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 March 31, 2005
 
 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 Ave. PO Box 657****Des
      Moines, Iowa 50303****333-15387**
    
    **MIDAMERICAN
      ENERGY COMPANY**
    
    **42-1425214****(An
      Iowa Corporation)****666
      Grand Ave. PO Box 657****Des
      Moines, Iowa 50303**
 
 (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 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. Yes [X]  No [
]
 
 Indicate
by check mark whether the registrants are accelerated filers (as defined in Rule
12b-2 of the Exchange Act).
 Yes [ ]
No [X]
 
 As of
April 25, 2005, all of the member’s equity of MidAmerican Funding, LLC was held
by its parent company, MidAmerican Energy Holdings Company.
 
 As of
April 25, 2005, 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.
 
 
   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
    3Item 2.
    Management's Discussion and Analysis of Financial
      Condition and Results of Operations
    22Item 3.
    Quantitative and Qualitative Disclosures About Market
      Risk
    33Item 4.
    Controls and Procedures
    33**Part II - Other Information**Item 1.
    Legal Proceedings
    34Item 2.
    Unregistered Sales of Equity Securities and Use of
      Proceeds
    34Item 3.
    Defaults Upon Senior Securities
    34Item 4.
    Submission of Matters to a Vote of Security
      Holders
    34Item 5.
    Other Information
    34Item 6.
    Exhibits
    34Signatures
    
    35Exhibit Index
    
    36
  
 2
 
 
 **PART I - FINANCIAL INFORMATION**
 
 **Item
1.**  **Financial Statements.**
 
 
 MidAmerican
      Energy Company and SubsidiaryReport
      of Independent Registered Public Accounting Firm
    4Consolidated
      Balance Sheets
    5Consolidated
      Statements of Operations
    6Consolidated
      Statements of Cash Flows
    7Notes
      to Consolidated Financial Statements
    8MidAmerican
      Funding, LLC and SubsidiariesReport
      of Independent Registered Public Accounting Firm
    14Consolidated
      Balance Sheets
    15Consolidated
      Statements of Operations
    16Consolidated
      Statements of Cash Flows
    17Notes
      to Consolidated Financial Statements
    18
 
 3
 
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 To the
Board of Directors and Shareholder
 MidAmerican
Energy Company
 Des
Moines, Iowa
 
 We have
reviewed the accompanying consolidated balance sheet of MidAmerican Energy
Company and subsidiary (the “Company”) as of March 31, 2005, and the
related consolidated statements of operations and cash flows for the three-month
periods ended March 31, 2005 and 2004. 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
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiary as of December 31, 2004, 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
February 25, 2005, 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, 2004 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
 May 5,
2005
  4
 
 
  **MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY**
 **CONSOLIDATED
BALANCE SHEETS**
 (In
thousands)
 
 **As
      of****March
      31,**
    
    
    **December
      31,****2005**
    
    
    **2004******
    
    
    **(Unaudited)****ASSETS****Utility
      Plant, Net**Electric
    
    $
    5,540,484
    
    $
    5,498,878Gas
    
    
    965,949
    
    
    957,0116,506,433
    
    
    6,455,889Accumulated
      depreciation and amortization
    
    
    (3,002,637
    )
    
    (2,956,856
    )3,503,796
    
    
    3,499,033Construction
      work in progress
    
    
    495,637
    
    
    369,4063,999,433
    
    
    3,868,439**Current
      Assets**Cash
      and cash equivalents
    
    
    48,636
    
    
    88,113Short-term
      investments
    
    
    25,000
    
    
    39,500Receivables,
      net
    
    
    346,839
    
    
    332,759Inventories
    
    
    32,479
    
    
    89,646Other
    
    
    35,474
    
    
    22,080488,428
    
    
    572,098**Investments
      and Nonregulated Property, Net**
    
    
    341,526
    
    
    333,360**Regulatory
      Assets**
    
    
    210,420
    
    
    227,997**Other
      Assets**
    
    
    119,120
    
    
    110,057**Total
      Assets**
    
    $
    5,158,927
    
    $
    5,111,951**CAPITALIZATION
      AND LIABILITIES****Capitalization**Common
      shareholder’s equity
    
    $
    1,580,628
    
    $
    1,527,468MidAmerican
      Energy preferred securities
    
    
    30,329
    
    
    30,329Long-term
      debt, excluding current portion
    
    
    1,331,583
    
    
    1,331,5092,942,540
    
    
    2,889,306**Current
      Liabilities**Current
      portion of long-term debt
    
    
    417
    
    
    91,018Accounts
      payable
    
    
    239,931
    
    
    241,836Taxes
      accrued
    
    
    93,855
    
    
    70,810Interest
      accrued
    
    
    21,763
    
    
    13,842Other
    
    
    75,169
    
    
    83,949431,135
    
    
    501,455**Other
      Liabilities**Deferred
      income taxes
    
    
    480,577
    
    
    486,970Investment
      tax credits
    
    
    47,097
    
    
    48,143Asset
      retirement obligations
    
    
    169,229
    
    
    166,845Regulatory
      liabilities
    
    
    708,790
    
    
    677,489Other
    
    
    379,559
    
    
    341,7431,785,252
    
    
    1,721,190**Total
      Capitalization and Liabilities**
    
    $
    5,158,927
    
    $
    5,111,951
 
 The
accompanying notes are an integral part of these financial
statements.
 
 5
 
 ****
 **MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 (In
thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    
    **2004****(Unaudited)****Operating
      Revenues**Regulated
      electric
    
    $
    312,579
    
    $
    363,184Regulated
      gas
    
    
    467,465
    
    
    393,571Nonregulated
    
    
    75,092
    
    
    83,177855,136
    
    
    839,932**Operating
      Expenses**Regulated:Cost
      of fuel, energy and capacity
    
    
    88,763
    
    
    114,234Cost
      of gas sold
    
    
    387,012
    
    
    310,775Other
      operating expenses
    
    
    90,393
    
    
    89,042Maintenance
    
    
    31,650
    
    
    28,018Depreciation
      and amortization
    
    
    63,402
    
    
    82,528Property
      and other taxes
    
    
    24,446
    
    
    24,927685,666
    
    
    649,524Nonregulated:Cost
      of sales
    
    
    66,426
    
    
    74,804Other
    
    
    3,583
    
    
    4,15570,009
    
    
    78,959Total
      operating expenses
    
    
    755,675
    
    
    728,483**Operating
      Income**
    
    
    99,461
    
    
    111,449**Non-Operating
      Income**Interest
      and dividend income
    
    
    1,166
    
    
    599Other
      income
    
    
    5,277
    
    
    4,365Other
      expense
    
    
    (600
    )
    
    (761
    )5,843
    
    
    4,203**Fixed
      Charges**Interest
      on long-term debt
    
    
    19,946
    
    
    17,579Other
      interest expense
    
    
    1,822
    
    
    1,237Allowance
      for borrowed funds
    
    
    (1,946
    )
    
    (1,322
    )19,822
    
    
    17,494**Income
      Before Income Taxes**
    
    
    85,482
    
    
    98,158**Income
      Taxes**
    
    
    29,133
    
    
    33,271**Net
      Income**
    
    
    56,349
    
    
    64,887**Preferred
      Dividends**
    
    
    312
    
    
    309**Earnings
      on Common Stock**
    
    $
    56,037
    
    $
    64,578
 
 The
accompanying notes are an integral part of these financial
statements.
 
 6
 
  **MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 (In
thousands)
 
 **Three
      Months****Ended
      March 31,****2005**
    
    
    **2004******
    
    **(Unaudited)****Net
      Cash Flows From Operating Activities**Net
      income
    
    $
    56,349
    
    $
    64,887Adjustments
      to reconcile net income to net cash provided:Depreciation
      and amortization
    
    
    63,728
    
    
    82,836Deferred
      income taxes and investment tax credit, net
    
    
    (4,953
    )
    
    26,262Amortization
      of other assets and liabilities
    
    
    6,705
    
    
    1,399Impact
      of changes in working capital:Receivables,
      net
    
    
    10,500
    
    
    (21,702
    )Inventories
    
    
    57,167
    
    
    57,263Accounts
      payable
    
    
    (41,606
    )
    
    (1,393
    )Taxes
      accrued
    
    
    23,045
    
    
    (592
    )Other
      current assets and liabilities
    
    
    5,105
    
    
    9,895Other
    
    
    5,700
    
    
    2,857Net
      cash provided by operating activities
    
    
    181,740
    
    
    221,712**Net
      Cash Flows From Investing Activities**Utility
      construction expenditures
    
    
    (142,758
    )
    
    (112,205
    )Quad
      Cities Station decommissioning trust fund
    
    
    (2,075
    )
    
    (2,075
    )Purchases
      of available-for-sale securities
    
    
    (75,502
    )
    
    -Proceeds
      from sales of available-for-sale securities
    
    
    90,002
    
    
    -Other
      investing activities, net
    
    
    (129
    )
    
    (37
    )Net
      cash used in investing activities
    
    
    (130,462
    )
    
    (114,317
    )**Net
      Cash Flows From Financing Activities**Dividends
      paid
    
    
    (312
    )
    
    (309
    )Retirement
      of long-term debt, including reacquisition cost
    
    
    (90,614
    )
    
    (132
    )Reacquisition
      of preferred securities
    
    
    -
    
    
    (1,430
    )Net
      decrease in notes payable
    
    
    -
    
    
    (48,000
    )Other
    
    
    171
    
    
    -Net
      cash used in financing activities
    
    
    (90,755
    )
    
    (49,871
    )**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    (39,477
    )
    
    57,524**Cash
      and Cash Equivalents at Beginning of Period**
    
    
    88,113
    
    
    3,151**Cash
      and Cash Equivalents at End of Period**
    
    $
    48,636
    
    $
    60,675**Supplemental
      Disclosure:**Interest
      paid, net of amounts capitalized
    
    $
    10,642
    
    $
    10,468Income
      taxes paid (refunded)
    
    $
    (6,193
    )
    $
    (10,622
    )
 
 The
accompanying notes are an integral part of these financial
statements.
 
 7
 
  **MIDAMERICAN
ENERGY COMPANY AND SUBSIDIARY**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.**
    **General**
 
 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 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 the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation, including
the reclassification of auction rate securities. All significant intercompany
transactions have been eliminated. Although MidAmerican Energy believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Energy’s latest Annual Report on Form 10-K.
  The
accompanying Consolidated Balance Sheet as of December 31, 2004, reflects a
$39.5 million reclassification of instruments used in the MidAmerican
Energy’s cash management program from Cash and Cash Equivalents to Short-Term
Investments. This reclassification is to present auction rate securities as
short-term investments rather than as cash equivalents due to the stated
maturities of these investments. These instruments are classified as
available-for-sale securities as management does not intend to hold them to
maturity nor are they bought and sold with the objective of generating profits
on short-term differences in price. The carrying value of these instruments
approximates their fair value.
 
 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.
 
 **2.**
    **New
      Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations,” refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation.
MidAmerican Energy and MidAmerican Funding are required to adopt the provisions
of FIN 47 by December 2005. Adoption of FIN 47 is not expected to have a
material effect on MidAmerican Energy’s or MidAmerican Funding’s financial
position, results of operations or cash flows.
 
 **3.**  **Commitments
and Contingencies**
 
 (a)
    Air
      Quality
 
 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.
 
 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
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 in the area 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 is in attainment of the ozone standards
and the fine particulate matter standards.
  8
 
 On March
10, 2005, the EPA released the final Clean Air Interstate Rule (“CAIR”), calling
for reductions of sulfur dioxide (“SO 2 ”) and
nitrogen oxides (“NO x ”) in the
eastern United States through a 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, by 2015. The CAIR will impact MidAmerican Energy’s
coal-burning generating facilities and will require MidAmerican Energy to either
reduce emissions from those facilities through the installation of emission
controls or purchase additional emission allowances, or some combination
thereof.
 
 On
March 15, 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 current 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. The CAMR
will impact MidAmerican Energy’s coal-burning generating facilities and will
require MidAmerican Energy to either reduce emissions from those facilities
through the installation of emission controls or purchase additional emission
allowances, or some combination thereof.
  The CAIR
or the CAMR 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 the “Clear Skies Initiative,” and
other 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 CAIR and the
CAMR, the rules could be changed or overturned as a result of litigation.
 
 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 and
NO X 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.
On July 17, 2003, the IUB issued an order that affirmed an
administrative law judge’s approval of the initial plan filed April 1,
2002, as amended. On October 4, 2004, the IUB issued an order approving
MidAmerican Energy’s second biennial plan as revised in a settlement MidAmerican
Energy entered into with the Iowa Office of Consumer Advocate (“OCA”). That plan
covers the time period from April 1, 2004 through December 31, 2006.
Neither IUB order resulted in any changes to electric rates for MidAmerican
Energy. The effect of the orders is to approve the prudence of expenditures made
consistent with the plans. 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 environmental
requirements cumulatively exceed $325 million, then MidAmerican Energy may seek
to recover the additional expenditures from customers. Based on a review of the
final CAIR and CAMR, MidAmerican Energy does not expect the qualified
expenditures to exceed $325 million through January 1, 2011.
 
 Under the
New Source Review (“NSR”) provisions of the Clean Air Act, a utility 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 facility
that potentially increases 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.
  9
 In recent
years, the EPA has requested from several utilities information and support
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. However, on
August 27, 2003, the EPA announced changes to its NSR rules that clarify
what constitutes routine repair, maintenance and replacement for purposes of
triggering NSR requirements. The EPA concluded equipment that is repaired,
maintained or replaced with an expenditure not greater than 20 percent of the
value of the source will not trigger the New Source Revisions of the Clean Air
Act. A number of states and local air districts challenged the EPA’s
clarifications of the NSR rule, and a panel of the United States Circuit Court
of Appeals for the District of Columbia issued an order on December 24,
2003, staying the EPA’s implementation of its clarifications of the equipment
replacement rule. On July 1, 2004, the EPA published a notice of stay of
the final equipment replacement rule in the *Federal
Register,* consistent
with the judicial stay. Additionally, on the same date, the EPA published a
Notice of Reconsideration and Request for Comment on the equipment replacement
rule in response to the Petitioners’ legal challenges. Until such time as the
EPA takes final action on the equipment replacement rule, the previous rules
without the clarified exemption remain in effect.
  (b)
    Nuclear
      Decommissioning Costs
 
 Expected
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 decommissioning costs are included in base rates in Iowa
tariffs.
 
 MidAmerican
Energy’s share of expected decommissioning costs for Quad Cities Station, in
2004 dollars, is $154 million and is the asset retirement obligation for Quad
Cities Station. 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
March 31, 2005 and December 31, 2004, was $213.8 million and $207.5
million, respectively, and is reflected in Investments and Nonregulated
Property, Net on the Consolidated Balance Sheets.
 
 (c)
    Manufactured
      Gas Plant Facilities
 
 The EPA
and the state environmental agencies have determined that contaminated wastes
remaining at decommissioned manufactured gas plant facilities may pose a threat
to the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial
action.
 
 MidAmerican
Energy has evaluated all known properties that were, at one time, sites of gas
manufacturing plants for which it may be a potentially responsible party. The
purpose of these evaluations was to determine whether waste materials are
present, whether the materials constitute a health or environmental risk, and
whether MidAmerican Energy has any responsibility for remedial action.
MidAmerican Energy has actively worked with the regulatory agencies and has
received regulatory closure on fourteen sites. MidAmerican Energy is continuing
to work with the agencies to obtain regulatory closure on an additional ten
sites.
 
 MidAmerican
Energy estimates the range of possible costs for investigation, remediation and
monitoring for the sites discussed above to be approximately $6 million to $13
million. As of March 31, 2005 and December 31, 2004,
MidAmerican Energy had recorded a liability of $7.7 million and $9.3 million,
respectively, for these sites and a corresponding regulatory asset for future
recovery through the regulatory process. MidAmerican Energy projects that these
amounts will be incurred or paid over the next two years.
 
 The
estimated liability is determined through a site-specific cost evaluation
process. The estimate includes incremental direct costs of remediation, site
monitoring costs and costs of compensation to employees for time expected to be
spent directly on the remediation effort. The estimated recorded liabilities for
these properties are based upon preliminary data. Thus, actual costs could vary
significantly from the estimates. The estimate could change materially based on
facts and circumstances derived from site investigations, changes in required
remedial action and changes in technology relating to remedial alternatives.
Insurance recoveries have been received for some of the sites under
investigation. Those recoveries are intended to be used principally for
accelerated remediation, as specified by the IUB and are recorded as a
regulatory liability.
 
 10
 
  Although
the timing of potential incurred costs and recovery of such costs in rates may
affect the results of operations in individual periods, management believes that
the outcome of these issues will not have a material adverse effect on
MidAmerican Energy’s financial position, results of operations or cash
flows.
  **4.**
    **Rate
      Matters**
 
 Under
three settlement agreements between MidAmerican Energy, the OCA and other
intervenors approved by the IUB, MidAmerican Energy has agreed not to seek a
general increase in electric rates prior to 2012 unless, beginning in 2006, 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 rates prior to
January 1, 2012. 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.
 
 Under the
first settlement agreement, which was approved by the IUB on December 21,
2001, and is 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 is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy’s application for ratemaking principles on
its wind power project and was 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 third
settlement agreement was approved by the IUB on January 31, 2005, in
conjunction with MidAmerican Energy’s proposed expansion of its wind power
project by up to 90 megawatts (“MW”). This settlement extended through 2011
MidAmerican Energy’s commitment not to seek a general increase in electric rates
unless its Iowa jurisdictional electric return on equity falls below 10%. It
also extended the revenue sharing mechanism through 2011. In addition, the OCA
agreed to commit not to seek any decrease in Iowa electric base rates to become
effective before January 1, 2012. The total capacity added as the
result of the wind expansion project is currently projected to be 50 MW.
 
 The
regulatory liabilities created by the three 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. The regulatory
liabilities created for the years through 2010 are expected to be reduced as
they are credited against plant in service in amounts equal to the allowance for
funds used during construction associated with generating plant additions. As a
result of the credit applied to generating plant balances from the reduction of
the regulatory liabilities, future depreciation will be reduced. As of
March 31, 2005 and December 31, 2004, the related regulatory liability
reflected on the Consolidated Balance Sheets was $188.7 million and $181.2
million, respectively. The regulatory liability for 2011, if any, will be
credited to customer bills in 2012.
 
 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. Illinois law provides that, through 2006, Illinois
earnings above a computed level of return on common equity are to be shared
equally between regulated retail electric customers and MidAmerican Energy.
MidAmerican Energy’s computed level of return on common equity is based on a
rolling two-year average of the Monthly Treasury Long-Term Average Rate, as
published by the Federal Reserve System, plus a premium of 8.5% for 2000 through
2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which
sharing must occur for 2004 was 13.57%. The law allows MidAmerican Energy to
mitigate the sharing of earnings above the threshold return on common equity
through accelerated recovery of electric assets.
 
 11
 
 **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. 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. Non-union employees hired after June 30, 2004, are not
eligible for postretirement benefits other than pensions. 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 ended March 31, (in
thousands):
  Pension
    Postretirement2005
    
    
    2004
    
    
    2005
    
    
    2004Components
      of net periodic benefit cost:Service
      cost
    
    $
    6,687
    
    $
    6,598
    
    $
    1,648
    
    $
    1,962Interest
      cost
    
    
    9,172
    
    
    8,700
    
    
    3,589
    
    
    4,183Expected
      return on plan assets
    
    
    (9,527
    )
    
    (9,634
    )
    
    (2,321
    )
    
    (1,861
    )Amortization
      of net transition balance
    
    
    -
    
    
    (198
    )
    
    614
    
    
    1,028Amortization
      of prior service cost
    
    
    671
    
    
    687
    
    
    -
    
    
    148Amortization
      of prior year loss
    
    
    409
    
    
    419
    
    
    421
    
    
    834Net
      periodic benefit cost
    
    $
    7,412
    
    $
    6,572
    
    $
    3,951
    
    $
    6,294
 
 MidAmerican
Energy expects to contribute $6.6 million and $15.8 million in 2005 to its
pension and postretirement plans, respectively. As of March 31, 2005,
$1.4 million and $4.3 million of contributions have been made to the pension and
postretirement plans, respectively.
 
 **6.**
    **Segment
      Information**
 
 MidAmerican
Energy has identified four reportable operating segments based principally on
management structure. The generation segment derives most of its revenue from
the sale of regulated and nonregulated wholesale electricity and natural gas.
The energy delivery segment derives its revenue principally from the sale and
delivery of regulated retail electricity and natural gas, while the transmission
segment obtains most of its revenue from the sale of electric transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense and income tax expense are allocated to
each segment based on MidAmerican Energy allocators most related to the nature
of the cost.
 
 The
energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. Regulated electric retail revenues are billed to
external customers by the energy delivery segment based on bundled tariffs that
do not segregate components for the other segments. For internal segment
reporting purposes, MidAmerican Energy has developed transfer prices to transfer
the appropriate portion of those revenues to the other segments. The transfer
prices are based on cost of service or tariffed rates, except for the generation
segment which receives the residual.
 
 MidAmerican
Energy’s external revenues by product and service are displayed on the
Consolidated Statements of Operations.
 
 12
 
 
 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
      MonthsEnded
      March 31,2005
    
    
    2004Segment
      Profit InformationOperating
      revenues:External
      revenues -Generation
    
    $
    158,897
    
    $
    178,871Energy
      delivery
    
    
    617,427
    
    
    574,427Transmission
    
    
    7,981
    
    
    6,628Marketing
      & sales
    
    
    70,831
    
    
    80,006Total
    
    
    855,136
    
    
    839,932Intersegment
      revenues -Generation
    
    
    139,113
    
    
    143,207Energy
      delivery
    
    
    (153,794
    )
    
    (157,978
    )Transmission
    
    
    14,681
    
    
    14,771Total
    
    
    -
    
    
    -Consolidated
    
    $
    855,136
    
    $
    839,932Earnings
      on common stock:Generation
    
    $
    8,274
    
    $
    21,834Energy
      delivery
    
    
    37,715
    
    
    34,328Transmission
    
    
    8,887
    
    
    7,147Marketing
      & sales
    
    
    1,161
    
    
    1,269Consolidated
    
    $
    56,037
    
    $
    64,578
 
 As
      ofMarch 31,
    
    
    December
      31,2005
    
    
    2004Segment
      Asset InformationTotal
      assets:Generation
    
    $
    2,332,901
    
    $
    2,229,909Energy
      delivery
    
    
    2,555,392
    
    
    2,625,081Transmission
    
    
    288,771
    
    
    277,771Marketing
      & sales
    
    
    45,397
    
    
    42,725Total
    
    
    5,222,461
    
    
    5,175,486Reclassifications
      and intersegment eliminations (a)
    
    
    (63,534
    )
    
    (63,535
    )Consolidated
    
    $
    5,158,927
    
    $
    5,111,951
 
 (a)
    Reclassifications
      and intersegment eliminations relate principally to the reclassification
      of income tax balances in accordance with generally accepted accounting
      principles and the elimination of intersegment accounts receivables and
      payables.
 
 **7.**
    **Total
      Comprehensive Income**
 
 MidAmerican
Energy’s total comprehensive income for the three months ended March 31,
2005 and 2004, was $53.1 million and $64.2 million, respectively. The difference
from Earnings on Common Stock for the three months ended
March 31, 2004, was due to the effective portion of net gains and
losses on MidAmerican Energy’s derivative instruments classified as cash flow
hedges. For the three months ended March 31, 2005, the difference from
Earnings on Common Stock was due to a minimum pension liability adjustment.
Accumulated other comprehensive loss, net, was $2.9 million and $- as of
March 31, 2005, and December 31, 2004, respectively.
 
 13
 
 
  **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 March 31, 2005, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 2005 and 2004. 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
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2004, 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
February 25, 2005, 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, 2004 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
 May 5,
2005
  14
  **MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 (In
thousands)
 
 **As
      of******
    
    
    **March 31,**
    
    
    **December
      31,****2005**
    
    
    **2004******
    
    
    **(Unaudited)****ASSETS****Utility
      Plant, Net**Electric
    
    $
    5,540,484
    
    $
    5,498,878Gas
    
    
    965,949
    
    
    957,0116,506,433
    
    
    6,455,889Accumulated
      depreciation and amortization
    
    
    (3,002,637
    )
    
    (2,956,856
    )3,503,796
    
    
    3,499,033Construction
      work in progress
    
    
    495,637
    
    
    369,4063,999,433
    
    
    3,868,439**Current
      Assets**Cash
      and cash equivalents
    
    
    48,923
    
    
    88,367Short-term
      investments
    
    
    25,000
    
    
    39,500Receivables,
      net
    
    
    346,409
    
    
    337,333Inventories
    
    
    32,479
    
    
    89,646Other
    
    
    36,161
    
    
    22,585488,972
    
    
    577,431**Investments
      and Nonregulated Property, Net**
    
    
    377,573
    
    
    375,230**Goodwill**
    
    
    1,268,082
    
    
    1,268,082**Regulatory
      Assets**
    
    
    210,420
    
    
    227,997**Other
      Assets**
    
    
    119,128
    
    
    110,065**Total
      Assets**
    
    $
    6,463,608
    
    $
    6,427,244**CAPITALIZATION
      AND LIABILITIES****Capitalization**Member’s
      equity
    
    $
    2,095,943
    
    $
    2,042,403MidAmerican
      Energy preferred securities
    
    
    30,329
    
    
    30,329Long-term
      debt, excluding current portion
    
    
    2,031,583
    
    
    2,031,5094,157,855
    
    
    4,104,241**Current
      Liabilities**Note
      payable to affiliate
    
    
    36,550
    
    
    31,500Current
      portion of long-term debt
    
    
    417
    
    
    91,018Accounts
      payable
    
    
    240,766
    
    
    242,966Taxes
      accrued
    
    
    98,379
    
    
    77,388Interest
      accrued
    
    
    25,802
    
    
    29,612Other
    
    
    75,365
    
    
    84,032477,279
    
    
    556,516**Other
      Liabilities**Deferred
      income taxes
    
    
    510,232
    
    
    518,004Investment
      tax credits
    
    
    47,097
    
    
    48,143Asset
      retirement obligations
    
    
    169,229
    
    
    166,845Regulatory
      liabilities
    
    
    708,790
    
    
    677,489Other
    
    
    393,126
    
    
    356,0061,828,474
    
    
    1,766,487**Total
      Capitalization and Liabilities**
    
    $
    6,463,608
    
    $
    6,427,244
 
 The
accompanying notes are an integral part of these financial
statements
 
 15
 
 
 **MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 (In
thousands)
 
 **Three
      Months******
    
    **Ended
      March 31,****2005**
    
    
    **2004******
    
    **(Unaudited)****Operating
      Revenues**Regulated
      electric
    
    $
    312,579
    
    $
    363,184Regulated
      gas
    
    
    467,465
    
    
    393,571Nonregulated
    
    
    76,234
    
    
    84,191856,278
    
    
    840,946**Operating
      Expenses**Regulated:Cost
      of fuel, energy and capacity
    
    
    88,763
    
    
    114,234Cost
      of gas sold
    
    
    387,012
    
    
    310,775Other
      operating expenses
    
    
    90,393
    
    
    89,042Maintenance
    
    
    31,650
    
    
    28,018Depreciation
      and amortization
    
    
    63,402
    
    
    82,528Property
      and other taxes
    
    
    24,446
    
    
    24,927685,666
    
    
    649,524Nonregulated:Cost
      of sales
    
    
    66,590
    
    
    75,073Other
    
    
    4,671
    
    
    5,28471,261
    
    
    80,357Total
      operating expenses
    
    
    756,927
    
    
    729,881**Operating
      Income**
    
    
    99,351
    
    
    111,065**Non-Operating
      Income**Interest
      and dividend income
    
    
    1,205
    
    
    629Other
      income
    
    
    16,478
    
    
    6,993Other
      expense
    
    
    (2,512
    )
    
    (865
    )15,171
    
    
    6,757**Fixed
      Charges**Interest
      on long-term debt
    
    
    31,720
    
    
    29,303Other
      interest expense
    
    
    2,056
    
    
    1,288Preferred
      dividends of subsidiaries
    
    
    312
    
    
    309Allowance
      for borrowed funds
    
    
    (1,946
    )
    
    (1,322
    )32,142
    
    
    29,578**Income
      Before Income Taxes**
    
    
    82,380
    
    
    88,244**Income
      Taxes**
    
    
    26,023
    
    
    33,887**Net
      Income**
    
    $
    56,357
    
    $
    54,357
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
 16
 
  **MIDAMERICAN
FUNDING, LLC AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 (In
thousands)
 
 **Three
      Months******
    
    **Ended
      March 31,****2005**
    
    
    **2004******
    
    **(Unaudited)****Net
      Cash Flows From Operating Activities**Net
      income
    
    $
    56,357
    
    $
    54,357Adjustments
      to reconcile net income to net cash provided:Depreciation
      and amortization
    
    
    63,779
    
    
    82,888Deferred
      income taxes and investment tax credit, net
    
    
    (6,420
    )
    
    26,180Amortization
      of other assets and liabilities
    
    
    6,298
    
    
    682Gain
      on sale of securities, assets and other investments
    
    
    (10,190
    )
    
    (300
    )Loss
      from impairment of assets and investments
    
    
    1,876
    
    
    -Impact
      of changes in working capital:Receivables,
      net
    
    
    15,504
    
    
    (17,351
    )Inventories
    
    
    57,167
    
    
    57,263Accounts
      payable
    
    
    (41,901
    )
    
    (1,405
    )Taxes
      accrued
    
    
    20,991
    
    
    (5,183
    )Other
      current assets and liabilities
    
    
    (6,695
    )
    
    (2,678
    )Other
    
    
    7,609
    
    
    9,396Net
      cash provided by operating activities
    
    
    164,375
    
    
    203,849**Net
      Cash Flows From Investing Activities**Utility
      construction expenditures
    
    
    (142,758
    )
    
    (112,205
    )Quad
      Cities Station decommissioning trust fund
    
    
    (2,075
    )
    
    (2,075
    )Purchases
      of available-for-sale securities
    
    
    (75,502
    )
    
    -Proceeds
      from sales of available-for-sale securities
    
    
    91,046
    
    
    1,024Proceeds
      from sales of assets and other investments
    
    
    11,046
    
    
    7Other
    
    
    (183
    )
    
    910Net
      cash used in investing activities
    
    
    (118,426
    )
    
    (112,339
    )**Net
      Cash Flows From Financing Activities**Retirement
      of long-term debt, including reacquisition cost
    
    
    (90,614
    )
    
    (133
    )Reacquisition
      of preferred securities
    
    
    -
    
    
    (1,430
    )Note
      payable to affiliate
    
    
    5,050
    
    
    14,325Net
      decrease in notes payable
    
    
    -
    
    
    (48,000
    )Other
    
    
    171
    
    
    -Net
      cash used in financing activities
    
    
    (85,393
    )
    
    (35,238
    )**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    (39,444
    )
    
    56,272**Cash
      and Cash Equivalents at Beginning of Period**
    
    
    88,367
    
    
    4,558**Cash
      and Cash Equivalents at End of Period**
    
    $
    48,923
    
    $
    60,830**Supplemental
      Disclosure:**Interest
      paid, net of amounts capitalized
    
    $
    34,384
    
    $
    34,060Income
      taxes paid (refunded)
    
    $
    (5,773
    )
    $
    (9,998
    )
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
 17
 
 
 **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 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 the financial position, the results of operations and the
changes in cash flows for the periods presented. Prior year amounts have been
reclassified to a basis consistent with the current year presentation, including
the reclassification of auction rate securities.  All significant
intercompany transactions have been eliminated. Although MidAmerican Funding
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in MidAmerican Funding’s latest Annual Report on Form
10-K.
  The
accompanying Consolidated Balance Sheet as of December 31, 2004, reflects a
$39.5 million reclassification of instruments used in the MidAmerican
Energy’s cash management program from Cash and Cash Equivalents to Short-Term
Investments. This reclassification is to present auction rate securities as
short-term investments rather than as cash equivalents due to the stated
maturities of these investments. These instruments are classified as
available-for-sale securities as management does not intend to hold them to
maturity nor are they bought and sold with the objective of generating profits
on short-term differences in price. The carrying value of these instruments
approximates their fair value.
 
 MidAmerican
Funding is an Iowa limited liability company with MidAmerican Energy Holdings
Company as its sole member. 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 exempt 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 MidAmerican Funding’s 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.
   18
 
 **6.**
    **Segment
      Information**
 
 MidAmerican
Funding has identified four reportable operating segments based principally on
management structure. The generation segment derives most of its revenue from
the sale of regulated and nonregulated wholesale electricity and natural gas.
The energy delivery segment derives its revenue principally from the sale and
delivery of regulated retail electricity and natural gas, while the transmission
segment obtains most of its revenue from the sale of electric transmission
capacity. The marketing and sales segment receives its revenue principally from
nonregulated retail sales of natural gas and electricity. Common operating
costs, interest income, interest expense and income tax expense are allocated to
each segment based on MidAmerican Energy allocators most related to the nature
of the cost.
  
 The
energy delivery and transmission segments and substantially all of the
generation segment are regulated as to rates, and other factors, related to
services to external customers. Regulated electric retail revenues are billed to
external customers by the energy delivery segment based on bundled tariffs that
do not segregate components for the other segments. For internal segment
reporting purposes, MidAmerican Energy has developed transfer prices to transfer
the appropriate portion of those revenues to the other segments. The transfer
prices are based on cost of service or tariffed rates, except for the generation
segment which receives the residual.
 
 MidAmerican
Funding’s external revenues by product and service are displayed on the
Consolidated Statements of Operations.
 
 19
  The
following tables provide MidAmerican Funding’s operating revenues, net income
and total assets on a reportable operating segment basis (in
thousands):
 
 Three
      MonthsEnded
      March 31,2005
    
    
    2004Segment
      Profit InformationOperating
      revenues:External
      revenues -Generation
    
    $
    158,897
    
    $
    178,871Energy
      delivery
    
    
    617,427
    
    
    574,427Transmission
    
    
    7,981
    
    
    6,628Marketing
      & sales
    
    
    70,831
    
    
    80,006Other
    
    
    1,142
    
    
    1,014Total
    
    
    856,278
    
    
    840,946Intersegment
      revenues -Generation
    
    
    139,113
    
    
    143,207Energy
      delivery
    
    
    (153,794
    )
    
    (157,978
    )Transmission
    
    
    14,681
    
    
    14,771Total
    
    
    -
    
    
    -Consolidated
    
    $
    856,278
    
    $
    840,946Net
      income:Generation
    
    $
    8,274
    
    $
    21,834Energy
      delivery
    
    
    37,715
    
    
    34,328Transmission
    
    
    8,887
    
    
    7,147Marketing
      & sales
    
    
    1,161
    
    
    1,269Other
    
    
    320
    
    
    (10,221
    )Consolidated
    
    $
    56,357
    
    $
    54,357
 
 As
      ofMarch 31,
    
    
    December
      31,2005
    
    
    2004Segment
      Asset InformationTotal
      assets (a):Generation
    
    $
    3,255,760
    
    $
    3,153,106Energy
      delivery
    
    
    2,816,967
    
    
    2,886,213Transmission
    
    
    372,419
    
    
    361,524Marketing
      & sales
    
    
    45,397
    
    
    42,725Other
    
    
    249,490
    
    
    227,258Total
    
    
    6,740,033
    
    
    6,670,826Reclassifications
      and intersegment eliminations (b)
    
    
    (276,425
    )
    
    (243,582
    )Consolidated
    
    $
    6,463,608
    
    $
    6,427,244
 
 (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.”(b)
    Reclassifications
      and intersegment eliminations relate principally to the reclassification
      of income tax balances in accordance with generally accepted accounting
      principles and the elimination of intersegment accounts receivables and
      payables.
  20
  **7.**
    **Total
      Comprehensive Income**
 
 MidAmerican
Funding’s total comprehensive income for the three months ended March 31,
2005 and 2004, was $53.6 million and $54.0 million, respectively. The difference
from Net Income for the three months ended March 31, 2004, was due to the
effective portion of net gains and losses on MidAmerican Energy’s derivative
instruments classified as cash flow hedges. For the three months ended March 31,
2005, the difference from Net Income was substantially due to a minimum pension
liability adjustment. Accumulated other comprehensive loss, net, was $2.8
million and $- million as of March 31, 2005, and December 31,
2004, respectively.
 
 21
 
  **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**
 
 The
following events and changes, as discussed in more detail herein, highlight some
factors that had an effect on MidAmerican Energy’s and MidAmerican Funding’s
operating results, liquidity and capital resources:
 
 ·
    MidAmerican
      Energy’s regulated electric gross margin was impacted by a 43.7% decrease
      in wholesale sales volumes resulting in a $19.2 million reduction in
      wholesale gross margin. The timing of planned generation outages, mainly
      for the Louisa Generating Station, and the loss of generating capacity at
      the Ottumwa Generating Station Unit No. 1 (“OGS Unit No. 1”), which
      experienced a failure of its step-up transformer on February 20, 2005,
      resulted in lost wholesale sales opportunities and required MidAmerican
      Energy to generate or purchase more costly replacement power.  OGS
      Unit No. 1 returned to service on May 3, 2005. Additionally, a change in
      the mix of higher-priced on-peak and lower-priced off-peak sales and
      higher cost of energy caused a decrease in the average electric wholesale
      margins per megawatt hour, reducing electric wholesale gross margin by
      $14.3 million compared to the first quarter of
2004.
 
 The
regulatory expense related to the Iowa revenue sharing arrangement decreased by
$20.5 million. Amounts under the arrangement are determined based upon Iowa
electric returns on equity which were unfavorably impacted by the lower
wholesale revenues. Iowa revenue sharing is recorded as depreciation and
amortization in the accompanying consolidated statement of
operations.
  22
 
  ·
    MidAmerican
      Energy is currently constructing a 790-megawatt (“MW”)(expected
      accreditation) super-critical-temperature, coal-fired generation project
      and a 360-MW (nameplate rating) wind power project in Iowa and expects to
      invest approximately $1.1 billion in the projects through 2007. Through
      March 31, 2005, $439.3 million of the $1.1 billion had been
      invested. In December 2004, 160.5 MW of the wind power project was
      completed and placed in service. The remainder of the wind power project
      is expected to be completed in 2005.
  
 **Results
of Operations for the Quarter Ended March 31, 2005 and
2004**
 
 Earnings
Overview
 
 MidAmerican
Energy’s earnings on common stock decreased $8.6 million to $56.0 million for
the first quarter of 2005 compared to $64.6 million for the first quarter of
2004. MidAmerican Funding’s net income increased $2.0 million to $56.4 million
for the first quarter of 2005 compared to $54.4 million for the first quarter of
2004. The decreased earnings on common stock at MidAmerican Energy was more than
offset by gains on the sales of interests in non-strategic, passive investments
at MidAmerican Funding.
 
 Following
is a discussion of various factors that affected earnings. Explanations include
management's best estimate of the impact of weather, customer growth and other
factors.
 
 Regulated
Electric Gross Margin
 
 QuarterEnded
      March 31,2005
    
    
    2004Gross
      margin (in millions):Operating
      revenues
    
    $
    312.6
    
    $
    363.2Less
      cost of fuel, energy and capacity
    
    
    88.8
    
    
    114.2Electric
      gross margin
    
    $
    223.8
    
    $
    249.0Sales
      (gigawatt-hours):Residential
    
    
    1,369
    
    
    1,393Small
      general service
    
    
    960
    
    
    963Large
      general service
    
    
    1,730
    
    
    1,695Other
    
    
    353
    
    
    340Total
      retail
    
    
    4,412
    
    
    4,391Wholesale
    
    
    1,719
    
    
    3,052Total
    
    
    6,131
    
    
    7,443
 
 Electric
gross margin for the first quarter of 2005 decreased $25.2 million compared to
the first quarter of 2004 due to a $33.5 million decrease in gross margin on
wholesale sales and a $1.4 million decrease in gross margin on retail sales.
These decreases were partially offset by an $8.3 million increase in net margin
on MidAmerican Energy’s sales and purchases of electric capacity and a $1.4
million increase in transmission revenues.
 
 Sales of
energy to other utilities, municipalities and marketers inside and outside of
MidAmerican Energy's delivery system are classified as wholesale. The decrease
in gross margin on electric wholesale energy sales is due principally to a 43.7%
decrease in wholesale sales volumes, which decreased wholesale gross margin by
$19.2 million. The timing of planned generation outages, mainly for the Louisa
Generating Station, and the loss of generating capacity at the OGS Unit No. 1,
which experienced a failure of its step-up transformer on February 20, 2005,
resulted in lost wholesale sales opportunities and required MidAmerican Energy
to generate or purchase more costly replacement power. OGS Unit No. 1 returned
to service on May 3, 2005. Additionally, a change in the mix of higher-priced
on-peak and lower-priced off-peak sales and higher cost of energy caused a
decrease in the average electric wholesale margins per megawatt hour,
reducing electric wholesale gross margin by $14.3 million compared to the first
quarter of 2004.
  23
 
  In total,
electric retail sales volumes increased 0.5% compared to the first quarter of
2004. The effect of temperature conditions during the first quarter of 2005
compared to the first quarter of 2004 resulted in a $2.9 million decrease in
electric retail gross margin. Electricity usage factors not dependent on
weather, such as changes in individual customer usage patterns, increased
electric margin by $3.7 million compared to the first quarter of 2004 while an
increase in the average number of retail customers improved electric retail
gross margin by $3.1 million. An increase in fuel costs related to Iowa retail
electric sales decreased electric retail gross margin by $6.6 million compared
to the first quarter of 2004 due in part to the cost of replacement power as a
result of the generating station outages mentioned above. Revenues from the
recovery of energy efficiency program costs increased $1.4 million compared to
the first quarter of 2004. Changes in these revenues are substantially matched
with corresponding changes in other operating expenses.
  Regulated
Gas Gross Margin
 
 QuarterEnded
      March 31,2005
    
    
    2004Gross
      margin (in millions)Operating
      revenues
    
    $
    467.5
    
    $
    393.6Less
      cost of gas sold
    
    
    387.0
    
    
    310.8Gas
      gross margin
    
    $
    80.5
    
    $
    82.8Sales
      (000’s decatherms):Residential
    
    
    22,893
    
    
    25,146Small
      general service
    
    
    10,880
    
    
    11,672Large
      general service
    
    
    1,595
    
    
    1,018Other
    
    
    27
    
    
    90Total
      retail
    
    
    35,395
    
    
    37,926Wholesale
    
    
    17,255
    
    
    13,688Total
    
    
    52,650
    
    
    51,614
 
 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 quarter of
2004, MidAmerican Energy’s average per-unit cost of gas sold increased 22.1%,
resulting in a $70.0 million increase in cost of gas sold for the quarter. The
remainder of the increase in cost of gas sold was due to an increase in sales
volumes.
 
 The
following table summarizes the variance in gas operating revenues, including the
impact of the fluctuation in the cost of gas sold. The variances in gas
operating revenues other than the fluctuation in cost of gas sold have the same
impact on gross margin.
 
 Quarter
      EndedMarch 31,2005
      vs. 2004(In
      millions)Change
      in cost of gas sold:Price
    
    $
    70.0Sales
      volumes
    
    
    6.2Total
    
    
    76.2Weather
    
    
    (2.3
    )Customer
      growth
    
    
    1.5Other
      usage factors
    
    
    (2.7
    )Other
    
    
    1.2Total
      revenue variance
    
    $
    73.9
  24
 
 The
decrease in gas gross margin due to weather was the result of mild temperature
conditions in the first quarter of 2005 compared to the same quarter in 2004.
Other gas usage factors, such as changes in individual customer usage patterns
and reaction to prices, also decreased gas margin. MidAmerican Energy's average
number of gas retail customers increased 1.6% compared to the first quarter of
2004.
  Regulated
Operating Expenses
 
 Maintenance
expenses for the first quarter of 2005 increased $3.6 million compared to the
first quarter of 2004 due principally to a $1.9 million increase in fossil fuel
generating maintenance and a $1.2 million increase in distribution
maintenance.
 
 Depreciation
and amortization expense for the first quarter of 2005 decreased $19.1 million
compared to the first quarter of 2004 due to a $20.5 million decrease in
regulatory expense related to a revenue sharing arrangement in Iowa due to lower
Iowa electric returns on equity primarily due to lower electric margins. Refer
to the "Legislative and Utility Regulatory Matters" section for an explanation
of the revenue sharing arrangement.
 
 Nonregulated
Gross Margin
 
 QuarterEnded
      March 31,2005
    
    2004(In
      millions)MidAmerican
      Energy -Nonregulated
      operating revenues
    
    $
    75.1
    
    $
    83.2Less
      nonregulated cost of sales
    
    
    66.4
    
    
    74.8Nonregulated
      gross margin
    
    $
    8.7
    
    $
    8.4MidAmerican
      Funding Consolidated -Nonregulated
      operating revenues
    
    $
    76.2
    
    $
    84.2Less
      nonregulated cost of sales
    
    
    66.6
    
    
    75.1Nonregulated
      gross margin
    
    $
    9.6
    
    $
    9.1
 
 MidAmerican
Energy’s nonregulated retail gas marketing services operate in Iowa, Illinois,
Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements. A 34.9% decrease in nonregulated retail gas sales
volumes compared to the first quarter of 2004 accounted for the decrease in
nonregulated operating revenues and cost of sales, offset partially by increases
related to nonregulated electric retail sales. The decrease in nonregulated
retail gas sales volumes was due in large part to the non-renewal of sales
contracts as a result of a related regulatory issue in Illinois. Refer to “Rate
Matters” for a discussion of the issue.
 
 Other
Income
 
 MidAmerican
Energy -
 
 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”). Other
income for the capitalized allowance on equity funds used during construction
totaled $4.4 million and $3.3 million in the first quarter of 2005 and 2004,
respectively. MidAmerican Energy expects to continue to record income for the
allowance on equity funds used during construction through 2007 while the
announced generating facilities are constructed.
 
 MidAmerican
Funding -
 
 Other
income for the first quarter of 2005 includes $9.9 million of gains from the
sale of two non-strategic, passive investments. These gains were partially
offset by a decrease in income from other alternative energy capital
investments.
  25
 
  Fixed
Charges
 
 The
increase in interest on long-term debt was due to the effect of $350.0 million
of MidAmerican Energy long-term debt issued on October 1, 2004, offset
partially by maturities of higher rate debt in 2004 and 2005. Other interest
expense increased due to interest on 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. Allowance for borrowed funds increased due to increased
utility construction expenditures. MidAmerican Energy expects to continue to
record allowance for borrowed funds used during construction through 2007 while
the announced generating facilities are constructed.
 
 Income
Taxes
 
 MidAmerican
Energy -
 
 In
October 2004, the President signed into law legislation that extends the federal
production tax credit for electricity produced by wind energy facilities placed
in service prior to January 1, 2006. Accordingly, in 2005, MidAmerican Energy’s
income taxes for the three months ended March 31, 2005, were reduced by the
production tax credits related to energy produced by its wind power
facilities.
 
 State
utility rate regulation in Iowa requires that the tax effect of certain timing
differences be flowed through immediately to customers. Accordingly, 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,
particularly as it related to the federal bonus depreciation deductions
associated with the significant generation plant additions in 2004.
 
 During
the first quarter of 2004, MidAmerican Energy settled an income tax audit with
the Internal Revenue Service and recorded as income a tax liability previously
established for the settled issue, resulting in an $8.5 million reduction to
MidAmerican Energy’s income tax expense for the first quarter of
2004.
 
 MidAmerican
Funding -
 
 A
significant portion of MidAmerican Energy’s tax liability for the settled issue
above was originally established in 1999 when MidAmerican Energy's parent
company, MHC Inc., was acquired by MidAmerican Funding. This change in estimate
of an income tax uncertainty that resulted from a purchase business combination
was accounted for as an adjustment to the remaining balance of goodwill
attributable to the acquisition. Accordingly, in the first quarter of 2004,
MidAmerican Funding decreased goodwill and increased income tax expense by $4.7
million to reflect the settlement of that portion of the income tax liability
recognized at the time of the acquisition of MHC.
 
 26
 
  **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 $181.7 million and $221.7 million for
the first quarter of 2005 and 2004, respectively. MidAmerican Funding’s net cash
provided by operating activities was $164.4 million and $203.8 million for the
first quarter of 2005 and 2004, respectively.
 
 Utility
Construction Expenditures
 
 MidAmerican
Energy’s primary need for capital is utility construction expenditures. For the
first quarter of 2005, utility construction expenditures incurred totaled $184.4
million, including allowance for funds used during construction and Quad Cities
Station nuclear fuel purchases. Utility construction expenditures include
non-cash and accrued amounts, which include $22.1 million in the first quarter
of 2005 for MidAmerican Energy’s share of deferred payments related to the
Council Bluffs Energy Center Unit No. 4 (“CBEC Unit 4”) generation project.
Under a contract with the general contractor on that project, 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.
Another non-cash expenditure included in utility construction expenditures
relates to a computed cost of 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.
 
 Forecasted
utility construction expenditures, including allowance for funds used during
construction and completion of the wind power project discussed below, are $856
million for 2005. 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 CBEC Unit 4, a 790-MW (expected accreditation)
super-critical-temperature, coal-fired facility, and a 360-MW (nameplate rating)
wind power project in Iowa. The projects will provide service to regulated
retail electricity customers. MidAmerican Energy has obtained regulatory
approval to include the Iowa portion of the actual costs of the generation
projects in its Iowa rate base as long as actual costs do not exceed the agreed
caps that MidAmerican Energy has deemed to be reasonable. If the caps are
exceeded, MidAmerican Energy has the right to demonstrate the prudence of the
expenditures above the caps, subject to regulatory review. Wholesale sales may
also be made from the projects to the extent the power is not immediately needed
for regulated retail service. MidAmerican Energy expects to invest approximately
$1.1 billion in the CBEC Unit 4 and wind generation projects, of which $439.3
million has been invested through March 31, 2005.
 
 MidAmerican
Energy will operate CBEC Unit 4 and hold an undivided ownership interest as a
tenant in common with the other owners of the plant. MidAmerican Energy's
ownership interest is 60.67%, equating to 479 MW of output. MidAmerican Energy
expects its share of the estimated cost of the project, including transmission
facilities, to be approximately $737 million, excluding allowance for funds used
during construction. Municipal, cooperative and public power utilities will own
the remainder, which is a typical ownership arrangement for large base-load
plants in Iowa. On February 12, 2003, MidAmerican Energy executed a contract
with Mitsui & Co. Energy Development, Inc. for engineering, procurement and
construction of the plant. On September 9, 2003, MidAmerican Energy began
construction of the plant, which it expects to be completed in the summer of
2007. On December 29, 2004, MidAmerican Energy received an order from the IUB
approving construction of the associated transmission facilities and is
proceeding with construction.
 
 The wind
power project currently under construction consists of wind power facilities
located at two sites in north central Iowa totaling 360 MW (nameplate rating),
including an expected 50-MW expansion of the original project. Generally
speaking, accredited capacity ratings for wind power facilities are considerably
less than the nameplate ratings due to the varying nature of wind. The current
projected accredited capacity for these wind power facilities is approximately
61 MW. MidAmerican Energy will own and operate these facilities, which,
including transmission facilities, are expected to cost approximately $386
million, excluding allowance for funds used during construction. As of
December 31, 2004, wind turbines totaling 160.5 MW at one of the sites were
completed and in service. The remaining turbines are expected to be completed in
2005. On January 31, 2005, the IUB approved ratemaking principles related to the
expansion of the wind power project. Refer to the “Rate Matters” discussion
below for information regarding the rate aspects of related settlement
agreements.
  27
 
 
 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. Approximately 70%
of the fair value of the trusts’ funds is now invested in domestic corporate
debt and common equity securities. The remainder is invested in investment grade
municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear
decommissioning is reflected 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 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.
 
 Debt
Redemption and Issuance
 
 MidAmerican
Energy’s 7% series of mortgage bonds, totaling $90.5 million, matured on
February 15, 2005. MidAmerican Energy expects to issue long-term debt in
2005 to support construction of its electric generation projects and for general
corporate purposes.
 
 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 $425.0 million revolving credit
facility that supports its $304.6 million commercial paper program and its
variable rate pollution control revenue obligations. The facility expires
November 18, 2009.
 
 MidAmerican
Energy currently has the following authorizations to issue additional long-term
securities. MidAmerican Energy has on file with the Securities and Exchange
Commission registration statements providing for the issuance of $530.0 million
in various forms of senior and subordinated long-term debt and preferred
securities. MidAmerican Energy has authorization from the FERC to issue various
forms of long-term debt in the amount of $880.0 million through
November 30, 2005, and $425.0 million for December 1, 2005
through November 30, 2006. Under the FERC authorization, such funds would
be used to refinance maturing debt and to finance a portion of the cost of the
generation projects noted above. MidAmerican Energy has authority from the
Illinois Commerce Commission (“ICC”) to issue up to $546.4 million of long-term
debt for refinancing purposes and capital expenditures.
 
 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.
 
 28
 
  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. Other than
the energy trading 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 wholesale marketing and trading activities, MidAmerican
Energy must meet credit quality standards as required by counterparties.
MidAmerican Energy has energy trading agreements that, in accordance with
industry practice, 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 marketing and trading activities. As of March 31, 2005,
MidAmerican Energy’s estimated potential collateral requirements totaled
approximately $123 million. MidAmerican Energy’s 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
three 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 rates prior to 2012
unless, beginning in 2006, 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 rates prior to January 1, 2012. 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.
 
 Under the
first settlement agreement, which was approved by the IUB on December 21,
2001, and is 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 is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy’s application for ratemaking principles on
its wind power project and was 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 third
settlement agreement was approved by the IUB on January 31, 2005, in
conjunction with MidAmerican Energy’s proposed expansion of its wind power
project by up to 90 MW. This settlement extended through 2011 MidAmerican
Energy’s commitment not to seek a general increase in electric rates unless its
Iowa jurisdictional electric return on equity falls below 10%. It also extended
the revenue sharing mechanism through 2011. In addition, the OCA agreed to
commit not to seek any decrease in Iowa electric base rates to become effective
before January 1, 2012. The total capacity added as the result of the wind
expansion project is currently projected to be 50 MW.
  29
 
 
 The
regulatory liabilities created by the three 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. The regulatory
liabilities created for the years through 2010 are expected to be reduced as
they are credited against plant in service in amounts equal to the allowance for
funds used during construction associated with generating plant additions. As a
result of the credit applied to generating plant balances from the reduction of
the regulatory liabilities, future depreciation will be reduced. As of
March 31, 2005 and December 31, 2004, the related regulatory liability
reflected on the Consolidated Balance Sheets was $188.7 million and $181.2
million, respectively. The regulatory liability for 2011, if any, will be
credited to customer bills in 2012.
 
 In an
order issued September 27, 2004, the IUB requires 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 request to reduce rates
for some residential customers by approximately $4.0 million in 2008 and $3.0
million in 2009 for a total annualized reduction of $7.0 million 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.
 
 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. Illinois law provides that, through 2006, Illinois
earnings above a computed level of return on common equity are to be shared
equally between regulated retail electric customers and MidAmerican Energy.
MidAmerican Energy’s computed level of return on common equity is based on a
rolling two-year average of the Monthly Treasury Long-Term Average Rate, as
published by the Federal Reserve System, plus a premium of 8.5% for 2000 through
2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which
sharing must occur for 2004 was 13.57%. The law allows MidAmerican Energy to
mitigate the sharing of earnings above the threshold return on common equity
through accelerated recovery of electric assets.
 
 The ICC
staff has questioned the legality of MidAmerican Energy’s competitive sales of
gas to retail customers within the state of Illinois. In its testimony in the
purchase gas adjustment proceedings covering 2001 and 2002, the ICC staff
expressed its position that MidAmerican Energy must reduce gas costs recovered
from Illinois regulated gas customers through the purchase 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. The ICC has not yet ruled in either
case. If the ICC accepts the adjustments proposed by its staff 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 a
related proceeding, the ICC issued a declaratory ruling on May 11, 2004, finding
that MidAmerican Energy cannot lawfully sell competitive, or nonregulated, gas
anywhere in Illinois. In that same decision, the ICC decided to open a separate
proceeding to determine an appropriate remedy for such sales. That decision is
now on appeal in the Illinois Appellate Court.
 
 In
November 2004, the Illinois legislature overrode the Governor’s veto of SB 2525.
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.
 
 Transmission
Developments
 
 The FERC
has undertaken several measures to increase competition in the markets for
wholesale electric energy, including efforts to foster the development of
regional transmission organizations ("RTO") in its Order No. 2000 issued
December 1999 and its July 2002 proposed rulemaking that would implement a
standard market design ("SMD") for wholesale electric markets.
  30
 
  If
implemented, the FERC’s July 2002 proposed rule for SMD would require sweeping
changes to the use and expansion of the interstate transmission and wholesale
bulk power systems in the United States. However, it is unclear when or even
whether the FERC will issue a final rule and what form the final rule would
ultimately take. In response to significant criticism of its proposed rule, the
FERC subsequently indicated that it had changed its proposal and would adopt a
flexible approach to SMD that would accommodate regional differences. Any final
rule on SMD or similar FERC action could impact the costs of MidAmerican
Energy’s electricity and transmission products. Such FERC action could directly
or indirectly influence how transmission services are priced, the availability
of transmission services, how transmission services are obtained, and market
prices for electricity in markets in which MidAmerican Energy buys and sells
electricity. Although MidAmerican Energy is not presently a member of an RTO,
three RTO’s - Midwest Independent System Operator, PJM Interconnection and
Southwest Power Pool, Inc. - are directly interconnected with MidAmerican
Energy’s transmission facilities. MidAmerican Energy cannot predict what impact,
if any, the evolution of these RTO’s, or others, may have on how wholesale
electricity is bought and sold, as well as the geographic scope of the wholesale
marketplace in which MidAmerican Energy buys and sells electricity.
 
 On
June 3, 2004, the FERC’s Division of Operational Investigations of the
Office of Market Oversight and Investigations informed MidAmerican Energy that
it was commencing an audit to determine whether and how MidAmerican Energy and
its subsidiaries and affiliates are complying with (1) requirements of the
standards of conduct and open access same-time information system of the FERC’s
regulations, (2) codes of conduct, and (3) transmission practices. The FERC has
commenced several such audits of utilities in 2003 and 2004. The audit is
on-going, and MidAmerican Energy expects it to be completed within the first
half of 2005. MidAmerican Energy does not expect the outcome of this issue to
have a material effect on its results of operations, financial position or cash
flows.
 
 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. In
accordance with the FERC order, MidAmerican Energy’s market-based sales became
subject to refund beginning November 1, 2004, and will remain so until the
matter is resolved. MidAmerican Energy does not expect the outcome of this issue
to have a material effect on its results of operations, financial position or
cash flows.
 
 **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. Refer to Note (3)(a) of Notes
to Consolidated Financial Statements in this Form 10-Q for further discussion of
air quality standards affecting MidAmerican Energy.
 
 On
February 16, 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. The
McCain-Lieberman bill, known as the Climate Stewardship Act, which was defeated
by Congress in 2004, was reintroduced in Congress on February 10, 2005. The
Climate Stewardship Act would require a reduction of greenhouse gas emissions in
certain economic sectors to 2000 levels by 2010 through the utilization of
emission allowances. On February 15, 2005, Senator Chuck Hagen proposed a
comprehensive approach to dealing with the issue of climate change through the
introduction of three bills that address technology deployment in the United
States by providing loans, investment protection and power production incentives
for United States businesses investing in advanced climate technology,
technology deployment in developing countries, and research and development tax
incentives.
 
 Litigation
is pending before the United States Circuit Court of Appeals for the District of
Columbia to determine whether the Clean Air Act requires federal regulation of
carbon dioxide emissions. 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. 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 facilities and, therefore, its results of operations.
 31
  The EPA
and the state environmental agencies have determined that contaminated wastes
remaining at decommissioned manufactured gas plant facilities may pose a threat
to the public health or the environment if such contaminants are in sufficient
quantities and at such concentrations as to warrant remedial
action.
 
 MidAmerican
Energy has evaluated all known properties that were, at one time, sites of gas
manufacturing plants for which it may be a potentially responsible party. The
purpose of these evaluations was to determine whether waste materials are
present, whether the materials constitute an environmental or health risk, and
whether MidAmerican Energy has any responsibility for remedial action. As of
March 31, 2005, MidAmerican Energy has recorded a $7.7 million liability
for these sites and a corresponding regulatory asset for future recovery through
the regulatory process. Refer to Note (3)(c) of Notes to Consolidated Financial
Statements in this Form 10-Q for further discussion of MidAmerican Energy’s
environmental activities related to manufactured gas plant sites and cost
recovery.
 
 Although
the timing of potential incurred costs and recovery of such costs in rates may
affect the results of operations in individual periods, management believes that
the outcome of these issues will not have a material adverse effect on
MidAmerican Energy’s financial position, results of operations or cash
flows.
   **Generating
Capability**
 
 In August
2003, retail customer usage of electricity caused a new record hourly peak
demand of 3,935 MW on MidAmerican Energy’s electric system. For the 2004 cooling
season, MidAmerican Energy’s hourly peak demand was 3,894 MW on July 20,
2004. MidAmerican Energy is interconnected with Iowa and neighboring utilities
and is party to an electric generation and transmission pooling agreement
administered by the Mid-Continent Area Power Pool (“MAPP”). Each MAPP
participant is required to maintain for emergency purposes a net generating
capability reserve of at least 15% above its system peak demand. For the 2004
cooling season, MidAmerican Energy’s reserve was approximately 26% above its
system peak demand.
 
 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 appropriate 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 addressed under “Utility Regulatory Matters" above
also can impact MidAmerican Energy's wholesale electric purchases and sales. In
addition, organized markets for the sale of energy may impact the price
MidAmerican Energy pays for wholesale electricity as well as the prices it
receives for wholesale sales. The FERC has other 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.
 
 **New
Accounting Pronouncements**
 
 In March
2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,
an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
that the term *conditional
asset retirement obligation* as used
in Statement of Financial Accounting Standards No. 143, “Accounting for Asset
Retirement Obligations,” refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. Uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation.
MidAmerican Energy and MidAmerican Funding are required to adopt the provisions
of FIN 47 by December 2005. Adoption of FIN 47 is not expected to have a
material effect on MidAmerican Energy’s or MidAmerican Funding’s financial
position, results of operations or cash flows.
 
 32
 
 
 **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, 2004.
 
 **Item
3.**  **Quantitative and Qualitative Disclosures About Market
Risk.**
 
 MidAmerican
Energy’s exposure to market risk has not changed materially from its risk as of
December 31, 2004. The scope of its use of financial instruments for both
hedging and proprietary trading purposes has also not changed materially from
December 31, 2004. MidAmerican Energy trades financial instruments that are
almost entirely exchange-traded or have prices that are actively quoted.
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 March 31, 2005. 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 material
affect, its internal control over financial reporting.
 
 33
 
  **PART II - OTHER INFORMATION**
 
 **Item
      1.**
    **Legal
Proceedings.**
 
 MidAmerican
Energy is 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 alleges 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 ("NYMEX") during
the period of January 1, 2000 to December 31, 2002. MidAmerican Energy
is mentioned as a company that has engaged in wash trades on Enron Online (an
electronic trading platform) that had the effect of distorting prices for gas
trades on the NYMEX. The plaintiffs to the class action do not specify the
amount of alleged damages. At this time MidAmerican Energy does not believe that
it has any material exposure in this lawsuit.
 
 The
original complaint in this matter, *Cornerstone
Propane Partners, L.P. v. Reliant, et al. (“Cornerstone”),* was filed
on August 18, 2003 in the United States District Court, Southern District
of New York naming MidAmerican Energy. On October 1, 2003, a second
complaint, *Roberto,
E. Calle Gracey, et al. (“Calle Gracey”),* was filed
in the same court but did not name MidAmerican Energy. On November 14,
2003, a third complaint, *Dominick
Viola (“Viola”), et al.,* was filed
in the same court and named MidAmerican Energy as a defendant. On December 5,
2003, the court entered Pretrial Order No. 1, which among other procedural
matters, ordered the consolidation of the *Cornerstone,
Calle Gracey* and *Viola* complaints and permitted plaintiffs to file an amended complaint in this matter.
On January 20, 2004, plaintiffs filed *In
Re: Natural Gas Commodity Litigation* as the
amended complaint reasserting their previous allegations. On February 19,
2004, MidAmerican Energy filed a Motion to Dismiss and joined with several other
defendants to file a joint Motion to Dismiss. The plaintiffs filed a response on
May 19, 2004, contesting both Motions to Dismiss. On September 24, 2004,
the pending motions to dismiss were denied. On October 14, 2004, plaintiffs
filed an amended complaint to add certain defendants’ affiliates as defendants
and reasserted their previous allegations. MidAmerican Energy and the other
defendants filed their respective answers to the complaint on October 28, 2004.
Plaintiffs filed a motion for class actions certification on January 25, 2005.
MidAmerican Energy will continue to coordinate with the other defendants and
vigorously defend the allegations against it.
 
 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 "Legislation and
Utility Regulatory Matters" section of MD&A in Item 2 of this Form
10-Q.
 
 **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.
 
 34
 
 
 **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:
      May 6, 2005
    
    /s/
      Patrick J. GoodmanPatrick
      J. GoodmanVice
      President and Treasurerof
      MidAmerican Funding, LLC(principal
      financial and accounting officer)/s/
      Thomas B. SpecketerThomas
      B. SpecketerVice
      President and Controllerof
      MidAmerican Energy Company(principal
      financial and accounting officer)
 
 35
 
 
 ****
 **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
 36