coverage limits of $1.375 billion each. This structure provides that both MidAmerican Energy and the Nebraska Public Power District are covered for their respective 50% obligation in the event of a loss totaling up to $2.75 billion. MidAmerican Energy also directly purchases extra expense/business interruption coverage for its share of replacement power and/or other extra expenses in the event of a covered accidental outage at Cooper or Quad Cities Station. The coverages purchased directly by MidAmerican Energy, and the property coverages purchased by Exelon Generation, which includes the interests of MidAmerican Energy, are underwritten by an industry mutual insurance company and contain provisions for retrospective premium assessments should two or more full policy-limit losses occur in one policy year. Currently, the maximum retrospective amounts that could be assessed against MidAmerican Energy from industry mutual policies for its obligations associated with Cooper and Quad Cities Station combined, total $20.5 million. The master nuclear worker liability coverage, which is purchased by the Nebraska Public Power District and Exelon Generation for Cooper and Quad Cities Station, respectively, is an industry-wide guaranteed-cost policy with an aggregate limit of $200 million for the nuclear industry as a whole, which is in effect to cover tort claims in nuclear-related industries. (G) COOPER LITIGATION: On July 23, 1997, the Nebraska Public Power District filed a complaint, in the United States District Court for the District of Nebraska, naming MidAmerican Energy as the defendant and seeking declaratory judgment as to -56- three issues under the parties' long-term power purchase agreement for Cooper capacity and energy. More specifically, the Nebraska Public Power District sought a declaratory judgment in the following respects: (1) that MidAmerican Energy is obligated to pay 50% of all costs and expenses associated with decommissioning Cooper, and that in the event the Nebraska Public Power District continues to operate Cooper after expiration of the power purchase agreement (September 2004), MidAmerican Energy is not entitled to reimbursement of any decommissioning funds it has paid to date or will pay in the future; (2) that the current method of allocating transition costs as 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 Energy filed its answer and counterclaims. The counterclaims filed by MidAmerican Energy are generally as follows: (1) that MidAmerican Energy has no duty under the power purchase agreement to reimburse or pay 50% of the decommissioning costs unless conditions to reimbursement occur; (2) that the term "monthly power costs" as defined in the power purchase agreement does not include costs and expenses associated with decommissioning the plant; (3) that the Nebraska Public Power District violated MidAmerican Energy's directions for application of payments; (4) that transition costs are not included in any decommissioning costs and are not any kind of costs that MidAmerican Energy is obligated to pay; (5) that the Nebraska Public Power District has the duty to repay all amounts that MidAmerican Energy has prefunded for decommissioning in the event the Nebraska Public Power District operates the plant after the term of the power purchase agreement; (6) that the Nebraska Public Power District is equitably estopped from continuing to operate the plant after the term of the power purchase agreement so long as the Nebraska Public Power District does not repay all amounts MidAmerican Energy has prefunded for estimated decommissioning costs together with other amounts in certain funds and accounts and for so long as the Nebraska Public Power District fails to provide MidAmerican Energy with certain requested accountings and information; (7) that certain funds, accounts, and reserves are excessive and are required to be paid to MidAmerican Energy or credited to MidAmerican Energy's pre-2004 monthly power costs; (8) that MidAmerican Energy has no duty to pay for nuclear fuel, operations and maintenance projects or capital improvements that have useful lives after the term of the power purchase agreement; (9) that the Nebraska Public Power District has mismanaged the plant in numerous described transactions resulting in damage to MidAmerican Energy; -57- (10) that the Nebraska Public Power District has breached its contractual and other duties to MidAmerican Energy by not joining certain litigation and by failing to credit or agree to credit MidAmerican Energy with any recovery for low-level radioactive waste; and (11) that the Nebraska Public Power District has breached its duty to MidAmerican Energy in making investments of decommissioning funds; On October 6, 1999, the court rendered summary judgment for the Nebraska Public Power District on the above-mentioned issue concerning liability for decommissioning (issue one in the first paragraph above) and the related counterclaims filed by MidAmerican Energy (issues one and two in the second paragraph above). The court referred all remaining issues in the case to mediation, and cancelled the November 1999 trial date. MidAmerican Energy appealed the court's summary judgment ruling. On December 12, 2000, the United States Court of Appeals for the Eighth Circuit reversed the ruling of the district court and granted summary judgment in favor of MidAmerican Energy on issues one and two in the second paragraph above, as well as issue one in the first paragraph above. Additionally, it remanded the case for trial on all other claims and counterclaims. Since the remand to the District Court from the Eighth Circuit Court of Appeals, the Nebraska Public Power District has been granted permission, over MidAmerican Energy's objections, to file a second amended complaint. The second amended complaint asserts that even though the Eighth Circuit Court of Appeals held that MidAmerican Energy has no liability under the power purchase agreement to reimburse or pay the Nebraska Public Power District a 50% share of decommissioning costs unless certain conditions occur, MidAmerican Energy has unconditional liability for a 50% share based on agreements other than the power purchase agreement as originally written. The Nebraska Public Power District's post-remand contentions -- all strongly disputed by MEC -- are that MidAmerican Energy has unconditional liability for a 50% share of decommissioning based on any of the following alternative theories: (i) the parties without written amendment either modified the power purchase agreement or made a separate agreement that imposes unconditional liability on MidAmerican Energy for decommissioning costs; (ii) absent unconditional liability for a 50% share of decommissioning costs, MidAmerican Energy would be unjustly enriched; (iii) MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs based on promissory estoppel; or (iv) the Nebraska Public Power District is entitled to have the power purchase agreement reformed to provide that MidAmerican Energy has unconditional liability for a 50% share of decommissioning costs. In response to the Nebraska Public Power District's second amended complaint, MidAmerican Energy filed its first amended answer and third amended counterclaims containing denials, several affirmative defenses, and the counterclaims summarized above. In the course of discovery, the Nebraska Public Power District has contended that MidAmerican Energy has some responsibility for some costs of storage of spent fuel resulting from the operation of the plant during the term of the power purchase agreement. MidAmerican Energy disputes this. MidAmerican Energy recently filed a mandamus petition with Eighth Circuit Court of Appeals seeking an order of that court directing the District Court not to permit the Nebraska Public Power District to pursue the above alternative theories at trial, since the above alternative theories appear to be contrary to the December 12, 2000 Eighth Circuit Court of Appeals decision. If such relief is not granted, MidAmerican Energy will strongly dispute at trial these contentions and theories put forth by the Nebraska Public Power District. Trial in these matters has been recently rescheduled to September 9, 2002. -58- (H) FUEL, ENERGY AND OPERATING LEASE COMMITMENTS: MidAmerican Energy has supply and related transportation contracts for its fossil fueled generating stations. The contracts, with expiration dates ranging from 2002 to 2007, require minimum payments of $80.3 million, $70.6 million, $36.2 million, $34.0 million and $2.6 million for the years 2002 through 2006, respectively, and $2.6 million for the total of the years thereafter. MidAmerican Energy expects to supplement these coal contracts with additional contracts and spot market purchases to fulfill its future fossil fuel needs. MidAmerican Energy has a contract with Cordova Energy Company LLC, a subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and energy from a gas-fired combined cycle generation plant. The minimum payments under the contract, which terminates in May 2004, are $18.3 million, $24.1 million and $9.4 million for 2002, 2003 and 2004, respectively. The minimum payments are based on MidAmerican Energy's 50% of the projected monthly net capacity ratings of the plant. MidAmerican Energy also has contracts with non-affiliated companies to purchase electric capacity. The contracts, with expiration dates ranging from 2002 to 2011, require minimum payments of $27.0 million, $30.5 million, $15.3 million, $2.9 million and $2.2 million for the years 2002 through 2006, respectively, and $11.0 million for the total of the years thereafter. MidAmerican Energy has various natural gas supply and transportation contracts for its gas operations. The minimum commitments under these contracts are $56.6 million, $41.3 million, $13.4 million, $13.2 million and $13.0 million for the years 2002 through 2006, respectively, and $26.7 million for the total of the years thereafter. MidAmerican Energy has non-cancellable operating leases primarily for office space and rail cars. The minimum payments under these leases are $5.5 million, $3.8 million, $1.9 million, $0.9 million and $0.3 million for the years 2002 through 2006, respectively, and $0.5 million for the total of the years thereafter. (I) OTHER COMMITMENTS AND CONTINGENCIES: MidAmerican Energy is involved in a number of other legal proceedings and claims. While management is unable to predict the ultimate outcome of these matters, it is not expected that their resolution will have a material adverse effect on the results of operations and financial condition. (5) RETIREMENT PLANS: MidAmerican Energy has primarily noncontributory cash balance defined benefit pension plans covering substantially all employees of MidAmerican Energy Holdings and its domestic subsidiaries. Benefit obligations under the plans are based on participants' compensation, years of service and age at retirement. Funding is based upon the actuarially determined costs of the plans and the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act. MidAmerican Energy has been allowed to recover pension costs related to its employees in rates. MidAmerican Energy also maintains noncontributory, nonqualified supplemental executive retirement plans for active and retired participants. MidAmerican Energy currently provides certain postretirement health care and life insurance benefits for retired employees of MidAmerican Energy Holdings and its domestic subsidiaries. Under the plans, substantially all of MidAmerican Energy's employees may become eligible for these benefits if they reach retirement age while working for MidAmerican Energy. However, MidAmerican Energy retains the right to change these benefits anytime at its discretion. MidAmerican Energy expenses postretirement benefit costs on an accrual basis and includes provisions for such costs in rates. -59- Net periodic pension, supplemental retirement and postretirement benefit costs included the following components for MidAmerican Energy and the aforementioned affiliates for the years ended December 31 (in thousands).
Pension Cost Postretirement Cost -------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 -------- -------- -------- -------- -------- --------- Service cost ............................ $ 18,114 $ 16,256 $ 12,192 $ 4,357 $ 2,609 $ 3,066 Interest cost ........................... 33,027 35,387 31,557 10,418 8,354 7,947 Expected return on plan assets .......... (36,326) (48,132) (46,265) (4,032) (4,931) (4,380) Amortization of net transition obligation (2,591) (2,591) (2,591) 4,110 4,110 4,110 Amortization of prior service cost ...... 2,729 2,885 1,428 425 425 216 Amortization of prior year (gain) loss .. (3,894) (4,119) (2,703) 332 (873) (181) Curtailment loss ........................ -- -- 5,283 -- -- -- -------- -------- -------- -------- -------- -------- Net periodic (benefit) cost ........... $ 11,059 $ (314) $ (1,099) $ 15,610 $ 9,694 $ 10,778 ======== ======== ======== ======== ======== ========
In 2001, MidAmerican Energy was allocated $5.8 million of pension cost and $14.6 million of postretirement cost. The pension plan assets are in external trusts and are comprised of corporate equity securities, United States government debt, corporate bonds, and insurance contracts. The postretirement benefit plans assets are in external trusts and are comprised primarily of corporate equity securities, corporate bonds, money market investment accounts and municipal bonds. Although the supplemental executive retirement plan had no assets as of December 31, 2001, MidAmerican Energy has Rabbi trusts which hold corporate-owned life insurance and other investments to provide funding for the future cash requirements. Because this plan is nonqualified, the fair value of these assets is not included in the following table. The fair value of the Rabbi trust investments was $50.4 million and $44.7 million at December 31, 2001 and 2000, respectively. During 1999 certain participants in the supplemental executive retirement plan left MidAmerican Energy reducing the future service of active employees by 28%. As a result, a curtailment loss of $5.3 million was recognized in 1999. Additionally, termination benefits provided to the participants, totaling $3.5 million, were expensed in 1999. The projected benefit obligation and accumulated benefit obligation for the supplemental executive retirement plans were $91.2 million and $88.2 million, respectively, as of December 31, 2001, and $82.7 million and $77.5 million, respectively, as of December 31, 2000. -60- The following table presents a reconciliation of the beginning and ending balances of the benefit obligation, fair value of plan assets and the funded status of the aforementioned plans to the net amounts recognized in the Consolidated Balance Sheets as of December 31 (dollars in thousands):
Pension Benefits Postretirement Benefits ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Reconciliation of benefit obligation: Benefit obligation at beginning of year ......................... $ 472,349 $ 447,170 $ 131,822 $ 107,744 Service cost .................................................... 18,114 16,256 4,357 2,609 Interest cost ................................................... 33,027 35,387 10,418 8,354 Participant contributions ....................................... -- 74 3,059 2,395 Plan amendments ................................................. 652 (132) -- -- Actuarial (gain) loss ........................................... 17,333 6,007 57,101 20,589 Benefits paid ................................................... (23,267) (32,413) (11,840) (9,869) --------- --------- --------- --------- Benefit obligation at end of year ............................... 518,208 472,349 194,917 131,822 --------- --------- --------- --------- Reconciliation of the fair value of plan assets: Fair value of plan assets at beginning of year .................. 555,208 605,059 75,090 72,622 Employer contributions .......................................... 4,576 4,355 16,022 10,543 Participant contributions ....................................... -- 74 3,059 2,395 Actual return on plan assets .................................... (20,627) (21,867) (1,202) (601) Benefits paid ................................................... (23,267) (32,413) (11,840) (9,869) --------- --------- --------- --------- Fair value of plan assets at end of year ........................ 515,890 555,208 81,129 75,090 --------- --------- --------- --------- Funded status ................................................... (2,318) 82,859 (113,788) (56,732) Unrecognized net (gain) loss .................................... (52,244) (130,423) 63,328 1,326 Unrecognized prior service cost ................................. 22,885 24,962 4,264 4,689 Unrecognized net transition obligation (asset) .................. (5,974) (8,566) 45,212 49,322 --------- --------- --------- --------- Net amount recognized in the Consolidated Balance Sheets ................................... $ (37,651) $ (31,168) $ (984) $ (1,395) ========= ========= ========= ========= Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid benefit cost ............................................ $ 15,381 $ 16,773 $ 1,493 $ 1,493 Accrued benefit liability ....................................... (88,210) (77,538) (2,477) (2,888) Intangible assets ............................................... 22,796 25,510 -- -- Accumulated other comprehensive income .......................... 12,382 4,087 -- -- --------- --------- --------- --------- Net amount recognized ........................................... $ (37,651) $ (31,168) $ (984) $ (1,395) ========= ========= ========= =========
-61- Pension and Postretirement Assumptions -------------------------- 2001 2000 1999 ----- ----- ----- Assumptions used were: Discount rate ......................... 6.50% 7.00% 7.75% Rate of increase in compensation levels 5.00% 5.00% 5.00% Weighted average expected long-term rate of return on assets .......... 7.00% 9.00% 9.00% For purposes of calculating the postretirement benefit obligation, it is assumed health care costs for covered individuals will increase by 11.25% in 2002 and that the rate of increase thereafter will decrease to an ultimate rate of 5.25% by the year 2006. If the assumed health care trend rates used to measure the expected cost of benefits covered by the plans were increased by 1.0%, the total service and interest cost for 2001 would increase by $3.0 million and the postretirement benefit obligation at December 31, 2001, would increase by $30.6 million. If the assumed health care trend rates were to decrease by 1.0%, the total service and interest cost for 2001 would decrease by $2.3 million and the postretirement benefit obligation at December 31, 2001, would decrease by $24.2 million. MidAmerican Energy sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. MidAmerican Energy's contributions vary depending on the plan but are based primarily on each participant's level of contribution and cannot exceed the maximum allowable for tax purposes. Total contributions were $7.2 million, $7.4 million and $6.2 million for 2001, 2000 and 1999, respectively. (6) SHORT-TERM BORROWING: Interim financing of working capital needs and the construction program may be obtained from the sale of commercial paper or short-term borrowing from banks. Information regarding short-term debt follows (dollars in thousands):
2001 2000 ------- -------- Balance at year-end ............................. $89,350 $ 81,600 Weighted average interest rate on year-end balance. 1.9% 6.6% Average daily amount outstanding during the year... $25,921 $109,213 Weighted average interest rate on average daily amount outstanding during the year......... 4.7% 6.2%
MidAmerican Energy has authority from the Federal Energy Regulatory Commission to issue short-term debt in the form of commercial paper and bank notes aggregating $500 million. MidAmerican Energy currently has in place a $370.4 million revolving credit facility which supports its $250 million commercial paper program and its variable rate pollution control revenue obligations. In addition, MidAmerican Energy has a $5 million line of credit. -62- (7) RATE MATTERS: In 1997, pursuant to a rate proceeding before the Iowa Utilities Board, MidAmerican Energy, the Office of Consumer Advocate and other parties entered into a pricing plan settlement agreement establishing MidAmerican Energy's Iowa retail electric rates. That settlement agreement expired on December 31, 2000. On March 14, 2001, the Office of the Consumer Advocate filed a petition with the Iowa Utilities Board to reduce Iowa retail electric rates by approximately $77 million annually. On June 11, 2001, MidAmerican Energy responded to that petition by filing a request with the Iowa Utilities Board to increase MidAmerican Energy's Iowa retail electric rates by $51 million annually. On December 21, 2001, the Iowa Utilities Board approved a settlement agreement that freezes the rates in effect on December 31, 2000, through December 31, 2005, and, with modifications, reinstates the revenue sharing provisions of the 1997 pricing plan settlement agreement. Under the 2001 settlement agreement, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year will be recorded as a regulatory liability to be used to offset a portion of the cost of future generating plant investments. An amount equal to the regulatory liability will be recorded as depreciation expense. As of December 31, 2001, MidAmerican Energy has recorded a $47.1 million regulatory liability that is reflected in Regulatory Liabilities on the Consolidated Balance Sheet. Under an Illinois restructuring law enacted in 1997, a sharing mechanism is in place for MidAmerican Energy's Illinois regulated retail electric operations whereby earnings above a computed threshold will be shared equally between customers and shareholders. A two-year average return on common equity greater than a two-year average benchmark will trigger an equal sharing of earnings on the excess. MidAmerican Energy's computed level of return on common equity is based on a rolling two-year average of the 30-year Treasury Bond rates plus a premium of 5.5% for 1998 and 1999 and a premium of 8.5% for 2000 through 2004. The two-year average above which sharing must occur for 2001 was 14.34%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of regulatory assets. (8) CONCENTRATION OF CREDIT RISK: MidAmerican Energy's regulated electric utility operations serve 586,000 customers in Iowa, 83,000 customers in western Illinois and 4,000 customers in southeastern South Dakota. MidAmerican Energy's regulated gas utility operations serve 512,000 customers in Iowa, 65,000 customers in western Illinois, 70,000 customers in southeastern South Dakota and 5,000 customers in northeastern Nebraska. The largest communities served by MidAmerican Energy are the Iowa and Illinois Quad-Cities; Des Moines, Sioux City, Cedar Rapids, Waterloo, Iowa City and Council Bluffs, Iowa; and Sioux Falls, South Dakota. MidAmerican Energy's utility operations grant unsecured credit to customers, substantially all of whom are local businesses and residents. As of December 31, 2001, billed receivables from MidAmerican Energy's utility customers, net of receivables sold, totaled $4.5 million. As described in Note (15), billed receivables related to utility services have been sold to a wholly owned unconsolidated subsidiary. MidAmerican Energy also extends unsecured credit to utility service customers, other utilities and marketers for nonregulated electric and gas transactions. Strict guidelines are established regarding the amount of unsecured credit extended to individual customers. MidAmerican Energy's credit exposure to any individual did not exceed 6% of the $47.9 million of related receivables outstanding at December 31, 2001. (9) PREFERRED SHARES: The $7.80 Series Preferred Shares have sinking fund requirements under which 66,600 shares will be redeemed at $100 per share each May 1 through May 1, 2005. MidAmerican Energy has the option to redeem at $100 per share an additional 66,600 shares through the sinking fund each May 1. Additionally, MidAmerican -63- Energy may redeem all of the remaining shares at $103.90 per share prior to May 1, 2003, and $101.95 per share thereafter, plus accrued dividends. The 7.98% Series Preferred Shares were issued by a wholly owned statutory business trust of MidAmerican Energy whose sole assets are $103.1 million of MidAmerican Energy 7.98% Series A Debentures due 2045. The preferred shares are mandatorily redeemable. Refer to Note (14) for additional information. During 2001, MidAmerican Energy redeemed all 100,000 shares of the $5.25 Series Preferred Shares at $100 per share and 133,200 shares of the $7.80 Series Preferred Shares at $100 per share. A combined loss of $0.2 million on the redemptions is reflected in Preferred Dividends on the Consolidated Statement of Income. The total outstanding cumulative preferred securities of MidAmerican Energy not subject to mandatory redemption requirements may be redeemed at the option of MidAmerican Energy at prices which, in the aggregate, total $32.6 million. The aggregate total the holders of all preferred securities outstanding at December 31, 2001, are entitled to upon involuntary bankruptcy is $158.4 million plus accrued dividends. Annual dividend requirements for all preferred securities outstanding at December 31, 2001, total $11.4 million. (10) SEGMENT INFORMATION: MidAmerican Energy has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated wholesale electricity and nonregulated wholesale and retail natural gas. The energy delivery segment derives its revenue principally from the delivery of retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated sales of natural gas and electricity. Common operating costs, interest income, interest expense, income tax expense and equity in the net income or loss of investees are allocated to each segment. MidAmerican Energy's external revenues by product and services are displayed on the Consolidated Statements of Income. -64- The following tables provides information on an operating segment basis as of and for the years ended December 31 (in thousands):
2001 2000 1999 ----------- ----------- ----------- SEGMENT PROFIT INFORMATION Revenues: External revenues - Generation ........................... $ 910,510 $ 724,500 $ 354,568 Energy delivery ...................... 1,664,462 1,694,942 1,479,193 Transmission ......................... 22,852 17,276 10,662 Sales & marketing .................... 133,249 95,641 15,851 ----------- ----------- ----------- Total .............................. 2,731,073 2,532,359 1,860,274 ----------- ----------- ----------- Intersegment revenues - Generation ......................... 606,164 588,862 548,633 Energy delivery .................... -- -- -- Transmission ....................... 55,086 58,220 71,110 Sales & marketing .................. 2,727 2,564 -- ----------- ----------- ----------- Total ............................ 663,977 649,646 619,743 Intersegment eliminations ............ (663,977) (649,646) (619,743) ----------- ----------- ----------- Consolidated ....................... $ 2,731,073 $ 2,532,359 $ 1,860,274 =========== =========== =========== Depreciation and amortization expense (a): Generation ............................. $ 133,681 $ 87,480 $ 84,559 Energy delivery ........................ 106,496 101,295 92,572 Transmission ........................... 8,900 8,663 13,861 Sales & marketing ...................... 2,022 -- -- ----------- ----------- ----------- Total ................................ $ 251,099 $ 197,438 $ 190,992 =========== =========== =========== Interest and dividend income: Generation ............................. $ 5,450 $ 7,935 $ 1,240 Energy delivery ........................ 6,727 6,695 1,451 Transmission ........................... 822 855 349 Sales & marketing ...................... 70 14 -- ----------- ----------- ----------- Total ................................ $ 13,069 $ 15,499 $ 3,040 =========== =========== =========== Fixed charges: Generation ............................. $ 31,726 $ 31,799 $ 34,612 Energy delivery ........................ 42,654 44,395 43,602 Transmission ........................... 5,401 5,630 10,362 Sales & marketing ...................... 363 14 -- ----------- ----------- ----------- Total ................................ 80,144 81,838 88,576 Preferred dividends .................... (4,544) (4,955) (4,955) ----------- ----------- ----------- Consolidated ......................... $ 75,600 $ 76,883 $ 83,621 =========== =========== ===========
-65-
2001 2000 1999 ----------- ----------- ----------- SEGMENT PROFIT INFORMATION (CONTINUED) Income before income taxes: Generation ............................. $ 142,637 $ 120,993 $ 85,263 Energy delivery ........................ 84,334 124,680 115,883 Transmission ........................... 39,514 32,470 21,749 Sales & marketing ...................... (5,799) (7,181) (12,066) ----------- ----------- ----------- Total ................................ 260,686 270,962 210,829 Preferred dividends .................... 4,544 4,955 4,955 ----------- ----------- ----------- Consolidated ......................... $ 265,230 $ 275,917 $ 215,784 =========== =========== =========== SEGMENT ASSET INFORMATION Capital expenditures: Generation ............................. $ 87,296 $ 48,386 $ 54,700 Energy delivery ........................ 159,302 120,919 119,613 Transmission ........................... 3,733 22,189 25,592 Sales & marketing ...................... 1,963 25,308 4,210 ----------- ----------- ----------- Total ................................ $ 252,294 $ 216,802 $ 204,115 =========== =========== =========== Total Assets: Generation ............................. $ 1,282,677 $ 1,333,253 $1,347,855 Energy delivery ........................ 2,107,598 2,226,445 1,981,431 Transmission ........................... 226,251 247,641 358,647 Sales & marketing ...................... 51,164 113,347 26,815 ----------- ----------- ---------- Total ................................ 3,667,690 3,920,686 $3,714,748 ========== Reclassifications and intersegment eliminations (b) ........ (89,798) (97,120) ----------- ----------- Consolidated ........................... $ 3,577,892 $ 3,823,566 =========== ===========
(a) Depreciation and amortization expense above includes depreciation related to nonregulated operations, which is included in Nonregulated Operating Expense - Other on the Consolidated Statements of Income. (b) Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Tariffs for MidAmerican Energy's utility services are established based on historical cost ratemaking. Therefore, the impact of any realized gains or losses related to financial instruments applicable to MidAmerican Energy's utility operations is dependent on the treatment authorized under future ratemaking proceedings. Cash and cash equivalents - The carrying amount approximates fair value due to the short maturity of these instruments. Quad Cities Station nuclear decommissioning trust fund - Fair value is based on quoted market prices of the investments held by the fund. -66- Notes payable - Fair value is estimated to be the carrying amount due to the short maturity of these issues. Preferred securities - Fair value of preferred securities with mandatory redemption provision is estimated based on the quoted market prices for similar issues. Long-term debt - Fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates available to MidAmerican Energy for debt of the same remaining maturities. Gas futures contracts and swaps - Fair value of the futures contracts are based on quoted market prices and generally have maturities of one year or less. The fair value of the swaps is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that would expect to be received or paid to terminate the agreements. See Note 1(i) for additional discussion of fair value. The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in thousands):
2001 2000 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- ------- Financial Instruments Issued by MidAmerican Energy: MidAmerican Energy preferred securities; subject to mandatory redemption ........................ $ 26,680 $ 27,747 $ 50,000 $ 50,700 MidAmerican Energy-obligated preferred securities; subject to mandatory redemption ................ 100,000 99,640 100,000 98,752 Long-term debt, including current portion ........ 820,594 843,930 921,682 925,349
The amortized cost, gross unrealized gains and losses and estimated fair value of investments held in the Quad Cities Station nuclear decommissioning trust fund at December 31 are as follows (in thousands): 2001 --------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Equity Securities ......... $ 50,241 $ 24,444 $ (316) $ 74,369 Municipal Bonds ........... 27,842 1,315 (92) 29,065 U.S. Government Securities 26,725 1,910 (19) 28,616 Corporate Debt Securities . 18,394 808 (23) 19,179 Cash equivalents .......... 7,120 -- -- 7,120 -------- -------- --------- -------- $130,322 $ 28,477 $ (450) $158,349 ======== ======== ========= ======== -67- 2000 -------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- -------- Available-for-sale: Equity Securities ........ $ 48,124 $ 30,714 $ (1,942) $ 76,896 Municipal Bonds .......... 27,758 1,071 (175) 28,654 U.S. Government Securities 26,284 1,163 -- 27,447 Corporate Securities ..... 14,709 48 (394) 14,363 Cash equivalents ......... 5,740 -- -- 5,740 -------- -------- --------- -------- $122,615 $ 32,996 $ (2,511) $153,100 ======== ======== ========= ======== At December 31, 2001, the debt securities, which include municipal bonds, U.S. Government securities and corporate securities, held in the Quad Cities Station nuclear decommissioning trust fund had the following maturities (in thousands): Available for Sale Amortized Fair Cost Value --------- ------- Within 1 year............ $ 2,981 $ 3,040 1 through 5 years........ 28,851 30,706 5 through 10 years....... 10,733 11,578 Over 10 years............ 30,396 31,536 The proceeds and gross realized gains and losses on the disposition of investments held in the Quad Cities Station nuclear decommissioning trust fund for the years ended December 31 are as follows (in thousands). For the purpose of computing realized gains and losses, the cost of investments is determined by specific identification. 2001 2000 1999 -------- -------- -------- Proceeds from sales ... $ 68,333 $ 34,279 $ 24,684 Gross realized gains .. 2,676 3,356 615 Gross realized losses . (7,314) (4,515) (2,704) (12) INCOME TAX EXPENSE: Income tax expense from continuing operations includes the following for the years ended December 31 (in thousands): 2001 2000 1999 --------- --------- --------- Current Federal .............. $ 111,674 $ 105,754 $ 95,967 State ................ 33,327 32,450 29,553 --------- --------- --------- 145,001 138,204 125,520 --------- --------- --------- Deferred Federal .............. (23,199) (18,174) (25,657) State ................ (4,433) (4,021) (5,746) --------- --------- --------- (27,632) (22,195) (31,403) --------- --------- --------- Investment tax credit, net (4,917) (5,548) (5,664) --------- --------- --------- Total ................. $ 112,452 $ 110,461 $ 88,453 ========= ========= ========= -68- Included in Deferred Income Taxes in the Consolidated Balance Sheets as of December 31 are deferred tax assets and deferred tax liabilities as follows (in thousands): 2001 2000 -------- -------- Deferred tax assets related to: Investment tax credits ...................... $ 41,275 $ 44,846 Pensions .................................... 27,955 17,820 Nuclear reserves and decommissioning ........ 17,898 20,690 Revenue sharing ............................. 24,769 3,742 Accrued liabilities ......................... 2,413 5,422 Other ....................................... 10 4,025 -------- -------- 114,320 96,545 -------- -------- Deferred tax liabilities related to: Depreciable property ........................ 412,773 421,481 Income taxes recoverable through future rates 185,222 186,427 Energy efficiency ........................... -- 4,391 Reacquired debt ............................. 7,544 10,256 Fuel cost recoveries ........................ 20,272 14,598 Other ....................................... 2,487 -- -------- -------- 628,298 637,153 Net deferred income tax liability ............... $513,978 $540,608 ======== ======== The following table is a reconciliation between the effective income tax rate indicated by the Consolidated Statements of Income and the statutory federal income tax rate for the years ended December 31: 2001 2000 1999 ---- ---- ---- Effective federal and state income tax rate 42% 40% 41% Amortization of investment tax credit ..... 2 2 3 State income tax, net of federal income tax benefit ............................. (7) (7) (7) Other ..................................... (2) -- (2) --- --- --- Statutory federal income tax rate ......... 35% 35% 35% === === === (13) INVENTORIES: Inventories include the following amounts as of December 31 (in thousands): 2001 2000 ------- ------- Materials and supplies, at average cost $24,886 $26,038 Coal stocks, at average cost .......... 27,855 21,076 Gas in storage, at LIFO cost .......... 27,609 18,413 Fuel oil, at average cost ............. 1,892 2,506 Other ................................. 1,097 1,097 ------- ------- Total .............................. $83,339 $69,130 ======= ======= At December 31, 2001 prices, the current cost of gas in storage was $37.2 million. -69- (14) MIDAMERICAN ENERGY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MIDAMERICAN ENERGY FINANCING I: In December 1996, MidAmerican Energy Financing I, a wholly owned statutory business trust of MidAmerican Energy, issued 4,000,000 shares of 7.98% Series MidAmerican Energy-obligated Mandatorily Redeemable Preferred Securities. The sole assets of MidAmerican Energy Financing are $103.1 million of MidAmerican Energy 7.98% Series A Debentures due 2045. There is a full and unconditional guarantee by MidAmerican Energy of the MidAmerican Energy Financing obligations under the Preferred Securities. MidAmerican Energy has the right to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarters. If interest payments on the Debentures are deferred, distributions on the Preferred Securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon, and MidAmerican Energy may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. If the Debentures, or a portion thereof, are redeemed, MidAmerican Energy Financing must redeem a like amount of the Preferred Securities. If a termination of MidAmerican Energy Financing occurs, MidAmerican Energy Financing will distribute to the holders of the Preferred Securities a like amount of the Debentures unless such a distribution is determined not to be practicable. If such determination is made, the holders of the Preferred Securities will be entitled to receive, out of the assets of the trust after satisfaction of its liabilities, a liquidation amount of $25 for each Preferred Security held plus accrued and unpaid distributions. (15) SALE OF ACCOUNTS RECEIVABLE: In 1997 MidAmerican Energy entered into a revolving agreement, which expires in October 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation, a special purpose entity established to purchase accounts receivable from MidAmerican Energy. MidAmerican Energy Funding Corporation in turn sells receivable interests to outside investors. In consideration of the sale, MidAmerican Energy received cash and a subordinated note, bearing interest at 8%, from MidAmerican Energy Funding Corporation. As of December 31, 2001, the revolving cash balance was $44 million, down $26 million from December 31, 2000, and the amount outstanding under the subordinated note was $28.7 million. The agreement is structured as a true sale under which the creditors of MidAmerican Energy Funding Corporation will be entitled to be satisfied out of the assets of MidAmerican Energy Funding Corporation prior to any value being returned to MidAmerican Energy or its creditors. Therefore, the accounts receivable sold are not reflected on the Consolidated Balance Sheets. At December 31, 2001, $71.5 million of accounts receivable, net of reserves, was sold under the agreement. (16) AFFILIATED COMPANY TRANSACTIONS: The companies identified as affiliates are MidAmerican Energy Holdings and its subsidiaries. The basis for these charges is provided for in service agreements between MidAmerican Energy and its affiliates. MHC incurred charges which are of general benefit to all of its subsidiaries. These costs were for administrative and general salaries and expenses, outside services, director fees, pension, deferred compensation, and retirement costs, some of which originated at MidAmerican Energy. MHC reimbursed MidAmerican Energy for charges originating at MidAmerican Energy in the amount of $0.4 million, $1.9 million, and $7.7 million for 2001, 2000 and 1999, respectively. MidAmerican Energy's allocated share of these costs and those which originated at MHC was $1.0 million, $(0.3) million, and $7.7 million for 2001, 2000 and 1999, respectively. -70- MidAmerican Energy was also reimbursed for charges incurred on behalf of its affiliates. The majority of these reimbursed expenses was for employee wages and benefits, insurance, building rent, computer costs, administrative services, travel expense, and general and administrative expense; including treasury, legal, shareholder relations and accounting functions. The amount of such expenses was $27.0 million, $25.8 million, and $11.7 million for 2001, 2000 and 1999, respectively. In 2001, MidAmerican Energy acquired a gas turbine equipment purchase contract from MidAmerican Energy Holdings for $22.0 million. MidAmerican Energy purchased a corporate jet from MidAmerican Energy Holdings for $14.5 million in 1999. MidAmerican Energy also reimbursed MidAmerican Energy Holdings in the amount of $8.8 million, $9.5 million and $5.0 million in 2001, 2000 and 1999, respectively, for its allocated share of corporate expenses. MidAmerican Energy leases unit trains from an affiliate for the transportation of coal to MidAmerican Energy's generating stations. Unit train costs, including maintenance, were approximately $0.1 million, $0.4 million and $1.0 million for 2001, 2000 and 1999, respectively. MidAmerican Energy purchased railcars from MidAmerican Rail Inc. in the amount of $1.4 million in 1999. MidAmerican Energy sold natural gas to AmGas, an affiliate, in the amount of $11.6 million, $32.0 million and $42.3 million for 2001, 2000 and 1999, respectively. In 2000 and 1999, MidAmerican Energy also purchased natural gas from AmGas. MidAmerican Energy's cost of gas related to these transactions was $1.3 million and $4.0 million for 2000 and 1999, respectively. MidAmerican Energy had accounts receivable from affiliates of $5.0 million and $3.7 million as of December 31, 2001 and 2000, respectively, that are included in Receivables on the Consolidated Balance Sheets. MidAmerican Energy also had accounts payable to affiliates of $1.9 million and $2.5 million as of December 31, 2001 and 2000, respectively, that are included in Accounts Payable on the Consolidated Balance Sheets. MidAmerican Energy has an agreement with Cordova Energy Company LLC, a subsidiary of MidAmerican Energy Holdings, to purchase electric capacity and energy from a gas-fired combined cycle generation plant which started commercial operation in June 2001. The agreement, which terminates in May 2004, provides for MidAmerican Energy to purchase up to 50% of the net capacity of the plant and to supply the fuel stock required to generate the energy purchased. MidAmerican Energy's payment for monthly capacity charges totaled $18.1 million for 2001. -71- (17) UNAUDITED QUARTERLY OPERATING RESULTS: 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands) Operating revenues .............. $958,786 $639,061 $580,244 $552,982 Operating income ................ 114,576 76,614 113,340 29,044 Income from continuing operations 55,789 32,636 56,564 7,789 Earnings on common stock ........ 54,550 31,368 55,588 6,728 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (In thousands) Operating revenues .............. $556,593 $523,482 $612,306 $839,978 Operating income ................ 95,977 61,067 123,215 58,497 Income from continuing operations 44,799 23,875 64,431 32,351 Earnings on common stock ........ 43,560 22,637 63,192 31,112 Quarterly data reflect seasonal variations common in the utility industry. The decrease in Earnings on Common Stock for the fourth quarter of 2001 compared to the fourth quarter of 2000 is due primarily to significantly warmer temperature conditions during the 2001 quarter. (18) OTHER INFORMATION: Non-Operating Income - Other, Net, as shown on the Consolidated Statements of Income includes the following for the years ended December 31 (in thousands):
2001 2000 1999 -------- -------- -------- Discount on sold receivables ...................... $(16,010) $(10,212) $ (9,457) Subservicer fee for sold receivables .............. 2,864 1,905 1,515 Gain on sale of rail cars ......................... 1,387 -- 5,357 Corporate-owned life insurance income ............. 5,258 9,299 251 Merger investigation costs ........................ (150) (297) (1,491) Allowance for equity funds used during construction 1,571 -- -- Other ............................................. (733) (2,150) 126 -------- -------- -------- Total expense ................................. $ (5,813) $ (1,455) $ (3,699) ======== ======== ========
-72- INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholder MidAmerican Energy Company Des Moines, Iowa We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of MidAmerican Energy Company and subsidiaries (Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, retained earnings, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MidAmerican Energy Company and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Des Moines, Iowa January 17, 2002 -73- SCHEDULE II MIDAMERICAN ENERGY COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 2001 (IN THOUSANDS)
Column A Column B Column C Column D Column E Balance at Additions Balance Beginning Charged at End Description of Year to Income Deductions of Year ----------- ---------- --------- ---------- -------- Reserves Deducted From Assets To Which They Apply: Reserve for uncollectible accounts: Year ended 2001....................... $ 102 $15,266 $(14,741) $ 627 ====== ======= ======== ====== Year ended 2000....................... $ - $ 8,498 $ (8,396) $ 102 ====== ======= ======== ====== Year ended 1999....................... $ - $ 6,581 $ (6,581) $ - ====== ======= ======== ====== Reserves Not Deducted From Assets (1): Year ended 2001....................... $8,146 $ 2,766 $ (3,110) $7,802 ====== ======= ======== ====== Year ended 2000....................... $8,051 $ 3,316 $ (3,221) $8,146 ====== ======= ======== ====== Year ended 1999....................... $4,688 $ 4,906 $ (1,543) $8,051 ====== ======= ======== ======
(1) Reserves not deducted from assets include estimated liabilities for losses retained by MidAmerican Energy for workers compensation, public liability and property damage claims. -74- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report, as amended, to be signed on its behalf by the undersigned, thereunto duly authorized. MIDAMERICAN ENERGY COMPANY -------------------------- Registrant Date: March 26, 2002 By /s/ Gregory E. Abel * ---------------------- (Gregory E. Abel) President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report, as amended, has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: Signature Title Date --------- ----- ---- /s/ David L. Sokol * Chairman and Director March 26, 2002 ---------------------------- (David L. Sokol) /s/ Gregory E. Abel * President, Chief Executive March 26, 2002 ---------------------------- Officer and Director (Gregory E. Abel) /s/ Patrick J. Goodman * Senior Vice President, March 26, 2002 ----------------------------- Chief Finnnancial Officer (Patrick J. Goodman) and Director /s/ Douglas L. Anderson * Senior Vice President March 26, 2002 ---------------------------- and Director (Douglas L. Anderson) *By:/s/ Paul J. Leighton Attorney-in-Fact March 26, 2002 ------------------------ (Paul J. Leighton) -75- EXHIBIT INDEX Exhibits Filed Herewith ----------------------- 10.17 Iowa Utilities Board Settlement Agreement, dated December 21, 2001 12 Computation of ratios of earnings to fixed charges and computation of ratios of earnings to fixed charges plus preferred dividend requirements 23 Consent of Deloitte & Touche LLP 24 Power of Attorney Exhibits Incorporated by Reference ---------------------------------- 3.1 Restated Articles of Incorporation of MidAmerican Energy Company, as amended October 27, 1998. (Filed as Exhibit 3.3 to MidAmerican Energy's Quarterly Report on Form 10-Q for the period ended September 30, 1998, Commission File No. 1-11505.) 3.2 Restated Bylaws of MidAmerican Energy Company, as amended July 24, 1996. (Filed as Exhibit 3.1 to MidAmerican Energy's Quarterly Report on Form 10-Q for the period ended June 30, 1996, Commission File No. 1-11505.) 4.1 General Mortgage Indenture and Deed of Trust dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-1 to Midwest Resources Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.2 First Supplemental Indenture dated as of January 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-2 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.3 Second Supplemental Indenture dated as of January 15, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4(b)-3 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-10654.) 4.4 Third Supplemental Indenture dated as of May 1, 1993, between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee. (Filed as Exhibit 4.4 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.) 4.5 Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.5 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 4.6 Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.6 to Midwest Resources' -76- Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 4.7 Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947. (Filed by Iowa-Illinois as Exhibit 7B to Commission File No. 2-6922.) 4.8 Sixth Supplemental Indenture dated as of July 1, 1967. (Filed by Iowa- Illinois as Exhibit 2.08 to Commission File No. 2-28806.) 4.9 Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the period ended June 30, 1982, Commission File No. 1-3573.) 4.10 Resignation and Appointment of successor Individual Trustee. (Filed by Iowa-Illinois as Exhibit 4.B.30 to Commission File No. 33-39211.) 4.11 Twenty-Eighth Supplemental Indenture dated as of May 15, 1992. (Filed as Exhibit 4.31.B to Iowa-Illinois' Current Report on Form 8-K dated May 21, 1992, Commission File No. 1-3573.) 4.12 Twenty-Ninth Supplemental Indenture dated as of March 15, 1993. (Filed as Exhibit 4.32.A to Iowa-Illinois' Current Report on Form 8-K dated March 24, 1993, Commission File No. 1-3573.) 4.13 Thirtieth Supplemental Indenture dated as of October 1, 1993. (Filed as Exhibit 4.34.A to Iowa-Illinois' Current Report on Form 8-K dated October 7, 1993, Commission File No. 1-3573.) 4.14 Sixth Supplemental Indenture dated as of July 1, 1995, between Midwest Power Systems Inc. and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.15 to MidAmerican Energy's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 4.15 Thirty-First Supplemental Indenture dated as of July 1, 1995, between Iowa-Illinois Gas and Electric Company and Harris Trust and Savings Bank, Trustee. (Filed as Exhibit 4.16 to MidAmerican Energy's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.1 MidAmerican Energy Company Severance Plan For Specified Officers dated November 1, 1996. (Filed as Exhibit 10.1 to Holdings' and MidAmerican Energy's respective Annual Reports on the combined Form 10-K for the year ended December 31, 1996, Commission File Nos. 1-12459 and 1-11505, respectively.) 10.2 MidAmerican Energy Company Restated Executive Deferred Compensation Plan. (Filed as Exhibit 10.2 to MidAmerican Energy's Quarterly Report on Form 10-Q dated March 31, 1999, Commission File No. 1-11505.) 10.3 MidAmerican Energy Company Combined Midwest Resources/Iowa Resources Restated Deferred Compensation Plan for Board of Directors. (Filed as Exhibit 10.1 to MidAmerican Energy's Quarterly Report on Form 10-Q dated March 31, 1999, Commission File No. 1-11505.) 10.4 MidAmerican Energy Company Supplemental Retirement Plan for Designated Officers. (Filed as Exhibit 10.3 to MidAmerican Energy's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) -77- 10.5 Midwest Resources Inc. Supplemental Retirement Plan (formerly the Midwest Energy Company Supplemental Retirement Plan). (Filed as Exhibit 10.10 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-10654.) 10.6 Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 4-C-2 to Iowa Power Inc.'s (IPR) Registration Statement, Registration No. 2-27681.) 10.7 Amendments Nos. 1 and 2 to Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District. (Filed as Exhibit 4-C-2a to IPR's Registration Statement, Registration No. 2-35624.) 10.8 Amendment No. 3 dated August 31, 1970, to the Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 5-C-2-b to IPR's Registration Statement, Registration No. 2-42191.) 10.9 Amendment No. 4 dated March 28, 1974, to the Power Sales Contract between Iowa Power Inc. and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 5-C-2-c to IPR's Registration Statement, Registration No. 2-51540.) 10.10 Supplemental Retirement Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.) 10.11 Compensation Deferral Plan for Principal Officers, as amended as of July 1, 1993. (Filed as Exhibit 10.K.2 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-3573.) 10.12 Board of Directors' Compensation Deferral Plan. (Filed as Exhibit 10.K.4 to Iowa-Illinois' Annual Report on Form 10-K for the year ended December 31, 1992, Commission File No. 1-3573.) 10.13 Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement Plan. (Filed as Exhibit 10.24 to Midwest Resources' Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-10654.) 10.14 Form of Indemnity Agreement between MidAmerican Energy Company and its directors and officers. (Filed as Exhibit 10.37 to MidAmerican's Annual Report on Form 10-K dated December 31, 1995, Commission File No. 1-11505.) 10.15 Amendment No. 5 dated September 2, 1997, to the Power Sales contract between MidAmerican Energy Company and Nebraska Public Power District, dated September 22, 1967. (Filed as Exhibit 10.2 to Holdings' and MidAmerican Energy's respective Quarterly Reports on the combined Form 10-Q for the quarter ended September 30, 1997, Commission File Nos. 1-12459 and 1-11505, respectively.) Note: Pursuant to (b) (4) (iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt not registered in which the total amount of securities authorized thereunder does not exceed 10% of total assets of the Company, but hereby agrees to furnish to the Commission on request any such instruments. -78-