UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934





For the
quarterly period ended September 30, 2008





or





[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934





For the
transition period from _________to _________





Commission
            
            Exact
      name of registrant as specified in its charter;
            
            IRS
      EmployerFile
      Number
            
            State
      or other jurisdiction of incorporation or
    organization
            
            Identification No.333-90553
            
            MIDAMERICAN
      FUNDING, LLC
            
            47-0819200(An
      Iowa Limited Liability Company)666
      Grand Avenue, Suite 500Des
      Moines, Iowa 50309-2580333-15387
            
            MIDAMERICAN
      ENERGY COMPANY
            
            42-1425214(An
      Iowa Corporation)666
      Grand Avenue, Suite 500Des
      Moines, Iowa 50309-2580(515)
      242-4300(Registrant’s
      telephone number, including area code)N/A(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
by check mark whether the registrants (1) have 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.





MidAmerican
      Funding, LLC
            Yes
      £  No
      T
            MidAmerican
      Energy Company
            Yes
      T  No
      £





Indicate
by check mark whether the registrants are large accelerated filers, accelerated
filers, non-accelerated filers or smaller reporting companies. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer T
            Smaller
      reporting company £





Indicate
by check mark whether either registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  £          No  T





All of
the member’s equity of MidAmerican Funding, LLC was held by its parent company,
MidAmerican Energy Holdings Company as of October 31, 2008.





All
common stock of MidAmerican Energy Company is held by its parent company, MHC
Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding, LLC. As
of October 31, 2008, 70,980,203 shares of MidAmerican Energy Company common
stock, without par value, were outstanding.














MidAmerican
Funding, LLC (“MidAmerican Funding”) and MidAmerican Energy Company
(“MidAmerican Energy”) separately file this combined Form 10-Q. Information
relating to each individual registrant is filed by such registrant on its own
behalf. Except for its subsidiary, MidAmerican Energy makes no representation as
to information relating to any other subsidiary of MidAmerican
Funding.





TABLE OF
CONTENTS








PART
      I - FINANCIAL INFORMATIONItem 1.
            Financial Statements
            3Item 2.
            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            23Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            35Item 4(T).
            Controls and Procedures
            36PART
      II - OTHER INFORMATIONItem 1.
            Legal Proceedings
            37Item 1A.
            Risk Factors
            37Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            37Item 3.
            Defaults Upon Senior Securities
            37Item 4.
            Submission of Matters to a Vote of Security
      Holders
            37Item 5.
            Other Information
            37Item 6.
            Exhibits
            37Signatures
            
            38Exhibit Index
            
            39








2








PART
I - FINANCIAL INFORMATION






Item 1.
            Financial
Statements




MidAmerican Energy Company
and Subsidiary





Report of Independent Registered Public Accounting
      Firm
            4Consolidated Balance Sheets
            5Consolidated Statements of
      Operations
            6Consolidated Statements of Cash
    Flows
            7Notes to Consolidated Financial
      Statements
            8MidAmerican Funding,
      LLC and SubsidiariesReport of Independent Registered Public Accounting
      Firm
            16Consolidated Balance Sheets
            17Consolidated Statements of
      Operations
            18Consolidated Statements of Cash
    Flows
            19Notes to Consolidated Financial
      Statements
            20








3





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM











To the
Board of Directors and Shareholder


MidAmerican
Energy Company


Des
Moines, Iowa





We have
reviewed the accompanying consolidated balance sheet of MidAmerican Energy
Company and subsidiary (the “Company”) as of September 30, 2008, and the
related consolidated statements of operations for the three-month and nine-month
periods ended September 30, 2008 and 2007, and of cash flows for the
nine-month periods ended September 30, 2008 and 2007. These interim
financial statements are the responsibility of the Company’s
management.





We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.





Based on
our reviews, we are not aware of any material modifications that should be made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.





We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet and
consolidated statement of capitalization (not presented herein) of MidAmerican
Energy Company and subsidiary as of December 31, 2007, and the related
consolidated statements of operations, comprehensive income, cash flows, and
retained earnings for the year then ended (not presented herein); and in our
report dated February 27, 2008, we expressed an unqualified opinion on
those consolidated financial statements, which included an explanatory paragraph
related to the adoption of Statement of Financial Accounting Standards
No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132(R), as of
December 31, 2006. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2007, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.








/s/
Deloitte & Touche LLP





Des
Moines, Iowa


November 7,
2008








4





MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS (Unaudited)


(In
millions)





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007ASSETSUtility
      Plant, NetElectric
            
            $
            7,810
            
            
            $
            7,473Gas
            
            
            1,135
            
            
            
            1,0868,945
            
            
            
            8,559Accumulated
      depreciation and amortization
            
            
            (3,379
            )
            
            
            (3,237
            )5,566
            
            
            
            5,322Construction
      work in progress
            
            
            1,066
            
            
            
            3866,632
            
            
            
            5,708Current
      AssetsCash
      and cash equivalents
            
            
            14
            
            
            
            11Restricted
      cash and short-term investments
            
            
            25
            
            
            
            -Receivables,
      net
            
            
            361
            
            
            
            485Inventories
            
            
            174
            
            
            
            133Other
            
            
            89
            
            
            
            39663
            
            
            
            668Other
      AssetsInvestments
      and nonregulated property, net
            
            
            431
            
            
            
            478Regulatory
      assets
            
            
            309
            
            
            
            268Other
            
            
            115
            
            
            
            129855
            
            
            
            875Total
      Assets
            
            $
            8,150
            
            
            $
            7,251CAPITALIZATION
      AND LIABILITIESCapitalizationCommon
      shareholder’s equity
            
            $
            2,524
            
            
            $
            2,288Preferred
      securities
            
            
            30
            
            
            
            30Long-term
      debt, excluding current portion
            
            
            2,865
            
            
            
            2,4705,419
            
            
            
            4,788Current
      LiabilitiesNotes
      payable
            
            
            235
            
            
            
            86Current
      portion of long-term debt
            
            
            -
            
            
            
            1Accounts
      payable
            
            
            354
            
            
            
            408Taxes
      accrued
            
            
            85
            
            
            
            85Interest
      accrued
            
            
            37
            
            
            
            41Other
            
            
            104
            
            
            
            76815
            
            
            
            697Other
      LiabilitiesDeferred
      income taxes
            
            
            648
            
            
            
            517Investment
      tax credits
            
            
            36
            
            
            
            38Asset
      retirement obligations
            
            
            202
            
            
            
            182Regulatory
      liabilities
            
            
            794
            
            
            
            793Other
            
            
            236
            
            
            
            2361,916
            
            
            
            1,766Total
      Capitalization and Liabilities
            
            $
            8,150
            
            
            $
            7,251





The
accompanying notes are an integral part of these financial
statements.





5





MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


(In
millions)





Three
      Months
            
            
            Nine
      MonthsEnded September 30,
            
            
            Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Operating
      RevenuesRegulated
      electric
            
            $
            552
            
            
            $
            537
            
            
            $
            1,527
            
            
            $
            1,484Regulated
      gas
            
            
            192
            
            
            
            146
            
            
            
            1,043
            
            
            
            854Nonregulated
            
            
            360
            
            
            
            299
            
            
            
            985
            
            
            
            8491,104
            
            
            
            982
            
            
            
            3,555
            
            
            
            3,187Operating
      ExpensesRegulated:Cost
      of fuel, energy and capacity
            
            
            206
            
            
            
            184
            
            
            
            571
            
            
            
            557Cost
      of gas sold
            
            
            154
            
            
            
            110
            
            
            
            866
            
            
            
            684Other
      operating expenses
            
            
            104
            
            
            
            105
            
            
            
            305
            
            
            
            305Maintenance
            
            
            54
            
            
            
            44
            
            
            
            152
            
            
            
            129Depreciation
      and amortization
            
            
            60
            
            
            
            70
            
            
            
            209
            
            
            
            215Property
      and other taxes
            
            
            26
            
            
            
            22
            
            
            
            77
            
            
            
            72604
            
            
            
            535
            
            
            
            2,180
            
            
            
            1,962Nonregulated:Cost
      of sales
            
            
            337
            
            
            
            272
            
            
            
            925
            
            
            
            783Other
            
            
            5
            
            
            
            4
            
            
            
            14
            
            
            
            13342
            
            
            
            276
            
            
            
            939
            
            
            
            796Total
      operating expenses
            
            
            946
            
            
            
            811
            
            
            
            3,119
            
            
            
            2,758Operating
      Income
            
            
            158
            
            
            
            171
            
            
            
            436
            
            
            
            429Non-Operating
      IncomeInterest
      and dividend income
            
            
            1
            
            
            
            5
            
            
            
            4
            
            
            
            7Allowance
      for equity funds
            
            
            6
            
            
            
            9
            
            
            
            17
            
            
            
            31Other
      income
            
            
            1
            
            
            
            3
            
            
            
            5
            
            
            
            7Other
      expense
            
            
            (1
            )
            
            
            -
            
            
            
            (3
            )
            
            
            (2
            )7
            
            
            
            17
            
            
            
            23
            
            
            
            43Fixed
      ChargesInterest
      on long-term debt
            
            
            39
            
            
            
            35
            
            
            
            114
            
            
            
            87Other
      interest expense
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            8Allowance
      for borrowed funds
            
            
            (5
            )
            
            
            (3
            )
            
            
            (11
            )
            
            
            (14
            )35
            
            
            
            33
            
            
            
            106
            
            
            
            81Income
      Before Income Taxes
            
            
            130
            
            
            
            155
            
            
            
            353
            
            
            
            391Income
      Taxes
            
            
            32
            
            
            
            45
            
            
            
            88
            
            
            
            115Net
      Income
            
            
            98
            
            
            
            110
            
            
            
            265
            
            
            
            276Preferred
      Dividends
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            1Earnings
      on Common Stock
            
            $
            98
            
            
            $
            110
            
            
            $
            264
            
            
            $
            275





The
accompanying notes are an integral part of these financial
statements.





6





MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


(In
millions)





Nine
      MonthsEnded
      September 30,2008
            
            
            2007Net
      Cash Flows From Operating ActivitiesNet
      income
            
            $
            265
            
            
            $
            276Adjustments
      to reconcile net income to net cash flows
              from
      operating activities:Depreciation
      and amortization
            
            
            210
            
            
            
            215Deferred
      income taxes and investment tax credit, net
            
            
            145
            
            
            
            13Amortization
      of other assets and liabilities
            
            
            21
            
            
            
            21Impact
      of changes in working capital -Receivables,
      net
            
            
            91
            
            
            
            (28
            )Inventories
            
            
            (41
            )
            
            
            (10
            )Accounts
      payable
            
            
            (68
            )
            
            
            17Taxes
      accrued
            
            
            -
            
            
            
            6Other
      current assets and liabilities
            
            
            (29
            )
            
            
            10Other,
      net
            
            
            (13
            )
            
            
            (9
            )Net
      cash flows from operating activities
            
            
            581
            
            
            
            511Net
      Cash Flows From Investing ActivitiesUtility
      construction expenditures
            
            
            (1,102
            )
            
            
            (879
            )Purchases
      of available-for-sale securities
            
            
            (118
            )
            
            
            (477
            )Proceeds
      from sales of available-for-sale securities
            
            
            112
            
            
            
            442Change
      in restricted cash and investments
            
            
            (25
            )
            
            
            -Other,
      net
            
            
            15
            
            
            
            8Net
      cash flows from investing activities
            
            
            (1,118
            )
            
            
            (906
            )Net
      Cash Flows From Financing ActivitiesProceeds
      from long-term debt
            
            
            451
            
            
            
            649Retirement
      of long-term debt
            
            
            (58
            )
            
            
            (1
            )Net
      change in notes payable
            
            
            149
            
            
            
            -Other,
      net
            
            
            (2
            )
            
            
            (4
            )Net
      cash flows from financing activities
            
            
            540
            
            
            
            644Net
      Change in Cash and Cash Equivalents
            
            
            3
            
            
            
            249Cash
      and Cash Equivalents at Beginning of Period
            
            
            11
            
            
            
            9Cash
      and Cash Equivalents at End of Period
            
            $
            14
            
            
            $
            258





The
accompanying notes are an integral part of these financial
statements.





7





MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(1)
            General





MidAmerican
Energy Company (“MidAmerican Energy”) is a public utility with electric and
natural gas operations and is the principal subsidiary of MHC Inc. MHC Inc. is
the direct wholly owned subsidiary of MidAmerican Funding, LLC (“MidAmerican
Funding”), which is an Iowa limited liability company with MidAmerican Energy
Holdings Company (“MEHC”) as its sole member. MEHC is a consolidated subsidiary
of Berkshire Hathaway Inc.





The
unaudited Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and the United States Securities and
Exchange Commission’s rules and regulations for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the disclosures required
by GAAP for annual financial statements. Management believes the unaudited
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for the fair presentation of
its financial statements as of September 30, 2008, and for the three and
nine months ended September 30, 2008 and 2007. Certain amounts in the prior
period Consolidated Financial Statements have been reclassified to conform to
the current period presentation. Such reclassifications did not impact
previously reported operating income, net income or retained earnings. The
results of operations for the three and nine months ended September 30,
2008, are not necessarily indicative of the results to be expected for the full
year.





The
unaudited Consolidated Financial Statements include the accounts of MidAmerican
Energy and the subsidiary in which it holds a controlling financial interest.
Intercompany accounts and transactions have been eliminated, other than those
between rate-regulated operations.





The
preparation of the unaudited Consolidated Financial Statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results may differ from the estimates used in preparing the unaudited
Consolidated Financial Statements. Note 2 of Notes to Consolidated
Financial Statements included in MidAmerican Energy’s Annual Report on Form 10-K
for the year ended December 31, 2007, describes the most significant
accounting estimates and policies used in the preparation of the Consolidated
Financial Statements. There have been no significant changes in MidAmerican
Energy’s assumptions regarding significant accounting policies during the first
nine months of 2008.





(2)
            New
      Accounting Pronouncements





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand how and
why an entity uses derivative instruments and their effects on an entity’s
financial position, financial performance and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged.
MidAmerican Energy is currently evaluating the impact of adopting SFAS
No. 161 on its disclosures included within the notes to its Consolidated
Financial Statements.





In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) applies to all
transactions or other events in which an entity obtains control of one or more
businesses. SFAS No. 141(R) establishes how the acquirer of a business
should recognize, measure and disclose in its financial statements the
identifiable assets and goodwill acquired, the liabilities assumed and any
noncontrolling interest in the acquired business. SFAS No. 141(R) is
applied prospectively for all business combinations with an acquisition date on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, with early application prohibited. SFAS
No. 141(R) will not have an impact on MidAmerican Energy’s historical
Consolidated Financial Statements and will be applied to business combinations
completed, if any, on or after January 1, 2009.








8





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
No. 160”). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 requires entities to report noncontrolling
interests as a separate component of shareholders’ equity in the consolidated
financial statements. The amount of earnings attributable to the parent and to
the noncontrolling interests should be clearly identified and presented on the
face of the consolidated statements of operations. Additionally, SFAS
No. 160 requires any changes in a parent’s ownership interest of its
subsidiary, while retaining its control, to be accounted for as equity
transactions. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008 and interim periods within those fiscal years.
MidAmerican Energy is currently evaluating the impact of adopting SFAS
No. 160 on its consolidated financial position and results of
operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and FinancialLiabilities - including
an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS
No. 159 permits entities to elect to measure many financial instruments and
certain other items at fair value. Upon adoption of SFAS No. 159, an entity
may elect the fair value option for eligible items that exist at the adoption
date. Subsequent to the initial adoption, the election of the fair value option
may only be made at initial recognition of the asset or liability or upon a
re-measurement event that gives rise to new-basis accounting. The decision about
whether to elect the fair value option is applied on an instrument-by-instrument
basis, is irrevocable and is applied only to an entire instrument and not only
to specified risks, cash flows or portions of that instrument. SFAS No. 159
does not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value nor does it eliminate disclosure
requirements included in other accounting standards. MidAmerican Funding and
MidAmerican Energy adopted SFAS No. 159 effective January 1, 2008, and
did not elect the fair value option for any existing eligible
items.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 does not impose fair value measurements on items
not already accounted for at fair value; rather it applies, with certain
exceptions, to other accounting pronouncements that either require or permit
fair value measurements. Under SFAS No. 157, fair value refers to the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants in the principal or most
advantageous market. The standard clarifies that fair value should be based on
the assumptions market participants would use when pricing the asset or
liability. In February 2008, the FASB issued Staff Position (“FSP”)
No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS
157-2”), which delays the effective date of SFAS No. 157 for all
non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the consolidated financial statements on a recurring
basis until fiscal years beginning after November 15, 2008. These
non-financial items include assets and liabilities such as asset retirement
obligations initially measured at fair value. In October 2008, the FASB
issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies
the application of SFAS No. 157 in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
FAS 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. MidAmerican Energy applied the
guidance of FSP FAS 157-3 when determining the fair value of its
auction rate securities. MidAmerican Funding and MidAmerican Energy adopted the
provisions of SFAS No. 157 for assets and liabilities recognized at fair
value on a recurring basis effective January 1, 2008. The partial adoption
of SFAS No. 157 did not have a material impact on MidAmerican Funding’s or
MidAmerican Energy’s Consolidated Financial Statements. Refer to Note 4 for
additional discussion.





(3)
            Risk
      Management





MidAmerican
Energy is exposed to the impact of market fluctuations in commodity prices,
principally natural gas and electricity. Interest rate risk exists on variable
rate debt, commercial paper and future debt issuances. MidAmerican Energy
employs established policies and procedures to manage its risks associated with
these market fluctuations using various commodity and financial derivative
instruments, including forward contracts, futures, options, swaps and other
over-the-counter agreements. The risk management process is designed to
identify, assess, monitor, report, manage, and mitigate each of the various
types of risk involved in its business. MidAmerican Energy does not engage in a
material amount of proprietary trading activities.








9





The
following table summarizes the various derivative mark-to-market positions
included in the Consolidated Balance Sheet as of September 30, 2008 (in
millions):





AccumulatedRegulatory
            
            
            OtherDerivative
      Net Assets (Liabilities)
            
            
            Net
      Assets
            
            
            ComprehensiveAssets
            
            
            Liabilities
            
            
            Net
            
            
            (Liabilities)
            
            
            (Income)
      Loss(1)Regulated
      electric
            
            $
            33
            
            
            $
            (2
            )
            
            $
            31
            
            
            $
            (31
            )
            
            $
            -Regulated
      gas
            
            
            1
            
            
            
            (57
            )
            
            
            (56
            )
            
            
            56
            
            
            
            -Nonregulated
            
            
            30
            
            
            
            (62
            )
            
            
            (32
            )
            
            
            -
            
            
            
            31Counterparty
      netting(2)
            
            
            (25
            )
            
            
            60
            
            
            
            35
            
            
            
            -
            
            
            
            -Total
            
            $
            39
            
            
            $
            (61
            )
            
            $
            (22
            )
            
            $
            25
            
            
            $
            31Current
            
            $
            31
            
            
            $
            (48
            )
            
            $
            (17
            )Non-current
            
            
            8
            
            
            
            (13
            )
            
            
            (5
            )Total
            
            $
            39
            
            
            $
            (61
            )
            
            $
            (22
            )





(1)
            Before
      income taxes.(2)
            Includes
      netting of cross-commodity positions with the same counterparty and
      netting of $35 million of collateral paid by MidAmerican Energy
      against derivative balances of the same
  counterparties.





The
following table summarizes the various derivative mark-to-market positions
included in the Consolidated Balance Sheet as of December 31, 2007 (in
millions):





AccumulatedRegulatory
            
            
            OtherDerivative
      Net Assets (Liabilities)
            
            
            Net
      Assets
            
            
            ComprehensiveAssets
            
            
            Liabilities
            
            
            Net
            
            
            (Liabilities)
            
            
            (Income)
      Loss(1)Regulated
      electric
            
            $
            6
            
            
            $
            (9
            )
            
            $
            (3
            )
            
            $
            3
            
            
            $
            -Regulated
      gas
            
            
            5
            
            
            
            (19
            )
            
            
            (14
            )
            
            
            17
            
            
            
            -Nonregulated
            
            
            13
            
            
            
            (12
            )
            
            
            1
            
            
            
            -
            
            
            
            (1
            )Total
            
            $
            24
            
            
            $
            (40
            )
            
            $
            (16
            )
            
            $
            20
            
            
            $
            (1
            )Current
            
            $
            22
            
            
            $
            (38
            )
            
            $
            (16
            )Non-current
            
            
            2
            
            
            
            (2
            )
            
            
            -Total
            
            $
            24
            
            
            $
            (40
            )
            
            $
            (16
            )





(1)
            Before
      income taxes.





(4)
            Fair
      Value Measurements





MidAmerican
Energy has various financial instruments that are measured at fair value in the
Consolidated Financial Statements, including marketable debt and equity
securities and commodity derivatives. MidAmerican Energy’s financial assets and
liabilities are measured using inputs from the three levels of the fair value
hierarchy. A financial asset or liability classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value
measurement. The three levels are as follows:





·
            Level
      1 – Inputs are unadjusted quoted prices in active markets for identical
      assets or liabilities that MidAmerican Energy has the ability to access at
      the measurement date.




·
            Level
      2 – Inputs include quoted prices for similar assets and liabilities in
      active markets, quoted prices for identical or similar assets or
      liabilities in markets that are not active, inputs other than quoted
      prices that are observable for the asset or liability and inputs that are
      derived principally from or corroborated by observable market data by
      correlation or other means (market corroborated
  inputs).






10






·
            Level
      3 – Unobservable inputs reflect MidAmerican Energy’s judgments about the
      assumptions market participants would use in pricing the asset or
      liability since limited market data exists. MidAmerican Energy develops
      these inputs based on the best information available, including
      MidAmerican Energy’s own data.




The
following table presents MidAmerican Energy’s assets and liabilities recognized
in the Consolidated Balance Sheet and measured at fair value on a recurring
basis as of September 30, 2008 (in millions):





Input
      Levels for Fair Value MeasurementsDescription
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            Other(1)
            
            
            TotalAssets(2)Available-for-sale
      securities
            
            $
            174
            
            
            $
            72
            
            
            $
            27
            
            
            $
            -
            
            
            $
            273Commodity
      derivatives
            
            
            6
            
            
            
            76
            
            
            
            28
            
            
            
            (71
            )
            
            
            39$
            180
            
            
            $
            148
            
            
            $
            55
            
            
            $
            (71
            )
            
            $
            312LiabilitiesCommodity
      derivatives
            
            $
            (50
            )
            
            $
            (109
            )
            
            $
            (8
            )
            
            $
            106
            
            
            $
            (61
            )





(1)
            Represents
      netting under master netting arrangements and cash collateral
      requirements.(2)
            Does
      not include investments in either pension or other postretirement plan
      assets.





MidAmerican
Energy’s investments in debt and equity securities are classified as
available-for-sale and stated at fair value. When available, the quoted market
price or net asset value of an identical security in the principal market is
used to record the fair value. In the absence of a quoted market price in a
readily observable market, the fair value is determined using pricing models
based on observable market inputs and quoted market prices of securities with
similar characteristics. The fair value of MidAmerican Energy’s investments in
auction rate securities, where there is no current liquid market, is determined
using pricing models based on available observable market data and MidAmerican
Energy’s judgement about the assumptions, including liquidity and nonperformance
risks, which market participants would use when pricing the asset.





MidAmerican
Energy uses various commodity derivative instruments, including forward
contracts, futures, options, swaps and other over-the-counter agreements. The
fair value of commodity derivatives is determined using unadjusted quoted prices
for identical instruments on the applicable exchange in which MidAmerican Energy
transacts. When quoted prices for identical instruments are not available,
MidAmerican Energy uses forward price curves derived from market price
quotations, when available, or internally developed and commercial models, with
internal and external fundamental data inputs. Market price quotations are
obtained from independent energy brokers, exchanges, direct communication with
market participants and actual transactions executed by MidAmerican Energy.
Market price quotations for certain major electricity and natural gas trading
hubs are generally readily obtainable for the applicable term of MidAmerican
Energy’s outstanding commodity derivative instruments, and therefore,
MidAmerican Energy’s forward price curves for those locations and periods
reflect observable market quotes. Market price quotations for other electricity
and natural gas trading points are not as readily obtainable or the instrument
is not actively traded. Given that limited market data exists for these
instruments, MidAmerican Energy uses forward price curves derived from internal
models based on perceived pricing relationships to major trading hubs that are
based on significant unobservable inputs.








11





The
following table reconciles the beginning and ending balances of MidAmerican
Energy’s assets and liabilities measured at fair value on a recurring basis
using significant Level 3 inputs (in millions):





Three Months Ended
            
            
            Nine Months EndedSeptember 30, 2008
            
            
            September 30, 2008Available-
            
            
            
            
            
            Available-For-Sale
            
            
            Commodity
            
            
            For-Sale
            
            
            CommoditySecurities
            
            
            Derivatives
            
            
            Securities
            
            
            DerivativesBeginning
      balance
            
            $
            31
            
            
            $
            (24
            )
            
            $
            40
            
            
            $
            -Changes
      included in earnings(1)
            
            
            -
            
            
            
            36
            
            
            
            -
            
            
            
            16Unrealized
      gains (losses) included in regulatory assets and
    liabilities
            
            
            -
            
            
            
            9
            
            
            
            -
            
            
            
            4Unrealized
      gains (losses) included in other comprehensive income
            
            
            (4
            )
            
            
            (1
            )
            
            
            (13
            )
            
            
            -Ending
      balance
            
            $
            27
            
            
            $
            20
            
            
            $
            27
            
            
            $
            20





(1)
            Changes
      included in earnings are reported as nonregulated revenues in the
      Consolidated Statement of Operations. Net unrealized gains included in
      earnings for the three and nine months ended related to commodity
      derivatives held at September 30, 2008, totaled $33 million and
      $21 million, respectively.





(5)
            Commitments
      and Contingencies





Environmental
Matters





MidAmerican
Energy is subject to numerous environmental laws, including the federal Clean
Air Act, related air quality standards promulgated by the United States
Environmental Protection Agency (“EPA”) and various state air quality laws; the
Endangered Species Act, particularly as it relates to certain endangered species
of fish; the Comprehensive Environmental Response, Compensation and Liability
Act and similar state laws relating to environmental cleanups; the Resource
Conservation and Recovery Act and similar state laws relating to the storage and
handling of hazardous materials; and the Clean Water Act and similar state laws
relating to water quality. These laws have the potential for impacting
MidAmerican Energy’s operations. Specifically, the Clean Air Act will likely
continue to impact the operation of MidAmerican Energy’s generating facilities
and will likely require MidAmerican Energy to reduce emissions from those
facilities through the installation of additional or improved emission controls,
the purchase of additional emission allowances, or some combination thereof.
MidAmerican Energy believes it is in material compliance with current
environmental requirements.





Other
Commitments and Contingencies





MidAmerican
Energy is a party in a variety of legal actions or claims arising out of the
normal course of business. Plaintiffs occasionally seek punitive or exemplary
damages. MidAmerican Energy does not believe that such normal and routine
matters will have a material effect on its financial results.





12








(6)
            Employee
      Benefit Plans





MidAmerican
Energy sponsors a noncontributory defined benefit pension plan covering
substantially all employees of MEHC and its domestic energy subsidiaries other
than PacifiCorp. MidAmerican Energy also sponsors certain postretirement health
care and life insurance benefits covering substantially all retired employees of
MEHC and its domestic energy subsidiaries other than PacifiCorp. Net periodic
benefit cost for the pension, including supplemental executive retirement plans,
and other postretirement benefit plans included the following components (in
millions):





Three
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007PensionService
      cost
            
            $
            6
            
            
            $
            8
            
            
            $
            19
            
            
            $
            20Interest
      cost
            
            
            11
            
            
            
            10
            
            
            
            31
            
            
            
            29Expected
      return on plan assets
            
            
            (11
            )
            
            
            (12
            )
            
            
            (34
            )
            
            
            (32
            )Net
      amortization
            
            
            -
            
            
            
            1
            
            
            
            1
            
            
            
            3Net
      periodic benefit cost
            
            $
            6
            
            
            $
            7
            
            
            $
            17
            
            
            $
            20





Three
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Other
      PostretirementService
      cost
            
            $
            1
            
            
            $
            1
            
            
            $
            4
            
            
            $
            5Interest
      cost
            
            
            3
            
            
            
            2
            
            
            
            10
            
            
            
            11Expected
      return on plan assets
            
            
            (3
            )
            
            
            (2
            )
            
            
            (11
            )
            
            
            (11
            )Net
      amortization
            
            
            -
            
            
            
            1
            
            
            
            1
            
            
            
            2Net
      periodic benefit cost
            
            $
            1
            
            
            $
            2
            
            
            $
            4
            
            
            $
            7





Employer
contributions to the pension and other postretirement plans are expected to be
$7 million and $14 million, respectively, in 2008. As of
September 30, 2008, $5 million and $10 million of contributions
had been made to the pension and other postretirement plans,
respectively.





(7)
            Comprehensive
      Income and Components of Accumulated Other Comprehensive Income (Loss),
      Net





The
components of comprehensive income are as follows (in millions):





Three
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Earnings
      on common stock
            
            $
            98
            
            
            $
            110
            
            
            $
            264
            
            
            $
            275Other
      comprehensive income (loss):Fair
      value adjustment on cash flow hedges, net of tax of $(22), $(1), $(12)
      and $6
            
            
            (36
            )
            
            
            (1
            )
            
            
            (20
            )
            
            
            9Unrealized
      losses on available-for-sale securities, net of tax of $(1), $-, $(5)
      and $-
            
            
            (3
            )
            
            
            -
            
            
            
            (8
            )
            
            
            -Total
      other comprehensive income (loss)
            
            
            (39
            )
            
            
            (1
            )
            
            
            (28
            )
            
            
            9Comprehensive
      income
            
            $
            59
            
            
            $
            109
            
            
            $
            236
            
            
            $
            284








13





Accumulated
other comprehensive income (loss), net is included in the Consolidated Balance
Sheets in common shareholder’s equity and consists of the following components
(in millions):





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007Fair
      value adjustment on cash flow hedges, net of tax of $(12) and
      $-
            
            $
            (19
            )
            
            $
            1Unrealized
      losses on available-for-sale securities, net of tax of $(5) and
      $-
            
            
            (8
            )
            
            
            -Total
      accumulated other comprehensive income (loss), net
            
            $
            (27
            )
            
            $
            1





(8)
            Segment
      Information





MidAmerican
Energy has identified three reportable operating segments: regulated electric,
regulated gas and nonregulated energy. The regulated electric segment derives
most of its revenue from regulated retail sales of electricity to residential,
commercial, and industrial customers and from wholesale sales. The regulated gas
segment derives most of its revenue from regulated retail sales of natural gas
to residential, commercial, and industrial customers and also obtains
significant revenues by transporting gas owned by others through its
distribution system. Pricing for regulated electric and gas sales are
established separately by regulatory agencies; therefore, management also
reviews each segment separately to make decisions regarding allocation of
resources and in evaluating performance. The nonregulated energy segment derives
most of its revenue from nonregulated retail electric and gas activities. Common
operating costs, interest income, interest expense and income tax expense are
allocated to each segment based on MidAmerican Energy allocators most related to
the nature of the cost.





The
following tables provide information on a reportable operating segment basis (in
millions):





Three
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Segment Profit
      InformationOperating
      revenues:Regulated
      electric
            
            $
            552
            
            
            $
            537
            
            
            $
            1,527
            
            
            $
            1,484Regulated
      gas
            
            
            192
            
            
            
            146
            
            
            
            1,043
            
            
            
            854Nonregulated
      energy
            
            
            360
            
            
            
            299
            
            
            
            985
            
            
            
            849Total
            
            $
            1,104
            
            
            $
            982
            
            
            $
            3,555
            
            
            $
            3,187Depreciation
      and amortization:Regulated
      electric
            
            $
            51
            
            
            $
            61
            
            
            $
            184
            
            
            $
            191Regulated
      gas
            
            
            9
            
            
            
            9
            
            
            
            25
            
            
            
            24Nonregulated
      energy
            
            
            1
            
            
            
            -
            
            
            
            1
            
            
            
            -$
            61
            
            
            $
            70
            
            
            $
            210
            
            
            $
            215Operating
      income:Regulated
      electric
            
            $
            148
            
            
            $
            157
            
            
            $
            353
            
            
            $
            346Regulated
      gas
            
            
            (5
            )
            
            
            (7
            )
            
            
            43
            
            
            
            35Nonregulated
      energy
            
            
            15
            
            
            
            21
            
            
            
            40
            
            
            
            48Total
            
            $
            158
            
            
            $
            171
            
            
            $
            436
            
            
            $
            429Earnings
      on common stock:Regulated
      electric
            
            $
            98
            
            
            $
            103
            
            
            $
            222
            
            
            $
            231Regulated
      gas
            
            
            (6
            )
            
            
            (5
            )
            
            
            18
            
            
            
            17Nonregulated
      energy
            
            
            6
            
            
            
            12
            
            
            
            24
            
            
            
            27Total
            
            $
            98
            
            
            $
            110
            
            
            $
            264
            
            
            $
            275








14





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007Segment Asset
      InformationTotal
      assets:Regulated
      electric
            
            $
            7,035
            
            
            $
            6,110Regulated
      gas
            
            
            883
            
            
            
            938Nonregulated
      energy
            
            
            232
            
            
            
            203Total
            
            $
            8,150
            
            
            $
            7,251








(9)
            Recent
      Debt Transactions





On
July 1, 2008, the Iowa Finance Authority issued $45 million of
variable-rate tax-exempt bonds due July 1, 2038, the proceeds of which were
loaned to MidAmerican Energy and are restricted for the payment of qualified
environmental construction costs. Also on July 1, 2008, the Iowa Finance
Authority issued $57 million of variable-rate tax-exempt bonds due
May 1, 2023, to refinance $57 million of pollution control revenue
refunding bonds issued on behalf of MidAmerican Energy in 1993. These
variable-rate tax-exempt bonds are remarketed and the interest rates reset on a
weekly basis. As of September 30, 2008, the weighted average interest rate for
these bonds was 8.25% and as of October 31, 2008, was 2.22%. MidAmerican Energy
is contractually responsible for the timely payment of principal and interest on
these variable-rate tax-exempt bonds.





On
April 1, 2008, MidAmerican Energy increased its unsecured revolving credit
facility from $500 million to $650 million. In September 2008,
MidAmerican Energy’s unsecured revolving credit facility was effectively reduced
by $5 million in connection with Lehman Brothers Bank, FSB’s bankruptcy.
The remaining $645 million unsecured revolving credit facility supports its
commercial paper program and its variable-rate tax-exempt bonds. As of
September 30, 2008, MidAmerican Energy had $235 million of commercial
paper outstanding and $195 million was reserved for support of
variable-rate tax-exempt bond obligations outstanding, leaving $215 million of
the revolving credit facility available. Additionally, on October 9, 2008,
MidAmerican Energy entered into a revolving credit agreement, expiring
October 8, 2009, for $250 million that provides support for additional
commercial paper capacity.





On
March 25, 2008, MidAmerican Energy issued $350 million of 5.3% Senior
Notes due March 15, 2018. The proceeds were used by MidAmerican Energy to
pay construction costs, including costs for its wind-powered generation projects
in Iowa, to repay short-term indebtedness and for general corporate
purposes.








15





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM











To the
Board of Managers and Member


MidAmerican
Funding, LLC


Des
Moines, Iowa





We have
reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC
and subsidiaries (the “Company”) as of September 30, 2008, and the related
consolidated statements of operations for the three-month and nine-month periods
ended September 30, 2008 and 2007, and of cash flows for the nine-month
periods ended September 30, 2008 and 2007. These interim financial
statements are the responsibility of the Company’s management.





We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.





Based on
our reviews, we are not aware of any material modifications that should be made
to such consolidated interim financial statements for them to be in conformity
with accounting principles generally accepted in the United States of
America.





We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet and
consolidated statement of capitalization (not presented herein) of MidAmerican
Funding, LLC and subsidiaries as of December 31, 2007, and the related
consolidated statements of operations, comprehensive income, cash flows, and
retained earnings for the year then ended (not presented herein); and in our
report dated February 27, 2008, we expressed an unqualified opinion on
those consolidated financial statements, which included an explanatory paragraph
related to the adoption of Statement of Financial Accounting Standards
No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans – an
amendment of FASB Statements No. 87, 88, 106, and 132(R), as of
December 31, 2006. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2007, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.








/s/
Deloitte & Touche LLP





Des
Moines, Iowa


November 7,
2008








16





MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS (Unaudited)


(In
millions)





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007ASSETSUtility
      Plant, NetElectric
            
            $
            7,810
            
            
            $
            7,473Gas
            
            
            1,135
            
            
            
            1,0868,945
            
            
            
            8,559Accumulated
      depreciation and amortization
            
            
            (3,379
            )
            
            
            (3,237
            )5,566
            
            
            
            5,322Construction
      work in progress
            
            
            1,066
            
            
            
            3866,632
            
            
            
            5,708Current
      AssetsCash
      and cash equivalents
            
            
            15
            
            
            
            12Restricted
      cash and short-term investments
            
            
            25
            
            
            
            -Receivables,
      net
            
            
            365
            
            
            
            490Inventories
            
            
            174
            
            
            
            133Other
            
            
            88
            
            
            
            40667
            
            
            
            675Other
      AssetsInvestments
      and nonregulated property, net
            
            
            446
            
            
            
            494Goodwill
            
            
            1,270
            
            
            
            1,270Regulatory
      assets
            
            
            309
            
            
            
            268Other
            
            
            115
            
            
            
            1292,140
            
            
            
            2,161Total
      Assets
            
            $
            9,439
            
            
            $
            8,544CAPITALIZATION
      AND LIABILITIESCapitalizationMember’s
      equity
            
            $
            3,041
            
            
            $
            2,825MidAmerican
      Energy preferred securities
            
            
            30
            
            
            
            30Long-term
      debt, excluding current portion
            
            
            3,390
            
            
            
            3,1706,461
            
            
            
            6,025Current
      LiabilitiesNotes
      payable
            
            
            235
            
            
            
            86Note
      payable to affiliate
            
            
            63
            
            
            
            33Current
      portion of long-term debt
            
            
            175
            
            
            
            1Accounts
      payable
            
            
            354
            
            
            
            408Taxes
      accrued
            
            
            85
            
            
            
            86Interest
      accrued
            
            
            41
            
            
            
            57Other
            
            
            104
            
            
            
            761,057
            
            
            
            747Other
      LiabilitiesDeferred
      income taxes
            
            
            637
            
            
            
            509Investment
      tax credits
            
            
            36
            
            
            
            38Asset
      retirement obligations
            
            
            202
            
            
            
            182Regulatory
      liabilities
            
            
            794
            
            
            
            793Other
            
            
            252
            
            
            
            2501,921
            
            
            
            1,772Total
      Capitalization and Liabilities
            
            $
            9,439
            
            
            $
            8,544





The
accompanying notes are an integral part of these financial
statements





17





MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)


(In
millions)





Three Months
            
            
            Nine MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Operating
      RevenuesRegulated
      electric
            
            $
            552
            
            
            $
            537
            
            
            $
            1,527
            
            
            $
            1,484Regulated
      gas
            
            
            192
            
            
            
            146
            
            
            
            1,043
            
            
            
            854Nonregulated
            
            
            363
            
            
            
            302
            
            
            
            991
            
            
            
            8551,107
            
            
            
            985
            
            
            
            3,561
            
            
            
            3,193Operating
      ExpensesRegulated:Cost
      of fuel, energy and capacity
            
            
            206
            
            
            
            184
            
            
            
            571
            
            
            
            557Cost
      of gas sold
            
            
            154
            
            
            
            110
            
            
            
            866
            
            
            
            684Other
      operating expenses
            
            
            104
            
            
            
            105
            
            
            
            305
            
            
            
            305Maintenance
            
            
            54
            
            
            
            44
            
            
            
            152
            
            
            
            129Depreciation
      and amortization
            
            
            60
            
            
            
            70
            
            
            
            209
            
            
            
            215Property
      and other taxes
            
            
            26
            
            
            
            22
            
            
            
            77
            
            
            
            72604
            
            
            
            535
            
            
            
            2,180
            
            
            
            1,962Nonregulated:Cost
      of sales
            
            
            337
            
            
            
            272
            
            
            
            926
            
            
            
            784Other
            
            
            7
            
            
            
            7
            
            
            
            17
            
            
            
            18344
            
            
            
            279
            
            
            
            943
            
            
            
            802Total
      operating expenses
            
            
            948
            
            
            
            814
            
            
            
            3,123
            
            
            
            2,764Operating
      Income
            
            
            159
            
            
            
            171
            
            
            
            438
            
            
            
            429Non-Operating
      IncomeInterest
      and dividend income
            
            
            1
            
            
            
            5
            
            
            
            4
            
            
            
            7Allowance
      for equity funds
            
            
            6
            
            
            
            9
            
            
            
            17
            
            
            
            31Other
      income
            
            
            1
            
            
            
            3
            
            
            
            6
            
            
            
            8Other
      expense
            
            
            (1
            )
            
            
            -
            
            
            
            (3
            )
            
            
            (2
            )7
            
            
            
            17
            
            
            
            24
            
            
            
            44Fixed
      ChargesInterest
      on long-term debt
            
            
            52
            
            
            
            47
            
            
            
            150
            
            
            
            122Other
      interest expense
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            9Preferred
      dividends of subsidiaries
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            1Allowance
      for borrowed funds
            
            
            (5
            )
            
            
            (3
            )
            
            
            (11
            )
            
            
            (14
            )48
            
            
            
            45
            
            
            
            143
            
            
            
            118Income
      Before Income Taxes
            
            
            118
            
            
            
            143
            
            
            
            319
            
            
            
            355Income
      Taxes
            
            
            27
            
            
            
            39
            
            
            
            75
            
            
            
            100Net
      Income
            
            $
            91
            
            
            $
            104
            
            
            $
            244
            
            
            $
            255





The
accompanying notes are an integral part of these financial
statements.





18





MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)


(In
millions)





Nine MonthsEnded
      September 30,2008
            
            
            2007Net
      Cash Flows From Operating ActivitiesNet
      income
            
            $
            244
            
            
            $
            255Adjustments
      to reconcile net income to net cash flows
              from
      operating activities:Depreciation
      and amortization
            
            
            210
            
            
            
            215Deferred
      income taxes and investment tax credit, net
            
            
            142
            
            
            
            12Amortization
      of other assets and liabilities
            
            
            21
            
            
            
            21Impact
      of changes in working capital -Receivables,
      net
            
            
            91
            
            
            
            (36
            )Inventories
            
            
            (41
            )
            
            
            (10
            )Accounts
      payable
            
            
            (68
            )
            
            
            21Taxes
      accrued
            
            
            2
            
            
            
            7Other
      current assets and liabilities
            
            
            (41
            )
            
            
            (2
            )Other,
      net
            
            
            (9
            )
            
            
            (7
            )Net
      cash flows from operating activities
            
            
            551
            
            
            
            476Net
      Cash Flows From Investing ActivitiesUtility
      construction expenditures
            
            
            (1,102
            )
            
            
            (879
            )Purchases
      of available-for-sale securities
            
            
            (118
            )
            
            
            (477
            )Proceeds
      from sales of available-for-sale securities
            
            
            112
            
            
            
            442Change
      in restricted cash and investments
            
            
            (25
            )
            
            
            -Other,
      net
            
            
            15
            
            
            
            7Net
      cash flows from investing activities
            
            
            (1,118
            )
            
            
            (907
            )Net
      Cash Flows From Financing ActivitiesProceeds
      from long-term debt
            
            
            451
            
            
            
            649Retirement
      of long-term debt
            
            
            (58
            )
            
            
            (1
            )Net
      increase in note payable to affiliate
            
            
            30
            
            
            
            36Net
      change in notes payable
            
            
            149
            
            
            
            -Other,
      net
            
            
            (2
            )
            
            
            (3
            )Net
      cash flows from financing activities
            
            
            570
            
            
            
            681Net
      Change in Cash and Cash Equivalents
            
            
            3
            
            
            
            250Cash
      and Cash Equivalents at Beginning of Period
            
            
            12
            
            
            
            9Cash
      and Cash Equivalents at End of Period
            
            $
            15
            
            
            $
            259





The
accompanying notes are an integral part of these financial
statements.








19





MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(1)
            General





MidAmerican
Funding, LLC (“MidAmerican Funding”) is an Iowa limited liability company with
MidAmerican Energy Holdings Company (“MEHC”) as its sole member. MEHC is a
consolidated subsidiary of Berkshire Hathaway Inc. MidAmerican Funding’s direct,
wholly owned subsidiary is MHC Inc. (“MHC”), which constitutes substantially all
of MidAmerican Funding’s assets, liabilities and business activities except
those related to MidAmerican Funding’s long-term debt securities. MHC,
MidAmerican Funding and MEHC are holding companies headquartered in Des Moines,
Iowa. MHC conducts no business other than the ownership of its subsidiaries.
MHC’s principal subsidiary is MidAmerican Energy Company (“MidAmerican Energy”),
a public utility with electric and natural gas operations. Direct, wholly owned
nonregulated subsidiaries of MHC are InterCoast Capital Company, Midwest Capital
Group, Inc., MidAmerican Services Company and MEC Construction Services
Co.





The
unaudited Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and the United States Securities and
Exchange Commission’s rules and regulations for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
disclosures required by GAAP for annual financial statements. Management
believes the unaudited Consolidated Financial Statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for the fair presentation of its financial statements as of
September 30, 2008, and for the three and nine months ended
September 30, 2008 and 2007. The results of operations for the three and
nine months ended September 30, 2008, are not necessarily indicative of the
results to be expected for the full year.





The
unaudited Consolidated Financial Statements include the accounts of MidAmerican
Funding and its subsidiaries in which it holds a controlling financial interest.
Intercompany accounts and transactions have been eliminated, other than those
between rate-regulated operations.





The
preparation of the unaudited Consolidated Financial Statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results may differ from the estimates used in preparing the unaudited
Consolidated Financial Statements. Note 2 of Notes to Consolidated
Financial Statements included in MidAmerican Funding’s Annual Report on Form
10-K for the year ended December 31, 2007, describes the most significant
accounting estimates and policies used in the preparation of the Consolidated
Financial Statements. There have been no significant changes in MidAmerican
Funding’s assumptions regarding significant accounting policies during the first
nine months of 2008.





(2)
            New
      Accounting Pronouncements





Refer to
Note 2 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding new accounting pronouncements.





(3)
            Risk
      Management





Refer to
Note 3 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding MidAmerican Funding’s risk management.





(4)
            Fair
      Value Measurements





Refer to
Note 4 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding MidAmerican Funding’s fair value measurements. In
addition to MidAmerican Energy’s financial instruments recorded at fair value,
MidAmerican Funding had $3 million of other trust securities as of
September 30, 2008, which are categorized as Level 2
assets.





20








(5)
            Commitments
      and Contingencies





Refer to
Note 5 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding MidAmerican Funding’s commitments and
contingencies.





Other
Commitments and Contingencies





MidAmerican
Funding is a party in a variety of legal actions or claims arising out of the
normal course of business. Plaintiffs occasionally seek punitive or exemplary
damages. MidAmerican Funding does not believe that such normal and routine
matters will have a material effect on its financial results.





(6)
            Employee
      Benefit Plans





Refer to
Note 6 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding MidAmerican Funding’s employee benefit
plans.





(7)
            Comprehensive
      Income and Components of Accumulated Other Comprehensive Income (Loss),
      Net





The
components of comprehensive income are as follows (in millions):





Three Months
            
            
            Nine MonthsEnded September 30,
            
            
            Ended September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Net
      income
            
            $
            91
            
            
            $
            104
            
            
            $
            244
            
            
            $
            255Other
      comprehensive income (loss):Fair
      value adjustment on cash flow hedges, net of tax of $(22), $(1), $(12)
      and $6
            
            
            (36
            )
            
            
            (1
            )
            
            
            (20
            )
            
            
            9Unrealized
      losses on available-for-sale securities, net of tax of $(1), $-, $(5)
      and $-
            
            
            (3
            )
            
            
            -
            
            
            
            (8
            )
            
            
            -Total
      other comprehensive income (loss)
            
            
            (39
            )
            
            
            (1
            )
            
            
            (28
            )
            
            
            9Comprehensive
      income
            
            $
            52
            
            
            $
            103
            
            
            $
            216
            
            
            $
            264





Accumulated
other comprehensive income (loss), net is included in the Consolidated Balance
Sheets in member’s equity and consists of the following components (in
millions):





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007Fair
      value adjustment on cash flow hedges, net of tax of $(12) and
      $-
            
            $
            (19
            )
            
            $
            1Unrealized
      losses on available-for-sale securities, net of tax of $(5) and
      $-
            
            
            (8
            )
            
            
            -Total
      accumulated other comprehensive income (loss), net
            
            $
            (27
            )
            
            $
            1





(8)
            Segment
      Information





MidAmerican
Funding has identified three reportable operating segments: regulated electric,
regulated gas and nonregulated energy. The regulated electric segment derives
most of its revenue from regulated retail sales of electricity to residential,
commercial, and industrial customers and from wholesale sales. The regulated gas
segment derives most of its revenue from regulated retail sales of natural gas
to residential, commercial, and industrial customers and also obtains
significant revenues by transporting gas owned by others through its
distribution system. Pricing for regulated electric and gas sales are
established separately by regulatory agencies; therefore, management also
reviews each segment separately to make decisions regarding allocation of
resources and in evaluating performance. The nonregulated energy segment derives
most of its revenue from nonregulated retail electric and gas activities. Common
operating costs, interest income, interest expense and income tax expense are
allocated to each segment based on MidAmerican Funding allocators most related
to the nature of the cost. “Other” in the tables below consists of the
nonregulated subsidiaries of MidAmerican Funding not engaged in the energy
business and parent company interest expense. The following tables provide
information on a reportable operating segment basis (in millions):




21





Three
      Months
            
            
            Nine
      MonthsEnded
      September 30,
            
            
            Ended
      September 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Segment Profit
      InformationOperating
      revenues:Regulated
      electric
            
            $
            552
            
            
            $
            537
            
            
            $
            1,527
            
            
            $
            1,484Regulated
      gas
            
            
            192
            
            
            
            146
            
            
            
            1,043
            
            
            
            854Nonregulated
      energy
            
            
            360
            
            
            
            299
            
            
            
            985
            
            
            
            849Other
            
            
            3
            
            
            
            3
            
            
            
            6
            
            
            
            6Total
            
            $
            1,107
            
            
            $
            985
            
            
            $
            3,561
            
            
            $
            3,193Depreciation
      and amortization:Regulated
      electric
            
            $
            51
            
            
            $
            61
            
            
            $
            184
            
            
            $
            191Regulated
      gas
            
            
            9
            
            
            
            9
            
            
            
            25
            
            
            
            24Nonregulated
      energy
            
            
            1
            
            
            
            -
            
            
            
            1
            
            
            
            -$
            61
            
            
            $
            70
            
            
            $
            210
            
            
            $
            215Operating
      income:Regulated
      electric
            
            $
            148
            
            
            $
            157
            
            
            $
            353
            
            
            $
            346Regulated
      gas
            
            
            (5
            )
            
            
            (7
            )
            
            
            43
            
            
            
            35Nonregulated
      energy
            
            
            15
            
            
            
            21
            
            
            
            40
            
            
            
            48Other
            
            
            1
            
            
            
            -
            
            
            
            2
            
            
            
            -Total
            
            $
            159
            
            
            $
            171
            
            
            $
            438
            
            
            $
            429Net
      income:Regulated
      electric
            
            $
            98
            
            
            $
            103
            
            
            $
            222
            
            
            $
            231Regulated
      gas
            
            
            (6
            )
            
            
            (5
            )
            
            
            18
            
            
            
            17Nonregulated
      energy
            
            
            6
            
            
            
            12
            
            
            
            24
            
            
            
            27Other
            
            
            (7
            )
            
            
            (6
            )
            
            
            (20
            )
            
            
            (20
            )Total
            
            $
            91
            
            
            $
            104
            
            
            $
            244
            
            
            $
            255





As
      ofSeptember 30,
            
            
            December 31,2008
            
            
            2007Segment Asset
      InformationTotal
      assets(1):Regulated
      electric
            
            $
            8,226
            
            
            $
            7,301Regulated
      gas
            
            
            962
            
            
            
            1,017Nonregulated
      energy
            
            
            232
            
            
            
            203Other
            
            
            19
            
            
            
            23Total
            
            $
            9,439
            
            
            $
            8,544





(1)
            Total
      assets by operating segment reflect the assignment of goodwill to
      applicable reporting units.





(9)
            Recent
      Debt Transactions





Refer to
Note 9 of MidAmerican Energy’s Notes to Consolidated Financial Statements
for information regarding MidAmerican Funding’s recent debt
transactions.





22








Item 2.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
  Operations




MidAmerican
Energy Company (“MidAmerican Energy”) is a public utility with electric and
natural gas operations and is the principal subsidiary within MidAmerican
Funding, LLC (“MidAmerican Funding”).





Management’s
Discussion and Analysis (“MD&A”) addresses the financial statements of
MidAmerican Funding and its subsidiaries and MidAmerican Energy and its
subsidiary as presented in this joint filing. Information in MD&A related to
MidAmerican Energy, whether or not segregated, also relates to MidAmerican
Funding. Information related to other subsidiaries of MidAmerican Funding
pertains only to the discussion of the financial condition and results of
operations of MidAmerican Funding. Where necessary, discussions have been
segregated under the heading “MidAmerican Funding” to allow the reader to
identify information applicable only to MidAmerican Funding.





MD&A
should be read in conjunction with the financial statements included in this
Form 10-Q and the notes to those statements, together with MD&A in
MidAmerican Energy’s and MidAmerican Funding’s most recently filed Annual Report
on Form 10-K.





Forward-Looking
Statements





This
report contains statements that do not directly or exclusively relate to
historical facts. These statements are ‘‘forward-looking statements’’ within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements can typically be identified by the use of forward-looking words, such
as ‘‘may,’’ ‘‘could,’’ ‘‘project,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘expect,’’
‘‘estimate,’’ ‘‘continue,’’ “intend,” ‘‘potential,’’ ‘‘plan,’’ ‘‘forecast,’’ and
similar terms. These statements are based upon MidAmerican Funding’s and/or
MidAmerican Energy’s current intentions, assumptions, expectations and beliefs
and are subject to risks, uncertainties and other important factors. Many of
these factors are outside the control of MidAmerican Funding or MidAmerican
Energy and could cause actual results to differ materially from those expressed
or implied by such forward-looking statements. These factors include, among
others:





·
            general
      economic, political and business conditions in the jurisdictions in which
      MidAmerican Energy’s facilities are
located;




·
            changes
      in governmental, legislative, or regulatory requirements affecting
      MidAmerican Energy or the electric or gas utility
    industries;




·
            changes
      in, and compliance with, environmental laws, regulations, decisions and
      policies that could increase operating and capital improvement costs,
      reduce plant output and delay plant
  construction;




·
            the
      outcome of general rate cases and other proceedings conducted by
      regulatory commissions or other governmental and legal
    bodies;




·
            changes
      in economic, industry or weather conditions, as well as demographic
      trends, that could affect customer growth and usage or supply of
      electricity and gas;




·
            changes
      in prices and availability for both purchases and sales of wholesale
      electricity, coal, natural gas, other fuel sources and fuel transportation
      that could have a significant impact on energy
  costs;




·
            the
      financial condition and creditworthiness of significant customers and
      suppliers;




·
            changes
      in business strategy or development
plans;




·
            availability,
      terms and deployment of capital, including severe reductions in demand for
      investment-grade commercial paper, debt securities and other sources of
      debt financing and volatility in the London Interbank Offered Rate
      (“LIBOR”), the base interest rate for MidAmerican Energy’s credit
      facilities;




·
            performance
      of MidAmerican Energy’s generation facilities, including unscheduled
      generation outages or repairs;




·
            risks
      relating to nuclear generation;




23




·
            the
      impact of derivative instruments used to mitigate or manage volume and
      price risk and interest rate risk and changes in the commodity prices,
      interest rates and other conditions that affect the value of the
      derivatives;




·
            the
      impact of increases in healthcare costs, changes in interest rates,
      mortality, morbidity and investment performance on pension and other
      postretirement benefits expense, as well as the impact of changes in
      legislation on funding
requirements;




·
            changes
      in MidAmerican Funding’s or MidAmerican Energy’s credit
      ratings;




·
            unanticipated
      construction delays, changes in costs, receipt of required permits and
      authorizations, ability to fund capital projects and other factors that
      could affect future generation plants and infrastructure
      additions;




·
            the
      impact of new accounting pronouncements or changes in current accounting
      estimates and assumptions on financial
results;




·
            other
      risks or unforeseen events, including litigation and wars, the effects of
      terrorism, embargos and other catastrophic events;
  and




·
            other
      business or investment considerations that may be disclosed from time to
      time in MidAmerican Funding’s or MidAmerican Energy’s filings with the
      United States Securities and Exchange Commission (“SEC”) or in other
      publicly disseminated written
documents.




Further
details of the potential risks and uncertainties affecting MidAmerican Funding
or MidAmerican Energy are described in their filings with the SEC, including
Item 1A and other discussions contained in this Form 10-Q. MidAmerican
Funding and MidAmerican Energy undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. The foregoing review of factors should not be
construed as exclusive.





Results
of Operations for the Three Months Ended September 30, 2008 and
2007





Overview





MidAmerican
Energy’s earnings on common stock decreased $12 million to $98 million
for the third quarter of 2008 compared to $110 million for the third
quarter of 2007. Increased maintenance expense for emergency response and
restoration related to storms in the third quarter of 2008 and lower regulated
electric margins were partially offset by a decrease in regulatory expense
related to a revenue sharing arrangement in Iowa as a result of lower Iowa
electric equity returns. Additionally, issuances of long-term debt in 2007 and
2008, principally to fund MidAmerican Energy’s construction of additional
wind-powered generation capacity in Iowa, and the timing of the use of the
related proceeds resulted in higher interest expense and lower interest income
compared to the third quarter of 2007. A reduction in income taxes due to
benefits from higher tax depreciation from significant capital additions and
greater production tax credits in 2008, partially offset the decreases to
earnings on common stock. MidAmerican Funding’s net income decreased
$13 million to $91 million for the third quarter of 2008 compared to
$104 million for the third quarter of 2007.





Regulated Electric Gross
Margin





Three
      MonthsEnded September 30,2008
            
            
            2007Gross
      margin (in millions):Operating
      revenues
            
            $
            552
            
            
            $
            537Less
      cost of fuel, energy and capacity
            
            
            206
            
            
            
            184Electric
      gross margin
            
            $
            346
            
            
            $
            353Sales
      (Gigawatt hours (“GWh”)):Retail
            
            
            5,596
            
            
            
            5,850Wholesale
            
            
            3,508
            
            
            
            3,097Total
            
            
            9,104
            
            
            
            8,947





Electric
gross margin for the third quarter of 2008 decreased $7 million compared to the
third quarter of 2007. Gross margin on electric retail sales decreased
$9 million, while gross margin on electric wholesale sales, which include
sales of energy to markets operated by regional transmission organizations,
other utilities, municipalities and marketers inside and outside of MidAmerican
Energy’s balancing authority area, increased $2 million. The decrease in
electric retail gross margin was due to lower sales volumes resulting from mild
temperatures experienced in the service territory compared to the third quarter
of 2007, partially offset by increases due to other usage factors. Additionally,
sales of renewable energy credits contributed $5 million to electric retail
gross margin for the third quarter of 2008. The improvement in electric
wholesale gross margin was due to an increase in wholesale sales volumes
resulting from increased generation available from the addition of owned
generation and the impact of lower retail sales volumes, substantially offset by
an increase in related fuel and energy unit costs.




24




Regulated Gas Gross
Margin





Three
      MonthsEnded
      September 30,2008
            
            
            2007Gross
      margin (in millions):Operating
      revenues
            
            $
            192
            
            
            $
            146Less
      cost of gas sold
            
            
            154
            
            
            
            110Gas
      gross margin
            
            $
            38
            
            
            $
            36Sales
      (000’s decatherms (“Dths”)):Retail
            
            
            6,222
            
            
            
            5,536Wholesale
            
            
            10,387
            
            
            
            11,222Total
            
            
            16,609
            
            
            
            16,758





Regulated
gas revenues include purchased 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 directly
affect gross margin or net income because revenues reflect comparable
fluctuations through the purchased gas adjustment clauses. Compared to the third
quarter of 2007, MidAmerican Energy’s average per-unit cost of gas sold
increased 41%, resulting in a $46 million increase in gas revenues and cost
of gas sold for the third quarter of 2008. Regulated gas revenues and cost of
gas sold decreased $2 million due to the decrease in total sales volumes in
the third quarter of 2008.





Regulated Operating
Expenses





Maintenance
expense of $54 million for the third quarter of 2008 increased
$10 million compared to the third quarter of 2007 due to a $14 million
increase in emergency response and restoration costs resulting from intense
storms in the third quarter of 2008.





Depreciation
and amortization expense of $60 million for the third quarter of 2008
decreased $10 million compared to the third quarter of 2007 due to a $15
million decrease in regulatory expense related to a revenue sharing arrangement
in Iowa as a result of lower Iowa electric equity returns. Utility plant
depreciation expense increased $6 million as a result of additional wind-powered
generating facilities placed in service in the fourth quarter of 2007 and the
first quarter of 2008. Refer to the “Utility Regulatory Matters” section of Item
7 in MidAmerican Energy’s Annual Report on Form 10-K for the year ended December
31, 2007, for an explanation of the revenue sharing arrangement.








25





Nonregulated Gross
Margin





Three
      MonthsEnded September 30,2008
            
            
            2007MidAmerican
      Energy (in millions) -Nonregulated
      operating revenues
            
            $
            360
            
            
            $
            299Less
      nonregulated cost of sales
            
            
            337
            
            
            
            272Nonregulated
      gross margin
            
            $
            23
            
            
            $
            27MidAmerican
      Funding Consolidated (in millions) -Nonregulated
      operating revenues
            
            $
            363
            
            
            $
            302Less
      nonregulated cost of sales
            
            
            337
            
            
            
            272Nonregulated
      gross margin
            
            $
            26
            
            
            $
            30Nonregulated
      electric retail sales (GWh)
            
            
            2,517
            
            
            
            2,793





Nonregulated
revenues and cost of sales for the third quarter of 2008 increased compared to
the third quarter of 2007 principally due to higher average prices and costs for
nonregulated gas sales. Nonregulated gross margin decreased $4 million for
the third quarter of 2008 due primarily to a lower gross margin on nonregulated
electric retail sales as a result of increased costs of electricity and the
reduction in electric retail sales volumes in the Illinois market.





Non-Operating
Income





MidAmerican
Energy’s non-operating income for the third quarter of 2008 decreased
$10 million compared to the third quarter of 2007 due in part to a $4
million decrease in interest income resulting from a more favorable cash
position in the third quarter of 2007 following the issuance of $650 million of
long-term debt in June 2007. Additionally, allowance for equity funds decreased
$3 million as a result of a greater portion of construction being financed by
debt in 2008. 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
(“FERC”).





Fixed
Charges





The
$4 million increase in MidAmerican Energy’s interest on long-term debt for
the third quarter of 2008 compared to the third quarter of 2007 was primarily
due to the issuance of $350 million of 5.3% Senior Notes in
March 2008. MidAmerican Energy is allowed to capitalize, and record as a
reduction to fixed charges, a cost of construction for debt funds used, based on
guidelines set forth by the FERC. The $2 million increase in allowance for
borrowed funds for the third quarter of 2008 was due to an increase in
construction work in progress related to wind-powered generation compared to the
third quarter of 2007 and the increased debt discussed above.





Income
Taxes





MidAmerican
Energy’s income tax expense decreased $13 million to $32 million for
the third quarter of 2008 with an effective tax rate of 25% compared to 29% for
the third quarter of 2007.





Federal
law currently provides for federal production tax credits for energy produced by
renewable electricity generation facilities, including wind-powered generation,
for ten years after the in-service date. MidAmerican Energy’s income taxes for
the third quarter of 2008 include $5 million of additional production tax
credits compared to the third quarter of 2007 due to additional wind-powered
generation.








26





Results
of Operations for the Nine Months Ended September 30, 2008 and
2007





Overview





MidAmerican
Energy’s earnings on common stock decreased $11 million to
$264 million for the first nine months of 2008 compared to
$275 million for the first nine months of 2007 due to increased interest
costs resulting from the issuance of long-term debt principally to fund
MidAmerican Energy’s construction of additional wind-powered generation capacity
in Iowa and by a decrease in allowances for equity and borrowed funds used
during construction as a result of Walter Scott, Jr. Energy Center Unit No. 4
(“WSEC Unit 4”) being placed in service in June 2007. Additionally, MidAmerican
Energy incurred increased maintenance expense due to generation plant outages
and greater costs in 2008 for emergency response and restoration related to
storms and flooding. The decrease in earnings resulting from these factors was
significantly offset by improved margins on regulated electric sales, a
reduction in income taxes and lower depreciation related to a regulatory charge
for a revenue sharing arrangement in Iowa as a result of lower Iowa electricity
equity returns.





Regulated Electric Gross
Margin





Nine
      MonthsEnded September 30,2008
            
            
            2007Gross
      margin (in millions):Operating
      revenues
            
            $
            1,527
            
            
            $
            1,484Less
      cost of fuel, energy and capacity
            
            
            571
            
            
            
            557Electric
      gross margin
            
            $
            956
            
            
            $
            927Sales
      (Gigawatt hours (“GWh”)):Retail
            
            
            15,844
            
            
            
            15,906Wholesale
            
            
            10,686
            
            
            
            9,489Total
            
            
            26,530
            
            
            
            25,395





Electric
gross margin for the first nine months of 2008 increased $29 million
compared to the first nine months of 2007. Gross margin on electric wholesale
sales, which include sales of energy to markets operated by regional
transmission organizations, other utilities, municipalities and marketers inside
and outside of MidAmerican Energy’s balancing authority area, increased
$36 million, while gross margin on electric retail sales decreased
$7 million. The increase in electric wholesale gross margin was
attributable to an increase in wholesale sales volumes and a lower average cost
of electricity compared to the first nine months of 2007 due principally to the
addition of WSEC Unit 4 in June 2007 and 288 MW (nameplate ratings) of
wind-powered generation placed in service in the fourth quarter of 2007 and the
first nine months of 2008. The decrease in electric retail gross margin was due
to lower sales volumes resulting from mild temperatures experienced in the
service territory compared to the first nine months of 2007, offset partially by
an improvement in other usage factors and a lower average cost of electricity.
Sales of renewable energy credits contributed $8 million to electric retail
gross margin in the first nine months of 2008.





Regulated Gas Gross
Margin





Nine MonthsEnded September 30,2008
            
            
            2007Gross
      margin (in millions):Operating
      revenues
            
            $
            1,043
            
            
            $
            854Less
      cost of gas sold
            
            
            866
            
            
            
            684Gas
      gross margin
            
            $
            177
            
            
            $
            170Sales
      (000’s decatherms (“Dths”)):Retail
            
            
            59,287
            
            
            
            53,100Wholesale
            
            
            32,302
            
            
            
            34,892Total
            
            
            91,589
            
            
            
            87,992




27




Regulated
gas revenues include purchased 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 directly
affect gross margin or net income because revenues reflect comparable
fluctuations through the purchased gas adjustment clauses. Compared to the first
nine months of 2007, MidAmerican Energy’s average per-unit cost of gas sold
increased 22%, resulting in a $154 million increase in gas revenues and
cost of gas sold for the first nine months of 2008. Regulated gas revenues and
cost of gas sold increased $28 million due to the increase in total sales
volumes in the first nine months of 2008.





The
following table summarizes the variance in gas operating revenues based on the
change in gas cost recoveries and margin components (in millions):





Nine
      MonthsEnded September 30,2008
      vs. 2007Change
      in recoveries of cost of gas sold:Average
      cost per unit
            
            $
            154Sales
      volumes
            
            
            28Total
      change in cost of gas sold
            
            
            182Change
      in margin:Usage
      factors
            
            
            8Energy
      efficiency cost recovery
            
            
            (4
            )Other
            
            
            3Total revenue
      variance
            
            $
            189





Usage
factors includes the effect of colder temperatures compared to the first nine
months of 2007 and influences on customer usage other than weather, such as
technology, energy efficiency and economics. Changes in revenues from the
recovery of energy efficiency program costs are substantially matched with
corresponding changes in other operating expenses.





Regulated Operating
Expenses





Other
operating expenses of $305 million for the first nine months of 2008 were
unchanged compared to the first nine months of 2007. Fossil-fueled generation
operation costs increased $4 million due in part to WSEC Unit 4
beginning commercial operation in June 2007. Additionally, electric distribution
costs increased $4 million compared to the first nine months of 2007. These
increases were offset by a $6 million decrease in pension and other
postretirement costs resulting from lower annual cost estimates and a
$5 million decrease in energy efficiency program costs, which was
substantially matched by decreases in related electric and gas
revenues.





Maintenance
expense of $152 million for the first nine months of 2008 increased
$23 million compared to the first nine months of 2007 primarily due to a
$12 million increase in costs for emergency response and restoration as a result
of storms and flooding in 2008. Additionally, fossil-fueled generation plant
maintenance costs increased $10 million as a result of outages. Other power
generation maintenance expense increased $3 million due to the increase in
the number of wind-powered generation facilities in service.





Depreciation
and amortization expense of $209 million for the first nine months of 2008
decreased $6 million compared to the first nine months of 2007 due to a
$28 million decrease in regulatory expense related to a revenue sharing
arrangement in Iowa as a result of lower Iowa electric equity returns. Utility
plant depreciation expense increased $23 million as a result of additional plant
in service, including WSEC Unit 4 placed in service on June 1, 2007,
and wind-powered generating facilities placed in service in the fourth quarter
of 2007 and the first quarter of 2008. Refer to the “Utility Regulatory Matters”
section of Item 7 in MidAmerican Energy’s Annual Report on Form 10-K for the
year ended December 31, 2007, for an explanation of the revenue sharing
arrangement.








28





Nonregulated Gross
Margin





Nine
      MonthsEnded September 30,2008
            
            
            2007MidAmerican
      Energy (in millions) -Nonregulated
      operating revenues
            
            $
            985
            
            
            $
            849Less
      nonregulated cost of sales
            
            
            925
            
            
            
            783Nonregulated
      gross margin
            
            $
            60
            
            
            $
            66MidAmerican
      Funding Consolidated (in millions) -Nonregulated
      operating revenues
            
            $
            991
            
            
            $
            855Less
      nonregulated cost of sales
            
            
            926
            
            
            
            784Nonregulated
      gross margin
            
            $
            65
            
            
            $
            71Nonregulated
      electric retail sales (GWh)
            
            
            7,169
            
            
            
            7,480





Nonregulated
revenues and cost of sales for the first nine months of 2008 increased compared
to the first nine months of 2007 principally due to higher average prices and
costs related to both nonregulated gas sales and nonregulated electric retail
sales. Additionally, nonregulated gas sales volumes increased 9%, while
nonregulated electric retail sales volumes decreased 4%. Nonregulated gross
margin decreased $6 million for the first nine months of 2008 due primarily
to increases in costs of electricity and natural gas.





Non-Operating
Income





MidAmerican
Energy’s non-operating income for the first nine months of 2008 decreased
$20 million compared to the first nine months of 2007 primarily due to a
$14 million decrease in allowance for equity funds as a result of the
decrease in construction work in progress from WSEC Unit 4 being placed in
service in June 2007. 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 FERC. Additionally, interest
income decreased $3 million as a result of a more favorable cash position in the
third quarter of 2007 following the issuance of $650 million of long-term debt
in June 2007.





Fixed
Charges





The
$27 million increase in MidAmerican Energy’s interest on long-term debt for
the first nine months of 2008 compared to the first nine months of 2007 was
primarily due to the issuances of $400 million of 5.65% Senior Notes and
$250 million of 5.95% Senior Notes in June 2007 and $350 million of
5.3% Senior Notes in March 2008. MidAmerican Energy’s other interest
expense decreased $5 million due to a lower balance of the Iowa revenue
sharing liability. MidAmerican Energy is allowed to capitalize, and record as a
reduction to fixed charges, a cost of construction for debt funds used, based on
guidelines set forth by the FERC. The $3 million decrease in allowance for
borrowed funds for the first nine months of 2008 was primarily due to a decrease
in construction work in progress from WSEC Unit 4 being placed in service
in June 2007.





Income
Taxes





MidAmerican
Energy’s income tax expense decreased $27 million to $88 million for
the first nine months of 2008 with an effective tax rate of 25% compared to 29%
for the first nine months of 2007.





Federal
law currently provides for federal production tax credits for energy produced by
renewable electricity generation facilities, including wind-powered generation,
for ten years after the in-service date. MidAmerican Energy’s income taxes for
the first nine months of 2008 include $13 million of additional production
tax credits compared to the first nine months of 2007 due to additional
wind-powered generation.




29





Liquidity
and Capital Resources





MidAmerican
Energy and MidAmerican Funding have available a variety of sources of liquidity
and capital resources, both internal and external, including cash flows from
operations, public and private debt offerings, the issuance of commercial paper,
the use of unsecured revolving credit facilities, and other sources. These
sources are expected to provide funds required for current operations, capital
expenditures, debt retirements and other capital requirements. The availability
and terms under which MidAmerican Energy and MidAmerican Funding have access to
external financing depends on a variety of factors, including their credit
ratings, investors’ judgment of risk and conditions in the overall capital
market at the time of marketing, including the condition of the utility industry
in general.





In the
U.S. and most other economies around the world, recent market and economic
conditions have been unprecedented and challenging with more restrictive credit
conditions and slow growth through the third quarter of 2008. For the first nine
months of 2008, continued concerns about the systemic impact of inflation,
energy costs, geopolitical issues, the availability and cost of credit, the U.S.
mortgage market and a declining real estate market in the U.S. have contributed
to increased market volatility and diminished expectations for the economy. In
the third quarter, large financial institutions such as Countrywide Financial
Corporation, Washington Mutual Savings Bank, the Federal Home Loan Mortgage
Association, the Federal National Mortgage Association, Wachovia Corporation,
Bear Stearns Companies Inc and Merrill Lynch & Co., Inc. were unable to
survive as independent institutions. Lehman Brothers Holdings Inc. was forced to
file for bankruptcy. Other surviving institutions such as Citigroup Inc.,
Goldman Sachs Group, Inc., American International Group, Inc., Morgan Stanley
and others required multibillion dollar capital infusions.The U.S. federal
government enacted emergency legislation in an attempt to stabilize the economy,
increased the federal deposit insurance, invested billions of dollars in
financial institutions and is taking other steps to infuse liquidity into the
economy. The global nature of this credit crisis led other governments to
institute similar measures. These conditions, combined with volatile oil, gas
and other commodity prices, declining business and consumer confidence and
increased unemployment have in the weeks subsequent to the end of the quarter
contributed to volatility of unprecedented levels.





As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and
significantly wider credit spreads. Concern about the general stability of the
markets and the credit strength of counterparties has led many lenders and
institutional investors to reduce, and in some cases, cease to provide funding
to borrowers. Continued turbulence in the U.S. and international markets and
economies may adversely affect our liquidity and financial condition, and the
liquidity and financial condition of our customers. Although in some cases,
certain strong investment grade regulated utilities have been able to issue debt
in the capital markets, the cost of this capital has increased and, if these
poor market conditions continue, it may limit our ability to access the bank and
debt markets to meet liquidity and capital expenditure needs, resulting in
adverse effects on the timing and amount of our capital expenditures, financial
condition and results of operations.





As
reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy’s net
cash provided by operating activities was $581 million and
$511 million for the first nine months of 2008 and 2007, respectively.
MidAmerican Funding’s net cash provided by operating activities was
$551 million and $476 million for the first nine months of 2008 and
2007, respectively. The increase in operating cash flows was primarily due to a
reduction in income taxes paid resulting from greater tax depreciation from
increased capital additions and greater production tax credits in 2008. The
increase resulting from a reduction in income taxes paid was partially offset by
greater disbursements for interest and maintenance expense and by greater cash
collateral posted for derivative positions.





Utility Construction
Expenditures





MidAmerican
Energy’s primary need for capital is utility construction expenditures, which
totaled $1.1 billion and $879 million for the first nine months of
2008 and 2007, respectively. Utility construction expenditures for 2007 included
amounts for the construction of WSEC Unit 4, which was placed into service
June 1, 2007. MidAmerican Energy’s utility construction expenditures for
2008, excluding the non-cash allowance for equity funds used during
construction, are estimated to be approximately $1.5 billion, which
includes $1.0 billion for the wind-powered generation projects discussed
below, $91 million for emissions control equipment to address current and
anticipated air quality regulations, and $385 million for ongoing
operational projects, including connections for new customers and facilities to
accommodate load growth. Capital expenditure needs are reviewed regularly by
management and may change significantly as a result of such reviews. Estimates
may change significantly at any time as a result of, among other factors,
changes in rules and regulations, including environmental and nuclear, changes
in income tax laws, general business conditions, load projections, the cost and
efficiency of construction labor, equipment, and materials, and the cost of
capital. In addition, there can be no assurance that costs related to capital
expenditures will be fully recovered. MidAmerican Energy expects to meet these
capital expenditure requirements with short-term borrowings, cash flows from
operations and the issuance of long-term debt, however, to the extent this
capital is more costly or not available, capital projects may be delayed or
cancelled.




30




On
July 27, 2007, the Iowa Utilities Board (“IUB”) approved a settlement
agreement between MidAmerican Energy and the Iowa Office of Consumer Advocate
(“OCA”) in conjunction with MidAmerican Energy’s ratemaking principles
application for up to 540 MW (nameplate ratings) of additional wind-powered
generation capacity in Iowa to be placed in service on or before
December 31, 2013. All new wind-powered generation capacity up to the
540 MW will be subject to the 2007 settlement agreement, including
78 MW (nameplate ratings) placed in service in the fourth quarter of 2007
and 87 MW (nameplate ratings) placed in service in the first nine months of
2008. On June 16, 2008 and August 27, 2008, the IUB approved separate
settlement agreements between MidAmerican Energy and the OCA for 108 MW
(nameplate ratings) and 53 MW (nameplate ratings), respectively. As of
September 30, 2008, MidAmerican Energy had 748 MW (nameplate ratings)
of operating wind-powered generation capacity and 536 MW (nameplate
ratings) of wind-powered generation capacity in Iowa under development or
construction that it expects will be placed in service by December 31,
2008. Generally speaking, accredited capacity ratings for wind-powered
generation facilities are considerably less than the nameplate ratings due to
the varying nature of wind. MidAmerican Energy continues to pursue additional
cost effective wind-powered generation capacity. Refer to Note 14 of Notes
to Consolidated Financial Statements included in Item 8 of MidAmerican
Energy’s Annual Report on Form 10-K for the year ended December 31, 2007,
for a discussion of the 2007 settlement agreement.





Refer to
the “Environmental Matters” section later in MD&A for additional information
regarding capital expenditures for emission control equipment.





Investment Trust
Valuation





MidAmerican
Energy sponsors a defined benefit pension plan and postretirement benefit plans
covering substantially all employees of MEHC and its domestic energy
subsidiaries other than PacifiCorp. The investments within the associated
employee benefit plan trusts incurred market losses of approximately
$118 million, or 14%, during the first nine months of 2008. The benefit
plan assets and obligations are measured as of December 31 each year.
Reductions in plan assets as a result of investment losses may result in a
change in individual plan funded status and a decrease (increase) in regulatory
assets (liabilities). Changes in the value of plan assets will not have an
impact on earnings for 2008; however, reduced benefit plan assets may result in
increased benefit costs in future years and may increase the amount and
accelerate the timing of required future funding contributions.





Nuclear
decommissioning trust funds have been established for the Quad Cities Nuclear
Station Units 1 and 2 to satisfy MidAmerican Energy’s nuclear decommissioning
obligations. These funds will not be needed until decommissioning commences.
Current licenses for the Quad Cities Station provide for operation until
December 14, 2032. These investments in debt and equity securities are
classified as available-for-sale and are reported at fair value. Funds are
invested in the trusts in accordance with applicable federal and state
investment guidelines and are restricted for use as reimbursement for costs of
decommissioning the Quad Cities Station. The investments within the associated
trusts incurred market losses of approximately $27 million, or 10%, during
the first nine months of 2008. Should the trust funds continue to
experience declines in market value, MidAmerican Energy may be required to take
measures, such as making additional contributions to the trusts or providing
financial guarantees through letters of credit or guarantees, to assure
regulatory authorities that the trusts are adequately funded.





Debt
Issuance





On
July 1, 2008, the Iowa Finance Authority issued $45 million of
variable-rate tax-exempt bonds due July 1, 2038, the proceeds of which were
loaned to MidAmerican Energy and are restricted for the payment of qualified
environmental construction costs. Also on July 1, 2008, the Iowa Finance
Authority issued $57 million of variable-rate tax-exempt bonds due
May 1, 2023, to refinance $57 million of pollution control revenue
refunding bonds issued on behalf of MidAmerican Energy in 1993. MidAmerican
Energy is contractually responsible for the timely payment of principal and
interest on these variable-rate tax-exempt bonds.




31





On
March 25, 2008, MidAmerican Energy issued $350 million of 5.3% Senior
Notes due March 15, 2018. The proceeds were used by MidAmerican Energy to
pay construction costs, including costs for its wind-powered generation projects
in Iowa, to repay short-term indebtedness and for general corporate
purposes.





Debt Authorizations and
Related Matters





MidAmerican
Energy has authority from the FERC to issue through October 30, 2010, short-term
debt in the form of commercial paper and bank notes aggregating $1.2 billion.
MidAmerican Energy currently has in place a revolving credit facility, expiring
July 6, 2012, for $645 million that supports $450 million of its
commercial paper program and its variable-rate tax-exempt obligations.
Additionally, on October 9, 2008, MidAmerican Energy entered into a revolving
credit agreement, expiring October 8, 2009, for $250 million that provides
support for additional commercial paper capacity.





MidAmerican
Energy currently has an effective registration statement with the SEC to issue
any amount of long-term securities through October 1, 2011. It also has
authorization from the FERC to issue long-term securities totaling up to
$1.118 billion through May 14, 2009, and $870 million through October
30, 2010. Regarding annual and multiple year capital projects, MidAmerican
Energy has authorizations, expiring May 2, 2009, and May 2, 2011,
respectively, from the Illinois Commerce Commission (“ICC”) to issue up to an
aggregate of $236 million of long-term debt securities. In October 2008,
regarding annual and multiple year capital projects, MidAmerican Energy received
additional authorizations from the ICC, expiring October 8, 2010, and
October 8, 2012, respectively, to issue up to an aggregate of
$870 million of long-term debt securities.





In
conjunction with the March 1999 merger, MidAmerican Energy committed to the IUB
to use commercially reasonable efforts to maintain an investment grade rating on
its long-term debt and to maintain its common equity level above 42% of total
capitalization unless circumstances beyond its control result in the common
equity level decreasing to below 39% of total capitalization. MidAmerican Energy
must seek the approval of the IUB of a reasonable utility capital structure if
MidAmerican Energy’s common equity level decreases below 42% of total
capitalization, unless the decrease is beyond the control of MidAmerican Energy.
MidAmerican Energy is also required to seek the approval of the IUB if
MidAmerican Energy’s equity level decreases to below 39%, even if the decrease
is due to circumstances beyond the control of MidAmerican Energy. If MidAmerican
Energy’s common equity level were to drop below the required thresholds,
MidAmerican Energy’s ability to issue debt could be restricted. As of
September 30, 2008, MidAmerican Energy’s common equity ratio was 47%
computed on a basis consistent with its commitment.





MidAmerican
Funding or one of its subsidiaries, including MidAmerican Energy, may from time
to time seek to retire its outstanding debt through cash purchases in the open
market, privately negotiated transactions or otherwise. Any debt securities
repurchased by MidAmerican Funding or one of its subsidiaries may be reissued or
resold by MidAmerican Funding or one of its subsidiaries from time to time and
will depend on prevailing market conditions, the issuing company’s liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.





Contractual Obligations and
Commercial Commitments





Subsequent
to December 31, 2007, there were no material changes outside the normal
course of business in MidAmerican Energy’s and MidAmerican Funding’s contractual
obligations and commercial commitments from the information provided in
Item 7 of their Annual Report on Form 10-K for the year ended
December 31, 2007, other than the following debt
issuances.  Additionally, refer to “Utility Construction Expenditures”
and “Investment Trust Valuation” discussions included in Liquidity and Capital
Resources.”





Credit
Ratings Risks


On
September 18, 2008, Standard & Poor’s placed MidAmerican Energy’s debt
credit ratings on CreditWatch with negative implications. As of
September 30, 2008, MidAmerican Energy’s senior unsecured debt credit
ratings were as follows: Fitch Ratings, “A/stable;” Moody’s Investor Service,
“A2/stable;” and Standard & Poor’s, “A-/watch negative.” Debt and preferred
securities of MidAmerican Energy are rated by nationally recognized credit
rating agencies. Assigned credit ratings are based on each rating agency’s
assessment of MidAmerican Energy’s ability to, in general, meet the obligations
of its issued debt or preferred securities. The credit ratings are not a
recommendation to buy, sell or hold securities, and there is no assurance that a
particular credit rating will continue for any given period of
time.
 
 MidAmerican
Funding and MidAmerican Energy have no credit rating downgrade triggers that
would accelerate the maturity dates of its outstanding debt, and a change in
credit rating is not an event of default under the applicable debt instruments.
MidAmerican Energy’s unsecured revolving credit facility does not require the
maintenance of a minimum credit rating level in order to draw upon its
availability. However, commitment fees and interest rates under the credit
facility are tied to credit ratings and increase or decrease when the ratings
change. A ratings downgrade could also increase the future cost of commercial
paper, short- and long-term debt issuances or new credit
facilities.
 
 A change
in MidAmerican Energy’s credit ratings could result in the requirement to post
cash collateral, letters of credit or other similar credit support under certain
agreements related to its procurement or sale of electricity, natural gas, coal,
transportation and other supplies. In accordance with industry practice,
MidAmerican Energy’s energy supply and marketing activities may either
specifically provide bilateral rights to demand cash or other security if credit
exposures on a net basis exceed certain ratings-dependent threshold levels or
provide the right for counterparties to demand “adequate assurances” in the
event of a material adverse change in MidAmerican Energy’s creditworthiness. As
of September 30, 2008, MidAmerican Energy’s credit ratings from the three
recognized credit rating agencies were investment grade; however, if the ratings
fell one rating below investment grade, its collateral requirements would
increase by approximately $226 million. MidAmerican Energy’s collateral
requirements could fluctuate considerably due to seasonality, market price
volatility, a loss of key MidAmerican Energy generating facilities or other
related factors.


32


Environmental
Matters





MidAmerican
Energy is subject to federal, state and local laws and regulations with regard
to air and water quality, renewable portfolio standards, hazardous and solid
waste disposal and other environmental matters. The future costs (beyond
existing planned capital expenditures) of complying with applicable
environmental laws, regulations and rules cannot be reasonably estimated but are
expected to be material to MidAmerican Energy. In particular, future mandates
including those associated with addressing the issue of global climate change,
may impact the operation of MidAmerican Energy generating facilities and may
require MidAmerican Energy to reduce emissions at its facilities through the
installation of additional emission control equipment or to purchase additional
emission allowances or offsets in the future. MidAmerican Energy is not aware of
any proven, commercially available technology that eliminates or captures and
stores carbon dioxide emissions from coal-fired and gas-fired generation
facilities, and MidAmerican Energy is uncertain when, or if, such technology
will be commercially available.





MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions that may be required to meet emissions reductions as
promulgated by the U.S. Environmental Protection Agency (“EPA”). The plan is
designed to effectively manage its expenditures required to comply with
emissions standards. On April 1, 2008, MidAmerican Energy submitted to the
IUB an updated plan, as required every two years by Iowa law, which increased
its estimate of required expenditures. That plan estimated that the cost of
incremental capital expenditures for emission control equipment included in its
plan for compliance with current air quality requirements would total
approximately $360 million for January 1, 2008, through
December 31, 2015. Additionally, MidAmerican Energy expected to incur
significant incremental operating costs in conjunction with the utilization of
the emissions control equipment. In light of the recent action on the Clean Air
Interstate Rule (“CAIR”), as discussed below, MidAmerican Energy will be
updating its estimates. Given the uncertainty in air emissions regulation, the
change in estimates, if any, cannot be quantified at this time. Estimates of the
environmental capital and operating requirements may change significantly at any
time as a result of, among other factors, changes in related regulations, prices
of products used to meet the requirements and management’s strategies for
achieving compliance with the regulations.





National Ambient Air Quality
Standards





The EPA
implements national ambient air quality standards for ozone and fine particulate
matter, as well as for other criteria pollutants that set the minimum level of
air quality for the United States. Areas that achieve the standards, as
determined by ambient air quality monitoring, are characterized as being in
attainment, while those that fail to meet the standards are designated as being
nonattainment areas. Generally, sources of emissions in a nonattainment area are
required to make emissions reductions. A new, more stringent standard for fine
particulate matter became effective on December 18, 2006, but is under
legal challenge in the United States Court of Appeals for the District of
Columbia Circuit. On September 2, 2008, the EPA recommended that all of Scott
and Muscatine Counties in Iowa and Rock Island County in Illinois be designated
as being in nonattainment of the fine particulate standard adopted in December
2006. MidAmerican Energy’s Riverside coal-fired generating facility is located
in Scott County, Iowa and its Louisa coal-fired generating facility is located
in Louisa County, adjacent to Muscatine County, Iowa. The Iowa Department of
Natural Resources disagrees with the EPA’s recommended nonattainment designation
for all of Scott and Muscatine Counties and believes that the nonattainment
boundaries should be drawn more narrowly to include only those facilities they
believe have caused the monitored exceedances of the standard. The EPA plans to
make its final designations regarding nonattainment by December 18, 2008. Until
the final designations have been made, it cannot be determined what impact the
nonattainment designation may have on the operation of MidAmerican Energy’s
facilities.




33





Regulated Air Pollutants





In
March 2005, the EPA released the final CAIR, calling for reductions of
sulfur dioxide (“SO2”) and
nitrogen oxide (“NOx”)
emissions in the Eastern United States through, at each state’s option, a
market-based cap and trade system, emission reductions, or both because of
contributions to downwind nonattainment of the fine particulate matter and ozone
standards. The SO2 and
NOx
emissions reductions were planned to be accomplished in two phases, in 2009-2010
and 2015. However, on July 11, 2008, the United States Court of Appeals for the
District of Columbia Circuit held that the CAIR was fatally flawed and vacated
the rule, remanding it to the EPA to consider which states are included in CAIR
based on their contribution to nonattainment and connect states’ emission
reductions to contributions to nonattainment in addition to distributing
allowances appropriately. On September 24, 2008, the EPA and others filed a
petition for rehearing to the full court of the CAIR. On October 21, 2008, the
United States Court of Appeals for the District of Columbia Circuit, on its own
motion, ordered the parties to the appeal to file additional briefs on two
issues, including whether the parties seek to have the CAIR vacated and whether
the court should stay its mandate until the EPA promulgates a revised rule.
Given the court’s ruling, the pending petition for rehearing, and the request
for additional briefing, it is unknown when reductions in emissions of SO2 and
NOx
will be required or the level of any required reductions on MidAmerican Energy’s
generation facilities. Under the CAIR, a market for trading SO2 and
NOx
emission credits had developed. As a result of the rule being vacated, that
market has been adversely affected, and the value of credits has declined. While
MidAmerican Energy participated in the market for SO2 credits,
management does not expect these market declines to be material to MidAmerican
Energy.





The Clean
Air Mercury Rule (“CAMR”), issued in 2005, set up an emissions trading system to
reduce mercury emissions. The rule was unanimously overturned on February 8,
2008, by a three-judge panel of the United States Court of Appeals for the
District of Columbia Circuit. On September 17, 2008, the Utility Air Regulatory
Group petitioned the United States Supreme Court for a writ of certiorari to
review the United States Court of Appeals for the District of Columbia Circuit’s
February 8, 2008, decision overturning the rule. The EPA filed a petition to the
United States Supreme Court on October 17, 2008, seeking to overturn the lower
court’s ruling.





The
emissions reductions could be made more stringent by current or future
regulatory and legislative proposals at the federal or state levels that would
result in significant reductions of SO2, NOx and
mercury, as well as carbon dioxide and other gases that may affect global
climate change.





Regional Haze





The EPA
has initiated a regional haze program intended to improve visibility at specific
federally protected areas. Some of MidAmerican Energy’s plants meet the
threshold applicability criteria under the Clean Air Visibility Rules. In
accordance with the federal requirements, states were required to submit state
implementation plans by December 2007 to demonstrate reasonable progress toward
achieving natural visibility conditions in certain Class I areas by
requiring emission controls, known as best available retrofit technology
(“BART”), on sources with emissions that are anticipated to cause or contribute
to impairment of visibility. Iowa submitted its state implementation plan to the
EPA by December 2007 and suggested that the emission reductions already made by
MidAmerican Energy and additional reductions that will be made under the CAIR
place the state in the position that no further reductions should be required.
However, because the court has vacated the CAIR, emissions reductions could be
required under the regional haze provisions at MidAmerican Energy’s
BART-eligible sources. Until the outcome of the CAIR or its replacement is
better known, it is not known whether emissions reductions will be required
under this provision.





Refer to
the Environmental Regulations section of Item 1 in MidAmerican Energy’s
Annual Report on Form 10-K for the year ended December 31, 2007, for a
detailed discussion of environmental standards affecting MidAmerican
Energy.








34





New
Accounting Pronouncements





For a
discussion of new accounting pronouncements affecting MidAmerican Energy and
MidAmerican Funding, refer to Note 2 of Notes to Consolidated Financial
Statements included in Item 1 of this Form 10-Q.





Critical
Accounting Policies and Estimates





Certain
accounting policies require management to make estimates and judgments
concerning transactions that will be settled in the future. Amounts recognized
in the Consolidated Financial Statements from such estimates are necessarily
based on numerous assumptions involving varying and potentially significant
degrees of judgment and uncertainty. Accordingly, the amounts currently
reflected in the Consolidated Financial Statements will likely increase or
decrease in the future as additional information becomes available. Estimates
are used for, but not limited to, the accounting for the effects of certain
types of regulation, derivatives, impairment of long-lived assets and goodwill,
pension and other postretirement obligations, income taxes and revenue
recognition - unbilled revenue. For additional discussion of MidAmerican
Energy’s and MidAmerican Funding’s critical accounting policies, see Item 7
of their Annual Report on Form 10-K for the year ended December 31,
2007. MidAmerican Energy’s and MidAmerican Funding’s critical accounting
policies have not changed materially since December 31, 2007.




Item 3.
            Quantitative and Qualitative
      Disclosures About Market Risk





For
quantitative and qualitative disclosures about market risk affecting MidAmerican
Energy and MidAmerican Funding, see Item 7A of their Annual Report on
Form 10-K for the year ended December 31, 2007. MidAmerican Energy’s
and MidAmerican Funding’s exposure to market risk and their management of such
risk has not changed materially since December 31, 2007. The recent
unprecedented volatility in the capital and credit markets has developed rapidly
and may create additional risks in the future. Refer to Note 3 of Notes to
Consolidated Financial Statements included in Item 1 of this Form 10-Q for
disclosure of MidAmerican Energy’s derivative positions as of September 30,
2008 and December 31, 2007.





Credit
Risk





As of
September 30, 2008, 80% of MidAmerican Energy’s credit exposure, net of
collateral, from wholesale operations was with counterparties having externally
rated “investment grade” credit ratings, while an additional 17% of MidAmerican
Energy’s credit exposure, net of collateral, from wholesale operations was with
counterparties having financial characteristics deemed equivalent to “investment
grade” by MidAmerican Energy based on internal review.





For the
nine month period ended September 30, 2008, MidAmerican Energy has not
experienced a significant increase in customers’ inability to pay, or pay on
time, amounts owed to MidAmerican Energy. Management continues to closely
monitor credit risks and has heightened collection efforts, including the
evaluation of counterparty credit risk. MidAmerican Energy’s bad debt expense
has not materially changed for the first nine months of 2008 as compared to
2007.





Interest
Rate Risk





As of
September 30, 2008, MidAmerican Energy had short- and long-term
floating-rate obligations totaling $430 million that expose MidAmerican
Energy to the risk of increased interest expense in the event of increases in
short-term interest rates. Changes in floating interest rates have not had a
material impact on MidAmerican Energy’s consolidated interest expense for the
nine month period ended September 30, 2008.





Refer to
the “Liquidity and Capital Resources” discussion in Item 2 of this Form
10-Q for a discussion regarding the current debt markets and the potential
impact to MidAmerican Energy.








35






Item 4(T).
            Controls and
      Procedures





At the
end of the period covered by this Quarterly Report on Form 10-Q, MidAmerican
Energy and MidAmerican Funding each carried out an evaluation, under the
supervision and with the participation of their respective management, including
the Chief Executive Officer (principal executive officer) and the Chief
Financial Officer (principal financial officer), of the effectiveness of the
design and operation of their respective disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of
1934, as amended). Based upon that evaluation, each company’s management,
including the Chief Executive Officer (principal executive officer) and the
Chief Financial Officer (principal financial officer), concluded that their
respective disclosure controls and procedures were effective to ensure that
information required to be disclosed by each company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and is
accumulated and communicated to management, including their respective company’s
Chief Executive Officer (principal executive officer) and Chief Financial
Officer (principal financial officer), or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure. There
has been no change in MidAmerican Funding’s or MidAmerican Energy’s internal
control over financial reporting during the quarter ended September 30,
2008, that has materially affected, or is reasonably likely to materially
affect, their respective internal control over financial reporting.





36








PART
II – OTHER INFORMATION








Item 1.
            Legal
      Proceedings




MidAmerican
Funding and its subsidiaries currently have no material legal proceedings. For a
discussion of the termination of a previously disclosed legal proceeding, refer
to Part II, Item 1 in MidAmerican Energy’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2008. Information regarding
MidAmerican Energy’s regulatory and environmental matters is included in the
“Utility Regulatory Matters” and “Environmental Matters” sections, respectively,
of Item 7 in its Annual Report on Form 10-K for the year ended
December 31, 2007.




Item 1A.
            Risk Factors




There has
been no material change to MidAmerican Funding’s or MidAmerican Energy’s risk
factors from those disclosed in Item 1A of their Annual Report on
Form 10-K for the year ended December 31, 2007.




Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds




Not
applicable.




Item 3.
            Defaults Upon Senior
  Securities




Not
applicable.




Item 4.
            Submission of Matters to a Vote of Security
      Holders




Not
applicable.




Item 5.
            Other
      Information




Not
applicable.




Item 6.
            Exhibits





The
exhibits listed on the accompanying Exhibit Index are filed as a part of this
Quarterly Report.







37





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, each registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








MIDAMERICAN
      FUNDING, LLCMIDAMERICAN ENERGY
      COMPANYRegistrantsDate:  November 7,
      2008
            /s/  Thomas
      B. SpecketerThomas
      B. SpecketerVice
      President and Controllerof
      MidAmerican Funding, LLCand
      MidAmerican Energy Company(principal
      financial and accounting officer)








38








EXHIBIT INDEX





Exhibit
      No.
            DescriptionMidAmerican
      Energy15
            Awareness
      Letter of Independent Registered Public Accounting
Firm.31.1
            Principal
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Principal
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            Principal
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
            Principal
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.MidAmerican
      Funding31.3
            Principal
      Executive Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.4
            Principal
      Financial Officer Certification Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.3
            Principal
      Executive Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.4
            Principal
      Financial Officer Certification Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.









39