**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, 2006





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 500****Des
                Moines, Iowa 50309-2580****333-15387**
            
            **MIDAMERICAN
                ENERGY COMPANY**
            
            **42-1425214****(An
                Iowa Corporation)****666
                Grand Avenue, Suite 500****Des
                Moines, Iowa 50309-2580**(515)
                242-4300(Registrant’s
                telephone number, including area code)(Former
                name, former address and former fiscal year, if changed since last
                report)





Indicate
      by check mark if either registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act. Yes  ̈ No T





Indicate
      by check mark if either registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Act.





MidAmerican
                Funding, LLC
            YesTNo ̈
            MidAmerican
                Energy Company
            Yes ̈NoT





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 ̈NoT
            MidAmerican
                Energy Company
            YesTNo ̈









Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrants’ knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. T





Indicate
      by check mark whether the registrants are large accelerated filers, accelerated
      filers, or non-accelerated filers. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerT





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


Yes  ̈  No T





As
      of
      October 27, 2006, all of the member’s equity of MidAmerican Funding, LLC
      was held by its parent company, MidAmerican Energy Holdings
      Company.





As
      of
      October 27, 2006, all 70,980,203 outstanding shares of MidAmerican Energy
      Company’s voting stock were held by its parent company, MHC Inc., a direct,
      wholly owned subsidiary of MidAmerican Funding, LLC.




2





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 INFORMATION**





Item
                1.
            Financial
                Statements
            4Item
                2.
            Management’s
                Discussion and Analysis of Financial
                Condition and Results of Operations
            26Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            43Item
                4.
            Controls
                and Procedures
            44**PART
                II - OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            45Item
                1A.
            Risk
                Factors
            45Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            46Item
                3.
            Defaults
                Upon Senior Securities
            46Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            46Item
                5.
            Other
                Information
            46Item
                6.
            Exhibits
            46Signatures
            
            47Exhibit
                Index
            
            48




3




**PART
      I - FINANCIAL INFORMATION**





**Item
      1.****Financial
      Statements.**





MidAmerican
      Energy Company and Subsidiary








Report
                of Independent Registered Public Accounting
                Firm
            5Consolidated
                Balance Sheets
            6Consolidated
                Statements of
                Operations
            7Consolidated
                Statements of Comprehensive
                Income
            8Consolidated
                Statements of Cash
                Flows
            9Notes
                to Consolidated Financial
                Statements
            10MidAmerican
                Funding, LLC and SubsidiariesReport
                of Independent Registered Public Accounting
                Firm
            18Consolidated
                Balance Sheets
            19Consolidated
                Statements of
                Operations
            20Consolidated
                Statements of Comprehensive
                Income
            21Consolidated
                Statements of Cash
                Flows
            22Notes
                to Consolidated Financial
                Statements
            23




4


**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, 2006, and the
      related consolidated statements of operations and comprehensive income for
      the
      three-month and nine-month periods ended September 30, 2006 and 2005, and
      of cash flows for the nine-month periods ended September 30, 2006 and 2005.
      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, 2005, and the related
      consolidated statements of operations, comprehensive income, retained earnings,
      and cash flows for the year then ended (not presented herein); and in our report
      dated March 3, 2006 (May 16, 2006 as to Note 10), we expressed an
      unqualified opinion on those consolidated financial statements. In our opinion,
      the information set forth in the accompanying consolidated balance sheet as
      of
      December 31, 2005 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 3,
      2006





5




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS(Unaudited)**


(In
      thousands)





**As
                of****September 30,**
            
            **December 31,****2006**
            
            **2005****ASSETS****Utility
                Plant, Net**Electric
            
            $
            6,151,407
            
            $
            5,933,387Gas
            
            
            1,022,910
            
            
            992,8347,174,317
            
            
            6,926,221Accumulated
                depreciation and amortization
            
            
            (3,237,309
            )
            
            (3,096,933
            )3,937,008
            
            
            3,829,288Construction
                work in progress
            
            
            826,288
            
            
            596,4584,763,296
            
            
            4,425,746**Current
                Assets**Cash
                and cash equivalents
            
            
            4,058
            
            
            70,914Short-term
                investments
            
            
            -
            
            
            25,425Receivables,
                net
            
            
            282,830
            
            
            463,630Inventories
            
            
            99,560
            
            
            84,623Other
            
            
            130,697
            
            
            61,221517,145
            
            
            705,813**Investments
                and Nonregulated Property, Net**
            
            
            382,775
            
            
            359,690**Regulatory
                Assets**
            
            
            232,750
            
            
            237,201**Other
                Assets**
            
            
            60,442
            
            
            135,687**Total
                Assets**
            
            $
            5,956,408
            
            $
            5,864,137**CAPITALIZATION
                AND LIABILITIES****Capitalization**Common
                shareholder’s equity
            
            $
            1,957,033
            
            $
            1,744,882MidAmerican
                Energy preferred securities
            
            
            30,329
            
            
            30,329Long-term
                debt, excluding current portion
            
            
            1,470,497
            
            
            1,471,2513,457,859
            
            
            3,246,462**Current
                Liabilities**Notes
                payable
            
            
            70,000
            
            
            -Current
                portion of long-term debt
            
            
            1,150
            
            
            160,509Accounts
                payable
            
            
            398,260
            
            
            359,496Taxes
                accrued
            
            
            97,749
            
            
            84,122Interest
                accrued
            
            
            26,174
            
            
            14,488Other
            
            
            129,072
            
            
            94,501722,405
            
            
            713,116**Other
                Liabilities**Deferred
                income taxes
            
            
            469,282
            
            
            471,892Investment
                tax credits
            
            
            41,527
            
            
            43,962Asset
                retirement obligations
            
            
            200,104
            
            
            191,117Regulatory
                liabilities
            
            
            823,359
            
            
            763,155Other
            
            
            241,872
            
            
            434,4331,776,144
            
            
            1,904,559**Total
                Capitalization and Liabilities**
            
            $
            5,956,408
            
            $
            5,864,137





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




6


**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS
      (Unaudited)**


(In
      thousands)





**Three
                Months**
            
            **Nine
                Months****Ended September 30,**
            
            **Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Operating
                Revenues**Regulated
                electric
            
            $
            494,525
            
            $
            467,586
            
            $
            1,370,322
            
            $
            1,127,434Regulated
                gas
            
            
            153,421
            
            
            181,228
            
            
            778,241
            
            
            858,671Nonregulated
            
            
            117,414
            
            
            72,843
            
            
            418,250
            
            
            209,158765,360
            
            
            721,657
            
            
            2,566,813
            
            
            2,195,263**Operating
                Expenses**Regulated:Cost
                of fuel, energy and capacity
            
            
            199,346
            
            
            147,616
            
            
            516,818
            
            
            339,845Cost
                of gas sold
            
            
            113,791
            
            
            145,641
            
            
            619,344
            
            
            699,594Other
                operating expenses
            
            
            100,490
            
            
            92,044
            
            
            287,900
            
            
            276,949Maintenance
            
            
            34,114
            
            
            32,996
            
            
            104,794
            
            
            104,810Depreciation
                and amortization
            
            
            57,722
            
            
            77,102
            
            
            219,161
            
            
            214,150Property
                and other taxes
            
            
            23,808
            
            
            23,555
            
            
            72,844
            
            
            71,237529,271
            
            
            518,954
            
            
            1,820,861
            
            
            1,706,585Nonregulated:Cost
                of sales
            
            
            103,394
            
            
            67,981
            
            
            391,873
            
            
            188,058Other
            
            
            3,635
            
            
            4,518
            
            
            10,925
            
            
            12,225107,029
            
            
            72,499
            
            
            402,798
            
            
            200,283Total
                operating expenses
            
            
            636,300
            
            
            591,453
            
            
            2,223,659
            
            
            1,906,868**Operating
                Income**
            
            
            129,060
            
            
            130,204
            
            
            343,154
            
            
            288,395**Non-Operating
                Income**Interest
                and dividend income
            
            
            696
            
            
            939
            
            
            5,719
            
            
            3,344Allowance
                for equity funds
            
            
            10,233
            
            
            7,815
            
            
            25,484
            
            
            17,720Other
                income
            
            
            2,867
            
            
            1,968
            
            
            5,899
            
            
            4,585Other
                expense
            
            
            (551
            )
            
            (1,403
            )
            
            (2,191
            )
            
            (3,155
            )13,245
            
            
            9,319
            
            
            34,911
            
            
            22,494**Fixed
                Charges**Interest
                on long-term debt
            
            
            20,655
            
            
            18,769
            
            
            67,884
            
            
            58,086Other
                interest expense
            
            
            3,112
            
            
            2,100
            
            
            8,783
            
            
            5,959Allowance
                for borrowed funds
            
            
            (4,120
            )
            
            (3,199
            )
            
            (11,375
            )
            
            (7,771
            )19,647
            
            
            17,670
            
            
            65,292
            
            
            56,274**Income
                Before Income Taxes**
            
            
            122,658
            
            
            121,853
            
            
            312,773
            
            
            254,615**Income
                Taxes**
            
            
            37,989
            
            
            39,485
            
            
            95,546
            
            
            83,684**Net
                Income**
            
            
            84,669
            
            
            82,368
            
            
            217,227
            
            
            170,931**Preferred
                Dividends**
            
            
            312
            
            
            312
            
            
            935
            
            
            935**Earnings
                on Common Stock**
            
            $
            84,357
            
            $
            82,056
            
            $
            216,292
            
            $
            169,996





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




7


**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)**


(In
      thousands)





**Three
                Months**
            
            **Nine
                Months****Ended September 30,**
            
            **Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Earnings
                on Common Stock**
            
            $
            84,357
            
            $
            82,056
            
            $
            216,292
            
            $
            169,996**Other
                Comprehensive Income (Loss)**Unrealized
                gains (losses) on cash flow hedges during
              period:Before
                income taxes
            
            
            (6,883
            )
            
            -
            
            
            (6,883
            )
            
            -Income
                tax (expense) benefit
            
            
            2,730
            
            
            -
            
            
            2,730
            
            
            -Net
                unrealized gains (losses)
            
            
            (4,153
            )
            
            -
            
            
            (4,153
            )
            
            -Minimum
                pension liability adjustment:Before
                income taxes
            
            
            -
            
            
            -
            
            
            18
            
            
            (4,924
            )Income
                tax (expense) benefit
            
            
            -
            
            
            -
            
            
            (7
            )
            
            2,047Net
                adjustment
            
            
            -
            
            
            -
            
            
            11
            
            
            (2,877
            )Other
                comprehensive income (loss)
            
            
            (4,153
            )
            
            -
            
            
            (4,142
            )
            
            (2,877
            )**Comprehensive
                Income**
            
            $
            80,204
            
            $
            82,056
            
            $
            212,150
            
            $
            167,119








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




8


**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS
      (Unaudited)**


(In
      thousands)





**Nine
                Months****Ended September 30,****2006**
            
            
            **2005****Net
                Cash Flows From Operating Activities**Net
                income
            
            $
            217,227
            
            $
            170,931Adjustments
                to reconcile net income to net cash provided:Depreciation
                and amortization
            
            
            220,028
            
            
            215,130Deferred
                income taxes and investment tax credit, net
            
            
            (2,507
            )
            
            (13,204
            )Amortization
                of other assets and liabilities
            
            
            19,257
            
            
            20,014Impact
                of changes in working capital:Receivables,
                net
            
            
            171,615
            
            
            103,701Inventories
            
            
            (14,937
            )
            
            (2,725
            )Accounts
                payable
            
            
            (124,851
            )
            
            (10,941
            )Taxes
                accrued
            
            
            15,316
            
            
            13,263Other
                current assets and liabilities
            
            
            32,589
            
            
            16,303Other,
                net
            
            
            (13,630
            )
            
            (2,890
            )Net
                cash provided by operating activities
            
            
            520,107
            
            
            509,582**Net
                Cash Flows From Investing Activities**Utility
                construction expenditures
            
            
            (513,594
            )
            
            (497,411
            )Quad
                Cities Station decommissioning trust fund contributions
            
            
            (6,224
            )
            
            (6,224
            )Purchases
                of available-for-sale securities
            
            
            (518,309
            )
            
            (196,681
            )Proceeds
                from sales of available-for-sale securities
            
            
            534,049
            
            
            226,979Other,
                net
            
            
            13,720
            
            
            10,489Net
                cash used in investing activities
            
            
            (490,358
            )
            
            (462,848
            )**Net
                Cash Flows From Financing Activities**Dividends
                paid
            
            
            (935
            )
            
            (935
            )Retirement
                of long-term debt, including reacquisition cost
            
            
            (160,441
            )
            
            (90,851
            )Net
                increase in notes payable
            
            
            70,000
            
            
            -Other
            
            
            (5,229
            )
            
            4,427Net
                cash used in financing activities
            
            
            (96,605
            )
            
            (87,359
            )**Net
                Decrease in Cash and Cash Equivalents**
            
            
            (66,856
            )
            
            (40,625
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            70,914
            
            
            88,113**Cash
                and Cash Equivalents at End of Period**
            
            $
            4,058
            
            $
            47,488








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





9





**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**(Unaudited)**





**1.**
            **General**





The
      consolidated financial statements included herein have been prepared by
      MidAmerican Energy Company (“MidAmerican Energy”), without audit, pursuant to
      the rules and regulations of the Securities and Exchange Commission. Certain
      information and disclosures normally included in a complete set of financial
      statements prepared in accordance with generally accepted accounting principles
      have been condensed or omitted pursuant to such rules and regulations. In the
      opinion of MidAmerican Energy, all adjustments, consisting of normal recurring
      adjustments, have been made to present fairly its financial position, results
      of
      operations and changes in cash flows for the periods presented. Where
      applicable, prior year amounts have been reclassified to a basis consistent
      with
      the current year presentation. Such reclassifications did not impact previously
      reported net income or retained earnings. All significant intercompany
      transactions have been eliminated. Although MidAmerican Energy believes that
      the
      disclosures contained herein are adequate to make the information presented
      not
      misleading, it is suggested that these financial statements be read in
      conjunction with the consolidated financial statements and the notes thereto
      included in MidAmerican Energy’s latest Annual Report on
      Form 10-K.





Certain
      classifications of amounts for 2005 are different than originally reported.
      The
      accompanying Consolidated Statement of Cash Flows for the nine months ended
      September 30, 2005, now reflects Purchases of Available-for-Sale Securities
      totaling $63.2 million and Proceeds from Sales of Available-for-Sale
      Securities totaling $54.0 million related to transactions of securities
      held in the Quad Cities Station nuclear decommissioning trusts.





MidAmerican
      Energy is a public utility with electric and natural gas operations and is
      the
      principal subsidiary of MHC Inc. (“MHC”). MHC is a direct, wholly owned
      subsidiary of MidAmerican Funding, LLC (“MidAmerican Funding”), whose sole
      member is MidAmerican Energy Holdings Company. MidAmerican Energy Holdings
      Company is 88.2% owned by Berkshire Hathaway Inc.





**2.**
            **New
                Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109” ** (“FIN
      48”) *.* FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in accordance with Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a return. Guidance is also
      provided on de-recognition, classification, interest and penalties, accounting
      in interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. MidAmerican Funding and
      MidAmerican Energy are currently evaluating the impact of adopting FIN 48
      on their respective consolidated financial positions and results of
      operations.




In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
        Postretirement Plans -an amendment of FASB Statements No. 87, 88, 106, and
        132(R)” (“SFAS 158”). SFAS 158 requires an employer to recognize in its
        statement of financial position the over- or under-funded status of a defined
        benefit postretirement plan measured as the difference between the fair value
        of
        plan assets and the benefit obligation. For a pension plan, the benefit
        obligation is the projected benefit obligation; for any other postretirement
        benefit plan, such as a retiree health care plan, the benefit obligation
        is the
        accumulated postretirement benefit obligation. SFAS 158 also requires entities
        to recognize as a component of other comprehensive income, net of tax, the
        actuarial gains and losses and the prior service costs and credits that arise
        during the period, but were not recognized as components of net periodic
        benefit
        cost of the period pursuant to SFAS No. 87, “Employers’ Accounting for Pensions”
(“SFAS 87”) and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
        Other Than Pensions”(“SFAS 106”). MidAmerican Funding and MidAmerican Energy
        intend to recognize as regulatory assets (liabilities) those amounts
        attributable to its regulated operations that would otherwise be charged
        to
        other comprehensive income, net of tax, pursuant to SFAS No. 71, “Accounting for
        the Effects of Certain Types of Regulation.” SFAS 158 does not impact the
        calculation of net periodic benefit cost and the amounts recognized in either
        accumulated other comprehensive income or regulatory assets (liabilities)
        will
        be adjusted as they are subsequently recognized as components of net periodic
        benefit cost pursuant to the recognition and amortization provisions of SFAS
        87
        and SFAS 106.




10




The
      recognition and related disclosure provisions of SFAS 158 are effective for
      MidAmerican Funding’s and MidAmerican Energy’s fiscal year ending
      December 31, 2006, while the requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is not effective until fiscal years ending after December
      15,
      2008. MidAmerican Funding and MidAmerican Energy are currently evaluating the
      impact of adopting SFAS 158 on their consolidated financial position and results
      of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. SFAS 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. SFAS 157 is effective
      for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. MidAmerican Funding and MidAmerican Energy are currently
      evaluating the impact of adopting SFAS 157 on their respective consolidated
      financial positions and results of operations.





**3.**
            **Commitments
                and Contingencies**(a)
            Environmental
                Matters





MidAmerican
      Energy is subject to numerous environmental laws, including the federal Clean
      Air Act and various state air quality laws; the Endangered Species Act; 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.





Air
      Quality -





MidAmerican
      Energy is subject to applicable provisions of the Clean Air Act and related
      air
      quality standards promulgated by the United States Environmental Protection
      Agency (“EPA”). The Clean Air Act provides the framework for regulation of
      certain air emissions and permitting and monitoring associated with those
      emissions. MidAmerican Energy believes it is in material compliance with current
      air quality requirements.





The
      EPA
      has in recent years implemented more stringent national ambient air quality
      standards for ozone and new standards for fine particulate matter. These
      standards set the minimum level of air quality that must be met throughout
      the
      United States. Areas that achieve the standards, as determined by ambient air
      quality monitoring, are characterized as being in attainment of the standard.
      Areas that fail to meet the standard are designated as being nonattainment
      areas. Generally, once an area has been designated as a nonattainment area,
      sources of emissions that contribute to the failure to achieve the ambient
      air
      quality standards are required to make emissions reductions. The EPA has
      concluded that the entire state of Iowa, where MidAmerican Energy’s major
      emission sources are located, is in attainment of the ozone, and the current
      fine particulate matter, standards.





In
      December 2005, the EPA proposed a revision of the ambient air quality
      standards for fine particles that would maintain the current annual standard
      and
      set a new, more stringent 24-hour standard for the concentration of fine
      particulate in ambient air. The standards were published in the *Federal
      Register* on
      October 17, 2006, and become final on December 18, 2006.




11




In
      March 2005, the EPA released the final Clean Air Mercury Rule (“CAMR”). The
      CAMR utilizes a market-based cap and trade mechanism to reduce mercury emissions
      from coal-burning power plants from the 1999 nationwide level of 48 tons to
      15
      tons at full implementation. The CAMR’s two-phase reduction program requires
      initial reductions of mercury emission in 2010 and an overall reduction in
      mercury emissions from coal-burning power plants of 70% by 2018. Individual
      states are required to implement the CAMR or alternative requirements to achieve
      equivalent or greater mercury emission reductions through their state
      implementation plans.





In
      March 2005, the EPA released the final Clean Air Interstate Rule (“CAIR”),
      calling for reductions of sulfur dioxide (“SO 2 ”)
      and
      nitrogen oxides (“NO x ”)
      emissions in the eastern United States through, at each state’s option, a
      market-based cap and trade system, emission reductions, or both. The state
      of
      Iowa has implemented rules that exercise the option of the market-based cap
      and
      trade system. While the state of Iowa has been determined to be in attainment
      of
      the ozone and fine particulate standards, Iowa has been found to significantly
      contribute to nonattainment of the fine particulate standard in Cook County,
      Illinois; Lake County, Indiana; Madison County, Illinois; St. Clair County,
      Illinois; and Marion County, Indiana. The EPA has also concluded that emissions
      from Iowa significantly contribute to ozone nonattainment in Kenosha and
      Sheboygan counties in Wisconsin and Macomb County, Michigan. Under the final
      CAIR, the first phase reductions of SO 2 emissions are effective on January 1, 2010, with the second phase
      reductions effective January 1, 2015. For NO x ,
      the
      first phase emissions reductions are effective January 1, 2009, and
      the second phase reductions are effective January 1, 2015. The CAIR calls
      for overall reductions of SO 2 and
      NO x in Iowa
      of 68% and 67%, respectively, from 2003 levels by 2015.





The
      CAMR
      or the CAIR could, in whole or in part, be superseded or made more stringent
      by
      one of a number of multi-pollutant emission reduction proposals currently under
      consideration at the federal level, including pending legislative proposals
      that
      contemplate 70% to 90% reductions of SO 2 ,
      NO X and
      mercury, as well as possible new federal regulation of carbon dioxide and other
      gases that may affect global climate change. In addition to any federal
      legislation that could be enacted by Congress to supersede the CAMR and the
      CAIR, the rules could be changed or overturned as a result of litigation. The
      sufficiency of the standards established by both the CAMR and the CAIR has
      been
      legally challenged in the United States District Court for the District of
      Columbia.





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.
      MidAmerican Energy and other stakeholders are participating in the Central
      States Regional Air Partnership to help develop the technical and policy tools
      needed to comply with this program.





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 EPA. In accordance with an Iowa law passed in 2001,
      MidAmerican Energy has on file with the Iowa Utilities Board (“IUB”) its current
      multi-year plan and budget for managing SO 2 ,
      NO X and
      mercury from its generating facilities in a cost-effective manner. The plan,
      which is required to be updated every two years, provides specific actions
      to be
      taken at each coal-fired generating facility and the related costs and timing
      for each action. Pursuant to an unrelated rate settlement agreement approved
      by
      the IUB on October 17, 2003, if prior to January 1, 2011, capital
      and operating expenditures to comply with air quality requirements cumulatively
      exceed $325 million, then MidAmerican Energy may seek to recover the
      additional expenditures from customers.





Under
      the
      existing New Source Review (“NSR”) provisions of the Clean Air Act, any facility
      that emits regulated pollutants is required to obtain a permit from the EPA
      or a
      state regulatory agency prior to (1) beginning construction of a new major
      stationary source of an NSR-regulated pollutant or (2) making a physical or
      operational change to an existing stationary source of such pollutants that
      increases certain levels of emissions, unless the changes are exempt under
      the
      regulations (including routine maintenance, repair and replacement of
      equipment). In general, projects subject to NSR regulations are subject to
      pre-construction review and permitting under the Prevention of Significant
      Deterioration (“PSD”) provisions of the Clean Air Act. Under the PSD program, a
      project that emits threshold levels of regulated pollutants must undergo a
      Best
      Available Control Technology analysis and evaluate the most effective emissions
      controls. These controls must be installed in order to receive a permit.
      Violations of NSR regulations, which may be alleged by the EPA, states, and
      environmental groups, among others, potentially subject a utility to material
      expenses for fines and other sanctions and remedies including requiring
      installation of enhanced pollution controls and funding supplemental
      environmental projects.




12




The
      EPA
      has requested from several utilities information and supporting documentation
      regarding their capital projects for various generating plants. The requests
      were issued as part of an industry-wide investigation to assess compliance
      with
      the NSR and the New Source Performance Standards of the Clean Air Act. In
      December 2002 and April 2003, MidAmerican Energy received requests
      from the EPA to provide documentation related to its capital projects from
      January 1, 1980, to April 2003 for a number of its generating plants.
      MidAmerican Energy has submitted information to the EPA in responses to these
      requests, and there are currently no outstanding data requests pending from
      the
      EPA. MidAmerican Energy cannot predict the outcome of these requests at this
      time.





In
      2002
      and 2003, the EPA proposed various changes to its NSR rules that clarify what
      constitutes routine repair, maintenance and replacement for purposes of
      triggering NSR requirements. These changes have been subject to legal challenge
      and, until such time as the legal challenges are resolved and the rules are
      effective, MidAmerican Energy will continue to manage projects at its generating
      plants in accordance with the rules in effect prior to 2002. In
      October 2005, the EPA proposed a rule that would change or clarify how
      emission increases are to be calculated for purposes of determining the
      applicability of the NSR permitting program for existing power plants. The
      EPA
      also proposed additional changes to the NSR rules in September 2006 that are
      intended to simplify the permitting process and allow facilities to undertake
      activities that improve the safety, reliability and efficiency of plants without
      triggering NSR. The EPA plans to finalize the rules by May 2007.





In
      February 2005, the Kyoto Protocol became effective, requiring 35 developed
      countries to reduce greenhouse gas emissions by approximately 5% between 2008
      and 2012. While the United States did not ratify the protocol, the ratification
      and implementation of its requirements in other countries has resulted in
      increased attention on the climate change issue in the United States. In 2005,
      the Senate adopted a “sense of the Senate” resolution that puts the Senate on
      record that Congress should enact a comprehensive and effective national program
      of mandatory, market-based limits and incentives on emissions of greenhouse
      gases that slow, stop, and reverse the growth of such emissions at a rate and
      in
      a manner that will not significantly harm the United States economy; and will
      encourage comparable action by other nations that are major trading partners
      and
      key contributors to global emissions. It is anticipated that the resolution
      may
      be further addressed by Congress in 2006. While debate continues at the national
      level over the direction of domestic climate policy, several states are
      developing state-specific or regional legislative initiatives to reduce
      greenhouse gas emissions. In December 2005, the states of Connecticut,
      Delaware, Maine, New Hampshire, New Jersey, New York and Vermont signed a
      mandatory regional pact to reduce greenhouse gas emissions that would become
      effective in 2009 and ultimately would require a reduction in greenhouse gas
      emissions of 10 percent from 1990 levels. An executive order signed by
      California’s governor in June 2005 would reduce greenhouse gas emissions in
      that state to 2000 levels by 2010, to 1990 levels by 2020 and 80 percent below
      1990 levels by 2050. In August 2006, the California legislature adopted a
      greenhouse gas emission performance standard to all electricity generated within
      the state or delivered from outside the state that is no higher than the
      greenhouse gas emission levels of a state-of-the-art combined-cycle natural
      gas
      generation facility. California also adopted a statewide greenhouse gas emission
      cap to reduce greenhouse gas emissions by approximately 25 percent from 1990
      levels by 2020. Both requirements have been signed by California’s governor and
      will move forward through the rulemaking and implementation
      process.





Litigation
      was filed in the federal district court for the southern district of New York
      seeking to require reductions of carbon dioxide emissions from generating
      facilities of five large electric utilities. The court dismissed the public
      nuisance suit, holding that such critical issues affecting the United States
      such as greenhouse gas emissions reductions are not the domain of the court
      and
      should be resolved by the Executive Branch and the U.S. Congress. This ruling
      has been appealed to the Second Circuit Court of Appeals. The outcome of climate
      change litigation and federal and state initiatives cannot be determined at
      this
      time; however, adoption of stringent limits on greenhouse gas emissions could
      significantly impact MidAmerican Energy’s fossil-fueled facilities and,
      therefore, its results of operations.





The
      EPA’s
      regulation of certain pollutants under the Clean Air Act, and its failure to
      regulate other pollutants, is being challenged by various lawsuits brought
      by
      both individual state attorney generals and environmental groups. To the extent
      that these actions may be successful in imposing additional and/or more
      stringent regulation of emissions on fossil-fueled facilities in general and
      MidAmerican Energy’s facilities in particular, such actions will likely impact
      MidAmerican Energy’s fossil-fueled facilities and, therefore, its results of
      operations.




13




(b)
            Nuclear
                Decommissioning Costs





Expected
      nuclear decommissioning costs for Quad Cities Station have been developed based
      on a site-specific decommissioning study that includes decontamination,
      dismantling, site restoration, dry fuel storage cost and an assumed shutdown
      date. Quad Cities Station nuclear decommissioning costs are included in base
      rates in MidAmerican Energy’s Iowa tariffs.





The
      fair
      value of MidAmerican Energy’s share of estimated decommissioning costs for Quad
      Cities Station, as calculated in accordance with Statement of Financial
      Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” was
      $170.1 million and $163.0 million as of September 30, 2006 and
      December 31, 2005, respectively, and is reflected in Asset Retirement
      Obligations on the Consolidated Balance Sheets. Refer to Note (14) of
      MidAmerican Energy’s most recently filed Form 10-K for a discussion of asset
      retirement obligations. MidAmerican Energy has established trusts for the
      investment of funds for decommissioning the Quad Cities Station. The fair value
      of the assets held in the trusts as of September 30, 2006 and
      December 31, 2005, was $247.1 million and $228.1 million,
      respectively, and is reflected in Investments and Nonregulated Property, Net
      on
      the Consolidated Balance Sheets.





MidAmerican
      Energy’s depreciation and amortization includes costs for Quad Cities Station
      decommissioning. The regulatory provision charged to expense is equal to the
      funding that is being collected in Iowa rates.





(c)
            Deferred
                Construction Costs





On
      February 12, 2003, MidAmerican Energy executed a contract with Mitsui &
Co. Energy Development, Inc. (“Mitsui”) for engineering, procurement and
      construction of a 790-MW (based on expected accreditation) coal-fired generating
      plant expected to be completed in the summer of 2007. MidAmerican Energy
      currently holds a 60.67% individual ownership interest as a tenant in common
      with the other owners of the plant. Under the contract, MidAmerican Energy
      is
      allowed to defer payments, including the other owners’ shares, for up to
      $200.0 million of billed construction costs through the end of the project.
      In July 2005, MidAmerican Energy reached the total allowed amount of
      $200.0 million of deferred payments. On the Consolidated Balance Sheets,
      the $200.0 million liability is reflected in Accounts Payable as of
      September 30, 2006, in anticipation of its payment in the summer of 2007
      and in Other Liabilities - Other as of December 31, 2005.





A
      $78.7 million asset representing the other owners’ share of the deferred
      payments is reflected on the Consolidated Balance Sheets in Other Current Assets
      as of September 30, 2006, and in Other Assets as of December 31, 2005.
      MidAmerican Energy will bill each of the other owners for its share of the
      deferred payments when payment is made to Mitsui.





**4.**
            **Rate
                Matters**





Under
      a
      series of settlement agreements between MidAmerican Energy, the Iowa Office
      of
      Consumer Advocate (“OCA”) and other intervenors approved by the IUB, MidAmerican
      Energy has agreed not to seek a general increase in electric base rates to
      become effective prior to January 1, 2013, unless its Iowa jurisdictional
      electric return on equity for any year falls below 10%. Prior to filing for
      a
      general increase in electric rates, MidAmerican Energy is required to conduct
      30
      days of good faith negotiations with the signatories to the settlement
      agreements to attempt to avoid a general increase in such rates. As a party
      to
      the settlement agreements, the OCA has agreed not to request or support any
      decrease in MidAmerican Energy’s Iowa electric base rates to become effective
      prior to January 1, 2013. The settlement agreements specifically allow the
      IUB to approve or order electric rate design or cost of service rate changes
      that could result in changes to rates for specific customers as long as such
      changes do not result in an overall increase in revenues for MidAmerican Energy.
      The settlement agreements also each provide that portions of revenues associated
      with Iowa retail electric returns on equity within specified ranges will be
      recorded as a regulatory liability.




14


Under
      a
      settlement agreement approved by the IUB on December 21, 2001, which was
      effective through December 31, 2005, an amount equal to 50% of revenues
      associated with returns on equity between 12% and 14%, and 83.33% of revenues
      associated with returns on equity above 14%, in each year was recorded as a
      regulatory liability. A settlement agreement, which was filed in conjunction
      with MidAmerican Energy’s application for ratemaking principles on its 2004/2005
      wind-powered generation project and approved by the IUB on October 17,
      2003, provides that during the period January 1, 2006 through
      December 31, 2010, an amount equal to 40% of revenues associated with
      returns on equity between 11.75% and 13%, 50% of revenues associated with
      returns on equity between 13% and 14%, and 83.3% of revenues associated with
      returns on equity above 14%, in each year will be recorded as a regulatory
      liability. The settlement agreement also includes commitments by MidAmerican
      Energy and the OCA not to seek or support a general increase or decrease,
      respectively, in electric base rates to become effective prior to
      January 1, 2011.





On
      January 31, 2005, the IUB approved a settlement agreement filed in
      conjunction with MidAmerican Energy’s 2005 expansion of its wind-powered
      generation project. On April 18, 2006, the IUB approved a settlement
      agreement filed in conjunction with MidAmerican Energy’s application for up to
      545 MW, based on nameplate ratings, of additional wind-powered generation
      capacity in Iowa. The settlement agreements extend the current revenue sharing
      mechanism through 2012 and extend MidAmerican Energy’s and the OCA’s commitments
      regarding general increases or decreases in electric base rates through
      December 31, 2012.





The
      regulatory liabilities created by the settlement agreements are recorded as
      a
      regulatory charge in depreciation and amortization expense when the liability
      is
      accrued. Additionally, interest expense is accrued on the portion of the
      regulatory liability balance recorded in prior years. Regulatory liabilities
      created for the years through 2010 will be reduced as they are credited against
      plant in service associated with generating plant additions. As a result of
      such
      credits applied to generating plant balances, future depreciation will be
      reduced. The regulatory liability accrued for 2011 and 2012, if any, will be
      credited to customer bills in 2012 and 2013, respectively. The change in the
      balance of the regulatory liability is summarized as follows (in
      thousands):





Balance
                January 1, 2006
            
            $
            213,135Revenue
                sharing
            
            
            46,000Interest
                costs
            
            
            7,751Amounts
                applied to utility plant in service
            
            
            (2,192
            )Balance
                September 30, 2006
            
            $
            264,694





**5.**
            **Retirement
                Plans**





MidAmerican
      Energy sponsors a noncontributory defined benefit pension plan covering
      substantially all employees of MidAmerican Energy Holdings Company 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 MidAmerican Energy Holdings Company
      and
      its domestic energy subsidiaries other than PacifiCorp. Non-union employees
      hired after June 30, 2004, and union employees hired after June 30,
      2006, under contracts covering substantially all of MidAmerican Energy’s union
      employees are not eligible for postretirement benefits other than
      pensions.




15




Net
      periodic benefit cost for the pension, including supplemental retirement,
      and postretirement benefit plans of MidAmerican Energy and the aforementioned
      affiliates included the following components for the three months and nine
      months ended September 30 (in thousands):





Three
                Months
            
            Nine
                MonthsEnded September 30,
            
            Ended September 30,2006
            
            
            2005
            
            
            2006
            
            
            2005PensionComponents
                of net periodic benefit cost:Service
                cost
            
            $
            6,506
            
            $
            6,459
            
            $
            18,984
            
            $
            19,817Interest
                cost
            
            
            9,748
            
            
            9,539
            
            
            28,439
            
            
            27,942Expected
                return on plan assets
            
            
            (9,839
            )
            
            (10,239
            )
            
            (28,704
            )
            
            (29,293
            )Amortization
                of prior service cost
            
            
            657
            
            
            740
            
            
            1,913
            
            
            2,089Amortization
                of prior year loss
            
            
            313
            
            
            193
            
            
            911
            
            
            960Net
                periodic benefit cost
            
            $
            7,385
            
            $
            6,692
            
            $
            21,543
            
            $
            21,515





Three
                Months
            
            Nine
                MonthsEnded September 30,
            
            Ended September 30,2006
            
            
            2005
            
            
            2006
            
            
            2005PostretirementComponents
                of net periodic benefit cost:Service
                cost
            
            $
            1,971
            
            $
            1,786
            
            $
            5,386
            
            $
            5,081Interest
                cost
            
            
            3,857
            
            
            3,074
            
            
            10,540
            
            
            10,251Expected
                return on plan assets
            
            
            (2,773
            )
            
            (2,680
            )
            
            (7,577
            )
            
            (7,322
            )Amortization
                of net transition balance
            
            
            395
            
            
            603
            
            
            1,079
            
            
            1,831Amortization
                of prior service cost
            
            
            (31
            )
            
            -
            
            
            (84
            )
            
            -Amortization
                of prior year loss
            
            
            753
            
            
            342
            
            
            2,058
            
            
            1,184Net
                periodic benefit cost
            
            $
            4,172
            
            $
            3,125
            
            $
            11,402
            
            $
            11,025





MidAmerican
      Energy expects to contribute $5.9 million and $15.6 million in 2006 to
      its pension and postretirement plans, respectively. As of
      September 30, 2006, $4.4 million and $11.6 million of
      contributions have been made to the pension and postretirement plans,
      respectively.





**6.**
            **Segment
                Information**




Beginning
      in 2006, MidAmerican Energy changed its reportable operating segments. Prior
      year amounts are reflected on a consistent basis with the 2006 amounts.
      MidAmerican Energy has identified two reportable operating segments: regulated
      electric and regulated gas. 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 to other utilities. 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. 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.
      “Nonregulated and other” in the tables below consists principally of
      nonregulated gas, nonregulated electric and parent company
      activities.




16





The
      following tables provide MidAmerican Energy’s operating revenues, earnings on
      common stock and total assets on a reportable operating segment basis (in
      thousands):





Three
                Months
            
            Nine
                MonthsEnded
                September 30,
            
            Ended
                September 30,2006
            
            
            2005
            
            
            2006
            
            
            2005Segment
                Profit InformationOperating
                revenues:Regulated
                electric
            
            $
            494,525
            
            $
            467,586
            
            $
            1,370,322
            
            $
            1,127,434Regulated
                gas
            
            
            153,421
            
            
            181,228
            
            
            778,241
            
            
            858,671Nonregulated
                and other
            
            
            117,414
            
            
            72,843
            
            
            418,250
            
            
            209,158Total
            
            $
            765,360
            
            $
            721,657
            
            $
            2,566,813
            
            $
            2,195,263Earnings
                on common stock:Regulated
                electric
            
            $
            83,868
            
            $
            88,643
            
            $
            196,966
            
            $
            154,969Regulated
                gas
            
            
            (5,455
            )
            
            (6,345
            )
            
            11,377
            
            
            12,404Nonregulated
                and other
            
            
            5,944
            
            
            (242
            )
            
            7,949
            
            
            2,623Total
            
            $
            84,357
            
            $
            82,056
            
            $
            216,292
            
            $
            169,996





As
                ofSeptember 30,
            
            December 31,2006
            
            
            2005Segment
                Asset InformationTotal
                assets:Regulated
                electric
            
            $
            5,088,846
            
            $
            4,698,923Regulated
                gas
            
            
            781,855
            
            
            1,052,978Nonregulated
                and other
            
            
            85,707
            
            
            112,236Total
            
            $
            5,956,408
            
            $
            5,864,137








**7.**
            **Risk
                Management**





In
      2006,
      MidAmerican Energy changed its management strategy with regard to certain
      nonregulated end-use gas contracts. This change resulted in recording
      prospectively the related revenues and cost of sales on a gross, rather than
      net, basis in accordance with Emerging Issues Task Force Issue No. 02-3,
“Recognition and Reporting of Gains and Losses on Energy Trading Contracts Under
      Issues No. 98-10 and 00-17.” For the three months and nine months ended
      September 30, 2005, cost of sales netted in revenues for such end-use gas
      contracts totaled $64.7 million and $180.3 million, respectively.




17




**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, 2006, and the related
      consolidated statements of operations and comprehensive income for the
      three-month and nine-month periods ended September 30, 2006 and 2005, and
      of cash flows for the nine-month periods ended September 30, 2006 and 2005.
      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, 2005, and the related
      consolidated statements of operations, comprehensive income, retained earnings,
      and cash flows for the year then ended (not presented herein); and in our report
      dated March 3, 2006 (May 16, 2006 as to Notes 1(m) and 10), we
      expressed an unqualified opinion on those consolidated financial statements.
      In
      our opinion, the information set forth in the accompanying consolidated balance
      sheet as of December 31, 2005 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 3,
      2006





18


**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS(Unaudited)**


(In
      thousands)





**As
                of****September 30,**
            
            **December 31,****2006**
            
            **2005****ASSETS****Utility
                Plant, Net**Electric
            
            $
            6,151,407
            
            $
            5,933,387Gas
            
            
            1,022,910
            
            
            992,8347,174,317
            
            
            6,926,221Accumulated
                depreciation and amortization
            
            
            (3,237,309
            )
            
            (3,096,933
            )3,937,008
            
            
            3,829,288Construction
                work in progress
            
            
            826,288
            
            
            596,4584,763,296
            
            
            4,425,746**Current
                Assets**Cash
                and cash equivalents
            
            
            4,189
            
            
            71,207Short-term
                investments
            
            
            -
            
            
            25,425Receivables,
                net
            
            
            276,892
            
            
            469,128Inventories
            
            
            99,560
            
            
            84,623Other
            
            
            130,970
            
            
            61,577511,611
            
            
            711,960**Investments
                and Nonregulated Property, Net**
            
            
            401,253
            
            
            380,835**Goodwill**
            
            
            1,269,204
            
            
            1,265,979**Regulatory
                Assets**
            
            
            232,750
            
            
            237,201**Other
                Assets**
            
            
            60,450
            
            
            135,695**Total
                Assets**
            
            $
            7,238,564
            
            $
            7,157,416**CAPITALIZATION
                AND LIABILITIES****Capitalization**Member’s
                equity
            
            $
            2,453,421
            
            $
            2,234,837MidAmerican
                Energy preferred securities
            
            
            30,329
            
            
            30,329Long-term
                debt, excluding current portion
            
            
            2,170,497
            
            
            2,171,2514,654,247
            
            
            4,436,417**Current
                Liabilities**Notes
                payable
            
            
            70,000
            
            
            -Note
                payable to affiliate
            
            
            58,053
            
            
            54,283Current
                portion of long-term debt
            
            
            1,150
            
            
            160,509Accounts
                payable
            
            
            392,122
            
            
            360,225Taxes
                accrued
            
            
            114,583
            
            
            105,029Interest
                accrued
            
            
            30,388
            
            
            30,401Other
            
            
            129,356
            
            
            94,712795,652
            
            
            805,159**Other
                Liabilities**Deferred
                income taxes
            
            
            470,179
            
            
            468,550Investment
                tax credits
            
            
            41,527
            
            
            43,962Asset
                retirement obligations
            
            
            200,104
            
            
            191,117Regulatory
                liabilities
            
            
            823,359
            
            
            763,155Other
            
            
            253,496
            
            
            449,0561,788,665
            
            
            1,915,840**Total
                Capitalization and Liabilities**
            
            $
            7,238,564
            
            $
            7,157,416





The
      accompanying notes are an integral part of these financial
      statements





19




**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS
      (Unaudited)**


(In
      thousands)





**Three
                Months**
            
            **Nine
                Months****Ended September 30,**
            
            **Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Operating
                Revenues**Regulated
                electric
            
            $
            494,525
            
            $
            467,586
            
            $
            1,370,322
            
            $
            1,127,434Regulated
                gas
            
            
            153,421
            
            
            181,228
            
            
            778,241
            
            
            858,671Nonregulated
            
            
            118,839
            
            
            74,494
            
            
            421,521
            
            
            213,195766,785
            
            
            723,308
            
            
            2,570,084
            
            
            2,199,300**Operating
                Expenses**Regulated:Cost
                of fuel, energy and capacity
            
            
            199,346
            
            
            147,616
            
            
            516,818
            
            
            339,845Cost
                of gas sold
            
            
            113,791
            
            
            145,641
            
            
            619,344
            
            
            699,594Other
                operating expenses
            
            
            100,490
            
            
            92,044
            
            
            287,900
            
            
            276,949Maintenance
            
            
            34,114
            
            
            32,996
            
            
            104,794
            
            
            104,810Depreciation
                and amortization
            
            
            57,722
            
            
            77,102
            
            
            219,161
            
            
            214,150Property
                and other taxes
            
            
            23,808
            
            
            23,555
            
            
            72,844
            
            
            71,237529,271
            
            
            518,954
            
            
            1,820,861
            
            
            1,706,585Nonregulated:Cost
                of sales
            
            
            103,655
            
            
            68,415
            
            
            392,652
            
            
            189,062Other
            
            
            4,677
            
            
            5,693
            
            
            13,737
            
            
            15,486108,332
            
            
            74,108
            
            
            406,389
            
            
            204,548Total
                operating expenses
            
            
            637,603
            
            
            593,062
            
            
            2,227,250
            
            
            1,911,133**Operating
                Income**
            
            
            129,182
            
            
            130,246
            
            
            342,834
            
            
            288,167**Non-Operating
                Income**Interest
                and dividend income
            
            
            751
            
            
            988
            
            
            5,988
            
            
            3,475Allowance
                for equity funds
            
            
            10,233
            
            
            7,815
            
            
            25,484
            
            
            17,720Other
                income
            
            
            4,173
            
            
            3,158
            
            
            52,700
            
            
            17,114Other
                expense
            
            
            (582
            )
            
            (15,416
            )
            
            (6,860
            )
            
            (19,118
            )14,575
            
            
            (3,455
            )
            
            77,312
            
            
            19,191**Fixed
                Charges**Interest
                on long-term debt
            
            
            32,428
            
            
            30,543
            
            
            103,206
            
            
            93,408Other
                interest expense
            
            
            3,776
            
            
            2,561
            
            
            10,877
            
            
            6,982Preferred
                dividends of subsidiaries
            
            
            312
            
            
            312
            
            
            935
            
            
            935Allowance
                for borrowed funds
            
            
            (4,120
            )
            
            (3,199
            )
            
            (11,375
            )
            
            (7,771
            )32,396
            
            
            30,217
            
            
            103,643
            
            
            93,554**Income
                Before Income Taxes**
            
            
            111,361
            
            
            96,574
            
            
            316,503
            
            
            213,804**Income
                Taxes**
            
            
            32,739
            
            
            29,653
            
            
            93,733
            
            
            65,317**Net
                Income**
            
            $
            78,622
            
            $
            66,921
            
            $
            222,770
            
            $
            148,487








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




20


**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME
      (Unaudited)**


(In
      thousands)





**Three
                Months**
            
            **Nine
                Months****Ended September 30,**
            
            **Ended September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Net
                Income**
            
            $
            78,622
            
            $
            66,921
            
            $
            222,770
            
            $
            148,487**Other
                Comprehensive Income (Loss)**Unrealized
                gains (losses) on cash flow hedges duringperiod:Before
                income taxes
            
            
            (6,883
            )
            
            -
            
            
            (6,883
            )
            
            -Income
                tax (expense) benefit
            
            
            2,730
            
            
            -
            
            
            2,730
            
            
            -Net
                unrealized gains (losses)
            
            
            (4,153
            )
            
            -
            
            
            (4,153
            )
            
            -Unrealized
                gains (losses) on available-for-sale securities:Unrealized
                holding gains (losses) during period-Before
                income taxes
            
            
            (33
            )
            
            284
            
            
            32,046
            
            
            669Income
                tax (expense) benefit
            
            
            12
            
            
            (100
            )
            
            (11,217
            )
            
            (234
            )(21
            )
            
            184
            
            
            20,829
            
            
            435Less
                realized gains (losses) reflected in net income during
                period-Before
                income taxes
            
            
            -
            
            
            313
            
            
            32,113
            
            
            652Income
                tax (expense) benefit
            
            
            -
            
            
            (110
            )
            
            (11,240
            )
            
            (229
            )-
            
            
            203
            
            
            20,873
            
            
            423Net
                unrealized gains (losses)
            
            
            (21
            )
            
            (19
            )
            
            (44
            )
            
            12Minimum
                pension liability adjustment:Before
                income taxes
            
            
            -
            
            
            -
            
            
            18
            
            
            (4,924
            )Income
                tax (expense) benefit
            
            
            -
            
            
            -
            
            
            (7
            )
            
            2,047Net
                adjustment
            
            
            -
            
            
            -
            
            
            11
            
            
            (2,877
            )Other
                comprehensive income (loss)
            
            
            (4,174
            )
            
            (19
            )
            
            (4,186
            )
            
            (2,865
            )**Comprehensive
                Income**
            
            $
            74,448
            
            $
            66,902
            
            $
            218,584
            
            $
            145,622








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




21


**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)**


(In
      thousands)





**Nine
                Months****Ended
                September 30,****2006**
            
            **2005****Net
                Cash Flows From Operating Activities**Net
                income
            
            $
            222,770
            
            $
            148,487Adjustments
                to reconcile net income to net cash provided:Depreciation
                and amortization
            
            
            220,172
            
            
            215,279Deferred
                income taxes and investment tax credit, net
            
            
            (1,782
            )
            
            (28,207
            )Amortization
                of other assets and liabilities
            
            
            14,542
            
            
            18,576Gain
                on sale of securities, assets and other investments
            
            
            (36,053
            )
            
            (10,648
            )Loss
                from impairment of assets and investments
            
            
            -
            
            
            15,841Impact
                of changes in working capital:Receivables,
                net
            
            
            183,051
            
            
            103,150Inventories
            
            
            (14,937
            )
            
            (2,725
            )Accounts
                payable
            
            
            (131,718
            )
            
            (11,349
            )Taxes
                accrued
            
            
            12,849
            
            
            11,996Other
                current assets and liabilities
            
            
            21,045
            
            
            4,944Other,
                net
            
            
            (11,974
            )
            
            2,544Net
                cash provided by operating activities
            
            
            477,965
            
            
            467,888**Net
                Cash Flows From Investing Activities**Utility
                construction expenditures
            
            
            (513,594
            )
            
            (497,411
            )Quad
                Cities Station decommissioning trust fund contributions
            
            
            (6,224
            )
            
            (6,224
            )Purchases
                of available-for-sale securities
            
            
            (518,309
            )
            
            (196,681
            )Proceeds
                from sales of available-for-sale securities
            
            
            561,692
            
            
            228,592Proceeds
                from sales of assets and other investments
            
            
            9,749
            
            
            11,100Other,
                net
            
            
            13,603
            
            
            9,863Net
                cash used in investing activities
            
            
            (453,083
            )
            
            (450,761
            )**Net
                Cash Flows From Financing Activities**Retirement
                of long-term debt, including reacquisition cost
            
            
            (160,441
            )
            
            (90,851
            )Net
                increase in note payable to affiliate
            
            
            3,770
            
            
            29,500Net
                increase in notes payable
            
            
            70,000
            
            
            -Other
            
            
            (5,229
            )
            
            4,427Net
                cash used in financing activities
            
            
            (91,900
            )
            
            (56,924
            )**Net
                Decrease in Cash and Cash Equivalents**
            
            
            (67,018
            )
            
            (39,797
            )**Cash
                and Cash Equivalents at Beginning of Period**
            
            
            71,207
            
            
            88,367**Cash
                and Cash Equivalents at End of Period**
            
            $
            4,189
            
            $
            48,570








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




22


**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**(Unaudited)**





**1.**
            **General**





The
      consolidated financial statements included herein have been prepared by
      MidAmerican Funding, LLC (“MidAmerican Funding”), without audit, pursuant to the
      rules and regulations of the Securities and Exchange Commission. Certain
      information and disclosures normally included in a complete set of financial
      statements prepared in accordance with generally accepted accounting principles
      have been condensed or omitted pursuant to such rules and regulations. In the
      opinion of MidAmerican Funding, all adjustments, consisting of normal recurring
      adjustments, have been made to present fairly its financial position, results
      of
      operations and changes in cash flows for the periods presented. Where
      applicable, prior year amounts have been reclassified to a basis consistent
      with
      the current year presentation. Such reclassifications did not impact previously
      reported net income or retained earnings. All significant intercompany
      transactions have been eliminated. Although MidAmerican Funding believes that
      the disclosures contained herein are adequate to make the information presented
      not misleading, it is suggested that these financial statements be read in
      conjunction with the consolidated financial statements and the notes thereto
      included in MidAmerican Funding’s latest Annual Report on Form
      10-K.





Certain
      classifications of amounts for 2005 are different than originally reported.
      The
      accompanying Consolidated Statement of Cash Flows for the nine months ended
      September 30, 2005, now reflects Purchases of Available-for-Sale Securities
      totaling $63.2 million and Proceeds from Sales of Available-for-Sale
      Securities totaling $54.0 million related to transactions of securities
      held in the Quad Cities Station nuclear decommissioning trusts.





MidAmerican
      Funding is an Iowa limited liability company with MidAmerican Energy Holdings
      Company as its sole member. MidAmerican Energy Holdings Company is 88.2% owned
      by 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
      MidAmerican Energy Holdings Company are public utility holding companies
      headquartered in Des Moines, Iowa. MHC’s principal subsidiary is MidAmerican
      Energy Company, a public utility with electric and natural gas operations.
      Other
      direct, wholly owned subsidiaries of MHC include InterCoast Capital Company,
      Midwest Capital Group, Inc., MidAmerican Services Company and MEC Construction
      Services Co.





**2.**
            **New
                Accounting Pronouncements**





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





**3.**
            **Commitments
                and Contingencies**





Refer
      to
      Note 3 of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      information regarding MidAmerican Funding’s commitments and
      contingencies.





**4.**
            **Rate
                Matters**





Refer
      to
      Note 4 of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      information regarding MidAmerican Funding’s rate matters.





**5.**
            **Retirement
                Plans**





Refer
      to
      Note 5 of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      information regarding MidAmerican Funding’s retirement plans.





23





**6.**
            **Segment
                Information**





Beginning
      in 2006, MidAmerican Funding changed its reportable operating segments. Prior
      year amounts are reflected on a consistent basis with the 2006 amounts.
      MidAmerican Funding has identified two reportable operating segments: regulated
      electric and regulated gas. 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 to other utilities. 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. 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.
      “Nonregulated and other” in the tables below consists principally of
      nonregulated gas, nonregulated electric and parent company
      activities.





The
      following tables provide MidAmerican Funding’s operating revenues, net income
      and total assets on a reportable operating segment basis (in
      thousands):





Three
                Months
            
            Nine
                MonthsEnded September 30,
            
            Ended September 30,2006
            
            2005
            
            2006
            
            2005Segment
                Profit InformationOperating
                revenues:Regulated
                electric
            
            $
            494,525
            
            $
            467,586
            
            $
            1,370,322
            
            $
            1,127,434Regulated
                gas
            
            
            153,421
            
            
            181,228
            
            
            778,241
            
            
            858,671Nonregulated
                and other
            
            
            118,839
            
            
            74,494
            
            
            421,521
            
            
            213,195Total
            
            $
            766,785
            
            $
            723,308
            
            $
            2,570,084
            
            $
            2,199,300Net
                income:Regulated
                electric
            
            $
            83,868
            
            $
            88,643
            
            $
            196,966
            
            $
            154,969Regulated
                gas
            
            
            (5,455
            )
            
            (6,345
            )
            
            11,377
            
            
            12,404Nonregulated
                and other
            
            
            209
            
            
            (15,377
            )
            
            14,427
            
            
            (18,886
            )Total
            
            $
            78,622
            
            $
            66,921
            
            $
            222,770
            
            $
            148,487





As
                ofSeptember 30,
            
            December 31,2006
            
            
            2005Segment
                Asset InformationTotal
                assets (a):Regulated
                electric
            
            $
            6,279,570
            
            $
            5,886,632Regulated
                gas
            
            
            860,334
            
            
            1,131,247Nonregulated
                and other
            
            
            98,660
            
            
            139,537Total
            
            $
            7,238,564
            
            $
            7,157,416





(a)
            Total
                assets by operating segment reflect the assignment of goodwill to
                applicable reporting units in accordance with Statement of Financial
                Accounting Standards No. 142, “Goodwill and Other Intangible
                Assets.”





24




**7.**
            **Risk
                Management**





Refer
      to
      Note 7 of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      information regarding MidAmerican Funding’s risk management.





**8.**
            **Goodwill**





In
      January 2006, MidAmerican Energy changed its reportable operating segments.
      Accordingly, goodwill has been reclassified to match the new segment
      presentation. For the nine months ended September 30, 2006, MidAmerican
      Funding adjusted goodwill for a change in deferred income taxes due to tax
      matters existing at the time of its purchase of MHC. The following table shows
      the change in the carrying amount of goodwill by reportable operating segment
      for the nine months ended September 30, 2006 (in thousands):





Electric
            
            Gas
            
            TotalBalance
                at January 1, 2006
            
            $
            1,187,710
            
            $
            78,269
            
            $
            1,265,979Income
                tax adjustment
            
            
            3,015
            
            
            210
            
            
            3,225Balance
                at September 30, 2006
            
            $
            1,190,725
            
            $
            78,479
            
            $
            1,269,204





**9.**
            **Other
                Income and Other Expense**





During
      the second quarter of 2006, MidAmerican Funding sold a majority of the common
      shares it held of an electronic energy and metals trading exchange and recorded
      proceeds of $27.6 million and pre-tax gains totaling $27.6 million, or
      $16.5 million after-tax. MidAmerican Funding donated its remaining shares
      in the company to a charitable foundation and recognized $4.5 million of
      both pre-tax gain and donation expense.





25


**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 to MidAmerican Funding, excluding MidAmerican
      Energy.





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**





From
      time
      to time, MidAmerican Funding, or one of its subsidiaries individually, including
      MidAmerican Energy, may make forward-looking statements within the meaning
      of
      the federal securities laws that involve judgments, assumptions and other
      uncertainties beyond the control of MidAmerican Funding or any of its
      subsidiaries individually. These forward-looking statements may include, among
      others, statements concerning revenue and cost trends, cost recovery, cost
      reduction strategies and anticipated outcomes, pricing strategies, changes
      in
      the utility industry, planned capital expenditures, financing needs and
      availability, statements of MidAmerican Funding’s expectations, beliefs, future
      plans and strategies, anticipated events or trends and similar comments
      concerning matters that are not historical facts. These types of forward-looking
      statements are based on current expectations and involve a number of known
      and
      unknown risks and uncertainties that could cause the actual results and
      performance of MidAmerican Funding to differ materially from any expected future
      results or performance, expressed or implied, by the forward-looking statements.
      In connection with the safe harbor provisions of the Private Securities
      Litigation Reform Act of 1995, MidAmerican Funding has identified important
      factors that could cause actual results to differ materially from those
      expectations, including weather effects on sales volumes and revenues, fuel
      prices, fuel transportation and other operating uncertainties, acquisition
      uncertainty, uncertainties relating to economic and political conditions and
      uncertainties regarding the impact of regulations, changes in government policy,
      utility industry deregulation and competition. Neither MidAmerican Funding,
      nor
      any one of its subsidiaries individually, assumes any responsibility to update
      forward-looking information contained herein.





**Executive
      Summary**





MidAmerican
      Energy’s earnings on common stock improved $2.3 million to
      $84.4 million for the third quarter of 2006 compared to $82.1 million
      for the third quarter of 2005. MidAmerican Funding’s net income increased
      $11.7 million to $78.6 million for the third quarter of 2006 compared
      to $66.9 million for the third quarter of 2005.





MidAmerican
      Energy’s earnings on common stock improved $46.3 million to
      $216.3 million for the first nine months of 2006 compared to
      $170.0 million for the first nine months of 2005. MidAmerican Funding’s net
      income increased $74.3 million to $222.8 million for the first nine
      months of 2006 compared to $148.5 million for the first nine months of
      2005.




The
      following significant events and changes, as discussed in more detail herein,
      highlight some of the factors that had an effect on MidAmerican Energy’s and
      MidAmerican Funding’s operating results, liquidity and capital resources during
      the periods presented:




26





·
            MidAmerican
                Energy is currently constructing a 790-megawatt (“MW”) (expected
                accreditation) super-critical-temperature, coal-fired generation
                project
                and expects to invest approximately $850 million in the project
                through 2007, including transmission facilities. Through
                September 30, 2006, $725.4 million had been invested,
                including $121.3 million for MidAmerican Energy’s share of deferred
                payments allowed by contract.





·
            In
                the last half of 2005, MidAmerican Energy placed 200 MW (nameplate
                ratings) of wind-powered generation into service. On April 18, 2006,
                MidAmerican Energy received Iowa Utilities Board (“IUB”) approval of the
                ratemaking principles for up to 545 MW (nameplate ratings) of additional
                wind-powered generation capacity in Iowa. MidAmerican Energy has
                entered
                into agreements with wind project developers and contractors to add
                99 MW
                and 123 MW (nameplate ratings) of wind-powered generation by the
                end of
                2006 and 2007, respectively.





·
            MidAmerican
                Energy’s regulated electric gross margin decreased $24.8 million
                compared to the third quarter of 2005 due principally to a $29.0
                million
                decrease in gross margin for electric wholesale sales driven by increased
                energy costs, which resulted in lower margins per megawatt hour sold.





·
            The
                regulatory expense related to the Iowa revenue sharing arrangement
                decreased by $20.5 million compared to the third quarter of 2005.
                Amounts under the arrangement are determined based upon Iowa electric
                returns on equity, which were negatively impacted by lower wholesale
                margins in the third quarter of 2006. Iowa revenue sharing is recorded
                as
                depreciation and amortization in the accompanying consolidated statement
                of operations.





·
            During
                the second quarter of 2006, MidAmerican Funding recognized pre-tax
                gains
                of $27.6 million, or $16.5 million after-tax, on the sales of
                its shares of common stock of an electronic energy and metals trading
                exchange.





Following
      is a discussion of various factors that affected earnings for the periods
      presented on the Consolidated Statements of Operations. Explanations include
      management’s best estimate of the impact of weather, customer growth and other
      factors.





**Results
      of Operations for the Quarter Ended September 30, 2006 and
      2005**





Regulated
      Electric Gross Margin





QuarterEnded September 30,2006
            
            2005Gross
                margin (in millions):Operating
                revenues
            
            $
            494.5
            
            $
            467.6Less
                cost of fuel, energy and capacity
            
            
            199.3
            
            
            147.6Electric
                gross margin
            
            $
            295.2
            
            $
            320.0Sales
                (gigawatt-hours):Retail
            
            
            5,515
            
            
            5,415Wholesale
            
            
            2,618
            
            
            2,154Total
            
            
            8,133
            
            
            7,569





Electric
      gross margin for the third quarter of 2006 decreased $24.8 million compared
      to the third quarter of 2005 due to a $29.0 million decrease in gross
      margin on wholesale sales due to a lower margin per megawatt hour sold offset
      partially by an increase in sales volumes. Gross margin on retail sales was
      relatively unchanged as an improvement due to customer growth was offset by
      a
      decrease due to milder temperature conditions. Transmission revenues increased
      $3.0 million due to an increase in the use of MidAmerican Energy’s
      transmission lines by other utilities.




27




Sales
      of
      energy to other utilities, municipalities and marketers inside and outside
      of
      MidAmerican Energy’s delivery system are classified as wholesale. A decrease in
      the average electric wholesale margins per megawatt hour sold reduced electric
      wholesale gross margin by $38.6 million compared to the third quarter of
      2005. The decrease in margins per megawatt hour sold was due to reduced
      availability of MidAmerican Energy-owned base load generation, which resulted
      in
      an increase in purchases of higher cost replacement power. An increase in
      regional market opportunities contributed to a 21.5% increase in wholesale
      sales
      volumes during the third quarter of 2006 compared to the third quarter of 2005,
      resulting in a $9.6 million increase in wholesale gross
      margin.





Gross
      margin on electric retail sales increased $0.1 million, with electric
      retail sales volumes increasing 1.9% compared to the third quarter of 2005.
      An
      increase in the average number of retail customers, in particular the addition
      of a large steel manufacturer in the fourth quarter of 2005, improved electric
      retail gross margin by $10.0 million compared to the third quarter of 2005.
      The effect of temperature conditions during the third quarter of 2006 compared
      to the third quarter of 2005 resulted in a $10.6 million decrease in
      electric retail gross margin. Electricity usage factors not dependent on
      weather, such as changes in individual customer usage patterns, decreased
      electric margin by $2.7 million. A decrease in fuel costs related to Iowa
      retail electric sales improved electric retail gross margin by $0.7 million
      compared to the third quarter of 2005 due in part to an increase in the portion
      of energy requirements met with wind-powered generation. Recoveries of energy
      efficiency program costs increased electric retail gross margin by
      $2.8 million compared to the third quarter of 2005. Changes in revenues
      from the recovery of energy efficiency program costs are substantially matched
      with corresponding changes in other operating expenses.





Regulated
      Gas Gross Margin





QuarterEnded
                September 30,2006
            
            2005Gross
                margin (in millions):Operating
                revenues
            
            $
            153.4
            
            $
            181.2Less
                cost of gas sold
            
            
            113.8
            
            
            145.6Gas
                gross margin
            
            $
            39.6
            
            $
            35.6Sales
                (000’s decatherms):Retail
            
            
            6,323
            
            
            5,918Wholesale
            
            
            11,494
            
            
            10,170Total
            
            
            17,817
            
            
            16,088





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 affect
      gross margin or net income because revenues reflect comparable fluctuations
      through the purchased gas adjustment clauses. Compared to the third quarter
      of
      2005, MidAmerican Energy’s average per-unit cost of gas sold decreased 29.4%,
      resulting in a $47.5 million decrease in cost of gas sold and revenues for
      the third quarter of 2006. The decrease in cost of gas sold and gas revenues
      as
      a result of the per-unit cost of gas was partially offset by a
      $15.7 million increase due to improved sales volumes for the third quarter
      of 2006.




28




The
      following table summarizes the variance in gas operating revenues based on
      the
      change in gas cost recoveries and margin components.





Quarter
                EndedSeptember 30,2006
                vs. 2005(In
                millions)Change
                in cost of gas sold:Sales
                volumes
            
            $
            15.7Average
                cost per unit
            
            
            (47.5
            )Total
                change in cost of gas sold
            
            
            (31.8
            )Change
                in margin:Weather
            
            
            1.4Other
                usage factors
            
            
            (0.7
            )Customer
                growth
            
            
            0.3Energy
                efficiency cost recoveries
            
            
            2.5Other
            
            
            0.5Total
                change in margin
            
            
            4.0Total
                revenue variance
            
            $
            (27.8
            )





The
      increase in gas gross margin due to weather was the result of cooler temperature
      conditions in the third quarter of 2006 compared to the same quarter in 2005.
      Other gas usage factors, such as changes in individual customer usage, decreased
      gas margin. MidAmerican Energy’s average number of gas retail customers
      increased 1.2% compared to the third quarter of 2005. 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 increased $8.4 million for the third quarter of 2006
      compared to the third quarter of 2005 due primarily to a $5.2 million
      increase in energy efficiency program costs. Changes in energy efficiency
      program costs are substantially matched by changes in related electric and
      gas
      revenues.





Maintenance
      expenses for the third quarter of 2006 increased $1.1 million compared to
      the third quarter of 2005 due to a $1.3 million increase in electric and
      gas distribution maintenance.





Depreciation
      and amortization expense for the third quarter of 2006 decreased
      $19.4 million compared to the third quarter of 2005 due to a
      $20.5 million decrease in regulatory expense related to a revenue sharing
      arrangement in Iowa as a result of lower Iowa electric returns on equity
      primarily from a reduction in electric margins. Refer to the “Utility Regulatory
      Matters” section for an explanation of the revenue sharing
      arrangement.





29


Nonregulated
      Gross Margin





QuarterEnded
                September 30,2006
            
            
            2005(In
                millions)MidAmerican
                Energy -Nonregulated
                operating revenues
            
            $
            117.4
            
            $
            72.8Less
                nonregulated cost of sales
            
            
            103.4
            
            
            68.0Nonregulated
                gross margin
            
            $
            14.0
            
            $
            4.8MidAmerican
                Funding Consolidated -Nonregulated
                operating revenues
            
            $
            118.8
            
            $
            74.5Less
                nonregulated cost of sales
            
            
            103.7
            
            
            68.4Nonregulated
                gross margin
            
            $
            15.1
            
            $
            6.1





Nonregulated
      revenues and cost of sales for the third quarter of 2006 increased due primarily
      to a change in the management strategy related to certain end-use gas contracts
      that resulted in recording prospectively the related revenues and cost of sales
      on a gross, rather than net, basis in accordance with Emerging Issues Task
      Force
      Issue No. 02-3, “Recognition and Reporting of Gains and Losses on Energy Trading
      Contracts Under Issues No. 98-10 and 00-17.” For the third quarter of 2005, cost
      of sales totaling $64.7 million was netted in nonregulated operating revenues
      for such end-use gas contracts. The increase in nonregulated gross margin
      compared to the third quarter of 2005 was due principally to higher realized
      margins and an increase in unrealized net gains on electric and gas financial
      instruments used for hedging purposes. Effective September 1, 2006,
      MidAmerican Energy began recognizing unrealized gains and losses on certain
      electric positions in other comprehensive income, reducing a portion of future
      market volatility on margins.





Allowance
      for Equity Funds





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”). The
      $2.4 million increase in income for the capitalized allowance on equity
      funds used during construction in the third quarter of 2006 was due to the
      increase in construction work in progress compared to the third quarter of
      2005.
      MidAmerican Energy expects to continue to record higher-than-normal income
      for
      the allowance on equity funds used during construction through 2007 while the
      announced generating facilities are constructed.





Other
      Income and Expense





MidAmerican
      Funding -





Other
      expense for the third quarter of 2005 included write-downs of some of
      MidAmerican Funding’s investments in commercial passenger aircraft. MidAmerican
      Funding’s evaluation of its investments in these aircraft resulted in $14.0
      million of pre-tax write-downs during the third quarter of 2005. The write-downs
      reflected a continued deterioration in the airline industry, including the
      bankruptcy filings of two major carriers during 2005.





Fixed
      Charges





The
      $1.9 million increase in interest on long-term debt was due to the
      November 1, 2005 issuance of $300.0 million of MidAmerican Energy
      long-term debt, offset partially by maturities of higher rate debt in 2005
      and
      2006. Other interest expense increased due to a higher 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 $0.9 million increase
      in allowance for borrowed funds for the third quarter of 2006 was due to the
      increase in construction work in progress compared to the third quarter of
      2005.
      MidAmerican Energy expects to continue to record higher-than-normal allowance
      for borrowed funds used during construction through 2007 while the announced
      generating facilities are constructed.




30




Income
      Taxes





MidAmerican
      Energy -





Federal
      law currently provides for federal production tax credits for energy produced
      by
      renewable electricity generation projects, including wind power facilities.
      MidAmerican Energy’s income taxes for the third quarter of 2006 were reduced
      $1.8 million more by the production tax credits compared to the third
      quarter of 2005 due to wind power facilities placed in service in the third
      quarter of 2005.





State
      utility rate regulation in Iowa requires that the tax effect of certain timing
      differences be flowed through immediately to customers. Therefore, amounts
      that
      would otherwise have been recognized in income tax expense have been included
      as
      changes in regulatory assets. This flow-through treatment of such timing
      differences impacts the effective tax rates from year to year.





**Results
      of Operations for the Nine Months Ended September 30, 2006 and
      2005**





Regulated
      Electric Gross Margin





Nine
                MonthsEnded
                September 30,2006
            
            2005Gross
                margin (in millions):Operating
                revenues
            
            $
            1,370.3
            
            $
            1,127.4Less
                cost of fuel, energy and capacity
            
            
            516.8
            
            
            339.8Electric
                gross margin
            
            $
            853.5
            
            $
            787.6Sales
                (gigawatt-hours):Retail
            
            
            15,111
            
            
            14,356Wholesale
            
            
            8,357
            
            
            5,922Total
            
            
            23,468
            
            
            20,278





Electric
      gross margin for the first nine months of 2006 increased $65.9 million
      compared to the first nine months of 2005 due to a $30.7 million increase
      in gross margin on wholesale sales due primarily to an increase in related
      sales
      volumes. Gross margin on retail sales increased $21.9 million due
      principally to customer growth. Additionally, transmission revenues increased
      $11.2 million due to an increase in the use of MidAmerican Energy’s
      transmission lines by other utilities.





Sales
      of
      energy to other utilities, municipalities and marketers inside and outside
      of
      MidAmerican Energy’s delivery system are classified as wholesale. The increased
      availability of MidAmerican Energy-owned base load generation, including
      generation available as a result of newly added wind generation supplying retail
      customers, as well as market opportunities, contributed to a 41.1% increase
      in
      wholesale sales volumes during the first nine months of 2006, resulting in
      a
      $22.1 million increase in wholesale gross margin. An increase in the
      average electric wholesale margins per megawatt hour sold due to higher market
      prices and a greater availability of MidAmerican Energy-owned base load
      generation improved electric wholesale gross margin by $8.6 million
      compared to the first nine months of 2005.




31




Gross
      margin on electric retail sales increased $21.9 million, with electric
      retail sales volumes increasing 5.3% compared to the first nine months of 2005.
      An increase in the average number of retail customers, in particular the
      addition of a large steel manufacturer in the fourth quarter of 2005, improved
      electric retail gross margin by $27.7 million compared to the first nine
      months of 2005. Electricity usage factors not dependent on weather, such as
      changes in individual customer usage patterns, increased electric margin by
      $9.4 million. The effect of temperature conditions during the first nine
      months of 2006 compared to the first nine months of 2005 resulted in a
      $15.0 million decrease in electric retail gross margin. An increase in fuel
      costs related to Iowa retail electric sales decreased electric retail gross
      margin by $4.4 million compared to the first nine months of 2005 due in
      part to an increase in the cost of energy purchased to serve the retail load.
      Recoveries of energy efficiency program costs increased electric retail gross
      margin by $4.4 million compared to the first nine months of 2005. Changes
      in revenues from the recovery of energy efficiency program costs are
      substantially matched with corresponding changes in other operating
      expenses.




Regulated
      Gas Gross Margin





Nine
                MonthsEnded
                September 30,2006
            
            2005Gross
                margin (in millions)Operating
                revenues
            
            $
            778.2
            
            $
            858.7Less
                cost of gas sold
            
            
            619.3
            
            
            699.6Gas
                gross margin
            
            $
            158.9
            
            $
            159.1Sales
                (000’s decatherms):Retail
            
            
            46,266
            
            
            50,990Wholesale
            
            
            34,811
            
            
            41,112Total
            
            
            81,077
            
            
            92,102





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 affect
      gross margin or net income because revenues reflect comparable fluctuations
      through the purchased gas adjustment clauses. Compared to the first nine months
      of 2005, MidAmerican Energy’s average per-unit cost of gas sold increased 0.6%,
      resulting in a $3.5 million increase in cost of gas sold for the first nine
      months of 2006. The increase in cost of gas sold and gas revenues as a result
      of
      the per-unit cost of gas was more than offset by a $83.8 million decrease
      due to the reduction in sales volumes.




32





The
      following table summarizes the variance in gas operating revenues based on
      the
      change in gas cost recoveries and margin components.





Nine
                MonthsEnded September 30,2006
                vs. 2005(In
                millions)Change
                in cost of gas sold:Sales
                volumes
            
            $
            (83.8
            )Average
                cost per unit
            
            
            3.5Total
                change in cost of gas sold
            
            
            (80.3
            )Change
                in margin:Other
                usage factors
            
            
            (4.8
            )Weather
            
            
            (2.6
            )Customer
                growth
            
            
            1.6Energy
                efficiency cost recoveries
            
            
            4.0Other
            
            
            1.6Total
                change in margin
            
            
            (0.2
            )Total
                revenue variance
            
            $
            (80.5
            )





Other
      gas
      usage factors, such as changes in individual customer usage patterns, decreased
      gas margin. The decrease in gas gross margin due to weather was the result
      of
      mild temperature conditions in the first nine months of 2006 compared to the
      same period in 2005. MidAmerican Energy’s average number of gas retail customers
      increased 1.4% compared to the first nine months of 2005. 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 increased $11.0 million for the first nine months of
      2006 compared to the first nine months of 2005 due primarily to an
      $8.4 million increase in energy efficiency program costs. Changes in energy
      efficiency program costs are substantially matched with changes in related
      electric and gas revenues. Additionally, steam generating plant operating costs
      increased $3.2 million.





Maintenance
      expenses for the first nine months of 2006 were unchanged compared to the first
      nine months of 2005. Steam generating plant maintenance decreased
      $5.8 million as a result of planned outages in 2005 but was offset by
      increases in maintenance costs related to wind-powered generating facilities
      and
      the electric and gas distribution systems.





Depreciation
      and amortization expense for the first nine months of 2006 increased
      $5.0 million compared to the first nine months of 2005 due to an increase
      in utility plant depreciation principally as a result of wind-powered generating
      facilities placed in service in the third quarter of 2005 offset partially
      by a
      decrease in amortization of software.




33





Nonregulated
      Gross Margin





Nine
                MonthsEnded
                September 30,2006
            
            2005(In
                millions)MidAmerican
                Energy -Nonregulated
                operating revenues
            
            $
            418.3
            
            $
            209.2Less
                nonregulated cost of sales
            
            
            391.9
            
            
            188.1Nonregulated
                gross margin
            
            $
            26.4
            
            $
            21.1MidAmerican
                Funding Consolidated -Nonregulated
                operating revenues
            
            $
            421.5
            
            $
            213.2Less
                nonregulated cost of sales
            
            
            392.7
            
            
            189.1Nonregulated
                gross margin
            
            $
            28.8
            
            $
            24.1





Nonregulated
      revenues and cost of sales for the first nine months of 2006 increased due
      primarily to a change in the management strategy related to certain end-use
      gas
      contracts that resulted in recording prospectively the related revenues and
      cost
      of sales on a gross, rather than net, basis in accordance with Emerging Issues
      Task Force Issue No. 02-3, “Recognition and Reporting of Gains and Losses on
      Energy Trading Contracts Under Issues No. 98-10 and 00-17.” For the first nine
      months of 2005, cost of sales totaling $180.3 million was netted in nonregulated
      operating revenues for such end-use gas contracts. The increase in nonregulated
      gross margin compared to the first nine months of 2005 was principally due
      to
      higher realized margins and an increase in unrealized net gains on gas financial
      instruments. Effective September 1, 2006, MidAmerican Energy began
      recognizing unrealized gains and losses on certain electric positions in other
      comprehensive income, reducing a portion of future market volatility on
      margins.





Allowance
      for Equity Funds





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. The $7.8 million increase in income for
      the capitalized allowance on equity funds used during construction in the first
      nine months of 2006 was due to the increase in construction work in progress
      compared to the first nine months of 2005. MidAmerican Energy expects to
      continue to record higher-than-normal income for the allowance on equity funds
      used during construction through 2007 while the announced generating facilities
      are constructed.





Other
      Income and Expense





MidAmerican
      Energy -





Interest
      and dividend income increased $2.4 million compared to the first nine
      months of 2005 due to a more favorable cash position and higher interest
      rates.





MidAmerican
      Funding -





Other
      income for the first nine months of 2006 includes $27.6 million of pre-tax
      gains from the sales of MidAmerican Funding’s shares of common stock of an
      electronic energy and metals trading exchange. Additionally, $4.5 million
      of gain was recognized on shares of that common stock, which MidAmerican Funding
      donated to a charitable foundation. Other expense for the first nine months
      of
      2006 reflects $4.5 million of expense for the donation of the shares. Refer
      to Note (9) of MidAmerican Funding’s Notes to Consolidated Financial Statements
      for further discussion of these transactions.




34




Other
      income for the first nine months of 2006 also includes $8.5 million for a
      gain on the sale of MidAmerican Funding’s non-controlling interest in a
      non-utility gas-fired cogeneration facility. Additionally, other income reflects
      $5.2 million of income resulting from changes in a financing arrangement
      related to a non-strategic investment in a hydroelectric generating facility.
      Other income for the first nine months of 2005 includes $9.9 million of
      gains from the sale of two non-strategic, passive investments.





Other
      expense for the first nine months of 2005 includes write-downs of some of
      MidAmerican Funding’s investments in commercial passenger aircraft. MidAmerican
      Funding’s evaluation of its investments in these aircraft resulted in
      $15.8 million of pre-tax write-downs during the 2005 nine-month period. The
      write-downs reflected a continued deterioration in the airline industry,
      including the bankruptcy filings of two major carriers during 2005.





Fixed
      Charges





The
      $9.8 million increase in interest on long-term debt was due to the
      November 1, 2005 issuance of $300.0 million of MidAmerican Energy
      long-term debt, offset partially by maturities of higher rate debt in 2005
      and
      2006. Other interest expense increased due to a higher 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 $3.6 million increase
      in allowance for borrowed funds for the first nine months of 2006 was due to
      the
      increase in construction work in progress compared to the first nine months
      of
      2005. MidAmerican Energy expects to continue to record higher-than-normal
      allowance for borrowed funds used during construction through 2007 while the
      announced generating facilities are constructed.





Income
      Taxes





MidAmerican
      Energy -





Federal
      law currently provides for federal production tax credits for energy produced
      by
      renewable electricity generation projects, including wind power facilities.
      MidAmerican Energy’s income taxes for the first nine months of 2006 were reduced
      $8.5 million more by the production tax credits compared to the first nine
      months of 2005 due to wind power facilities placed in service in the third
      quarter of 2005.





State
      utility rate regulation in Iowa requires that the tax effect of certain timing
      differences be flowed through immediately to customers. Therefore, amounts
      that
      would otherwise have been recognized in income tax expense have been included
      as
      changes in regulatory assets. This flow-through treatment of such timing
      differences impacts the effective tax rates from year to year.





35


**Liquidity
      and Capital Resources**





MidAmerican
      Energy and MidAmerican Funding have available a variety of sources of liquidity
      and capital resources, both internal and external. These resources provide
      funds
      required for current operations, construction expenditures, dividends, debt
      retirement and other capital requirements.





As
      reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy’s net
      cash provided by operating activities was $520.1 million and
      $509.6 million for the first nine months of 2006 and 2005, respectively.
      MidAmerican Funding’s net cash provided by operating activities was
      $478.0 million and $467.9 million for the first nine months of 2006
      and 2005, respectively.





Utility
      Construction Expenditures




MidAmerican
        Energy’s primary need for capital is utility construction expenditures. For the
        first nine months of 2006, utility construction expenditures totaled
        $513.6 million, including Quad Cities Station nuclear fuel purchases.
        MidAmerican Energy’s capital requirements for 2006, which exclude the non-cash
        allowance for equity funds used during construction, are estimated to be
        approximately $752 million, which includes $352 million for the
        coal-fired and wind-powered generation projects discussed below,
        $53 million for emissions control equipment to address current and
        anticipated air quality regulations and $347 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. MidAmerican
        Energy expects to meet these capital expenditures with cash flows from
        operations and the issuance of long-term debt.





MidAmerican
      Energy anticipates a continuing increase in demand for electricity from its
      regulated customers. To meet anticipated demand and ensure adequate electric
      generation in its service territory, MidAmerican Energy is currently
      constructing Council Bluffs Energy Center Unit No. 4 (“CBEC Unit 4”), a 790-MW
      (expected accreditation) super-critical-temperature, coal-fired generating
      plant. MidAmerican Energy will operate the plant and hold an undivided ownership
      interest as a tenant in common with the other owners of the plant. MidAmerican
      Energy’s current ownership interest is 60.67%, equating to 479 MW of output.
      Municipal, cooperative and public power utilities will own the remainder, which
      is a typical ownership arrangement for large base-load plants in Iowa. The
      facility will provide service to regulated retail electricity customers.
      Wholesale sales may also be made from the facility to the extent the power
      is
      not immediately needed for regulated retail service. MidAmerican Energy has
      obtained regulatory approval to include the Iowa portion of the actual cost
      of
      the generation project in its Iowa rate base as long as the actual cost does
      not
      exceed the agreed cap that MidAmerican Energy has deemed to be reasonable.
      If
      the cap is exceeded, MidAmerican Energy has the right to demonstrate the
      prudence of the expenditures above the cap, subject to regulatory review.
      MidAmerican Energy expects to invest approximately $850 million in CBEC
      Unit 4, including transmission facilities and approximately $64 million of
      non-cash allowance for equity funds used during construction. Through
      September 30, 2006, MidAmerican Energy has invested $725.4 million in
      the project, including $121.3 million for MidAmerican Energy’s share of
      deferred payments allowed by the construction contract and $40.8 million of
      non-cash allowance for equity funds used during construction.





On
      December 16, 2005, MidAmerican Energy filed with the IUB a settlement
      agreement between MidAmerican Energy and the Iowa Office of Consumer Advocate
      (“OCA”) regarding ratemaking principles for up to 545 MW (nameplate ratings) of
      wind-powered generation capacity in Iowa to be installed in 2006 and 2007.
      Generally speaking, accredited capacity ratings for wind-powered generation
      facilities are considerably less than the nameplate ratings due to the varying
      nature of wind. The settlement agreement was approved by the IUB on
      April 18, 2006. Refer to “Utility Regulatory Matters” below for more
      information regarding the rate aspects of the settlement agreement.




36


MidAmerican
      Energy has been working with wind project developers and contractors to add
      new
      MidAmerican Energy-owned generation assets. In February 2006, MidAmerican Energy
      entered into agreements to add 99 MW (nameplate ratings) of wind-powered
      generation by the end of 2006. In June 2006, MidAmerican Energy entered into
      an
      additional agreement to add 123 MW (nameplate ratings) of wind-powered
      generation by the end of 2007.





While
      MidAmerican Energy continues to pursue additional wind-powered generation in
      the
      2006-2007 timeframe, MidAmerican Energy will only add additional wind-powered
      generation if it views that it will be cost effective.





Nuclear
      Decommissioning





Each
      licensee of a nuclear facility is required to provide financial assurance for
      the cost of decommissioning its licensed nuclear facility. In general,
      decommissioning of a nuclear facility means to safely remove the facility from
      service and restore the property to a condition allowing unrestricted use by
      the
      operator.





MidAmerican
      Energy currently contributes $8.3 million annually to trusts established
      for the investment of funds for decommissioning Quad Cities Station. As of
      September 30, 2006, approximately 54.8% of the fair value of the trusts’
funds was invested in domestic common equity securities, 11.1% in domestic
      corporate debt and the remainder in investment grade municipal and U.S. Treasury
      bonds. Funding for Quad Cities Station nuclear decommissioning is reflected
      as
      depreciation expense in the Consolidated Statements of Operations. Quad Cities
      Station decommissioning costs charged to Iowa customers are included in base
      rates, and recovery of increases in those amounts must be sought through the
      normal ratemaking process.





Contractual
      Obligations and Commercial Commitments





MidAmerican
      Energy and MidAmerican Funding have various contractual obligations and
      commercial commitments. There have been no material changes, other than the
      debt
      issuance discussed below, in the amount of such obligations and commitments
      from
      what was disclosed in the “Liquidity and Capital Resources” section of MD&A
      in MidAmerican Energy’s and MidAmerican Funding’s most recently filed
      Form 10-K. Refer to Note (3)(c) of Notes to Consolidated Financial
      Statements in this Form 10-Q for discussion regarding deferred construction
      payments and their balance sheet classification.





Debt
      Redemption and Issuance





MidAmerican
      Energy’s 6.375% series of medium-term notes, totaling $160.0 million,
      matured on June 15, 2006. On October 6, 2006, MidAmerican Energy issued
      $350.0 million of 5.8% medium-term notes due October 15, 2036.





Debt
      Authorizations and Credit Facilities





MidAmerican
      Energy has authority from the FERC to issue through April 14, 2007,
      short-term debt in the form of commercial paper and bank notes aggregating
      $500.0 million. MidAmerican Energy currently has in place a
      $500.0 million revolving credit facility that supports its
      $379.6 million commercial paper program and its variable rate pollution
      control revenue obligations. The facility expires July 6, 2011.





MidAmerican
      Energy currently has the necessary authorizations from the Securities and
      Exchange Commission to issue up to $480.0 million of additional long-term
      securities; from the FERC to issue up to $75.0 million of additional
      long-term securities through November 30, 2006, and up to $600 million
      for December 1, 2006, through November 30, 2008; and from the Illinois
      Commerce Commission (“ICC”) to issue up to $480.0 million of additional
      long-term debt securities through July 12, 2011.




37




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, 2006, MidAmerican Energy’s common equity ratio was 53.9%
      computed on a basis consistent with its commitment.




Other
      Financing Information





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





**Credit
      Ratings Risks**





Debt
      and
      preferred securities of MidAmerican Funding and MidAmerican Energy are rated
      by
      nationally recognized credit rating agencies. Assigned credit ratings are based
      on each rating agency’s assessment of MidAmerican Funding’s or MidAmerican
      Energy’s ability to, in general, meet the obligations of the debt or preferred
      securities issued by the rated company. 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. As of
      October 31, 2006, MidAmerican Energy’s senior unsecured debt credit ratings
      were as follows: Fitch Ratings, “A/stable;” Moody’s Investor Service,
“A2/stable;” and Standard and Poor’s, “A-/stable.” Other than the energy supply
      and marketing agreements discussed below, neither MidAmerican Funding nor
      MidAmerican Energy has any credit agreements that require termination or a
      material change in collateral requirements or payment schedule in the event
      of a
      downgrade in the credit ratings of the respective company’s
      securities.





In
      conjunction with its risk management activities, MidAmerican Energy must meet
      credit quality standards as required by counterparties. In accordance with
      industry practice, master agreements that govern MidAmerican Energy’s energy
      supply and marketing activities either specifically require it to maintain
      investment grade credit ratings or provide the right for counterparties to
      demand “adequate assurances” in the event of a material adverse change in
      MidAmerican Energy’s creditworthiness. If one or more of MidAmerican Energy’s
      credit ratings decline below investment grade, MidAmerican Energy may be
      required to post cash collateral, letters of credit or other similar credit
      support to facilitate ongoing wholesale energy supply and marketing activities.
      As of September 30, 2006, MidAmerican Energy’s estimated potential
      collateral requirements totaled approximately $173 million. MidAmerican
      Energy’s potential collateral requirements could fluctuate considerably due to
      seasonality, market price volatility, and a loss of key MidAmerican Energy
      generating facilities or other related factors.





**Utility
      Regulatory Matters**





Rate
      Matters





Under
      a
      series of electric settlement agreements between MidAmerican Energy, the Iowa
      Office of Consumer Advocate (“OCA”) and other intervenors approved by the IUB,
      MidAmerican Energy has agreed not to seek a general increase in electric base
      rates to become effective prior to January 1, 2013, unless its Iowa
      jurisdictional electric return on equity in any year falls below 10%. As a
      party
      to the settlement agreements, the OCA has agreed not to seek any decrease in
      MidAmerican Energy’s Iowa electric base rates prior to
      January 1, 2013. Illinois bundled electric rates are frozen until
      2007, subject to certain exceptions allowing for increases, at which time
      bundled rates may be increased or decreased by the ICC. Refer to Note (4) of
      MidAmerican Energy’s Notes to Consolidated Financial Statements for further
      discussion of these rate matters.




38




In
      an
      order issued September 27, 2004, the IUB required MidAmerican Energy to
      file various plans to fully equalize and consolidate its class zonal electric
      rates by the end of each of the years 2007 through 2010. On
      October 18, 2004, MidAmerican Energy filed a motion for
      reconsideration opposing full rate equalization and proposing a series of rate
      reductions. On March 21, 2005, the IUB required MidAmerican Energy to file
      additional information about potential rate changes concerning phased
      equalization or consolidation of existing zonal rate differences that could
      have
      the effect of bringing rates together on a basis designed to have no impact
      on
      the overall revenues MidAmerican Energy receives from its Iowa electric
      customers. MidAmerican Energy filed the requested information on April 11,
      2005. In the same proceeding, MidAmerican Energy has a pending plan to reduce
      rates for some residential customers by a total of approximately
      $7.0 million in the 2008-2009 time frame in addition to the reductions to
      be offset by cost decreases related to existing contracts. The $7.0 million
      reduction in revenues may begin to be offset by a rate increase for other
      residential customers starting in 2011. On June 19, 2006, without ruling on
      revenue requirement issues, the IUB issued an order requiring MidAmerican Energy
      to hold informal workshops in 2007 and file a comprehensive class
      cost-of-service study and a revenue neutral rate equalization/rate consolidation
      plan by mid-2009.





In
      2004,
      the ICC issued a declaratory ruling finding that MidAmerican Energy’s
      competitive sales of gas to retail customers within the state of Illinois were
      not authorized under the Illinois Public Utilities Act. In its ruling, the
      ICC
      left for subsequent proceedings issues related to the financial implications
      of
      these sales. To date, these issues have been addressed by ICC staff in its
      testimony in the purchased gas adjustment reconciliation proceedings covering
      2001 and 2002. In that testimony, the ICC staff expressed its position that
      MidAmerican Energy must reduce gas costs recovered from Illinois regulated
      gas
      customers through the purchased gas adjustment by the gross margins earned
      from
      MidAmerican Energy’s Illinois nonregulated retail customers since 1996. Gross
      margin is the difference between the revenue and the related cost of gas for
      MidAmerican Energy’s nonregulated sales of gas to retail customers in the entire
      state of Illinois. On October 17, 2006, an administrative law judge issued
      a
      proposed order in the 2001 purchased gas adjustment reconciliation proceeding
      accepting the staff’s position. That decision is now pending before the ICC to
      issue a final order. There have not been any orders issued in the 2002 purchased
      gas adjustment reconciliation proceeding. There can be no assurance that the
      gross margins earned in earlier periods in final purchased gas adjustment
      reconciliation proceedings back to 1996 will not be subject to challenge. If
      the
      ICC adopts the proposed order as its own in the 2001 purchased gas adjustment
      reconciliation proceeding and makes the same adjustment for the years 2003
      -
      2004, the total cumulative adjustment through November 30, 2004, including
      the adjustments since 1996, would be $7.8 million. In its declaratory
      ruling, the ICC decided to open a separate proceeding, in addition to the
      purchased gas adjustment reconciliation proceedings, to determine an appropriate
      remedy to impose upon MidAmerican Energy for making competitive sales throughout
      the state of Illinois without statutory or regulatory authorization. In its
      order initiating this separate proceeding, the ICC stated there would not be
      any
      further litigation of the ICC conclusions arrived at in the declaratory ruling
      proceeding, despite the lack of an evidentiary hearing in that proceeding.
      An
      appeal of the order from the ICC in the declaratory ruling proceeding was filed
      with the Illinois Appellate Court. On May 26, 2006, the court issued an
      Order dismissing MidAmerican Energy’s appeal of the ICC’s action. The court
      subsequently reaffirmed its decision in a July 19, 2006, order in response
      to MidAmerican Energy’s petition for rehearing.





Effective
      January 1, 2005, SB 2525 became law in Illinois. That law allows
      MidAmerican Energy to continue its competitive gas sales in Illinois subject
      to
      ICC regulation. The ICC still must resolve the historical issues in the on-going
      purchase gas adjustment and related proceedings noted above.





On
      April 18, 2006, MidAmerican Energy filed with the ICC an offer to eliminate
      its monthly adjustment clause for recovery of fuel for electric generation
      and
      purchased power costs in Illinois beginning January 1, 2007, pending
      satisfactory resolution of fuel adjustment clause reconciliation issues. On
      September 13, 2006, the ICC approved MidAmerican Energy’s 2005 fuel
      adjustment clause reconciliation, and, accordingly, MidAmerican Energy filed
      on
      October 18, 2006, a proposal to eliminate its monthly fuel adjustment clause.
      Under this proposal, base rates would be adjusted to include recoveries at
      average 2004/2005 cost levels. If approved by the ICC, the proposal would expose
      MidAmerican Energy to monthly market price changes for fuel and purchased power
      costs in Illinois, with rate case approval required for any base rate changes.
      Once the fuel adjustment clause is eliminated, MidAmerican Energy may not
      petition for its reinstatement for five years.




39




Transmission
      Developments





On
      August 30, 2006, a third party vendor commenced operations as MidAmerican
      Energy’s transmission service coordinator (“TSC”). The TSC is the administrator
      of various MidAmerican Energy Open Access Transmission Tariff (“OATT”) functions
      for transmission service. The FERC previously conditionally approved MidAmerican
      Energy’s TSC agreement and selection of a third party vendor. Under the
      contract, the vendor provides its tariff administration and planning services
      for a three-year term. MidAmerican Energy does not believe that the incremental
      costs will have a material impact on its results of operations, financial
      position or cash flows.





Electric
      Market Developments





On
      July 13, 2004, the FERC issued an order requiring MidAmerican Energy to
      conduct a study to determine whether MidAmerican Energy or its affiliates
      possess generation market power. MidAmerican Energy is being required to show
      the absence of generation market power in order to be allowed to continue to
      sell wholesale electric power at market-based rates. The FERC order is intended
      to have MidAmerican Energy conform to what has become the FERC’s general
      practice for utilities given authorization to make wholesale market-based sales.
      Under this general practice, utilities authorized to make market-based electric
      sales must submit a new market power study to the FERC every three years.
      MidAmerican Energy filed the required study on October 29, 2004. On
      June 1, 2005, the FERC issued an order setting for investigation the
      reasonableness of MidAmerican Energy’s market-based rates within its control
      area. The order also terminated the previously established November 1,
      2004, refund date and instead required that market-based sales made by
      MidAmerican Energy within its control area beginning August 7, 2005, be
      subject to refund until the matter is resolved. The FERC also required
      MidAmerican Energy to file additional information by July 1, 2005, and
      August 1, 2005. In its August 1, 2005 filing, MidAmerican Energy filed
      a proposed cost-based sales tariff (“CBST”) applicable to sales made within its
      control area to replace its market-based sales tariff. On March 17, 2006,
      the FERC issued an order (“March 17 Order”) accepting MidAmerican Energy’s
      commitment not to make sales using market-based rates in its control area but
      rejected the proposed applicable tariff language. The FERC directed MidAmerican
      Energy to file revised tariff language by April 17, 2006. MidAmerican
      Energy made such filing together with a request for clarification, or in the
      alternative, rehearing (“Request for Clarification”) of the March 17 Order.
      MidAmerican Energy estimates that its maximum potential refund obligation is
      $16 million and its minimum potential refund obligation is $50,000 for the
      period August 7, 2005 through September 30, 2006. The actual refund
      will depend upon the FERC’s ruling on the Request for Clarification and the
      applicability of the CBST to certain sales made within the control area for
      delivery outside the control area. MidAmerican Energy does not believe at this
      time that the ultimate outcome of this issue will have a material impact on
      its
      results of operations, financial position or cash flows.





The
      Energy Policy Act of 2005





On
      August 8, 2005, the Energy Policy Act of 2005 (“Energy Policy Act”) was
      signed into law. That law potentially impacts many segments of the energy
      industry. A tax provision extended the federal production tax credit for new
      renewable electricity generation projects through December 31, 2007. In
      part as a result of that portion of the law, MidAmerican Energy began
      development efforts to add additional wind generation, as previously discussed
      under “Utility Construction Expenditures” above. The law also expands FERC
      regulatory authority in areas such as electric system reliability, electric
      transmission expansion and pricing, regulation of utility holding companies,
      and
      enforcement authority to issue substantial civil penalties. The Energy Policy
      Act also repealed the Public Utility Holding Company Act of 1935 effective
      February 8, 2006. As a result of the repeal and a stock conversion,
      effective February 9, 2006, Berkshire Hathaway Inc. became the majority
      owner of voting securities of MidAmerican Energy Holdings Company.





**Environmental
      Matters**





MidAmerican
      Energy’s generating facilities are subject to applicable provisions of the Clean
      Air Act and related air quality standards promulgated by the United States
      Environmental Protection Agency (“EPA”). The Clean Air Act provides the
      framework for regulation of certain air emissions and permitting and monitoring
      associated with those emissions. MidAmerican Energy believes it is in material
      compliance with current air quality requirements.




40




The
      EPA
      has in recent years implemented and proposed more stringent national ambient
      air
      quality standards. Additionally, legislation is pending, and could be proposed
      in the future, that may impact MidAmerican Energy if enacted. 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
      EPA. The plan allows MidAmerican Energy to more effectively manage its
      expenditures required to comply with emissions standards. On April 1, 2006,
      MidAmerican Energy submitted to the IUB an updated plan, as required every
      two
      years by Iowa law, which increased its estimate of required expenditures.
      MidAmerican Energy currently estimates that the incremental capital expenditures
      for emission control equipment to comply with air quality requirements will
      total approximately $540 million for January 1, 2006, through
      December 31, 2015. Additionally, MidAmerican Energy expects to incur
      significant incremental operating costs in conjunction with the utilization
      of
      the emissions control equipment. 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.





Refer
      to
      Note (3)(a) of Notes to Consolidated Financial Statements for further discussion
      of air quality standards affecting MidAmerican Energy.





**Generating
      Capability**





On
      July 31, 2006, retail customer usage of electricity caused a new record
      hourly peak demand of 4,279 MW on MidAmerican Energy’s electric system, 239 MW
      greater than the previous record set in July 2005. MidAmerican Energy is
      interconnected with Iowa utilities and utilities in neighboring states.
      MidAmerican Energy is also a party to an electric generation reserve sharing
      pool and regional transmission group administered by the Mid-Continent Area
      Power Pool (“MAPP”). Each MAPP generation reserve participant is required to
      maintain for emergency purposes a net generating capability reserve of at least
      15% above its system peak demand on a 12-month rolling basis. MidAmerican
      Energy’s reserve margin at peak demand for 2006 was approximately
      20%.





MidAmerican
      Energy believes it has adequate electric capacity reserve through 2009,
      including capacity provided by the generating projects discussed above. However,
      significantly higher-than-normal temperatures during the cooling season could
      cause MidAmerican Energy’s reserve to fall below the 15% minimum. If MidAmerican
      Energy fails to maintain the required minimum reserve, significant penalties
      could be contractually imposed by the MAPP.





MidAmerican
      Energy is financially exposed to movements in energy prices since it does not
      recover its energy costs through an energy adjustment clause in Iowa. Although
      MidAmerican Energy believes it has sufficient generation under typical operating
      conditions for its retail electric needs, a loss of adequate generation by
      MidAmerican Energy requiring the purchase of replacement power at a time of
      high
      market prices could subject MidAmerican Energy to losses on its energy sales.





The
      transmission developments may also impact MidAmerican Energy’s wholesale
      electric purchases and sales. The FERC has proceedings underway which may
      influence the wholesale electric marketplace. Because of the uncertainties
      as to
      future regulatory policy governing transmission service and pricing, and
      regulation of wholesale electric sales, MidAmerican Energy is uncertain whether
      past wholesale costs and revenues will be representative of future wholesale
      costs and revenues.





All
      of
      the coal-fired generating stations operated by MidAmerican Energy are fueled
      by
      low-sulfur, western coal from the Powder River Basin. MidAmerican Energy’s coal
      supply portfolio includes multiple suppliers and mines under agreements of
      varying terms and quantities. MidAmerican Energy typically has one to two years
      of coal supply under contracts with fixed prices and regularly monitors the
      western coal market, looking for opportunities to enhance its coal supply
      portfolio. Operational delays in rail transportation out of the Powder River
      Basin during 2005 and 2006 have resulted in the reduction of coal inventories
      to
      suboptimum levels. MidAmerican Energy believes the transportation issues are
      temporary and that its coal inventories will be restored to preferred levels
      by
      late-2007. Additional information regarding MidAmerican Energy’s coal supply
      contracts is included in Note (4)(e) of Notes to Consolidated Financial
      Statements in Item 8 of its most recently filed Annual Report on Form
      10-K.




41




**New
      Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      interpretation of FASB Statement No. 109” ** (“FIN
      48”) *.* FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in accordance with Statement of Financial Accounting Standards No. 109,
“Accounting for Income Taxes,” and prescribes a recognition threshold and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a return. Guidance is also
      provided on de-recognition, classification, interest and penalties, accounting
      in interim periods, disclosure and transition. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. MidAmerican Funding and
      MidAmerican Energy are currently evaluating the impact of adopting FIN 48 on
      their respective consolidated financial positions and results of
      operations.




In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
        Postretirement Plans -an amendment of FASB Statements No. 87, 88, 106, and
        132(R)” (“SFAS 158”). SFAS 158 requires an employer to recognize in its
        statement of financial position the over- or under-funded status of a defined
        benefit postretirement plan measured as the difference between the fair value
        of
        plan assets and the benefit obligation. For a pension plan, the benefit
        obligation is the projected benefit obligation; for any other postretirement
        benefit plan, such as a retiree health care plan, the benefit obligation
        is the
        accumulated postretirement benefit obligation. SFAS 158 also requires entities
        to recognize as a component of other comprehensive income, net of tax, the
        actuarial gains and losses and the prior service costs and credits that arise
        during the period, but were not recognized as components of net periodic
        benefit
        cost of the period pursuant to SFAS No. 87, “Employers’ Accounting for Pensions”
(“SFAS 87”) and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
        Other Than Pensions”(“SFAS 106”). MidAmerican Funding and MidAmerican Energy
        intend to recognize as regulatory assets (liabilities) those amounts
        attributable to its regulated operations that would otherwise be charged
        to
        other comprehensive income, net of tax, pursuant to SFAS No. 71, “Accounting for
        the Effects of Certain Types of Regulation.” SFAS 158 does not impact the
        calculation of net periodic benefit cost and the amounts recognized in either
        accumulated other comprehensive income or regulatory assets (liabilities)
        will
        be adjusted as they are subsequently recognized as components of net periodic
        benefit cost pursuant to the recognition and amortization provisions of SFAS
        87
        and SFAS 106.




The
      recognition and related disclosure provisions of SFAS 158 are effective for
      MidAmerican Funding’s and MidAmerican Energy’s fiscal year ending
      December 31, 2006, while the requirement to measure plan assets and benefit
      obligations as of the date of the employer’s fiscal year-end statement of
      financial position is not effective until fiscal years ending after December
      15,
      2008. MidAmerican Funding and MidAmerican Energy are currently evaluating the
      impact of adopting SFAS 158 on their consolidated financial position and results
      of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value and expands disclosures about fair value measurements. SFAS 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. SFAS 157 is effective
      for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. MidAmerican Funding and MidAmerican Energy are currently
      evaluating the impact of adopting SFAS 157 on their respective consolidated
      financial positions and results of operations.





**Other
      Matters**





On
      May 25, 2006, the membership of the International Brotherhood of Electrical
      Workers locals 109 and 499, comprising more than 90% of MidAmerican Energy’s
      represented workforce, ratified a contract between MidAmerican Energy and the
      locals for a term extending through April 30, 2009.





42


**Critical
      Accounting Policies and Estimates**





MidAmerican
      Energy’s and MidAmerican Funding’s significant accounting policies are described
      in their respective Note (1) of Notes to Consolidated Financial Statements
      in
      Item 8 of their most recently filed Annual Report on Form 10-K. For a discussion
      of their critical accounting policies and estimates, see “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” in
      their most recently filed Annual Report on Form 10-K. MidAmerican Energy’s and
      MidAmerican Funding’s critical accounting policies have not changed materially
      since December 31, 2005.





**Item
      3.****Quantitative
      and Qualitative Disclosures About Market Risk.**





MidAmerican
      Energy is exposed to loss of net income, cash flows and asset values due to
      market risk, including: 1) changes in the market price of gas, electricity
      and
      fuel used in its regulated and nonregulated businesses, 2) variations in the
      severity of weather conditions from normal, and 3) changes in interest rates.
      To
      manage these exposures, MidAmerican Energy enters into various financial
      derivative instruments, including futures, swaps, options and forward physical
      contracts. Through the functioning of a risk oversight committee, senior
      management provides the overall direction, structure, conduct and control of
      MidAmerican Energy’s risk management activities, including authorization and
      communication of risk management policies and procedures, the use of financial
      derivative instruments, strategic hedging program guidelines, appropriate market
      and credit risk limits, and appropriate systems for recording, monitoring and
      reporting the results of transactional and risk management activities.





As
      of
      September 30, 2006, MidAmerican Energy held derivative instruments used for
      non-trading and trading purposes with the following fair values (in
      thousands):





MaturityContract
                Type
            
            Within
                1
            
            1
                to 3
            
            AfterYear
            
            Years
            
            3
                Years
            
            TotalNon-trading:Regulated
                electric assets
            
            $
            12,283
            
            $
            7,853
            
            $
            -
            
            $
            20,136Regulated
                electric (liabilities)
            
            
            (2,343
            )
            
            (686
            )
            
            -
            
            
            (3,029
            )Regulated
                gas assets
            
            
            1,276
            
            
            -
            
            
            -
            
            
            1,276Regulated
                gas (liabilities)
            
            
            (42,425
            )
            
            -
            
            
            -
            
            
            (42,425
            )Nonregulated
                electric assets
            
            
            2,921
            
            
            -
            
            
            -
            
            
            2,921Nonregulated
                electric (liabilities)
            
            
            (6,046
            )
            
            (2,557
            )
            
            -
            
            
            (8,603
            )Nonregulated
                gas assets
            
            
            18,538
            
            
            2,736
            
            
            30
            
            
            21,304Nonregulated
                gas (liabilities)
            
            
            (18,107
            )
            
            (3,413
            )
            
            -
            
            
            (21,520
            )Total
            
            
            (33,903
            )
            
            3,933
            
            
            30
            
            
            (29,940
            )Trading:Nonregulated
                electric assets
            
            
            8,177
            
            
            3,882
            
            
            -
            
            
            12,059Nonregulated
                electric (liabilities)
            
            
            (7,871
            )
            
            (3,888
            )
            
            -
            
            
            (11,759
            )Total
            
            
            306
            
            
            (6
            )
            
            -
            
            
            300Total
                MidAmerican Energy assets
            
            $
            43,195
            
            $
            14,471
            
            $
            30
            
            $
            57,696Total
                MidAmerican Energy (liabilities)
            
            $
            (76,792
            )
            $
            (10,544
            )
            $
            -
            
            $
            (87,336
            )Regulatory
                net asset (liability)
            
            $
            31,209
            
            $
            (7,167
            )
            $
            -
            
            $
            24,042





Derivative
      instruments maturing within one year are reflected in Current Assets-Other
      or
      Current Liabilities-Other on the Consolidated Balance Sheets as appropriate.
      Derivative instruments with maturities greater than one year are reflected
      in
      either Other Assets or Other Liabilities-Other.




43




Reference
      is made to MidAmerican Energy’s and MidAmerican Funding’s most recently filed
      Form 10-K, and in particular, Item 7A. Quantitative and Qualitative Disclosures
      About Market Risk, and Notes (1)(i) and (12) in Notes to Consolidated Financial
      Statements in Item 8 of that report.





**Item
      4.****Controls
      and Procedures.**





With
      the
      supervision and participation of MidAmerican Funding’s and MidAmerican Energy’s
      management, including the respective persons acting as chief executive officer
      and chief financial officer, each company performed an evaluation regarding
      the
      effectiveness of the design and operation of its disclosure controls and
      procedures (as defined in Rule 13a-15(e) promulgated under the Securities and
      Exchange Act of 1934, as amended) as of September 30, 2006. Based on that
      evaluation, MidAmerican Funding’s and MidAmerican Energy’s management, including
      the respective persons acting as chief executive officer and chief financial
      officer, concluded that their respective disclosure controls and procedures
      were
      effective. There have been no changes during the quarter covered by this report
      in MidAmerican Funding’s or MidAmerican Energy’s internal control over financial
      reporting that has materially affected, or is reasonably likely to materially
      affect, its internal control over financial reporting.





44


**PART
      II - OTHER INFORMATION**





**Item
                1.**
            **Legal
                Proceedings.**





MidAmerican
      Energy was one of dozens of companies named as defendants in a January 20,
      2004 consolidated class action lawsuit filed in the United States District
      Court
      for the Southern District of New York. The suit alleged that the defendants
      have
      engaged in unlawful manipulation of the prices of natural gas futures and
      options contracts traded on the New York Mercantile Exchange during the period
      of January 1, 2000 to December 31, 2002. On September 9, 2005,
      MidAmerican Energy and counsel for the plaintiffs executed a stipulation and
      agreement of settlement, which upon final approval by the court following notice
      to all class members, MidAmerican Energy would be dismissed from the lawsuit.
      The court approved the settlement on a preliminary basis on February 8,
      2006, and signed its final judgment and order of dismissal on May 24, 2006.
      No appeal of the order was filed within the applicable appeal period and,
      accordingly, the matter is concluded. MidAmerican Energy’s obligation to the
      plaintiffs was an immaterial amount.





On
      December 28, 2004, an apparent gas explosion and fire resulted in three
      fatalities, one serious injury and property damage at a commercial building
      in
      Ramsey, Minnesota. According to the Minnesota Office of Pipeline Safety, an
      improper installation of a pipeline connection may have been a cause of the
      explosion and fire. A predecessor company to MidAmerican Energy provided gas
      service in Ramsey, Minnesota, at the time of the original installation in 1980.
      In 1993, a predecessor of CenterPoint Energy, Inc. (“CenterPoint”) acquired all
      of the Minnesota gas properties owned by the MidAmerican Energy predecessor
      company.





A s
      a
      result of the explosion and fire, MidAmerican Energy and CenterPoint received
      settlement demands which totaled $15.5 million. MidAmerican Energy’s
      exposure, if any, to these demands are covered under its liability insurance
      coverage to which a $2.0 million retention applies. In addition, counsel
      for CenterPoint stated that a replacement program has been initiated for the
      purpose of locating and replacing all mechanical couplings in the former North
      Central Public Service Company properties located in Minnesota. Counsel for
      CenterPoint has represented that the value of the replacement claim may be
      in
      the range of $35-45 million.





Two
      lawsuits naming MidAmerican Energy as a defendant are currently on file related
      to this incident. On February 8, 2006, MidAmerican Energy was served with a
      Third Party Complaint filed in U.S. District Court, District of Minnesota by
      CenterPoint Resources Corp. d/b/a CenterPoint Energy. The Third Party Complaint
      seeks contribution and indemnity on a wrongful death claim filed by the estate
      of Lorraine Melton, one of the decedents, and all sums associated with
      CenterPoint’s replacement program. MidAmerican Energy was served with a second
      Third Party Complaint filed in U.S. District Court, District of Minnesota by
      CenterPoint seeking contribution and indemnity on a property damage and business
      interruption claim filed by Ramsey Premier Partners, LLC, and all sums
      associated with CenterPoint’s replacement program. MidAmerican Energy’s motion
      for summary judgment filed in both of these cases has been heard by the court
      and a decision is pending. All claims arising from this incident have been
      settled by CenterPoint pursuant to Confidential Orders and Agreements; however,
      the Third Party actions by CenterPoint Energy Resources Corp. against
      MidAmerican Energy remain. MidAmerican Energy intends to vigorously defend
      its
      position in these lawsuits and believes their ultimate outcome will not have
      a
      material impact on its results of operations, financial position or cash
      flows.





Other
      than the litigation described above, MidAmerican Funding and its subsidiaries
      currently have no material legal proceedings. Information on MidAmerican
      Energy’s environmental matters is included in the “Environmental Matters”
section of MD&A in Item 2 of this Form 10-Q. Information regarding
      MidAmerican Energy’s regulatory matters is included in the “Utility Regulatory
      Matters” section of MD&A in Item 2 of this Form 10-Q.





**Item
                1A.**
            **Risk
                Factors**





For
      a
      discussion of MidAmerican Funding’s and MidAmerican Energy’s risk factors, refer
      to Item 1A. Risk Factors in Part I of their latest Annual Report on Form 10-K.
      No material changes in MidAmerican Funding’s or MidAmerican Energy’s risk
      factors have occurred since the filing of the Form 10-K.




45




**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.**





Reference
      is made to the accompanying Exhibit Index for a list of exhibits filed as a
      part
      of this Quarterly Report.





46





**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 COMPANY(Registrants)Date:
                November 3, 2006
            
            /s/
                Thomas B. SpecketerThomas
                B. SpecketerVice
                President and Controllerof
                MidAmerican Funding, LLCand
                MidAmerican Energy Company(principal
                financial and accounting officer)





47





**EXHIBIT
      INDEX**





**Exhibit
      No.**





MidAmerican
      Energy





15
            Awareness
                Letter of Independent Registered Public Accounting Firm31.1
            Chief
                executive officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            Chief
                financial officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            Chief
                executive officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            Chief
                financial officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





MidAmerican
      Funding





31.3
            Chief
                executive officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.4
            Chief
                financial officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.3
            Chief
                executive officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.4
            Chief
                financial officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





MidAmerican
      Energy and MidAmerican Funding





4.1
            Indenture,
                dated as of October 1, 2006 - Senior Debt Securities between
                MidAmerican Energy Company and The Bank of New York Trust Company,
                N.A.,
                as Trustee4.2
            First
                Supplemental Indenture, dated as of October 6, 2006 - 5.800% Notes
                due 2036 between MidAmerican Energy Company and The Bank of New York
                Trust
                Company, N.A., as Trustee4.3
            Distribution
                Agreement, dated October 3, 2006 - Medium Term Notes between
                MidAmerican Energy Company and Credit Suisse Securities (USA) LLC,
                J. P.
                Morgan Securities, Inc., LaSalle Financial Services, Inc., and BNP
                Paribas
                Securities Corp.








48