UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 2003

Commission       Registrant's Name, State of Incorporation,      IRS Employer
File Number             Address and Telephone Number         Identification No.
-----------             ----------------------------         ------------------

333-90553                   MIDAMERICAN FUNDING, LLC             47-0819200
                       (AN IOWA LIMITED LIABILITY COMPANY)
                            666 GRAND AVE. PO BOX 657
                             DES MOINES, IOWA 50303
                                  515-242-4300

1-11505                    MIDAMERICAN ENERGY COMPANY            42-1425214
                              (AN IOWA CORPORATION)
                        666 GRAND AVE. PO BOX 657
                             DES MOINES, IOWA 50303
                                  515-242-4300

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                   Preferred Stock, $3.30 Series, no par value
                   Preferred Stock, $3.75 Series, no par value
                   Preferred Stock, $3.90 Series, no par value
                   Preferred Stock, $4.20 Series, no par value
                   Preferred Stock, $4.35 Series, no par value
                   Preferred Stock, $4.40 Series, no par value
                   Preferred Stock, $4.80 Series, no par value

                             (Title of each Class)
--------------------------------------------------------------------------------
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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Sect.  229.405 of this chapter) is not contained herein,  and
will not be  contained,  to the best of  registrants'  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

Indicate  by check mark  whether  the  registrants  are  accelerated  filers (as
defined in Rule 12-b-2 of the Act). Yes [ ] No [X]


<PAGE>


All of the member's  equity of  MidAmerican  Funding,  LLC is held by its parent
company, MidAmerican Energy Holdings Company, as of February 1, 2004.

All common stock of MidAmerican  Energy  Company is held by its parent  company,
MHC Inc.,  which is a direct,  wholly owned  subsidiary of MidAmerican  Funding,
LLC. As of February 1, 2004,  70,980,203  shares of  MidAmerican  Energy Company
common stock, without par value, were outstanding.

MidAmerican  Funding, LLC and MidAmerican Energy Company meet the conditions set
forth in  General  Instruction  I(1)(a)  and (b) of Form 10-K and are  therefore
filing this Form 10-K with the reduced  disclosure  format  specified in General
Instruction I(2) of Form 10-K.

                                      -2-
<PAGE>


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

                                TABLE OF CONTENTS


                                                                           Page

                                     PART I

Item 1.    Business...........................................................4
Item 2.    Properties........................................................20
Item 3.    Legal Proceedings.................................................21
Item 4.    Submission of Matters to Vote of Security Holders.................21

                                     PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities.................21
Item 6.    Selected Financial Data...........................................22
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations.............................................24
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk.........46
Item 8.    Financial Statements and Supplementary Data.......................50
Item 9.    Changes in and Disagreements with Accountants on Accounting......107
Item 9A.   Controls and Procedures..........................................107

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant...............108
Item 11.   Executive Compensation...........................................110
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters..................................110
Item 13.   Certain Relationships and Related Transactions...................110
Item 14.   Principal Accountant Fees and Services...........................111

                                     PART IV

Item 15.   Exhibits, Financial Statement Schedules, and Reports
           on Form 8-K......................................................112
Signatures..................................................................115
Exhibit Index...............................................................117

                                      -3-

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

MidAmerican Funding, LLC ("MidAmerican  Funding"),  is an Iowa limited liability
company  that was formed in March 1999.  Its sole member is  MidAmerican  Energy
Holdings Company  ("MidAmerican Energy Holdings").  MidAmerican Funding owns all
of the outstanding  common stock of MHC Inc., which owns all of the common stock
of MidAmerican Energy Company ("MidAmerican Energy"); InterCoast Capital Company
("InterCoast  Capital",  formerly named MidAmerican  Capital  Company);  Midwest
Capital  Group,  Inc.   ("Midwest   Capital");   MidAmerican   Services  Company
("MidAmerican   Services");    and   MEC   Construction   Services   Co.   ("MEC
Construction").  MidAmerican Energy is a public utility company headquartered in
Des Moines, Iowa, and incorporated in the state of Iowa.

On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company,  completed
a merger  transaction  with CalEnergy  Company,  Inc. On that date,  MidAmerican
Funding,  which was formed by CalEnergy Company, Inc. as a single member limited
liability company,  acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings  Company.  As a result of this  transaction,  MHC and its subsidiaries,
including  MidAmerican  Energy,  became wholly owned subsidiaries of MidAmerican
Funding.  MHC,  MidAmerican  Funding and MidAmerican Energy Holdings Company are
exempt public utility holding companies headquartered in Des Moines, Iowa.

MidAmerican  Energy  Holdings is a privately  owned company with publicly traded
fixed-income  securities  and  is  owned  by an  investor  group  consisting  of
Berkshire Hathaway Inc., Walter Scott, Jr., David L. Sokol and Gregory E. Abel.

                           FORWARD-LOOKING STATEMENTS

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

     -    general  economic and business  conditions  in the United  States as a
          whole and in the  midwestern  United States and  MidAmerican  Energy's
          service territory in particular;

     -    governmental, statutory, regulatory or administrative initiatives;

     -    weather effects on sales and revenues;

     -    general industry trends;

     -    increased competition in the power generation industry;

     -    fuel and power costs and availability;

     -    changes   in   business   strategy,   development   plans  or   vendor
          relationships;

     -    availability, term and deployment of capital;


                                      -4-
<PAGE>


     -    availability of qualified personnel;

     -    unscheduled generation outages or repairs;

     -    risks relating to nuclear generation;

     -    financial or regulatory  accounting  principles or policies imposed by
          the Financial  Accounting Standards Board, the Securities and Exchange
          Commission,  the  Federal  Energy  Regulatory  Commission  and similar
          entities with regulatory oversight;

     -    other  risks or  unforeseen  events,  including  wars,  the effects of
          terrorism, embargoes and other catastrophic events; and

     -    other business or investment considerations that may be disclosed from
          time  to  time  in  MidAmerican   Funding's  or  MidAmerican  Energy's
          Securities  and  Exchange  Commission  filings  or in  other  publicly
          disseminated written documents.

MidAmerican  Funding and MidAmerican  Energy undertake no obligation to publicly
update or revise  any  forward-looking  statements,  whether  as a result of new
information,  future events or otherwise. The foregoing review of factors should
not be construed as exhaustive.

                           MIDAMERICAN FUNDING AND MHC
                           ---------------------------

MidAmerican  Funding  conducts no business other than activities  related to the
issuance of its debt securities and the ownership of MHC.

MHC conducts no business  other than the  ownership of its  subsidiaries.  MHC's
interests  include 100% of the common stock of  MidAmerican  Energy,  InterCoast
Capital, Midwest Capital, MidAmerican Services and MEC Construction. MidAmerican
Energy  is  primarily  engaged  in the  business  of  generating,  transmitting,
distributing  and  selling  electric  energy and in  distributing,  selling  and
transporting  natural gas. It accounts for the predominant  part of MHC's assets
and earnings.  InterCoast  Capital  manages  equipment  leases and other passive
investment  activities.   Midwest  Capital  functions  as  a  regional  business
development  company in  MidAmerican  Energy's  service  territory.  MidAmerican
Services  provides  comprehensive  energy  services to commercial and industrial
companies,  and MEC  Construction  provides  nonregulated  utility  construction
services.

Substantially  all  of  MidAmerican   Funding's   operating  revenues  are  from
MidAmerican Energy.  Financial  information on MidAmerican Funding's segments of
business is included in Note (12) of Notes to Consolidated  Financial Statements
included in Item 8 of this Form 10-K.

MidAmerican  Funding and its subsidiaries had 3,709 employees as of December 31,
2003.

                               MIDAMERICAN ENERGY
                               ------------------

MidAmerican  Energy is a public utility company  headquartered in Iowa with $4.4
billion of assets as of December  31,  2003,  and  operating  revenues  for 2003
totaling $2.6 billion. MidAmerican Energy is principally engaged in the business
of generating,  transmitting,  distributing  and selling  electric energy and in
distributing,   selling  and  transporting   natural  gas.   MidAmerican  Energy
distributes  electricity at retail in Council  Bluffs,  Des Moines,  Fort Dodge,
Iowa  City,  Sioux City and  Waterloo,  Iowa;  the Quad  Cities  (Davenport  and
Bettendorf,  Iowa and Rock  Island,  Moline and East  Moline,  Illinois);  and a
number of adjacent  communities  and areas. It also  distributes  natural gas at
retail in Cedar  Rapids,  Des  Moines,  Fort  Dodge,  Iowa City,  Sioux City and
Waterloo,  Iowa;  the Quad Cities;  Sioux Falls,  South Dakota;  and a number of
adjacent communities and areas. As of December 31, 2003,  MidAmerican Energy had
approximately  689,000 retail electric  customers and 668,000 retail natural gas
customers.

                                      -5-
<PAGE>

In  addition to retail  sales,  MidAmerican  Energy  sells  electric  energy and
natural gas to other utilities,  marketers and  municipalities.  These sales are
referred  to as  wholesale  sales.  It also  transports  natural gas through its
distribution  system for a number of end-use  customers  who have  independently
secured their supply of natural gas.

Financial  information on MidAmerican  Energy's segments of business is included
in Note (12) of Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.

MidAmerican  Energy's  regulated electric and gas operations are conducted under
franchises,  certificates,  permits and licenses  obtained  from state and local
authorities.  The franchises,  with various  expiration dates, are typically for
25-year terms.

MidAmerican  Energy  has a diverse  customer  base  consisting  of  residential,
agricultural,  and a variety of commercial and industrial customer groups. Among
the primary industries served by MidAmerican Energy are those that are concerned
with food products,  the  manufacturing,  processing and  fabrication of primary
metals, real estate,  farm and other  non-electrical  machinery,  and cement and
gypsum products.

MidAmerican Energy also conducts a number of nonregulated  business  activities.
Refer to the  "Nonregulated  Operations"  section  later  in Part I for  further
discussion.

For the year ended December 31, 2003,  MidAmerican Energy derived  approximately
54% of its gross operating revenues from its regulated  electric  business,  36%
from  its  regulated  gas  business  and  10%  from  its  nonregulated  business
activities.  For 2002 and 2001, the corresponding percentages were 61% electric,
31% gas and 8%  nonregulated;  and 56%  electric,  37% gas and 7%  nonregulated,
respectively.

At December 31, 2003, MidAmerican Energy had 3,694 employees of which 1,735 were
covered by union contracts.  MidAmerican Energy has five separate contracts with
locals of the  International  Brotherhood of Electrical  Workers  ("IBEW"),  the
United  Association  of Plumbers and  Pipefitters  and the United Paper  Workers
International  Union. One contract with IBEW locals 109 and 499 expires February
28, 2006, and covers 1,678 employee members.

                                      -6-

<PAGE>


REGULATED ELECTRIC OPERATIONS

The following tables present historical regulated electric sales data related to
customer class and jurisdictions.

                                        Total Regulated Electric Sales
                                              By Customer Class
                                        ------------------------------
                                          2003       2002       2001
                                         -----      -----      -----
          Residential .................   19.4%      19.8%      20.6%
          Small general service (1) ...   14.0       14.2       15.3
          Large general service (2) ...   25.4       24.5       25.8
          Wholesale (3) ...............   32.7       32.4%      31.0
          Other .......................    8.5        9.1        7.3
                                         -----      -----      -----
                                         100.0%     100.0%     100.0%
                                         =====      =====      =====

     (1)  Small general  service  generally  includes  commercial and industrial
          customers with a demand of 200 kilowatts or less.

     (2)  Large general  service  generally  includes  commercial and industrial
          customers with a demand of more than 200 kilowatts.

     (3)  Wholesale   generally   includes   other   utilities,   marketers  and
          municipalities to whom electric energy is sold at wholesale for resale
          to ultimate customers.

                                        Regulated Retail Electric Sales
                                                   By State
                                        -------------------------------
                                          2003       2002       2001
                                          ----       ----       ----
          Iowa.........................   88.8%      88.5%      88.6%
          Illinois.....................   10.4       10.7       10.6
          South Dakota.................    0.8        0.8        0.8
                                         -----      -----      -----
                                         100.0%     100.0%     100.0%
                                         =====      =====      =====

There are seasonal variations in MidAmerican Energy's electric business that are
principally related to the use of electricity for air conditioning. In 2003, 39%
of MidAmerican  Energy's regulated electric revenues were reported in the months
of June, July, August and September.

The annual hourly peak demand on MidAmerican  Energy's  electric  system usually
occurs as a result of air conditioning use during the cooling season.  In August
2003,  MidAmerican  Energy  reached a new  record  hourly  peak  demand of 3,935
megawatts  ("MW"),  which was 46 MW greater than MidAmerican  Energy's  previous
record hourly peak demand of 3,889 MW set in July 2002.

MidAmerican Energy's accredited net generating  capability in the summer of 2003
was 4,787 MW.  Accredited  net  generating  capability  represents the amount of
generation available to meet the requirements on MidAmerican Energy's system and
consists of MidAmerican Energy-owned generation, generation under power purchase
contracts and the net amount of capacity purchases and sales. The net generating
capability at any time may be less than it would  otherwise be due to regulatory
restrictions,  fuel  restrictions and generating units being  temporarily out of
service for inspection, maintenance, refueling or modifications.

                                      -7-

<PAGE>

The following  table details net accredited  generating  capacity of MidAmerican
Energy,  along with  participation  purchases  and sales,  net,  for summer 2003
accreditation.

                                                                Company's Share
                                                                 of Accredited
                                                Percent            Generating
          Plant                                Ownership  Fuel   Capability (MW)
--------------------------------------------   ---------  ----   ---------------
Steam electric generating plants:
  Council Bluffs Energy Center
    Unit No. 1 .............................     100.0   Coal         45
    Unit No. 2 .............................     100.0   Coal         88
    Unit No. 3 .............................      79.1   Coal        546
  George Neal Station
    Unit No. 1 .............................     100.0   Coal        135
    Unit No. 2 .............................     100.0   Coal        300
    Unit No. 3 .............................      72.0   Coal        371
    Unit No. 4 .............................      40.6   Coal        261
  Louisa Unit ..............................      88.0   Coal        616
  Ottumwa Unit .............................      52.0   Coal        368
  Riverside Station
    Unit No. 3 .............................     100.0   Coal          5
    Unit No. 5 .............................     100.0   Coal        130
                                                                   -----
                                                                   2,865
                                                                   -----
Combustion turbines:
  Coralville - 4 units .....................     100.0   Gas/Oil      64
  Electrifarm - 3 units ....................     100.0   Gas/Oil     200
  Greater Des Moines Energy Center - 2 units     100.0   Gas         327
  Moline - 4 units .........................     100.0   Gas/Oil      64
  Parr - 2 units ...........................     100.0   Gas/Oil      32
  Pleasant Hill Energy Center - 3 units ....     100.0   Oil         157
  River Hills Energy Center - 8 units ......     100.0   Gas/Oil     120
  Sycamore Energy Center - 2 units .........     100.0   Gas/Oil     148
                                                                    -----
                                                                    1,112
                                                                    -----
Nuclear:  Quad Cities Station
  Unit No. 1 ...............................      25.0   Nuclear      218
  Unit No. 2 ...............................      25.0   Nuclear      219
                                                                    -----
                                                                      437
                                                                    -----

Hydro: Moline - 4 units ....................     100.0   Water          3

Portable power modules - 28 units ..........     100.0   Oil           56
                                                                    -----

Accredited generating capacity .............                        4,473

Participation purchases and (sales), net:
  Cordova Energy Company, LLC (1) ..........                          250
  Nebraska Public Power District (2) .......                          380
  Other, net ...............................                         (316)
                                                                    -----
Net accredited generating capability .......                        4,787
                                                                    =====

     (1)  The amount shown above is MidAmerican  Energy's  entitlement  (50%) of
          the Cordova  Energy  Center's net  accredited  capacity  under a power
          purchase contract extending to May 2004. Cordova Energy Company LLC, a
          subsidiary of MidAmerican Energy Holdings, owns Cordova Energy Center.

     (2)  The amount shown is capacity purchased under a power purchase contract
          with the NPPD extending to December  2004.  Subsequent to December 31,
          2003,  MidAmerican  Energy entered into a power purchase contract with
          NPPD for January 1, 2005,  through December 31, 2009, that will result
          in  MidAmerican  Energy  obtaining  250 MW annually for the  five-year
          period.

                                      -8-
<PAGE>

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 two electric generating projects in Iowa and is developing a third.
Upon  completion,   the  projects  will  provide  service  to  regulated  retail
electricity  customers.  MidAmerican Energy has obtained  regulatory approval to
include  the actual  costs of the  generation  projects in its Iowa rate base as
long as actual  costs do not  exceed a cap  MidAmerican  Energy has deemed to be
reasonable. Wholesale sales may also be made from the projects to the extent the
power is not needed for regulated retail service.

The first project is a natural gas-fired,  combined cycle unit with an estimated
cost of $357 million,  excluding  allowance for funds used during  construction.
MidAmerican Energy will own and operate the plant.  Commercial  operation of the
simple  cycle mode began on May 5, 2003.  The plant,  which will  continue to be
operated in simple  cycle mode  during  2004,  resulted in 327 MW of  accredited
capacity in the summer of 2003.  The  combined  cycle  operation  is expected to
commence in December 2004 and achieve an expected additional accredited capacity
of 190 MW.

The second project is currently under  construction  and will be a 790-MW (based
on expected  accreditation)  super-critical-temperature,  low-sulfur  coal-fired
plant. MidAmerican Energy will operate the plant and hold an undivided ownership
interest as a tenant in common with the other  owners of the plant.  MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy   expects  its  share  of  the  estimated  cost  of  the  project  to  be
approximately   $713  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 May 29, 2003, the Iowa Utilities  Board ("IUB") issued an order that
approves  the  ratemaking  principles  for  the  plant,  and on June  27,  2003,
MidAmerican  Energy  received a  certificate  from the IUB allowing  MidAmerican
Energy to construct the plant. On February 12, 2003, MidAmerican Energy executed
a contract  with Mitsui & Co.  Energy  Development,  Inc.  for the  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.  MidAmerican  Energy  is also  seeking  an  order  from the IUB
approving construction of the associated transmission facilities.

The third project is currently under  development and is comprised of wind power
facilities  totaling 310 MW based on the nameplate rating.  Generally  speaking,
accredited  capacity ratings for the 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
53 MW. If constructed, MidAmerican Energy will own and operate these facilities,
which are expected to cost approximately $323 million. MidAmerican Energy's plan
to construct the wind project is in conjunction with a settlement agreement that
extends through  December 31, 2010, an Iowa retail electric rate freeze that was
previously  scheduled to expire at the end of 2005.  The  settlement  agreement,
which  was  filed  with  the  IUB  in  conjunction  with  MidAmerican   Energy's
application for ratemaking  principles for the wind project, was approved by the
IUB on October 17, 2003. The  obligation of MidAmerican  Energy to construct the
wind project may be terminated by MidAmerican  Energy if the Federal  production
tax credit  applicable to the wind energy  facilities is not available at a rate
of 1.8 cents per kWh for a period  of at least  ten years  after the  facilities
begin  generating  electricity.  The  production tax credit is available only to
wind facilities placed in service before January 1, 2004. MidAmerican Energy has
received  authorization  from the IUB to construct  the wind power  project.  If
MidAmerican  Energy does not construct the  facilities by December 31, 2007, the
rate extension from January 1, 2006 through December 31, 2010 may terminate.

MidAmerican  Energy is  interconnected  with Iowa  utilities  and  utilities  in
neighboring  states  and is party to an  electric  generation  and  transmission
pooling agreement  administered by the  Mid-Continent  Area Power Pool ("MAPP").
MAPP  is a  voluntary  association  of  electric  utilities  doing  business  in
Minnesota, Nebraska, North Dakota and the Canadian provinces of Saskatchewan and
Manitoba  and  portions  of Iowa,  Montana,  South  Dakota  and  Wisconsin.  Its
membership also includes power  marketers,  regulatory  agencies and independent
power producers.  MAPP  facilitates  operation of the  transmission  system,  is
responsible for the safety and reliability of the bulk electric system,  and has
responsibility for administration of MAPP's Open-Access Transmission Tariff.

Each MAPP  participant  is  required to maintain  for  emergency  purposes a net
generating capability reserve of at least 15% above its system peak demand. If a
participant's  capability  reserve  falls  below  the 15%  minimum,

                                      -9-
<PAGE>

significant  penalties  could be  contractually  imposed  by  MAPP.  MidAmerican
Energy's reserve margin at peak demand for 2003 was approximately 22%.

MidAmerican Energy's transmission system connects its generating facilities with
distribution  substations and interconnects with 14 other transmission providers
in Iowa and five adjacent states. Under normal operating conditions, MidAmerican
Energy's  transmission  system  has  adequate  capacity  to  deliver  energy  to
MidAmerican  Energy's  distribution  system and to export and import energy with
other interconnected  systems.  Refer to Item 2 of this Form 10-K for additional
information on transmission lines.

The Federal Energy  Regulatory  Commission  (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.

In  response  to Order No.  2000,  MidAmerican  Energy and five  other  electric
utilities applied for FERC approval to create TRANSLink Transmission Company LLC
("TRANSLink") as a for-profit independent transmission company to be operated in
conjunction  with a  FERC-approved  RTO. The FERC approved that  application  in
April  2002.  In June  2003,  the IUB issued an order  disapproving  MidAmerican
Energy's  application  for state  regulatory  approval of  MidAmerican  Energy's
participation  in  TRANSLink  and  inviting  MidAmerican  Energy to  refile  the
application  once certain  issues at the federal  level have been  resolved.  On
November 21, 2003, in response to continued  regulatory  uncertainty,  TRANSLink
suspended its operations and dissolved its interim management team.  MidAmerican
Energy is currently  evaluating options relating to its transmission  options in
light of TRANSLink's current status.

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 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.
Legislation  that is  currently  pending in Congress  would forbid the FERC from
implementing  the SMD rule for several years, but it is not certain whether that
legislation  will be  adopted.  Any final  rule on SMD may  impact  the costs of
MidAmerican Energy's electricity and transmission  products. A final rule on SMD
could directly or indirectly influence how transmission services are priced, the
availability  of  transmission  services,  and  how  transmission  services  are
obtained. In addition, the rule could affect 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.  MidAmerican  Energy recognizes
there  is  considerable  uncertainty  as to  the  timing  and  outcome  of  this
rulemaking  and will  continue to evaluate the status of the adoption of SMD for
the wholesale  markets.  Transferring  the operations and control of MidAmerican
Energy's  transmission  assets  to  other  entities  could  increase  costs  for
MidAmerican  Energy;  however,  the  actual  effect of any such  transaction  on
MidAmerican Energy's future transmission costs, or alternate RTO strategies,  is
not yet known.

                                      -10-
<PAGE>


Energy Supply for Electric Operations
-------------------------------------

MidAmerican  Energy's  total energy  supplied to retail and  wholesale  electric
customers was from the following sources:

                                                   2003      2002      2001
                                                   ----      ----      ----
   MidAmerican Energy-owned generation .......     77.9%     76.5%     82.6%
   Energy purchased under long-term contracts      11.5      14.3      13.5
   Energy purchased - other ..................     10.6       9.2       3.9
                                                  -----     -----     -----
                                                  100.0%    100.0%    100.0%
                                                  =====     =====     =====

Sources of fuel for MidAmerican Energy-owned electric generation were as follows
for the years ended December 31:

                                                   2003      2002      2001
                                                   ----      ----      ----
   Coal ......................................     83.9%     79.1%     74.9%
   Nuclear (a) ...............................     15.5      20.5      24.5
   Gas .......................................      0.5       0.3       0.5
   Oil/Hydro .................................      0.1       0.1       0.1
                                                  -----     -----     -----
                                                  100.0%    100.0%    100.0%
                                                  =====     =====     =====

     (a)  In 2001 and 2002,  nuclear includes energy  purchased  through a power
          purchase contract with Nebraska Public Power District.  As a result of
          a contract  restructuring  effective August 1, 2002,  energy purchased
          under that contract after the restructuring is excluded from the table
          since  it is  similar  to  other  purchased  energy  in that it is not
          restricted to a particular energy source.

MidAmerican  Energy is not  allowed  to  automatically  recover a portion of its
energy costs relating to retail sales in Iowa through energy adjustment clauses.
Accordingly, fluctuations in energy costs affect MidAmerican Energy's earnings.

All of the coal-fired  generating  stations  operated by MidAmerican  Energy are
fueled by low-sulfur,  western coal from the Powder River Basin and Hanna Basin.
MidAmerican Energy's coal supply portfolio includes multiple suppliers and mines
under agreements of varying terms and quantities.  MidAmerican  Energy regularly
monitors the western coal market,  looking for opportunities to improve its coal
supply  portfolio.  MidAmerican  Energy believes its sources of coal supply are,
and  will  continue  to  be,  satisfactory.   Additional  information  regarding
MidAmerican  Energy's coal supply  contracts is included in Note (4)(f) of Notes
to Consolidated Financial Statements in Item 8 of this Form 10-K.

MidAmerican Energy has agreements with Union Pacific Railroad Company to deliver
coal  directly  to  its  Neal  and  Council  Bluffs  Energy  Centers.  Coal  for
MidAmerican  Energy's  Louisa and  Riverside  Energy  Centers is delivered to an
interchange  point by Union Pacific for  transportation  to its  destination  by
Iowa, Chicago & Eastern Railroad Corporation. MidAmerican Energy has the ability
to use The  Burlington  Northern and Santa Fe Railway  Company for delivery of a
small amount of coal to the Council Bluffs,  Louisa and Riverside Energy Centers
should the need  arise.  MidAmerican  Energy  believes  its coal  transportation
arrangements are adequate to meet its coal delivery needs.

MidAmerican  Energy uses natural gas and oil as fuel for  intermediate  and peak
demand  electric  generation,  igniter  fuel,  transmission  support and standby
purposes.  These sources are presently in adequate  supply and available to meet
MidAmerican Energy's needs.

MidAmerican  Energy has an  agreement  with the Nebraska  Public Power  District
("NPPD"),  to purchase  electric  capacity and energy through December 31, 2004.
Under the contract, as restructured effective August 1, 2002, MidAmerican Energy
will purchase 380 MW of the accredited  capacity of Cooper Nuclear Station and a

                                      -11-
<PAGE>

minimum  volume of energy in 2004.  NPPD is not  required to use Cooper  Nuclear
Station to meet the minimum  energy  requirement.  In January 2004,  MidAmerican
Energy  and NPPD  entered  into a series  of  agreements  that  will  result  in
MidAmerican purchasing 250 MW of NPPD capacity for a five-year period commencing
January 1, 2005.

MidAmerican  Energy  has  an  agreement  with  Cordova  Energy  Company  LLC,  a
subsidiary of MidAmerican  Energy Holdings,  to purchase  electric  capacity and
energy from a gas-fired  combined cycle generation plant that started commercial
operation in June 2001. The agreement,  which  terminates in May 2004,  provides
for  MidAmerican  Energy to purchase up to 50% of the net  capacity of the plant
and to supply the fuel stock required to generate the energy purchased.

MidAmerican  Energy is a 25% joint owner of Quad Cities  Generating  Station,  a
nuclear power plant. Exelon Generation Company, LLC ("Exelon  Generation"),  the
other joint owner and the operator of Quad Cities  Station,  is a subsidiary  of
Exelon Corporation.

Approximately  one-third  of the  nuclear  fuel  assemblies  in the core at Quad
Cities Station Units 1 and 2 is replaced every 24 months. MidAmerican Energy has
been advised by Exelon  Generation that the majority of its uranium  concentrate
and uranium conversion  requirements for Quad Cities Station through 2005 can be
met under  existing  supplies  or  commitments.  Exelon  Generation  foresees no
problem  in  obtaining  the  remaining  requirements  now  or  obtaining  future
requirements.   Exelon  Generation  further  advises  that  enrichment  services
contracted  through  2007  provide  flexibility  as to the  quantity  purchased.
Commitments  for fuel  fabrication  have  been  obtained  through  2013.  Exelon
Generation  does not anticipate  that it will have difficulty in contracting for
uranium  concentrates for conversion,  enrichment or fabrication of nuclear fuel
needed to operate Quad Cities Station.

REGULATED NATURAL GAS OPERATIONS

MidAmerican  Energy is engaged in the procurement,  transportation,  storage and
distribution  of natural gas for  customers in the Midwest.  MidAmerican  Energy
purchases natural gas from various suppliers,  transports it from the production
area to MidAmerican  Energy's service  territory under contracts with interstate
pipelines,  stores it in various  storage  facilities to manage  fluctuations in
system demand and seasonal  pricing,  and  distributes  it to customers  through
MidAmerican Energy's distribution system.

MidAmerican  Energy sells  natural gas to end-use,  or retail,  customers and to
other  utilities,   marketers  and   municipalities.   MidAmerican  Energy  also
transports through its distribution  system natural gas purchased  independently
by a number of end-use  customers.  During 2003,  approximately 43% of total gas
delivered  through  MidAmerican  Energy's system for end-use customers was under
gas transportation service.

There are seasonal  variations  in  MidAmerican  Energy's gas business  that are
principally  due  to the  use of  natural  gas  for  heating.  In  2003,  58% of
MidAmerican  Energy's  regulated  gas  revenues  were  reported in the months of
January, February, March, and December.

                                      -12-

<PAGE>

The following  tables  present  historical  regulated gas sales data,  excluding
transportation throughput, related to customer class and jurisdictions.

                                           Total Regulated Gas Sales
                                               By Customer Class
                                           --------------------------
                                           2003       2002       2001
                                           ----       ----       ----
         Residential ................      43.7%      39.0%      34.5%
         Small general service (1) ..      20.8       19.7       18.2
         Large general service (1) ..       1.9        1.5        1.5
         Wholesale (2) ..............      28.1       38.6       44.1
         Other ......................       5.5        1.2        1.7
                                          -----      -----      -----
                                          100.0%     100.0%     100.0%
                                          =====      =====      =====

     (1)  Small and large general  service  customers are  classified  primarily
          based on the nature of their  business  and gas usage.  Small  general
          service   customers  are  business   customers   whose  gas  usage  is
          principally for heating.  Large general service customers are business
          customers  whose  principal  gas  usage  is  for  their  manufacturing
          processes.

     (2)  Wholesale   generally   includes   other   utilities,   marketers  and
          municipalities  to whom natural gas is sold at wholesale  for eventual
          resale to ultimate customers.

                                           Regulated Retail Gas Sales
                                                    By State
                                           --------------------------
                                           2003       2002       2001
                                           ----       ----       ----
         Iowa .......................      77.9%      78.0%      78.9%
         Illinois ...................      10.0       10.0        9.8
         South Dakota ...............      11.3       11.2       10.5
         Nebraska ...................       0.8        0.8        0.8
                                          -----      -----      -----
                                          100.0%     100.0%     100.0%
                                          =====      =====      =====

Fuel Supply and Capacity
------------------------

MidAmerican  Energy  purchases  gas  supplies  from  producers  and third  party
marketers.  To  ensure  system  reliability,  a  geographically  diverse  supply
portfolio  with varying  terms and contract  conditions  is utilized for the gas
supplies.  MidAmerican  Energy  attempts to optimize the value of its regulatory
assets by engaging in sales for resale transactions. IUB and South Dakota Public
Utilities  Commission  rulings have allowed  MidAmerican Energy to retain 50% of
the respective jurisdictional margins earned on sales for resale of natural gas,
with the  remaining  50% being  returned to customers  through the purchased gas
adjustment clause discussed below.

MidAmerican  Energy has rights to firm pipeline capacity to transport gas to its
service  territory  through  direct  interconnects  to the  pipeline  systems of
Northern  Natural Gas  Company  (an  affiliate  company),  Natural Gas  Pipeline
Company of America,  Northern Border Pipeline Company and ANR Pipeline  Company.
At times,  the capacity  available  through  MidAmerican  Energy's firm capacity
portfolio may exceed the demand on  MidAmerican  Energy's  distribution  system.
Firm capacity in excess of  MidAmerican  Energy's  system needs can be resold to
other companies to achieve optimum use of the available  capacity.  Past IUB and
South Dakota Public Utilities Commission rulings have allowed MidAmerican Energy
to retain  30% of the  respective  jurisdictional  margins  earned on the resold
capacity,  with the  remaining  70% being  returned  to  customers  through  the
purchased gas adjustment clause.

MidAmerican  Energy's cost of gas is recovered from customers  through purchased
gas adjustment  clauses.  In 1995, the IUB gave initial  approval of MidAmerican
Energy's  Incentive Gas Supply  Procurement  Program.  In November 2003, the IUB
extended the program  through October 31, 2004.  Under the program,  as amended,
MidAmerican  Energy  is  required  to file  with  the IUB  every  six  months  a
comparison of its gas procurement  costs to an index-based  reference  price. If
MidAmerican  Energy's  cost of gas for the  period  is less or  greater  than an

                                      -13-
<PAGE>

established  tolerance band around the reference price, then MidAmerican  Energy
shares a portion of the savings or costs with  customers.  A similar  program is
currently  in  effect  in South  Dakota  through  October  31,  2005.  Since the
implementation of the program,  MidAmerican Energy has successfully achieved and
shared  savings  with its  natural  gas  customers.  Refer to the  "Nonregulated
Operations" section below for additional information.

MidAmerican Energy utilizes leased gas storage to meet peak day requirements and
to manage the daily changes in demand due to changes in weather. The storage gas
is typically replaced during the summer months. In addition,  MidAmerican Energy
also utilizes three liquefied  natural gas plants and two propane-air  plants to
meet peak day demands in the winter.  The  storage and peak  shaving  facilities
reduce  MidAmerican  Energy's  dependence on gas  purchases  during the volatile
winter heating season. In addition,  MidAmerican Energy has entered into various
financial and physical gas purchase agreements to mitigate the volatility of gas
prices during the winter heating season.

On February 2, 1996,  MidAmerican  Energy had its highest  peak-day  delivery of
1,143,026  million  British  thermal units  ("MMBtus").  This peak-day  delivery
consisted of approximately 88% traditional sales service and 12%  transportation
service of  customer-owned  gas. As of January 31,  2004,  MidAmerican  Energy's
2003/2004  winter  heating  season  peak-day  delivery of  1,093,294  MMBtus was
reached on January 29, 2004. This peak-day delivery  included  approximately 73%
traditional sales service and 27% transportation service.

The supply sources utilized by MidAmerican Energy to meet its 2003/2004 peak-day
deliveries to its traditional sales service customers were:

                                                 Thousands   Percent
                                                     of        of
                                                   MMBtus     Total
                                                 ---------   -------
        Leased storage and peak shaving plants     314.5      39.2%
        Firm supply ..........................     487.8      60.8
                                                   -----     -----
                                                   802.3     100.0%
                                                   =====     =====

MidAmerican  Energy has strategically  built multiple pipeline  interconnections
into several of its larger communities.  Multiple pipeline  interconnects create
competition among pipeline suppliers for transportation  capacity to serve those
communities,  thus reducing costs. In addition,  multiple pipeline interconnects
give  MidAmerican  Energy the  ability to  optimize  delivery of the lowest cost
supply  from the  various  supply  basins into these  communities  and  increase
delivery  reliability.  Benefits to MidAmerican  Energy's  system  customers are
shared with all  jurisdictions  through a consolidated  purchased gas adjustment
clause.

MidAmerican  Energy  does not  anticipate  difficulties  in  meeting  its future
demands  through the use of its supply  portfolio and pipeline  interconnections
for the foreseeable future.

NONREGULATED OPERATIONS

MidAmerican  Energy's  nonregulated  operations  include a variety of activities
outside of the traditional regulated electric and gas services.

                                      -14-

<PAGE>

Historical  gross  margins,   or  revenues  less  related  cost  of  sales,  for
MidAmerican Energy's nonregulated operations are shown below (in millions):

                                               2003         2002          2001
                                              -----        -----          ----
Nonregulated retail electric..............    $13.2        $11.4         $ 4.6
Nonregulated retail gas...................      4.9          2.7           2.0
Wholesale gas and electric................      4.7          3.3           6.9
Income sharing arrangements under
  regulated gas tariffs...................      5.0          3.1           4.4
Incentive gas supply procurement
  program award...........................      3.8          3.4           4.1
Other ....................................      3.1          4.5           3.6
                                              -----        -----         -----
                                              $34.7        $28.4         $25.6
                                              =====        =====         =====

As of May 1, 2002, all retail electric  customers in Illinois,  except for those
served by electric cooperatives and municipalities,  had been phased in to allow
them to select their provider of electric supply services.  MidAmerican Energy's
nonregulated  electric retail revenues  include revenues related to these supply
services provided to customers  outside of MidAmerican  Energy's delivery system
who choose their energy supplier.  Revenues related to non-supply services, such
as distribution and transmission,  are reflected in regulated electric revenues.
In September 2002, MidAmerican Energy began serving retail customers in Ohio.

MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio.  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.

MidAmerican   Energy's   wholesale  gas  and  electric   operations  consist  of
nonregulated  wholesale  electric and natural gas marketing  operations  through
which  it buys  from,  and  sells  to,  other  utilities  and  marketers.  These
operations are considered  "energy trading"  activities under generally accepted
accounting principles, and accordingly, related revenues are recorded net of the
related cost of sales on the statements of operations.

Nonregulated  operations also include earnings from sharing  arrangements  under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public  Utilities  Commission  ("SDPUC"),  for  MidAmerican  Energy's  regulated
natural gas operations. Under these arrangements,  MidAmerican Energy is allowed
to keep a portion of the benefits of gas sales for resale and  capacity  release
transactions.  MidAmerican  Energy also has an Incentive Gas Supply  Procurement
Program,  under which it can receive  awards for  successful  performance of gas
supply  procurement.  Refer to the preceding  "Regulated Natural Gas Operations"
section  for  further  discussion  of  the  sharing  arrangements  and  the  gas
procurement program.

REGULATION

General Utility Regulation
--------------------------

MidAmerican  Energy is a public  utility within the meaning of the Federal Power
Act and a natural  gas  company  within  the  meaning  of the  Natural  Gas Act.
Therefore,  it is  subject  to  regulation  by the FERC in  regard  to  numerous
activities,  including  the  issuance of  securities,  accounting  policies  and
practices,  electricity sales for resale rates, the establishment and regulation
of electric  interconnections  and  transmission  services  and  replacement  of
certain gas utility property.

MidAmerican  Energy  is  regulated  by the  IUB as to  retail  rates,  services,
construction  of utility  property and in other respects as provided by the laws
of Iowa.  MidAmerican  Energy is regulated by the Illinois  Commerce  Commission
("ICC"), as to bundled retail rates, unbundled delivery services,  services that
have not been  declared to be  competitive,  issuance of  securities,  affiliate
transactions,   construction,   acquisition   and  sale  of  utility   property,
acquisition and sale of securities and in other respects as provided by the laws
of Illinois. MidAmerican

                                      -15-
<PAGE>

Energy is also subject to  regulation by the SDPUC as to electric and gas retail
rates and service as provided by the laws of South Dakota.

Rate Regulation
---------------

Under Iowa law,  temporary  collection  of higher  rates can  begin,  subject to
refund,  90 days after filing with the IUB for that portion of such higher rates
approved by the IUB based on prior ratemaking principles and a rate of return on
common  equity  previously  approved.  If the IUB has not  issued a final  order
within ten months after the filing date, the temporary rates cease to be subject
to refund and any balance of the  requested  rate increase may then be collected
subject to refund. Exceptions to the ten-month limitation provide for extensions
due to a  utility's  lack of due  diligence  in the  rate  proceeding,  judicial
appeals and situations  involving new generating  units being placed in service.
MidAmerican  Energy's cost of gas is collected in its Iowa gas rates through the
Iowa Uniform Purchased Gas Adjustment Clause.

In accordance  with two electric rate  settlements,  approved by the IUB in 2001
and 2003,  respectively,  MidAmerican  Energy's Iowa retail  electric  rates are
effectively frozen through December 31, 2010. Additionally,  under the incentive
regulation aspects of the settlements,  earnings exceeding a return on equity of
12% through  December 31, 2005, and 11.75% for January 1, 2006 through  December
31,  2010,  are shared with  customers.  See Note (10) of Notes to  Consolidated
Financial  Statements in Item 8 of this Form 10-K for  additional  discussion of
this settlement. In accordance with a 2002 rate settlement, MidAmerican Energy's
Iowa retail gas rates are effectively fixed through November 2004.

South Dakota law authorizes its Public Utilities Commission to suspend new rates
for up to six months during the pendency of rate proceedings; however, the rates
are permitted to be  implemented  after six months  subject to refund  pending a
final order in the proceeding.

Under Illinois law, new rates may become effective 45 days after filing with the
ICC, or on such earlier date as the ICC may approve, subject to its authority to
suspend the proposed new rates,  subject to hearing,  for a period not to exceed
approximately  eleven  months after filing.  Under  Illinois  electric  tariffs,
MidAmerican Energy's Fuel Cost Adjustment Clause reflects changes in the cost of
all  fuels  used  for  retail  electric   generation,   including  certain  fuel
transportation  costs,  nuclear fuel disposition costs and the effects of energy
transactions  (other  than  wholesale  capacity  and  energy  sales)  with other
utilities.  MidAmerican  Energy's  cost of gas is  reflected in its Illinois gas
rates through the Illinois Uniform Purchased Gas Adjustment Clause.

In December  1997,  Illinois  enacted a law to  restructure  Illinois'  electric
utility  industry.  The law changes how and what electric services are regulated
by the ICC and transitions  portions of the traditional  electric  services to a
competitive  environment.  In general,  the law allows for certain limits on the
ICC's  regulatory  authority  over a utility's  generation  and also relaxes its
regulatory authority over many corporate  transactions,  such as the transfer of
generation assets to affiliates.  Special authority and limitations of authority
apply during the transition to a competitive marketplace.  Also, the law permits
utilities to eliminate their fuel adjustment clauses and incorporates provisions
by which earnings in excess of allowed amounts are either partially  refunded to
customers or are used to accelerate a company's  regulatory asset cost recovery.
Electric rates in Illinois are frozen until 2007,  subject to certain exceptions
allowing for  increases,  at which time bundled  rates are subject to cost-based
ratemaking.

The FERC regulates MidAmerican Energy's rates charged to wholesale customers for
energy  and  transmission  services.   Most  of  MidAmerican  Energy's  electric
wholesale sales and purchases take place under  market-based  pricing allowed by
the FERC and are  therefore  subject  to market  volatility.  Margins  earned on
wholesale sales have historically been included as a component of retail cost of
service upon which retail rates are based.

Refer  to  the   "Legislative  and  Utility   Regulatory   Matters"  section  of
Management's  Discussion and Analysis in Item 7 of this Form 10-K for additional
discussion of matters affecting utility regulation.

                                      -16-
<PAGE>

Nuclear Regulation
------------------

MidAmerican  Energy is subject to the  jurisdiction  of the  Nuclear  Regulatory
Commission  ("NRC"),  with respect to its license and 25% ownership  interest in
Quad Cities  Station  Units 1 and 2. Exelon  Generation  is the operator of Quad
Cities Station and is under contract with MidAmerican  Energy to secure and keep
in effect all necessary NRC licenses and authorizations.

The NRC  regulations  control  the  granting  of permits  and  licenses  for the
construction  and  operation  of nuclear  generating  stations  and subject such
stations to  continuing  review and  regulation.  The NRC review and  regulatory
process covers, among other things, operations,  maintenance,  and environmental
and radiological aspects of such stations. The NRC may modify, suspend or revoke
licenses and impose civil penalties for failure to comply with the Atomic Energy
Act, the regulations  under such Act or the terms of such licenses.  Quad Cities
Station  Licenses  currently  expire in 2012.  Exelon  Generation  submitted  an
application  to renew the Quad Cities  Station  licenses with the NRC in January
2003.  Action  by the NRC on the  application  is  expected  by  November  2004.
Approval would result in the licenses allowing operation through 2032.

Under the Nuclear  Waste Policy Act of 1982,  the U.S.  Department  of Energy is
responsible  for the  selection and  development  of  repositories  for, and the
permanent  disposal of, spent nuclear fuel and  high-level  radioactive  wastes.
Exelon Generation,  as required by the Nuclear Waste Act, signed a contract with
the  Department  of Energy to provide for the disposal of spent nuclear fuel and
high-level  radioactive  waste  beginning  not  later  than  January  1998.  The
Department of Energy did not begin receiving spent nuclear fuel on the scheduled
date, and the schedule will be significantly  delayed.  The earliest expectation
for completion is now 2010. The costs to be incurred by the Department of Energy
for  disposal  activities  are being  financed  by fees  charged  to owners  and
generators of the waste. Exelon Generation has informed  MidAmerican Energy that
existing  on-site  storage  capability  at Quad Cities  Station is sufficient to
permit interim storage into 2005. For Quad Cities Station, Exelon Generation has
begun to develop an interim  spent fuel storage  installation  ("ISFSI") at Quad
Cities  Station to store spent  nuclear fuel in dry casks in order to free space
in the  storage  pool.  The  first pad at the ISFSI is  expected  to  facilitate
storage of casks to support  operations  at Quad Cities  Station  until at least
2017. Exelon  Generation  expects the bulk of the construction work will be done
in 2004 with the first cask  loading to take place in 2005.  In the 2017 to 2022
timeframe,  Exelon  Generation  plans  to  add a  second  pad to  the  ISFSI  to
accommodate  storage of spent nuclear fuel through the end of operations at Quad
Cities Station.

Federal  regulations provide that any nuclear operating facility may be required
to cease operation if the NRC determines there are deficiencies in state,  local
or utility  emergency  preparedness  plans  relating to such  facility,  and the
deficiencies are not corrected. Exelon Generation has advised MidAmerican Energy
that an emergency preparedness plan for Quad Cities Station has been approved by
the NRC. Exelon  Generation has also advised  MidAmerican  Energy that state and
local plans  relating to Quad Cities  Station have been  approved by the Federal
Emergency Management Agency.

The NRC also regulates the decommissioning of nuclear power plants including the
planning  and  funding  for  the  eventual  decommissioning  of the  plants.  In
accordance with these  regulations,  MidAmerican  Energy submits a report to the
NRC every two years providing  reasonable assurance that funds will be available
to pay the costs of decommissioning its share of Quad Cities Station.

MidAmerican  Energy has established  external trusts for the investment of funds
collected  for nuclear  decommissioning  associated  with Quad  Cities  Station.
Electric  tariffs   currently  in  effect  include   provisions  for  annualized
collection of estimated  decommissioning  costs at Quad Cities Station. In Iowa,
estimated Quad Cities Station decommissioning costs are reflected in base rates.
MidAmerican  Energy's cost related to  decommissioning  funding in 2003 was $8.3
million.

                                      -17-
<PAGE>

Environmental Regulations
-------------------------

MidAmerican  Energy  is  subject  to  a  number  of  federal,  state  and  local
environmental  laws and  regulations  affecting  many aspects of our present and
future operations.  These requirements  relate to air emissions,  water quality,
waste management,  hazardous chemical use, noise abatement,  land use aesthetics
and atomic radiation.

Environmental laws and regulations  currently have, and future modifications may
have,  the effect of (i) increasing  the lead time for the  construction  of new
facilities,  (ii)  significantly  increasing  the total cost of new  facilities,
(iii) requiring  modification of MidAmerican Energy's existing facilities,  (iv)
increasing  the  risk  of  delay  on  construction   projects,   (v)  increasing
MidAmerican Energy's cost of waste disposal and (vi) reducing the reliability of
service  provided by MidAmerican  Energy and the amount of energy available from
MidAmerican  Energy's  facilities.  Any of these items could have a  substantial
impact on amounts required to be expended by MidAmerican Energy in the future.

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 U.S.
Environmental  Protection  Agency ("EPA").  MidAmerican  Energy has five jointly
owned,  and six wholly  owned,  coal-fired  generating  units,  which  represent
approximately  60% of MidAmerican  Energy's  electric net accredited  generating
capability.  MidAmerican  Energy  believes  it is in  material  compliance  with
current air quality requirements.  Refer to Note (4)(b) of Notes to Consolidated
Financial  Statements  in Item 8 of this  Form 10-K for  additional  information
regarding air quality regulation.

Hazardous Materials and Waste Management -

The EPA and state  environmental  agencies  have  determined  that  contaminated
wastes remaining at certain decommissioned manufactured gas plant facilities may
pose a threat to the public health or the environment if such  contaminants  are
in  sufficient  quantities  and at such  concentrations  as to warrant  remedial
action.

MidAmerican  Energy has evaluated or is  evaluating 27 properties  that were, at
one time, sites of gas manufacturing plants in which MidAmerican Energy may be a
potentially  responsible  party.  MidAmerican  Energy  estimates  the  range  of
possible costs for investigation,  remediation and monitoring for these sites to
be $11 million to $30 million.  As of December 31, 2003,  MidAmerican Energy has
recorded a liability  and  regulatory  asset of $14.0  million for these  sites.
MidAmerican  Energy's  present rates in Iowa provide for a fixed annual recovery
of manufactured gas plant costs.  Additional information relating to MidAmerican
Energy's  manufactured  gas plant  facilities  is included  under Note (4)(a) of
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.

Pursuant to the Toxic Substances  Control Act, a federal law administered by the
EPA, MidAmerican Energy developed a comprehensive program for the use, handling,
control and  disposal of all  polychlorinated  biphenyls  ("PCBs")  contained in
electrical  equipment.  The  future  use of  equipment  containing  PCBs will be
minimized. Capacitors,  transformers and other miscellaneous equipment are being
purchased with a non-PCB dielectric fluid.  MidAmerican Energy's exposure to PCB
liability has been reduced  through the orderly  replacement of a number of such
electrical devices with similar non-PCB electrical devices.

                                      -18-
<PAGE>

                               INTERCOAST CAPITAL
                               ------------------

InterCoast  Capital is a wholly owned  nonregulated  subsidiary of MHC primarily
engaged  in  investment   activities.   Investments  include  equipment  leases,
marketable securities and energy-related  venture capital interests.  InterCoast
Capital   manages  these   activities   through  its   nonregulated   investment
subsidiaries.  As of December 31, 2003,  InterCoast  Capital had total assets of
$41.3 million, a majority of which relate to investments in equipment leases.

InterCoast Capital had equity  participations in equipment leases totaling $29.5
million  and $32.6  million at  December  31,  2003 and 2002,  respectively.  At
December 31, 2003,  approximately  $20.9 million was invested in five commercial
passenger  aircraft.  Approximately  $8.2  million  of the  December  31,  2003,
investment in equipment leases related to a seven percent undivided  interest in
an  electric  generating  station  leased  to  a  utility  located  in  Arizona.
InterCoast Capital also has investments in safe harbor lease transactions. Refer
to  Note  (1)(f)  of  MidAmerican  Funding's  Notes  to  Consolidated  Financial
Statements  in Item 8 of this Form 10-K for  additional  discussion of equipment
leases.

In addition,  InterCoast Capital and its subsidiaries have direct investments in
energy  projects and indirect  investments,  through venture capital funds, in a
variety of nonregulated energy production technologies.

                                 MIDWEST CAPITAL
                                 ---------------

Midwest  Capital is a wholly  owned  nonregulated  subsidiary  of MHC with total
assets of $8.1  million as of  December  31,  2003.  Midwest  Capital's  primary
activity  is the  management  of utility  service  area  investments  to support
economic  development.  Midwest  Capital's  principal  interest is a  2,000-acre
master planned  residential and business community in southeastern South Dakota.
The major  construction  phase of the planned  community  is  complete,  and the
marketing  phase  to  sell  developed  residential  and  commercial  lots  is in
progress.

                                      -19-

<PAGE>

ITEM 2.  PROPERTIES

MidAmerican Energy's utility properties consist of physical assets necessary and
appropriate to render electric and gas service in its service territories. It is
the opinion of management  that the principal  depreciable  properties  owned by
MidAmerican  Energy  are  in  good  operating  condition  and  well  maintained.
MidAmerican  Energy's most  significant  properties are its electric  generation
facilities.  For  information  regarding these  facilities,  please refer to the
"Regulated  Electric  Operations"  discussion  in Item 1 - Business of this Form
10-K.  Additional  electric  property  consists  primarily of  transmission  and
distribution facilities.

The electric  transmission  system of  MidAmerican  Energy at December 31, 2003,
included 918 miles of 345-kilovolt ("kV") lines and 1,128 miles of 161-kV lines.
MidAmerican Energy's electric distribution system included approximately 220,400
transformers and 373 substations at December 31, 2003.

Gas property  consists  primarily  of natural gas mains and services  pipelines,
meters and related distribution equipment, including feeder lines to communities
served  from  natural  gas  pipelines  owned  by  others.  The gas  distribution
facilities of MidAmerican Energy at December 31, 2003,  included 21,182 miles of
gas mains and service pipelines.

Net utility  plant in service by operating  segment is as follows as of December
31, 2003 (in thousands):

                      Generation ............   $1,239,370
                      Energy delivery -
                        Electric distribution    1,271,110
                        Gas distribution ....      603,381
                      Transmission ..........      229,694
                      Marketing and sales ...       16,705
                                                ----------
                                                $3,360,260
                                                ==========

Substantially  all of the  former  Iowa-Illinois  Gas and  Electric  Company,  a
predecessor company,  utility property and franchises,  and substantially all of
the former  Midwest Power  Systems,  a  predecessor  company,  electric  utility
property  located in Iowa,  or  approximately  80% of gross  utility  plant,  is
pledged to secure mortgage bonds.

                                      -20-

<PAGE>

ITEM 3.  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 U.S.  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.
Unless  extended  by  agreement  of the parties or by court  order,  MidAmerican
Energy's  answer and/or  responsive  pleading in this matter is due February 19,
2004.   MidAmerican  Energy  will  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 Item 1 - Business and
in the "Environmental  Matters" section of Management's  Discussion and Analysis
in Item 7 of this Form 10-K.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

MidAmerican  Funding  is an Iowa  limited  liability  company  whose  membership
interest is held solely by MidAmerican Energy Holdings.

                                      -21-

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

                           MIDAMERICAN ENERGY COMPANY
                      SELECTED CONSOLIDATED FINANCIAL DATA
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                       DECEMBER 31
                                           ------------------------------------------------------------------
                                              2003          2002          2001          2000          1999
                                           ----------    ----------    ----------    ----------    ----------
<S>                                        <C>           <C>           <C>           <C>           <C>

STATEMENT OF OPERATIONS DATA:
Revenues ..............................    $2,595,812    $2,236,159    $2,367,249    $2,271,832    $1,762,350
Operating income ......................       370,820       354,997       333,574       338,756       300,064
Net income ............................       188,597       175,821       152,778       165,456       127,331
Earnings on common stock ..............       187,187       172,888       148,234       160,501       122,376

BALANCE SHEET DATA:
Total assets (a) ......................    $4,404,434    $3,823,951    $3,585,127    $3,825,954    $3,609,591
Long-term debt (b) ....................     1,128,647     1,053,418       820,594       921,682       870,499
Power purchase obligation (c) .........             -             -        25,867        52,282        68,049
Short-term borrowings .................        48,000        55,000        89,350        81,600       204,000
Preferred stock:
  Not subject to mandatory redemption .        31,759        31,759        31,759        31,759        31,759
  Subject to mandatory redemption .....             -             -       126,680       150,000       150,000
Common shareholder's equity ...........     1,318,519     1,319,139     1,226,292     1,164,356     1,057,855
</TABLE>


(a)  In  January  2003,   MidAmerican  Energy  adopted  Statement  of  Financial
     Accounting   Standards   No.   143,   "Accounting   for  Asset   Retirement
     Obligations,"  ("SFAS No. 143").  Accordingly,  MidAmerican Energy recorded
     $114.4 million of assets related to the asset retirement obligation ("ARO")
     liability  required by SFAS No. 143.  Additionally,  an accrual for non-ARO
     costs of removing electric and gas assets that was previously  reflected in
     accumulated depreciation is now classified as a regulatory liability,  thus
     increasing   total  assets  compared  to  prior  years.   The  accrual  was
     approximately  $408.6 million at December 31, 2003. Refer to Note (1)(j) of
     Notes to Consolidated  Financial Statements in Item 8 of this Form 10-K for
     further discussion.

(b)  Includes amounts due within one year.

(c)  On August 1, 2002,  MidAmerican  Energy's contract with the Nebraska Public
     Power District  regarding  Cooper Nuclear  Station was  restructured.  As a
     result,  the power  purchase  obligation and the related asset were removed
     from the  balance  sheet.  Refer to Note  (1)(h)  of Notes to  Consolidated
     Financial  Statements  later  in  Item 8 of  this  Form  10-K  for  further
     discussion.

                                      -22-
<PAGE>

                            MIDAMERICAN FUNDING, LLC
                      SELECTED CONSOLIDATED FINANCIAL DATA
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                                          MHC
                                                            MIDAMERICAN FUNDING                      (PREDECESSOR)
                                     --------------------------------------------------------------  -------------
                                                                                          MAR. 12        JAN. 1
                                                  YEARS ENDED DECEMBER 31,                THROUGH       THROUGH
                                     -------------------------------------------------    DEC. 31,      MAR. 11,
                                        2003         2002         2001         2000         1999          1999
                                     ----------   ----------   ----------   ----------   ----------     --------
<S>                                  <C>          <C>          <C>          <C>          <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues .........................   $2,600,239   $2,240,879   $2,388,650   $2,316,343   $1,411,542     $375,884
Operating income .................      367,868      349,988      300,085      327,560      227,133       58,898
Income from continuing
  operations (a) .................      157,176      136,716      103,087      126,784      124,077       16,789
Net income .......................      157,176      136,716      103,087      126,784      135,335       17,210

                                                           AS OF DECEMBER 31,
                                     --------------------------------------------------------------
                                        2003         2002         2001         2000         1999
                                     ----------   ----------   ----------   ----------   ----------
BALANCE SHEET DATA:
Total assets (b) .................   $5,737,614   $5,166,056   $5,182,707   $5,425,397   $5,212,387
Long-term debt (c) ...............    1,828,647    1,753,418    1,544,969    1,670,636    1,642,476
Power purchase obligation (d) ....            -            -       25,867       52,282       68,049
Short-term borrowings ............       48,000       55,000       91,780       81,600      204,000
Preferred securities not subject
  to mandatory redemption ........       31,759       31,759       31,759       31,759       31,759
Preferred securities subject
  to mandatory redemption ........            -            -      126,680      150,000      151,598
Member's equity ..................    1,863,769    1,879,191    1,981,840    1,877,175    1,800,416
</TABLE>

(a)  In accordance  with  Statement of Financial  Accounting  Standards No. 142,
     "Goodwill  and  Other  Intangible   Assets,"  beginning  January  1,  2002,
     MidAmerican Funding's goodwill is no longer amortized. Refer to Note (1)(k)
     of MidAmerican  Funding's Notes to Consolidated  Financial Statements later
     in Item 8 of this Form 10-K. In 2002,  MidAmerican Funding recorded pre-tax
     expense  of  $21.9   million  of  write  downs  for  impaired   assets  and
     investments,  including  a $12.6  million  pre-tax  write down of  airplane
     leases. In May 1999, MidAmerican Funding sold most of its investment in the
     common stock of McLeodUSA and recorded an after-tax  gain of $47.1 million.
     For the period  ended  March 11,  1999,  MHC  expensed  $18.6  million  for
     transaction  costs  related  to  its  acquisition  by  MidAmerican   Energy
     Holdings.

(b)  In  January  2003,   MidAmerican  Energy  adopted  Statement  of  Financial
     Accounting   Standards   No.   143,   "Accounting   for  Asset   Retirement
     Obligations,"  ("SFAS No. 143").  Accordingly,  MidAmerican Energy recorded
     $114.4 million of assets related to the asset retirement obligation ("ARO")
     liability  required by SFAS No. 143.  Additionally,  an accrual for non-ARO
     costs of removing electric and gas assets that was previously  reflected in
     accumulated depreciation is now classified as a regulatory liability,  thus
     increasing   total  assets  compared  to  prior  years.   The  accrual  was
     approximately  $408.6 million at December 31, 2003. Refer to Note (1)(j) of
     Notes to Consolidated  Financial Statements in Item 8 of this Form 10-K for
     further discussion.

(c)  Includes amounts due within one year.

(d)  On August 1, 2002,  MidAmerican  Energy's contract with the Nebraska Public
     Power District  regarding  Cooper Nuclear  Station was  restructured.  As a
     result,  the power  purchase  obligation and the related asset were removed
     from the  balance  sheet.  Refer to Note  (1)(h)  of Notes to  Consolidated
     Financial  Statements  later  in  Item 8 of  this  Form  10-K  for  further
     discussion.

                                      -23-
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

                                      INDEX


                                                                         Page
                                                                         ----

General...................................................................25

Results of Operations.....................................................31

Liquidity and Capital Resources...........................................38

Credit Ratings Risks......................................................41

Legislative and Utility Regulatory Matters................................41

Environmental Matters.....................................................43

Generating Capability.....................................................43

New Accounting Pronouncements.............................................44

Critical Accounting Policies and Estimates................................45

                                      -24-

<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

GENERAL

MidAmerican Funding, LLC ("MidAmerican  Funding"),  is an Iowa limited liability
company that was formed in March 1999. The sole member of MidAmerican Funding is
MidAmerican Energy Holdings Company ("MidAmerican Energy Holdings"). MidAmerican
Funding owns all of the outstanding  common stock of MHC Inc., which owns all of
the  common  stock  of  MidAmerican  Energy  Company   ("MidAmerican   Energy"),
InterCoast  Capital  Company  (formerly  MidAmerican  Capital  Company)  Midwest
Capital Group, Inc.,  MidAmerican Services Company and MEC Construction Services
Co.

On March 12, 1999, MHC, formerly MidAmerican Energy Holdings Company,  completed
a merger  transaction  with CalEnergy  Company,  Inc. On that date,  MidAmerican
Funding,  which was formed by CalEnergy Company, Inc. as a single member limited
liability company,  acquired MHC. Also on that date, CalEnergy Company, Inc. was
reincorporated as an Iowa corporation and changed its name to MidAmerican Energy
Holdings  Company.  As a result of this  transaction,  MHC and its subsidiaries,
including  MidAmerican  Energy became wholly owned  subsidiaries  of MidAmerican
Funding.  MHC,  MidAmerican  Funding and MidAmerican  Energy Holdings are exempt
public utility holding companies headquartered in Des Moines, Iowa.

Management's Discussion and Analysis ("MD&A") addresses the financial statements
of MidAmerican Energy and MidAmerican Funding as presented in this joint filing.
Information  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  and labeled to allow the reader to  identify  information
applicable only to MidAmerican Funding.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

Earnings Overview
-----------------

MidAmerican Energy -

MidAmerican  Energy's  earnings on common stock improved $14.3 million to $187.2
million  for 2003  compared  to $172.9  million  for 2002.  Significant  factors
contributing  to the  improvement  in earnings  were:  1) a  reduction  in costs
related to Cooper Nuclear Station due to a  restructuring  of the power purchase
contract in August 2002, 2) an increase in the number of electric and gas retail
customers,  3) an  increase  in retail  gas  rates,  and 4) a  decrease  in Iowa
electric retail costs due to the recognition of cost recovery  related to a coal
purchase  contract with Enron Corp.  The impact of these factors were  partially
offset by increases in other expenses.

MidAmerican Funding -

MidAmerican  Funding's net income for 2003 totaled  $157.2  million  compared to
$136.7  million  for  2002.  In  addition  to the  factors  discussed  above for
MidAmerican  Energy, net income for 2003 includes $4.0 million of after-tax loss
for  write-downs  of impaired  investments.  Net income for 2002  reflects  $4.9
million of after-tax  income related to a gain and interest income from the sale
of an investment in a communications  company,  $17.1 million after-tax loss for
impairments of investments and $4.0 million of additional income taxes.

                                      -25-

<PAGE>

Regulated Electric Gross Margin
-------------------------------

                                                   2003        2002
                                                 --------    --------
                                                     (In millions)
       Operating revenues ...................    $1,398.0    $1,353.4
       Less cost of fuel, energy and capacity       397.7       346.7
                                                 --------     -------
          Electric gross margin .............    $1,000.3    $1,006.7
                                                 ========    ========

Electric gross margin for 2003 decreased $6.4 million compared to 2002.

The most  significant  factor  influencing the comparison of electric margin for
2003 and 2002 was a change in the  classification  of costs for energy purchased
under the Cooper  Nuclear  Station  contract due to  MidAmerican  Energy and the
Nebraska Public Power District ("NPPD") restructuring their contract,  effective
August 1, 2002.  The restructuring  affected both the  classification of related
costs on  MidAmerican  Energy's  statement of  operations  and the total cost to
MidAmerican Energy.

Prior to the  restructuring,  MidAmerican  Energy  paid for its  share of Cooper
Nuclear  Station costs based on 50% of the fixed and  operating  costs of Cooper
Nuclear  Station,  excluding  depreciation  but  including  debt  service and in
exchange received 50% of the actual  electrical  output of the facility.  During
that time, only  MidAmerican  Energy's share of nuclear fuel cost was classified
as a cost of fuel, energy and capacity,  thus impacting  electric margin.  Other
costs under the contract were classified as other operating expenses.

Under  the  terms of the  restructured  contract,  MidAmerican  Energy  pays for
contracted  amounts of  capacity  and energy at fixed  prices  specified  in the
contract and therefore, there is no distinction between fuel costs and any other
actual  costs of  operating  Cooper  Nuclear  Station.  Accordingly,  all  costs
incurred under the  restructured  contract are included in MidAmerican  Energy's
cost of fuel,  energy and capacity,  consistent with the cost of power purchased
from other entities.

In aggregate, MidAmerican Energy's costs for the Cooper Nuclear Station contract
declined  $46.7  million for 2003  compared to 2002,  which is  reflected  as an
increase in cost of fuel, energy and capacity of $10.8 million and a decrease in
other operating expenses of $57.5 million.  The $46.7 million aggregate decrease
was due to cost savings  resulting from the  restructuring of the contract.  The
savings  resulted from the  restructured  contract  costs being less than 50% of
NPPD's  historical  fixed and  operating  costs of Cooper  Nuclear  Station that
MidAmerican Energy was required to pay under the original contract, $7.7 million
of  amortization  related to a cash  payment  from NPPD in August  2002 and $3.6
million of  amortization  related to  decommissioning  expense  recognized  from
December 2000 through July 2002.  The cash payment and the previously recognized
decommissioning  expense are being recognized into income based on the estimated
energy expected to be received for the remainder of the contract,  which expires
December  31, 2004.  Refer to Notes  (1)(h) and (4)(c) of Notes to  Consolidated
Financial  Statements in Item 8 of this Form 10-K for  additional  discussion of
the Cooper Nuclear Station contract and related costs.

Restructuring  the  contract  has  enhanced   MidAmerican  Energy's  ability  to
economically purchase energy. The restructured contract provides 1) certainty of
price  paid for  capacity  and  energy,  2)  market-competitive  prices,  and 3)
certainty of supply because NPPD must provide the contracted  energy even if the
Cooper  Nuclear  Station  is  not  available.   Under  the  original   contract,
MidAmerican  Energy was subject to the  fluctuating  costs and plant  outages of
Cooper Nuclear Station.

Following  is a  discussion  of various  factors  other than the Cooper  Nuclear
Station contract that affected gross margin.  Margin variation  explanations are
management's  best estimate of the impact of weather,  customer growth and other
factors  based on historical  consumption  patterns.  The effect of  temperature
conditions  during 2003  compared  to 2002,  resulted  in  approximately  a $7.4
million decrease in electric margin.  Other electricity  usage factors,  such as
changes due to individual  customer  conservation and a variety of circumstances
affecting  customers within MidAmerican  Energy's service  territory,  decreased
electric margin by $11.5 million compared to 2002.  Conversely,  a 1.1% increase
in the average  number of retail  customers  improved  electric  gross margin by
$14.3  million  compared  to 2002.  In  total,  retail  electric  sales  volumes
increased 0.6% compared to 2002.

                                      -26-
<PAGE>

Lower  fuel  costs for Iowa  retail  electric  sales,  excluding  the  impact of
restructuring  the Cooper  contract,  increased  electric margin by $6.3 million
relative to 2002.  The  decrease in fuel costs for Iowa  electric  retail  sales
includes the Iowa portion of $10.9  million of cost  recovery  recognized in the
second  quarter of 2003 related to MidAmerican  Energy's coal purchase  contract
with Enron  Corp.  ("Enron").  In November  2001,  MidAmerican  Energy  received
collateral  from  Enron  for costs to  MidAmerican  Energy  related  to the coal
purchase  contract as a result of a downgrade in Enron's credit ratings in 2001.
MidAmerican  Energy  recognized  the value of the  collateral in June 2003 after
resolution of related bankruptcy proceedings.  The decrease in fuel costs due to
the coal purchase  contract with Enron was partially  offset by the Iowa portion
of $5.1 million of expense  related to the write-off of the  remaining  value of
failed nuclear fuel assemblies at Quad Cities Station.

MidAmerican Energy sells and purchases  electric  capacity.  The net margin from
those sales and purchases decreased $2.7 million compared to 2002. Revenues from
transmission services increased $5.2 million compared to 2002.

Regulated Gas Gross Margin
--------------------------
                                             2003      2002
                                            ------    ------
                                              (In millions)
              Operating revenues .......    $947.4    $695.8
              Less cost of gas sold ....     720.6     482.8
                                            ------    ------
                Gas gross margin .......    $226.8    $213.0
                                            ======    ======

Gas gross margin for 2003 increased $13.8 million compared to 2002.

Regulated gas revenues  include  purchase gas adjustment  clauses  through which
MidAmerican  Energy is allowed  to recover  the cost of gas sold from its retail
gas utility customers. Consequently, fluctuations in the cost of gas sold do not
affect  gross  margin  or  net  income  because  revenues   reflect   comparable
fluctuations  from  purchase gas  adjustment  clauses.  A 59.9%  increase in the
average per-unit cost of gas compared to 2002 increased revenues and cost of gas
sold for 2003 by $269.9 million. That increase in cost of gas sold was partially
offset by the effect of a decrease in sales volumes  related to sales for resale
customers.

The following table summarizes the variance in gas operating revenues, including
the impact of the  fluctuation  in the cost of gas sold.  Amounts not related to
the increase in cost of gas have the same impact on gross margin (in millions):

                                              2003 vs. 2002
                                              -------------
                Increase in cost of gas:
                  Price .....................    $269.9
                  Sales volumes .............     (32.1)
                                                 ------
                    Total ...................     237.8
                Increases in retail rates ...      12.3
                Weather .....................       4.0
                Weather derivative ..........      (2.5)
                Transported gas .............       3.0
                Customer growth .............       2.7
                Other usage factors .........      (7.3)
                Other .......................       1.6
                                                 ------
                    Total revenue variance       $251.6
                                                 ======

The  increases in  MidAmerican  Energy's  natural gas retail rates  largely took
effect subsequent to the second quarter of 2002. On February 20, 2002, the South
Dakota Public  Utilities  Commission  approved a settlement  agreement  allowing
increased natural gas rates of $3.1 million annually,  effective immediately. On
June 12, 2002,  the Iowa  Utilities  Board ("IUB")  issued an order  granting an
interim  rate  increase  of  approximately  $13.8  million  annually,  effective
immediately.  On  November  8, 2002,  the IUB  approved  a  proposed  settlement

                                      -27-
<PAGE>

agreement previously filed by MidAmerican Energy and the Iowa Office of Consumer
Advocate  that  provides  for a final  increase of $17.7  million  annually  for
MidAmerican  Energy's Iowa retail natural gas customers.  On September 11, 2002,
MidAmerican Energy received a final order from the Illinois Commerce  Commission
to increase its Illinois  natural gas rates by $2.2 million  annually.  Refer to
the "Legislative and Utility Regulatory Matters" section of MD&A for comments on
the Iowa gas rate settlement.

The  increase  in gas  gross  margin  due to  weather  was the  result of colder
temperature conditions in the first quarter of 2003 compared to the same quarter
in 2002,  offset  partially  by  milder  temperature  conditions  in much of the
remainder of 2003.  Other gas usage  factors,  such as changes due to individual
customer  conservation,  reaction  to  prices,  and a variety  of  circumstances
affecting customers within MidAmerican Energy's service territory, decreased gas
margin.  MidAmerican  Energy's average number of gas retail customers  increased
1.0% compared to 2002. Total natural gas retail sales volumes increased 3.0%.

MidAmerican  Energy may enter  into  degree day swaps to offset a portion of the
financial impact of variations in weather conditions on its delivery margins for
the winter heating  season.  The net loss on such weather  derivative  financial
instruments  partially  offset  the  increased  delivery  margins  due to colder
temperature conditions.

The  transported  gas increase  relates to revenue from natural gas  transported
through  MidAmerican  Energy's  distribution  system  to  a  number  of  end-use
customers who have independently purchased their supply from third parties.

Regulated Operating Expenses
----------------------------

Regulated other operating  expenses for 2003 decreased $34.3 million compared to
2002.  As discussed in the  "Regulated  Electric  Gross Margin"  section  above,
effective  August  1,  2002,  MidAmerican  Energy  and NPPD  restructured  their
contract  for Cooper  Nuclear  Station.  Prior to the  restructuring,  all costs
incurred under the contract,  other than the cost of fuel to generate the energy
purchased by MidAmerican  Energy,  were classified as other operating  expenses.
Following the  restructuring,  substantially  all costs  incurred by MidAmerican
Energy under the contract are classified as a cost of fuel, energy and capacity.
Accordingly,  as a result of that change,  MidAmerican  Energy's other operating
expenses decreased $57.5 million in 2003 compared to 2002.

The decrease in other operating expenses due to Cooper Nuclear Station costs was
partially  offset by increases  totaling $15.0 million related to employee costs
for   deferred   compensation,   health  care  costs,   and  pension  and  other
postretirement  costs; and by a $4.7 million  increase in electric  distribution
costs; and a $3.2 million increase in safety costs.

Maintenance expenses increased $17.9 million compared to 2002 due principally to
a $12.4  million  increase  in  fossil  fuel  generation  maintenance  costs due
generally to the timing of maintenance.  Additionally, maintenance costs at Quad
Cities  Station  increased  $2.5  million and general  plant  maintenance  costs
increased $2.6 million.

Depreciation and amortization  expense increased $12.7 million compared to 2002.
Utility plant depreciation increased $4.9 million due primarily to an April 2002
change in the estimated useful life of general utility plant assets.  The change
in  estimated  useful  lives from  eleven  years to eight years  increased  2003
depreciation   expense  by   approximately   $3.4  million   compared  to  2002.
Amortization  related to an Illinois revenue sharing  arrangement  accounted for
$4.5  million  of  the  increase  in  depreciation  and  amortization   expense.
Additionally,  amortization for 2002 includes a $2.2 million gain related to the
restructuring  of the Cooper  Nuclear  Station  contract  in 2002.  Refer to the
"Legislative and Utility  Regulatory  Matters" section for an explanation of the
revenue sharing arrangements.

Property and other taxes  increased $4.1 million due primarily to an increase in
property  taxes as a result  of  higher  levels  of  electricity  generated  and
delivered  during the measurement  period.  Iowa law provides for property taxes
for electric and gas utilities to be based predominantly on energy consumption.

                                      -28-

<PAGE>

Nonregulated Gross Margin
-------------------------

                                                 2003       2002
                                                -------    -------
                                                   (In millions)
     MidAmerican Energy -
       Nonregulated operating revenues .....    $ 250.4    $ 186.9
       Less nonregulated cost of sales .....      215.7      158.5
                                                -------    -------
         Nonregulated gross margin .........    $  34.7    $  28.4
                                                =======    =======

                                                   2003       2002
                                                -------    -------
                                                   (In millions)
     MidAmerican Funding Consolidated -
       Nonregulated operating revenues .....    $ 254.8    $ 191.6
       Less nonregulated cost of sales .....      216.2      159.4
                                                -------    -------
         Nonregulated gross margin .........    $  38.6    $  32.2
                                                =======    =======

MidAmerican Energy -

MidAmerican  Energy's  nonregulated gross margin for 2003 increased $6.3 million
compared to 2002. The following  table  presents the margins  related to various
nonregulated activities (in millions):

                                              2003     2002
                                              ----     ----
     Nonregulated retail electric .......    $13.2    $11.4
     Nonregulated retail gas ............      4.9      2.7
     Income sharing arrangements under
       regulated gas tariffs ............      5.0      3.1
     Incentive gas supply procurement
       program award ....................      3.8      3.4
     Wholesale gas and electric .........      4.7      3.3
     Other ..............................      3.1      4.5
                                             -----    -----
                                             $34.7    $28.4

Electric  retail  customers  in  Illinois,  except for those  served by electric
cooperatives  and  municipalities,  are allowed to select their  electric  power
supplier.  MidAmerican  Energy's  nonregulated  electric retail revenues include
revenues  related to these  supply  services  provided to  customers  outside of
MidAmerican  Energy's  delivery  system who choose  their energy  supplier.  The
improvement  in gross  margin was due  primarily  to a 43.9%  increase  in sales
volumes.  Nonregulated  electric retail revenues increased $6.4 million to $69.5
million for 2003,  while the related  cost of sales  increased  $4.6  million to
$56.3 million.

MidAmerican Energy's nonregulated retail gas marketing services operate in Iowa,
Illinois and Ohio.  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. The improvement in gross margin from these operations
was due  almost  entirely  to a 75.0%  increase  in the  margin  per unit  sold.
Additionally, sales volumes increased 4.6% compared to 2002. Nonregulated retail
gas revenues  increased  $55.5 million to $162.4  million due  principally to an
increase in the average price per unit sold,  which reflects a 44.4% increase in
the  average  cost of gas.  Related  nonregulated  cost of gas  increased  $53.3
million to $157.5 million for 2003.

                                      -29-
<PAGE>

Nonregulated  operations also include earnings from sharing  arrangements  under
applicable state regulations and tariffs filed with the IUB and the South Dakota
Public  Utilities  Commission for  MidAmerican  Energy's  regulated  natural gas
operations.  Under these  arrangements,  MidAmerican Energy is allowed to keep a
portion  of  the  benefits  of  gas  sales  for  resale  and  capacity   release
transactions.  MidAmerican  Energy also has an Incentive Gas Supply  Procurement
Program ("IGSPP") in Iowa and a similar program in South Dakota,  under which it
can receive awards for successful  performance of gas supply procurement.  Under
the  IGSPP,  if  MidAmerican  Energy's  cost of gas varies  from an  established
reference price range,  then the savings or cost is shared between customers and
shareholders.  The IGSPP extends  through October 31, 2004, and the South Dakota
program extends through October 31, 2005.

Interest and Dividend Income
----------------------------

MidAmerican Energy -

Interest and dividend  income  decreased  $3.9 million for 2003 compared to 2002
due to a  reduction  in interest  income on a note  receivable  associated  with
MidAmerican  Energy's accounts receivable sold. The related agreement terminated
on October 29, 2002.

MidAmerican Funding -

Interest income related to notes  receivable with  MidAmerican  Funding's parent
company  decreased $4.7 million  compared to 2002.  The related note  receivable
balances  have been zero  throughout  2003.  Additionally,  2002  includes  $5.0
million from the settlement of an investment in a communications company.

Marketable Securities Gains and Losses, Net
-------------------------------------------

MidAmerican Funding -

Net losses on marketable  securities decreased compared to 2002 due primarily to
$4.4 million of losses recorded in 2002 related to other-than-temporary declines
in MidAmerican Funding's available-for-sale common stock investments.

Other Income and Expense
------------------------

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").
Accordingly,  other  income for the  capitalized  allowance on equity funds used
during  construction  totaled  $11.4  million in 2003 and $8.6  million in 2002.
MidAmerican  Energy  anticipates  recording  income for the  allowance on equity
funds used during  construction  over the next several years while the announced
generating plants are constructed.

Other income also includes net earnings  related to the cash surrender  value of
corporate-owned  life insurance  policies.  Such income totaled $6.3 million and
$1.3  million for 2003 and 2002,  respectively.  The increase was due to general
improvement in the stock market.

Other  income for 2002  includes  $1.3  million of income  from a fee charged to
MidAmerican  Energy  Funding  Corporation  for  servicing  MidAmerican  Energy's
accounts  receivable sold to them.  Likewise,  other expense for 2002 includes a
discount on sold  accounts  receivable.  The  discount was designed to cover the
expenses of MidAmerican Energy Funding Corporation,  including bad debt expense,
subservicer fees, monthly  administrative  costs and interest.  The discount was
recorded in other expense because it is not reflected in utility cost of service
for regulatory purposes. The discount totaled $6.4 million for 2002. The related
arrangement terminated October 29, 2002.

                                      -30-
<PAGE>

MidAmerican Funding -

Other  income  for  2003 and  2002  includes  $1.8  million  and  $7.9  million,
respectively,  of income from equity method investments. Of the $7.9 million for
2002,  $5.3 million  relates to a distribution of common stock held by a venture
capital fund investment.

Additionally,  other income for 2003 includes $3.1 million of income  related to
the  settlement of a lawsuit.  Other income for 2002 also includes gains of $2.6
million  from the sale of an  investment  in a  communications  company and $0.5
million from the sale of rail cars.

Other expense for  MidAmerican  Funding in 2003 includes  losses of $4.3 million
for the  write-down  of an  impaired  energy  project  and $2.1  million for the
write-off of a receivable  from a venture capital  investment.  Other expense in
2002  includes  write-downs  for impaired  assets and  investments.  MidAmerican
Funding has investments in commercial passenger aircraft, including two aircraft
leased to United Air Lines,  Inc.,  which it accounts for as  leveraged  leases.
Evaluation of these investments  resulted in a $12.6 million write-down in 2002.
Additionally,   MidAmerican  Funding  recorded  a  $5.1  million  loss  for  the
impairment  of an equity  method  investment,  a $2.7  million loss related to a
receivable  from a venture  capital  investment and losses totaling $1.5 million
from impairments on three venture capital fund investments in 2002.

Fixed Charges and Preferred Dividends
-------------------------------------

MidAmerican Energy -

Preferred  dividends of MidAmerican  Energy's  subsidiary trust decreased due to
the reacquisition of all of the related preferred  securities on March 11, 2002.
Dividends for MidAmerican  Energy's  preferred  securities,  which are reflected
after Net Income on MidAmerican Energy's Consolidated  Statements of Operations,
decreased  due  to  preferred  securities  reacquired  in  May  2002.  Preferred
dividends  for 2002 reflect a $0.7 million  loss on  reacquisition  of preferred
securities.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

Earnings Overview
-----------------

MidAmerican Energy -

MidAmerican  Energy's  earnings on common stock improved $24.7 million to $172.9
million  for 2002  compared  to $148.2  million  for 2001.  Significant  factors
contributing to the improvement in earnings were: 1) warmer  temperatures during
the 2002  cooling  season,  2) a reduction  in costs  related to Cooper  Nuclear
Station due to a restructuring of the power purchase contract in August 2002 and
3) an increase in retail gas rates.

MidAmerican Funding -

MidAmerican  Funding's net income for 2002 totaled  $136.7  million  compared to
$103.1 million for 2001. In accordance with SFAS No. 142, MidAmerican  Funding's
goodwill ceased being amortized  effective  January 1, 2002. Net income for 2001
was reduced by $34.4 million for goodwill  amortization.  After  considering the
difference  due to  goodwill  amortization,  net income for 2002  declined  $0.8
million  compared  to 2001.  In  addition  to the  factors  discussed  above for
MidAmerican  Energy,  net income for 2002  reflects  $4.9  million of  after-tax
income related to a gain and interest income from the sale of an investment in a
communications  company,  $17.1  million of after-tax  loss for  impairments  of
investments and $4.0 million of additional income taxes.

                                      -31-

<PAGE>


Regulated Electric Gross Margin
-------------------------------

                                                     2002            2001
                                                   --------        --------
                                                         (In millions)
   Operating revenues........................      $1,353.4        $1,318.1
   Less cost of fuel, energy and capacity....         346.7           275.9
                                                   --------        --------
     Electric gross margin...................      $1,006.7        $1,042.2
                                                   ========        ========

Electric gross margin for 2002 decreased $35.5 million compared to 2001.

Effective  August  1,  2002,  MidAmerican  Energy  and NPPD  restructured  their
contract for Cooper Nuclear Station.  In aggregate,  MidAmerican  Energy's costs
for the Cooper Nuclear Station contract declined $13.0 million for 2002 compared
to  2001.  Refer to the  "Regulated  Electric  Gross  Margin"  section  for 2003
compared  to 2002 for a  discussion  of the  restructuring.  As a result  of the
restructuring,  MidAmerican Energy's costs under the contract are now classified
differently on its statement of operations.  The change in cost  classification,
partially offset by savings from the contract restructuring, resulted in a $33.2
million decrease in electric gross margin compared to 2002.

In addition  to the effect of  restructuring  the  contract  for Cooper  Nuclear
Station, MidAmerican Energy's gross margin on electric wholesale sales decreased
$23.1  million for 2002  compared to 2001.  Lower  margins per unit sold reduced
electric  wholesale  gross  margin by $48.9  million  but were offset by a $25.8
million  improvement  due  to a  21.1%  increase  in  wholesale  sales  volumes.
Wholesale sales are the sales of energy to other utilities,  municipalities  and
marketers inside and outside of MidAmerican Energy's delivery system.

Warmer temperatures in the 2002 cooling season resulted in approximately a $16.0
million  increase in electric margin compared to 2001. Other  electricity  usage
factors,  such as changes due to individual customer  conservation and a variety
of circumstances  affecting  customers  within the MidAmerican  Energy's service
territory,  increased  electric margin by $16.3 million compared to 2001. A 1.0%
increase in the average  number of customers  improved  electric gross margin by
$8.6 million for 2002.  Additionally,  a decrease in fuel costs  related to Iowa
retail electric sales,  excluding the impact of restructuring the Cooper Nuclear
Station contract, increased electric margin by $7.9 million relative to 2001. In
total, retail electric sales volumes increased 3.9% for 2002.

Electric revenues from the recovery of energy efficiency program costs decreased
$14.9  million  compared to 2001.  The decrease in 2002 was due to completion in
the third  quarter  of 2001 of the final  recovery  phase  for  deferred  energy
efficiency  costs.  Deferred  energy  efficiency  costs  were  costs  previously
incurred by MidAmerican Energy,  which, in accordance with rate treatment,  were
not charged to expense until recovery from customers began. Recovery of deferred
energy  efficiency  costs  occurred  over  a  four-year  period  from  the  date
collection  began for each phase. The decrease in recovery of deferred costs was
offset  partially  by an increase in the recovery of current  energy  efficiency
costs.  Changes in these revenues are substantially  matched with  corresponding
changes in other operating expenses.  Approximately $13.9 million of MidAmerican
Energy's  2002  electric  revenues  were from the recovery of energy  efficiency
program costs compared to $28.8 million in 2001.

MidAmerican Energy sells and purchases  electric  capacity.  The net margin from
those  sales and  purchases  decreased  $2.3  million  compared  to 2001.  Also,
MidAmerican  Energy's  gains from sales of emission  allowances  decreased  $3.2
million  in 2002  due to a gain in 2001.  Revenues  from  transmission  services
decreased  $2.5 million  compared to 2001,  and electric  revenues from recovery
mechanisms  related to Cooper Nuclear Station and  manufactured  gas plant costs
decreased $2.6 million.

                                      -32-

<PAGE>

Regulated Gas Gross Margin
--------------------------
                                               2002      2001
                                              ------    ------
                                                (In millions)
              Operating revenues .........    $695.8    $869.1
              Less cost of gas sold ......     482.8     674.9
                                              ------    ------
                Gas gross margin .........    $213.0    $194.2
                                              ======    ======

Gas gross margin for 2002 increased $18.8 million compared to 2001.

Regulated gas revenues  include  purchase gas adjustment  clauses  through which
MidAmerican  Energy is allowed  to recover  the cost of gas sold from its retail
gas utility customers. Consequently, fluctuations in the cost of gas sold do not
affect  gross  margin  or  net  income  because  revenues   reflect   comparable
fluctuations  from  purchase gas  adjustment  clauses.  A 22.9%  decrease in the
per-unit  cost of gas compared to 2001  decreased  revenues and cost of gas sold
for 2002 by approximately  $135.2 million. The remainder of the decrease in cost
of gas  sold  was due to a  decrease  in  volumes  purchased  as a  result  of a
reduction in sales volumes related to sales-for-resale customers.

The following table summarizes the variance in gas operating revenues, including
the impact of the fluctuation in the cost of gas sold (in thousands):

                                                  2002 vs. 2001
                                                  -------------
                   Decrease in cost of gas:
                   Price ........................   $(135.2)
                   Sales volumes ................     (56.9)
                                                    -------
                   Total ........................    (192.1)
                   Increases in retail rates ....      11.5
                   Weather ......................       1.0
                   Weather derivative ...........      (1.3)
                   Customer growth ..............       2.0
                   Other usage factors ..........       5.7
                   Other ........................      (0.1)
                                                    -------
                   Total revenue variance .......   $(173.3)
                                                    =======

The  increases in retail rates  reflects the impact of a portion of several rate
increases  throughout  2002.  On February  20,  2002,  the South  Dakota  Public
Utilities  Commission approved a settlement agreement allowing increased natural
gas rates of $3.1 million annually, effective immediately. On June 12, 2002, the
IUB issued an order  granting an interim rate  increase of  approximately  $13.8
million annually, effective immediately. On November 8, 2002, the IUB approved a
proposed  settlement  agreement  previously filed by MidAmerican  Energy and the
Office of Consumer  Advocate that provides for a final increase of $17.7 million
annually  for  MidAmerican  Energy's  Iowa  retail  natural  gas  customers.  On
September 11, 2002,  MidAmerican Energy received a final order from the Illinois
Commerce  Commission to increase its Illinois  natural gas rates by $2.2 million
annually.  Refer to the "Legislative and Utility Regulatory  Matters" section of
MD&A for comments on the Iowa gas rate settlement.

The  increase  in gas  gross  margin  due to  weather  was the  result of colder
temperature conditions in the second and fourth quarters of 2002 compared to the
same quarters in 2001, offset partially by milder temperature  conditions in the
remainder of 2002.  Other gas usage  factors,  such as changes due to individual
customer  conservation,  reaction  to  prices,  and a variety  of  circumstances
affecting customers within MidAmerican Energy's service territory, increased gas
margin in 2003.  MidAmerican  Energy's  average  number of gas retail  customers
increased  1.2%  compared  to 2001.  Total  natural  gas  retail  sales  volumes
increased 1.3%.

MidAmerican Energy entered into a degree day swap in 2002 to offset a portion of
the financial impact of variations in weather conditions on its delivery margins
for the winter heating  season.  The loss on such weather  derivative  financial
instrument  offset the  increased  delivery  margins  due to colder  temperature
conditions.

                                      -33-
<PAGE>

Regulated Operating Expenses
----------------------------

Regulated  other  operating  expenses  for  2002  decreased  $54.9  million  for
MidAmerican  Energy and $50.8 million for MidAmerican  Funding compared to 2001.
Effective  August  1,  2002,  MidAmerican  Energy  and NPPD  restructured  their
contract for Cooper  Nuclear  Station.  Refer to the  "Regulated  Electric Gross
Margin" section for 2003 compared to 2002 for a discussion of the restructuring.
Accordingly,  as a result of that change,  MidAmerican  Energy's other operating
expenses decreased $46.2 million for 2002 compared to 2001.

Other substantive  decreases in other operating  expenses included $10.4 million
in  energy  efficiency   program  costs,  $6.5  million  in  the  provision  for
uncollectible  accounts  receivable  and $2.5  million  related  to  information
technology.  The decreases were partially  offset by increases  compared to 2001
for pension and other  postretirement  costs,  which  increased  $10.8  million,
health  care costs,  which  increased  $4.2  million,  and Quad  Cities  Station
(nuclear) costs, which increased $3.9 million.

Maintenance  expenses  decreased $2.9 million for 2002 compared to 2001 due to a
$5.6 million decrease in electric distribution  maintenance expenses as a result
of a  reduction  in costs for  tree-trimming  activity.  Fossil-fuel  generation
maintenance expenses increased $1.9 million for 2002.

Depreciation and amortization  expense for 2002 increased $16.7 million compared
to 2001 due to a $13.5  million  increase  in  utility  plant  depreciation  due
principally  to a change in the estimated  useful life of general  utility plant
assets.  In April 2002,  MidAmerican  Energy changed the estimated lives for its
general  utility  plant assets from eleven  years to eight  years,  resulting in
approximately a $10.1 million  increase in depreciation  expense in 2002. A $7.8
million increase related to the establishment of a regulatory  liability for the
electric  revenue sharing  arrangement in Iowa also contributed to the increase.
Refer to the  "Legislative and Utility  Regulatory  Matters" section of MD&A for
further discussion. The increases were partially offset by a gain related to the
restructuring of the Cooper Nuclear Station contract.

Property and other taxes  fluctuated in 2002 and 2001 compared to each preceding
year due primarily to changes in MidAmerican Energy's Iowa property tax assessed
values.

Nonregulated Gross Margin
-------------------------

                                                       2002      2001
                                                      ------    ------
                                                        (In millions)
          MidAmerican Energy -
          Nonregulated operating revenues ........    $186.9    $180.0
          Less nonregulated cost of sales ........     158.5     154.4
                                                      ------    ------
          Nonregulated gross margin ..............    $ 28.4    $ 25.6
                                                      ======    ======

          MidAmerican Funding Consolidated -
          Nonregulated operating revenues ........    $191.6    $201.4
          Less nonregulated cost of sales ........     159.4     170.5
                                                      ------    ------
          Nonregulated gross margin ..............    $ 32.2    $ 30.9
                                                      ======    ======
                                      -34-

<PAGE>

MidAmerican Energy -

MidAmerican  Energy's  nonregulated gross margin for 2002 increased $2.8 million
compared to 2001. The following  table  presents the margins  related to various
nonregulated activities (in millions):

                                                     2002     2001
                                                     ----     ----
         Nonregulated retail electric ..........    $11.4    $ 4.6
         Nonregulated retail gas ...............      2.7      2.0
         Incentive gas supply procurement
         program award .........................      3.4      4.1
         Income sharing arrangements under
         regulated gas tariffs .................      3.1      4.4
         Wholesale gas and electric ............      3.3      6.9
         Other .................................      4.5      3.6
                                                    -----    -----
                                                    $28.4    $25.6
                                                    =====    =====

All electric retail  customers in Illinois,  except for those served by electric
cooperatives  and  municipalities,  are allowed to select their  electric  power
supplier.  The  improvement  in gross  margin  was due to an  increase  in sales
volumes as a result of the addition of  customers  and an increase in margin per
unit sold as a result of decreases  in the related cost of energy.  Nonregulated
electric retail revenues increased $29.7 million to $63.1 million for 2002 while
cost of sales increased $22.1 million to $51.7 million.

Gross margin for MidAmerican Energy's nonregulated retail natural gas operations
increased $0.7 million to $2.7 million for 2002. The improvement in gross margin
reflects a 19.8%  increase in margin per unit sold and a 12.0% increase in sales
volumes.  Revenues from  nonregulated  retail natural gas  operations  decreased
$11.8 million to $106.9  million for 2002 due to a decrease in the average price
per unit sold,  reflective  of a 20.3%  decrease in the average cost of gas. The
decrease  due to average  price was  partially  offset by the  increase in sales
volumes.  Related  nonregulated  cost of gas  decreased  $12.5 million to $104.2
million for 2002.

Nonregulated revenues include earnings from sharing arrangements under regulated
natural gas  tariffs.  MidAmerican  Energy also has  incentive  gas  procurement
programs,  such  that  if  MidAmerican  Energy's  cost  of gas  varies  from  an
established  reference  price range,  then the savings or cost is shared between
customers and shareholders.  Earnings from the sharing arrangements totaled $6.5
million for 2002 and $8.5 million for 2001.

Nonregulated  revenues for 2001 include $6.2 million from  MidAmerican  Energy's
market access service project.  Related cost of sales totaled $5.4 million.  The
pilot project,  which concluded in May 2001,  allowed larger Iowa customers that
were participating in the project to choose their electric power supplier.

Nonregulated Operating Expenses: Other
--------------------------------------

MidAmerican Funding -

MidAmerican  Funding's  nonregulated  other  operating  expenses,  exclusive  of
MidAmerican  Energy amounts,  decreased $34.1 million for 2002 compared to 2001.
MidAmerican  Funding's  goodwill is no longer being amortized as a result of the
adoption  of SFAS No.  142 on  January  1,  2002.  Amortization  of  MidAmerican
Funding's goodwill totaled $34.4 million for 2001.

                                      -35-

<PAGE>

Interest and Dividend Income
----------------------------

MidAmerican Energy -

Interest and dividend  income  decreased  $4.2 million for 2002 compared to 2001
due to a  $5.9  million  reduction  in  interest  income  on a  note  receivable
associated  with  MidAmerican  Energy's  accounts  receivable  sold. The related
agreement  terminated  on October  29,  2002.  A more  favorable  cash  position
increased interest income on short-term  investments compared to 2001, partially
offsetting the decrease in interest income on the note receivable.  The improved
cash  position was due  principally  to the issuance of $400 million of notes in
February 2002.

MidAmerican Funding -

Excluding MidAmerican Energy,  interest income for MidAmerican Funding increased
$2.0 million for 2002 compared to 2001.  Interest  income for 2002 includes $5.0
million from the settlement of an investment in a communications company but was
partially  offset by a $2.6 million  decrease in interest income related to note
receivables  with MidAmerican  Funding's  parent company.  Refer to Note (16) of
Notes to  Consolidated  Financial  Statements  in Item 8 of this Form 10-K for a
discussion of the notes with the parent company.

Dividend  income  decreased in 2002 and 2001 compared to each preceding year due
to the on-going liquidation of the preferred stock investment portfolio.

Marketable Securities Gains and Losses, Net
-------------------------------------------

MidAmerican Funding -

Net losses on marketable  securities increased $4.0 million for 2002 compared to
2001. In 2002,  MidAmerican  Funding  recorded  losses totaling $4.3 million for
other-than-temporary   declines   in   its   available-for-sale   common   stock
investments.  Additionally, other losses on marketable securities increased $2.0
million in 2002. The first quarter of 2001 includes a $2.4 million  pre-tax loss
related to the  re-characterization  of  marketable  securities  to "trading" as
allowed by SFAS No. 133, thus increasing 2002 income relative to 2001.

Other Income and Expense
------------------------

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 FERC. Accordingly,  other income for the capitalized
allowance on equity funds used during construction  totaled $8.6 million in 2002
and $1.6 million in 2001.  MidAmerican Energy  anticipates  recording income for
the  allowance  on equity funds used during  construction  over the next several
years while the announced generating plants are constructed.

Other  income  includes  net  earnings  related to the cash  surrender  value of
corporate-owned  life insurance  policies.  Such income totaled $1.3 million and
$5.3  million for 2002 and 2001,  respectively.  The income for 2001  includes a
gain from common stock  received as a result of an initial stock  offering by an
insurance provider.

Other income  includes  income from a fee charged to MidAmerican  Energy Funding
Corporation for servicing MidAmerican Energy's accounts receivable sold to them.
Subservicer  fee income totaled $1.3 million and $2.9 million for 2002 and 2001,
respectively.  Likewise,  other  expense  includes a discount  on sold  accounts
receivable. The discount is designed to cover the expenses of MidAmerican Energy
Funding  Corporation,  including bad debt  expense,  subservicer  fees,  monthly
administrative  costs and interest.  The discount totaled $6.4 million and $16.0
million  for 2002 and 2001,  respectively.  The related  arrangement  terminated
October 29, 2002.

                                      -36-
<PAGE>

MidAmerican Funding -

Other income of  MidAmerican  Funding  includes $7.9 million and $5.1 million of
income from equity method  investments  in 2002 and 2001,  respectively.  Equity
income for 2002  includes  $5.3 million of income for a  distribution  of common
stock held by a venture capital fund investment. In 2001, equity income includes
$2.3  million  related  to a gain on a  common  stock  distribution  from one of
MidAmerican Funding's venture capital fund investments.

Other  income  for 2002  also  includes  a $2.6  million  gain on the sale of an
investment  in a  communications  company and $0.5 million from the sale of rail
cars.

Other expense for MidAmerican Funding in 2002 includes  write-downs for impaired
assets and  investments.  MidAmerican  Funding  has  investments  in  commercial
passenger  aircraft,  including two leased to United Air Lines,  Inc.,  which it
accounts for as leveraged leases.  Evaluation of these investments resulted in a
$12.6 million pre-tax write-down.  Additionally,  MidAmerican Funding recorded a
$5.1 million loss for the  impairment  of an equity  method  investment,  a $2.7
million loss  related to a  receivable  from a venture  capital  investment  and
losses  totaling $1.5 million from  impairments  on three  venture  capital fund
investments.

Fixed Charges and Preferred Dividends
-------------------------------------

MidAmerican Energy -

The increase in interest on long-term  debt for 2002 compared to 2001 was due to
the  issuance of $400  million of notes in February  2002,  net of the impact of
debt maturities in 2001 and lower variable interest rates in 2002.

Other interest  expense  decreased for 2002 compared to 2001 due  principally to
interest in 2001 related to income tax assessments. Additionally, other interest
expense decreased due to a reduction in short-term debt outstanding.

Preferred  dividends of MidAmerican  Energy's subsidiary trust decreased in 2002
due to the reacquisition of all of the related preferred securities on March 11,
2002.  Dividends  for  MidAmerican  Energy's  preferred  securities,  which  are
reflected after Net Income on MidAmerican  Energy's  Consolidated  Statements of
Operations, decreased due to preferred securities reacquired in May and November
2001 and May 2002.

                                      -37-

<PAGE>

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 $441.3 million, $352.8 million and
$478.8 million for 2003, 2002 and 2001, respectively.  MidAmerican Funding's net
cash provided by operating  activities  was $416.7  million,  $365.6 million and
$461.0 million for 2003, 2002 and 2001, respectively.

Utility Construction Expenditures
---------------------------------

MidAmerican   Energy's   primary  need  for  capital  is  utility   construction
expenditures.   For  2003,  utility  construction  expenditures  totaled  $376.2
million,  including allowance for funds used during construction and Quad Cities
Station nuclear fuel purchases.

Forecasted utility construction expenditures, including allowance for funds used
during  construction,  are $844 million for 2004. 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 two electric generating projects in Iowa and is developing a third.
Upon  completion,   the  projects  will  provide  service  to  regulated  retail
electricity  customers.  MidAmerican Energy has obtained  regulatory approval to
include  the actual  costs of the  generation  projects in its Iowa rate base as
long as actual  costs do not  exceed an agreed cap 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 needed for regulated retail service.  MidAmerican Energy
expects to invest  approximately  $1.4 billion in the three  projects,  of which
approximately $314 million has been invested through December 31, 2003.

The first project is a natural  gas-fired  combined cycle unit with an estimated
cost of $357 million,  excluding  allowance for funds used during  construction.
MidAmerican Energy will own and operate the plant.  Commercial  operation of the
simple  cycle mode began on May 5, 2003.  The plant,  which will  continue to be
operated in simple cycle mode during 2004,  resulted in 327 megawatts  ("MW") of
accredited  capacity in the summer of 2003.  The  combined  cycle  operation  is
expected  to  commence  in  December  2004 and  achieve an  expected  additional
accredited capacity of 190 MW.

The second project is currently under  construction  and will be a 790-MW (based
on expected  accreditation)  super-critical-temperature,  low-sulfur  coal-fired
plant. MidAmerican Energy will operate the plant and hold an undivided ownership
interest as a tenant in common with the other  owners of the plant.  MidAmerican
Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican
Energy   expects  its  share  of  the  estimated  cost  of  the  project  to  be
approximately   $713  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 May 29, 2003,  the IUB issued an order that approves the  ratemaking
principles for the plant,  and on June 27, 2003,  MidAmerican  Energy received a
certificate from the IUB allowing  MidAmerican Energy to construct the plant. On
February  12, 2003,  MidAmerican  Energy  executed a contract  with Mitsui & Co.
Energy  Development,  Inc. for the 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.  MidAmerican
Energy is also  seeking  an order  from the IUB  approving  construction  of the
associated transmission facilities.

                                      -38-
<PAGE>

The third project is currently under  development and is comprised of wind power
facilities  totaling 310 MW based on the nameplate rating.  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 53 MW. If
constructed, MidAmerican Energy will own and operate these facilities, which are
expected  to cost  approximately  $323  million.  MidAmerican  Energy's  plan to
construct the wind project is in  conjunction  with a settlement  agreement that
extends through  December 31, 2010, an Iowa retail electric rate freeze that was
previously  scheduled to expire at the end of 2005.  The  settlement  agreement,
which was filed with the IUB as part of  MidAmerican  Energy's  application  for
ratemaking  principles for the wind project,  was approved by the IUB on October
17, 2003. The obligation of MidAmerican Energy to construct the wind project may
be  terminated  by  MidAmerican  Energy if the  Federal  production  tax  credit
applicable to the wind energy facilities is not available at a rate of 1.8 cents
per kWh for a period of at least ten years after the facilities begin generating
electricity.  The  production  tax credit is available  only to wind  facilities
placed in service before January 1, 2004.  MidAmerican  Energy has also received
authorization  from the IUB to construct the wind power project.  If MidAmerican
Energy does not  construct the wind power  facilities by December 31, 2007,  the
rate extension from January 1, 2006,  through  December 31, 2010, may terminate.
Refer to the "Rate Matters" discussion below for more information  regarding the
rate aspects of the settlement.

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 external
trusts established for the investment of funds for  decommissioning  Quad Cities
Station.  Approximately  65% 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.  The following table  summarizes as of December 31,
2003,  the material  cash  obligations  of  MidAmerican  Energy and  MidAmerican
Funding (in millions).
<TABLE>
<CAPTION>

                                                     Period Payments are Due
                                         --------------------------------------------------
                                                                2005-     2007-     After
Type of Obligation                         Total      2004      2006      2008      2008
------------------                       --------    ------    ------    ------    --------
<S>                                      <C>         <C>       <C>       <C>       <C>
MidAmerican Energy:
Long-term debt, excluding unamortized
  debt premium and discount, net ....    $1,134.1    $ 56.1    $251.6    $  2.0    $  824.4
Operating leases (1) ................        25.4       7.2       9.8       6.1         2.3
Coal, electricity and natural gas
  contract commitments (1) ..........       602.9     188.8     204.5     101.2       108.4
                                         --------    ------    ------    ------    --------
  Total .............................     1,762.4     252.1     465.9     109.3       935.1

MidAmerican Funding parent:
Long-term debt ......................       700.0         -         -         -       700.0
                                         --------    ------    ------    ------    --------
  Total .............................    $2,462.4    $252.1    $465.9    $109.3    $1,635.1
                                         ========    ======    ======    ======    ========
</TABLE>

(1)  The operating  leases and coal,  energy and natural gas commitments are not
     reflected on the Consolidated Balance Sheets. Refer to Note (4)(f) in Notes
     to  Consolidated  Financial  Statements  in Item 8 of this  Form 10-K for a
     discussion of the nature of these commitments.

                                      -39-
<PAGE>

MidAmerican Energy has other types of commitments that are subject to change and
relate primarily to the items listed below. For additional  information,  refer,
where  applicable,  to the respective  referenced  note in Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.

     -    Construction   expenditures:   Refer  to  the  "Utility   Construction
          Expenditures"  section above.

     -    Manufactured gas plant facilities (see Note (4)(a))

     -    Nuclear decommissioning costs (see Note (4)(d))

     -    Residual guarantees on operating leases (see Note (4)(g))

Debt Authorizations and Credit Facilities
-----------------------------------------

MidAmerican  Energy has authority from the FERC to issue through April 14, 2005,
short-term debt in the form of commercial paper and bank notes  aggregating $500
million.  MidAmerican  Energy currently has in place a $370.4 million  revolving
credit facility that supports its $250 million  commercial paper program and its
variable  rate  pollution  control  revenue  obligations.  The facility  expires
January 13, 2005.

MidAmerican  Energy  has on file with the  Securities  and  Exchange  Commission
registration  statements  providing  for the issuance of $880 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 million through November 30, 2004, and $455
million for December 1, 2004 through November 30, 2005. 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  is  required  to  obtain  authorization  from the  Illinois
Commerce  Commission ("ICC") prior to issuing any securities.  If 90% or more of
the proceeds  from a  securities  issuance  are used for  refinancing  purposes,
MidAmerican  Energy need only provide the ICC with an "informational  statement"
prior to the issuance which sets forth the type,  amount and use of the proceeds
of the  securities  to be issued.  If less than 90% of the proceeds are used for
refinancing,  MidAmerican Energy must file a comprehensive  application  seeking
authorization  prior to issuance.  The ICC is required to hold a hearing  before
issuing its  authorization.  MidAmerican Energy currently has authority from the
ICC to issue up to $895 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.

Debt Issuances and Redemptions
------------------------------

On  January  14,  2003,   MidAmerican  Energy  issued  $275  million  of  5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.

On February 10, 2003,  MidAmerican Energy redeemed all $75 million of its 7.375%
series of mortgage  bonds,  and on March 17, 2003, it redeemed all $6.94 million
of its 7.45% series of mortgage bonds. Additionally, MidAmerican Energy's 7.125%
series of mortgage bonds  totaling $100 million  matured on February 3, 2003. On

                                      -40-

<PAGE>

October 17, 2003,  MidAmerican  Energy  redeemed all $12.5  million of its 6.95%
series of mortgage bonds at 103.48% of the principal amount.

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 December 31, 2003,
MidAmerican  Energy's  estimated  potential   collateral   requirements  totaled
approximately $89 million.  MidAmerican  Energy's collateral  requirements could
fluctuate  considerably due to seasonality,  market price volatility,  a loss of
key MidAmerican Energy generating facilities or other related factors.

LEGISLATIVE AND UTILITY REGULATORY MATTERS

Electric Deregulation
---------------------

Under  Illinois law, as of December 31, 2000, all  non-residential  customers in
Illinois  are allowed to select  their  provider of  electric  supply  services.
Residential  customers  all received the  opportunity  to select their  electric
supplier beginning May 1, 2002.

In Iowa and elsewhere,  the pace of  deregulation  has slowed  considerably as a
result of the energy crisis and related events in California  beginning in 2000.
These and other events have heightened concerns nationally about deregulation of
the electric utility industry.

Rate Matters
------------

Under two settlement  agreements approved by the IUB,  MidAmerican Energy's Iowa
retail  electric  rates in effect on December 31, 2000, are  effectively  frozen
through  December 31, 2010. The  settlement  agreements  specifically  allow the
filing of electric rate design or cost of service rate changes that are intended
to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but
could result in changes to individual  tariffs.  The settlement  agreements also
each  provide that  portions of revenues  associated  with Iowa retail  electric

                                      -41-
<PAGE>

returns on equity  within  specified  ranges will be  recorded  as a  regulatory
liability to be used to offset a portion of the cost to Iowa customers of future
generating plant investment.

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 a
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.  An  amount  equal to the  regulatory
liability is recorded as a regulatory  charge in depreciation  and  amortization
expense when the liability is accrued.  Future depreciation will be reduced as a
result of the credit  applied to  generating  plant  balances as the  regulatory
liability is reduced.  The liability is being reduced as it is credited  against
plant in  service  in  amounts  equal to the  allowance  for funds  used  during
construction  associated with generating  plant  additions.  Interest expense is
accrued on the portion of the regulatory liability related to prior years. As of
December 31, 2003 and 2002, the related  regulatory  liability  reflected on the
Consolidated Balance Sheets was $144.4 million and $102.9 million, respectively.

The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any  consecutive  12-month  period after  January 1,
2006,  MidAmerican  Energy  may seek to file for a  general  increase  in rates.
However, prior to filing for a general increase in rates,  MidAmerican Energy is
required  by  the  settlement  agreement  to  conduct  30  days  of  good  faith
negotiations with all of the signatories to the settlement  agreement to attempt
to avoid a general increase in rates.

Illinois  bundled  electric  rates are  frozen  until  2007,  subject to certain
exceptions  allowing for  increases,  at which time bundled rates are subject to
cost-based  ratemaking.  Illinois law provides  for  Illinois  earnings  above a
computed level of return on common equity 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 2003 was
13.73%.  The law allows  MidAmerican  Energy to mitigate the sharing of earnings
above the threshold  return on common  equity  through  accelerated  recovery of
electric assets.

Transmission Developments
-------------------------

The Federal Energy  Regulatory  Commission  (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.

In  response  to Order No.  2000,  MidAmerican  Energy and five  other  electric
utilities applied for FERC approval to create TRANSLink Transmission Company LLC
("TRANSLink") as a for-profit independent transmission company to be operated in
conjunction  with a  FERC-approved  RTO. The FERC approved that  application  in
April  2002.  In June  2003,  the IUB issued an order  disapproving  MidAmerican
Energy's  application  for state  regulatory  approval of  MidAmerican  Energy's
participation  in  TRANSLink  and  inviting  MidAmerican  Energy to  refile  the
application  once certain  issues at the federal  level have been  resolved.  On
November 21, 2003, in response to continued  regulatory  uncertainty,  TRANSLink
suspended its operations and dissolved its interim management team.  MidAmerican
Energy is currently  evaluating options relating to its transmission  options in
light of TRANSLink's current status.

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

                                      -42-
<PAGE>

unclear  when or even  whether  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.  Legislation that is currently pending in Congress would forbid the
FERC from  implementing  the SMD rule for several  years,  but it is not certain
whether that legislation  will be adopted.  Any final rule on SMD may impact the
costs of MidAmerican  Energy's  electricity and transmission  products.  A final
rule on SMD could directly or indirectly influence how transmission services are
priced, the availability of transmission services, and how transmission services
are obtained.  In addition,  the rule could affect 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.   MidAmerican  Energy
recognizes  there is  considerable  uncertainty  as to the timing and outcome of
this  rulemaking and will continue to evaluate the status of the adoption of SMD
for  the  wholesale   markets.   Transferring  the  operations  and  control  of
MidAmerican Energy's  transmission assets to other entities could increase costs
for MidAmerican  Energy;  however,  the actual effect of any such transaction on
MidAmerican Energy's future transmission costs, or alternate RTO strategies,  is
not yet known.

ENVIRONMENTAL MATTERS

The  U.S.  Environmental  Protection  Agency  ("EPA")  and  state  environmental
agencies have determined that  contaminated  wastes remaining at  decommissioned
manufactured  gas plant facilities may pose a threat to the public health or the
environment if these contaminants are in sufficient quantities and at sufficient
concentrations as to warrant remedial action.

MidAmerican  Energy has evaluated or is  evaluating 27 properties  that were, at
one time,  sites of gas  manufacturing  plants in which it may be a  potentially
responsible  party.  The purpose of these  evaluations  is to determine  whether
waste materials are present,  whether the materials  constitute an environmental
or health  risk,  and  whether  MidAmerican  Energy has any  responsibility  for
remedial  action.  As of December  31, 2003,  MidAmerican  Energy has recorded a
$14.0 million liability for these sites and a corresponding regulatory asset for
future recovery through the regulatory process. Refer to Note (4)(a) of Notes to
Consolidated  Financial  Statements  in Item 8 of this  Form  10-K  for  further
discussion  of  MidAmerican   Energy's   environmental   activities  related  to
manufactured gas plant sites and cost recovery.

Although the timing of potential  incurred  costs and recovery of costs in rates
may affect the results of operations in individual periods,  management believes
that the  outcome of these  issues  will not have a material  adverse  effect on
MidAmerican Energy's financial position or results of operations.

MidAmerican Energy's generating  facilities are subject to applicable provisions
of the Clean Air Act and related air quality  standards  promulgated by the EPA.
The Clean Air Act provides the framework for regulation of certain air emissions
and permitting  and  monitoring  associated  with those  emissions.  MidAmerican
Energy is believes it is in material compliance with current regulations.  Refer
to Note (4)(b) of Notes to Consolidated  Financial  Statements in Item 8 of this
Form 10-K for further discussion of air quality standards affecting  MidAmerican
Energy.

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,  surpassing the
previous  record  of  3,889  MW  set  in  July  2002.   MidAmerican   Energy  is
interconnected  with  Iowa  and  neighboring  utilities  and is  involved  in an
electric  power  pooling  agreement  known  as  Mid-Continent  Area  Power  Pool
("MAPP"). Each MAPP participant is required to maintain for emergency purposes a
net generating  capability reserve of at least 15% above its system peak demand.
For the 2003 cooling season,  MidAmerican Energy's reserve was approximately 22%
above its system peak demand.

MidAmerican  Energy believes it has adequate  electric  capacity reserve through
2004 and  continues  to manage its  generating  resources  to ensure an adequate
reserve in the future. However,  significantly  higher-than-normal

                                      -43-
<PAGE>

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
MAPP.

MidAmerican Energy is financially exposed to movements in energy prices since it
no longer recovers 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.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003,  MidAmerican Energy adopted SFAS No. 143, "Accounting for Asset
Retirement  Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal  obligations  associated with the retirement of long-lived  assets that
result from the  acquisition,  construction,  development or normal operation of
such assets.  Concurrent  with the  recognition of the liability,  the estimated
cost of an asset  retirement  obligation is capitalized and depreciated over the
remaining life of the asset.

On  January  1,  2003,  MidAmerican  Energy  recorded  $275.2  million  of asset
retirement  obligation  ("ARO")  liabilities;  $12.6 million of  associated  ARO
assets,  net of accumulated  depreciation;  $101.8 million of regulatory assets;
and reclassified  $1.0 million of accumulated  depreciation to the ARO liability
in conjunction  with adoption of SFAS No. 143.  Adoption of SFAS No. 143 did not
impact net income. The initial ARO liability  recognized includes $266.5 million
that pertains to obligations  associated  with the  decommissioning  of the Quad
Cities   Station.   The  $266.5  million   includes  a  $159.8  million  nuclear
decommissioning  liability that had been recorded as of December 31, 2002. As of
December  31,  2003,  $184.2  million of assets  reflected  in  Investments  and
Nonregulated  Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.

The change in the  balance of the ARO  liability  during 2003 is  summarized  as
follows (in thousands):

        Balance January 1, 2003 ..........................    $ 275,228
        Revision to nuclear decommissioning ARO liability.      (21,902)
        Capitalized accretion ............................       15,798
                                                              ---------
        Balance December 31, 2003 ........................    $ 269,124
                                                              =========

The revision to the nuclear decommissioning ARO liability was due to the results
of  a  decommissioning  study  in  2003.  Accretion  on  the  ARO  liability  is
capitalized  as  a  regulatory  asset.  In  addition  to  the  ARO  liabilities,
MidAmerican  Energy has accrued for the cost of removing  other electric and gas
assets through its  depreciation  rates, in accordance with accepted  regulatory
practices.  The accrual was previously included in accumulated  depreciation but
is  currently  reflected  as a  regulatory  liability  in  conjunction  with the
adoption of SFAS No. 143. As of December 31, 2003, the estimated  amount of such
accruals  included in regulatory  liabilities was  approximately  $408.6 million
based on the cost of removal component in current depreciation rates.

The ARO  liability,  computed  on a pro forma  basis as if SFAS No. 143 had been
applied  during  each of the periods  presented  in the  consolidated  financial
statements, would have been as follows (in thousands):

                   As of January 1, 2001 ........    $249,694
                   As of December 31, 2001 ......     262,035
                   As of December 31, 2002 ......     275,228

On April 30, 2003, the FASB issued SFAS No. 149,  "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No. 133
for derivative instruments, including certain derivative instruments embedded in
other  contracts and for hedging  activities.  SFAS No. 149 also amends  certain
other  existing   pronouncements   and  requires   contracts   with   comparable
characteristics  to be accounted for

                                      -44-
<PAGE>

similarly.  The most  significant  impact  of  adopting  SFAS  No.  149 was that
MidAmerican  Energy's contracts for the sale or purchase of electric energy that
are not considered  capacity contracts are no longer afforded "normal" treatment
and must be marked to market.  SFAS No. 149 was effective for MidAmerican Energy
and  MidAmerican  Funding for contracts  entered into or modified after June 30,
2003.  Adoption of SFAS No. 149 did not have a material effect on the results of
operations,   financial  position  or  cash  flows  of  MidAmerican  Energy  and
MidAmerican Funding.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

MidAmerican Energy's and MidAmerican Funding's  significant  accounting policies
are described in Note (1) of Notes to Consolidated Financial Statements later in
Item 8 of this Form 10-K.

Accounting for Regulated Entities
---------------------------------

MidAmerican  Funding's and MidAmerican  Energy's most critical accounting policy
is the application of Statement of Financial  Accounting  Standards ("SFAS") No.
71,  "Accounting for the Effects of Certain Types of Regulation," at MidAmerican
Energy.  A possible  consequence of deregulation in the utility industry is that
SFAS No. 71 may no longer apply.  SFAS No. 71 sets forth  accounting  principles
for operations that are regulated and meet the stated  criteria.  For operations
that meet the criteria,  SFAS No. 71 requires,  among other things, the deferral
of  expense  or  income  that  would  otherwise  be  recognized  when  incurred.
MidAmerican  Energy's  electric and gas utility  operations  currently  meet the
criteria  required  by SFAS  No.  71,  but  its  applicability  is  periodically
reexamined. If portions of its utility operations no longer meet the criteria of
SFAS No. 71,  MidAmerican  Energy  could be  required  to write off the  related
regulatory  assets and liabilities  from its balance sheet, and thus, a material
adjustment to earnings in that period could result if regulatory  assets are not
recovered in transition provisions of any deregulation legislation.

Revenue Recognition
-------------------

Revenues are recorded as services are rendered to customers.  MidAmerican Energy
records  unbilled  revenues  representing the estimated amount customers will be
billed for services  rendered  between the  meter-reading  dates in a particular
month and the end of that month. The unbilled  revenues  estimate is reversed in
the following  month. To the extent the estimated amount differs from the amount
subsequently billed,  revenues will be affected.  At December 31, 2003 and 2002,
$61.5 million and $55.1 million, respectively, of unbilled revenues are included
in accounts receivable.

Excess of Cost Over Fair Value of Assets Acquired
-------------------------------------------------

MidAmerican  Funding's  excess of cost over fair  value of assets  acquired,  or
goodwill,  must be evaluated annually in accordance with SFAS No. 142, "Goodwill
and Other  Intangible  Assets,"  to  determine  if the  carrying  value might be
impaired.  Determination  of the fair  values  of the  related  reporting  units
involves  substantial  estimates,  as ready markets are not available for all of
the involved assets and  liabilities.  Accordingly,  a change in the assumptions
and/or  estimates used in the  determination of the fair values of the reporting
units  could  significantly  affect  the  outcome,   possibly  resulting  in  an
impairment of related goodwill.

Contingent Liabilities
----------------------

MidAmerican Funding  establishes  reserves for estimated loss contingencies when
it is management's assessment that a loss is probable and the amount of the loss
can be reasonably estimated. Revisions to contingent liabilities are recorded in
the period in which different facts or information become known or circumstances
change that affect the previous  assumptions  with respect to the  likelihood or
amount of loss. Reserves for contingent liabilities and subsequent revisions are
reflected in income when the reserves or revisions are recorded or as regulatory
treatment  dictates.   Reserves  for  contingent   liabilities  are  based  upon
management's  assumptions and estimates,  advice of legal counsel or other third
parties regarding the probable outcomes of the matter. Should the

                                      -45-
<PAGE>

outcome differ from the  assumptions  and estimates,  revisions to the estimated
reserves for contingent liabilities would be required.

Accrued Pension and Postretirement Expense
------------------------------------------

Pension  and  postretirement  costs are  accrued  throughout  the year  based on
results of an annual study performed by external  actuaries.  In addition to the
benefits granted to employees, the timing of the cost of these plans is impacted
by  assumptions  used  by  the  actuaries,  including  assumptions  provided  by
MidAmerican Energy for the discount rate and long-term rate of return on assets.
Both of these factors  require  estimates and  projections by management and can
fluctuate  from  period to period.  Actual  returns on assets are  significantly
affected by stock and bond markets,  over which  management has little  control.
The  interest  rate at which  projected  benefits are  discounted  significantly
affects amounts expensed.  If management  increased the assumed discount rate by
1%,  pension and  postretirement  costs for 2003 would have  decreased  by $10.9
million.  Refer to Note (11) of Notes to Consolidated Financial Statements later
in Item 8 of this Form 10-K for disclosures about MidAmerican  Energy retirement
plans and costs.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MidAmerican  Funding,  including  MidAmerican  Energy, is exposed to loss of net
income, cash flows and asset values due to market risk, including: 1) changes in
the market price of gas and electricity  used in its regulated and  nonregulated
businesses,  2)  changes  in the  value of open  positions  in its  nonregulated
trading  operations,  3) variations in the severity of weather  conditions  from
normal,  and 4)  changes  in  interest  rates.  See  also  Note  (9) of Notes to
Consolidated  Financial  Statements in Item 8 of this Form 10-K for a discussion
of MidAmerican  Funding's and MidAmerican  Energy's exposures to credit risk. To
manage  these  exposures,  MidAmerican  Energy  enters  into  various  financial
derivative  instruments,  including futures,  over-the-counter swaps and forward
physical contracts. Senior management provides the overall direction, structure,
conduct  and  control  of  MidAmerican  Energy's  risk  management   activities,
including  authorization  and  communication  of risk  management  policies  and
procedures,  the use of  financial  derivative  instruments,  strategic  hedging
program  guidelines,  appropriate market and credit risk limits, and appropriate
systems for recording, monitoring and reporting the results of transactional and
risk management activities.

                                      -46-

<PAGE>


As of December 31, 2003, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in thousands):

                                                       Maturity in  Maturity in
     Contract Type                            2004       2005-07       Total
     -------------                          --------   -----------  -----------
Non-trading:
  Regulated electric assets ..............  $  5,924    $   217     $  6,141
  Regulated electric (liabilities) .......   (14,275)         -      (14,275)
  Regulated gas assets ...................     9,008          -        9,008
  Regulated weather (liabilities) ........    (1,775)         -       (1,775)
  Nonregulated electric assets ...........     2,953      1,676        4,629
  Nonregulated electric (liabilities) ....    (1,711)    (1,131)      (2,842)
  Nonregulated gas assets ................    11,498        798       12,296
  Nonregulated gas (liabilities) .........   (11,867)      (739)     (12,606)
                                            --------    -------     --------
       Total .............................      (245)       821          576
                                            --------    -------     --------

Trading:
  Nonregulated gas assets ................       389        247          636
  Nonregulated gas (liabilities) .........      (419)         -         (419)
                                            --------    -------     --------
       Total .............................       (30)       247          217
                                            --------    -------     --------

  Total MidAmerican Energy assets ........  $ 29,772    $ 2,938     $ 32,710
                                            ========    =======     ========
  Total MidAmerican Energy (liabilities) .  $(30,047)   $(1,870)    $(31,917)
                                            ========    =======     ========

Commodity Price Risk
--------------------

Under the current regulatory framework, MidAmerican Energy is allowed to recover
its cost of gas from all of its regulated gas customers  through a purchased gas
adjustment  clause  included in revenues.  Because the  majority of  MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly  market index,  MidAmerican  Energy's  regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.

MidAmerican  Energy uses  natural  gas  futures,  options  and  over-the-counter
agreements  to  mitigate  a portion of the market  price  risk  retained  by its
regulated gas customers  through the purchased gas  adjustment  clause.  The net
amounts of realized and unrealized gains and losses on swap agreements,  futures
and options  contracts  are  included in the cost of gas sold and  recovered  in
revenues from regulated gas  customers.  Accordingly,  net  unrealized  gains or
losses on these derivative  positions are recorded as regulatory  liabilities or
assets.

MidAmerican  Energy is exposed to variations in the price of fuel for generation
and the price of purchased power.  Fuel price risk is mitigated through physical
and financial forward contracts. Under typical operating conditions, MidAmerican
Energy has sufficient  generation to supply its regulated retail electric needs.
MidAmerican  Energy may incur a loss as a result of having to pay  higher  costs
for electric  power than it is permitted  to recover  from its  customers  under
current  electric  rates.  Forward  electricity  purchase  and  sales  contracts
utilized for regulated  purposes are marked to market with net unrealized  gains
and losses recorded as regulatory liabilities or assets.

MidAmerican  Energy also  derives  revenues  from  nonregulated  retail sales of
natural gas and  electricity to commercial  and  industrial  end users.  Pricing
provisions  are  individually  negotiated  with these  customers and may include
fixed prices, prices based on a daily or monthly market index or prices based on
MidAmerican  Energy's actual costs.  MidAmerican  Energy enters into natural gas
futures,  options and swap agreements to hedge gas commodity prices for physical
delivery to  nonregulated  customers.  Forward  physical  supply  contracts  are
generally  entered  into in close  proximity  to entering  into retail  electric
contracts  to  offset  the  impact  of  variances  in  electricity  prices.  All
nonregulated  retail electric contracts are considered  "normal" sales and gains
and losses on such contracts are recognized when settled. All other nonregulated
gas and electric contracts are recorded at fair value.

                                      -47-
<PAGE>

Derivative  instruments are used for two types of economic  hedges.  Hedges that
offset the  variability  in earnings and cash flows related to firm  commitments
are referred to as fair value  hedges.  Realized  gains and losses on fair value
hedges are recognized in income as operating  revenues and cost of fuel,  energy
and capacity, respectively,  depending upon the nature of the item being hedged.
Hedges  that  offset the  variability  in  earnings  and cash  flows  related to
forecasted  transactions  are referred to as cash flow hedges.  Beginning in the
fourth quarter of 2003, net unrealized  gains and losses on all hedges  utilized
for  regulated  purposes  are  recorded  as  regulatory  assets or  liabilities.
Unrealized  gains or losses on cash flow hedges used for  nonregulated  purposes
are recorded as other comprehensive  income and reflected in net income when the
forecasted  transaction  is  realized.  Realized  gains and  losses on cash flow
hedges are  recognized  in income as either  operating  revenues;  cost of fuel,
energy  and  capacity;  or cost of gas sold,  depending  upon the  nature of the
physical transaction being hedged.

During the twelve months beginning  January 1, 2004, it is anticipated that $5.3
million of the net deferred unrealized gains/losses on cash flow hedges recorded
in regulatory  liabilities/assets and $59,000 of accumulated other comprehensive
income on  nonregulated  cash flow  hedges  will be  realized  and  recorded  in
earnings  as the hedged  transactions  settle.  MidAmerican  Energy has hedged a
portion  of its  exposure  to the  variability  of  cash  flows  for  forecasted
transactions through December 2006.

Weather Risk
------------

MidAmerican  Energy and its customers are exposed to the effect of variations in
weather  conditions  on sales and  purchases  of  electricity  and natural  gas.
MidAmerican  Energy may enter  into  degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican  Energy or its customers.

Trading Risk
------------

MidAmerican Energy also uses natural gas and electricity  derivative instruments
for  proprietary  trading  purposes under strict  guidelines  outlined by senior
management.  Derivative  instruments  held for proprietary  trading purposes are
recorded  at fair  value and any  unrealized  gains or losses  are  reported  in
earnings.

MidAmerican  Energy  uses value at risk,  or VaR,  calculations  to measure  and
control its exposure to market risk sensitive instruments. VaR is an estimate of
the potential  loss on a portfolio  over a specified  holding  period,  based on
normal market  conditions and within a given  statistical  confidence  interval.
MidAmerican   Energy   calculates  VaR  separately  for  its  electric  and  gas
proprietary  trading  activities  based on a  variance-covariance  method  using
historical prices to estimate  volatilities and correlations,  a one-day holding
period and a 95% level of confidence.

                                               VaR (in millions)
                                             ---------------------
                                             2003             2002
                                             ----             ----
         At December 31..................    $0.2            $0.1
         High during year................     1.6             0.6
         Low during year.................       -               -
         Average during year.............     0.1             0.1

                                      -48-

<PAGE>

The  fair  value of  MidAmerican  Energy's  proprietary  trading  activities  at
December 31, 2003 and the periods in which net  unrealized  gains and losses are
expected to be realized are as follows (in thousands):

                                            Maturity in   Maturity in
          Type                               in 2004       in 2005-07    Total
          ----                              -----------   -----------    -----
Exchange prices and
  prices actively quoted ................     $ 389          $131        $ 520
Prices provided by other external sources      (419)          116         (303)
                                              -----          ----        -----
   Total ................................     $ (30)         $247        $ 217
                                              =====          ====        =====

Interest Rate Risk
------------------

MidAmerican Energy -

As of December  31,  2003,  MidAmerican  Energy had  fixed-rate  long-term  debt
totaling $1.0 billion with a fair value of $1.1 billion.  These  instruments are
fixed-rate  and  therefore  do not  expose  MidAmerican  Energy  to the  risk of
earnings loss due to changes in market interest rates.  However,  the fair value
of these  instruments  would decrease by  approximately  $46 million if interest
rates were to  increase  by 10% from  their  levels at  December  31,  2003.  In
general, such a decrease in fair value would impact earnings and cash flows only
if  MidAmerican  Energy were to reacquire all or a portion of these  instruments
prior to their maturity.

As of  December  31,  2003,  MidAmerican  Energy  had  long-term  floating  rate
obligations  totaling  $120 million and  short-term  floating  rate  obligations
totaling  $48  million  which  expose  MidAmerican  Energy to risk of  increased
interest  expense in the event of increases in short-term  interest rates.  This
market risk is not hedged.  The carrying  value of the long-term and  short-term
floating rate obligations at December 31, 2003,  approximated fair value. If the
floating interest rates were to increase by 10% from December 31, 2003,  levels,
MidAmerican  Energy's  interest expense for the floating rate obligations  would
increase by  approximately  $0.2  million  annually  based on December 31, 2003,
principal balances.

MidAmerican Funding -

As of December 31,  2003,  MidAmerican  Funding  parent  company had  fixed-rate
long-term  debt totaling  $700 million with a fair value of $746 million.  These
instruments  are fixed-rate and therefore do not expose  MidAmerican  Funding to
the risk of earnings loss due to changes in market interest rates.  However, the
fair value of these  instruments  would decrease by approximately $36 million if
interest  rates were to increase by 10% from their  levels at December 31, 2003.
In general,  such a decrease in fair value would impact  earnings and cash flows
only if  MidAmerican  Funding  were  to  reacquire  all or a  portion  of  these
instruments prior to their maturity.

                                      -49-

<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                               MidAmerican Energy
                               ------------------


Independent Auditors' Report...............................................51


Consolidated Balance Sheets................................................52


Consolidated Statements of Operations......................................53


Consolidated Statements of Comprehensive Income............................54


Consolidated Statements of Cash Flows......................................55


Consolidated Statements of Capitalization..................................56


Consolidated Statements of Retained Earnings...............................57


Notes to Consolidated Financial Statements.................................58





                               MidAmerican Funding
                               -------------------


Independent Auditors' Report...............................................86


Consolidated Balance Sheets................................................87


Consolidated Statements of Operations......................................88


Consolidated Statements of Comprehensive Income............................89


Consolidated Statements of Cash Flows......................................90


Consolidated Statements of Capitalization..................................91


Consolidated Statements of Retained Earnings...............................92


Notes to Consolidated Financial Statements.................................93


                                      -50-

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


Board of Directors and Shareholder
MidAmerican Energy Company
Des Moines, Iowa

We have audited the  accompanying  consolidated  balance sheets and consolidated
statements of capitalization of MidAmerican Energy Company and subsidiaries (the
"Company")  as of  December  31,  2003 and 2002,  and the  related  consolidated
statements of operations,  comprehensive  income,  retained  earnings,  and cash
flows for each of the three years in the period ended  December  31,  2003.  Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 15. These financial  statements and financial  statement  schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on the financial  statements and financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of  MidAmerican  Energy Company and
subsidiaries  as of  December  31,  2003  and  2002,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in the  United  States of  America.  Also,  in our  opinion,  such  consolidated
financial  statement  schedule,   when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.

As  discussed  in Note  (1)(j) to the  consolidated  financial  statements,  the
Company changed its accounting policy for asset retirement obligations in 2003.



/s/  Deloitte & Touche LLP

Des Moines, Iowa
February 9, 2004


                                      -51-
<PAGE>

                           MIDAMERICAN ENERGY COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                     AS OF DECEMBER 31,
                                                                 ---------------------------
                                                                    2003             2002
                                                                 -----------     -----------
                                     ASSETS
<S>                                                              <C>             <C>
UTILITY PLANT, NET
Electric ....................................................    $ 5,030,960     $ 4,731,002
Gas .........................................................        922,099         900,209
                                                                 -----------     -----------
                                                                   5,953,059       5,631,211
Accumulated depreciation and amortization ...................     (2,810,336)     (3,011,123)
                                                                 -----------     -----------
                                                                   3,142,723       2,620,088
Construction work in progress ...............................        217,537         205,988
                                                                 -----------     -----------
                                                                   3,360,260       2,826,076
                                                                 -----------     -----------

CURRENT ASSETS
Cash and cash equivalents ...................................          3,151          28,500
Receivables, less reserves of $7,484 and $7,615, respectively        300,643         321,321
Inventories .................................................         85,465          88,492
Other .......................................................         42,459          28,655
                                                                 -----------     -----------
                                                                     431,718         466,968
                                                                 -----------     -----------

INVESTMENTS AND NONREGULATED PROPERTY, NET ..................        299,103         273,864
REGULATORY ASSETS ...........................................        261,696         204,586
OTHER ASSETS ................................................         51,657          52,457
                                                                 -----------     -----------

TOTAL ASSETS ................................................    $ 4,404,434     $ 3,823,951
                                                                 ===========     ===========

                         CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholder's equity .................................    $ 1,318,519     $ 1,319,139
MidAmerican Energy preferred securities .....................         31,759          31,759
Long-term debt, excluding current portion ...................      1,072,496         947,691
                                                                 -----------     -----------
                                                                   2,422,774       2,298,589
                                                                 -----------     -----------
CURRENT LIABILITIES
Notes payable ...............................................         48,000          55,000
Current portion of long-term debt ...........................         56,151         105,727
Accounts payable ............................................        198,273         239,531
Taxes accrued ...............................................         72,558          83,063
Interest accrued ............................................         10,235           9,731
Other .......................................................         67,160          55,464
                                                                 -----------     -----------
                                                                     452,377         548,516
                                                                 -----------     -----------
OTHER LIABILITIES
Deferred income taxes .......................................        415,788         424,153
Investment tax credits ......................................         52,510          56,886
Asset retirement obligations ................................        269,124         159,757
Regulatory liabilities ......................................        574,490         113,477
Other .......................................................        217,371         222,573
                                                                 -----------     -----------
                                                                   1,529,283         976,846
                                                                 -----------     -----------

TOTAL CAPITALIZATION AND LIABILITIES ........................    $ 4,404,434     $ 3,823,951
                                                                 ===========     ===========
</TABLE>

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

                                      -52-
<PAGE>

                           MIDAMERICAN ENERGY COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                     YEARS ENDED DECEMBER 31,
                                           -------------------------------------------
                                              2003            2002            2001
                                           -----------     -----------     -----------
<S>                                        <C>             <C>             <C>
OPERATING REVENUES
Regulated electric ....................    $ 1,397,997     $ 1,353,431     $ 1,318,129
Regulated gas .........................        947,393         695,799         869,132
Nonregulated ..........................        250,422         186,929         179,988
                                           -----------     -----------     -----------
                                             2,595,812       2,236,159       2,367,249
                                           -----------     -----------     -----------
OPERATING EXPENSES
Regulated:
  Cost of fuel, energy and capacity ...        397,727         346,685         275,904
  Cost of gas sold ....................        720,633         482,837         674,883
  Other operating expenses ............        360,090         394,436         449,328
  Maintenance .........................        153,405         135,487         138,343
  Depreciation and amortization .......        279,650         266,983         250,315
  Property and other taxes ............         80,122          76,025          71,705
                                           -----------     -----------     -----------
                                             1,991,627       1,702,453       1,860,478
                                           -----------     -----------     -----------
Nonregulated:
  Cost of sales .......................        215,664         158,463         154,448
  Other ...............................         17,701          20,246          18,749
                                           -----------     -----------     -----------
                                               233,365         178,709         173,197
                                           -----------     -----------     -----------
  Total operating expenses ............      2,224,992       1,881,162       2,033,675
                                           -----------     -----------     -----------

OPERATING INCOME ......................        370,820         354,997         333,574
                                           -----------     -----------     -----------

NON-OPERATING INCOME
Interest and dividend income ..........          4,956           8,832          13,069
Other income ..........................         18,721          14,063          12,291
Other expense .........................         (3,205)         (8,790)        (18,104)
                                           -----------     -----------     -----------
                                                20,472          14,105           7,256
                                           -----------     -----------     -----------
FIXED CHARGES
Interest on long-term debt ............         72,207          71,401          60,880
Other interest expense ................          3,813           3,412           8,401
Preferred dividends of subsidiary trust              -           1,574           7,980
Allowance for borrowed funds ..........         (4,586)         (3,336)         (1,661)
                                           -----------     -----------     -----------
                                                71,434          73,051          75,600
                                           -----------     -----------     -----------

INCOME BEFORE INCOME TAXES ............        319,858         296,051         265,230
INCOME TAXES ..........................        131,261         120,230         112,452
                                           -----------     -----------     -----------

NET INCOME ............................        188,597         175,821         152,778
PREFERRED DIVIDENDS ...................          1,416           2,933           4,544
                                           -----------     -----------     -----------

EARNINGS ON COMMON STOCK ..............    $   187,181     $   172,888     $   148,234
                                           ===========     ===========     ===========
</TABLE>

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

                                      -53-
<PAGE>

                           MIDAMERICAN ENERGY COMPANY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                          -------------------------------------
                                                                             2003          2002          2001
                                                                          ---------     ---------     ---------
<S>                                                                       <C>           <C>           <C>
EARNINGS ON COMMON STOCK .............................................    $ 187,181     $ 172,888     $ 148,234
                                                                          ---------     ---------     ---------

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on cash flow hedges:
  Unrealized gains (losses) during period-
    Before income taxes ..............................................       (7,372)       (2,458)        7,690
    Income tax (expense) benefit .....................................        3,065         1,022        (3,197)
                                                                          ---------     ---------     ---------
                                                                             (4,307)       (1,436)        4,493
                                                                          ---------     ---------     ---------
  Less realized gains (losses) reflected in net income during period-
    Before income taxes ..............................................        5,513         2,277         1,757
    Income tax (expense) benefit .....................................       (2,292)         (946)         (731)
                                                                          ---------     ---------     ---------
                                                                              3,221         1,331         1,026
                                                                          ---------     ---------     ---------

  Less net unrealized gains (losses) reclassified to regulatory assets
    and liabilities -
      Before income taxes ............................................      (12,369)            -             -
      Income tax benefit .............................................        5,142             -             -
                                                                          ---------     ---------     ---------
                                                                             (7,227)            -             -
                                                                          ---------     ---------     ---------

Other comprehensive income (loss) ....................................         (301)       (2,767)        3,467
                                                                          ---------     ---------     ---------

COMPREHENSIVE INCOME .................................................    $ 186,880     $ 170,121     $ 151,701
                                                                          =========     =========     =========
</TABLE>

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

                                      -54-
<PAGE>

                           MIDAMERICAN ENERGY COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                   YEARS ENDED DECEMBER 31,
                                                             -----------------------------------
                                                                2003         2002         2001
                                                             ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...............................................   $ 188,597    $ 175,821    $ 152,778
Adjustments to reconcile net income to net cash provided:
   Depreciation and amortization .........................     280,803      268,446      251,099
   Deferred income taxes and investment tax credit, net ..         544      (63,335)     (32,550)
   Amortization of other assets and liabilities ..........      20,891       32,150       44,963
   Change in accrued customer rate credits ...............           -            -      (21,531)
   Power purchase contract restructuring receipt .........           -       39,100            -
   Cash outflows of accounts receivable securitization ...           -      (44,000)     (26,000)
   Impact of changes in working capital-
     Receivables, net ....................................      20,678     (157,581)     328,921
     Inventories .........................................       3,027       (5,153)     (14,209)
     Other current assets ................................     (13,804)       6,263       (2,240)
     Accounts payable ....................................     (47,765)      51,268     (134,973)
     Taxes accrued .......................................     (10,505)      28,888      (70,318)
     Interest accrued ....................................         504       (1,978)        (307)
     Other current liabilities ...........................      11,696       11,650        9,147
   Other..................................................     (13,407)      11,262       (6,022)
                                                             ---------    ---------    ---------
       Net cash provided by operating activities .........     441,259      352,801      478,758
                                                             ---------    ---------    ---------

NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ........................    (376,218)    (356,636)    (250,073)
Non-cash and accrued utility construction expenditures ...      32,081       25,349         (705)
Quad Cities Station decommissioning trust fund ...........      (8,299)      (8,299)      (8,299)
Nonregulated capital expenditures ........................      (1,257)        (822)      (2,221)
Other investing activities, net ..........................      12,527       10,362        4,597
                                                             ---------    ---------    ---------
   Net cash used in investing activities .................    (341,166)    (330,046)    (256,701)
                                                             ---------    ---------    ---------

NET CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ...........................................    (188,916)     (80,433)     (94,544)
Issuance of long-term debt, net of issuance cost .........     272,550      391,145            -
Retirement of long-term debt, including reacquisition cost    (202,076)    (163,957)    (101,600)
Reacquisition of preferred securities ....................           -     (126,680)     (23,320)
Net increase (decrease) in notes payable .................      (7,000)     (34,350)       7,750
                                                             ---------    ---------    ---------
   Net cash used in financing activities .................    (125,442)     (14,275)    (211,714)
                                                             ---------    ---------    ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....     (25,349)       8,480       10,343
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...........      28,500       20,020        9,677
                                                             ---------    ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................   $   3,151    $  28,500    $  20,020
                                                             =========    =========    =========

SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized ................   $  65,105    $  67,068    $  61,344
                                                             =========    =========    =========
Income taxes paid ........................................   $ 142,660    $ 133,142    $ 217,140
                                                             =========    =========    =========
</TABLE>

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

                                      -55-
<PAGE>
                           MIDAMERICAN ENERGY COMPANY
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>

                                                                                   AS OF DECEMBER 31,
                                                                      -----------------------------------------
                                                                               2003                  2002
                                                                      --------------------  -------------------
<S>                                                                    <C>          <C>     <C>           <C>
COMMON SHAREHOLDER'S EQUITY
Common shares, no par; 350,000,000 shares authorized;
  70,980,203 shares outstanding ....................................   $  561,024           $   561,024
Retained earnings ..................................................      757,096               757,415
Accumulated other comprehensive income:
  Unrealized gain on cash flow hedges ..............................          399                   700
                                                                       ----------            ----------
                                                                        1,318,519    54.4%    1,319,139    57.4%
                                                                       ----------   -----    ----------   -----
PREFERRED SECURITIES (100,000,000 SHARES AUTHORIZED)
Cumulative  shares outstanding; not subject to mandatory redemption:
  $3.30 Series, 49,451 shares ......................................        4,945                 4,945
  $3.75 Series, 38,305 shares ......................................        3,831                 3,831
  $3.90 Series, 32,630 shares ......................................        3,263                 3,263
  $4.20 Series, 47,362 shares ......................................        4,736                 4,736
  $4.35 Series, 49,945 shares ......................................        4,994                 4,994
  $4.40 Series, 50,000 shares ......................................        5,000                 5,000
  $4.80 Series, 49,898 shares ......................................        4,990                 4,990
                                                                       -----------            ---------
                                                                           31,759     1.3%       31,759     1.4%
                                                                       -----------  -----     ---------   -----

LONG-TERM DEBT
Mortgage bonds:
  7.7% Series, due 2004 ............................................            -                55,630
  7.0% Series, due 2005 ............................................       90,500                90,500
  7.375% Series, due 2008 ..........................................            -                75,000
  7.45% Series, due 2023 ...........................................            -                 6,940
  6.95% Series, due 2025 ...........................................            -                12,500
Pollution control revenue obligations:
  6.1% Series due 2007 .............................................        1,000                 1,000
  5.95% Series, due 2023 (secured by general mortgage bonds) .......       29,030                29,030
  Variable rate series -
    Due 2016 and 2017, 1.26% and 1.64%, respectively ...............       37,600                37,600
    Due 2023 (secured by general mortgage bonds),
      1.26% and 1.64%, respectively ................................       28,295                28,295
    Due 2023, 1.26% and 1.64%, respectively ........................        6,850                 6,850
    Due 2024, 1.26% and 1.64%, respectively ........................       34,900                34,900
    Due 2025, 1.26% and 1.64%, respectively ........................       12,750                12,750
Notes:
  6.375% Series, due 2006 ..........................................      160,000               160,000
  5.125% Series, due 2013 ..........................................      275,000                     -
  6.75% Series, due 2031 ...........................................      400,000               400,000
Obligation under capital lease .....................................        2,060                 2,161
Unamortized debt premium and discount, net .........................       (5,489)               (5,465)
                                                                       ----------              --------
                                                                        1,072,496    44.3%      947,691    41.2%
                                                                       ----------   -----     ---------   -----

TOTAL CAPITALIZATION ...............................................   $2,422,774   100.0%   $2,298,589   100.0%
                                                                       ==========   =====    ==========   =====
</TABLE>

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

                                      -56-

<PAGE>

                           MIDAMERICAN ENERGY COMPANY
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                                 (In thousands)
<TABLE>
<CAPTION>

                                                  YEARS ENDED DECEMBER 31,
                                             --------------------------------
                                               2003        2002        2001
                                             --------    --------    --------

<S>                                          <C>         <C>         <C>
BEGINNING OF YEAR .......................    $757,415    $662,027    $603,793
                                             --------    --------    --------

NET INCOME ..............................     188,597     175,821     152,778
                                             --------    --------    --------

DEDUCT:
Loss on reacquisition of preferred shares           -         750         235
Dividends declared on preferred shares ..       1,416       2,183       4,309
Dividends declared on common shares .....     187,500      77,500      90,000
                                             --------    --------    --------
                                              188,916      80,433      94,544
                                             --------    --------    --------

END OF YEAR .............................    $757,096    $757,415    $662,027
                                             ========    ========    ========
</TABLE>

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

                                      -57-

<PAGE>


                           MIDAMERICAN ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

                                                                         Page
                                                                         ----

(1)  Summary of Significant Accounting Policies ........................  59

(2)  Jointly Owned Utility Plant........................................  64

(3)  Inventories........................................................  64

(4)  Commitments and Contingencies......................................  64

(5)  Long-term Debt.....................................................  69

(6)  Short-term Borrowing...............................................  70

(7)  Preferred Securities...............................................  70

(8)  Risk Management and Energy Trading.................................  70

(9)  Concentration of Credit Risk.......................................  72

(10) Rate Matters.......................................................  74

(11) Retirement Plans...................................................  75

(12) Segment Information................................................  79

(13) Income Taxes.......................................................  82

(14) Fair Value of Financial Instruments................................  83

(15) Non-Operating Other Income and Expense.............................  83

(16) Affiliated Company Transactions....................................  84

(17) Unaudited Quarterly Operating Results..............................  85

                                      -58-
<PAGE>


                           MIDAMERICAN ENERGY COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a)  Company Organization
          --------------------

MidAmerican  Energy  Company  ("MidAmerican  Energy") is a public  utility  with
electric and natural gas operations and is the principal  subsidiary of MHC Inc.
("MHC").  MHC has the following  nonregulated  subsidiaries:  InterCoast Capital
Company,  MidAmerican  Services  Company,  Midwest  Capital Group,  Inc. and MEC
Construction  Services  Co.  MHC  is  the  direct  wholly  owned  subsidiary  of
MidAmerican  Funding,  LLC,  ("MidAmerican  Funding"),  which is an Iowa limited
liability company with MidAmerican Energy Holdings Company  ("MidAmerican Energy
Holdings") as its sole member.  MHC,  MidAmerican Funding and MidAmerican Energy
Holdings  are exempt  public  utility  holding  companies  headquartered  in Des
Moines, Iowa.

     (b)  Principles of Consolidation and Preparation of Financial Statements
          -------------------------------------------------------------------

The accompanying  consolidated  financial  statements include MidAmerican Energy
and subsidiaries under its control.  All significant  intercompany  transactions
have been eliminated. The preparation of financial statements in conformity with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  may differ from those  estimates.  Certain  classifications  of
amounts for 2003 are different than that of prior years. Accordingly, historical
amounts have been reclassified.

     (c)  Accounting for the Effects of Certain Types of Regulation
          ---------------------------------------------------------

MidAmerican  Energy's  utility  operations  are subject to the regulation of the
Iowa Utilities Board ("IUB");  the Illinois  Commerce  Commission  ("ICC");  the
South Dakota Public  Utilities  Commission,  and the Federal  Energy  Regulatory
Commission   ("FERC").   MidAmerican   Energy's   accounting  policies  and  the
accompanying  consolidated  financial  statements  conform to generally accepted
accounting principles  applicable to rate-regulated  enterprises and reflect the
effects of the ratemaking process.

A possible consequence of deregulation in the utility industry is that Statement
of Financial  Accounting  Standards ("SFAS") No. 71, "Accounting for the Effects
of Certain Types of  Regulation,"  may no longer  apply.  SFAS No. 71 sets forth
accounting  principles  for  operations  that are  regulated and meet the stated
criteria.  For operations  that meet the criteria,  SFAS No. 71 requires,  among
other  things,  the  deferral  of expense  or income  that  would  otherwise  be
recognized  when  incurred.   MidAmerican  Energy's  electric  and  gas  utility
operations  currently meet the criteria of SFAS No. 71, but its applicability is
periodically  reexamined.  If portions of its utility  operations no longer meet
the criteria of SFAS No. 71,  MidAmerican  Energy could be required to write off
the related  regulatory assets and liabilities from its balance sheet, and thus,
a material  adjustment  to earnings in that period  could  result if  regulatory
assets  are  not  recovered  in  transition   provisions  of  any   deregulation
legislation.

                                      -59-

<PAGE>

The  following  regulatory  assets  represent  costs  that  are  expected  to be
recovered in future charges to utility  customers.  The  regulatory  liabilities
represent income to be recognized or returned to customers in future periods.
<TABLE>
<CAPTION>

                                                                 As of December 31,
                                                    -----------------------------------------
                                                    Weighted Average
                                                     Remaining Life        2003        2002
                                                    ----------------     --------    --------
                                                                            (In thousands)
<S>                                                      <C>             <C>         <C>
Regulatory assets:
  Deferred income taxes, net.......................      22 years        $108,464    $122,301
  Asset retirement obligations.....................      30 years          77,104           -
  Debt refinancing costs...........................       7 years          19,698      22,187
  Unrealized loss on regulated hedges..............        1 year          14,248           -
  Environmental costs..............................       4 years          13,995      16,588
  Minimum pension liability adjustment.............      15 years          10,996      12,072
  Nuclear generation assets........................       9 years           7,522       8,573
  Cooper Nuclear Station capital improvement costs.        1 year           7,314      16,841
  Enrichment facilities decommissioning............       4 years           1,116       1,459
  Other............................................       Various           1,239       4,565
                                                                         --------    --------
     Total.........................................                      $261,696    $204,586
                                                                         ========    ========

Regulatory liabilities:
  Cost of removal accrual..........................      22 years        $408,608 $         -
  Iowa electric settlement accrual.................       4 years         144,418     102,871
  Unrealized gain on regulated hedges..............        1 year          15,122           -
  Environmental insurance recovery.................       3 years           3,781       8,678
  Nuclear insurance reserve........................      30 years           2,561       1,928
                                                                         --------    --------
     Total.........................................                      $574,490    $113,477
                                                                         ========    ========
</TABLE>

Of the  regulatory  assets  listed,  only the Cooper  capital  improvements  are
included  in rate  base and earn a return.  The  amortization  of the  assets is
recoverable over periods shown above.

Refer to Note (1)(h) for  additional  information  regarding the power  purchase
contract  for Cooper  Nuclear  Station.  For a discussion  of the Iowa  electric
settlement reserve, refer to Note (10).

     (d)  Revenue Recognition
          -------------------

Revenues are recorded as services are rendered to customers.  MidAmerican Energy
records  unbilled  revenues  representing the estimated amount customers will be
billed for services  rendered  between the  meter-reading  dates in a particular
month and the end of that month.  Accrued  unbilled  revenues were $61.5 million
and $55.1 million at December 31, 2003 and 2002, respectively,  and are included
in Receivables on the Consolidated Balance Sheets.

MidAmerican  Energy's  Illinois  and  South  Dakota   jurisdictional  sales,  or
approximately  11% of total  retail  electric  sales,  and all of its retail gas
sales are subject to adjustment clauses.  MidAmerican Energy also has costs that
are  recovered,  at  least  in  part,  through  bill  riders,  including  energy
efficiency costs. The clauses and riders allow MidAmerican  Energy to adjust the
amounts  charged for electric and gas service as the related costs  change.  The
costs  recovered  in  revenues  through use of the  adjustment  clauses and bill
riders are charged to expense in the same period. At any given time, these costs
may be over or under  collected  from  customers.  The  total  under  collection
included in  Receivables  at December 31, 2003 and 2002,  was $55.7  million and
$48.3 million, respectively.

                                      -60-
<PAGE>

     (e)  Depreciation and Amortization
          -----------------------------

MidAmerican  Energy's  provisions  for  depreciation  and  amortization  for its
utility  operations are based on  straight-line  composite rates. In April 2002,
MidAmerican  Energy changed the estimated  useful lives of its electric  utility
general plant assets from eleven years to eight years. The impact of that change
is reflected in the average electric  depreciation and amortization  rates below
for 2003 and 2002.  As a result of the change in  estimated  useful  lives,  net
income  for  2002  was  reduced  by  approximately  $5.9  million.  The  average
depreciation and amortization rates applied to depreciable utility plant for the
years ended December 31 were as follows:

                                         2003     2002     2001
                                         ----     ----     ----

                Electric ...........     4.3%     4.4%     4.2%
                Gas ................     3.5%     3.5%     3.5%

Utility  plant is  stated  at  original  cost  which  includes  overhead  costs,
administrative costs and an allowance for funds used during construction.

The cost of repairs and minor  replacements  is charged to maintenance  expense.
Property  additions  and  major  property  replacements  are  charged  to  plant
accounts. In addition to asset retirement  obligations required by SFAS No. 143,
as discussed in Note (1)(j), MidAmerican Energy accrues for the cost of removing
electric and gas assets through its depreciation  rates. The estimated amount of
such accruals is included in  regulatory  liabilities.  The cost of  depreciable
units of utility  plant  retired or disposed of in the normal course of business
are  eliminated  from the  utility  plant  accounts  and such cost is charged to
accumulated depreciation.

Additionally,  depreciation  and  amortization  expense for 2003,  2002 and 2001
includes $54.1 million,  $55.0 million and $47.1  million,  respectively,  for a
regulatory  charge pursuant to the terms of an electric rate settlement in Iowa.
Refer to Note (10) for a discussion of the settlement.

An allowance for the estimated annual  decommissioning  costs of the Quad Cities
Generating  Station  equal to the level of  funding  into the  related  external
trusts is also included in depreciation  expense. See Note (4)(d) for additional
information regarding decommissioning costs.

     (f)  Investments and Nonregulated Property, Net
          ------------------------------------------

Investments and Nonregulated  Property, Net includes the following amounts as of
December 31 (in thousands):

                                                             2003         2002
                                                           --------     --------

Nuclear decommissioning trust fund ...................     $184,171     $159,757
Rabbi trusts .........................................       96,237       90,501
Coal transportation property, net of accumulated
  depreciation of $1,996 and $1,705, respectively ....        9,923       10,215
Non-utility property, net of accumulated depreciation
  of $2,169 and $1,293, respectively .................        8,727        8,329
Note receivable from affiliate .......................            -        5,016
Other ................................................           45           46
                                                           --------     --------
Total ................................................     $299,103     $273,864
                                                           ========     ========

Investments held by the nuclear  decommissioning  trust fund for the Quad Cities
Station  units are  classified  as  available-for-sale  and are reported at fair
value.  An  amount  equal  to the net  unrealized  gains  and  losses  on  those
investments  is recorded as an  adjustment  to the asset  retirement  obligation
regulatory  asset,  which is included in Regulatory  Assets on the  Consolidated
Balance  Sheets.  Funds are invested in the trust in accordance  with applicable
federal  investment  guidelines and are restricted for use as reimbursement  for
costs of decommissioning MidAmerican Energy's Quad Cities Station.

                                      -61-
<PAGE>

The investment in Rabbi trusts represents the cash value of corporate-owned life
insurance policies on certain key executives and the fair value of other related
investments.   The  Rabbi  trusts  were   established   to  administer   various
nonqualified  executive and director compensation plans, and investments in each
trust are restricted  for use in meeting the costs and  obligations of the trust
and related compensation plans.

The coal  transportation  property is owned and operated by CBEC Railway Inc., a
subsidiary of MidAmerican Energy. The property is depreciated on a straight-line
basis over 37 years.

Non-utility  property consists of property such as computer  software,  land and
other assets not used for regulated utility purposes.  The depreciable  property
consists primarily of computer  software,  which is amortized on a straight-line
basis over five years.

The note receivable from affiliate was with Midwest Capital Group,  Inc. and was
paid in July 2003.

     (g)  Consolidated Statements of Cash Flows
          -------------------------------------

MidAmerican  Energy  considers  all  cash and  highly  liquid  debt  instruments
purchased with a remaining  maturity of three months or less to be cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.

     (h)  Accounting for Cooper Nuclear Station Power Purchase Contract
          -------------------------------------------------------------

MidAmerican  Energy has a power purchase contract with the Nebraska Public Power
District  for the purchase of capacity and energy,  which  expires  December 31,
2004. The current terms of the contract are the result of an agreement signed by
the parties that restructured the contract effective August 1, 2002.

Cooper  Nuclear  Station  ("Cooper")  capital  improvement  costs prior to 1997,
including  carrying costs, were deferred in accordance with then applicable rate
regulation. These costs are being amortized and recovered in rates over either a
five-year  period  from the time the  related  assets were put in service or the
remaining term of the original power purchase contract, namely through September
2004.  From July 11, 1997,  through  July 31, 2002,  the Iowa portion of capital
improvement  costs was  recovered  currently  from  customers  and  expensed  as
incurred.  For jurisdictions other than Iowa,  MidAmerican Energy began charging
Cooper capital  improvement costs to expense, as incurred in January 1997. Under
the terms of the restructured  power purchase  contract,  MidAmerican  Energy no
longer pays for Cooper capital improvements.

The fuel cost portion of the original  power  purchase  contract was included in
Cost of Fuel, Energy and Capacity on the Consolidated  Statements of Operations.
All other costs MidAmerican  Energy incurred in relation to this long-term power
purchase  contract prior to its  restructuring  were included in Other Operating
Expenses on the  Consolidated  Statements of Operations.  Beginning August 2002,
all costs related to this power purchase contract, excluding the amortization of
Cooper  capital  improvement  costs  discussed  above  and the  amortization  of
previously  recognized  decommissioning  expense, are reflected in Cost of Fuel,
Energy and Capacity on the Consolidated Statements of Operations.

See  Note  (4)(c)  for  additional  information  regarding  the  power  purchase
contract.

     (i)  Accounting for Derivatives
          --------------------------

On January 1, 2001,  MidAmerican  Energy  adopted SFAS No. 133 pertaining to the
accounting  for  derivative  instruments  and hedging  activities.  SFAS No. 133
requires  an entity to  recognize  all of its  derivatives  as either  assets or
liabilities in its statement of financial position and measure those instruments
at fair  value.  If the  conditions  specified  in SFAS No.  133 are met,  those
instruments  may be  designated  as  hedges.  Changes  in  the  value  of  hedge
instruments  used for  regulated  utility  purposes are  recorded as  regulatory
assets or liabilities and, therefore,  would not impact earnings until realized.
Due  to  the  relative  immateriality  of  the  adoption  of  SFAS  No.

                                      -62-
<PAGE>

133, a  cumulative-effect  presentation  is not  reflected  in the  Consolidated
Statement of Operations or the Consolidated  Statement of  Comprehensive  Income
for 2001.

Pursuant to Emerging  Issues Task Force Issue No. 02-3,  effective July 1, 2002,
revenue and cost of sales from derivative  instruments used for trading purposes
are presented as net nonregulated revenue on the statement of operations.  Prior
to that time,  such amounts were presented  gross.  Accordingly,  all historical
amounts have been reclassified to conform to the net presentation.

See Note (8) for further discussion on risk management and the use of derivative
instruments to manage such risk.

     (j)  New Accounting Pronouncements
          -----------------------------

In January 2003,  MidAmerican Energy adopted SFAS No. 143, "Accounting for Asset
Retirement  Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal  obligations  associated with the retirement of long-lived  assets that
result from the  acquisition,  construction,  development or normal operation of
such assets.  Concurrent  with the  recognition of the liability,  the estimated
cost of an asset  retirement  obligation is capitalized and depreciated over the
remaining life of the asset.

On  January  1,  2003,  MidAmerican  Energy  recorded  $275.2  million  of asset
retirement  obligation  ("ARO")  liabilities;  $12.6 million of  associated  ARO
assets,  net of accumulated  depreciation;  $101.8 million of regulatory assets;
and reclassified  $1.0 million of accumulated  depreciation to the ARO liability
in conjunction  with the adoption of SFAS No. 143.  Adoption of SFAS No. 143 did
not impact net income.  The initial ARO  liability  recognized  includes  $266.5
million that pertains to obligations  associated with the decommissioning of the
Quad  Cities  Station.  The $266.5  million  includes a $159.8  million  nuclear
decommissioning  liability that had been recorded as of December 31, 2002. As of
December  31,  2003,  $184.2  million of assets  reflected  in  Investments  and
Nonregulated  Property, Net on the Consolidated Balance Sheet are restricted for
satisfying the Quad Cities Station obligation.

The change in the  balance of the ARO  liability  during 2003 is  summarized  as
follows (in thousands):

       Balance January 1, 2003 ..........................     $ 275,228
       Revision to nuclear decommissioning ARO liability        (21,902)
       Capitalized accretion ............................        15,798
                                                              ---------
       Balance December 31, 2003 ........................     $ 269,124
                                                              =========

The revision to the nuclear decommissioning ARO liability was due to the results
of  a  decommissioning  study  in  2003.  Accretion  on  the  ARO  liability  is
capitalized  as  a  regulatory  asset.  In  addition  to  the  ARO  liabilities,
MidAmerican  Energy has accrued for the cost of removing  other electric and gas
assets through its  depreciation  rates, in accordance with accepted  regulatory
practices.   The  accrued   balance  was  previously   included  in  accumulated
depreciation but is currently reflected as a regulatory liability in conjunction
with the adoption of SFAS No. 143. As of December 31, 2003, the estimated amount
of such accruals  included in regulatory  liabilities was  approximately  $408.6
million based on the cost of removal component in current depreciation rates.

The ARO  liability,  computed  on a pro forma  basis as if SFAS No. 143 had been
applied  during  each of the periods  presented  in the  consolidated  financial
statements, would have been as follows (in thousands):

                  As of January 1, 2001 ........     $249,693
                  As of December 31, 2001 ......      262,035
                  As of December 31, 2002 ......      275,228

On April 30, 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149,  "Amendment  of Statement  133 on  Derivative  Instruments  and Hedging
Activities."  SFAS No.  149  amends  SFAS No.  133 for  derivative  instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging   activities.   SFAS  No.  149  also  amends   certain  other   existing
pronouncements  and requires  contracts with

                                      -63-
<PAGE>

comparable  characteristics to be accounted for similarly.  The most significant
impact of adopting SFAS No. 149 was that MidAmerican  Energy's contracts for the
sale or purchase of electric energy that are not considered  capacity  contracts
are no longer afforded "normal" treatment and must be marked to market. SFAS No.
149 was effective for MidAmerican  Energy and MidAmerican  Funding for contracts
entered into or modified  after June 30, 2003.  Adoption of SFAS No. 149 did not
have a material effect on the results of operations,  financial position or cash
flows of MidAmerican Energy or MidAmerican Funding.

(2)  JOINTLY OWNED UTILITY PLANT

Under joint plant ownership agreements with other utilities,  MidAmerican Energy
as a tenant in common had  undivided  interests at December 31, 2003, in jointly
owned generating plants as shown in the table below.

MidAmerican Energy uses the proportional consolidation method to account for its
share of each facility.  The dollar amounts below represent MidAmerican Energy's
share in each jointly owned unit. Each  participant  has provided  financing for
its share of each unit.  Operating  costs of each facility are assigned to joint
owners  based on  ownership  percentage  or energy  purchased,  depending on the
nature  of the  cost.  Operating  Expenses  on the  Consolidated  Statements  of
Operations  include  MidAmerican  Energy's  share of the expenses of these units
(dollars in millions).
<TABLE>
<CAPTION>

                                          Nuclear                         Coal-fired
                                         -----------     ---------------------------------------------
                                                                 Council
                                         Quad Cities     Neal    Bluffs     Neal    Ottumwa     Louisa
                                            Units        Unit     Unit      Unit      Unit       Unit
                                          No. 1 & 2      No. 3   No. 3     No. 4     No. 1      No. 1
                                         -----------     -----   -------   -----    -------     ------
<S>                                         <C>           <C>      <C>      <C>       <C>        <C>
 In service date........................    1972          1975     1978     1979      1981       1983
 Utility plant in service...............    $273          $149     $301     $175      $214       $548
 Accumulated depreciation...............    $144          $103     $219     $123      $142       $341
 Accredited capacity at MidAmerican
   Energy 2003 peak (megawatts, 100%)...   1,747           515      690      643       708        700
 Percent ownership......................    25.0%         72.0%    79.1%    40.6%     52.0%      88.0%
</TABLE>

(3)  INVENTORIES

Inventories include the following amounts as of December 31 (in thousands):

                                                       2003       2002
                                                     -------    -------
         Materials and supplies, at average cost     $31,987    $30,265
         Gas in storage, at LIFO cost ...........     25,371     27,405
         Coal stocks, at average cost ...........     24,723     27,863
         Fuel oil, at average cost ..............      1,759      1,865
         Other ..................................      1,625      1,094
                                                     -------    -------
         Total ..................................    $85,465    $88,492
                                                     =======    =======

At  December  31,  2003  prices,  the  current  cost of gas in storage was $80.2
million.

(4)  COMMITMENTS AND CONTINGENCIES

     (a)  Manufactured Gas Plant Facilities
          ---------------------------------

The  United  States  Environmental  Protection  Agency  ("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.

                                      -64-
<PAGE>

MidAmerican  Energy has evaluated or is  evaluating 27 properties  that were, at
one time,  sites of gas  manufacturing  plants in which it may be a  potentially
responsible  party.  The purpose of these  evaluations  is to determine  whether
waste  materials  are  present,  whether the  materials  constitute  a health or
environmental  risk, and whether  MidAmerican  Energy has any responsibility for
remedial  action.  MidAmerican  Energy is actively  working with the  regulatory
agencies and has received  regulatory closure on four sites.  MidAmerican Energy
is  continuing  to  evaluate  several  of the  sites  to  determine  the  future
liability, if any, for conducting site investigations or other site activity.

MidAmerican  Energy  estimates  the range of possible  costs for  investigation,
remediation and monitoring for the sites discussed above to be approximately $11
million to $30 million. As of December 31, 2003, MidAmerican Energy has recorded
a $14.0 million  liability 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 four 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.

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.

     (b)  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 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  standards for ozone and
fine particulate  matter.  Designations  regarding  attainment of the eight-hour
ozone standard have recently been reviewed by the EPA, and the EPA has concluded
that the entire state of Iowa is in attainment of the standards.  On December 4,
2003,  the EPA announced the  development  of its Interstate Air Quality Rule, a
proposal to require  coal-burning  power plants in 29 states and the District of
Columbia to reduce  emissions  of sulfur  dioxide  ("SO2") and  nitrogen  oxides
("NOX") in an effort to reduce ozone and fine particulate  matter in the Eastern
United States. It is likely that MidAmerican  Energy's  coal-burning  facilities
will be impacted by this proposal.

In December  2000,  the EPA concluded  that mercury  emissions  from  coal-fired
generating  stations should be regulated.  The EPA is currently  considering two
regulatory  alternatives for the regulation of mercury from coal-fired utilities
as necessary to protect public health.  One of these  alternatives would require
reductions of mercury from all coal-fired  facilities greater than 25 MW through
application of Maximum Achievable Control Technology with compliance assessed on
a facility basis. The other  alternative would regulate the mercury emissions of
coal-fired  facilities  that  pose  a  health  hazard  through  a  market  based
cap-and-trade  mechanism  similar  to  the  SO2  allowance  system.  The  EPA is
currently under a deadline to finalize the mercury rule by December 2004. Any of
these new or stricter  standards  could,  in whole or in part,  be superceded 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 SO2, NOX and mercury,  as well as possible
new federal  regulation of carbon dioxide and other gases that may affect global
climate change.

                                      -65-
<PAGE>

Depending  on the outcome of the final  regulations,  MidAmerican  Energy may be
required to install control equipment on its generating stations or decrease the
number of hours during which its generating  stations  operate.  However,  until
final  regulations  are issued,  the impact of the  regulations  on  MidAmerican
Energy cannot be predicted.

While  legislative  action is necessary for the Clear Skies  Initiative or other
multi-pollutant emission reduction legislation to become effective,  MidAmerican
Energy has  implemented  a planning  process that  forecasts  the  site-specific
controls and actions  required to meet emissions  reductions of this nature.  On
April 1, 2002, in accordance with an Iowa law passed in 2001, MidAmerican Energy
filed with the IUB its first multi-year plan and budget for managing SO2 and NOX
from its generating  facilities in a  cost-effective  manner.  The plan provides
specific  actions to be taken at each  coal-fired  generating  facility  and the
related costs and timing for each action.  Mercury emissions reductions were not
addressed in the plan.  On July 17, 2003,  the IUB issued an order that affirmed
an administrative law judge's approval of the plan, as amended. Accordingly, the
IUB order  provides  that the  approved  expenditures  will not be  subject to a
subsequent  prudence  review in a future electric rate case, but it rejected the
future  application of a tracker mechanism to recover emission  reduction costs.
However,  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.  At this time,  MidAmerican Energy does not expect these capital
expenditures to exceed such amount.

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 (a "major
modification")  to an existing  facility that potentially  increases  emissions,
unless the  changes  are exempt  under the  regulations.  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,  amoung  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.

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  the  present  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 New Source
Review 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. Since the NSR changes were announced, the
EPA's  enforcement  branch has  indicated it would apply the  clarified  routine
repair, maintenance and replacement rules to its pending investigation. A number
of states and local air districts have  challenged the EPA's  clarifications  of
the rule and a panel of the U.S.  Circuit  Court of Appeals for the  District of
Columbia  Circuit  issued  an order on  December  24,  2003,  staying  the EPA's
implementation of its clarifications of the equipment  replacement rule, meaning
that the previous rules without the expanded exemption remain in effect.

                                      -66-

<PAGE>

     (c)  Cooper Nuclear Station Power Purchase Contract
          ----------------------------------------------

Effective  August 1, 2002,  MidAmerican  Energy and the  Nebraska  Public  Power
District ("NPPD")  restructured their power purchase contract for Cooper.  Under
the  terms  of the  restructured  contract,  NPPD  is  required  to  provide  to
MidAmerican  Energy  through  December 31, 2004, 380 megawatts of the accredited
capacity of Cooper and a minimum volume of energy in 2004. MidAmerican Energy is
likewise  required to purchase at the  contract  prices the capacity and minimum
megawatt-hours  delivered.  MidAmerican  Energy's  minimum  payments  under  the
contract total $63.8 million for 2004.

In December 2000,  MidAmerican Energy ceased contributing  decommissioning funds
to NPPD and  maintained a separate  fund for  estimated  Cooper  decommissioning
costs. Through July 31, 2002,  MidAmerican Energy had accrued and retained $18.3
million in this separate fund. In conjunction  with the power purchase  contract
restructuring,  NPPD also paid  MidAmerican  Energy $39.1  million.  MidAmerican
Energy is  recognizing  the $39.1  million  cash  payment and the $18.3  million
previously accrued for decommissioning into income based on the estimated energy
expected to be received for the remainder of the contract.

In January 2004, MidAmerican Energy and NPPD entered into a series of agreements
that will result in MidAmerican  Energy purchasing 250 MW of NPPD capacity for a
five-year period commencing January 1, 2005.

     (d)  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 2003 dollars, is $260 million and is the asset retirement obligation
for  Quad  Cities  Station.  Refer  to Note  (1)(j)  for a  discussion  of asset
retirement  obligations.  MidAmerican Energy has established external trusts for
the investment of funds for  decommissioning  the Quad Cities Station.  The fair
value  of the  assets  held  in the  trusts  is  reflected  in  Investments  and
Nonregulated Property, Net.

MidAmerican  Energy's  depreciation and amortization  expense included costs for
Quad Cities  Station  nuclear  decommissioning  of $8.3  million for each of the
years 2003, 2002 and 2001. The regulatory  provision charged to expense is equal
to the funding that is being  collected in Iowa rates.  Realized and  unrealized
gains and  (losses) on the assets in the trust fund were $16.1  million,  $(6.9)
million and $(3.1) million for 2003, 2002 and 2001, respectively.

     (e)  Nuclear Insurance
          -----------------

MidAmerican  Energy maintains  financial  protection  against  catastrophic loss
associated  with its interest in Quad Cities  Station  through a combination  of
insurance  purchased by Exelon Generation  Company,  LLC (the operator and joint
owner of Quad Cities  Station),  insurance  purchased  directly  by  MidAmerican
Energy,  and the mandatory  industry-wide  loss funding mechanism afforded under
the  Price-Anderson  Amendments  Act of 1988. The general types of coverage are:
nuclear liability, property coverage and nuclear worker liability.

Exelon Generation  purchases nuclear liability insurance for Quad Cities Station
in the maximum  available  amount of $300 million,  which includes  coverage for
MidAmerican Energy's ownership. In accordance with the Price-Anderson Amendments
Act of 1988,  excess  liability  protection  above that  amount is provided by a
mandatory  industry-wide  Secondary Financial Protection program under which the
licensees  of nuclear  generating  facilities  could be assessed  for  liability
incurred due to a serious nuclear incident at any commercial  nuclear reactor in
the United States.  Currently,  MidAmerican Energy's aggregate maximum potential
share of an assessment  for Quad Cities Station is  approximately  $50.3 million
per incident, payable in installments not to exceed $5 million annually.

                                      -67-
<PAGE>

The property insurance covers property damage, stabilization and decontamination
of  the  facility,   disposal  of  the  decontaminated  material  and  premature
decommissioning  arising out of a covered loss. For Quad Cities Station,  Exelon
Generation  purchased primary and excess property  insurance  protection for the
combined  interests in Quad Cities  Station,  with coverage limits totaling $2.1
billion.  MidAmerican  Energy also directly  purchased extra expense or business
interruption  coverage  for its  share of  replacement  power  and  other  extra
expenses in the event of a covered accidental outage at Quad Cities Station. The
property and related coverages  purchased  directly by MidAmerican Energy and by
Exelon  Generation,  which  includes the interests of  MidAmerican  Energy,  are
underwritten by an industry mutual insurance company and contain  provisions for
retrospective  premium  assessments should two or more full policy-limit  losses
occur in one policy  year.  Currently,  the maximum  retrospective  amounts that
could be assessed against  MidAmerican  Energy from industry mutual policies for
its obligations associated with Quad Cities Station total $7.6 million.

The master  nuclear  worker  liability  coverage,  which is  purchased by Exelon
Generation for Quad Cities Station, is an industry-wide  guaranteed-cost  policy
with an  aggregate  limit of $300  million for the nuclear  industry as a whole,
which is in effect to cover tort claims in nuclear-related industries.

The  current   Price-Anderson   Act  expired  in  August  2002  and  is  pending
congressional action for reauthorization.  Its contingent financial  obligations
still apply to reactors licensed by the Nuclear Regulatory  Commission as of its
expiration date. It is anticipated that the  Price-Anderson  Act will be renewed
with  increased  third  party  financial  protection  requirements  for  nuclear
incidents.

     (f)  Fuel, Energy and Operating Lease Commitments
          --------------------------------------------

MidAmerican  Energy has  supply and  related  transportation  contracts  for its
fossil fueled generating stations. As of December 31, 2003, the contracts,  with
expiration  dates ranging from 2004 to 2010,  required minimum payments of $83.3
million,  $69.9 million,  $54.5 million, $50.2 million and $16.1 million for the
years 2004 through  2008,  respectively,  and $31.0 million for the total of the
years thereafter.  MidAmerican Energy expects to supplement these coal contracts
with additional contracts and spot market purchases to fulfill its future fossil
fuel needs. Additionally, MidAmerican Energy has a transportation contract for a
natural  gas-fired  generating  plant.  The  contract,  which  expires  in 2012,
requires  minimum  payments of $0.8  million for 2004 and $6.2  million for each
year thereafter.

MidAmerican Energy has a contract with Cordova Energy Company, LLC, a subsidiary
of MidAmerican Energy Holdings,  to purchase electric capacity and energy from a
natural gas-fired  combined cycle generation plant. As of December 31, 2003, the
minimum payments under the contract,  which terminates in May 2004, totaled $9.8
million for 2004. The minimum payments are based on MidAmerican  Energy's 50% of
the projected monthly net capacity ratings of the plant.

MidAmerican Energy also has contracts with non-affiliated  companies to purchase
electric capacity. As of December 31, 2003, the contracts, with expiration dates
ranging from 2004 to 2028,  required  minimum  payments of $38.6  million,  $3.6
million,  $2.3 million, $2.2 million and $2.2 million for the years 2004 through
2008, respectively, and $40.1 million for the total of the years thereafter.

MidAmerican Energy has various natural gas supply and  transportation  contracts
for its gas operations.  As of December 31, 2003, the minimum  commitments under
these contracts were $56.3 million,  $43.8 million, $18.0 million, $13.9 million
and $4.2  million  for the years  2004  through  2008,  respectively,  and $12.5
million for the total of the years thereafter.

MidAmerican  Energy has  non-cancelable  operating leases primarily for computer
equipment,  office space and rail cars.  As of December  31,  2003,  the minimum
payments under these leases were $7.2 million,  $5.7 million, $4.1 million, $3.7
million and $2.4 million for the years 2004 through 2008, respectively, and $2.3
million for the total of the years thereafter.

                                      -68-
<PAGE>

     (g)  Guarantees
          ----------

MidAmerican  Energy is the lessee on  operating  leases for coal  railcars  that
contain  guarantees of the residual value of such equipment  throughout the term
of the leases.  Events triggering the residual guarantees include termination of
the lease,  loss of the equipment or purchase of the equipment.  Lease terms are
for five years with  provisions  for  extensions.  As of December 31, 2003,  the
maximum  amount of such  guarantees  specified  in these  leases  totaled  $31.0
million. These guarantees are not reflected on the Consolidated Balance Sheets.

     (h)  Other Commitments and Contingencies
          -----------------------------------

MidAmerican  Energy is  involved  in a number  of other  legal  proceedings  and
claims.  While  management  is unable to predict the  ultimate  outcome of these
matters,  it is not expected that their  resolution will have a material adverse
effect on the results of operations and financial condition.

(5)  LONG-TERM DEBT

MidAmerican  Energy's sinking fund requirements and maturities of long-term debt
for 2004 through 2008 are approximately $56 million, $91 million,  $161 million,
$2 million and zero,  respectively.  Refer to MidAmerican Energy's  Consolidated
Statements of Capitalization for detail of long-term debt.

MidAmerican  Energy's Variable Rate Pollution  Control Revenue  Obligations bear
interest at rates that are periodically  established  through remarketing of the
bonds in the short-term  tax-exempt market.  MidAmerican  Energy, at its option,
may change the mode of interest  calculation  for these bonds by selecting  from
among several alternative floating or fixed rate modes. The interest rates shown
in the  Consolidated  Statements  of  Capitalization  are the  weighted  average
interest rates as of December 31, 2003 and 2002.  MidAmerican Energy maintains a
revolving  credit facility  agreement to provide  liquidity for holders of these
issues.

The indentures  securing  mortgage bonds contain certain covenants that obligate
MidAmerican  Energy to (i) timely pay principal and interest on such bonds; (ii)
timely  pay taxes;  and (iii)  maintain  (a) its  corporate  existence,  (b) its
properties,  (c) related  property  insurance  and (d) the liens  created by the
indentures.  The indenture  pertaining to MidAmerican  Energy's unsecured senior
notes contains certain covenants that obligate  MidAmerican Energy to (i) timely
pay  principal  and  interest  on such  notes and (ii)  maintain  its  corporate
existence.  In addition, this indenture provides that if MidAmerican Energy were
to issue secured debt in the future,  then such unsecured  senior notes,  as may
then be existing,  would equally and ratably be secured thereby.  As of December
31,  2003,  MidAmerican  Energy  was in  compliance  with all of its  applicable
long-term debt covenants.

Substantially  all of the  former  Iowa-Illinois  Gas and  Electric  Company,  a
predecessor  company,  utility property and franchises and  substantially all of
the former Midwest Power Systems Inc., a predecessor  company,  electric utility
property in Iowa, or approximately 80% of gross utility property,  is pledged to
secure mortgage bonds.

MidAmerican  Energy does not guarantee any of  MidAmerican  Funding's  long-term
debt.  However,  all of  MidAmerican  Energy's  common  stock  is  security  for
MidAmerican  Funding's long-term debt. Among other sources,  MidAmerican Funding
may use distributions  from MidAmerican Energy to make payments on its long-term
debt. Refer to Note (5) of MidAmerican Funding's Notes to Consolidated Financial
Statements.

On  January  14,  2003,   MidAmerican  Energy  issued  $275  million  of  5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.

                                      -69-

<PAGE>

(6)  SHORT-TERM BORROWING

Interim  financing of working capital needs and the construction  program may be
obtained from the sale of commercial  paper or short-term  borrowing from banks.
Information regarding short-term debt follows (dollars in thousands):

                                                          2003          2002
                                                        -------       -------

Balance at year-end   ...............................   $48,000       $55,000
Weighted average interest rate on year-end balance...     1.0%          1.3%
Average daily amount outstanding during the year.....   $ 1,927       $ 8,934
Weighted average interest rate on average
  daily amount outstanding during the year...........     1.2%          1.8%

MidAmerican  Energy has authority from the FERC to issue through April 14, 2005,
short-term debt in the form of commercial paper and bank notes  aggregating $500
million.  MidAmerican  Energy  has in place a $370.4  million  revolving  credit
facility  which  supports  its $250  million  commercial  paper  program and its
variable  rate  pollution  control  revenue  obligations.  The facility  expires
January 13,  2005.  In addition,  MidAmerican  Energy has a $5.0 million line of
credit, which expires July 1, 2004.

(7)  PREFERRED SECURITIES

The total outstanding  cumulative preferred securities of MidAmerican Energy are
not  subject to  mandatory  redemption  requirements  and may be redeemed at the
option of  MidAmerican  Energy at prices which,  in the  aggregate,  total $32.6
million. The aggregate total the holders of all preferred securities outstanding
at December  31,  2003,  are entitled to upon  involuntary  bankruptcy  is $31.8
million plus accrued dividends.  Annual dividend  requirements for all preferred
securities outstanding at December 31, 2003, total $1.3 million.

(8)  RISK MANAGEMENT AND ENERGY TRADING

MidAmerican Energy is exposed to loss of net income, cash flows and asset values
due to  market  risk,  including:  1)  changes  in the  market  price of gas and
electricity used in its regulated and nonregulated businesses, 2) changes in the
value of open positions in its nonregulated trading operations, 3) variations in
the  severity  of weather  conditions  from  normal,  and 4) changes in interest
rates. See also Note (9) of Notes to Consolidated Financial Statements in Item 8
of this Form 10-K for a discussion of  MidAmerican  Energy's  exposure to credit
risk.  To  manage  these  exposures,  MidAmerican  Energy  enters  into  various
financial derivative instruments,  including futures, over-the-counter swaps and
forward physical  contracts.  Senior management  provides the overall direction,
structure,   conduct  and  control  of  MidAmerican   Energy's  risk  management
activities,   including  authorization  and  communication  of  risk  management
policies and procedures, the use of financial derivative instruments,  strategic
hedging  program  guidelines,  appropriate  market and credit risk  limits,  and
appropriate  systems for  recording,  monitoring  and  reporting  the results of
transactional and risk management activities.

                                      -70-

<PAGE>

As of December 31, 2003, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in thousands):

                                            Maturity in   Maturity in
       Contract Type                           2004         2005-07      Total
       -------------                        -----------   -----------  ---------
Non-trading:
  Regulated electric assets ..............    $  5,924     $   217     $  6,141
  Regulated electric (liabilities) .......     (14,275)          -      (14,275)
  Regulated gas assets ...................       9,008           -        9,008
  Regulated weather (liabilities) ........      (1,775)          -       (1,775)
  Nonregulated electric assets ...........       2,953       1,676        4,629
  Nonregulated electric (liabilities) ....      (1,711)     (1,131)      (2,842)
  Nonregulated gas assets ................      11,498         798       12,296
  Nonregulated gas (liabilities) .........     (11,867)       (739)     (12,606)
                                              --------     -------     --------
    Total ................................        (245)        821          576
                                              --------     -------     --------

Trading:
  Nonregulated gas assets ................         389         247          636
  Nonregulated gas (liabilities) .........        (419)          -         (419)
                                              --------     -------     --------
    Total ................................         (30)        247          217
                                              --------     -------     --------

  Total MidAmerican Energy assets ........    $ 29,772     $ 2,938     $ 32,710
                                              ========     =======     ========
  Total MidAmerican Energy (liabilities) .    $(30,047)    $(1,870)    $(31,917)
                                              ========     =======     ========

Commodity Price Risk
--------------------

Under the current regulatory framework, MidAmerican Energy is allowed to recover
its cost of gas from all of its regulated gas customers  through a purchased gas
adjustment  clause  included in revenues.  Because the  majority of  MidAmerican
Energy's firm natural gas supply contracts contain pricing provisions based on a
daily or monthly  market index,  MidAmerican  Energy's  regulated gas customers,
although ensured of the availability of gas supplies, retain the risk associated
with market price volatility.

MidAmerican  Energy uses  natural  gas  futures,  options  and  over-the-counter
agreements  to  mitigate  a portion of the market  price  risk  retained  by its
regulated gas customers  through the purchased gas  adjustment  clause.  The net
amounts of realized and unrealized gains and losses on swap agreements,  futures
and options  contracts  are  included in the cost of gas sold and  recovered  in
revenues from regulated gas  customers.  Accordingly,  net  unrealized  gains or
losses on these derivative  positions are recorded as regulatory  liabilities or
assets.

MidAmerican  Energy is exposed to variations in the price of fuel for generation
and the price of purchased power.  Fuel price risk is mitigated through physical
and financial forward contracts. Under typical operating conditions, MidAmerican
Energy has sufficient  generation to supply its regulated retail electric needs.
MidAmerican  Energy may incur a loss as a result of having to pay  higher  costs
for electric  power than it is permitted  to recover  from its  customers  under
current  electric  rates.  Forward  electricity  purchase  and  sales  contracts
utilized for regulated  purposes are marked to market with net unrealized  gains
and losses recorded as regulatory liabilities or assets.

MidAmerican  Energy also  derives  revenues  from  nonregulated  retail sales of
natural gas and  electricity to commercial  and  industrial  end users.  Pricing
provisions  are  individually  negotiated  with these  customers and may include
fixed prices, prices based on a daily or monthly market index or prices based on
MidAmerican  Energy's actual costs.  MidAmerican  Energy enters into natural gas
futures,  options and swap agreements to hedge gas commodity prices for physical
delivery to  nonregulated  customers.  Forward  physical  supply  contracts  are
generally  entered  into in close  proximity  to entering  into retail  electric
contracts  to  offset  the  impact  of  variances  in  electricity  prices.  All
nonregulated  retail electric contracts are considered  "normal" sales and gains
and losses on such contracts are recognized when settled. All other nonregulated
gas and electric contracts are recorded at fair value.

                                      -71-
<PAGE>

Derivative  instruments are used for two types of economic  hedges.  Hedges that
offset the  variability  in earnings and cash flows related to firm  commitments
are referred to as fair value  hedges.  Realized  gains and losses on fair value
hedges are recognized in income as operating  revenues and cost of fuel,  energy
and capacity, respectively,  depending upon the nature of the item being hedged.
Hedges  that  offset the  variability  in  earnings  and cash  flows  related to
forecasted  transactions  are referred to as cash flow hedges.  Beginning in the
fourth quarter of 2003, net unrealized  gains and losses on all hedges  utilized
for  regulated  purposes  are  recorded  as  regulatory  assets or  liabilities.
Unrealized  gains or losses on cash flow hedges used for  nonregulated  purposes
are recorded as other comprehensive  income and reflected in net income when the
forecasted  transaction  is  realized.  Realized  gains and  losses on cash flow
hedges are  recognized  in income as either  operating  revenues;  cost of fuel,
energy  and  capacity;  or cost of gas sold,  depending  upon the  nature of the
physical transaction being hedged.

During the twelve months beginning  January 1, 2004, it is anticipated that $5.3
million of the net deferred unrealized gains/losses on cash flow hedges recorded
in regulatory  liabilities/assets and $59,000 of accumulated other comprehensive
income on  nonregulated  cash flow  hedges  will be  realized  and  recorded  in
earnings  as the hedged  transactions  settle.  MidAmerican  Energy has hedged a
portion  of its  exposure  to the  variability  of  cash  flows  for  forecasted
transactions through December 2006.

Weather Risk
------------

MidAmerican  Energy and its customers are exposed to the effect of variations in
weather  conditions  on sales and  purchases  of  electricity  and natural  gas.
MidAmerican  Energy may enter  into  degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican Energy or its customers.

Trading Risk
------------

MidAmerican Energy also uses natural gas and electricity  derivative instruments
for  proprietary  trading  purposes under strict  guidelines  outlined by senior
management.  Derivative  instruments  held for trading  purposes are recorded at
fair value and any unrealized gains or losses are reported in earnings.

The  fair  value of  MidAmerican  Energy's  proprietary  trading  activities  at
December 31, 2003 and the periods in which net  unrealized  gains and losses are
expected to be realized are as follows (in thousands):

                                               Maturity in  Maturity in
    Type                                           2004       2005-07     Total
    ----                                       -----------  -----------  ------
    Exchange prices and
      prices actively quoted ................     $ 389        $131      $ 520
    Prices provided by other external sources      (419)        116       (303)
                                                  -----        ----      -----
      Total .................................     $ (30)       $247      $ 217
                                                  =====        ====      =====

(9)  CONCENTRATION OF CREDIT RISK

Regulated Utility Operations
----------------------------

MidAmerican  Energy's regulated electric utility operations serve  approximately
601,000  customers  in Iowa,  84,000  customers  in western  Illinois  and 4,000
customers in  southeastern  South  Dakota.  MidAmerican  Energy's  regulated gas
utility  operations serve 524,000 customers in Iowa, 65,000 customers in western
Illinois,  75,000 customers in southeastern  South Dakota and 5,000 customers in
northeastern  Nebraska. The largest communities served by MidAmerican Energy are
the Iowa and  Illinois  Quad-Cities;  Des  Moines,  Sioux  City,  Cedar  Rapids,
Waterloo,  Iowa City and Council  Bluffs,  Iowa; and Sioux Falls,  South Dakota.
MidAmerican  Energy's  utility  operations  grant unsecured credit to customers,
substantially all of whom are local businesses and residents. As of December 31,
2003, billed receivables from MidAmerican  Energy's utility  customers,  totaled
$132.6 million.

                                      -72-
<PAGE>

Nonregulated Retail Operations
------------------------------

MidAmerican  Energy's  nonregulated retail operations provide energy services to
approximately 3,400 gas and electric customers in Iowa,  Illinois,  and Ohio. In
the  ordinary  course of  business,  MidAmerican  Energy's  nonregulated  retail
operations grant unsecured credit to customers,  substantially  all of which are
commercial,  industrial,  non-profit,  or other business  concerns.  MidAmerican
Energy analyzes each  counterparty's  financial condition prior to entering into
any  agreement to provide  energy  services.  As of December  31,  2003,  billed
receivables  from MidAmerican  Energy's  nonregulated  retail customers  totaled
$19.5 million.  Billed receivables from any one customer did not exceed 11.3% of
total nonregulated retail billed receivables.

Wholesale Operations
--------------------

MidAmerican Energy extends unsecured credit to high volume industrial end-users,
other utilities,  energy  marketers,  and financial  institutions in conjunction
with  wholesale  energy  marketing and trading  activities.  MidAmerican  Energy
analyzes the financial condition of each wholesale  counterparty before entering
into any transactions,  establishes  limits on the amount of unsecured credit to
be extended to each counterparty, and evaluates the appropriateness of unsecured
credit limits on an ongoing basis.  Credit exposures relative to approved limits
are monitored  daily,  with all exceptions to approved limits reported to senior
management.  MidAmerican Energy defines credit exposure as the potential loss in
value in the event of non-payment or  non-performance  by a counterparty,  which
includes  not  only  accounts   receivable,   but  also  the   replacement,   or
mark-to-market  value of contracts for future  performance.  MidAmerican  Energy
seeks to negotiate  contractual  arrangements  with wholesale  counterparties to
provide for net settlement of monthly  accounts  receivable and accounts payable
and net settlement of contracts for future  performance in the event of default.
Accounts  payable  are  deducted  from   calculations  of  credit  exposure  for
counterparties with whom such contractual arrangements exist. MidAmerican Energy
also seeks to negotiate  contractual  arrangements that provide for the exchange
of collateral in the event that credit exposure to a particular counterparty (1)
exceeds a specified  threshold or (2) in the event of a material  adverse change
in such counterparty's financial condition or downgrade in its credit ratings to
below  "investment  grade"  by  a  nationally   recognized   statistical  rating
organization  such  as  Moody's  or  Standard  &  Poor's.   MidAmerican   Energy
periodically requests and receives collateral,  typically in the form of cash or
letters  of  credit,  from  counterparties  with  credit  exposure  in excess of
established  limits.  As of December 31,  2003,  81.8% of  MidAmerican  Energy's
credit  exposure,  net  of  collateral,   from  wholesale  operations  was  with
counterparties  having  "investment grade" credit ratings and credit exposure to
any single  counterparty,  net of collateral,  did not exceed 10.6% of aggregate
credit exposure, net of collateral, to all wholesale counterparties.

MidAmerican  Energy's  credit  exposure  with respect to wholesale  natural gas,
electricity, and derivatives transactions is summarized below as of December 31,
2003 (dollars in thousands).

                                                        Credit      % of Credit
Credit Rating Equivalent        Credit  Collateral  Exposure, Net  Exposure, Net
(Standard & Poor's / Moody's)  Exposure    Held     of Collateral  of Collateral
-----------------------------  -------- ----------  -------------  -------------

AA-/Aa3 and above ...........   $ 8,386    $    -      $ 8,386        16.4%
A-/A3 to A+/A1 ..............    21,797         -       21,797        42.7
BBB-/Baa3 to BBB+/Baa1 ......    11,581         -       11,581        22.7
BB-/Ba3 to BB+/Ba1 ..........     2,799         -        2,799         5.5
B+/B1 or lower ..............        24       400            -           -
Unrated .....................     8,876     3,456        6,484        12.7
                                -------    ------      -------      ------
Total credit exposure .......   $53,463    $3,856      $51,047       100.0%
                                =======    ======      =======      ======

                                      -73-

<PAGE>

(10) RATE MATTERS

Under two settlement  agreements approved by the IUB,  MidAmerican Energy's Iowa
retail  electric  rates in effect on December 31, 2000, are  effectively  frozen
through  December 31, 2010. The  settlement  agreements  specifically  allow the
filing of electric rate design or cost of service rate changes that are intended
to keep MidAmerican Energy's overall Iowa retail electric revenue unchanged, but
could result in changes to individual  tariffs.  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 to be used to offset a portion of the cost to Iowa customers of future
generating plant investment.

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 a
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.  An  amount  equal to the  regulatory
liability is recorded as a regulatory  charge in depreciation  and  amortization
expense when the liability is accrued.  Future depreciation will be reduced as a
result of the credit  applied to  generating  plant  balances as the  regulatory
liability is reduced.  The liability is being reduced as it is credited  against
plant in  service  in  amounts  equal to the  allowance  for funds  used  during
construction  associated with generating  plant  additions.  Interest expense is
accrued on the portion of the regulatory liability related to prior years. As of
December 31, 2003 and 2002, the related  regulatory  liability  reflected on the
Consolidated Balance Sheets was $144.4 million and $102.9 million, respectively.

The 2003 settlement agreement also provides that if Iowa retail electric returns
on equity fall below 10% in any  consecutive  12-month  period after  January 1,
2006,  MidAmerican  Energy  may seek to file for a  general  increase  in rates.
However, prior to filing for a general increase in rates,  MidAmerican Energy is
required  by  the  settlement  agreement  to  conduct  30  days  of  good  faith
negotiations with all of the signatories to the settlement  agreement to attempt
to avoid a general  increase  in rates.  Also,  if  MidAmerican  Energy does not
construct  the wind power  facilities by December 31, 2007,  the rate  extension
from January 1, 2006, through December 31, 2010, may terminate.

Illinois  bundled  electric  rates are  frozen  until  2007,  subject to certain
exceptions  allowing for  increases,  at which time bundled rates are subject to
cost-based  ratemaking.  Illinois law provides  for  Illinois  earnings  above a
computed level of return on common equity 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 2003 was
13.73%.  The law allows  MidAmerican  Energy to mitigate the sharing of earnings
above the threshold  return on common  equity  through  accelerated  recovery of
electric assets.

On November 8, 2002, the IUB approved a gas rate settlement agreement previously
filed with it by  MidAmerican  Energy and the Iowa Office of Consumer  Advocate.
The  settlement  agreement  provided  for an increase in rates of $17.7  million
annually  for  MidAmerican  Energy's  Iowa  retail  natural  gas  customers  and
effectively froze base rates through November 2004. However,  MidAmerican Energy
will  continue  collecting  fluctuating  gas costs  through  its  purchased  gas
adjustment  clause.  The new rates were implemented for usage beginning November
25, 2002.

                                      -74-

<PAGE>

(11) RETIREMENT PLANS

MidAmerican  Energy  sponsors a  noncontributory  defined  benefit  pension plan
covering  substantially  all employees of  MidAmerican  Energy  Holdings and its
domestic energy  subsidiaries.  Benefit  obligations under the plan are based on
participants' compensation,  years of service and age at retirement.  Funding to
an external trust is based upon the actuarially determined costs of the plan and
the requirements of the Internal Revenue Code and the Employee Retirement Income
Security Act.  MidAmerican  Energy has been allowed to recover  accrued  pension
costs  related  to  its  employees  in  its  electric  and  gas  service  rates.
MidAmerican  Energy also maintains  noncontributory,  nonqualified  supplemental
executive retirement plans for active and retired participants.

MidAmerican  Energy also currently sponsors certain  postretirement  health care
and life insurance  benefits  covering  substantially  all retired  employees of
MidAmerican  Energy  Holdings  and its domestic  subsidiaries.  Under the plans,
substantially  all of  MidAmerican  Energy's  employees may become  eligible for
these  benefits  if they reach  retirement  age while  working  for  MidAmerican
Energy.  However,  MidAmerican Energy retains the right to change these benefits
anytime,  subject to the  provisions in its  collective  bargaining  agreements.
MidAmerican Energy expenses postretirement benefit costs on an accrual basis and
includes provisions for such costs in its electric and gas service rates.

Net periodic pension,  supplemental  retirement and postretirement benefit costs
included the following  components for MidAmerican Energy and the aforementioned
affiliates  for the years ended  December  31. For purposes of  calculating  the
expected  return  on  pension  plan  assets,  a  market-related  value  is used.
Market-related  value is equal to fair  value  except  for gains  and  losses on
equity  investments  which  are  amortized  into   market-related   value  on  a
straight-line basis over five years.

                                      -75-

<PAGE>

<TABLE>
<CAPTION>

                                                                Pension Cost                    Postretirement Cost
                                                       -----------------------------     ------------------------------
                                                         2003       2002       2001         2003       2002       2001
                                                       -------    -------    -------     --------    -------    -------

<S>                                                    <C>        <C>        <C>         <C>         <C>        <C>
Components of net periodic benefit cost (in thousands):
     Service cost..................................    $24,693    $20,235    $18,114     $  8,175    $ 6,028    $ 4,357
     Interest cost.................................     34,533     34,177     33,027       16,065     13,928     10,418
     Expected return on plan assets................    (38,396)   (38,213)   (36,326)      (6,008)    (4,880)    (4,032)
     Amortization of net transition obligation.....     (2,591)    (2,591)    (2,591)       4,110      4,110      4,110
     Amortization of prior service cost............      2,761      2,729      2,729          593        425        425
     Amortization of prior year (gain) loss........      1,483     (2,482)    (3,894)       3,716      2,385        332
     Regulatory expense............................      3,320      6,639          -           -           -          -
                                                       -------    -------    -------      -------    -------    -------
     Net periodic (benefit) cost...................    $25,803    $20,494    $11,059      $26,651    $21,996    $15,610
                                                       =======    =======    =======      =======    =======    =======

Weighted-average  assumptions used to determine
  benefit  obligations at December 31:
     Discount rate.................................     5.75%      5.75%      6.50%        5.75%      5.75%      6.50%
     Rate of compensation increase.................     5.00%      5.00%      5.00%

Weighted-average  assumptions used to determine
  net benefit cost for years ended December 31:
     Discount rate.................................     5.75%      6.50%      7.00%        5.75%      6.50%      7.00%
     Expected return on plan assets................     7.00%      7.00%      7.00%        7.00%      7.00%      7.00%
     Rate of compensation increase.................     5.00%      5.00%      5.00%
</TABLE>
<TABLE>
<CAPTION>
Assumed health care cost trend rates at December 31:
                                                                                        2003          2002
                                                                                       -----         -----
     <S>                                                                               <C>           <C>
     Health care cost trend rate assumed for next year .......................         11.00%        9.75%
     Rate that the cost trend rate gradually declines to .....................          5.00%        5.25%
     Year that the rate reaches the rate it is assumed to remain at...........          2010         2006
</TABLE>

Assumed  health care cost trend rates have a  significant  effect on the amounts
reported  for the health care plans.  A  one-percentage-point  change in assumed
health care cost trend rates would have the following effects in thousands:
<TABLE>
<CAPTION>
                                                          Increase (Decrease) in Expense
                                                   -------------------------------------------
                                                   One Percentage-Point   One Percentage-Point
                                                        Increase                Decrease
                                                   --------------------   -------------------
     <S>                                                <C>                    <C>

     Effect on total service and interest cost...       $ 5,484               $ (4,136)
     Effect on postretirement benefit obligation.       $47,583                $(37,761)
</TABLE>

In 2003, 2002 and 2001,  MidAmerican  Energy was allocated pension cost of $14.2
million,  $12.4  million and $5.8  million,  respectively.  Postretirement  cost
allocated to  MidAmerican  Energy in 2003,  2002 and 2001 totaled $22.4 million,
$19.6  million and $14.6  million,  respectively.  Net  periodic  benefit  costs
assigned to MidAmerican Energy affiliates are reimbursed currently in accordance
with its intercompany affiliate services agreements.

                                      -76-

<PAGE>

The  following  table  presents a  reconciliation  of the  beginning  and ending
balances  of the  benefit  obligation,  fair value of plan assets and the funded
status of the aforementioned plans to the net amounts measured and recognized in
the Consolidated Balance Sheets as of December 31:
<TABLE>
<CAPTION>

                                                      Pension Benefits       Postretirement Benefits
                                                   ----------------------    -----------------------
                                                      2003         2002         2003         2002
                                                   ---------    ---------    ---------    ---------
<S>                                                <C>          <C>          <C>          <C>
Reconciliation of the fair value of plan assets:
Fair value of plan assets at beginning of year .   $ 467,773    $ 515,890    $ 122,655    $  81,129
Employer contributions .........................       5,044        4,681       32,566       24,034
Participant contributions ......................           -            -        6,371        4,505
Actual return on plan assets ...................     105,438      (27,376)      15,853       (4,528)
Acquisition ....................................           -            -            -       32,500
Benefits paid ..................................     (26,687)     (25,422)     (19,596)     (14,985)
                                                   ---------    ---------    ---------    ---------
Fair value of plan assets at end of year .......   $ 551,568    $ 467,773    $ 157,849    $ 122,655
                                                   ---------    ---------    ---------    ---------

Reconciliation of benefit obligation:
Benefit obligation at beginning of year ........   $ 593,179    $ 518,208    $ 291,441    $ 194,917
Service cost ...................................      24,693       20,235        8,175        6,028
Interest cost ..................................      34,533       34,177       16,065       13,928
Participant contributions ......................           -            -        6,371        4,505
Plan amendments ................................           -          520            -        2,205
Actuarial (gain) loss ..........................      (5,670)      45,461       (5,023)      31,743
Acquisition ....................................           -            -            -       53,100
Benefits paid ..................................     (26,687)     (25,422)     (19,596)     (14,985)
                                                   ---------    ---------    ---------    ---------
Benefit obligation at end of year ..............   $ 620,048    $ 593,179    $ 297,433    $ 291,441
                                                   ---------    ---------    ---------    ---------

Funded status ..................................   $ (68,480)   $(125,406)   $(139,584)   $(168,786)
Amounts not recognized:
  Unrecognized net (gain) loss .................     (12,907)      61,289       83,509      102,095
  Unrecognized prior service cost ..............      17,915       20,676        5,451        6,043
  Unrecognized net transition obligation (asset)        (792)      (3,383)      36,992       41,102
                                                   ---------    ---------    ---------    ---------
Net amount recognized in the
  Consolidated Balance Sheets ..................   $ (64,264)   $ (46,824)   $ (13,632)   $ (19,546)
                                                   =========    =========    =========    =========

Amounts recognized in the Consolidated
  Balance Sheets consist of:
Prepaid benefit cost ...........................          39    $  11,825            -    $   1,493
Accrued benefit liability ......................    (100,490)     (99,392)           -       (3,881)
Intangible assets ..............................      17,367       20,082            -            -
Regulatory assets ..............................      18,820       20,661            -            -
Liability of affiliate company .................           -            -      (13,632)     (17,158)
                                                   ---------    ---------    ---------    ---------
Net amount recognized ..........................   $ (64,264)   $ (46,824)   $ (13,632)   $ (19,546)
                                                   =========    =========    =========    =========
</TABLE>

The  accumulated  benefit  obligation for all defined  benefit pension plans was
$554.6 million and $526.7  million at December 31, 2003 and 2002,  respectively.
The projected  benefit  obligation  (included in the table  above),  accumulated
benefit obligation and fair value of plan assets for the supplemental  executive
retirement  plan which had an accumulated  benefit  obligation in excess of plan
assets were $105.1 million,  $100.5 million and zero as of December 31, 2003 and
$103.4 million, $99.1 million and zero as of December 31, 2002, respectively.  A
minimum liability must be recognized for those plans whose  accumulated  benefit
obligation  exceeds plan  assets.  In  accordance  with SFAS No. 71, the minimum
pension   liability   adjustment  was  reclassified   from   accumulated   other
comprehensive income to regulatory assets.

Although the supplemental executive retirement plan had no assets as of December
31,  2003,  MidAmerican  Energy  and its  parent  have  Rabbi  trusts  that hold
corporate-owned  life insurance and other investments to provide

                                      -77-
<PAGE>

funding for the future cash requirements. Because this plan is nonqualified, the
fair value of these assets is not  included in the plan asset table  above.  The
fair value of the Rabbi trust investments was $88.1 million and $76.2 million at
December  31,  2003 and 2002,  respectively  including  $27.1  million and $18.0
million  held by  MidAmerican  Energy  Holdings at  December  31, 2003 and 2002,
respectively.

Plan Assets
-----------

MidAmerican  Energy's investment policy for its pension and postretirement plans
is to balance risk and return  through a diversified  portfolio of  high-quality
equity  and  fixed  income  securities.  Equity  targets  for  the  pension  and
postretirement plans are as indicated in the tables below.  Maturities for fixed
income  securities  are managed such that  sufficient  liquidity  exists to meet
near-term  benefit  payment  obligations.  The plans retain  outside  investment
advisors  to manage  plan  investments  within the  parameters  outlined  by the
MidAmerican   Energy's  Pension  and  Employee  Benefits  Plans   Administrative
Committee.  The  weighted  average  return  on  assets  assumption  is  based on
historical performance for the types of assets in which the plans invest.

MidAmerican  Energy's  pension  plan asset  allocation  at December 31, 2003 and
2002, are as follows:


                                                Percentage of Plan Assets
                                                -------------------------
                                                at December 31
                                                --------------   Target
         Asset Category                         2003     2002    Range
         --------------                         ----     ----    ------

         Equity securities ................      70%      60%    65-75%
         Debt securities ..................      23       33     20-30
         Real estate ......................       7        7      0-10
         Other ............................       -        -       0-5
                                                ---      ---
           Total ..........................     100%     100%
                                                ===      ===

MidAmerican  Energy's  postretirement  benefit plan asset allocation at December
31, 2003, and 2002, are as follows:

                                                Percentage of Plan Assets
                                                -------------------------
                                                at December 31   Target
         Asset Category                         2003     2002    Range
         --------------                         ----     ----    -----

         Equity securities................       49%      34%    45-55%
         Debt securities..................       48       48     45-55
         Real estate......................        -        -         -
         Other............................        3       18      0-10
                                                ---      ---
           Total..........................      100%     100%
                                                ===      ===

Cash Flows
----------

Employer  contributions to the pension and postretirement  plans are expected to
be $5.1 million and $27.6 million,  respectively, for 2004. MidAmerican Energy's
policy is to contribute the minimum  required amount to the pension plan and the
amount expensed to its postretirement plans.

MidAmerican  Energy sponsors defined  contribution  pension plans (401(k) plans)
covering  substantially all employees.  MidAmerican Energy's  contributions vary
depending  on the plan but are based  primarily on each  participant's  level of
contribution  and cannot exceed the maximum  allowable  for tax purposes.  Total
contributions  were $8.3 million,  $8.1 million and $7.2 million for 2003,  2002
and 2001, respectively.

In December 2003, the President signed into law the Medicare  Prescription Drug,
Improvement and  Modernization  Act of 2003 ("Medicare  Act").  The Medicare Act
introduces a  prescription  drug benefit under

                                      -78-
<PAGE>

Medicare  as well as a subsidy to  sponsors  of retiree  health  care plans that
provide a benefit to  participants  that is at least  actuarially  equivalent to
Medicare Part D. The Medicare Act is expected to ultimately  reduce  MidAmerican
Energy's  postretirement  costs  from what they  would  have  been  absent  such
changes.  Detailed  regulations  pertaining  to the  Medicare Act have yet to be
promulgated, and therefore, MidAmerican Energy cannot determine precisely how it
will implement the Medicare Act's provisions. Additionally,  accounting guidance
regarding  the  recognition  of the  impacts  of the  Medicare  Act is  pending.
Accordingly,  MidAmerican  Energy  continues  to evaluate its options and cannot
predict the magnitude or timing of any resulting  cost savings.  As permitted by
FASB Staff Position 106-1,  MidAmerican  Energy has elected to defer recognizing
the  effects of the  Medicare  Act in its  post-retirement  plan  accounting  at
December 31, 2003.

(12) 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 services are displayed on
the Consolidated Statements of Operations.

                                      -79-
<PAGE>


The following tables provide information on an operating segment basis as of and
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                                    2003             2002             2001
                                                 -----------      -----------      -----------
  Segment Profit Information
  --------------------------
  <S>                                            <C>              <C>              <C>
  Operating revenues:
    External revenues -
      Generation ...........................     $   522,349      $   415,921      $   516,915
      Energy delivery ......................       1,812,547        1,625,600        1,664,462
      Transmission .........................          25,916           20,721           22,852
      Marketing & sales ....................         235,000          173,917          163,020
                                                 -----------      -----------      -----------
        Total ..............................       2,595,812        2,236,159        2,367,249
                                                 -----------      -----------      -----------

    Intersegment revenues -
      Generation ...........................         629,939          651,342          606,164
      Energy delivery ......................        (690,126)        (708,953)        (663,977)
      Transmission .........................          57,946           55,207           55,086
      Marketing & sales ....................           2,241            2,404            2,727
                                                 -----------      -----------      -----------
        Total ..............................               -                -                -
                                                 -----------      -----------      -----------

    Consolidated ...........................     $ 2,595,812      $ 2,236,159      $ 2,367,249
                                                 ===========      ===========      ===========

  Depreciation and amortization expense (a):
    Generation .............................     $   145,645      $   139,054      $   133,681
    Energy delivery ........................         121,296          117,893          106,496
    Transmission ...........................          11,641            8,972            8,900
    Marketing & sales ......................           2,221            2,527            2,022
                                                 -----------      -----------      -----------
      Total ................................     $   280,803      $   268,446      $   251,099
                                                 ===========      ===========      ===========

  Interest and dividend income:
    Generation .............................     $     2,284      $     3,783      $     5,450
    Energy delivery ........................           2,307            4,468            6,727
    Transmission ...........................             346              530              822
    Marketing & sales ......................              19               51               70
                                                 -----------      -----------      -----------
      Total ................................     $     4,956      $     8,832      $    13,069
                                                 ===========      ===========      ===========

  Fixed charges:
    Generation .............................     $    30,364      $    29,989      $    31,726
    Energy delivery ........................          37,745           40,737           42,654
    Transmission ...........................           4,416            4,892            5,401
    Marketing & sales ......................             325              366              363
                                                 -----------      -----------      -----------
      Total ................................          72,850           75,984           80,144
    Preferred dividends ....................          (1,416)          (2,933)          (4,544)
                                                 -----------      -----------      -----------
      Consolidated .........................     $    71,434      $    73,051      $    75,600
                                                 ===========      ===========      ===========
</TABLE>

                                      -80-

<PAGE>

<TABLE>
<CAPTION>
                                                    2003             2002             2001
                                                 -----------      -----------      -----------
  Segment Profit Information (continued)
  --------------------------------------
  <S>                                            <C>              <C>              <C>
  Income before income taxes:
    Generation .............................     $   153,046      $   150,040      $   142,637
    Energy delivery ........................         111,089          101,176           84,334
    Transmission ...........................          47,364           40,403           39,514
    Marketing & sales ......................           6,943            1,499           (5,799)
                                                 -----------      -----------      -----------
      Total ................................         318,442          293,118          260,686
      Preferred dividends ..................           1,416            2,933            4,544
                                                 -----------      -----------      -----------
        Consolidated .......................     $   319,858      $   296,051      $   265,230
                                                 ===========      ===========      ===========

  Segment Asset Information
  -------------------------
  Capital expenditures:
    Generation .............................     $   215,952      $   197,666      $    87,296
    Energy delivery ........................         143,507          151,178          159,302
    Transmission ...........................          16,759            7,504            3,733
    Marketing & sales ......................           1,257            1,110            1,963
                                                 -----------      -----------      -----------
      Total ................................     $   377,475      $   357,458      $   252,294
                                                 ===========      ===========      ===========

  Total assets:
    Generation .............................     $ 1,639,541      $ 1,393,271      $ 1,282,677
    Energy delivery ........................       2,535,061        2,236,310        2,114,833
    Transmission ...........................         242,435          222,051          226,251
    Marketing & sales ......................          56,743           52,143           51,164
                                                 -----------      -----------      -----------
      Total ................................       4,473,780        3,903,775        3,674,925
    Reclassifications and
      intersegment eliminations (b) ........         (69,346)         (79,824)         (89,798)
                                                 -----------      -----------      -----------
      Consolidated .........................     $ 4,404,434      $ 3,823,951      $ 3,585,127
                                                 ===========      ===========      ===========
</TABLE>

(a)  Depreciation and amortization  expense above includes  depreciation related
     to nonregulated  operations,  which is included in  Nonregulated  Operating
     Expense - Other on the Consolidated Statements of Operations.

(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.

                                      -81-
<PAGE>

(13) INCOME TAXES

MidAmerican Energy is included in the MidAmerican  Energy Holdings  consolidated
income  tax  return.  However,  MidAmerican  Energy's  income tax  liability  is
computed on a stand-alone basis.

MidAmerican  Energy's  income tax expense  includes the  following for the years
ended December 31 (in thousands):

                                        2003          2002          2001
                                     ---------     ---------     ---------
     Current:
       Federal ..................    $  97,304     $ 135,657     $ 111,674
       State ....................       33,411        47,908        33,327
                                     ---------     ---------     ---------
                                       130,715       183,565       145,001
                                     ---------     ---------     ---------
     Deferred:
       Federal ..................        9,996       (44,179)      (23,199)
       State ....................       (5,074)      (14,750)       (4,433)
                                     ---------     ---------     ---------
                                         4,922       (58,929)      (27,632)
                                     ---------     ---------     ---------

     Investment tax credit, net .       (4,376)       (4,406)       (4,917)
                                     ---------     ---------     ---------
       Total ....................    $ 131,261     $ 120,230     $ 112,452
                                     =========     =========     =========

The following table is a reconciliation of the statutory federal income tax rate
and  the  effective   federal  and  state  income  tax  rate  indicated  by  the
Consolidated Statements of Operations for the years ended December 31:

                                                        2003     2002     2001
                                                        ----     ----     ----

 Statutory federal income tax rate .................     35%      35%      35%
 Amortization of investment tax credit .............     (1)      (1)      (2)
 State income tax, net of federal income tax benefit      5        8        7
 Other .............................................      2       (1)       2
                                                        ---      ---      ---
 Effective federal and state income tax rate .......     41%      41%      42%
                                                        ===      ===      ===

Included in  Deferred  Income  Taxes on the  Consolidated  Balance  Sheets as of
December 31 are deferred tax assets and deferred tax  liabilities as follows (in
thousands):

                                                         2003        2002
                                                       --------    --------
    Deferred tax assets related to:
      Revenue sharing .............................    $ 63,243    $ 46,428
      Nuclear reserves and decommissioning ........      35,956      28,411
      Pensions ....................................      35,429      32,004
      Investment tax credits ......................      35,213      38,296
      Accrued liabilities .........................       5,955       1,094
      Fuel cost recoveries ........................           -       9,558
      Other .......................................       5,927       3,190
                                                       --------    --------
                                                        181,723     158,981

    Deferred tax liabilities related to:
      Depreciable property ........................     436,384     418,809
      Income taxes recoverable through future rates     142,598     159,411
      Fuel cost recoveries ........................      12,864           -
      Reacquired debt .............................       5,665       4,914
                                                       --------    --------
                                                        597,511     583,134

    Net deferred income tax liability .............    $415,788    $424,153
                                                       ========    ========
                                      -82-
<PAGE>

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following  table  presents the carrying  amount and estimated  fair value of
MidAmerican  Energy's  long-term  debt,  including  the current  portion,  as of
December 31 (in thousands):

                                               2003             2002
                                             ----------      ----------

          Carrying amount.................   $1,128,647      $1,053,418
          Estimated fair value............    1,184,974       1,113,366

Investments  in the Quad Cities  Station  decommissioning  trust are reported at
market  value  in  accordance  with  SFAS  No.  115,   "Accounting  for  Certain
Investments in Debt and Equity  Securities."  As of December 31, 2003, the total
fair value of the investments was $184.2 million and the related total amortized
cost was $157.8  million.  As of December 31, 2002,  the total fair value of the
investments  was $159.8 million and the related total  amortized cost was $143.0
million.  Refer to Notes  (1)(f) and (4)(d) for further  discussion  of the Quad
Cities Station decommissioning trust.

(15) NON-OPERATING OTHER INCOME AND EXPENSE

Non-Operating  Income  -  Other  Income  and  Other  Expense,  as  shown  on the
Consolidated  Statements of Operations include the following for the years ended
December 31 (in thousands):

                                                         2003     2002     2001
                                                       -------  -------  -------
Other income:
  Allowance for equity funds used during construction  $11,377  $ 8,621  $ 1,571
  Corporate-owned life insurance income .............    6,314    1,333    5,258
  Fee for sold receivables ..........................        -    1,340    2,864
  Gain on sale of assets ............................        -    1,164    1,387
  Other .............................................    1,030    1,605    1,211
                                                       -------  -------  -------
    Total ...........................................  $18,721  $14,063  $12,291
                                                       =======  =======  =======

Other  Expense  for the  years  ended  December  31,  2002 and  2001,  consisted
principally  of a discount on sold  receivables  totaling $6.4 million and $16.0
million, respectively.

                                      -83-

<PAGE>

(16) AFFILIATED COMPANY TRANSACTIONS

The companies  identified as affiliates are MidAmerican  Energy Holdings and its
subsidiaries.  The basis for these charges is provided for in service agreements
between MidAmerican Energy and its affiliates.

MHC incurred  charges which are of general  benefit to all of its  subsidiaries.
These costs were for administrative  and general salaries and expenses,  outside
services,  director fees, pension, deferred compensation,  and retirement costs,
some of which  originated at  MidAmerican  Energy.  MHC  reimbursed  MidAmerican
Energy  for  charges  originating  at  MidAmerican  Energy in the amount of $0.4
million,  $0.5 million and $0.4 million for 2003,  2002 and 2001,  respectively.
MidAmerican  Energy,  in turn,  was allocated a share of costs from MHC totaling
$1.2  million,   $0.9  million  and  $1.0  million  for  2003,  2002  and  2001,
respectively.

MidAmerican  Energy was also  reimbursed  for charges  incurred on behalf of its
affiliates. The majority of these reimbursed expenses was for employee wages and
benefits,  insurance,  building rent, computer costs,  administrative  services,
travel expense,  and general and  administrative  expense;  including  treasury,
legal,  shareholder  relations  and  accounting  functions.  The  amount of such
expenses was $49.1 million,  $34.5 million and $27.0 million for 2003,  2002 and
2001, respectively.

In 2001,  MidAmerican  Energy acquired a gas turbine equipment purchase contract
from  MidAmerican  Energy  Holdings for $22.0 million.  MidAmerican  Energy also
reimbursed  MidAmerican  Energy  Holdings in the amount of $12.2 million,  $10.4
million and $8.8 million in 2003, 2002 and 2001, respectively, for its allocated
share of corporate expenses.

MidAmerican  Energy leased unit trains from an affiliate for the  transportation
of coal to MidAmerican Energy's generating stations. Unit train costs, including
maintenance,  were  approximately  $0.1  million  annually  for 2002  and  2001.
MidAmerican  Energy  purchased the remaining  leased  railcars from  MidAmerican
Rail, Inc. for $0.6 million in October 2002.

MidAmerican  Energy sold natural gas to AmGas,  an  affiliate,  in the amount of
$11.6 million in 2001.

MidAmerican  Energy  has an  agreement  with  Cordova  Energy  Company,  LLC,  a
subsidiary of MidAmerican  Energy Holdings,  to purchase  electric  capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operation in June 2001. The agreement,  which  terminates in May 2004,  provides
for  MidAmerican  Energy to purchase up to 50% of the net  capacity of the plant
and to  supply  the fuel  stock  required  to  generate  the  energy  purchased.
MidAmerican Energy's payments for monthly capacity charges totaled $26.6 million
for 2003, $21.2 million for 2002 and $18.1 million for 2001.

In August  2002,  Northern  Natural Gas Company  ("NNG")  became an affiliate of
MidAmerican  Energy when NNG was purchased by MidAmerican  Energy Holdings.  NNG
has  been  and  is  one  of  MidAmerican   Energy's  suppliers  of  natural  gas
transportation  and storage  capacity.  MidAmerican  Energy had net purchases of
$53.5  million of natural gas  transportation  and storage  capacity from NNG in
2003 and $17.9 million in August through December 2002.

MidAmerican  Energy had accounts  receivable from affiliates of $7.4 million and
$9.4 million as of December 31, 2003 and 2002,  respectively,  that are included
in Receivables on the Consolidated  Balance Sheets.  MidAmerican Energy also had
accounts  payable to  affiliates of $1.6 million and $2.8 million as of December
31, 2003 and 2002,  respectively,  that are included in Accounts  Payable on the
Consolidated Balance Sheets.

MidAmerican  Energy had a $5.0 million  long-term note  receivable  from Midwest
Capital as of December 31, 2002, which was paid off in 2003.

MidAmerican  Energy  may make  distributions  on its  capital  stock  subject to
regulatory restrictions agreed to by MidAmerican Energy in March 1999 whereby it
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

                                      -84-
<PAGE>

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 its 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.  A
transfer of assets between MidAmerican Energy and any of its affiliates, subject
to certain nonmaterial exceptions, requires the prior approval of either or both
the IUB and the Illinois Commerce Commission.

(17) UNAUDITED QUARTERLY OPERATING RESULTS

                                                         2003
                                    --------------------------------------------
                                       1st         2nd         3rd         4th
                                     Quarter     Quarter     Quarter     Quarter
                                    --------    --------    --------    --------
                                                    (In thousands)

Operating revenues ..............   $815,196    $535,883    $576,001    $668,732
Operating income ................    116,158      70,148     131,191      53,323
Income from continuing operations     58,692      33,132      64,305      32,468
Earnings on common stock ........     58,255      32,805      63,978      32,143

                                                       2002
                                    --------------------------------------------
                                       1st        2nd         3rd         4th
                                     Quarter    Quarter     Quarter     Quarter
                                    --------    --------    --------    --------
                                                    (In thousands)

Operating revenues ..............   $574,284    $492,688    $554,381    $614,806
Operating income ................     92,567      65,589     135,574      61,267
Income from continuing operations     43,384      29,251      70,510      32,676
Earnings on common stock ........     42,536      27,821      70,183      32,348

Quarterly data reflect seasonal  variations common in the utility industry.  The
increase in earnings for the first  quarter of 2003  compared to 2002 was due to
colder  weather in the first quarter of 2003 and a decrease in expenses  related
to Cooper  Nuclear  Station  as a result  of the  restructuring  of the  related
contract in August 2002.

                                      -85-

<PAGE>

                          INDEPENDENT AUDITORS' REPORT


Board of Managers and Member
MidAmerican Funding, LLC
Des Moines, Iowa

We have audited the  accompanying  consolidated  balance sheets and consolidated
statements of capitalization of MidAmerican  Funding,  LLC and subsidiaries (the
"Company")  as of  December  31,  2003 and 2002,  and the  related  consolidated
statements of operations,  comprehensive  income,  retained  earnings,  and cash
flows for each of the three years in the period ended  December  31,  2003.  Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 15. These financial  statements and financial  statement  schedule
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on the financial  statements and financial statement schedule
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of  MidAmerican  Funding,  LLC and
subsidiaries  as of  December  31,  2003  and  2002,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting  principles  generally accepted
in the  United  States of  America.  Also,  in our  opinion,  such  consolidated
financial  statement  schedule,   when  considered  in  relation  to  the  basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.

As discussed in Note (1)(j) and (1)(k) to the consolidated financial statements,
the Company changed its accounting  policy for asset  retirement  obligations in
2003 and for goodwill and other intangible assets in 2002.



  /s/  Deloitte & Touche LLP

Des Moines, Iowa
February 9, 2004

                                      -86-
<PAGE>
                            MIDAMERICAN FUNDING, LLC
                           CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                       AS OF DECEMBER 31,
                                                                  ---------------------------
                                                                     2003            2002
                                                                  -----------     -----------
                                     ASSETS
<S>                                                               <C>             <C>
UTILITY PLANT, NET
Electric .....................................................    $ 5,030,960     $ 4,731,002
Gas ..........................................................        922,099         900,209
                                                                  -----------     -----------
                                                                    5,953,059       5,631,211
Accumulated depreciation and amortization ....................     (2,810,336)     (3,011,123)
                                                                  -----------     -----------
                                                                    3,142,723       2,620,088
Construction work in progress ................................        217,537         205,988
                                                                  -----------     -----------
                                                                    3,360,260       2,826,076
                                                                  -----------     -----------

CURRENT ASSETS
Cash and cash equivalents ....................................          4,558          28,915
Marketable securities, trading ...............................              -           4,939
Receivables, less reserves of $7,554 and $7,685, respectively         305,198         321,698
Inventories ..................................................         85,465          88,492
Other ........................................................         43,572          30,070
                                                                  -----------     -----------
                                                                      438,793         474,114
                                                                  -----------     -----------

INVESTMENTS AND NONREGULATED PROPERTY, NET ...................        350,746         333,382
GOODWILL .....................................................      1,274,454       1,275,143
REGULATORY ASSETS ............................................        261,696         204,586
OTHER ASSETS .................................................         51,665          52,755
                                                                  -----------     -----------
TOTAL ASSETS .................................................    $ 5,737,614     $ 5,166,056
                                                                  ===========     ===========

                         CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Member's equity ..............................................    $ 1,863,769     $ 1,879,191
MidAmerican Energy preferred security ........................         31,759          31,759
Long-term debt, excluding current portion ....................      1,772,496       1,647,691
                                                                  -----------     -----------
                                                                    3,668,024       3,558,641
                                                                  -----------     -----------
CURRENT LIABILITIES
Notes payable ................................................         48,000          55,000
Note payable to affiliate ....................................         10,450               -
Current portion of long-term debt ............................         56,151         105,727
Accounts payable .............................................        200,549         242,733
Taxes accrued ................................................         79,304          85,987
Interest accrued .............................................         26,017          25,487
Other ........................................................         68,044          56,291
                                                                  -----------     -----------
                                                                      488,515         571,225
                                                                  -----------     -----------
OTHER LIABILITIES
Deferred income taxes ........................................        453,320         461,862
Investment tax credits .......................................         52,510          56,886
Asset retirement obligations .................................        269,124         159,757
Regulatory liabilities .......................................        574,490         113,477
Other ........................................................        231,631         244,208
                                                                  -----------     -----------
                                                                    1,581,075       1,036,190
                                                                  -----------     -----------

TOTAL CAPITALIZATION AND LIABILITIES .........................    $ 5,737,614     $ 5,166,056
                                                                  ===========     ===========
</TABLE>

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

                                      -87-
<PAGE>
                            MIDAMERICAN FUNDING, LLC
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                             -------------------------------------------
                                                2003            2002            2001
                                             -----------     -----------     -----------
<S>                                          <C>             <C>             <C>
OPERATING REVENUES
Regulated electric ......................    $ 1,397,997     $ 1,353,431     $ 1,318,129
Regulated gas ...........................        947,393         695,799         869,132
Nonregulated ............................        254,849         191,649         201,389
                                             -----------     -----------     -----------
                                               2,600,239       2,240,879       2,388,650
                                             -----------     -----------     -----------
OPERATING EXPENSES
Regulated:
  Cost of fuel, energy and capacity .....        397,727         346,685         275,904
  Cost of gas sold ......................        720,633         482,837         674,883
  Other operating expenses ..............        360,090         394,436         445,192
  Maintenance ...........................        153,405         135,487         138,343
  Depreciation and amortization .........        279,650         266,983         250,315
  Property and other taxes ..............         80,122          76,025          71,705
                                             -----------     -----------     -----------
                                               1,991,627       1,702,453       1,856,342
                                             -----------     -----------     -----------
Nonregulated:
  Cost of sales .........................        216,175         159,391         170,541
  Other .................................         24,569          29,047          61,682
                                             -----------     -----------     -----------
                                                 240,744         188,438         232,223
                                             -----------     -----------     -----------
Total operating expenses ................      2,232,371       1,890,891       2,088,565
                                             -----------     -----------     -----------

OPERATING INCOME ........................        367,868         349,988         300,085
                                             -----------     -----------     -----------

NON-OPERATING INCOME
Interest and dividend income ............          4,975          19,636          23,344
Marketable securities gains (losses), net            204          (5,094)         (1,124)
Other income ............................         24,527          26,972          21,711
Other expense ...........................        (10,096)        (31,273)        (18,737)
                                             -----------     -----------     -----------
                                                  19,610          10,241          25,194
                                             -----------     -----------     -----------
FIXED CHARGES
Interest on long-term debt ..............        119,333         119,129         109,224
Other interest expense ..................          4,061           3,431           6,417
Preferred dividends of subsidiaries .....          1,416           4,507          12,524
Allowance for borrowed funds ............         (4,586)         (3,336)         (1,661)
                                             -----------     -----------     -----------
                                                 120,224         123,731         126,504
                                             -----------     -----------     -----------

INCOME BEFORE INCOME TAXES ..............        267,254         236,498         198,775
INCOME TAXES ............................        110,078          99,782          95,688
                                             -----------     -----------     -----------

NET INCOME ..............................    $   157,176     $   136,716     $   103,087
                                             ===========     ===========     ===========
</TABLE>

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

                                      -88-

<PAGE>
                            MIDAMERICAN FUNDING, LLC
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
<TABLE>
<CAPTION>

                                                                                   YEARS ENDED DECEMBER 31,
                                                                            -------------------------------------
                                                                               2003          2002          2001
                                                                            ---------     ---------     ---------

<S>                                                                         <C>           <C>           <C>
NET INCOME .............................................................    $ 157,176     $ 136,716     $ 103,087
                                                                            ---------     ---------     ---------

OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on available-for-sale securities:
  Unrealized holding gains (losses) during period-
    Before income taxes ................................................          384        (9,512)       (5,315)
    Income tax (expense) benefit .......................................         (135)        3,329         1,860
                                                                            ---------     ---------     ---------
                                                                                  249        (6,183)       (3,455)
                                                                            ---------     ---------     ---------
    Less realized gains (losses) reflected in net income during period-
      Before income taxes ..............................................           71        (4,735)       (2,410)
      Income tax benefit ...............................................          (25)        1,657           844
                                                                            ---------     ---------     ---------
                                                                                   46        (3,078)       (1,566)
                                                                            ---------     ---------     ---------
        Net unrealized gains (losses) ..................................          203        (3,105)       (1,889)
                                                                            ---------     ---------     ---------

Unrealized gains (losses) on cash flow hedges:
  Unrealized gains (losses) during period-
    Before income taxes ................................................       (7,372)       (2,458)        7,690
    Income tax (expense) benefit .......................................        3,065         1,022        (3,197)
                                                                            ---------     ---------     ---------
                                                                               (4,307)       (1,436)        4,493
                                                                            ---------     ---------     ---------
    Less realized gains (losses) reflected in net income during period-
      Before income taxes ..............................................        5,513         2,277         1,757
      Income tax (expense) benefit .....................................       (2,292)         (946)         (731)
                                                                            ---------     ---------     ---------
                                                                                3,221         1,331         1,026
                                                                            ---------     ---------     ---------
    Less net unrealized gains (losses) reclassified to regulatory assets
      and liabilities -
        Before income taxes ............................................      (12,369)            -             -
        Income tax benefit .............................................        5,142             -             -
                                                                            ---------     ---------     ---------
                                                                               (7,227)            -             -
                                                                            ---------     ---------     ---------
        Net unrealized gains (losses) ..................................         (301)       (2,767)        3,467
                                                                            ---------     ---------     ---------

Other comprehensive income (loss) ......................................          (98)       (5,872)        1,578
                                                                            ---------     ---------     ---------

COMPREHENSIVE INCOME ...................................................    $ 157,078     $ 130,844     $ 104,665
                                                                            =========     =========     =========
</TABLE>


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

                                      -89-
<PAGE>

                            MIDAMERICAN FUNDING, LLC
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                                -------------------------------------
                                                                  2003          2002          2001
                                                                ---------     ---------     ---------
<S>                                                             <C>           <C>           <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................    $ 157,176     $ 136,716     $ 103,087
Adjustments to reconcile net income to net cash provided:
  Depreciation and amortization ............................      281,001       269,412       286,590
  Deferred income taxes and investment tax credit, net .....        4,558       (74,561)      (32,543)
  Amortization of other assets and liabilities .............       19,118        29,827        38,750
  Gain on sale of securities, assets and other investments .         (151)       (3,840)       (1,358)
  Loss from impairment of assets and investments ...........        6,375        23,584             -
  Income on equity investments .............................       (1,755)       (7,919)       (5,118)
  Net changes in accrued customer rate credits .............            -             -       (21,531)
  Power purchase contract restructuring receipt ............            -        39,100             -
  Cash outflows of accounts receivable securitization ......            -       (44,000)      (26,000)
  Impact of changes in working capital -
    Marketable securities, trading .........................        4,939        15,804        30,794
    Receivables, net .......................................       16,500      (109,729)      315,397
    Inventories ............................................        3,027        (5,153)      (14,209)
    Other current assets ...................................      (13,502)        6,526           511
    Accounts payable .......................................      (48,691)       40,477      (148,371)
    Taxes accrued ..........................................       (6,683)       24,718       (70,109)
    Interest accrued .......................................          530        (2,326)         (142)
    Other current liabilities ..............................       11,753        11,529         6,909
  Other ....................................................      (17,520)       15,450        (1,702)
                                                                ---------     ---------     ---------
      Net cash provided by operating activities ............      416,675       365,615       460,955
                                                                ---------     ---------     ---------

NET CASH FLOWS FROM INVESTING ACTIVITIES
Utility construction expenditures ..........................     (376,218)     (356,636)     (250,073)
Non-cash and accrued utility construction expenditures .....       32,081        25,349          (705)
Quad Cities Station decommissioning trust fund .............       (8,299)       (8,299)       (8,299)
Nonregulated capital expenditures ..........................       (2,312)       (1,558)       (2,541)
Purchase of assets and long-term investments ...............            -        (1,500)       (2,274)
Proceeds from sale of available-for-sale securities ........           71         4,555             -
Proceeds from sale of assets and other investments .........          326        12,138           358
Note receivable from affiliate .............................            -       151,888       (53,800)
Other investing activities, net ............................       11,895         9,984         6,555
                                                                ---------     ---------     ---------
  Net cash used in investing activities ....................     (342,456)     (164,079)     (310,779)
                                                                ---------     ---------     ---------

NET CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid ......................................     (172,500)     (233,493)            -
Issuance of long-term debt, net ............................      272,550       391,352       198,150
Retirement of long-term debt, including reacquisition cost .     (202,076)     (187,290)     (324,933)
Reacquisition of preferred securities ......................            -      (126,680)      (23,320)
Note payable to affiliate ..................................       10,450             -             -
Net increase (decrease) in notes payable ...................       (7,000)      (36,780)       10,179
                                                                ---------     ---------     ---------
  Net cash used in financing activities ....................      (98,576)     (192,891)     (139,924)
                                                                ---------     ---------     ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......      (24,357)        8,645        10,252
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...........       28,915        20,270        10,018
                                                                ---------     ---------     ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................    $   4,558     $  28,915     $  20,270
                                                                =========     =========     =========

SUPPLEMENTAL DISCLOSURE:
Interest paid, net of amounts capitalized ..................    $ 112,434     $ 116,185     $ 109,026
                                                                =========     =========     =========
Income taxes paid ..........................................    $ 117,566     $ 124,002     $ 200,098
                                                                =========     =========     =========
</TABLE>

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

                                      -90-
<PAGE>

                            MIDAMERICAN FUNDING, LLC
                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                                                 AS OF DECEMBER 31,
                                                                        ------------------------------------
                                                                           2003                      2002
                                                                        ----------               ----------
<S>                                                                     <C>                      <C>
MEMBER'S EQUITY
Paid in capital ....................................................    $1,669,753               $1,669,753
Retained earnings ..................................................       193,347                  208,671
Accumulated other comprehensive income, net:
  Unrealized gain on securities ....................................           270                       67
  Unrealized gain on cash flow hedges ..............................           399                      700
                                                                        ----------               ----------

                                                                         1,863,769      50.8%     1,879,191      52.8%
                                                                        ----------     -----     ----------     -----
MIDAMERICAN ENERGY PREFERRED SECURITIES
  (100,000,000 SHARES AUTHORIZED)
Cumulative shares outstanding; not subject to mandatory redemption:
  $3.30 Series, 49,451 shares ......................................         4,945                    4,945
  $3.75 Series, 38,305 shares ......................................         3,831                    3,831
  $3.90 Series, 32,630 shares ......................................         3,263                    3,263
  $4.20 Series, 47,362 shares ......................................         4,736                    4,736
  $4.35 Series, 49,945 shares ......................................         4,994                    4,994
  $4.40 Series, 50,000 shares ......................................         5,000                    5,000
  $4.80 Series, 49,898 shares ......................................         4,990                    4,990
                                                                        ----------               ----------
                                                                            31,759       0.9%        31,759       0.9%
                                                                        ----------     -----     ----------     -----
LONG-TERM DEBT
MidAmerican Energy mortgage bonds:
  7.7% Series, due 2004 ............................................             -                   55,630
  7.0% Series, due 2005 ............................................        90,500                   90,500
  7.375% Series, due 2008 ..........................................             -                   75,000
  7.45% Series, due 2023 ...........................................             -                    6,940
  6.95% Series, due 2025 ...........................................             -                   12,500
MidAmerican Energy pollution control revenue obligations:
  6.1% Series, due 2007 ............................................         1,000                    1,000
  5.95% Series, due 2023 (secured by general mortgage bonds) .......        29,030                   29,030
  Variable rate series -
    Due 2016 and 2017, 1.26% and 1.64%, respectively ...............        37,600                   37,600
    Due 2023 (secured by general mortgage bonds)
      1.26% and 1.64%, respectively ................................        28,295                   28,295
    Due 2023, 1.26% and 1.64%, respectively ........................         6,850                    6,850
    Due 2024, 1.26% and 1.64%, respectively ........................        34,900                   34,900
    Due 2025, 1.26% and 1.64%, respectively ........................        12,750                   12,750
MidAmerican Energy notes:
    6.375% Series, due 2006 ........................................       160,000                  160,000
    5.125% Series, due 2013 ........................................       275,000                        -
    6.75% Series, due 2031 .........................................       400,000                  400,000
Obligation under capital lease .....................................         2,060                    2,161
Unamortized debt premium and discount, net .........................        (5,489)                  (5,465)
                                                                        ----------               ----------
    Total utility ..................................................     1,072,496      29.2%       947,691      26.6%
                                                                        ----------     -----     ----------     -----
MidAmerican Funding parent debt:
  6.339% Senior Secured Notes Due 2009 .............................       175,000                  175,000
  6.75% Senior Secured Notes Due 2011 ..............................       200,000                  200,000
  6.927% Senior Secured Notes Due 2029 .............................       325,000                  325,000
                                                                        ----------               ----------
    Total MidAmerican Funding parent ...............................       700,000      19.1%       700,000      19.7%
                                                                        ----------     -----     ----------     -----
                                                                         1,772,496      48.3%     1,647,691      46.3%
                                                                        ----------     -----     ----------     -----

TOTAL CAPITALIZATION ...............................................    $3,668,024     100.0%    $3,558,641     100.0%
                                                                        ==========     =====     ==========     =====
</TABLE>


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

                                      -91-
<PAGE>

                            MIDAMERICAN FUNDING, LLC
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                                 (In thousands)
<TABLE>
<CAPTION>

                                           YEARS ENDED DECEMBER 31,
                                       ---------------------------------
                                         2003        2002        2001
                                       --------    --------    ---------

<S>                                    <C>         <C>         <C>
BEGINNING OF PERIOD ...............    $208,671    $305,448    $202,361

NET INCOME ........................     157,176     136,716     103,087

DEDUCT DIVIDENDS DECLARED .........     172,500     233,493           -
                                       --------    --------    --------

END OF PERIOD .....................    $193,347    $208,671    $305,448
                                       ========    ========    ========
</TABLE>


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

                                      -92-

<PAGE>


                            MIDAMERICAN FUNDING, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                      INDEX

                                                                            Page

(1)   Summary of Significant Accounting Policies ........................... 94

(2)   Jointly Owned Utility Plant........................................... 97

(3)   Inventories........................................................... 97

(4)   Commitments and Contingencies......................................... 97

(5)   Long-term Debt........................................................ 97

(6)   Short-term Borrowing.................................................. 99

(7)   Preferred Securities.................................................. 99

(8)   Risk Management and Energy Trading.................................... 99

(9)   Concentration of Credit Risk.......................................... 99

(10)  Rate Matters.......................................................... 99

(11)  Retirement Plans......................................................100

(12)  Segment Information...................................................100

(13)  Income Taxes..........................................................103

(14)  Fair Value of Financial Instruments...................................104

(15)  Non-Operating Other Income and Expense................................105

(16)  Affiliated Company Transactions.......................................105

(17)  Unaudited Quarterly Operating Results.................................107

                                      -93-

<PAGE>

                            MIDAMERICAN FUNDING, LLC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a)  Company Organization

MidAmerican  Funding,  LLC ("MidAmerican  Funding") is an Iowa limited liability
company with MidAmerican Energy Holdings Company ("MidAmerican Energy Holdings")
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 are exempt public utility holding companies headquartered in Des
Moines,   Iowa.  MHC's  principal   subsidiary  is  MidAmerican  Energy  Company
("MidAmerican   Energy"),  a  public  utility  with  electric  and  natural  gas
operations. Other direct wholly owned subsidiaries of MHC are InterCoast Capital
Company ("InterCoast  Capital",  formerly MidAmerican Capital Company),  Midwest
Capital Group, Inc.,  MidAmerican Services Company and MEC Construction Services
Co.

     (b)  Principles of Consolidation and Preparation of Financial Statements

The accompanying  Consolidated  Financial Statements include MidAmerican Funding
and its  subsidiaries.  All  significant  intercompany  transactions  have  been
eliminated. The preparation of financial statements in conformity with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of contingent liabilities at the date of the financial statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  may differ  from those  estimates.  Certain  classification  of
amounts for 2003 are different than that of prior years. Accordingly, historical
amounts have been reclassified.

     (c)  Regulation

Refer to Note (1)(c) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

     (d)  Revenue Recognition

Refer to Note (1)(d) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

     (e)  Depreciation and Amortization

Refer to Note (1)(e) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

                                      -94-
<PAGE>

     (f)  Investments and Nonregulated Property, Net
          ------------------------------------------

Investments and Nonregulated  Property, Net includes the following amounts as of
December 31 (in thousands):

                                                          2003       2002
                                                        --------   --------
Nuclear decommissioning trust fund ..................   $184,171   $159,757
Rabbi trusts ........................................     99,957     94,026
Equipment leases ....................................     29,549     32,625
Coal transportation property, net of accumulated
  depreciation of $1,996 and $1,705, respectively ...      9,923     10,215
MidAmerican Energy non-utility property,
  net of accumulated depreciation of
  $2,169 and $1,293, respectively ...................      8,727      8,329
Energy projects .....................................      7,567     11,162
Real estate, net of accumulated depreciation of
  $526 and $477, respectively .......................      5,755      5,244
Other venture capital investments ...................      2,596      7,272
Marketable securities, available-for-sale ...........        533        258
Other ...............................................      1,968      4,494
                                                        --------   --------
     Total ..........................................   $350,746   $333,382
                                                        ========   ========

Investments held by the nuclear  decommissioning  trust fund for the Quad Cities
Station  units are  classified  as  available-for-sale  and are reported at fair
value.  An  amount  equal  to the net  unrealized  gains  and  losses  on  those
investments  is recorded as an  adjustment  to the asset  retirement  obligation
regulatory  asset,  which is included in Regulatory  Assets on the  Consolidated
Balance  Sheets.  Funds are  invested  in  accordance  with  applicable  federal
investment  guidelines and are restricted for use as reimbursement  for costs of
decommissioning MidAmerican Energy's Quad Cities Station.

The investment in Rabbi trusts represents the cash value of corporate-owned life
insurance policies on certain key executives and the fair value of other related
investments.   The  Rabbi  trusts  were   established   to  administer   various
nonqualified  executive and director compensation plans, and investments in each
trust are restricted  for use in meeting the costs and  obligations of the trust
and related compensation plans.

Equipment  leases,  which are  accounted  for as  leveraged  leases  and held by
InterCoast  Capital,  are comprised  primarily of equity financing  provided for
five commercial passenger aircraft leased to major domestic airlines and a seven
percent undivided interest in an electric generating station, which is leased to
a utility located in Arizona.  InterCoast Capital's initial equity investment in
the aircraft  represented 20% - 34% of the purchase price;  the remaining amount
was furnished by third-party  non-recourse lenders.  InterCoast Capital has also
invested  in safe  harbor  lease  transactions  involving  ferryboats  leased to
entities  engaged in providing  recreational  boat tours.  The  investments  are
exposed to the credit risk of the  lessees.  The carrying  pre-tax  values as of
December 31 (in thousands) and the years of termination for the equipment leases
are as follows:

                                                               Year of
                                      2003        2002       Termination
                                     -------     -------     -----------

     Aircraft.....................   $20,926     $23,321       2008/2009
     Electric generation station..     8,191       8,811          2015
     Safe harbor..................       432         493      periodically
                                                              through 2015
                                     -------     -------
     Total........................   $29,549     $32,625
                                     =======     =======

The coal  transportation  property is owned and operated by CBEC Railway Inc., a
subsidiary of MidAmerican Energy. The property is depreciated on a straight-line
basis over 37 years.

                                      -95-
<PAGE>

Energy projects consist of investments in solar electric generating  facilities,
a hydroelectric  development  company,  energy  marketing assets and a gas-fired
cogeneration  plant.  The investments are supported by long-term sales contracts
to electric utilities primarily based on market price.

MidAmerican  Energy  non-utility  property consists of property such as computer
software,  land and other assets not used for regulated  utility  purposes.  The
depreciable property consists primarily of computer software, which is amortized
on a straight-line basis over five years.

Other venture capital investments  include investments in independently  managed
funds,  consisting  principally of  energy-related  venture  capital funds.  The
investments  are accounted  for using the cost or equity  method of  accounting,
depending on MidAmerican  Funding's  level of ownership and management  control.
Most of the special purpose funds have stated  termination  dates,  ranging from
2004 through 2007. At the time of fund termination, any remaining investments in
the fund are liquidated and distributions are made to investors.

The  investment  in real estate is  comprised  primarily of a 1,920 acre planned
residential and commercial development community located in the southeast corner
of South Dakota. As of December 31, 2003, 43.8% of the development available for
sale had been sold.

Marketable  securities,  which  consist of  investments  in common  stocks,  are
classified as available-for-sale and reported at fair value, with net unrealized
gains and  losses  reported  as a net of tax  amount in  Member's  Equity  until
realized. An other-than-temporary  decline in the value of a marketable security
is recognized through a write-down of the investment and charged to earnings.

     (g)  Consolidated Statements of Cash Flows

MidAmerican  Funding  considers  all cash and  highly  liquid  debt  instruments
purchased with a remaining  maturity of three months or less to be cash and cash
equivalents for the Consolidated Statements of Cash Flows.

     (h)  Accounting for Cooper Nuclear Station Power Purchase Contract

Refer to Note (1)(h) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

     (i)  Accounting for Derivatives

Refer to Note (1)(i) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

     (j)  New Accounting Pronouncements

Refer to Note (1)(j) of  MidAmerican  Energy's Notes to  Consolidated  Financial
Statements.

     (k)  Goodwill

On January 1, 2002,  MidAmerican  Funding  adopted SFAS No. 142,  "Goodwill  and
Other  Intangible  Assets," which dictates the accounting for acquired  goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and  indefinite-lived  intangible  assets  be  discontinued  and  that  entities
disclose net income for prior periods adjusted to exclude such  amortization and
related  income tax effects,  as well as a  reconciliation  from the  originally
reported net income to the adjusted net income.  MidAmerican  Funding's  related
amortization consisted solely of goodwill amortization,  which had no income tax
effect.  Amortization expense was included in Nonregulated  Operating Expenses -
Other  in  the   Consolidated   Statements   of   Operations.   Following  is  a
reconciliation  of net income as originally  reported to adjusted net income for
the years ended December 31 (in thousands):

                                      -96-
<PAGE>

                                              2003        2002        2001
                                            --------    --------    --------

    Net income as originally reported ..    $157,176    $136,716    $103,087
    Goodwill amortization ..............           -           -      34,415
                                            --------    --------    --------
    Net income as adjusted .............    $157,176    $136,716    $137,502
                                            ========    ========    ========

Based on MidAmerican  Funding's annual goodwill  impairment test completed as of
October 31, 2003,  no  impairment  was  indicated  for  goodwill.  In the fourth
quarter of 2003,  MidAmerican  Funding adjusted goodwill for a change in related
deferred  income taxes due to resolution  of tax issues  existing at the time of
purchase.  The  following  table  shows  the  change in the  carrying  amount of
goodwill by  reportable  segment for the years ended  December 31, 2003 and 2002
(in thousands):
<TABLE>
<CAPTION>

                                               Energy      Trans-    Marketing
                                Generation    Delivery     mission    & Sales       Total
                                ----------    ---------    -------   ---------    ----------
<S>                              <C>          <C>          <C>         <C>        <C>
Balance at January 1, 2002 ...   $ 927,819    $ 267,152    $ 84,172    $     -    $1,279,143
Income tax adjustment ........           -       (4,000)          -          -        (4,000)
                                 ---------    ---------    --------    -------    ----------
Balance at December 31, 2002..     927,819      263,152      84,172          -     1,275,143
Income tax adjustment ........        (338)        (246)       (105)         -          (689)
                                 ---------    ---------    --------    -------    ----------
Balance at December 31, 2003..   $ 927,481    $ 262,906    $ 84,067    $     -    $1,274,454
                                 =========    =========    ========    =======    ==========
</TABLE>

(2)  JOINTLY OWNED UTILITY PLANT

Refer to Note  (2) of  MidAmerican  Energy's  Notes  to  Consolidated  Financial
Statements.

(3)  INVENTORIES

Refer to Note  (3) of  MidAmerican  Energy's  Notes  to  Consolidated  Financial
Statements.

(4)  COMMITMENTS AND CONTINGENCIES

Refer  to  Notes  (4)(a)  through  (4)(g)  of  MidAmerican   Energy's  Notes  to
Consolidated   Financial  Statements  for  MidAmerican  Energy  commitments  and
contingencies disclosures.

     (h)  Other Commitments and Contingencies

InterCoast  Capital  has  issued a letter of credit  totaling  $6.0  million  in
conjunction with an energy project  investment,  $0.9 million of which was drawn
as  of  December  31,  2003.   The  letter  of  credit  is  reflected  in  Other
Liabilities-Other on MidAmerican Funding`s Consolidated Balance Sheets.

MidAmerican  Funding is  involved  in a number of other  legal  proceedings  and
claims.  While  management  is unable to predict the  ultimate  outcome of these
matters,  it is not expected that their  resolution will have a material adverse
effect on the results of operations and financial condition.

(5)  LONG-TERM DEBT

MidAmerican Funding's sinking fund requirements and maturities of long-term debt
for 2004 through 2008 are approximately $56 million, $91 million,  $161 million,
$2 million and zero,  respectively.  Refer to MidAmerican Funding's Consolidated
Statements of Capitalization for detail of long-term debt.

MidAmerican  Energy's Variable Rate Pollution  Control Revenue  Obligations bear
interest at rates that are periodically  established  through remarketing of the
bonds in the short-term  tax-exempt market.  MidAmerican  Energy, at its option,
may change the mode of interest  calculation  for these bonds by selecting  from
among several alternative  floating or fixed rate modes. The interest rate shown
in  the  Consolidated  Statements  of

                                      -97-
<PAGE>

Capitalization is the weighted average interest rate as of December 31, 2003 and
2002.  MidAmerican  Energy  maintains a revolving  credit facility  agreement to
provide liquidity for holders of these issues.

On  January  14,  2003,   MidAmerican  Energy  issued  $275  million  of  5.125%
medium-term notes due in 2013. The proceeds were used to refinance existing debt
and for other corporate purposes.

MidAmerican  Funding parent company long-term debt is secured by a pledge of the
common stock of MHC. The notes and bonds:

     o    are the direct senior secured obligations of MidAmerican Funding;

     o    rank  on an  equal  basis  with  all of  MidAmerican  Funding's  other
          existing and future senior obligations;

     o    rank  senior  to all of  MidAmerican  Funding's  existing  and  future
          subordinated indebtedness; and

     o    effectively  rank junior to all  indebtedness  and other  liabilities,
          including preferred stock, of the direct and indirect  subsidiaries of
          MidAmerican   Funding,   to  the   extent  of  the   assets  of  these
          subsidiaries.

MidAmerican  Funding may redeem any series of the notes and bonds in whole or in
part at any time at a redemption price equal to the sum of:

     o    the greater of the following:

          (1)  100% of the principal amount of the series being redeemed, and

          (2)  the sum of the present values of the remaining scheduled payments
               of  principal   and  interest  on  the  series  being   redeemed,
               discounted to the date of redemption on a semiannual basis at the
               treasury  yield plus (x) 15 basis  points in the case of the 2009
               notes (y) 20 basis  points in the case of the 2011 notes , or (z)
               25 basis points in the case of the 2029 Bonds, plus

     o    accrued and unpaid  interest on the  securities  being redeemed to the
          date of redemption.

MidAmerican Funding uses distributions that it receives from its subsidiaries to
make payments on the Notes and Bonds.  These  subsidiaries must make payments on
their own indebtedness before making  distributions to MidAmerican  Funding. The
distributions are also subject to utility regulatory  restrictions  agreed to by
MidAmerican  Energy in March 1999  whereby it  committed  to the Iowa  Utilities
Board ("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.

As of December 31, 2003, MidAmerican Funding and MidAmerican Energy were each in
compliance with all of their applicable long-term debt covenants.

Each of MidAmerican  Funding's direct or indirect subsidiaries is organized as a
legal  entity  separate  and  apart  from  MidAmerican  Funding  and  its  other
subsidiaries.  It should  not be  assumed  that any asset of any  subsidiary  of
MidAmerican  Funding will be available to satisfy the obligations of MidAmerican
Funding or any of its other subsidiaries;  provided,  however, that unrestricted
cash or other  assets  which are  available  for  distribution  may,  subject to
applicable  law and the terms of  financing  arrangements  of such  parties,  be
advanced,  loaned, paid as dividends or otherwise  distributed or contributed to
MidAmerican   Funding,   one  of  its   subsidiaries   or  affiliates   thereof.
Substantially  all of the  former  Iowa-Illinois  Gas and  Electric  Company,  a
predecessor  company,  utility property and franchises and  substantially all of
the former Midwest Power Systems Inc., a predecessor  company,  electric utility
property in Iowa, or  approximately  80% of  MidAmerican  Energy's gross utility
plant, is pledged to secure mortgage bonds.

                                      -98-

<PAGE>

(6)    SHORT-TERM BORROWING

Interim  financing of working capital needs and the construction  program may be
obtained  with  unaffiliated  parties  from  the  sale of  commercial  paper  or
short-term borrowing from banks.  Information  regarding short-term debt follows
(dollars in thousands):

                                                          2003       2002
                                                         -------    -------


Balance at year-end ..................................   $48,000    $55,000
Weighted average interest rate on year-end balance....       1.0%       1.3%
Average daily amount outstanding during the year .....   $ 1,960    $ 9,068
Weighted average interest rate on average daily
  amount outstanding during the year ................       1.2%       1.8%

MidAmerican  Energy has authority from the FERC to issue through April 14, 2005,
short-term debt in the form of commercial paper and bank notes  aggregating $500
million.  MidAmerican  Energy  has in place a $370.4  million  revolving  credit
facility  expiring January 13, 2005, which supports its $250 million  commercial
paper program and its variable rate pollution  control revenue  obligations.  In
addition,  MidAmerican  Energy has a $5.0 million line of credit,  which expires
July 1, 2004. As of December 31, 2003,  commercial  paper and bank notes totaled
$48.0  million for  MidAmerican  Energy.  MHC has a $4.0 million line of credit,
expiring July 1, 2004, under which zero was outstanding at December 31, 2003. As
of December  31,  2003,  InterCoast  Capital had a $5.1  million  line of credit
expiring  July 1, 2004,  to  support a $5.1  million  letter of  credit,  net of
amounts  drawn,  provided  to an  energy  project  in which it has  invested.  A
liability is reflected on MidAmerican Funding's  Consolidated Balance Sheets for
the letter of credit, net of amounts drawn.

(7)  PREFERRED SECURITIES

Refer to Note  (7) of  MidAmerican  Energy's  Notes  to  Consolidated  Financial
Statements.

(8)  RISK MANAGEMENT AND ENERGY TRADING

Refer to Note  (8) of  MidAmerican  Energy's  Notes  to  Consolidated  Financial
Statements for a discussion of MidAmerican  Funding's  commodity  price,  energy
trading and weather risks.

(9)  CONCENTRATION OF CREDIT RISK

Refer to Note  (9) of  MidAmerican  Energy's  Notes  to  Consolidated  Financial
Statements  for  information   regarding   concentration   of  credit  risk  for
MidAmerican Energy.

As disclosed in Note (1)(f), MidAmerican Capital has provided equity capital for
five commercial  aircraft leased to major domestic airlines.  As of December 31,
2003, the net receivables under these agreements totaled $20.9 million.

(10) RATE MATTERS

Refer to Note  (10) of  MidAmerican  Energy's  Notes to  Consolidated  Financial
Statements.

                                      -99-

<PAGE>

(11)   RETIREMENT PLANS

Refer to Note  (11) of  MidAmerican  Energy's  Notes to  Consolidated  Financial
Statements for additional  information  regarding MidAmerican Funding's pension,
supplemental retirement and postretirement benefit plans.

MidAmerican Funding allocated pension and postretirement costs to its parent and
other  affiliates  in each of the  years  ended  December  31,  as  follows  (in
millions):

                                            2003      2002      2001
                                           -----      ----      ----
            Pension costs ...........      $11.6      $8.1      $5.2
            Postretirement costs ....        4.2       1.5       1.0

(12) 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 services are displayed on
the Consolidated Statements of Operations.

                                     -100-

<PAGE>

The following tables provide information on an operating segment basis as of and
for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>

                                                    2003             2002             2001
                                                 -----------      -----------      -----------
  Segment Profit Information
  --------------------------

  <S>                                            <C>              <C>              <C>
  Operating revenues:
    External revenues -
       Generation ..........................     $   522,349      $   415,921      $   516,915
       Energy delivery .....................       1,812,547        1,625,600        1,664,462
       Transmission ........................          25,916           20,721           22,852
       Marketing & sales ...................         235,000          173,917          163,020
       Other ...............................           4,427            4,720           21,401
                                                 -----------      -----------      -----------
         Total .............................       2,600,239        2,240,879        2,388,650
                                                 -----------      -----------      -----------

    Intersegment revenues -
       Generation ..........................         629,939          651,342          606,164
       Energy delivery .....................        (690,126)        (708,953)        (664,099)
       Transmission ........................          57,946           55,207           55,086
       Marketing & sales ...................           2,241            2,404            2,727
       Other ...............................               -                -              122
                                                 -----------      -----------      -----------
         Total .............................               -                -                -
                                                 -----------      -----------      -----------

    Consolidated ...........................     $ 2,600,239      $ 2,240,879      $ 2,388,650
                                                 ===========      ===========      ===========

  Depreciation and amortization expense (a):
    Generation .............................     $   145,645      $   139,054      $   133,681
    Energy delivery ........................         121,296          117,893          106,496
    Transmission ...........................          11,641            8,972            8,900
    Marketing & sales ......................           2,221            2,527            2,022
    Other ..................................             198              966           35,491
                                                 -----------      -----------      -----------
       Total ...............................     $   281,001      $   269,412      $   286,590
                                                 ===========      ===========      ===========

  Interest and dividend income:
    Generation .............................     $     2,284      $     3,783      $     5,450
    Energy delivery ........................           2,307            4,468            6,727
    Transmission ...........................             346              530              822
    Marketing & sales ......................              19               51               70
    Other ..................................             117           12,283           15,382
                                                 -----------      -----------      -----------
       Total ...............................           5,073           21,115           28,451
    Intersegment eliminations ..............             (98)          (1,479)          (5,107)
                                                 -----------      -----------      -----------
       Consolidated ........................     $     4,975      $    19,636      $    23,344
                                                 ===========      ===========      ===========

  Fixed charges:
    Generation .............................     $    30,364      $    29,989      $    31,726
    Energy delivery ........................          37,745           40,737           42,654
    Transmission ...........................           4,416            4,892            5,401
    Marketing & sales ......................             325              366              363
    Other ..................................          47,472           49,226           51,467
                                                 -----------      -----------      -----------
       Total ...............................         120,322          125,210          131,611
    Intersegment eliminations ..............             (98)          (1,479)          (5,107)
                                                 -----------      -----------      -----------
       Consolidated ........................     $   120,224      $   123,731      $   126,504
                                                 ===========      ===========      ===========
</TABLE>

                                     -101-
<PAGE>
<TABLE>
<CAPTION>

                                                    2003             2002             2001
                                                 -----------      -----------      -----------
  Segment Profit Information (continued)
  --------------------------------------

  <S>                                            <C>              <C>              <C>
  Income before income taxes:
    Generation .............................     $   153,046      $   150,040      $   142,637
    Energy delivery ........................         111,089          101,176           84,334
    Transmission ...........................          47,364           40,403           39,514
    Marketing & sales ......................           6,943            1,499           (5,799)
    Other ..................................         (51,188)         (56,620)         (61,911)
                                                 -----------      -----------      -----------
       Total ...............................     $   267,254      $   236,498      $   198,775
                                                 ===========      ===========      ===========

  Segment Asset Information

  Capital expenditures:
    Generation .............................     $   215,952      $   197,666      $    87,296
    Energy delivery ........................         143,507          151,178          159,302
    Transmission ...........................          16,759            7,504            3,733
    Marketing & sales ......................           1,257            1,110            1,963
    Other ..................................           1,055              736              320
                                                 -----------      -----------      -----------
       Total ...............................     $   378,530      $   358,194      $   252,614
                                                 ===========      ===========      ===========

  Total assets (b):
    Generation .............................     $ 2,567,360      $ 2,321,090      $ 2,210,569
    Energy delivery ........................       2,797,524        2,499,462        2,382,006
    Transmission ...........................         326,607          306,223          310,429
    Marketing & sales ......................          56,743           52,143           51,164
    Other ..................................         200,863          179,141          506,331
                                                 -----------      -----------      -----------
       Total ...............................       5,949,097        5,358,059        5,460,499
     Reclassifications and
        intersegment eliminations (c) ......        (211,483)        (192,003)        (277,792)
                                                 -----------      -----------      -----------
     Consolidated ..........................     $ 5,737,614      $ 5,166,056      $ 5,182,707
                                                 ===========      ===========      ===========
</TABLE>

(a)  Depreciation and amortization  expense above includes  depreciation related
     to nonregulated operations and, for 2001, goodwill amortization,  which are
     included in  Nonregulated  Operating  Expenses - Other on the  Consolidated
     Statements of Operations.

(b)  Total assets by operating  segment  reflect the  assignment  of goodwill to
     applicable reporting units in accordance with SFAS No. 142.

(c)  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.

                                     -102-
<PAGE>

(13) INCOME TAXES

MidAmerican Funding is included in the MidAmerican Energy Holdings  consolidated
income tax  returns.  However,  MidAmerican  Funding's  income tax  liability is
computed on a stand-alone basis.

MidAmerican  Funding's  income tax expense  includes the following for the years
ended December 31 (in thousands):

                                    2003           2002           2001
                                 ---------      ---------      ---------

  Current:
    Federal ................     $  79,848      $ 129,922      $  99,662
    State ..................        25,672         44,421         28,569
                                 ---------      ---------      ---------
                                   105,520        174,343        128,231
                                 ---------      ---------      ---------
  Deferred:
    Federal ................         8,471        (54,193)       (23,373)
    State ..................           463        (15,962)        (4,253)
                                 ---------      ---------      ---------
                                     8,934        (70,155)       (27,626)

  Investment tax credit, net        (4,376)        (4,406)        (4,917)
                                 ---------      ---------      ---------
    Total ..................     $ 110,078      $  99,782      $  95,688
                                 =========      =========      =========

The following table is a reconciliation of the statutory federal income tax rate
and  the  effective   federal  and  state  income  tax  rate  indicated  by  the
Consolidated Statements of Operations for the years ended December 31:

                                                         2003     2002     2001
                                                         ----     ----     ----

Statutory federal income tax rate ...................     35%      35%      35%
Amortization of investment tax credit ...............     (2)      (2)      (2)
State income tax, net of federal income tax benefit..      6        8        8
Goodwill amortization ...............................      -        -        6
Other ...............................................      2        1        1
                                                         ---      ---      ---
Effective federal and state income tax rate .........     41%      42%      48%
                                                         ===      ===      ===

                                     -103-
<PAGE>

Included in  Deferred  Income  Taxes in the  Consolidated  Balance  Sheets as of
December 31 are deferred tax assets and deferred tax  liabilities as follows (in
thousands):

                                                        2003        2002
                                                      --------    --------

Deferred tax assets related to:
  Revenue sharing ................................    $ 63,243    $ 46,428
  Nuclear reserves and decommissioning ...........      35,956      28,411
  Pensions .......................................      35,410      31,985
  Investment tax credits .........................      35,213      38,296
  Accrued liabilities ............................       6,989       1,094
  Unrealized losses, net .........................       1,002         718
  Fuel cost recoveries ...........................           -       9,558
  Other ..........................................       7,743       6,859
                                                      --------    --------
                                                       185,556     163,349
                                                      --------    --------

Deferred tax liabilities related to:
  Depreciable property ...........................     477,749     460,886
  Income taxes recoverable through future rates ..     142,598     159,411
  Fuel cost recoveries ...........................      12,864           -
  Reacquired debt ................................       5,665       4,914
                                                      --------    --------
                                                       638,876     625,211
                                                      --------    --------
Net deferred income tax liability ................    $453,320    $461,862
                                                      ========    ========

(14) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amount and estimated fair value of the
named financial instruments as of December 31 (in thousands):
<TABLE>
<CAPTION>
                                                           2003                      2002
                                                 -----------------------   ------------------------
                                                  Carrying       Fair       Carrying       Fair
                                                   Amount       Value        Amount        Value
                                                 ----------   ----------   ----------   -----------

<S>                                              <C>          <C>          <C>          <C>
Financial instruments owned:
  Equity investments carried at cost .........   $    3,960   $    7,684   $    6,072   $    9,288

Financial instruments issued:
  Long-term debt, including current portion ..    1,828,647    1,931,086    1,753,418    1,849,314
</TABLE>

Substantially  all of  MidAmerican  Funding's  investments  in debt  and  equity
securities as of December 31, 2003 and 2002,  relate to its Quad Cities  Station
decommissioning  trust.  Refer to Note  (14) in  MidAmerican  Energy's  Notes to
Consolidated Financial Statements for additional information.

On  January  1,  2001,   InterCoast   Capital's  portfolio  of  preferred  stock
investments was transferred from the available-for-sale  category to the trading
category,  as  permitted  by SFAS No.  133.  Liquidation  of the  portfolio  was
completed in 2003. For trading securities held at December 31, 2002,  unrealized
gains and losses reflected in the Consolidated Statement of Operations totaled a
net gain of $0.1 million for the year ended December 31, 2002.  Earnings for the
year ended  December  31,  2001,  include  gross gains of $3.4 million and gross
losses of $5.8 million as a result of the transfer in January  2001.  Unrealized
gains and losses on trading securities held at December 31, 2001,  including the
effect of the transfer of those  securities to the trading  category,  totaled a
net loss of $1.6 million for the year ended December 31, 2001.

                                     -104-
<PAGE>

(15) NON-OPERATING OTHER INCOME AND EXPENSE

Non-Operating  Income  -  Other  Income  and  Other  Expense  as  shown  on  the
Consolidated  Statements of Operations include the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>

                                                           2003      2002      2001
                                                         -------   -------   -------
<S>                                                      <C>       <C>       <C>
Other income:
  Allowance for equity funds used during
    construction .....................................   $11,377   $ 8,621   $ 1,571
  Corporate-owned life insurance income ..............     6,317     1,330     5,265
  Lawsuit settlement .................................     3,083         -         -
  Income from equity method investments ..............     1,755     7,919     5,118
  Gross-up of contributions for construction .........       866       969       885
  Other venture capital investments ..................       223       358     1,783
  Energy project distribution ........................       109       408       857
  Gain on sale of assets, net ........................        57     4,212     1,358
  Fee for sold receivables ...........................         -     1,340     2,864
  Other ..............................................       740     1,815     2,010
                                                         -------   -------   -------
    Total ............................................   $24,527   $26,972   $21,711
                                                         =======   =======   =======

Other expense:
  Write down of equity method investments ............   $ 4,307   $ 5,118  $      -
  Write down of other venture capital investments ....     2,068     1,468         -
  Write down of impaired airplane leases .............         -    12,634         -
  Discount on sold receivables .......................         -     6,397    16,010
  Write off interest receivable related to a venture
    capital investment ...............................         -     2,718         -
  Other - primarily items not recoverable from
    MidAmerican Energy's regulated utility customers..     3,721     2,938     2,727
                                                         -------   -------   -------
    Total ............................................   $10,096   $31,273   $18,737
                                                         =======   =======   =======
</TABLE>

The  impairment  of  airplane  leases in 2002 was the  result  of the  financial
decline of United Air Lines,  Inc. Fair values for the leases were determined as
a result of lease restructuring negotiations and by obtaining values for similar
planes in the market at the time.

(16) AFFILIATED COMPANY TRANSACTIONS

The companies  identified as affiliates are MidAmerican  Energy Holdings and its
subsidiaries.  The basis for these charges is provided for in service agreements
between MidAmerican  Funding and its affiliates.  MidAmerican Funding reimbursed
MidAmerican  Energy  Holdings in the amount of $12.2 million,  $10.4 million and
$13.8 million in 2003, 2002 and 2001,  respectively,  for its allocated share of
corporate expenses. In 2001, MidAmerican Energy acquired a gas turbine equipment
purchase contract from MidAmerican Energy Holdings for $22.0 million.

MidAmerican  Funding  was  reimbursed  for  charges  incurred  on  behalf of its
affiliates. The majority of these reimbursed expenses was for allocated employee
wages and benefits,  insurance,  computer costs, administrative services, travel
expenses and general and administrative expenses:  including treasury, legal and
accounting  functions.  The amount of such  expenses  was $46.2  million,  $29.8
million and $20.1 million for 2003, 2002 and 2001, respectively.

MidAmerican  Energy  has  an  agreement  with  Cordova  Energy  Company  LLC,  a
subsidiary of MidAmerican  Energy Holdings,  to purchase  electric  capacity and
energy from a gas-fired combined cycle generation plant which started commercial
operational in June 2001. The agreement,  which terminates in May 2004, provides
for  MidAmerican  Energy to purchase up to 50% of the net  capacity of the plant
and to  supply  the fuel  stock  required

                                     -105-
<PAGE>

to  generate  the energy  purchased.  MidAmerican  Energy's  payment for monthly
capacity  charges  totaled  $26.6  million for 2003,  $21.2 million for 2002 and
$18.1 million for 2001.

In August  2002,  Northern  Natural Gas Company  ("NNG")  became an affiliate of
MidAmerican  Funding when NNG was purchased by MidAmerican Energy Holdings.  NNG
has  been  and  is  one  of  MidAmerican   Energy's  suppliers  of  natural  gas
transportation  and storage  capacity.  MidAmerican  Energy had net purchases of
$53.5  million of natural gas  transportation  and storage  capacity from NNG in
2003 and $17.9 million in August through December 2002.

MHC has a $200 million  revolving credit  arrangement  with  MidAmerican  Energy
Holdings  carrying  interest  at the  30-day  LIBOR  rate plus 25 basis  points.
Outstanding  balances are unsecured and due on demand.  As of December 31, 2003,
the  outstanding  balance was $10.5  million at an interest rate of 1.42% and is
reflected as Note Payable to Affiliate on the Consolidated Balance Sheet.

MidAmerican  Energy Holdings has a $100 million  revolving  credit  arrangement,
carrying  interest at the 30-day LIBOR rate plus 25 basis points, to borrow from
MHC.  Outstanding  balances are  unsecured  and due on demand.  The  outstanding
balance was zero at December  31, 2002,  and  throughout  2003.  At December 31,
2001, the outstanding balance on the note was $78.9 million. In 2002 and 2001, a
subsidiary  of MHC  had a  note  receivable  from  MidAmerican  Energy  Holdings
carrying  interest  of  5.75%  annually.  The  outstanding  balance  was zero at
December 31, 2002. At December 31, 2001, the outstanding balance on the note was
$73.0 million. MidAmerican Funding's interest income from the notes totaled $4.7
million and $7.2 million in 2002 and 2001, respectively.

MidAmerican Funding had accounts receivable from affiliates of $11.3 million and
$8.8  million  as of  December  31,  2003 and 2002,  respectively,  included  in
Receivables on the  Consolidated  Balance Sheets.  MidAmerican  Funding also had
accounts  payable to  affiliates of $1.4 million and $2.7 million as of December
31, 2003 and 2002,  respectively,  which is included in Accounts  Payable on the
Consolidated Balance Sheets.

The  indenture  pertaining to  MidAmerican  Funding's  long term debt  restricts
MidAmerican Funding from paying a distribution on its equity securities,  unless
after making such  distribution  either its debt to total capital ratio does not
exceed  0.67:1  and its  interest  coverage  ratio is not less than 2.2:1 or its
senior  secured  long  term  debt  rating  is at  least  BBB or its  equivalent.
MidAmerican  Funding may seek a release from this  restriction  upon delivery to
the indenture  trustee of written  confirmation  from the ratings  agencies that
without this  restriction  MidAmerican  Funding's  senior secured long term debt
would be rated at least BBB+.

                                     -106-

<PAGE>
(17) UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>

                                                   2003
                              -----------------------------------------------
                                1st          2nd          3rd         4th
                              Quarter      Quarter      Quarter      Quarter
                              --------     --------     --------     --------
                                        (In thousands)

<S>                           <C>          <C>          <C>          <C>
Operating revenues ......     $815,916     $536,440     $577,281     $670,602
Operating income ........      115,743       69,604      130,706       51,815
Net income ..............       50,353       26,293       57,444       23,086

                                                   2002
                              -----------------------------------------------
                                1st          2nd          3rd          4th
                              Quarter      Quarter      Quarter      Quarter
                              --------     --------     --------     --------
                                         (In thousands)

Operating revenues.......     $575,035     $493,856     $556,284     $615,704
Operating income.........       91,379       64,817      133,803       59,989
Net income...............       38,428       22,705       63,547       12,036
</TABLE>

Quarterly data reflect seasonal  variations common in the utility industry.  The
increase in earnings for the first  quarter of 2003  compared to 2002 was due to
colder  weather in the first quarter of 2003 and a decrease in expenses  related
to Cooper  Nuclear  Station  as a result  of the  restructuring  of the  related
contract in August 2002.  The  increase in net income for the fourth  quarter of
2003 compared to 2002 is due principally to the impairment of airplane leases in
2002. Refer to Note (15) of these Notes to Consolidated Financial Statements.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

With the supervision and participation of MidAmerican  Funding's and MidAmerican
Energy's  management,   including  their  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 December 31,
2003. Based on that evaluation,  MidAmerican  Funding's and MidAmerican Energy's
management, including their 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  significant  changes  in
MidAmerican  Funding's or  MidAmerican  Energy's  internal  controls or in other
factors that could significantly affect internal controls.

                                     -107-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MIDAMERICAN ENERGY

Information   concerning  the  current  directors  and  executive   officers  of
MidAmerican Energy is as follows:

Identification
--------------
                                                        Served in      Served as
                              Present                    Present        Director
Name                   Age    Position                Position Since     Since
----                   ---    --------                --------------   ---------


Jack L. Alexander       56    Senior Vice President        1998          2002
                                and Director

Keith D. Hartje         54    Senior Vice President        1999

Todd M. Raba            47    Senior Vice President        2001          2002
                                and Director

Brian K. Hankel         41    Vice President, Treasurer    1999          2002
                                and Director

Thomas B. Specketer     47    Vice President and           1999
                                and Controller

The  Board  of  Directors  elects  officers   annually.   There  are  no  family
relationships  among  these  officers,  nor any  arrangements  or  understanding
between  any  officer  and any other  person  pursuant  to which the officer was
selected.

Business Experience
-------------------

JACK L. ALEXANDER has been Director of MidAmerican  Energy since  September 2002
and Senior Vice  President  of  MidAmerican  Energy  since  November  1998.  Mr.
Alexander  served as Vice President of MidAmerican  Energy from November 1996 to
October  1998  and  held  various   executive  and  management   positions  with
MidAmerican Energy and its predecessors for more than five years prior thereto.

KEITH D. HARTJE has been Senior Vice President of MidAmerican Energy since March
1999.  Mr. Hartje served as Vice  President of  MidAmerican  Energy from 1996 to
March 1999 and held various executive and management  positions with MidAmerican
Energy and its predecessors for more than five years prior thereto.

TODD M. RABA has been Director of  MidAmerican  Energy since  September 2002 and
Senior Vice  President of  MidAmerican  Energy since July 2001.  Mr. Raba joined
MidAmerican  Energy  in 1997 as Vice  President.  Prior to  joining  MidAmerican
Energy, he was employed for 13 years with Rollins Environmental Services.

BRIAN K. HANKEL has been Director of MidAmerican Energy since September 2002 and
Vice President and Treasurer of MidAmerican  Energy since March 1999. Mr. Hankel
has been Vice  President  and Treasurer of  MidAmerican  Energy  Holdings  since
January 1997.

THOMAS B. SPECKETER has been Vice President and Controller of MidAmerican Energy
since  September  1999.  Mr.  Specketer  served as  Manager  Tax  Compliance  of
MidAmerican Energy from March 1999 to August

                                     -108-
<PAGE>

1999  and  held  various  other  tax and  accounting  management  positions  for
MidAmerican Energy and its predecessors for more than five years prior to that.

MIDAMERICAN FUNDING

Information   concerning  the  current   managers  and  executive   officers  of
MidAmerican Funding is as follows:

Identification
--------------
                                                         Served in     Served as
                            Present                       Present       Manager
Name                 Age    Position                   Position Since    Since
----                 ---    --------                   --------------  ---------


David L. Sokol        47    Chief Executive Officer
                              and Manager                     1999        1999

Gregory E. Abel       41    President and Chief Operating
                              Officer and Manager             1999        2001

Douglas L. Anderson   46    Vice President and
                              General Counsel                 2002

Patrick J. Goodman    37    Vice President and Treasurer      1999

Ronald W. Roskens     71    Independent Manager               2003        2003

The  Board  of  Managers   elects  officers   annually.   There  are  no  family
relationships  among  these  officers,  nor any  arrangements  or  understanding
between  any  officer  and any other  person  pursuant  to which the officer was
selected.

Business Experience
-------------------

DAVID L.  SOKOL has been  MidAmerican  Funding's  Chief  Executive  Officer  and
Chairman of the Board of Managers since MidAmerican Funding's formation in March
1999. Mr. Sokol has been Chief Executive Officer of MidAmerican  Energy Holdings
since April 1993 and served as President of  MidAmerican  Energy  Holdings  from
April 1993 until January 1995. He has been Chairman of the Board of Directors of
MidAmerican  Energy  Holdings  since May 1994 and a director  since  March 1991.
Formerly,  among other  positions held in the independent  power  industry,  Mr.
Sokol served as President and Chief  Executive  Officer of Kiewit Energy Company
and Ogden Projects, Inc.

GREGORY E. ABEL has been  MidAmerican  Funding's  President and Chief  Operating
Officer  since its  formation in March 1999 and a manager  since 2001.  Mr. Abel
joined MidAmerican Energy Holdings in 1992. Mr. Abel is a Chartered  Accountant,
and from 1984 to 1992, he was employed by  PriceWaterhouse.  As a Manager in the
San Francisco office of  PriceWaterhouse,  he was responsible for clients in the
energy industry.

DOUGLAS L. ANDERSON has been  MidAmerican  Funding's  Vice President and General
Counsel since May 2002. Mr. Anderson joined  MidAmerican Energy Holdings in 1993
and  has  served  in  various  legal  positions  including  General  Counsel  of
MidAmerican  Energy Holdings'  independent power affiliates.  From 1990 to 1993,
Mr. Anderson was a corporate attorney with Fraser,  Stryker.  Prior to that, Mr.
Anderson was a principal in the firm Anderson and Anderson.

PATRICK J. GOODMAN has been  MidAmerican  Funding's Vice President and Treasurer
since April 1999. Mr. Goodman joined  MidAmerican  Energy Holdings in June 1995,
and served in various accounting  positions  including Senior Vice President and
Chief Accounting  Officer.  Prior to joining  MidAmerican  Energy Holdings,

                                     -109-
<PAGE>

Mr. Goodman was a financial manager for National  Indemnity Company and a senior
associate at Coopers & Lybrand.

RONALD W.  ROSKENS has been  MidAmerican  Funding's  Independent  Manager  since
January  2003.  Dr.  Roskens has served  since 1996 as the  President  of Global
Connections,  Inc. (Omaha, Nebraska), an international business consulting firm.
Dr.  Roskens  has  previously  served as  Administrator  of the U.S.  Agency for
International  Development,  President of the University of Nebraska  System and
Executive  Vice  President  and  professor  at Kent  State  University.  He is a
director of ConAgra Inc.

AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT

During  the  fiscal  year  ended  December  31,  2003 and as of the date of this
Report,  MidAmerican  Funding's Board of Managers and MidAmerican Energy's Board
of  Directors  had  no  committees,   including  any  audit  committee.  Neither
MidAmerican  Funding nor  MidAmerican  Energy have any securities  listed on any
securities exchange and neither is required to have an audit committee. However,
the audit committee of MEHC is acting as the audit committee for the companies.

CODE OF ETHICS

MidAmerican  Funding and  MidAmerican  Energy each have adopted a code of ethics
that applies to its principal executive officer or officers, principal financial
officer and to its controller, or persons acting in such capacities. The code of
ethics is filed as an exhibit to this annual report on Form 10-K.


ITEM 11. EXECUTIVE COMPENSATION

Information  required  by Item 11 is omitted  pursuant  to  General  Instruction
I(2)(c) to Form 10-K.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

Information  required  by Item 12 is omitted  pursuant  to  General  Instruction
I(2)(c) to Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information  required  by Item 13 is omitted  pursuant  to  General  Instruction
I(2)(c) to Form 10-K.

                                     -110-

<PAGE>


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate fees billed to  MidAmerican  Funding and its  subsidiaries,  including
MidAmerican  Energy,  and to MidAmerican  Energy  separately,  during the fiscal
years ending  December  31, 2003 and 2002 by their  principal  accounting  firm,
Deloitte & Touche LLP and their respective affiliates (collectively, "Deloitte &
Touche"),  are set forth below.  The Audit  Committees of MidAmerican  Funding's
Board of  Managers  and  MidAmerican  Energy's  Board  of  Directors  have  each
considered  whether the provision of the non-audit  services  described below is
compatible with maintaining the principal accountant's independence.

                                    MidAmerican Funding   MidAmerican Energy
                                    -------------------   -----------------
                                      2003       2002       2003       2002
                                     ------     ------     ------     ------
                                                 (In thousands)
    Audit Fees (1) ..............    $626.0     $529.7     $563.4     $476.7
    Audit-Related Fees (2) ......      32.3       43.1       29.1       38.8
    Tax Fees (3) ................     282.0      407.3      253.8      365.6
    All Other Fees (4) ..........         -          -          -          -
                                     ------     ------     ------     ------
      Total aggregate fees billed    $940.3     $980.1     $846.3     $881.1
                                     ======     ======     ======     ======

(1)  Includes  the  aggregate  fees billed for each of the last two fiscal years
     for  professional  services  rendered by Deloitte & Touche for the audit of
     MidAmerican  Funding's and MidAmerican Energy's respective annual financial
     statements and the review of their respective financial statements included
     in Form 10-Q or for  services  that are  normally  provided  by  Deloitte &
     Touche in connection  with statutory and regulatory  filings or engagements
     for those fiscal years.

(2)  Includes the aggregate fees billed in each of the last two fiscal years for
     assurance  and related  services  by Deloitte & Touche that are  reasonably
     related  to the  performance  of the audit or  review of each  registrant's
     financial statements.  Services included in this category include audits of
     benefit plans,  due diligence for possible  acquisitions  and  consultation
     pertaining to new and proposed accounting and regulatory rules.

(3)  Includes the aggregate fees billed in each of the last two fiscal years for
     professional services rendered by Deloitte & Touche for tax compliance, tax
     advice, and tax planning.

(4)  Includes the aggregate fees billed in each of the last two fiscal years for
     products  and  services  provided  by  Deloitte  & Touche,  other  than the
     services reported as "Audit Fees", "Audit-Related Fees", or "Tax Fees".



                                     -111-
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements (included herein)

     Consolidated  financial  statements of MidAmerican  Energy and  MidAmerican
     Funding, as well as the Independent  Auditors' Report, are included in Item
     8 of this Form 10-K.

     (a)(2) Financial Statement Schedules

     The  following   schedules   should  be  read  in   conjunction   with  the
     aforementioned financial statements.

                                                                            Page
                                                                            ----
     MidAmerican Energy Company Consolidated Valuation and Qualifying
       Accounts (Schedule II) ...............................................113

     MidAmerican Funding, LLC Consolidated Valuation and Qualifying
       Accounts (Schedule II)................................................114

Other  schedules  are omitted  because they are not required or the  information
therein  is  not  applicable,  or is  reflected  in the  consolidated  financial
statements or notes thereto.

     (b)  Reports on Form 8-K

On October 20,  2003,  MidAmerican  Energy filed a Form 8-K,  dated  October 20,
2003,  discussing the Iowa Utilities  Board's approval on October 17, 2003, of a
settlement  agreement between MidAmerican Energy and the Iowa Office of Consumer
Advocate. A related news release is included as an exhibit to the filing.

     (c)  Exhibits

See Exhibits Index on page 117.

                                     -112-

<PAGE>
                                                                SCHEDULE II
                           MIDAMERICAN ENERGY COMPANY
                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2003
                                 (IN THOUSANDS)


   Column A                       Column B     Column C    Column D     Column E

                                  Balance at   Additions                Balance
                                  Beginning     Charged                  at End
         Description               of Year     to Income   Deductions   of Year
         -----------              ----------   ---------   ----------   --------

Reserves Deducted From Assets
   To Which They Apply:

  Reserve for uncollectible
    accounts receivable:

    Year ended 2003..............    $7,615    $ 9,909    $(10,040)    $7,484
                                     ======    =======    ========     ======

    Year ended 2002..............    $  627    $ 8,982    $ (1,994)    $7,615
                                     ======    =======    =========    ======

    Year ended 2001..............    $  102    $15,266    $(14,741)    $  627
                                     ======    =======    ========     ======



Reserves Not Deducted From
  Assets (1):

  Year ended 2003................    $8,198    $ 3,427    $ (2,846)    $8,779
                                     ======    =======    ========     ======

  Year ended 2002................    $7,802    $ 2,798    $ (2,402)    $8,198
                                     ======    =======    ========     ======

  Year ended 2001................    $8,146    $ 2,766    $ (3,110)    $7,802
                                     ======    =======    ========     ======


(1)  Reserves not deducted from assets include estimated  liabilities for losses
     retained by MidAmerican Energy for workers  compensation,  public liability
     and property damage claims.

                                     -113-
<PAGE>

                                                                  SCHEDULE II


                            MIDAMERICAN FUNDING, LLC
                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                   FOR THE THREE YEARS ENDED DECEMBER 31, 2003
                                 (IN THOUSANDS)


   Column A                        Column B    Column C   Column D     Column E

                                  Balance at   Additions               Balance
                                  Beginning    Charged                  at End
         Description               of Year     to Income  Deductions   of Year
         -----------              ----------   ---------  ----------   --------

Reserves Deducted From Assets
   To Which They Apply:

   Reserve for uncollectible
     accounts receivable:

     Year ended 2003.............    $7,685    $ 9,909    $(10,040)    $7,554
                                     ======    =======    ========     ======

     Year ended 2002.............    $  733    $ 8,946    $ (1,994)    $7,685
                                     ======    =======    ========     ======

     Year ended 2001.............    $  300    $15,314    $(14,881)    $  733
                                     ======    =======    ========     ======


Reserves Not Deducted From
  Assets (1):

     Year ended 2003.............    $9,166    $ 3,427    $ (2,856)    $9,737
                                     ======    =======    ========     ======

     Year ended 2002.............    $8,770    $ 2,798    $ (2,402)    $9,166
                                     ======    =======    ========     ======

     Year ended 2001.............    $9,867    $ 2,612    $ (3,709)    $8,770
                                     ======    =======    ========     ======


(1)  Reserves not deducted from assets include estimated  liabilities for losses
     retained by MHC for workers  compensation,  public  liability  and property
     damage claims.

                                     -114-

<PAGE>

                                   SIGNATURES

                               MIDAMERICAN ENERGY

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       MIDAMERICAN ENERGY COMPANY
                                       --------------------------
                                               Registrant

Date: February 9, 2004                 By /s/ Jack L. Alexander
                                         ------------------------------------
                                             (Jack L. Alexander)
                                              Senior Vice President
                                             (co-chief executive officer)

                                       By /s/ Todd M. Raba
                                         ------------------------------------
                                             (Todd M. Raba)
                                              Senior Vice President
                                             (co-chief executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the date indicated:

       Signature                   Title                        Date
       ---------                   -----                        ----



  /s/  Thomas B. Specketer      Vice President and Controller   February 9, 2004
----------------------------    (principal financial and
      (Thomas B. Specketer)      accounting officer)




  /s/  Jack L. Alexander        Senior Vice President           February 9, 2004
----------------------------    and Director
      (Jack L. Alexander)




  /s/  Brian K. Hankel          Vice President and              February 9, 2004
----------------------------    Director
      (Brian K. Hankel)




  /s/  Todd M. Raba             Senior Vice President           February 9, 2004
----------------------------    and Director
      (Todd M. Raba)


                                     -115-
<PAGE>


                            MIDAMERICAN FUNDING, LLC

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         MIDAMERICAN FUNDING, LLC
                                         ------------------------
                                                 Registrant


Date: February 9, 2004                   By /s/  David L. Sokol
                                           -----------------------------
                                                (David L. Sokol)
                                                 Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the date indicated:

       Signature                  Title                         Date
       ---------                  -----                         ----




  /s/  David L. Sokol           Chief Executive Officer         February 9, 2004
----------------------------
      (David L. Sokol)




  /s/  Patrick J. Goodman       Vice President and Treasurer    February 9, 2004
----------------------------    (principal financial and
      (Patrick J. Goodman)       accounting officer)




  /s/  Gregory E. Abel          Manager                         February 9, 2004
----------------------------
      (Gregory E. Abel)




  /s/ Ronald W. Roskens         Manager                         February 9, 2004
----------------------------
     (Ronald W. Roskens)


                                     -116-

<PAGE>


                                  EXHIBIT INDEX

EXHIBITS FILED HEREWITH

MidAmerican Energy
------------------

14.1  Code of Ethics for Chief Executive Officer, Chief  Financial  Officer and
      Chief Accounting Officer.

23    Consent of Deloitte & Touche LLP

24.1  Power of Attorney

31.1  Section 302 Certification for Form 10-K (co-chief executive officer)

31.2  Section 302 Certification for Form 10-K (co-chief executive officer)

31.3  Section 302 Certification for Form 10-K (chief financial officer)

32.1  Certification pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
      (co-chief executive officer)

32.2  Certification  pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
      (co-chief executive officer)

32.3  Certification  pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
      (chief financial officer)

MidAmerican Funding
-------------------

14.2  Code of Ethics for Chief Executive  Officer, Chief  Financial  Officer and
      Chief Accounting Officer.

24.2  Power of Attorney

31.4  Section 302 Certification for Form 10-K (chief executive officer)

31.5  Section 302 Certification for Form 10-K (chief financial officer)

32.4  Certification  pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
      (chief executive officer)

32.5  Certification  pursuant to Section 906 of the  Sarbanes-Oxley  Act of 2002
      (chief financial officer)


EXHIBITS INCORPORATED BY REFERENCE

MidAmerican Energy
------------------

3.1   Restated  Articles of  Incorporation of  MidAmerican  Energy  Company,  as
      amended  October 27, 1998.  (Filed as Exhibit 3.3 to MidAmerican Energy 's
      Quarterly Report on Form 10-Q for the period  ended  September  30,  1998,
      Commission File No. 1-11505.)

3.2   Restated Bylaws of MidAmerican Energy  Company,  as amended July 24, 1996.
      (Filed  as  Exhibit 3.1 to  MidAmerican Energy's  Quarterly Report  on
      Form 10-Q  for the period  ended  June 30, 1996, Commission File No.
      1-11505.)


                                     -117-
<PAGE>

MidAmerican Funding
-------------------

3.1   Articles of Organization of MidAmerican Funding, LLC

3.2   Operating Agreement of MidAmerican Funding, LLC

4.1   Indenture, dated as of March 11, 1999, by and between MidAmerican Funding,
      LLC and IBJ Whitehall Bank & Trust Company, as Trustee

4.2   First Supplemental  Indenture,  dated as of March 11, 1999, by and between
      MidAmerican  Funding, LLC  and IBJ  Whitehall Bank & Trust Company, as
      Trustee

4.3   Second  Supplemental Indenture,  dated as of March 1, 2001, by and between
      MidAmerican  Funding,  LLC and The Bank of New York,  as Trustee (Filed as
      Exhibit 4.4 to MidAmerican Funding's Registration Statement No. 333-56624)

4.4   Registration  Rights  Agreement,   dated  March  9,  1999,  by  and  among
      MidAmerican  Funding,  LLC, Credit Suisse First Boston Corporation, Lehman
      Brothers, Inc., Goldman Sachs & Co. and Merrill Lynch & Co.

MidAmerican Energy and MidAmerican Funding
------------------------------------------

4.1   General  Mortgage Indenture and Deed of Trust dated as of January 1, 1993,
      between Midwest Power Systems Inc. and Morgan Guaranty Trust Company of
      New York, Trustee.  (Filed as Exhibit 4(b)-1 to Midwest Resources Inc.'s
      Annual  Report on Form 10-K  for the  year ended December 31, 1992,
      Commission  File No. 1-10654.)

4.2   First Supplemental  Indenture dated as of January 1, 1993, between Midwest
      Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee.
      (Filed as Exhibit 4(b)-2 to Midwest Resources'  Annual Report on Form 10-K
      for the year ended December 31, 1992, Commission File No. 1-10654.)

4.3   Second Supplemental Indenture dated as of January 15, 1993, between
      Midwest Power Systems Inc. and Morgan Guaranty Trust Company of New York,
      Trustee.  (Filed as Exhibit 4(b)-3 to Midwest  Resources' Annual Report on
      Form 10-K for the year ended December 31, 1992, Commission File No.
      1-10654.)

4.4   Third Supplemental Indenture dated as of May 1, 1993, between Midwest
      Power Systems Inc. and Morgan Guaranty Trust Company of New York, Trustee.
      (Filed as Exhibit  4.4 to Midwest  Resources'  Annual  Report on Form 10-K
      for the year ended December 31, 1993, Commission File No. 1-10654.)

4.5   Fourth Supplemental Indenture dated as of October 1, 1994, between Midwest
      Power  Systems Inc. and Harris Trust and Savings Bank, Trustee.  (Filed as
      Exhibit 4.5 to Midwest  Resources' Annual Report on Form 10-K for the year
      ended December 31, 1994, Commission File No. 1-10654.)

4.6   Fifth Supplemental Indenture dated as of November 1, 1994, between Midwest
      Power Systems Inc. and Harris Trust and Savings Bank,  Trustee.  (Filed as
      Exhibit 4.6 to Midwest Resources'  Annual Report on Form 10-K for the year
      ended December 31, 1994, Commission File No. 1-10654.)

4.7   Indenture of Mortgage and Deed of Trust, dated as of March 1, 1947. (Filed
      by Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as Exhibit 7B to
      Commission File No. 2-6922.)

4.8   Sixth  Supplemental  Indenture  dated  as  of  July  1,  1967.  (Filed  by
      Iowa-Illinois  Gas and Electric Company as Exhibit 2.08 to Commission File
      No. 2-28806.)

4.9   Twentieth Supplemental Indenture dated as of May 1, 1982. (Filed as
      Exhibit 4.B.23 to Iowa-Illinois' Quarterly Report on Form 10-Q for the
      period ended June 30, 1982, Commission File No. 1-3573.)

                                     -118-

<PAGE>

4.10  Resignation and  Appointment of successor  Individual  Trustee.  (Filed by
      Iowa-Illinois Gas and Electric Company (Iowa-Illinois) as Exhibit 4.B.30
      to Commission File No. 33-39211.)

4.11  Twenty-Eighth  Supplemental Indenture dated as of May 15, 1992.  (Filed as
      Exhibit 4.31.B to  Iowa-Illinois' Current Report on Form 8-K dated May 21,
      1992, Commission File No. 1-3573.)

4.12  Thirtieth  Supplemental Indenture  dated as of October 1, 1993.  (Filed as
      Exhibit 4.34.A to Iowa-Illinois'  Current Report on Form 8-K dated October
      7, 1993, Commission File No. 1-3573.)

4.13  Sixth  Supplemental Indenture  dated as of July 1, 1995,  between  Midwest
      Power Systems Inc. and Harris Trust and Savings Bank,  Trustee.  (Filed as
      Exhibit  4.15 to MidAmerican  Energy's  Annual  Report on Form 10-K  dated
      December 31, 1995, Commission File No. 1-11505.)

4.14  Thirty-First Supplemental  Indenture  dated  as of July 1,  1995,  between
      Iowa-Illinois Gas and Electric  Company and Harris Trust and Savings Bank,
      Trustee.  (Filed as Exhibit 4.16 to MidAmerican  Energy's Annual Report on
      Form 10-K dated December 31, 1995, Commission File No. 1-11505.)

10.1  MidAmerican Energy Company Restated  Executive Deferred Compensation Plan.
      (Filed as Exhibit 10.2 to MidAmerican  Energy's  Quarterly  Report on Form
      10-Q dated March 31, 1999, Commission File No. 1-11505.)

10.2  MidAmerican  Energy Company  Combined  Midwest  Resources/Iowa   Resources
      Restated Deferred Compensation Plan - Board of Directors. (Filed as
      Exhibit 10.1 to MidAmerican Energy's Quarterly Report on Form 10-Q dated
      March 31, 1999, Commission File No. 1-11505.)

10.3  MidAmerican  Energy  Company  First  Amended  and  Restated   Supplemental
      Retirement Plan  for  Designated  Officers.  (Filed  as  Exhibit  10.52 to
      MidAmerican  Energy   Holding   Company's   Registration   Statement   No.
      333-101699.)

10.4  Midwest Resources Inc. Supplemental  Retirement Plan (formerly the Midwest
      Energy Company Supplemental  Retirement Plan).  (Filed as Exhibit 10.10 to
      Midwest  Resources' Annual Report on Form 10-K for the year ended December
      31, 1993, Commission File No. 1-10654.)

10.5  Iowa-Illinois Gas and Electric  Company  Supplemental  Retirement Plan for
      Principal Officers, as amended as of July 28, 1994.  (Filed as an Exhibit
      to Iowa-Illinois'  Annual Report on Form 10-K for the year ended  December
      31, 1994, Commission File No. 1-3573.)

10.6  Iowa-Illinois  Gas and Electric  Company  Compensation  Deferral  Plan for
      Principal Officers, as amended as of July 1, 1993.  (Filed as Exhibit
      10.K.2  to  Iowa-Illinois' Annual Report on Form 10-K for the year ended
      December 31, 1993, Commission File No. 1-3573.)

10.7  Iowa-Illinois Gas and Electric  Company Board of  Directors'  Compensation
      Deferral Plan.  (Filed as Exhibit 10.K.4 to Iowa-Illinois' Annual Report
      on Form  10-K for the year ended  December 31,  1992, Commission  File No.
      1-3573.)

10.8  Amendment No. 1 to the Midwest Resources Inc. Supplemental Retirement
      Plan.  (Filed as Exhibit 10.24 to Midwest  Resources' Annual Report on
      Form 10-K for the year ended December 31, 1994, Commission File No.
      1-10654.)

10.9  Form of Indemnity Agreement  between  MidAmerican  Energy  Company and its
      directors and officers.  (Filed as Exhibit  10.37 to MidAmerican  Energy's
      Annual  Report on Form 10-K dated  December 31, 1995, Commission  File No.
      1-11505.)

                                     -119-
<PAGE>


10.10 Iowa Utilities Board Order Approving Settlement With Modifications, issued
      December 21,  2001, in regards to  MidAmerican  Energy  Company  (Filed as
      Exhibit  10.7 to MidAmerican  Energy's  Annual  Report on Form 10-K  dated
      December 31, 2001, Commission File No. 1-11505.)

10.11 Stipulation  and  Agreement  in  Regard  to  MidAmerican   Energy  Company
      Ratemaking Principles  for Wind  Energy  Investment,  approved by the Iowa
      Utilities Board on October 17,  2003  (Filed as Exhibit 10 to  MidAmerican
      Funding's and MidAmerican  Energy's  joint Form 10-Q for the quarter ended
      September  30,  2003;   Commission   File  Nos.   333-90553  and  1-11505,
      respectively.)

Note: Pursuant to (b) (4) (iii)(A) of Item 601 of  Regulation  S-K,  the Company
      has not filed as an exhibit  to this Form 10-K  certain  instruments  with
      respect to  long-term  debt not  registered  in which the total  amount of
      securities authorized thereunder does not exceed 10% of total assets of
      the Company, but hereby agrees to furnish to the Commission on request any
      such instruments.

                                     -120-