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, 2004





Commission
    
    Registrant’s
      Name, State of Incorporation,
    
    IRS
      EmployerFile
      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****333-15387**
    
    **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]












All of
the member’s equity of MidAmerican Funding, LLC is held by its parent company,
MidAmerican Energy Holdings Company, as of February 1, 2005.





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, 2005, 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.













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****PART
      I**Item 1.
    Business
    4Item 2.
    Properties
    17Item 3.
    Legal Proceedings
    18Item 4.
    Submission of Matters to a Vote of Security
      Holders
    18**PART
      II**Item 5.
    Market for the Registrant's Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
    18Item 6.
    Selected Financial Data
    19Item 7.
    Management's Discussion and Analysis of Financial Condition
      and Results of Operations
    21Item 7A.
    Quantitative and Qualitative Disclosures About Market
      Risk
    41Item 8.
    Financial Statements and Supplementary
      Data
    45Item 9.
    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
    100Item 9A.
    Controls and Procedures
    100Item 9B.
    Other Information
    100**PART
      III**Item 10.
    Directors and Executive Officers of the
      Registrant
    100Item 11.
    Executive Compensation
    102Item 12.
    Security Ownership of Certain Beneficial Owners and
      Management
    102Item 13.
    Certain Relationships and Related
      Transactions
    102Item 14.
    Principal Accountant Fees and
    Services
    103**PART
      IV**Item 15.
    Exhibits and Financial Statement
      Schedules
    104Signatures
    107Exhibit Index
    109





3





**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. (“MHC”), which owns all of the common stock of
MidAmerican Energy Company (“MidAmerican Energy”); InterCoast Capital Company
(“InterCoast Capital”); 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
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;
 
 ·
    availability
      of qualified personnel;
 
 ·
    unscheduled
      generation outages or repairs;
 
 ·
    risks
      relating to nuclear generation;
  4





·
    financial
      or regulatory accounting principles or policies imposed by the Public
      Company Accounting Oversight Board, 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 manages economic development investments
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 (10) of Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.





MidAmerican
Funding and its subsidiaries had 3,696 employees as of December 31,
2004.





MIDAMERICAN
ENERGY





MidAmerican
Energy is a public utility company headquartered in Iowa with $5.1 billion of
assets as of December 31, 2004, and operating revenues for 2004 totaling
$2.7 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. Additionally, MidAmerican Energy transports
natural gas through its distribution system for a number of end-use customers
who have independently secured their supply of natural gas. As of
December 31, 2004, MidAmerican Energy had approximately 698,000 regulated
retail electric customers and 680,000 regulated retail and transportation
natural gas customers.





In
addition to retail sales and natural gas transportation, MidAmerican Energy
sells electric energy and natural gas to other utilities, marketers and
municipalities. These sales are referred to as wholesale sales.





Financial
information on MidAmerican Energy's segments of business is included in Note
(10) 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.





5








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, 2004, MidAmerican Energy derived 53% of its gross
operating revenues from its regulated electric business, 37% from its regulated
gas business and 10% from its nonregulated business activities. For 2003 and
2002, the corresponding percentages were 54% electric, 36% gas and 10%
nonregulated; and 61% electric, 31% gas and 8% nonregulated, respectively.





At
December 31, 2004, MidAmerican Energy had 3,696 employees, of which 1,755
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 1,687 employee members.





REGULATED
ELECTRIC OPERATIONS





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





Total
      Regulated Electric SalesBy
      Customer Class2004
    
    2003
    
    2002Residential
    
    
    19.6
    %
    
    19.4
    %
    
    19.8
    %Small
      general service(1)
    
    
    14.5
    
    
    14.0
    
    
    14.2Large
      general service(2)
    
    
    26.7
    
    
    25.4
    
    
    24.5Wholesale(3)
    
    
    34.2
    
    
    36.4
    
    
    36.7Other
    
    
    5.0
    
    
    4.8
    
    
    4.8100.0
    %
    
    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 State2004
    
    2003
    
    2002Iowa
    
    
    88.7
    %
    
    88.8
    %
    
    88.5
    %Illinois
    
    
    10.3
    
    
    10.4
    
    
    10.7South
      Dakota
    
    
    1.0
    
    
    0.8
    
    
    0.8100.0
    %
    
    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 general,
35-40% of MidAmerican Energy's regulated electric revenues are reported in the
months of June, July, August and September.




6







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 record hourly peak demand of 3,935 megawatts
(“MW”). For 2004, MidAmerican Energy recorded an hourly peak demand of 3,894 MW
on July 20.





MidAmerican
Energy's total accredited net generating capability in the summer of 2004 was
4,897 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 actual amount
of generating capacity available at any time may be less than the accredited
capability due to regulatory restrictions, transmission constraints, fuel
restrictions and generating units being temporarily out of service for
inspection, maintenance, refueling, modifications or other reasons.


7








The
following table details accredited generating capacity of MidAmerican Energy,
along with participation purchases and sales, net, for summer 2004
accreditation.




Company’s
      Share ofPercent
    
    
    
    Accredited
      GeneratingPlant
    
    Ownership
    
    Fuel
    
    Capability
      (MW)Steam
      electric generating plants:Council
      Bluffs Energy CenterUnit
      No. 1
    
    
    100.0
    %
    
    Coal
    
    
    45Unit
      No. 2
    
    
    100.0
    
    
    Coal
    
    
    88Unit
      No. 3
    
    
    79.1
    
    
    Coal
    
    
    546George
      Neal StationUnit
      No. 1
    
    
    100.0
    
    
    Coal
    
    
    135Unit
      No. 2
    
    
    100.0
    
    
    Coal
    
    
    300Unit
      No. 3
    
    
    72.0
    
    
    Coal
    
    
    371Unit
      No. 4
    
    
    40.6
    
    
    Coal
    
    
    261Louisa
      Unit
    
    
    88.0
    
    
    Coal
    
    
    616Ottumwa
      Unit
    
    
    52.0
    
    
    Coal
    
    
    372Riverside
      StationUnit
      No. 3
    
    
    100.0
    
    
    Coal
    
    
    5Unit
      No. 5
    
    
    100.0
    
    
    Coal
    
    
    1302,869Combustion
      turbines:Coralville
      - 4 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    64Electrifarm
      - 3 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    200Greater
      Des Moines Energy Center - 2 units
    
    
    100.0
    
    
    Gas
    
    
    327Moline
      - 4 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    64Parr
      - 2 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    32Pleasant
      Hill Energy Center - 3 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    163River
      Hills Energy Center - 8 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    118Sycamore
      Energy Center - 2 units
    
    
    100.0
    
    
    Gas/Oil
    
    
    1481,116Nuclear:
      Quad Cities StationUnit
      No. 1
    
    
    25.0
    
    
    Nuclear
    
    
    218Unit
      No. 2
    
    
    25.0
    
    
    Nuclear
    
    
    219437Hydro:
      Moline - 4 units
    
    
    100.0
    
    
    Water
    
    
    3Portable
      power modules - 28 units
    
    
    100.0
    
    
    Oil
    
    
    56Accredited
      generating capacity
    
    
    
    
    
    
    
    
    4,481Participation
      purchases and (sales), net
    
    
    
    
    
    
    
    
    416Accredited
      net generating capability
    
    
    
    
    
    
    
    
    4,897




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 recently completed its
combined cycle combustion turbine project and is currently constructing a 790-MW
(expected accreditation) super-critical-temperature, coal-fired Council Bluffs
Energy Center Unit No. 4 (“CBEC Unit 4”) and a 310-MW (nameplate rating) wind
power project in Iowa. A 50-MW (nameplate rating) expansion of the wind power
project is also expected to be constructed in 2005. The projects will provide
service to regulated retail electricity customers. MidAmerican Energy has
obtained regulatory approval to include the Iowa portion of the actual costs of
the generation projects in its Iowa rate base as long as actual costs do not
exceed the agreed caps that MidAmerican Energy has deemed to be reasonable. If
the caps are exceeded, MidAmerican Energy has the right to demonstrate the
prudence of the expenditures above the caps, subject to regulatory review.
Wholesale sales may also be made from the projects to the extent the power is
not immediately needed for regulated retail service. MidAmerican Energy expects
to invest approximately $1.1 billion in the CBEC Unit 4 and wind generation
projects, of which $350.4 million has been invested through December 31,
2004.


8


MidAmerican
Energy recently completed work on its Greater Des Moines Energy Center, a
natural gas-fired, combined cycle plant located near Pleasant Hill, Iowa.
Construction of the plant was completed in two phases. Commercial operation of
the simple cycle mode began on May 5, 2003, and continued through most of
2004, providing 327 MW of accredited capacity in the summer of 2004. Commercial
operation of the combined cycle mode began on December 16, 2004. The
additional accredited capacity from the completion of the second phase is
expected to be 190 MW. MidAmerican Energy expects the total cost of the Greater
Des Moines Energy Center to be under the $357 million cost cap established by
the Iowa Utilities Board (“IUB”).





MidAmerican
Energy is currently constructing the CBEC Unit 4, 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, including
transmission facilities, to be approximately $737 million, excluding allowance
for funds used during construction. Municipal, cooperative and public power
utilities will own the remainder, which is a typical ownership arrangement for
large base-load plants in Iowa. On February 12, 2003, MidAmerican Energy
executed a contract with Mitsui & Co. Energy Development, Inc. for 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. On December 29, 2004, MidAmerican Energy
received an order from the IUB approving construction of the associated
transmission facilities and is proceeding with construction.





The
second electric generating project currently under construction consists of wind
power facilities located at two sites in north central Iowa 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. MidAmerican Energy will own
and operate these facilities, which, including transmission facilities, are
expected to cost approximately $323 million, excluding allowance for funds used
during construction. As of December 31, 2004, wind turbines totaling 160.5
MW at one of the sites were completed and in service. Completion of the
remaining turbines is expected by the middle of 2005. On January 31, 2005, the
IUB approved ratemaking principles related to expanding the wind power project.
An additional 50 MW of capacity, based on the nameplate rating, is expected to
be constructed at the sites in 2005 at an estimated cost of $63
million.





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”). The 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.
The MAPP facilitates operation of the transmission system, is responsible for
some aspects of the safety and reliability of the bulk electric system, and has
responsibility for administration of the 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. MidAmerican
Energy’s reserve margin at peak demand for 2004 was approximately 26%.
MidAmerican Energy believes it has adequate electric capacity reserve through
2009, including capacity provided by the generating projects discussed above.
However, significantly higher-than-normal temperatures during the cooling season
could cause MidAmerican Energy’s reserve to fall below the 15% minimum. If
MidAmerican Energy fails to maintain the required minimum reserve, significant
penalties could be contractually imposed by the MAPP.





MidAmerican
Energy'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.




9








Energy
Supply for Electric Operations





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





2004
    
    2003
    
    2002MidAmerican
      Energy-owned generation
    
    
    76.5
    %
    
    77.9
    %
    
    76.5
    %Energy
      purchased under long-term contracts
    
    
    12.6
    
    
    11.5
    
    
    14.3Energy
      purchased - other
    
    
    10.9
    
    
    10.6
    
    
    9.2100.0
    %
    
    100.0
    %
    
    100.0
    %





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





2004
    
    2003
    
    2002Coal
    
    
    84.2
    %
    
    83.9
    %
    
    79.1
    %Nuclear
      (a)
    
    
    14.8
    
    
    15.5
    
    
    20.5Gas
    
    
    0.9
    
    
    0.5
    
    
    0.3Oil/Hydro
    
    
    0.1
    
    
    0.1
    
    
    0.1100.0
    %
    
    100.0
    %
    
    100.0
    %





(a)
    In
      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. 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)(e) of Notes to Consolidated Financial
Statements in Item 8 of this Form 10-K.





MidAmerican
Energy has a long-term coal transportation agreement with Union Pacific Railroad
Company (“Union Pacific”). Under this agreement, Union Pacific delivers coal
directly to MidAmerican Energy’s Neal and Council Bluffs Energy Centers and to
an interchange point with the Iowa, Chicago & Eastern Railroad Corporation
for delivery to the Louisa and Riverside Energy Centers. 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 is a 25% joint owner of Quad Cities Generating Station (“Quad Cities
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 are 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 2008 can be met under
existing supplies or commitments. Commitments for fuel fabrication have been
obtained through 2013 with options for another eight years. 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.





10








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 and transportation services to end-use, or retail,
customers and natural gas 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 2004, 45% 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 general, 45-55% of MidAmerican
Energy’s regulated gas revenues are reported in the months of January, February,
March, and December.





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





Total
      Regulated Gas SalesBy
      Customer Class2004
    
    2003
    
    2002Residential
    
    
    40.0
    %
    
    44.1
    %
    
    39.4
    %Small
      general service(1)
    
    
    19.6
    
    
    21.0
    
    
    19.9Large
      general service(1)
    
    
    2.2
    
    
    1.9
    
    
    1.6Wholesale(2)
    
    
    38.0
    
    
    32.7
    
    
    39.0Other
    
    
    0.2
    
    
    0.3
    
    
    0.1100.0
    %
    
    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 State2004
    
    2003
    
    2002Iowa
    
    
    77.7
    %
    
    77.9
    %
    
    78.0
    %Illinois
    
    
    9.9
    
    
    10.0
    
    
    10.0South
      Dakota
    
    
    11.5
    
    
    11.3
    
    
    11.2Nebraska
    
    
    0.9
    
    
    0.8
    
    
    0.8100.0
    %
    
    100.0
    %
    
    100.0
    %




11








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 regulated assets by
engaging in sales for resale transactions. IUB and South Dakota Public Utilities
Commission (“SDPUC”) rulings have allowed MidAmerican Energy to retain 50% of
the respective jurisdictional margins earned on wholesales sales 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 SDPUC 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 is allowed to recover its cost of gas from all of its regulated gas
customers through purchased gas adjustment clauses. Accordingly, MidAmerican
Energy’s regulated gas customers retain the risk associated with the market
price of gas. MidAmerican Energy uses several strategies to reduce the market
price risk for its gas customers, including the use of storage gas and peak
shaving facilities, sharing arrangements to share savings and costs with
customers, and short-term and long-term financial and physical gas purchase
agreements.





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 when the demand for gas has
historically been lower than during the heating season. 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 1995,
the IUB gave initial approval of MidAmerican Energy’s Incentive Gas Supply
Procurement Program. In November 2004, the IUB extended the program through
October 31, 2006. 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 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 for additional
information.





On
February 2, 1996, MidAmerican Energy had its highest peak-day delivery of
1,143,026 decatherms (“Dths”). This peak-day delivery consisted of approximately
88% traditional sales service and 12% transportation service of customer-owned
gas. As of January 31, 2005, MidAmerican Energy’s 2004/2005 winter heating
season peak-day delivery of 997,058 Dths was reached on January 14, 2005. This
peak-day delivery included 76% traditional sales service and 24% transportation
service.




12








The
supply sources utilized by MidAmerican Energy to meet its 2004/2005 peak-day
deliveries to its traditional sales service customers were:





Thousands
    
    Percentof
    
    ofDths
    
    TotalLeased
      storage and peak shaving plants
    
    
    125.3
    
    
    16.5
    %Firm
      supply
    
    
    632.2
    
    
    83.5757.5
    
    
    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.





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





2004
    
    2003
    
    2002Nonregulated
      retail electric
    
    $
    13.5
    
    $
    13.2
    
    $
    11.4Nonregulated
      retail gas
    
    
    3.9
    
    
    4.9
    
    
    2.7Wholesale
      gas and electric
    
    
    6.7
    
    
    4.7
    
    
    3.3Income
      sharing arrangements under regulated gas tariffs
    
    
    3.7
    
    
    5.0
    
    
    3.1Incentive
      gas supply procurement program award
    
    
    2.4
    
    
    3.8
    
    
    3.4Other
    
    
    2.9
    
    
    3.1
    
    
    4.5$
    33.1
    
    $
    34.7
    
    $
    28.4





MidAmerican
Energy’s nonregulated retail electric marketing services provide electric supply
services to retail customers in Illinois, Ohio and, beginning in September 2004,
Michigan.





MidAmerican
Energy’s nonregulated retail gas marketing services operate in Iowa, Illinois,
Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements.





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.





Nonregulated
operations also include earnings from sharing arrangements under applicable
state regulations and tariffs filed with the IUB and the 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.




13





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 Federal Energy Regulatory Commission (“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 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





In
accordance with three electric settlement agreements between MidAmerican Energy,
the Iowa Office of Consumer Advocate (“OCA”) and other intervenors approved by
the IUB in 2001, 2003 and 2005, MidAmerican Energy has agreed not to seek a
general increase in electric rates prior to 2012 unless its Iowa jurisdictional
electric return on equity in any year falls below 10%. Prior to filing for a
general increase in electric rates, MidAmerican Energy is required to conduct 30
days of good faith negotiations with the signatories to the settlement
agreements to attempt to avoid a general increase in rates. As a party to the
settlement agreements, the OCA has agreed not to request or support any decrease
in MidAmerican Energy’s Iowa electric rates prior to January 1, 2012. The
settlement agreements specifically allow the IUB to approve or order electric
rate design or cost of service rate changes that could result in changes to
rates for specific customers as long as such changes do not result in an overall
increase in revenues for MidAmerican Energy. 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, 2011, are shared with customers. See Note (5) of Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K for additional
discussion of these settlements.





Under
Iowa law, there are two options for temporary collection of higher rates.
Collection can begin, subject to refund, either within 10 days, without IUB
review, or 90 days after filing with and approval by the IUB. If the 10-day
option is selected, Iowa law provides that the utility may be required to make
refunds based on overpayments made by each customer class, group or rate zone of
the difference between final rates and the rates that would have been collected
if temporary rates had been based upon prior regulatory principles. If the
90-day option is selected, Iowa law provides the IUB with the latitude to
prescribe the manner of refunding the difference between final rules and the
rates based on prior ratemaking principles and a rate of return on common equity
previously approved by the IUB. In either case, 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.





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 cost of energy
purchased from other utilities. MidAmerican Energy's cost of gas is reflected in
its Illinois gas rates through the Illinois Uniform Purchased Gas Adjustment
Clause.




14








In
December 1997, Illinois enacted a law to restructure Illinois’ electric utility
industry. The law changed 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 asset 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. The FERC is currently conducting its
initial review of what will become a triennial review of MidAmerican Energy’s
market-based pricing authority. Margins earned on wholesale sales have
historically been included as a component of retail cost of service upon which
retail rates are based.





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.





If
implemented, the FERC’s July 2002 proposed rule for SMD would require sweeping
changes to the use and expansion of the interstate transmission and wholesale
bulk power systems in the United States. However, it is unclear when or even
whether the FERC will issue a final rule and what form the final rule would
ultimately take. In response to significant criticism of its proposed rule, the
FERC subsequently indicated that it had changed its proposal and would adopt a
flexible approach to SMD that would accommodate regional differences. Any final
rule on SMD or similar FERC action could impact the costs of MidAmerican
Energy’s electricity and transmission products. Such FERC action could directly
or indirectly influence how transmission services are priced, the availability
of transmission services, how transmission services are obtained, and market
prices for electricity in markets in which MidAmerican Energy buys and sells
electricity. Although MidAmerican Energy is not presently a member of an RTO,
two RTO’s - Midwest Independent System Operator (“MISO”) and PJM Interconnection
(“PJM”) - are directly interconnected with MidAmerican Energy’s transmission
facilities. MidAmerican Energy cannot predict what impact, if any, the evolution
of these RTO’s, or others, may have on how wholesale electricity is bought and
sold, as well as the geographic scope of the wholesale marketplace in which
MidAmerican Energy buys and sells electricity.





Refer to
the “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.





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. On October 29, 2004, the NRC granted renewed
licenses for both Quad Cities Station Unit 1 and Unit 2 that provide for
operation until December 14, 2032, which is in effect a 20-year extension of the
licenses. 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.





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.





15








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.





Under the
Nuclear Waste Policy Act of 1982 (“NWPA”), the U.S. Department of Energy (“DOE”)
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 NWPA, signed a contract with the DOE under
which the DOE was to receive spent nuclear fuel and high-level radioactive waste
for disposal beginning not later than January 1998. The DOE did not begin
receiving spent nuclear fuel on the scheduled date, and remains unable to
receive such fuel and waste. The earliest the DOE currently is expected to be
able to receive such fuel and waste is 2010. The costs to be incurred by the DOE
for disposal activities are being financed by fees charged to owners and
generators of the waste. In 2004, Exelon Generation reached a settlement with
the DOE concerning the DOE’s failure to begin accepting spent nuclear fuel in
1998. As a result, Quad Cities Station will be billing the DOE, and the DOE will
be obligated to reimburse the station for all station costs incurred due to the
DOE’s delay. 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 has completed the bulk of the construction work on the first pad and
expects 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.





MidAmerican
Energy has established 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 2004 was $8.3 million.





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 58.6% of MidAmerican
Energy's electric accredited net generating capability and 84.2% of the electric
energy generated in 2004. 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.





16





Hazardous
Materials and Waste Management -





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





MidAmerican
Energy has evaluated all known properties that were, at one time, sites of gas
manufacturing plants for which 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 $7 million to
$14 million. As of December 31, 2004, MidAmerican Energy has recorded a
liability and regulatory asset of $9.3 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.





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, 2004, InterCoast Capital had total assets of $30.8 million, a
majority of which relate to investments in equipment leases.





InterCoast
Capital had equity participations in equipment leases totaling $25.9 million and
$29.5 million at December 31, 2004 and 2003, respectively. At
December 31, 2004, approximately $18.2 million was invested in five
commercial passenger aircraft. Approximately $7.3 million of the
December 31, 2004, 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
$7.9 million as of December 31, 2004. Midwest Capital's primary activity is
the management of utility service area investments to support economic
development. Midwest Capital's principal interest is a 1,920-acre planned
residential and commercial development 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. As of
December 31, 2004, 46.1% of the development available for sale had been
sold.





**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, 2004,
included 918 miles of 345-kilovolt ("kV") lines and 1,128 miles of 161-kV lines.
MidAmerican Energy’s electric distribution system included approximately 222,300
transformers and 382 substations at December 31, 2004.





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, 2004, included approximately 21,548
miles of gas mains and service pipelines.





17








Net
utility plant in service by operating segment is as follows as of
December 31, 2004 (in thousands):





Generation
    
    $
    1,671,872Energy
      delivery -Electric
      distribution
    
    
    1,316,390Gas
      distribution
    
    
    623,949Transmission
    
    
    256,228$
    3,868,439





Refer to
Note (10) of MidAmerican Energy’s Notes to Consolidated Financial Statements in
Item 8 of this Form 10-K for a discussion of operating segments. As of December
31, 2004, substantially all of the former Midwest Power Systems, a predecessor
company, electric utility property located in Iowa, or approximately 49% of
gross utility plant, was pledged to secure $147.8 million in mortgage bonds, of
which $90.5 million matured on February 15, 2005. The remaining $57.3 million
mature on May 1, 2023.





**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. On February 19,
2004, MidAmerican Energy filed a Motion to Dismiss and joined with several other
defendants to file a joint Motion to Dismiss. The plaintiffs filed a response on
May 19, 2004, contesting both Motions to Dismiss. On September 24,
2004, the pending Motions to Dismiss were denied. On October 14, 2004,
plaintiffs filed an amended consolidated class action complaint reasserting
their previous allegations. On January 25, 2005, plaintiffs filed their motion
for class certification. MidAmerican Energy will continue to coordinate with the
other defendants and vigorously defend the allegations against it.





Other
than the litigation described above, MidAmerican Funding and its subsidiaries
currently have no material legal proceedings. Information on MidAmerican
Energy’s environmental matters is included in 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 a 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**





All
common stock of MidAmerican Energy is held by its parent company, MHC, which is
a direct, wholly owned subsidiary of MidAmerican Funding. MidAmerican Funding is
an Iowa limited liability company whose membership interest is held solely by
MidAmerican Energy Holdings.




18


**Item 6.**  **Selected
Financial Data**





The
following tables set forth selected financial data of MidAmerican Energy and
MidAmerican Funding, which should be read in conjunction with their respective
consolidated financial statements and the related notes to those statements
included in “Item 8. Financial Statements and Supplementary Data” and with “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” appearing elsewhere in this Form 10-K.





**MIDAMERICAN
ENERGY COMPANY**


**SELECTED
CONSOLIDATED FINANCIAL DATA**


**(In
thousands)**





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****Statement
      of Operations Data:**Revenues
    
    $
    2,696,353
    
    $
    2,595,812
    
    $
    2,236,159
    
    $
    2,367,249
    
    $
    2,271,832Operating
      income
    
    
    356,396
    
    
    370,820
    
    
    354,997
    
    
    333,574
    
    
    338,756Net
      income
    
    
    210,455
    
    
    188,597
    
    
    175,821
    
    
    152,778
    
    
    165,456Earnings
      on common stock
    
    
    209,210
    
    
    187,187
    
    
    172,888
    
    
    148,234
    
    
    160,501**Balance
      Sheet Data:**Total
      assets (a)
    
    $
    5,111,951
    
    $
    4,404,434
    
    $
    4,209,642
    
    $
    3,953,060
    
    $
    4,175,473Long-term
      debt (b)
    
    
    1,422,527
    
    
    1,128,647
    
    
    1,053,418
    
    
    820,594
    
    
    921,682Power
      purchase obligation (c)
    
    
    -
    
    
    -
    
    
    -
    
    
    25,867
    
    
    52,282Short-term
      borrowings
    
    
    -
    
    
    48,000
    
    
    55,000
    
    
    89,350
    
    
    81,600Preferred
      securities not subject to mandatory redemption
    
    
    30,329
    
    
    31,759
    
    
    31,759
    
    
    31,759
    
    
    31,759Preferred
      securities subject to mandatory redemption
    
    
    -
    
    
    -
    
    
    -
    
    
    126,680
    
    
    150,000Common
      shareholder’s equity
    
    
    1,527,468
    
    
    1,318,519
    
    
    1,319,139
    
    
    1,226,292
    
    
    1,164,356





(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-legal 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. Refer to Note (14) 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.








19





**MIDAMERICAN
FUNDING, LLC**


**SELECTED
CONSOLIDATED FINANCIAL DATA**


**(In
thousands)**





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****Statement
      of Operations Data:**Revenues
    
    $
    2,701,700
    
    $
    2,600,239
    
    $
    2,240,879
    
    $
    2,388,650
    
    $
    2,316,343Operating
      income
    
    
    355,947
    
    
    367,868
    
    
    349,988
    
    
    300,085
    
    
    327,560Net
      income (a)
    
    
    179,257
    
    
    157,176
    
    
    136,716
    
    
    103,087
    
    
    126,784**Balance
      Sheet Data:**Total
      assets (b)
    
    $
    6,427,244
    
    $
    5,737,614
    
    $
    5,551,747
    
    $
    5,550,640
    
    $
    5,774,916Long-term
      debt (c)
    
    
    2,122,527
    
    
    1,828,647
    
    
    1,753,418
    
    
    1,544,969
    
    
    1,670,636Power
      purchase obligation (d)
    
    
    -
    
    
    -
    
    
    -
    
    
    25,867
    
    
    52,282Short-term
      borrowings
    
    
    -
    
    
    48,000
    
    
    55,000
    
    
    91,780
    
    
    81,600Preferred
      securities not subject to mandatory redemption
    
    
    30,329
    
    
    31,759
    
    
    31,759
    
    
    31,759
    
    
    31,759Preferred
      securities subject to mandatory redemption
    
    
    -
    
    
    -
    
    
    -
    
    
    126,680
    
    
    150,000Member’s
      equity
    
    
    2,042,403
    
    
    1,863,769
    
    
    1,879,191
    
    
    1,981,840
    
    
    1,877,175





(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.(b)
    In
      January 2003, MidAmerican Energy adopted SFAS No. 143. Accordingly,
      MidAmerican Energy recorded $114.4 million of assets related to the ARO
      liability required by SFAS No. 143. Additionally, an accrual for non-legal
      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. Refer to Note (14) 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 in Item 8 of this Form 10-K for further
      discussion.




20





****


**Item 7.**  **Management's
Discussion and Analysis of Financial Condition and Results of
Operations**





**INDEX**








General
    22Executive Summary
    22Results of Operations
    23Liquidity and Capital Resources
    33Credit Ratings Risks
    36Utility Regulatory Matters
    36Environmental Matters
    39Generating Capability
    39Critical Accounting Policies and
      Estimates
    40








21





**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. (“MHC”), which owns all of
the common stock of MidAmerican Energy Company (“MidAmerican Energy”),
InterCoast 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.





**Executive Summary**





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




·  In
December 2004, MidAmerican Energy placed into service the second phase of its
517-megawatt (“MW”, expected accreditation) natural gas-fired, combined cycle
generating plant;





·  MidAmerican
Energy is currently constructing a 790-MW (expected accreditation)
super-critical-temperature, coal-fired generation project and a 310-MW
(nameplate rating) wind power project in Iowa and expects to invest
approximately $1.1 billion in the projects through 2007. Through
December 31, 2004, $350.4 million of the $1.1 billion had been invested. On
October 4, 2004, the President signed into law legislation that extends the
federal production tax credit to electricity produced by wind energy facilities
placed in service prior to January 1, 2006. Accordingly, MidAmerican Energy
initiated construction on its wind power project. In December 2004,
approximately one half of the wind turbines were completed and placed in
service. Completion of the remaining turbines is expected by the middle of 2005.
On January 31, 2005, the Iowa Utilities Board (“IUB”) approved ratemaking
principles related to expanding the wind power project. An additional 50 MW of
capacity, based on the nameplate rating, is expected to be constructed in
2005.





·  In
September 2004, the Iowa legislature passed legislation adopting a federal tax
provision into Iowa law that provides accelerated tax depreciation for certain
assets acquired after May 5, 2003 and before January 1, 2005.
Accordingly, as a result of Iowa regulatory rules for utility income taxes,
MidAmerican Energy’s income tax expense for 2004 was reduced, but this lower
cost was largely offset by increased revenue sharing included in depreciation
expense;





·  On
October 1, 2004, MidAmerican Energy issued $350 million of 4.65%
medium-term notes due October 1, 2014. The proceeds were used for general
corporate purposes.





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




22








**Results of Operations for the Years Ended December 31, 2004 and
2003**





Earnings
Overview





MidAmerican
Energy -





MidAmerican
Energy’s earnings on common stock improved $22.0 million to $209.2 million for
2004 compared to $187.2 million for 2003. Operating income decreased $14.4
million due primarily to increases in other operating and maintenance expenses.
These increases were partially offset by increased margins and a decrease in a
regulatory charge related to the Iowa revenue sharing arrangement. Refer to
“Rate Matters” later in MD&A for further discussion of the revenue sharing
arrangement. The decrease in operating income was more than offset by an
increase in other income related to MidAmerican Energy’s construction projects
and a reduction in income taxes due to a change in Iowa’s income tax laws and
the settlement of an income tax audit issue with the Internal Revenue
Service.





MidAmerican
Funding -





MidAmerican
Funding’s net income for 2004 increased $22.1 million to $179.3 million for 2004
compared to $157.2 million for 2003.





Regulated
Electric Gross Margin





2004
    
    
    2003Gross
      margin (in millions):Operating
      revenues
    
    $
    1,421.7
    
    $
    1,398.0Less
      cost of fuel, energy and capacity
    
    
    400.0
    
    
    397.7Electric
      gross margin
    
    $
    1,021.7
    
    $
    1,000.3Sales
      (GWh):Residential
    
    
    5,321
    
    
    5,303Small
      general service
    
    
    3,944
    
    
    3,845Large
      general service
    
    
    7,243
    
    
    6,951Wholesale
    
    
    9,260
    
    
    9,963Other
    
    
    1,357
    
    
    1,323Total
    
    
    27,125
    
    
    27,385





Electric
gross margin for 2004 increased $21.4 million compared to 2003 due to a $16.5
million increase in net margin on MidAmerican Energy’s sales and purchases of
electric capacity and a $9.2 million increase in electric wholesale gross
margin. Additionally, revenues from transmission services increased $3.2 million
compared to 2003. An increase in electric retail sales volumes improved electric
retail gross margin but was more than offset by a decrease due to higher fuel
costs for those sales. Accordingly, in total, electric retail gross margin
decreased $7.3 million compared to 2003.





Sales of
energy to other utilities, municipalities and marketers inside and outside of
MidAmerican Energy's delivery system are classified as wholesale. The increase
in gross margin on electric wholesale energy sales compared to 2003 was due to
improved margins per unit sold, which increased electric wholesale gross margin
by $16.9 million, offset partially by a $7.7 million decrease from reduced sales
volumes.





In total,
electric retail sales volumes increased 2.5% for 2004 compared to 2003.
Electricity usage factors not dependent on weather, such as changes in
individual customer usage patterns, increased electric margin by $18.3 million
compared to 2003. A 1.2% increase in the average number of retail customers
improved electric gross margin by $17.0 million. The effect of temperature
conditions, principally during the third quarter of 2004, resulted in a $23.8
million decrease in electric retail gross margin. Additionally, electric
revenues from the recovery of energy efficiency program costs increased $3.0
million compared to 2003. Changes in these revenues are substantially matched
with corresponding changes in other operating expenses.




23








Higher
fuel costs related to Iowa retail electric sales decreased electric retail gross
margin by $21.5 million compared to 2003. A majority of the increase in fuel
costs was for purchases of higher priced power to replace energy from plants
taken out of service in 2004 for preventive maintenance. Additionally, fuel
costs in 2003 were reduced by the recognition of $10.9 million of cost recovery
for MidAmerican Energy’s coal purchase contract with Enron Corp. (“Enron”)
following resolution of related Enron bankruptcy proceedings. That reduction in
2003 fuel costs was partially offset by $5.1 million of expense recognized in
2003 related to the write-off of the remaining value of failed nuclear fuel
assemblies at Quad Cities Station.





Regulated
Gas Gross Margin





2004
    
    
    2003Gross
      margin (in millions):Operating
      revenues
    
    $
    1,010.9
    
    $
    947.4Less
      cost of gas sold
    
    
    790.0
    
    
    720.6Gas
      gross margin
    
    $
    220.9
    
    $
    226.8Sales
      (000’s Dths):Residential
    
    
    49,170
    
    
    53,120Small
      general service
    
    
    24,146
    
    
    25,296Large
      general service
    
    
    2,680
    
    
    2,324Wholesale
    
    
    46,630
    
    
    39,329Other
    
    
    246
    
    
    285Total
    
    
    122,872
    
    
    120,354





Gas gross
margin for 2004 decreased $5.9 million compared to 2003.





Regulated
gas revenues include purchased gas adjustment clauses through which MidAmerican
Energy is allowed to recover the cost of gas sold from its retail gas utility
customers. Consequently, fluctuations in the cost of gas sold do not affect
gross margin or net income because revenues reflect comparable fluctuations
through the purchased gas adjustment clauses. MidAmerican Energy’s average
per-unit cost of gas increased 7.4% compared to 2003 resulting in a $54.3
million increase in cost of gas sold. The remainder of the increase in cost of
gas sold was due to an increase in sales volumes related to wholesale customers.





The
following table summarizes the variance in gas operating revenues, including the
impact of the fluctuation in the cost of gas sold. The variances in gas
operating revenues other than the fluctuation in cost of gas sold have the same
impact on gross margin.





2004
      vs. 2003(In
      millions)Change
      in cost of gas sold:Price
    
    $
    54.3Sales
      volumes
    
    
    15.1Total
    
    
    69.4Weather
    
    
    (5.4
    )Weather
      derivative
    
    
    2.1Energy
      efficiency cost recovery
    
    
    0.5Customer
      growth
    
    
    4.3Other
      usage factors
    
    
    (6.3
    )Other
    
    
    (1.1
    )Total
      revenue variance
    
    $
    63.5





The
decrease in gas gross margin due to weather was the result of milder temperature
conditions in 2004 compared to 2003. The weather decrease was partially offset
by a 2003 weather derivative loss that did not recur in 2004. MidAmerican
Energy's average number of gas retail customers increased 1.3% compared to 2003.
Other usage factors includes items such as changes in individual customer usage
patterns and reaction to prices. Total natural gas retail sales volumes
decreased 5.9%.





24








Regulated
Operating Expenses





Regulated
other operating expenses for 2004 increased $18.6 million compared to 2003.
Electric transmission and distribution operating expenses increased $9.2 million
due in part to payments to other utilities for the transmission of energy, the
write-off of computer software deemed unusable, and increased storm damage
repair costs. Quad Cities Station and fossil fuel generation operating expenses
increased $8.2 million. Costs of energy efficiency programs increased $3.3
million compared to 2003 and were offset by a comparable increase in cost
recovery in revenues. Training costs increased $2.8 million in part due to
continued emphasis on safety training. Decreases of $3.4 million and $3.3
million, respectively, in deferred compensation expenses and other
postretirement costs partially offset these increases.





Maintenance
expenses increased $23.7 million compared to 2003 due principally to an $18.3
million increase in fossil fuel generation maintenance, substantially for
preventive maintenance. Additionally, distribution maintenance costs increased
$4.5 million.





Depreciation
and amortization expense decreased $14.7 million compared to 2003 due primarily
to a $9.8 million decrease related to revenue sharing arrangements in Illinois
and Iowa. Additionally, utility plant depreciation and amortization decreased in
part due to software assets that were fully depreciated in 2003.





Nonregulated
Gross Margin





2004
    
    2003(In
      millions)MidAmerican
      Energy -Nonregulated
      operating revenues
    
    $
    263.7
    
    $
    250.4Less
      nonregulated cost of sales
    
    
    230.6
    
    
    215.7Nonregulated
      gross margin
    
    $
    33.1
    
    $
    34.7MidAmerican
      Funding Consolidated -Nonregulated
      operating revenues
    
    $
    269.1
    
    $
    254.8Less
      nonregulated cost of sales
    
    
    232.0
    
    
    216.2Nonregulated
      gross margin
    
    $
    37.1
    
    $
    38.6





MidAmerican
Energy’s nonregulated gross margin for 2004 decreased $1.6 million compared to
2003. The following table presents the margins related to various nonregulated
activities (in millions):





2004
    
    2003Nonregulated
      retail electric
    
    $
    13.5
    
    $
    13.2Nonregulated
      retail gas
    
    
    3.9
    
    
    4.9Income
      sharing arrangements under regulated gas tariffs
    
    
    3.7
    
    
    5.0Incentive
      gas supply procurement program award
    
    
    2.4
    
    
    3.8Wholesale
      gas and electric
    
    
    6.7
    
    
    4.7Other
    
    
    2.9
    
    
    3.1$
    33.1
    
    $
    34.7





MidAmerican
Energy’s nonregulated retail electric marketing services provide electric supply
services to retail customers in Illinois, Ohio and, beginning in September 2004,
Michigan. The improvement in the related gross margin was due to a 38.3%
increase in sales volumes. The increase from sales volumes was mostly offset by
a reduction in the margin per unit sold in 2004 compared to 2003. Nonregulated
electric retail revenues increased $24.3 million to $93.8 million for 2004,
while the related cost of sales increased $24.0 million to $80.3
million.


25


MidAmerican
Energy’s nonregulated retail gas marketing services operate in Iowa, Illinois,
Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements. The decrease in gross margin from these operations
was due to a 10.5% decrease in the margin per unit sold and
a 10.6% decrease in sales volumes compared to 2003. Nonregulated retail gas
revenues decreased $10.1 million to $152.3 million due to the decrease in sales
volumes, offset partially by an increase in the average price per unit sold,
which reflects a 5.4% increase in the average cost of gas. Related nonregulated
cost of gas decreased $9.1 million to $148.4 million for 2004.





Nonregulated
operations also include earnings from sharing arrangements under applicable
state regulations and tariffs filed with the Iowa Utilities Board (“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 (“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,
2006, and the South Dakota program extends through October 31,
2005.





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”). Other
income for the capitalized allowance on equity funds used during construction
totaled $18.9 million in 2004 and $11.4 million in 2003. MidAmerican Energy
expects to continue to record significant income for the allowance on equity
funds used during construction through 2007 while the announced generating
plants are constructed.





MidAmerican
Funding -





During
2004, MidAmerican Funding received distributions totaling $2.5 million from
several of its investments in energy projects and venture capital funds.





Other
income for 2003 includes $1.8 million of income from equity method investments
and $3.1 million of income related to the settlement of a lawsuit.





Other
expense for MidAmerican Funding in 2004 includes losses totaling $1.7 million
for write-downs related to two aircraft leases accounted for as leveraged
leases. 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.





Fixed
Charges and Preferred Dividends





MidAmerican
Energy -





Other
interest expense increased due to interest on the Iowa revenue sharing
regulatory liability. MidAmerican Energy is allowed to capitalize, and record as
a reduction to fixed charges, a cost of construction for debt funds used, based
on guidelines set forth by the FERC. The increase in allowance for borrowed
funds is the result of MidAmerican Energy’s increased construction expenditures.
MidAmerican Energy expects to continue to record significant allowance for
borrowed funds used during construction through 2007 while the announced
generating plants are constructed. 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 January 2004.





Income
Taxes





In
September 2004, the Iowa legislature passed legislation adopting a federal tax
provision into Iowa law that provides accelerated tax depreciation for certain
assets acquired after May 5, 2003 and before January 1, 2005.
Accordingly, as a result of Iowa regulatory rules for utility income taxes,
MidAmerican Energy’s income taxes for 2004 were reduced by approximately $15.7
million, including the retroactive adjustment for 2003.




26








Also
during 2004, MidAmerican Energy settled an income tax audit with the Internal
Revenue Service. Accordingly, MidAmerican Energy recorded as income a tax
liability previously established for the settled issue, resulting in an $8.5
million reduction to MidAmerican Energy’s income tax expense for
2004.





A
significant portion of the tax liability was originally established in 1999 when
MidAmerican Energy's parent company, MHC Inc., was acquired by MidAmerican
Funding. This change in estimate of an income tax uncertainty that resulted from
a purchase business combination was accounted for as an adjustment to the
remaining balance of goodwill attributable to the acquisition. Accordingly, in
2004, MidAmerican Funding decreased goodwill and increased income tax expense by
$4.7 million to reflect the settlement of that portion of the income tax
liability recognized at the time of the acquisition of MHC.





**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. The impact of these factors was 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.





Regulated
Electric Gross Margin





2003
    
    2002Gross
      margin (in millions):Operating
      revenues
    
    $
    1,398.0
    
    $
    1,353.4Less
      cost of fuel, energy and capacity
    
    
    397.7
    
    
    346.7Electric
      gross margin
    
    $
    1,000.3
    
    $
    1,006.7Sales
      (GWh):Residential
    
    
    5,303
    
    
    5,406Small
      general service
    
    
    3,845
    
    
    3,892Large
      general service
    
    
    6,951
    
    
    6,714Wholesale
    
    
    9,963
    
    
    10,049Other
    
    
    1,323
    
    
    1,309Total
    
    
    27,385
    
    
    27,370





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. That contract expired on December 31, 2004. The
restructuring affected both the classification of related costs on MidAmerican
Energy’s statement of operations and the total cost to MidAmerican Energy.




27








Prior to
the restructuring, MidAmerican Energy paid for its share of Cooper Nuclear
Station (“Cooper”) costs based on 50% of the fixed and operating costs of
Cooper, 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. 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 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 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) of Notes to Consolidated Financial Statements in Item 8 of this
Form 10-K for additional discussion of the Cooper 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 Cooper is not available.
Under the original contract, MidAmerican Energy was subject to the fluctuating
costs and plant outages of Cooper.





Following
is a discussion of various factors other than the Cooper 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. Electricity usage
factors not dependent on weather, such as changes in individual customer usage
patterns, decreased electric margin by $11.5 million compared to 2002. A 1.1%
increase in the average number of retail customers improved electric gross
margin by $14.3 million compared to 2002.





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. 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.







28





Regulated
Gas Gross Margin





2003
    
    2002Gross
      margin (in millions):Operating
      revenues
    
    $
    947.4
    
    $
    695.8Less
      cost of fuel, energy and capacity
    
    
    720.6
    
    
    482.8Gas
      gross margin
    
    $
    226.8
    
    $
    213.0Sales
      (000’s Dths):Residential
    
    
    53,120
    
    
    50,836Small
      general service
    
    
    25,296
    
    
    25,675Large
      general service
    
    
    2,324
    
    
    2,003Wholesale
    
    
    39,329
    
    
    50,214Other
    
    
    285
    
    
    186Total
    
    
    120,354
    
    
    128,914





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





Regulated
gas revenues include purchased gas adjustment clauses through which MidAmerican
Energy is allowed to recover the cost of gas sold from its retail gas utility
customers. Consequently, fluctuations in the cost of gas sold do not affect
gross margin or net income because revenues reflect comparable fluctuations
through the purchased gas adjustment clauses. 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 wholesale
customers.





The
following table summarizes the variance in gas operating revenues, including the
impact of the fluctuation in the cost of gas sold. The variances in gas
operating revenues other than the fluctuation in cost of gas sold have the same
impact on gross margin.





2003
      vs. 2002(In
      millions)Change
      in cost of gas sold:Price
    
    $
    269.9Sales
      volumes
    
    
    (32.1
    )Total
    
    
    237.8Increases
      in retail rates
    
    
    12.3Weather
    
    
    4.0Weather
      derivative
    
    
    (2.5
    )Transported
      gas
    
    
    3.0Customer
      growth
    
    
    2.7Other
      usage factors
    
    
    (7.3
    )Other
    
    
    1.6Total
      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 SDPUC
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
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 “Utility Regulatory Matters” section of MD&A
for comments on the Iowa gas rate settlement.





Total
natural gas retail sales volumes increased 3.0%. 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 in individual customer usage patterns and reaction to
prices, decreased gas margin. MidAmerican Energy’s average number of gas retail
customers increased 1.0% compared to 2002.




29


MidAmerican
Energy has entered, and 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. 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 were
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 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 “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.





Nonregulated
Gross Margin





2003
    
    2002(In
      millions)MidAmerican
      Energy -Nonregulated
      operating revenues
    
    $
    250.4
    
    $
    186.9Less
      nonregulated cost of sales
    
    
    215.7
    
    
    158.5Nonregulated
      gross margin
    
    $
    34.7
    
    $
    28.4MidAmerican
      Funding Consolidated -Nonregulated
      operating revenues
    
    $
    254.8
    
    $
    191.6Less
      nonregulated cost of sales
    
    
    216.2
    
    
    159.4Nonregulated
      gross margin
    
    $
    38.6
    
    $
    32.2







30





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





MidAmerican
Energy’s nonregulated retail electric marketing services provided electric
supply services to retail customers in Illinois and, beginning in September
2002, Ohio. 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,
Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third
party marketers and sells it directly to large commercial end-users. In
addition, MidAmerican Energy manages gas supplies for a number of smaller
commercial end-users, which includes the sale of gas to these customers to meet
their supply requirements. 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.





Nonregulated
operations also include earnings from sharing arrangements under applicable
state regulations and tariffs filed with the IUB and the 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 (“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.





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
were zero throughout 2003. Additionally, 2002 includes $5.0 million from the
settlement of an investment in a communications company.







31





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 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 expects to continue to record
significant income for the allowance on equity funds used during construction
through 2007 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.





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.




32








**Liquidityand 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 $523.5 million, $441.3 million and
$352.8 million for 2004, 2003 and 2002, respectively. MidAmerican Funding’s net
cash provided by operating activities was $493.6 million, $416.7 million and
$365.6 million for 2004, 2003 and 2002, respectively.





Utility
Construction Expenditures





MidAmerican
Energy’s primary need for capital is utility construction expenditures. For
2004, utility construction expenditures totaled $739.9 million, including
allowance for funds used during construction and Quad Cities Station nuclear
fuel purchases. Utility construction expenditures include non-cash and accrued
amounts, the most significant of which for 2004 is $78.2 million for MidAmerican
Energy’s share of deferred payments related to the Council Bluffs Energy Center
Unit 4 generation project discussed below. Under a contract with the general
contractor on that project, MidAmerican Energy is allowed to defer payments,
including the other owners’ shares, for up to $200 million of billed
construction costs through the end of the project. Another non-cash expenditure
included in utility construction expenditures relates to a computed cost of
equity funds. As a regulated public utility, MidAmerican Energy is allowed to
capitalize, and record as income, a cost of construction for equity funds used,
based on guidelines set forth by the FERC.





Forecasted
utility construction expenditures, including allowance for funds used during
construction and completion of the wind power project discussed below, are $845
million for 2005. Capital expenditure needs are reviewed regularly by management
and may change significantly as a result of such reviews. MidAmerican Energy
expects to meet these capital expenditures with cash flows from operations and
the issuance of long-term debt.





MidAmerican
Energy anticipates a continuing increase in demand for electricity from its
regulated customers. To meet anticipated demand and ensure adequate electric
generation in its service territory, MidAmerican Energy recently completed its
combined cycle combustion turbine project and is currently constructing a 790-MW
(expected accreditation) super-critical-temperature, coal-fired Council Bluffs
Energy Center Unit No. 4 (“CBEC Unit 4”) and a 310-MW (nameplate rating) wind
power project in Iowa. A 50-MW (nameplate rating) expansion of the wind power
project is also expected to be constructed in 2005. The projects will provide
service to regulated retail electricity customers. MidAmerican Energy has
obtained regulatory approval to include the Iowa portion of the actual costs of
the generation projects in its Iowa rate base as long as actual costs do not
exceed the agreed caps that MidAmerican Energy has deemed to be reasonable. If
the caps are exceeded, MidAmerican Energy has the right to demonstrate the
prudence of the expenditures above the caps, subject to regulatory review.
Wholesale sales may also be made from the projects to the extent the power is
not immediately needed for regulated retail service. MidAmerican Energy expects
to invest approximately $1.1 billion in the CBEC Unit 4 and wind generation
projects currently under construction, of which $350.4 million has been invested
through December 31, 2004.





MidAmerican
Energy recently completed work on its Greater Des Moines Energy Center, a
natural gas-fired, combined cycle plant located near Pleasant Hill, Iowa.
Construction of the plant was completed in two phases. Commercial operation of
the simple cycle mode began on May 5, 2003, and continued through most of
2004, providing 327 MW of accredited capacity in the summer of 2004. Commercial
operation of the combined cycle mode began on December 16, 2004. The
additional accredited capacity from the completion of the second phase is
expected to be 190 MW. MidAmerican Energy expects the total cost of the Greater
Des Moines Energy Center to be under the $357 million cost cap established by
the IUB.





MidAmerican
Energy is currently constructing the CBEC Unit 4, 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, including
transmission facilities, to be approximately $737 million, excluding allowance
for funds used during construction. Municipal, cooperative and public power
utilities will own the remainder, which is a typical ownership arrangement for
large base-load plants in Iowa. On February 12, 2003, MidAmerican Energy
executed a contract with Mitsui & Co. Energy Development, Inc.
(“Mitsui”) for engineering, procurement and construction of the plant. On
September 9, 2003, MidAmerican Energy began construction of the plant,
which it expects to be completed in the summer of 2007. On December 29, 2004,
MidAmerican Energy received an order from the IUB approving construction of the
associated transmission facilities and is proceeding with construction.




33







The
second electric generating project currently under construction consists of wind
power facilities located at two sites in north central Iowa 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. MidAmerican Energy will own
and operate these facilities, which, including transmission facilities, are
expected to cost approximately $323 million, excluding allowance for funds used
during construction. As of December 31, 2004, wind turbines totaling 160.5
MW at one of the sites were completed and in service. Completion of the
remaining turbines is expected by the middle of 2005. On January 31, 2005, the
IUB approved ratemaking principles related to expanding the wind power project.
An additional 50 MW of capacity, based on nameplate rating, is expected to be
constructed at the sites in 2005 at an estimated cost of $63 million. 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 trusts established for the
investment of funds for decommissioning Quad Cities Station. Approximately 70%
of the fair value of the trusts’ funds is now invested in domestic corporate
debt and common equity securities. The remainder is invested in investment grade
municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear
decommissioning is reflected as depreciation expense in the Consolidated
Statements of Operations. Quad Cities Station decommissioning costs charged to
Iowa customers are included in base rates, and recovery of increases in those
amounts must be sought through the normal ratemaking process.




34







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,
2004, the material cash obligations of MidAmerican Energy and MidAmerican
Funding (in millions).





Period
      Payments are Due2006-
    
    
    2008-
    
    
    AfterType
      of Obligation
    
    
    Total
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    2009MidAmerican
      Energy:Long-term
      debt, excluding unamortized debt premium and discount, net
    
    $
    1,428.0
    
    $
    91.0
    
    $
    162.2
    
    $
    0.4
    
    $
    1,174.4Operating
      leases (1)
    
    
    28.2
    
    
    7.5
    
    
    12.1
    
    
    6.1
    
    
    2.5Deferred
      costs on construction contract (2)
    
    
    152.3
    
    
    -
    
    
    152.3
    
    
    -
    
    
    -Coal,
      electricity and natural gas contract commitments (1)
    
    
    668.7
    
    
    173.0
    
    
    255.2
    
    
    122.2
    
    
    118.3Interest
      payments on long-term debt (3)
    
    
    1,062.1
    
    
    72.5
    
    
    123.4
    
    
    118.2
    
    
    748.03,339.3
    
    
    344.0
    
    
    705.2
    
    
    246.9
    
    
    2,043.2MidAmerican
      Funding parent:Long-term
      debt
    
    
    700.0
    
    
    -
    
    
    -
    
    
    175.0
    
    
    525.0Interest
      payments on long-term debt
    
    
    689.2
    
    
    47.1
    
    
    94.2
    
    
    88.7
    
    
    459.21,389.2
    
    
    47.1
    
    
    94.2
    
    
    263.7
    
    
    984.2Total
    
    $
    4,728.5
    
    $
    391.1
    
    $
    799.4
    
    $
    510.6
    
    $
    3,027.4





(1)
    The
      operating leases and coal, energy and natural gas commitments are not
      reflected on the Consolidated Balance Sheets. Refer to Note (4)(e) in
      Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for
      a discussion of the nature of these commitments.(2)
    MidAmerican
      Energy is allowed to defer up to $200.0 million in payments to Mitsui
      under its contract to build the Council Bluffs Energy Center Unit 4. Refer
      to Note (4)(g) in Notes to Consolidated Financial Statements in Item 8 of
      this Form 10-K for a discussion of this commitment.(3)
    Excludes
      interest payments on variable rate long-term
debt.





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)(c))


·  Residual
guarantees on operating leases (see Note (4)(f))





Debt
Redemption and Issuance





MidAmerican
Energy’s 7.7% series of mortgage bonds, totaling $55.6 million, matured on
May 17, 2004. On October 1, 2004, MidAmerican Energy issued $350
million of 4.65% medium-term notes due October 1, 2014.





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
$500.0 million. MidAmerican Energy currently has in place a $425.0 million
revolving credit facility that supports its $304.6 million commercial paper
program and its variable rate pollution control revenue obligations. The
facility expires November 18, 2009.




35





MidAmerican
Energy currently has the following authorizations to issue additional long-term
securities. MidAmerican Energy has on file with the Securities and Exchange
Commission registration statements providing for the issuance of $530.0 million
in various forms of senior and subordinated long-term debt and preferred
securities. MidAmerican Energy has authorization from the FERC to issue various
forms of long-term debt in the amount of $880.0 million through November 30,
2005, and $425.0 million for December 1, 2005 through November 30,
2006. Under the FERC authorization, such funds would be used to refinance
maturing debt and to finance a portion of the cost of the generation projects
noted above. MidAmerican Energy has authority from the Illinois Commerce
Commission (“ICC”) to issue up to $546.4 million of long-term debt for
refinancing purposes and capital expenditures.





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





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,
2004, MidAmerican Energy’s estimated potential collateral requirements totaled
approximately $151 million. MidAmerican Energy’s collateral requirements could
fluctuate considerably due to seasonality, market price volatility, and a loss
of key MidAmerican Energy generating facilities or other related factors.





**Utility Regulatory Matters**





Rate
Matters





Under
three settlement agreements between MidAmerican Energy, the Iowa Office of
Consumer Advocate (“OCA”) and other intervenors approved by the IUB, MidAmerican
Energy has agreed not to seek a general increase in electric rates prior to 2012
unless its Iowa jurisdictional electric return on equity for any year falls
below 10%. Prior to filing for a general increase in electric rates, MidAmerican
Energy is required to conduct 30 days of good faith negotiations with the
signatories to the settlement agreements to attempt to avoid a general increase
in such rates. As a party to the settlement agreements, the OCA has agreed not
to request or support any decrease in MidAmerican Energy’s Iowa electric rates
prior to January 1, 2012. The settlement agreements specifically allow the
IUB to approve or order electric rate design or cost of service rate changes
that could result in changes to rates for specific customers as long as such
changes do not result in an overall increase in revenues for MidAmerican Energy.
The settlement agreements also each provide that portions of revenues associated
with Iowa retail electric returns on equity within specified ranges will be
recorded as a regulatory liability.




36





Under the
first settlement agreement, which was approved by the IUB on December 21,
2001, and is effective through December 31, 2005, an amount equal to 50% of
revenues associated with returns on equity between 12% and 14%, and 83.33% of
revenues associated with returns on equity above 14%, in each year is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy’s application for ratemaking principles on
its wind power project and was approved by the IUB on October 17, 2003,
provides that during the period January 1, 2006 through December 31,
2010, an amount equal to 40% of revenues associated with returns on equity
between 11.75% and 13%, 50% of revenues associated with returns on equity
between 13% and 14%, and 83.3% of revenues associated with returns on equity
above 14%, in each year will be recorded as a regulatory liability.





The third
settlement agreement was approved by the IUB on January 31, 2005, in
conjunction with MidAmerican Energy’s proposed expansion of its wind power
project by up to 90 MW. This settlement extended through 2011 MidAmerican
Energy’s commitment not to seek a general increase in electric rates unless its
Iowa jurisdictional electric return on equity falls below 10%. It also extended
the revenue sharing mechanism through 2011. In addition, the Iowa Office of
Consumer Advocate agreed to commit not to seek any decrease in Iowa electric
base rates to become effective before January 1, 2012. The total capacity added
as the result of the wind expansion project is currently projected to be 50 MW.





The
regulatory liabilities created by the three settlement agreements are recorded
as a regulatory charge in depreciation and amortization expense when the
liability is accrued. Additionally, interest expense is accrued on the portion
of the regulatory liability balance recorded in prior years. The regulatory
liabilities created for the years through 2010 are expected to be reduced as
they are credited against plant in service in amounts equal to the allowance for
funds used during construction associated with generating plant additions. As a
result of the credit applied to generating plant balances from the reduction of
the regulatory liabilities, future depreciation will be reduced. As of
December 31, 2004 and 2003, the related regulatory liability reflected on
the Consolidated Balance Sheets was $181.2 million and $144.4 million,
respectively. The regulatory liability for 2011 will be credited to customer
bills in 2012.





In an
order issued September 27, 2004, the IUB requires MidAmerican Energy to
file various plans to fully equalize and consolidate its class zonal electric
rates by the end of each of the years 2007 through 2010. On October 18,
2004, MidAmerican Energy filed a motion for reconsideration opposing full rate
equalization and proposing a series of rate reductions. The resulting decreases
in revenues from some of the reductions would be offset by costs decreasing
pursuant to the expiration of certain contracts. However, MidAmerican Energy is
seeking to reduce rates for some residential customers by approximately $4.0
million in 2008 and $3.0 million in 2009 for a total annualized reduction of
$7.0 million in addition to the reductions to be offset by cost decreases
related to existing contracts. The $7.0 million reduction in revenues may begin
to be offset by a rate increase for other residential customers starting in
2011.





Illinois
bundled electric rates are frozen until 2007, subject to certain exceptions
allowing for increases, at which time bundled rates may be increased or
decreased by the ICC. Illinois law provides that, through 2006, Illinois
earnings above a computed level of return on common equity are to be shared
equally between regulated retail electric customers and MidAmerican Energy.
MidAmerican Energy’s computed level of return on common equity is based on a
rolling two-year average of the Monthly Treasury Long-Term Average Rate, as
published by the Federal Reserve System, plus a premium of 8.5% for 2000 through
2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which
sharing must occur for 2004 is 13.57%. The law allows MidAmerican Energy to
mitigate the sharing of earnings above the threshold return on common equity
through accelerated recovery of electric assets.





On
April 2, 2004, MidAmerican Energy made a filing with the SDPUC requesting
an increase in rates for its retail natural gas customers. On August 26, 2004,
the SDPUC approved a settlement stipulation between MidAmerican Energy and the
SDPUC staff for an increase of $1.0 million annually, effective
September 30, 2004.





The ICC
staff has questioned the legality of MidAmerican Energy’s competitive sales of
gas to retail customers within the State of Illinois. In its direct testimony in
the purchase gas adjustment proceeding covering 2001, the ICC staff expressed
its position that MidAmerican Energy must reduce gas costs recovered from
Illinois regulated gas customers through the purchase gas adjustment by the
gross margins earned from MidAmerican Energy’s Illinois nonregulated retail
customers from 2001, or approximately $1.0 million. Gross margin is the
difference between the revenue and the related cost of gas for MidAmerican
Energy’s nonregulated sales of gas to retail customers in the entire State of
Illinois. The ICC has not yet ruled in this 2001 case. If the ICC accepts the
adjustment proposed by its staff and makes the same adjustment for the years
2002 - 2004, the total cumulative adjustment through November 30, 2004,
including the adjustment for 2001, would be approximately $6.8
million.




37





In a
related proceeding, the ICC issued a declaratory ruling on May 11, 2004, finding
that MidAmerican Energy cannot lawfully sell competitive, or nonregulated, gas
anywhere in Illinois. In that same decision, the ICC decided to open a separate
proceeding to determine an appropriate remedy for such sales. That decision is
now on appeal in the Illinois Appellate Court.





In
November 2004, the Illinois legislature overrode the Governor’s veto of SB 2525.
That law allows MidAmerican Energy to continue its competitive gas sales in
Illinois subject to ICC regulation. The ICC still must resolve the historical
issues in the on-going purchase gas adjustment and related
proceedings.





Transmission
Developments





The FERC
has undertaken several measures to increase competition in the markets for
wholesale electric energy, including efforts to foster the development of
regional transmission organizations ("RTO") in its Order No. 2000 issued
December 1999 and its July 2002 proposed rulemaking that would implement a
standard market design ("SMD") for wholesale electric markets.





If
implemented, the FERC’s July 2002 proposed rule for SMD would require sweeping
changes to the use and expansion of the interstate transmission and wholesale
bulk power systems in the United States. However, it is unclear when or even
whether the FERC will issue a final rule and what form the final rule would
ultimately take. In response to significant criticism of its proposed rule, the
FERC subsequently indicated that it had changed its proposal and would adopt a
flexible approach to SMD that would accommodate regional differences. Any final
rule on SMD or similar FERC action could impact the costs of MidAmerican
Energy’s electricity and transmission products. Such FERC action could directly
or indirectly influence how transmission services are priced, the availability
of transmission services, how transmission services are obtained, and market
prices for electricity in markets in which MidAmerican Energy buys and sells
electricity. Although MidAmerican Energy is not presently a member of an RTO,
two RTO’s - Midwest Independent System Operator and PJM Interconnection - are
directly interconnected with MidAmerican Energy’s transmission facilities.
MidAmerican Energy cannot predict what impact, if any, the evolution of these
RTO’s, or others, may have on how wholesale electricity is bought and sold, as
well as the geographic scope of the wholesale marketplace in which MidAmerican
Energy buys and sells electricity.





On
June 3, 2004, the FERC’s Division of Operational Investigations of the
Office of Market Oversight and Investigations informed MidAmerican Energy that
it was commencing an audit to determine whether and how MidAmerican Energy and
its subsidiaries and affiliates are complying with (1) requirements of the
standards of conduct and open access same-time information system of the FERC’s
regulations, (2) codes of conduct, and (3) transmission practices. The FERC has
commenced several such audits of utilities in 2003 and 2004. The audit is
on-going, and MidAmerican Energy expects it to be completed within the first
half of 2005. MidAmerican Energy does not expect the outcome of this issue
to have a material effect on its results of operations, financial position or
cash flows.





On
July 13, 2004, the FERC issued an order requiring MidAmerican Energy to
conduct a study to determine whether MidAmerican Energy or its affiliates
possess generation market power. MidAmerican Energy is being required to show
the absence of generation market power in order to be allowed to continue to
sell wholesale electric power at market-based rates. The FERC order is intended
to have MidAmerican Energy conform to what has become the FERC’s general
practice for utilities given authorization to make wholesale market-based sales.
Under this general practice, utilities authorized to make market-based electric
sales must submit a new market power study to the FERC every three years. In
accordance with the FERC order, MidAmerican Energy’s market-based sales became
subject to refund beginning November 1, 2004, and will remain so until the
matter is resolved. MidAmerican Energy does not expect the outcome of this
issue to have a material effect on its results of operations, financial position
or cash flows.




38








**EnvironmentalMatters**





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





MidAmerican
Energy has evaluated all known properties that were, at one time, sites of gas
manufacturing plants for which it may be a potentially responsible party. The
purpose of these evaluations 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, 2004, MidAmerican Energy has recorded a $9.3 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
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. For the 2004 cooling
season, MidAmerican Energy’s hourly peak demand was 3,894 MW on July 20,
2004. MidAmerican Energy is interconnected with Iowa and neighboring utilities
and is 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 2004 cooling season, MidAmerican Energy’s reserve
was approximately 26% above its system peak demand.





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





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




The
transmission developments addressed under “Utility Regulatory Matters" above
also can impact MidAmerican Energy's wholesale electric purchases and sales. In
addition, efforts underway to form organized markets for the sale of energy may
impact the price MidAmerican Energy pays for wholesale electricity as well as
the prices it receives for wholesale sales. The FERC has other proceedings
underway which may influence the wholesale electric marketplace. Because of the
uncertainties as to future regulatory policy governing transmission service and
pricing, and regulation of wholesale electric sales, MidAmerican Energy is
uncertain whether past wholesale costs and revenues will be representative of
future wholesale costs and revenues.







39





**CriticalAccounting 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.





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, 2004 and 2003, $68.5
million and $61.5 million, respectively, of unbilled revenues were included in
accounts receivable.





Goodwill





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 accruals for estimated loss contingencies, such as
environmental, legal and regulatory matters, 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.
Accruals for contingent liabilities and subsequent revisions are reflected in
income when the accruals are recorded or as regulatory treatment dictates.
Accruals for contingent liabilities are based upon management's assumptions and
estimates, advice of legal counsel or other third parties regarding the probable
outcomes of the matter. Should the outcome differ from the assumptions and
estimates, revisions to the estimated accruals 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 also significantly affects
amounts expensed. Refer to Note (9) of Notes to Consolidated Financial
Statements later in Item 8 of this Form 10-K for disclosures about MidAmerican
Energy retirement plans and costs.





40





Income
Taxes





MidAmerican
Energy and MidAmerican Funding recognize deferred tax assets and liabilities
based on the difference between the financial statement and tax basis of assets
and liabilities using estimated tax rates in effect for the year in which the
differences are expected to reverse. Based on existing regulatory precedent,
MidAmerican Energy is not allowed to recognize deferred income tax expense
related to certain temporary differences resulting from accelerated tax
depreciation and other property related basis differences. For these
differences, MidAmerican Energy establishes deferred tax liabilities and
regulatory assets on the consolidated balance sheets since MidAmerican Energy is
allowed to recover the increased tax expense when these differences turn
around.





The
calculation of current and deferred income taxes requires management to apply
judgment related to the application of complex tax laws or related
interpretations and uncertainties related to the outcome of tax audits. Changes
in such factors may result in changes to management’s estimates, which could
require MidAmerican Energy or MidAmerican Funding to adjust its currently
recorded tax assets and liabilities and record additional income tax expense or
benefits.





**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, electricity and fuel 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 (13) 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, 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.




41


As of
December 31, 2004, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in
thousands):





Maturity
      in
    
    Maturity
      inContract
      Type
    
    2005
    
    2006-08
    
    TotalNon-trading:Regulated
      electric assets
    
    $
    2,260
    
    $
    431
    
    $
    2,691Regulated
      electric (liabilities)
    
    
    (10,057
    )
    
    (4,817
    )
    
    (14,874
    )Regulated
      gas assets
    
    
    2,973
    
    
    1,798
    
    
    4,771Regulated
      gas (liabilities)
    
    
    (21,921
    )
    
    -
    
    
    (21,921
    )Regulated
      weather (liabilities)
    
    
    (4,495
    )
    
    -
    
    
    (4,495
    )Nonregulated
      electric assets
    
    
    1,957
    
    
    372
    
    
    2,329Nonregulated
      electric (liabilities)
    
    
    (1,158
    )
    
    (214
    )
    
    (1,372
    )Nonregulated
      gas assets
    
    
    5,937
    
    
    1,919
    
    
    7,856Nonregulated
      gas (liabilities)
    
    
    (6,606
    )
    
    (1,558
    )
    
    (8,164
    )Total
    
    
    (31,110
    )
    
    (2,069
    )
    
    (33,179
    )Trading:Nonregulated
      gas assets
    
    
    993
    
    
    -
    
    
    993Nonregulated
      gas (liabilities)
    
    
    (430
    )
    
    (100
    )
    
    (530
    )Total
    
    
    563
    
    
    (100
    )
    
    463Total
      MidAmerican Energy assets
    
    $
    14,120
    
    $
    4,520
    
    $
    18,640Total
      MidAmerican Energy (liabilities)
    
    $
    (44,667
    )
    $
    (6,689
    )
    $
    (51,356
    )






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. Accordingly, MidAmerican Energy’s
regulated gas customers, although ensured of the availability of gas supplies,
retain the risk associated with market price volatility. In order to mitigate a
portion of the market price risk retained by its regulated gas customers through
the purchased gas adjustment clause, MidAmerican Energy uses natural gas
futures, options and over-the-counter agreements. The realized gains and losses
on these derivative instruments are recovered from regulated gas customers
through the purchased gas adjustment clause.





MidAmerican
Energy is exposed to variations in the price of fuel for generation and the
price of purchased power. Under typical operating conditions, MidAmerican Energy
has sufficient generation to supply its regulated retail electric needs, but
may, at times, need to purchase electric power. MidAmerican Energy may incur a
loss if the costs of fuel for generation or any purchases of electric power are
higher than MidAmerican Energy is permitted to recover from its customers under
current electric rates. MidAmerican Energy uses physical and financial forward
contracts to mitigate these regulated electric price risks.





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 economically 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. Nonregulated
retail physical electric contracts are considered "normal" purchases or sales
and gains and losses on such contracts are recognized when settled. All other
nonregulated gas and electric contracts are recorded at fair value.





Derivative
instruments are used to economically hedge both committed and forecasted energy
purchases and sales. Realized gains and losses on all hedges are recognized in
income as operating revenues; cost of fuel, energy and capacity; or cost of gas
sold, depending upon the nature of the item being hedged. Net unrealized gains
and losses on hedges utilized for regulated purposes are recorded as regulatory
assets or liabilities. Hedges that offset the variability in earnings and cash
flows related to forecasted transactions are referred to as cash flow hedges.
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.


42
 
 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. Total VaR for 2004 and 2003 was as follows
(in millions):





VaR2004
    
    2003At
      December 31
    
    $
    0.2
    
    $
    0.2High
      during year
    
    
    0.5
    
    
    1.6Low
      during year
    
    
    -
    
    
    -Average
      during year
    
    
    0.1
    
    
    0.1





The fair
value of MidAmerican Energy’s proprietary trading activities at
December 31, 2004 and the periods in which net unrealized gains and losses
are expected to be realized are as follows (in thousands):





Maturity
      in
    
    Maturity
      inType
    
    2005
    
    2006-08
    
    TotalExchange
      prices
    
    $
    (85
    )
    $
    -
    
    $
    (85
    )Prices
      actively quoted or provided by other external sources
    
    
    648
    
    
    (100
    )
    
    548Total
    
    $
    563
    
    $
    (100
    )
    $
    463





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.





Interest
Rate Risk





MidAmerican
Energy -





As of
December 31, 2004, MidAmerican Energy had fixed-rate long-term debt
totaling $1.3 billion with a fair value of $1.4 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 $57 million if interest
rates were to increase by 10% from their levels at December 31, 2004. 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, 2004, MidAmerican Energy had long-term floating rate
obligations totaling $120 million that 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
floating rate obligations at December 31, 2004, approximated fair value. If
the floating interest rates were to increase by 10% from December 31, 2004,
levels, MidAmerican Energy’s interest expense for the floating rate obligations
would increase by approximately $0.2 million annually based on December 31,
2004, principal balances.





43


MidAmerican
Funding -





As of
December 31, 2004, MidAmerican Funding parent company had fixed-rate
long-term debt totaling $700 million with a fair value of $770 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 $33 million if
interest rates were to increase by 10% from their levels at December 31,
2004. 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.




44







**Item
8.** **Financial
Statements and Supplementary Data**





MidAmerican
Energy Company








Report of Independent Registered Public Accounting
      Firm
    46Consolidated Balance Sheets
    47Consolidated Statements of
Operations
    48Consolidated Statements of Comprehensive
      Income
    49Consolidated Statements of Cash Flows
    50Consolidated Statements of
      Capitalization
    51Consolidated Statements of Retained
      Earnings
    52Notes to Consolidated Financial
      Statements
    53





MidAmerican
Funding, LLC





Report of Independent Registered Public Accounting
      Firm
    79Consolidated Balance Sheets
    80Consolidated Statements of
    Operations
    81Consolidated Statements of Comprehensive
      Income
    82Consolidated Statements of Cash Flows
    83Consolidated Statements of
      Capitalization
    84Consolidated Statements of Retained
      Earnings
    85Notes to Consolidated Financial
      Statements
    86





45








**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**











To the
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2004, 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 (14) 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 25,
2005





46





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
BALANCE SHEETS**


(In
thousands)





**As
      of December 31,****2004**
    
    **2003****ASSETS****Utility
      Plant, Net**Electric
    
    $
    5,498,878
    
    $
    5,030,960Gas
    
    
    957,011
    
    
    922,0996,455,889
    
    
    5,953,059Accumulated
      depreciation and amortization
    
    
    (2,956,856
    )
    
    (2,810,336
    )3,499,033
    
    
    3,142,723Construction
      work in progress
    
    
    369,406
    
    
    217,5373,868,439
    
    
    3,360,260**Current
      Assets**Cash
      and cash equivalents
    
    
    127,613
    
    
    3,151Receivables,
      less reserves of $8,678 and $7,484, respectively
    
    
    332,759
    
    
    300,643Inventories
    
    
    89,646
    
    
    85,465Other
    
    
    22,080
    
    
    42,459572,098
    
    
    431,718**Investments
      and Nonregulated Property, Net**
    
    
    333,360
    
    
    299,103**Regulatory
      Assets**
    
    
    227,997
    
    
    261,696**Other
      Assets**
    
    
    110,057
    
    
    51,657**Total
      Assets**
    
    $
    5,111,951
    
    $
    4,404,434**CAPITALIZATION
      AND LIABILITIES****Capitalization**Common
      shareholder’s equity
    
    $
    1,527,468
    
    $
    1,318,519MidAmerican
      Energy preferred securities
    
    
    30,329
    
    
    31,759Long-term
      debt, excluding current portion
    
    
    1,331,509
    
    
    1,072,4962,889,306
    
    
    2,422,774**Current
      Liabilities**Notes
      payable
    
    
    -
    
    
    48,000Current
      portion of long-term debt
    
    
    91,018
    
    
    56,151Accounts
      payable
    
    
    241,836
    
    
    198,273Taxes
      accrued
    
    
    70,810
    
    
    72,558Interest
      accrued
    
    
    13,842
    
    
    10,235Other
    
    
    83,949
    
    
    67,160501,455
    
    
    452,377**Other
      Liabilities**Deferred
      income taxes
    
    
    486,970
    
    
    415,788Investment
      tax credits
    
    
    48,143
    
    
    52,510Asset
      retirement obligations
    
    
    166,845
    
    
    269,124Regulatory
      liabilities
    
    
    677,489
    
    
    574,490Other
    
    
    341,743
    
    
    217,3711,721,190
    
    
    1,529,283**Total
      Capitalization and Liabilities**
    
    $
    5,111,951
    
    $
    4,404,434





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




47





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002****Operating
      Revenues**Regulated
      electric
    
    $
    1,421,709
    
    $
    1,397,997
    
    $
    1,353,431Regulated
      gas
    
    
    1,010,909
    
    
    947,393
    
    
    695,799Nonregulated
    
    
    263,735
    
    
    250,422
    
    
    186,9292,696,353
    
    
    2,595,812
    
    
    2,236,159**Operating
      Expenses**Regulated:Cost
      of fuel, energy and capacity
    
    
    399,959
    
    
    397,727
    
    
    346,685Cost
      of gas sold
    
    
    789,975
    
    
    720,633
    
    
    482,837Other
      operating expenses
    
    
    378,645
    
    
    360,090
    
    
    394,436Maintenance
    
    
    177,087
    
    
    153,405
    
    
    135,487Depreciation
      and amortization
    
    
    264,952
    
    
    279,650
    
    
    266,983Property
      and other taxes
    
    
    81,192
    
    
    80,122
    
    
    76,0252,091,810
    
    
    1,991,627
    
    
    1,702,453Nonregulated:Cost
      of sales
    
    
    230,567
    
    
    215,664
    
    
    158,463Other
    
    
    17,580
    
    
    17,701
    
    
    20,246248,147
    
    
    233,365
    
    
    178,709Total
      operating expenses
    
    
    2,339,957
    
    
    2,224,992
    
    
    1,881,162**Operating
      Income**
    
    
    356,396
    
    
    370,820
    
    
    354,997**Non-Operating
      Income**Interest
      and dividend income
    
    
    4,401
    
    
    4,956
    
    
    8,832Other
      income
    
    
    25,289
    
    
    18,721
    
    
    14,063Other
      expense
    
    
    (3,615
    )
    
    (3,205
    )
    
    (8,790
    )26,075
    
    
    20,472
    
    
    14,105**Fixed
      Charges**Interest
      on long-term debt
    
    
    71,949
    
    
    72,207
    
    
    71,401Other
      interest expense
    
    
    5,728
    
    
    3,813
    
    
    3,412Preferred
      dividends of subsidiary trust
    
    
    -
    
    
    -
    
    
    1,574Allowance
      for borrowed funds
    
    
    (7,816
    )
    
    (4,586
    )
    
    (3,336
    )69,861
    
    
    71,434
    
    
    73,051**Income
      Before Income Taxes**
    
    
    312,610
    
    
    319,858
    
    
    296,051**Income
      Taxes**
    
    
    102,155
    
    
    131,261
    
    
    120,230**Net
      Income**
    
    
    210,455
    
    
    188,597
    
    
    175,821**Preferred
      Dividends**
    
    
    1,245
    
    
    1,416
    
    
    2,933**Earnings
      on Common Stock**
    
    $
    209,210
    
    $
    187,181
    
    $
    172,888





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




48





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Earnings
      on Common Stock**
    
    $
    209,210
    
    $
    187,181
    
    $
    172,888**Other
      Comprehensive Income (Loss)**Unrealized
      gains (losses) on cash flow hedges:Unrealized
      gains (losses) during period-Before
      income taxes
    
    
    -
    
    
    (7,372
    )
    
    (2,458
    )Income
      tax (expense) benefit
    
    
    -
    
    
    3,065
    
    
    1,022-
    
    
    (4,307
    )
    
    (1,436
    )Less
      realized gains (losses) reflected in net income during
    period-Before
      income taxes
    
    
    682
    
    
    5,513
    
    
    2,277Income
      tax (expense) benefit
    
    
    (283
    )
    
    (2,292
    )
    
    (946
    )399
    
    
    3,221
    
    
    1,331Less
      net unrealized gains (losses) reclassified to regulatory
      assetsand
      liabilities -Before
      income taxes
    
    
    -
    
    
    (12,369
    )
    
    -Income
      tax benefit
    
    
    -
    
    
    5,142
    
    
    --
    
    
    (7,227
    )
    
    -Other
      comprehensive income (loss)
    
    
    (399
    )
    
    (301
    )
    
    (2,767
    )**Comprehensive
      Income**
    
    $
    208,811
    
    $
    186,880
    
    $
    170,121





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




49





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
STATEMENTS OF CASHFLOWS**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Net
      Cash Flows From Operating Activities**Net
      income
    
    $
    210,455
    
    $
    188,597
    
    $
    175,821Adjustments
      to reconcile net income to net cash provided:Depreciation
      and amortization
    
    
    266,207
    
    
    280,803
    
    
    268,446Deferred
      income taxes and investment tax credit, net
    
    
    35,531
    
    
    544
    
    
    (63,335
    )Amortization
      of other assets and liabilities
    
    
    18,210
    
    
    32,771
    
    
    42,735Power
      purchase contract restructuring receipt
    
    
    -
    
    
    -
    
    
    39,100Cash
      outflows of accounts receivable securitization
    
    
    -
    
    
    -
    
    
    (44,000
    )Impact
      of changes in working capital-Receivables,
      net
    
    
    (28,697
    )
    
    20,678
    
    
    (157,581
    )Inventories
    
    
    (4,181
    )
    
    3,027
    
    
    (5,153
    )Accounts
      payable
    
    
    29,310
    
    
    (47,765
    )
    
    51,268Taxes
      accrued
    
    
    (1,748
    )
    
    (10,505
    )
    
    28,888Other
      current assets and liabilities
    
    
    9,436
    
    
    (2,089
    )
    
    17,213Other
    
    
    (11,029
    )
    
    (24,802
    )
    
    (601
    )Net
      cash provided by operating activities
    
    
    523,494
    
    
    441,259
    
    
    352,801**Net
      Cash Flows From Investing Activities**Utility
      construction expenditures
    
    
    (631,962
    )
    
    (344,137
    )
    
    (331,287
    )Quad
      Cities Station decommissioning trust fund
    
    
    (8,299
    )
    
    (8,299
    )
    
    (8,299
    )Other
      investing activities, net
    
    
    (164
    )
    
    11,270
    
    
    9,540Net
      cash used in investing activities
    
    
    (640,425
    )
    
    (341,166
    )
    
    (330,046
    )**Net
      Cash Flows From Financing Activities**Dividends
      paid
    
    
    (1,245
    )
    
    (188,916
    )
    
    (80,433
    )Issuance
      of long-term debt, net of issuance cost
    
    
    347,769
    
    
    272,550
    
    
    391,145Retirement
      of long-term debt, including reacquisition cost
    
    
    (56,168
    )
    
    (202,076
    )
    
    (163,957
    )Net
      decrease in notes payable
    
    
    (48,000
    )
    
    (7,000
    )
    
    (34,350
    )Reacquisition
      of preferred securities
    
    
    (1,430
    )
    
    -
    
    
    (126,680
    )Other
    
    
    467
    
    
    -
    
    
    -Net
      cash provided by (used in) financing activities
    
    
    241,393
    
    
    (125,442
    )
    
    (14,275
    )**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    124,462
    
    
    (25,349
    )
    
    8,480**Cash
      and Cash Equivalents at Beginning of Year**
    
    
    3,151
    
    
    28,500
    
    
    20,020**Cash
      and Cash Equivalents at End of Year**
    
    $
    127,613
    
    $
    3,151
    
    $
    28,500**Supplemental
      Disclosure:**Interest
      paid, net of amounts capitalized
    
    $
    60,955
    
    $
    65,105
    
    $
    67,068Income
      taxes paid
    
    $
    68,348
    
    $
    142,660
    
    $
    133,142





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







50





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
STATEMENTS OF CAPITALIZATION**


(In
thousands, except share amounts)





**As
      of December 31,****2004**
    
    **2003****Common
      Shareholder’s Equity**Common
      shares, no par; 350,000,000 shares authorized; 70,980,203 shares
      outstanding
    
    $
    561,162
    
    
    
    
    $
    561,024Retained
      earnings
    
    
    966,306
    
    
    
    
    
    757,096Accumulated
      other comprehensive income:Unrealized
      gain on cash flow hedges
    
    
    -
    
    
    
    
    
    3991,527,468
    
    
    52.9
    %
    
    1,318,519
    
    
    54.4
    %**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, 35,697 and 50,000 shares, respectively
    
    
    3,570
    
    
    
    
    
    5,000$4.80
      Series, 49,898 shares
    
    
    4,990
    
    
    
    
    
    4,99030,329
    
    
    1.0
    %
    
    31,759
    
    
    1.3
    %**Long-Term
      Debt**Mortgage
      bonds:7.0%
      Series, due 2005
    
    
    -
    
    
    
    
    
    90,500Pollution
      control revenue obligations:6.1%
      Series due 2007
    
    
    1,000
    
    
    
    
    
    1,0005.95%
      Series, due 2023 (secured by general mortgage bonds)
    
    
    29,030
    
    
    
    
    
    29,030Variable
      rate series -Due
      2016 and 2017, 2.05% and 1.26%, respectively
    
    
    37,600
    
    
    
    
    
    37,600Due
      2023 (secured by general mortgage bonds), 2.05% and 1.26%,
      respectively
    
    
    28,295
    
    
    
    
    
    28,295Due
      2023, 2.05% and 1.26%, respectively
    
    
    6,850
    
    
    
    
    
    6,850Due
      2024, 2.05% and 1.26%, respectively
    
    
    34,900
    
    
    
    
    
    34,900Due
      2025, 2.05% and 1.26%, respectively
    
    
    12,750
    
    
    
    
    
    12,750Notes:6.375%
      Series, due 2006
    
    
    160,000
    
    
    
    
    
    160,0005.125%
      Series, due 2013
    
    
    275,000
    
    
    
    
    
    275,0004.65%
      Series, due 2014
    
    
    350,000
    
    
    
    
    
    -6.75%
      Series, due 2031
    
    
    400,000
    
    
    
    
    
    400,000Obligation
      under capital lease
    
    
    1,524
    
    
    
    
    
    2,060Unamortized
      debt premium and discount, net
    
    
    (5,440
    )
    
    
    
    
    (5,489
    )1,331,509
    
    
    46.1
    %
    
    1,072,496
    
    
    44.3
    %**Total
      Capitalization**
    
    $
    2,889,306
    
    
    100.0
    %
    $
    2,422,774
    
    
    100.0
    %





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




51





**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
STATEMENTS OF RETAINED EARNINGS**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Beginning
      of Year**
    
    $
    757,096
    
    $
    757,415
    
    $
    662,027**Net
      Income**
    
    
    210,455
    
    
    188,597
    
    
    175,821**Deduct:**Loss
      on reacquisition of preferred shares
    
    
    -
    
    
    -
    
    
    750Dividends
      declared on preferred shares
    
    
    1,245
    
    
    1,416
    
    
    2,183Dividends
      declared on common shares
    
    
    -
    
    
    187,500
    
    
    77,5001,245
    
    
    188,916
    
    
    80,433**End
      of Year**
    
    $
    966,306
    
    $
    757,096
    
    $
    757,415








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







52





**MIDAMERICAN
ENERGY COMPANY**


**NOTESTO CONSOLIDATED FINANCIAL
STATEMENTS**





**INDEX**




(1)
    Summary of Significant Accounting
      Policies
    54(2)
    Jointly Owned Utility Plant
    58(3)
    Inventories
    58(4)
    Commitments and Contingencies
    59(5)
    Rate Matters
    63(6)
    Long-Term Debt
    64(7)
    Short-Term Borrowing
    64(8)
    Preferred Securities
    65(9)
    Retirement Plans
    65(10)
    Segment Information
    69(11)
    Income Taxes
    72(12)
    Risk Management and Energy Trading
    73(13)
    Concentration of Credit Risk
    74(14)
    Asset Retirement Obligations
    76(15)
    Fair Value of Financial Instruments
    76(16)
    Non-Operating Other Income and
      Expense
    77(17)
    Affiliated Company Transactions
    77(18)
    Unaudited Quarterly Operating Results
    78





53









**MIDAMERICAN
ENERGY COMPANY**


**NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS**





**(1)** **Summary
of SignificantAccounting 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 2004 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.




54





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.





As
      of December 31,Weighted AverageRemaining
      Life
    
    
    2004
    
    
    2003(In
      thousands)Regulatory
      assets:Deferred
      income taxes, net
    
    
    24
      years
    
    $
    131,770
    
    $
    108,464Unrealized
      loss on regulated hedges
    
    
    1
      year
    
    
    36,794
    
    
    14,248Minimum
      pension liability adjustment
    
    
    NA
    
    
    18,203
    
    
    10,996Debt
      refinancing costs
    
    
    7
      years
    
    
    15,365
    
    
    19,698Environmental
      costs
    
    
    3
      years
    
    
    9,284
    
    
    13,995Asset
      retirement obligations
    
    
    9
      years
    
    
    8,273
    
    
    77,104Nuclear
      generation assets
    
    
    28
      years
    
    
    6,727
    
    
    7,522Cooper
      Nuclear Station capital improvement costs
    
    
    -
    
    
    -
    
    
    7,314Enrichment
      facilities decommissioning
    
    
    3
      years
    
    
    879
    
    
    1,116Other
    
    
    Various
    
    
    702
    
    
    1,239Total
    
    
    
    
    $
    227,997
    
    $
    261,696Regulatory
      liabilities:Cost
      of removal accrual
    
    
    24
      years
    
    $
    428,719
    
    $
    408,608Iowa
      electric settlement accrual
    
    
    3
      years
    
    
    181,188
    
    
    144,418Asset
      retirement obligations
    
    
    49
      years
    
    
    53,259
    
    
    -Unrealized
      gain on regulated hedges
    
    
    2
      years
    
    
    7,462
    
    
    15,122Environmental
      insurance recovery
    
    
    3
      years
    
    
    3,599
    
    
    3,781Nuclear
      insurance reserve
    
    
    49
      years
    
    
    3,262
    
    
    2,561Total
    
    
    
    
    $
    677,489
    
    $
    574,490





Of the
regulatory assets listed, only the nuclear generation assets are included in
rate base and earn a return. Amortization of the assets is recoverable over the
periods shown above.





The
decrease in the asset retirement obligations regulatory asset and the
establishment of a related regulatory liability is the result of a 20-year
extension to the operating license of Quad Cities Generating Station (“Quad
Cities Station”) and its impact on the timing of related cash flows. Refer to
Note (14) for additional discussion. Refer to Note (1)(h) for additional
information regarding the power purchase contract for Cooper Nuclear Station
(“Cooper”). For a discussion of the Iowa electric settlement reserve, refer to
Note (5), and for a discussion of the cost of removal accrual, refer to Note
(1)(e).





(d)  Revenue
Recognition





Revenues
are recorded in the period 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 $68.5
million and $61.5 million at December 31, 2004 and 2003, 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
energy 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 the related revenues are recognized. At any given
time, these costs may be over or under collected from customers. The total under
collection included in Receivables at December 31, 2004 and 2003, was $49.9
million and $55.7 million, respectively.





55





(e)  Depreciation
and Amortization





MidAmerican
Energy's provisions for depreciation and amortization for its utility operations
are based on straight-line composite rates. The average depreciation and
amortization rates applied to depreciable utility plant for the years ended
December 31 were as follows:





2004
    
    2003
    
    2002Electric
    4.0%
    
    4.3%
    
    4.4%Gas
    3.4%
    
    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 (14), 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 2004, 2003 and 2002 includes $50.8
million, $54.1 million and $55.0 million, respectively, for a regulatory charge
pursuant to the terms of an electric rate settlement agreement in Iowa. Refer to
Note (5) for a discussion of the settlement agreement.





An
allowance for the estimated annual decommissioning costs of the Quad Cities
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):





2004
    
    2003Nuclear
      decommissioning trust fund
    
    $
    207,464
    
    $
    184,171Rabbi
      trusts
    
    
    108,156
    
    
    96,237Coal
      transportation property, net of accumulated depreciation of $2,287 and
      $1,996, respectively
    
    
    9,632
    
    
    9,923Non-utility
      property, net of accumulated depreciation of $3,124 and $2,169,
      respectively
    
    
    8,063
    
    
    8,727Other
    
    
    45
    
    
    45Total
    
    $
    333,360
    
    $
    299,103





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. As of
December 31, 2004, approximately 70% of the fair value of the trusts’ funds was
invested in domestic corporate debt and common equity securities. The remainder
was invested in investment grade municipal and U.S. Treasury bonds. An amount
equal to the net unrealized gains and losses on those investments is recorded as
an adjustment to Regulatory Assets or Regulatory Liabilities 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.





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.




56





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 land, computer software 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.





(g)  Consolidated
Statements of Cash Flows





MidAmerican
Energy considers all cash and highly liquid debt instruments purchased with an
original 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 had a power purchase contract with the Nebraska Public Power District
(“NPPD”) for the purchase of capacity and energy, which expired
December 31, 2004. The original terms of the contract were restructured
effective August 1, 2002.





Cooper
capital improvement costs prior to 1997, including carrying costs, were deferred
in accordance with then applicable rate regulation. These costs were 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 currently
recovered 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 paid 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 in 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 discussed below, are reflected in
Cost of Fuel, Energy and Capacity on the Consolidated Statements of
Operations.





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 paid MidAmerican Energy $39.1 million. MidAmerican Energy
recognized 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.





(i)  Accounting
for Derivatives





MidAmerican
Energy uses a variety of financial derivative instruments to help manage its
exposure to market risk. Derivatives that qualify and are designated as “normal”
purchases or sales contracts are accounted for on an accrual basis. All other
derivatives are recorded as either assets or liabilities on the Consolidated
Balance Sheets and are measured at fair value. Changes in the value of
derivative instruments used for regulated utility hedging purposes are recorded
as regulatory assets or liabilities and, therefore, would not impact earnings
until realized. Revenue and cost of sales from derivative instruments used for
trading purposes are presented as net nonregulated revenue on the statement of
operations.





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





57








(j)  Income
Taxes





MidAmerican
Energy and MidAmerican Funding recognize deferred tax assets and liabilities
based on the difference between the financial statement and tax basis of assets
and liabilities using estimated tax rates in effect for the year in which the
differences are expected to reverse. Based on existing regulatory precedent,
MidAmerican Energy is not allowed to recognize deferred income tax expense
related to certain temporary differences resulting from accelerated tax
depreciation and other property related basis differences. For these differences
MidAmerican Energy establishes deferred tax liabilities and regulatory assets on
the consolidated balance sheets since MidAmerican Energy is allowed to recover
the increased tax expense when these differences turn around.





The
calculation of current and deferred income taxes requires management to apply
judgment related to the application of complex tax laws or related
interpretations and uncertainties related to the outcome of tax audits. Changes
in such factors may result in changes to management’s estimates, which could
require MidAmerican Energy or MidAmerican Funding to adjust its currently
recorded tax assets and liabilities and record additional income tax expense or
benefits.





**(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, 2004, 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 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.





Nuclear
    
    Coal-firedCouncilQuad Cities
    
    Neal
    
    Bluffs
    
    Neal
    
    Ottumwa
    
    LouisaUnits
    
    Unit
    
    Unit
    
    Unit
    
    Unit
    
    UnitNo.
      1 & 2
    
    No.
      3
    
    No.
      3
    
    No.
      4
    
    No.
      1
    
    No.
      1(dollars
      in millions)In
      service date
    
    
    1972
    
    
    1975
    
    
    1978
    
    
    1979
    
    
    1981
    
    
    1983Percent
      ownership
    
    
    25.0
    %
    
    72.0
    %
    
    79.1
    %
    
    40.6
    %
    
    52.0
    %
    
    88.0
    %Utility
      plant in service
    
    $
    261
    
    $
    145
    
    $
    307
    
    $
    176
    
    $
    221
    
    $
    548Accumulated depreciation
    
    $
    133
    
    $
    109
    
    $
    231
    
    $
    129
    
    $
    150
    
    $
    357Accredited
      capacity at MidAmerican Energy 2004 peak (megawatts)
    
    
    437
    
    
    371
    
    
    546
    
    
    261
    
    
    372
    
    
    616





**(3)**  **Inventories**





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





2004
    
    2003Materials
      and supplies, at average cost
    
    $
    36,998
    
    $
    31,987Coal
      stocks, at average cost
    
    
    26,659
    
    
    24,723Gas
      in storage, at LIFO cost
    
    
    22,600
    
    
    25,371Fuel
      oil, at average cost
    
    
    1,885
    
    
    1,759Other
    
    
    1,504
    
    
    1,625Total
    
    $
    89,646
    
    $
    85,465





At
December 31, 2004 prices, the current cost of gas in storage was $93.4
million.




58








**(4)**  **Commitments and Contingencies**





(a)  Manufactured
Gas Plant Facilities





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





MidAmerican
Energy has evaluated all known properties that were, at one time, sites of gas
manufacturing plants for which it may be a potentially responsible party. The
purpose of these evaluations 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 has actively worked with the regulatory agencies and has
received regulatory closure on thirteen sites. MidAmerican Energy is continuing
to work with the agencies to obtain regulatory closure on an additional ten
sites. MidAmerican Energy has investigated its liability as a potentially
responsible party for four other sites and has determined that no basis exists
for it to be liable for response costs under the Comprehensive Environmental
Response, Compensation, and Liability Act. Accordingly, those sites have been
removed from the list of sites for which MidAmerican Energy may have
responsibility for remedial action.





MidAmerican
Energy estimates the range of possible costs for investigation, remediation and
monitoring for the sites discussed above to be approximately $7 million to $14
million. As of December 31, 2004, MidAmerican Energy has recorded a $9.3
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 three 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 national ambient air quality
standards for ozone and new standards for fine particulate matter. These
standards set the minimum level of air quality that must be met throughout the
United States. Areas that achieve the standards, as determined by ambient
monitoring, are characterized as being in attainment of the standard. Areas that
fail to meet the standard are designated as being nonattainment areas.
Generally, once an area has been designated as a nonattainment area, sources of
emissions in the area that contribute to the failure to achieve the ambient air
quality standards are required to make emissions reductions. The EPA has
concluded that the entire State of Iowa is in attainment of the ozone standards
and the fine particulate standards.





On
December 4, 2003, the EPA announced the development of its Interstate Air
Quality Rule, now known as the Clean Air Interstate Rule, a proposal to require
coal-burning power plants in 29 states, including Iowa, and the District of
Columbia to reduce emissions of sulfur dioxide (“SO 2 ”) and
nitrogen oxides (“NO X ”) 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 that would reduce emissions of mercury from coal-fired
utilities. One of these alternatives would require reductions of mercury from
all coal-fired facilities greater than 25 megawatts





59








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 SO 2 allowance system. The EPA is currently under a deadline to finalize the mercury
reduction rule by March 2005.





The Clean
Air Interstate Rule or the mercury reduction rule could, in whole or in part, be
superseded or made more stringent by one of a number of multi-pollutant emission
reduction proposals currently under consideration at the federal level,
including the “Clear Skies Initiative,” and other pending legislative proposals
that contemplate 70% to 90% reductions of SO 2 ,
NO X and
mercury, as well as possible new federal regulation of carbon dioxide and other
gases that may affect global climate change.





Depending
on the outcome of the final Clean Air Interstate Rule and the mercury reduction
rule or any superseding legislation passed by Congress, MidAmerican Energy may
be required to install control equipment on its generating stations, purchase
emission allowances or decrease the number of hours during which its generating
stations operate. However, until final regulatory or legislative action is
taken, the impact of the regulations on MidAmerican Energy cannot be
predicted.





MidAmerican
Energy has implemented a planning process that forecasts the site-specific
controls and actions that may be required to meet emissions reductions as
contemplated by the EPA. In accordance with an Iowa law passed in 2001,
MidAmerican Energy has on file with the IUB its current multi-year plan and
budget for managing SO 2, and
NO X from its
generating facilities in a cost-effective manner. The plan, which is required to
be updated every two years, provides specific actions to be taken at each
coal-fired generating facility and the related costs and timing for each action.
On July 17, 2003, the IUB issued an order that affirmed an administrative
law judge’s approval of the initial plan filed April 1, 2002, as amended.
On October 4, 2004, the IUB issued an order approving MidAmerican Energy’s
second biennial plan as revised in a settlement MidAmerican Energy entered into
with the Iowa Consumer Advocate Division of the Department of Justice. That plan
covers the time period from April 1, 2004 through December 31, 2006.
Neither IUB order resulted in any changes to electric rates for MidAmerican
Energy. The effect of the orders is to approve the prudence of expenditures made
consistent with the plans. Pursuant to an unrelated rate settlement agreement
approved by the IUB on October 17, 2003, if prior to January 1, 2011,
capital and operating expenditures to comply with environmental requirements
cumulatively exceed $325 million, then MidAmerican Energy may seek to recover
the additional expenditures from customers. At this time, MidAmerican Energy
does not expect these 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 to an existing facility
that potentially increases emissions, unless the changes are exempt under the
regulations (including routine maintenance, repair and replacement of
equipment). In general, projects subject to NSR regulations are subject to
pre-construction review and permitting under the Prevention of Significant
Deterioration (“PSD”) provisions of the Clean Air Act. Under the PSD program, a
project that emits threshold levels of regulated pollutants must undergo a Best
Available Control Technology analysis and evaluate the most effective emissions
controls. These controls must be installed in order to receive a permit.
Violations of NSR regulations, which may be alleged by the EPA, states, and
environmental groups, among others, potentially subject a utility to material
expenses for fines and other sanctions and remedies including requiring
installation of enhanced pollution controls and funding supplemental
environmental projects.





In recent
years, the EPA has requested from several utilities information and support
regarding their capital projects for various generating plants. The requests
were issued as part of an industry-wide investigation to assess compliance with
the NSR and the New Source Performance Standards of the Clean Air Act. In
December 2002 and April 2003, MidAmerican Energy received requests from the EPA
to provide documentation related to its capital projects from January 1,
1980, to April 2003 for a number of its generating plants. MidAmerican Energy
has submitted information to the EPA in responses to these requests, and there
are currently no outstanding data requests pending from the EPA. MidAmerican
Energy cannot predict the outcome of these requests at this time. However, on
August 27, 2003, the EPA announced changes to its NSR rules that clarify
what constitutes routine repair, maintenance and replacement for purposes of
triggering NSR requirements. The EPA concluded equipment that is repaired,
maintained or replaced with an expenditure not greater than 20 percent of the
value of the source will not trigger the New Source Revisions of the Clean Air
Act. A number of states and local air districts challenged the EPA’s
clarifications of the NSR rule, and a panel of the 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. On July 1, 2004, the EPA published a notice of stay of
the final equipment replacement rule in the *Federal
Register,* consistent
with the judicial stay. Additionally, on the same date, the EPA published a
Notice of Reconsideration and Request for Comment on the equipment replacement
rule in response to the Petitioners’ legal challenges. Until such time as the
EPA takes final action on the equipment replacement rule, the previous rules
without the clarified exemption remain in effect.





60








(c)  Nuclear
Decommissioning Costs





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





MidAmerican
Energy's share of expected decommissioning costs for Quad Cities Station, in
2004 dollars, is $154 million and is the asset retirement obligation for Quad
Cities Station. Refer to Note (14) for a discussion of asset retirement
obligations. MidAmerican Energy has established trusts for the investment of
funds for decommissioning the Quad Cities Station. The fair value of the assets
held in the trusts is reflected in Investments and Nonregulated Property, Net on
the Consolidated Balance Sheets.





MidAmerican
Energy's depreciation and amortization expense included costs for Quad Cities
Station nuclear decommissioning of $8.3 million for each of the years 2004, 2003
and 2002. 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 $15.0 million, $16.1 million and
$(6.9) million for 2004, 2003 and 2002, respectively.





(d)  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.





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 $8.75
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.




61





(e)  Purchase
Commitments





MidAmerican
Energy has supply and related transportation contracts for its fossil fueled
generating stations. As of December 31, 2004, the contracts, with
expiration dates ranging from 2005 to 2010, required minimum payments of $83.5
million, $67.4 million, $62.8 million, $22.0 million and $15.8 million for the
years 2005 through 2009, respectively, and $15.5 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 $6.2 million for each year.





MidAmerican
Energy also has contracts to purchase electric capacity. As of December 31,
2004, the contracts, with expiration dates ranging from 2005 to 2028, required
minimum payments of $29.1 million, $25.1 million, $27.3 million, $35.8 million
and $28.9 million for the years 2005 through 2009, respectively, and $73.9
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, 2004, the contracts, with expiration dates
ranging from 2005 to 2013, required minimum payments of $54.2 million, $35.1
million, $25.2 million, $4.4 million and $2.9 million for the years 2005 through
2009, respectively, and $10.3 million for the total of the years thereafter.





MidAmerican
Energy has non-cancelable operating leases primarily for computer equipment,
office space and rail cars. Rental payments on non-cancelable operating leases
totaled $7.9 million for 2004, $7.9 million for 2003 and $8.0 million for 2002.
As of December 31, 2004, the minimum payments under these leases were $7.5
million, $6.5 million, $5.6 million, $4.2 million and $1.9 million for the years
2005 through 2009, respectively, and $2.5 million for the total of the years
thereafter.





(f)  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, 2004, the
maximum amount of such guarantees specified in these leases totaled $30.2
million. These guarantees are not reflected on the Consolidated Balance
Sheets.





(g)  Deferred
Construction Costs





On
February 12, 2003, MidAmerican Energy executed a contract with Mitsui &
Co. Energy Development, Inc. (“Mitsui”) for


engineering,
procurement and construction of a 790-MW (based on expected accreditation)
coal-fired generating plant expected to be completed in the summer of 2007.
MidAmerican Energy will hold a 60.67% individual ownership interest as a tenant
in common with the other owners of the plant. Under the contract, MidAmerican
Energy is allowed to defer payments, including the other owners’ shares, for up
to $200.0 million of billed construction costs through the end of the project.
Deferred payments as of December 31, 2004 and 2003, totaled $152.3 million
and $23.4 million, respectively, and are reflected in Other Liabilities - Other
on the Consolidated Balance Sheets.





An asset
representing the other owners’ share of the deferred payment is reflected in
Other Assets on the Consolidated Balance Sheets and totaled $59.9 million and
$9.2 million as of December 31, 2004 and 2003, respectively. MidAmerican
Energy will bill each of the other owners for its share of the deferred payments
when payment is made to Mitsui.





(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.





62





**(5)**  **RateMatters**





Under
three settlement agreements between MidAmerican Energy, the Iowa Office of
Consumer Advocate (“OCA”) and other intervenors approved by the IUB, MidAmerican
Energy has agreed not to seek a general increase in electric rates prior to 2012
unless its Iowa jurisdictional electric return on equity for any year falls
below 10%. Prior to filing for a general increase in electric rates, MidAmerican
Energy is required to conduct 30 days of good faith negotiations with the
signatories to the settlement agreements to attempt to avoid a general increase
in such rates. As a party to the settlement agreements, the OCA has agreed not
to request or support any decrease in MidAmerican Energy’s Iowa electric rates
prior to January 1, 2012. The settlement agreements specifically allow the IUB
to approve or order electric rate design or cost of service rate changes that
could result in changes to rates for specific customers as long as such changes
do not result in an overall increase in revenues for MidAmerican Energy. The
settlement agreements also each provide that portions of revenues associated
with Iowa retail electric returns on equity within specified ranges will be
recorded as a regulatory liability.





Under the
first settlement agreement, which was approved by the IUB on December 21,
2001, and is effective through December 31, 2005, an amount equal to 50% of
revenues associated with returns on equity between 12% and 14%, and 83.33% of
revenues associated with returns on equity above 14%, in each year is recorded
as a regulatory liability. The second settlement agreement, which was filed in
conjunction with MidAmerican Energy’s application for ratemaking principles on
its wind power project and was approved by the IUB on October 17, 2003,
provides that during the period January 1, 2006 through December 31,
2010, an amount equal to 40% of revenues associated with returns on equity
between 11.75% and 13%, 50% of revenues associated with returns on equity
between 13% and 14%, and 83.3% of revenues associated with returns on equity
above 14%, in each year will be recorded as a regulatory liability.





The third
settlement agreement was approved by the IUB on January 31, 2005, in
conjunction with MidAmerican Energy’s proposed expansion of its wind power
project by up to 90 MW. This settlement extended through 2011 MidAmerican
Energy’s commitment not to seek a general increase in electric rates unless its
Iowa jurisdictional electric return on equity falls below 10%. It also extended
the revenue sharing mechanism through 2011. In addition, the Iowa Office of
Consumer Advocate agreed to commit not to seek any decrease in Iowa electric
base rates to become effective before January 1, 2012. The total capacity added
as the result of the wind expansion project is currently projected to be 50 MW.





The
regulatory liabilities created by the three settlement agreements are recorded
as a regulatory charge in depreciation and amortization expense when the
liability is accrued. Additionally, interest expense is accrued on the portion
of the regulatory liability balance recorded in prior years. The regulatory
liabilities created for the years through 2010 are expected to be reduced as
they are credited against plant in service in amounts equal to the allowance for
funds used during construction associated with generating plant additions. As a
result of the credit applied to generating plant balances from the reduction of
the regulatory liabilities, future depreciation will be reduced. As of
December 31, 2004 and 2003, the related regulatory liability reflected on
the Consolidated Balance Sheets was $181.2 million and $144.4 million,
respectively. The regulatory liability for 2011 will be credited to customer
bills in 2012.





In an
order issued September 27, 2004, the IUB requires MidAmerican Energy to
file various plans to fully equalize and consolidate its class zonal electric
rates by the end of each of the years 2007 through 2010. On October 18,
2004, MidAmerican Energy filed a motion for reconsideration opposing full rate
equalization and proposing a series of rate reductions. The resulting decreases
in revenues from some of the reductions would be offset by costs decreasing
pursuant to the expiration of certain contracts. However, MidAmerican Energy is
seeking to reduce rates for some residential customers by approximately $4.0
million in 2008 and $3.0 million in 2009 for a total annualized reduction of
$7.0 million in addition to the reductions to be offset by cost decreases
related to existing contracts. The $7.0 million reduction in revenues would
begin to be offset by a rate increase for other residential customers starting
in 2011.





Illinois
bundled electric rates are frozen until 2007, subject to certain exceptions
allowing for increases, at which time bundled rates may be increased or
decreased by the ICC. Illinois law provides that, through 2006, Illinois
earnings above a computed level of return on common equity are to be shared
equally between regulated retail electric customers and MidAmerican Energy.
MidAmerican Energy’s computed level of return on common equity is based on a
rolling two-year average of the Monthly Treasury Long-Term Average Rate, as
published by the Federal Reserve System, plus a premium of 8.5% for 2000 through
2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which
sharing must occur for 2004 is 13.57%. The law allows MidAmerican Energy to
mitigate the sharing of earnings above the threshold return on common equity
through accelerated recovery of electric assets..





63





**(6)**  **Long-Term Debt**





MidAmerican
Energy’s annual sinking fund requirements and maturities of long-term debt for
2005 through 2009 are approximately $91 million, $161 million, $2 million, zero
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, 2004 and 2003. MidAmerican Energy maintains a
revolving credit facility agreement to provide liquidity for holders of these
issues.





The
indenture pertaining to MidAmerican Energy’s unsecured senior notes 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, 2004, MidAmerican Energy was in
compliance with all of its applicable long-term debt covenants.





As of
December 31, 2004, substantially all of the former Midwest Power Systems Inc., a
predecessor company, electric utility property in Iowa, or approximately 49% of
gross utility property, was pledged to secure $147.8 million in mortgage bonds,
of which $90.5 million matured on February 15, 2005. The remaining $57.3 million
mature on May 1, 2023.





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
(6) of MidAmerican Funding’s Notes to Consolidated Financial
Statements.





On
October 1, 2004, MidAmerican Energy issued $350 million of 4.65%
medium-term notes due in 2014. The proceeds were used for general corporate
purposes.





**(7)**  **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):





2004
    
    2003Balance
      at year-end
    
    $
    -
    
    $
    48,000Weighted
      average interest rate on year-end balance
    
    
    -
    %
    
    1.0
    %Average
      daily amount outstanding during the year
    
    $
    3,579
    
    $
    1,927Weighted
      average interest rate on average daily amount outstanding during the
      year
    
    
    1.1
    %
    
    1.2
    %





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 $425 million revolving credit facility which
supports its $304.6 million commercial paper program and its variable rate
pollution control revenue obligations, all of which was available at December
31, 2004. The facility expires November 18, 2009. The related credit
agreement requires that MidAmerican Energy’s ratio of consolidated debt to total
capitalization, including current maturities, not exceed 0.65 to 1 as of the
last day of any quarter. As of December 31, 2004, MidAmerican Energy was in
compliance with all covenants related to its short-term borrowings. In addition,
MidAmerican Energy has a $5.0 million line of credit, which expires July 1,
2005.




64








**(8)**  **Preferred Securities**





In
January 2004, MidAmerican Energy redeemed $1.4 million of its $4.40 Series
Preferred Securities at a price equal to 90.35% of the principal
amount.





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 $31.1 million.
The aggregate total the holders of all preferred securities outstanding at
December 31, 2004, are entitled to upon involuntary bankruptcy is $30.3
million plus accrued dividends. Annual dividend requirements for all preferred
securities outstanding at December 31, 2004, total $1.2
million.





**(9)**  **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
the established 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 defined benefit
supplemental executive retirement plans for active and retired
participants.





MidAmerican
Energy also sponsors certain postretirement health care and life insurance
benefits covering substantially all retired employees of MidAmerican Energy
Holdings and its domestic energy 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. On July 1, 2004,
the postretirement benefit plan was amended for non-union participants.
Non-union employees hired July 1, 2004, and after will no longer be
eligible for postretirement benefits other than pensions. The amendment
establishes retiree medical accounts for participants to which MidAmerican
Energy will make fixed contributions. Participants will use such accounts to pay
a portion of their medical premiums during retirement. 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.





65





Net
periodic benefit cost for the pension, including supplemental retirement, and
postretirement benefits plans of MidAmerican Energy and the aforementioned
affiliates included the following components 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.





Pension
    
    Postretirement2004
    
    2003
    
    2002
    
    2004
    
    2003
    
    2002Components
      of net periodic benefit cost (inthousands):Service cost
    
    $
    25,568
    
    $
    24,693
    
    $
    20,235
    
    $
    7,842
    
    $
    8,175
    
    $
    6,028Interest cost
    
    
    35,159
    
    
    34,533
    
    
    34,177
    
    
    15,716
    
    
    16,065
    
    
    13,928Expected return on plan assets
    
    
    (38,258
    )
    
    (38,396
    )
    
    (38,213
    )
    
    (8,437
    )
    
    (6,008
    )
    
    (4,880
    )Amortization
      of net transition obligation
    
    
    (792
    )
    
    (2,591
    )
    
    (2,591
    )
    
    3,283
    
    
    4,110
    
    
    4,110Amortization of prior service cost
    
    
    2,758
    
    
    2,761
    
    
    2,729
    
    
    296
    
    
    593
    
    
    425Amortization
      of prior year (gain) loss
    
    
    1,569
    
    
    1,483
    
    
    (2,482
    )
    
    3,299
    
    
    3,716
    
    
    2,385Regulatory expense
    
    
    -
    
    
    3,320
    
    
    6,639
    
    
    -
    
    
    -
    
    
    -Net periodic benefit cost
    
    $
    26,004
    
    $
    25,803
    
    $
    20,494
    
    $
    21,999
    
    $
    26,651
    
    $
    21,996Weighted
      average assumptions used todetermine benefit
      obligations as of December 31:Discount rate
    
    
    5.75
    %
    
    5.75
    %
    
    5.75
    %
    
    5.75
    %
    
    5.75
    %
    
    5.75
    %Rate of compensation increase
    
    
    5.00
    %
    
    5.00
    %
    
    5.00
    %
    Not
      applicableWeighted
      average assumptions used to determine netbenefit
      cost for the years ended December 31:Discount rate
    
    
    5.75
    %
    
    5.75
    %
    
    6.50
    %
    
    5.75
    %
    
    5.75
    %
    
    6.50
    %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
    %
    Not
      applicable





2004
    
    2003Assumed
      health care cost trend rates as of December 31:Health care cost trend rate assumed for next year
    
    
    10.00
    %
    
    11.00
    %Rate that the cost trend rate gradually declines to
    
    
    5.00
    %
    
    5.00
    %Year that the rate reaches the rate it is assumed to remain
    at
    
    
    2010
    
    
    2010





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):





Increase
      (Decrease) in ExpenseOne
      Percentage-Point
    
    One
      Percentage-PointIncrease
    
    DecreaseEffect
      on total service and interest cost
    
    $
    4,855
    
    $
    (3,740
    )Effect
      on postretirement benefit obligation
    
    $
    29,420
    
    $
    (24,066
    )





In 2004,
2003 and 2002, MidAmerican Energy’s pension cost was $14.5 million, $14.2
million and $12.4 million, respectively. MidAmerican Energy’s postretirement
cost in 2004, 2003 and 2002 totaled $18.9 million, $22.4 million and $19.6
million, respectively. Net periodic benefit costs assigned to MidAmerican Energy
affiliates are reimbursed currently in accordance with its intercompany
affiliate services agreements.




66








The
following table presents a reconciliation of the fair value of plan assets,
benefit obligation, and funded status of the aforementioned plans to the net
amounts measured and recognized in the Consolidated Balance Sheets as of
December 31 (in thousands):





Pension
      Benefits
    
    Postretirement
      Benefits2004
    
    2003
    
    2004
    
    2003Reconciliation
      of the fair value of plan assets:Fair
      value of plan assets at beginning of year
    
    $
    551,568
    
    $
    467,773
    
    $
    157,849
    
    $
    122,655Employer
      contributions
    
    
    5,083
    
    
    5,044
    
    
    23,782
    
    
    32,566Participant
      contributions
    
    
    -
    
    
    -
    
    
    7,733
    
    
    6,371Actual
      return on plan assets
    
    
    63,151
    
    
    105,438
    
    
    9,698
    
    
    15,853Benefits
      paid
    
    
    (28,174
    )
    
    (26,687
    )
    
    (19,687
    )
    
    (19,596
    )Fair
      value of plan assets at end of year
    
    
    591,628
    
    
    551,568
    
    
    179,375
    
    
    157,849Reconciliation
      of benefit obligation:Benefit
      obligation at beginning of year
    
    
    620,048
    
    
    593,179
    
    
    297,433
    
    
    291,441Service
      cost
    
    
    25,568
    
    
    24,693
    
    
    7,841
    
    
    8,175Interest
      cost
    
    
    35,159
    
    
    34,533
    
    
    15,716
    
    
    16,065Participant
      contributions
    
    
    -
    
    
    -
    
    
    7,733
    
    
    6,371Plan
      amendments
    
    
    -
    
    
    -
    
    
    (19,219
    )
    
    -Actuarial
      (gain) loss
    
    
    4,805
    
    
    (5,670
    )
    
    (33,773
    )
    
    (5,023
    )Benefits
      paid
    
    
    (28,174
    )
    
    (26,687
    )
    
    (19,687
    )
    
    (19,596
    )Benefit
      obligation at end of year
    
    
    657,406
    
    
    620,048
    
    
    256,044
    
    
    297,433Funded
      status
    
    
    (65,778
    )
    
    (68,480
    )
    
    (76,669
    )
    
    (139,584
    )Amounts
      not recognized in the Consolidated Balance Sheets:Unrecognized
      net (gain) loss
    
    
    (34,319
    )
    
    (12,907
    )
    
    42,768
    
    
    83,509Unrecognized
      prior service cost
    
    
    15,157
    
    
    17,915
    
    
    -
    
    
    5,451Unrecognized
      net transition obligation (asset)
    
    
    -
    
    
    (792
    )
    
    19,641
    
    
    36,992Net
      amount recognized in the Consolidated Balance Sheets
    
    $
    (84,940
    )
    $
    (64,264
    )
    $
    (14,260
    )
    $
    (13,632
    )Net
      amount recognized in the ConsolidatedBalance
      Sheets consist of:Prepaid
      benefit cost
    
    $
    -
    
    $
    39
    
    $
    -
    
    $
    -Accrued
      benefit liability
    
    
    (117,357
    )
    
    (100,490
    )
    
    (57
    )
    
    -Intangible
      assets
    
    
    14,653
    
    
    17,367
    
    
    -
    
    
    -Regulatory
      assets
    
    
    17,764
    
    
    18,820
    
    
    -
    
    
    -Liability
      of affiliate company
    
    
    -
    
    
    -
    
    
    (14,203
    )
    
    (13,632
    )Net
      amount recognized
    
    $
    (84,940
    )
    $
    (64,264
    )
    $
    (14,260
    )
    $
    (13,632
    )





The
portion of the pension projected benefit obligation, included in the table
above, related to the supplemental executive retirement plan was $106.5 million
and $105.1 million as of December 31, 2004 and 2003, respectively. The
supplemental executive retirement plan has no assets, and accordingly, the fair
value of its plan assets was zero as of December 31, 2004 and 2003. The
accumulated benefit obligation for all defined benefit pension plans was $585.4
million and $554.6 million at December 31, 2004 and 2003, respectively. Of
those amounts, the supplemental executive retirement plan accumulated benefit
obligation totaled $102.3 million and $100.5 million for 2004 and 2003,
respectively.





Although
the supplemental executive retirement plan had no assets as of December 31,
2004, MidAmerican Energy and its parent have Rabbi trusts that hold
corporate-owned life insurance and other investments to provide funding for the
future cash requirements. Because this plan is nonqualified, the cash surrender
value of these assets is not included in the plan assets. The cash surrender
value of all of the Rabbi trust investments was $98.8 million and $88.1 million
at December 31, 2004 and 2003, respectively, of which $68.7 million and
$61.0 million was held by MidAmerican Energy at December 31, 2004 and 2003,
respectively.




67







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. Asset allocation for the pension and postretirement
plans are as indicated in the tables below. Maturities for fixed income
securities are managed to targets consistent with prudent risk tolerances.
Sufficient liquidity is maintained 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 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 as of December 31, was as
follows:





Percentage
      of Plan AssetsTarget2004
    
    2003
    
    RangeEquity
      securities
    
    
    71
    %
    
    70
    %
    
    65-75
    %Debt
      securities
    
    
    22
    
    
    23
    
    
    20-30Real
      estate
    
    
    6
    
    
    7
    
    
    0-10Other
    
    
    1
    
    
    -
    
    
    0-5Total
    
    
    100
    %
    
    100
    %





MidAmerican
Energy’s postretirement benefit plan asset allocation as of December 31,
was as follows:





Percentage
      of Plan AssetsTarget2004
    
    2003
    
    RangeEquity
      securities
    
    
    49
    %
    
    49
    %
    
    45-55
    %Debt
      securities
    
    
    47
    
    
    48
    
    
    45-55Real
      estate
    
    
    -
    
    
    -
    
    
    -Other
    
    
    4
    
    
    3
    
    
    0-10Total
    
    
    100
    %
    
    100
    %





Cash
Flows





MidAmerican
Energy’s expected benefit payments for its pension and postretirement plans for
2005 through 2009 and for the five years thereafter are summarized below (in
thousands):





Projected
      Benefit PaymentsPension
    
    Post-Retirement2005
    
    $
    30,670
    
    $
    12,2412006
    
    
    32,728
    
    
    11,7312007
    
    
    34,972
    
    
    12,6182008
    
    
    38,092
    
    
    13,4322009
    
    
    42,339
    
    
    14,3212010-14
    
    
    267,549
    
    
    87,264





Employer
contributions to the pension and postretirement plans are expected to be $6.6
million and $15.8 million, respectively, for 2005. 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 $8.7 million, $8.3 million and $8.1 million for 2004, 2003 and 2002,
respectively.




68







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 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 were promulgated in July 2004 resulting in a $23.8 million
reduction in the accumulated postretirement benefit obligation, which has been
reflected as an actuarial gain in the table above. The impact of the Medicare
Act on the net periodic postretirement benefit expense will initially be
recognized in 2005 in conjunction with the next valuation of the postretirement
plans.





**(10)**  **Segment Information**





MidAmerican
Energy has identified four reportable operating segments based principally on
management structure. The generation segment derives most of its revenue from
the sale of regulated 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.




69





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





2004
    
    
    2003
    
    
    2002Segment
      Profit InformationOperating
      revenues:External
      revenues -Generation
    
    $
    579,251
    
    $
    522,349
    
    $
    415,921Energy
      delivery
    
    
    1,839,289
    
    
    1,812,547
    
    
    1,625,600Transmission
    
    
    29,088
    
    
    25,916
    
    
    20,721Marketing
      & sales
    
    
    248,725
    
    
    235,000
    
    
    173,917Total
    
    
    2,696,353
    
    
    2,595,812
    
    
    2,236,159Intersegment
      revenues -Generation
    
    
    643,334
    
    
    629,939
    
    
    651,342Energy
      delivery
    
    
    (702,418
    )
    
    (690,126
    )
    
    (708,953
    )Transmission
    
    
    59,084
    
    
    57,946
    
    
    55,207Marketing
      & sales
    
    
    -
    
    
    2,241
    
    
    2,404Total
    
    
    -
    
    
    -
    
    
    -Consolidated
    
    $
    2,696,353
    
    $
    2,595,812
    
    $
    2,236,159Depreciation
      and amortization expense (a):Generation
    
    $
    144,643
    
    $
    145,645
    
    $
    139,054Energy
      delivery
    
    
    111,172
    
    
    121,296
    
    
    117,893Transmission
    
    
    9,470
    
    
    11,641
    
    
    8,972Marketing
      & sales
    
    
    922
    
    
    2,221
    
    
    2,527Total
    
    $
    266,207
    
    $
    280,803
    
    $
    268,446Interest
      and dividend income:Generation
    
    $
    2,349
    
    $
    2,284
    
    $
    3,783Energy
      delivery
    
    
    1,844
    
    
    2,307
    
    
    4,468Transmission
    
    
    204
    
    
    346
    
    
    530Marketing
      & sales
    
    
    4
    
    
    19
    
    
    51Total
    
    $
    4,401
    
    $
    4,956
    
    $
    8,832Fixed
      charges:Generation
    
    $
    33,575
    
    $
    30,364
    
    $
    29,989Energy
      delivery
    
    
    33,225
    
    
    37,745
    
    
    40,737Transmission
    
    
    4,252
    
    
    4,416
    
    
    4,892Marketing
      & sales
    
    
    54
    
    
    325
    
    
    366Total
    
    
    71,106
    
    
    72,850
    
    
    75,984Preferred
      dividends
    
    
    (1,245
    )
    
    (1,416
    )
    
    (2,933
    )Consolidated
    
    $
    69,861
    
    $
    71,434
    
    $
    73,051





70








2004
    
    
    2003
    
    
    2002Segment
      Profit Information (continued)Income
      before income taxes:Generation
    
    $
    135,899
    
    $
    153,046
    
    $
    150,040Energy
      delivery
    
    
    116,418
    
    
    111,089
    
    
    101,176Transmission
    
    
    53,916
    
    
    47,364
    
    
    40,403Marketing
      & sales
    
    
    5,132
    
    
    6,943
    
    
    1,499Total
    
    
    311,365
    
    
    318,442
    
    
    293,118Preferred
      dividends
    
    
    1,245
    
    
    1,416
    
    
    2,933Consolidated
    
    $
    312,610
    
    $
    319,858
    
    $
    296,051Segment
      Asset InformationCapital
      expenditures:Generation
    
    $
    540,873
    
    $
    215,952
    
    $
    197,666Energy
      delivery
    
    
    164,957
    
    
    143,507
    
    
    151,178Transmission
    
    
    34,095
    
    
    16,759
    
    
    7,504Marketing
      & sales
    
    
    457
    
    
    1,257
    
    
    1,110Total
    
    $
    740,382
    
    $
    377,475
    
    $
    357,458Total
      assets:Generation
    
    $
    2,229,909
    
    $
    1,639,541
    
    $
    1,544,527Energy
      delivery
    
    
    2,625,081
    
    
    2,535,061
    
    
    2,453,471Transmission
    
    
    277,771
    
    
    242,435
    
    
    239,325Marketing
      & sales
    
    
    42,725
    
    
    56,743
    
    
    52,143Total
    
    
    5,175,486
    
    
    4,473,780
    
    
    4,289,466Reclassifications
      and intersegment eliminations (b)
    
    
    (63,535
    )
    
    (69,346
    )
    
    (79,824
    )Consolidated
    
    $
    5,111,951
    
    $
    4,404,434
    
    $
    4,209,642





(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.






71





**(11)**  **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. Accordingly, all of MidAmerican Energy’s accrued and deferred
income taxes are payable to MidAmerican Energy Holdings.





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





2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    64,827
    
    $
    97,304
    
    $
    135,657State
    
    
    1,797
    
    
    33,411
    
    
    47,90866,624
    
    
    130,715
    
    
    183,565Deferred:Federal
    
    
    46,848
    
    
    9,996
    
    
    (44,179
    )State
    
    
    (6,950
    )
    
    (5,074
    )
    
    (14,750
    )39,898
    
    
    4,922
    
    
    (58,929
    )Investment
      tax credit, net
    
    
    (4,367
    )
    
    (4,376
    )
    
    (4,406
    )Total
    
    $
    102,155
    
    $
    131,261
    
    $
    120,230





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:





2004
    
    2003
    
    2002Statutory
      federal income tax rate
    
    
    35
    %
    
    35
    %
    
    35
    %Amortization
      of investment tax credit
    
    
    (1
    )
    
    (1
    )
    
    (1
    )State
      income tax, net of federal income tax benefit
    
    
    6
    
    
    6
    
    
    6Settlement
      of income tax audits
    
    
    (3
    )
    
    -
    
    
    -Effects
      of ratemaking
    
    
    (2
    )
    
    2
    
    
    2Other
    
    
    (2
    )
    
    (1
    )
    
    (1
    )Effective
      federal and state income tax rate
    
    
    33
    %
    
    41
    %
    
    41
    %





Deferred
Income Taxes on the Consolidated Balance Sheets included the following as of
December 31 (in thousands):





2004
    
    
    2003Deferred
      tax assets related to:Revenue
      sharing
    
    $
    79,903
    
    $
    63,243Pensions
    
    
    39,817
    
    
    35,429Investment
      tax credits
    
    
    32,196
    
    
    35,213Nuclear
      reserves and decommissioning
    
    
    27,111
    
    
    35,956Accrued
      liabilities
    
    
    979
    
    
    5,955Other
    
    
    4,259
    
    
    5,927184,265
    
    
    181,723Deferred
      tax liabilities related to:Depreciable
      property
    
    
    498,223
    
    
    436,384Income
      taxes recoverable through future rates
    
    
    163,108
    
    
    142,598Fuel
      cost recoveries
    
    
    6,028
    
    
    12,864Reacquired
      debt
    
    
    3,876
    
    
    5,665671,235
    
    
    597,511Net
      deferred income tax liability
    
    $
    486,970
    
    $
    415,788





72





**(12)**  **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, electricity and
fuel 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 (13) 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.





As of
December 31, 2004, MidAmerican Energy held derivative instruments used for
non-trading and trading purposes with the following fair values (in
thousands):





Maturity
      in
    
    Maturity
      inContract
      Type
    
    2005
    
    2006-08
    
    TotalNon-trading:Regulated
      electric assets
    
    $
    2,260
    
    $
    431
    
    $
    2,691Regulated
      electric (liabilities)
    
    
    (10,057
    )
    
    (4,817
    )
    
    (14,874
    )Regulated
      gas assets
    
    
    2,973
    
    
    1,798
    
    
    4,771Regulated
      gas (liabilities)
    
    
    (21,921
    )
    
    -
    
    
    (21,921
    )Regulated
      weather (liabilities)
    
    
    (4,495
    )
    
    -
    
    
    (4,495
    )Nonregulated
      electric assets
    
    
    1,957
    
    
    372
    
    
    2,329Nonregulated
      electric (liabilities)
    
    
    (1,158
    )
    
    (214
    )
    
    (1,372
    )Nonregulated
      gas assets
    
    
    5,937
    
    
    1,919
    
    
    7,856Nonregulated
      gas (liabilities)
    
    
    (6,606
    )
    
    (1,558
    )
    
    (8,164
    )Total
    
    
    (31,110
    )
    
    (2,069
    )
    
    (33,179
    )Trading:Nonregulated
      gas assets
    
    
    993
    
    
    -
    
    
    993Nonregulated
      gas (liabilities)
    
    
    (430
    )
    
    (100
    )
    
    (530
    )Total
    
    
    563
    
    
    (100
    )
    
    463Total
      MidAmerican Energy assets
    
    $
    14,120
    
    $
    4,520
    
    $
    18,640Total
      MidAmerican Energy (liabilities)
    
    $
    (44,667
    )
    $
    (6,689
    )
    $
    (51,356
    )





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. Accordingly, MidAmerican Energy’s
regulated gas customers, although ensured of the availability of gas supplies,
retain the risk associated with market price volatility. In order to mitigate a
portion of the market price risk retained by its regulated gas customers through
the purchased gas adjustment clause, MidAmerican Energy uses natural gas
futures, options and over-the-counter agreements The realized gains and losses
on these derivative instruments are recovered from regulated gas customers
through the purchased gas adjustment clause.





MidAmerican
Energy is exposed to variations in the price of fuel for generation and the
price of purchased power. Under typical operating conditions, MidAmerican Energy
has sufficient generation to supply its regulated retail electric needs, but
may, at times, need to purchase electric power. MidAmerican Energy may incur a
loss if the costs of fuel for generation or any purchases of electric power are
higher than MidAmerican Energy is permitted to recover from its customers under
current electric rates. MidAmerican Energy uses physical and financial forward
contracts to mitigate these regulated electric price risks.




73





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 economically 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. Nonregulated
retail physical electric contracts are considered "normal" purchases or sales
and gains and losses on such contracts are recognized when settled. All other
nonregulated gas and electric contracts are recorded at fair value.





Derivative
instruments are used to economically hedge both committed and forecasted energy
purchases and sales. Realized gains and losses on all hedges are recognized in
income as operating revenues; cost of fuel, energy and capacity; or cost of gas
sold, depending upon the nature of the item being hedged. Net unrealized gains
and losses on hedges utilized for regulated purposes are recorded as regulatory
assets or liabilities. Hedges that offset the variability in earnings and cash
flows related to forecasted transactions are referred to as cash flow hedges.
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.





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.





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.





**(13)**  **Concentration of Credit Risk**





Regulated
Utility Operations





MidAmerican
Energy's regulated electric utility operations serve approximately 610,000
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 532,000 customers in Iowa, 66,000 customers in western Illinois, 77,000
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, 2004, billed
receivables from MidAmerican Energy's utility customers, totaled $137.3 million.





Nonregulated
Retail Operations





MidAmerican
Energy's nonregulated retail operations provide energy services to approximately
3,300 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, 2004, billed receivables from
MidAmerican Energy's nonregulated retail customers totaled $15.8 million. Billed
receivables from any one customer did not exceed 2.0% of total nonregulated
retail billed receivables.





74





Wholesale
Operations





MidAmerican
Energy extends unsecured credit to certain commercial and 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, 2004, 72.3% 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 12.0% 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, 2004
(dollars in thousands).





Exposure,
      Net of Collateral
    
    Credit
      Exposure
    
    Collateral
      Held
    
    Credit
      Exposure, Net of Collateral
    
    %
      of CreditAA-/Aa3
      and above
    
    $
    2,308
    
    $
    -
    
    $
    2,308
    
    
    4.3
    %A-/A3
      to A+/A1
    
    
    15,335
    
    
    -
    
    
    15,335
    
    
    28.6BBB-/Baa3
      to BBB+/Baa1
    
    
    21,213
    
    
    -
    
    
    21,213
    
    
    39.5BB-/Ba3
      to BB+/Ba1
    
    
    8,619
    
    
    -
    
    
    8,619
    
    
    16.0B+/B1
      or lower
    
    
    475
    
    
    875
    
    
    -
    
    
    -Unrated
    
    
    9,073
    
    
    5,750
    
    
    6,248
    
    
    11.6Total
      credit exposure
    
    $
    57,023
    
    $
    6,625
    
    $
    53,723
    
    
    100.0
    %







75





**(14)**  **Asset Retirement Obligations**





In
January 2003 MidAmerican Energy adopted SFAS No. 143 “Accounting for Asset
Retirement Obligations” and recognized a liability for legal obligations
associated with the retirement of certain long-lived assets. Concurrent with the
recognition of the liability, the estimated cost of the asset retirement
obligation (“ARO”) was capitalized and is being depreciated over the remaining
life of the asset. The difference between the ARO liability, the ARO net asset,
and amounts recovered from regulated customers to satisfy such liabilities is
recorded as a regulatory asset or liability.





At
December 31, 2004, $154.2 million of the ARO liability pertained to the
decommissioning of Quad Cities Station. Also at December 31, 2004, $207.5
million of assets reflected in Investments and Nonregulated Property, Net are
restricted for satisfying the Quad Cities Station ARO liability.





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





2004
    
    2003Balance
      January 1
    
    $
    269,124
    
    $
    275,228Revision
      to nuclear decommissioning ARO liability
    
    
    (120,098
    )
    
    (21,902
    )Addition
      for new wind power facilities
    
    
    2,777
    
    
    -Accretion
    
    
    15,042
    
    
    15,798Balance
      December 31
    
    $
    166,845
    
    $
    269,124





The 2003
revision to the nuclear decommissioning ARO liability was due to the results of
a decommissioning study performed by the plant operator. The 2004 revision is a
result of a change in the assumed life of Quad Cities Station pursuant to a
20-year extension to the operating license of the plant by the Nuclear
Regulatory Commission in October 2004 and its impact on the timing of related
cash flows.





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. These accruals are reflected as
regulatory liabilities and total $428.7 million and $408.6 million at
December 31, 2004 and 2003, respectively.





**(15)**  **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):





2004
    
    2003Carrying
      amount
    
    $
    1,422,527
    
    $
    1,128,647Estimated
      fair value
    
    
    1,494,385
    
    
    1,184,974





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, 2004, the total fair value of the
investments was $207.5 million and the related total cost was $172.5 million. As
of December 31, 2003, the total fair value of the investments was $184.2
million and the related total cost was $157.8 million. Refer to Notes (1)(f) and
(4)(c) for further discussion of the Quad Cities Station decommissioning trust.





76





**(16)**  **Non-Operating Other Income and
Expense**





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





2004
    
    2003
    
    2002Allowance
      for equity funds used during construction
    
    $
    18,949
    
    $
    11,377
    
    $
    8,621Corporate-owned
      life insurance income
    
    
    5,447
    
    
    6,314
    
    
    1,333Fee
      for sold receivables
    
    
    -
    
    
    -
    
    
    1,340Gain
      on sale of assets
    
    
    -
    
    
    -
    
    
    1,164Other
    
    
    893
    
    
    1,030
    
    
    1,605Total
    
    $
    25,289
    
    $
    18,721
    
    $
    14,063





Non-Operating
Income - Other Expense consists primarily of items not recoverable from
MidAmerican Energy’s regulated utility customers. Additionally, the year ended
December 31, 2002, included a discount on sold receivables totaling $6.4
million.





**(17)**  **Affiliated Company Transactions**





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





MidAmerican
Energy was reimbursed for charges incurred on behalf of its affiliates. The
majority of these reimbursed expenses were for employee wages and benefits,
insurance, building rent, computer costs, administrative services, travel
expense, and general and administrative expense; including treasury, legal, and
accounting functions. The amount of such reimbursements was $58.9 million, $49.1
million and $34.5 million for 2004, 2003 and 2002, respectively.





MidAmerican
Energy reimbursed MidAmerican Energy Holdings in the amount of $11.4 million,
$12.2 million and $10.4 million in 2004, 2003 and 2002, respectively, for its
allocated share of corporate expenses.





MidAmerican
Energy had 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 terminated in May 2004, provided 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 $12.7 million for 2004, $26.6
million for 2003 and $21.2 million for 2002.





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’s net purchases of natural gas
transportation and storage capacity from NNG totaled $48.3 million in 2004,
$53.5 million in 2003 and $17.9 million in August through December
2002.





MidAmerican
Energy had accounts receivable from affiliates of $3.1 million and $7.4 million
as of December 31, 2004 and 2003, respectively, that are included in
Receivables on the Consolidated Balance Sheets. MidAmerican Energy also had
accounts payable to affiliates of $2.4 million and $1.6 million as of
December 31, 2004 and 2003, respectively, that are included in Accounts
Payable on the Consolidated Balance Sheets.





MidAmerican
Energy may make distributions on its capital stock subject to regulatory
restrictions agreed to by MidAmerican Energy in March 1999. At that time,
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 from 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 ICC.





77





**(18)**  **Unaudited Quarterly Operating Results**





20041st
      Quarter
    
    2nd
      Quarter
    
    3rd
      Quarter
    
    4th
      Quarter(In
      thousands)Operating
      revenues
    
    $
    839,932
    
    $
    573,971
    
    $
    565,253
    
    $
    717,197Operating
      income
    
    
    111,449
    
    
    59,362
    
    
    115,259
    
    
    70,326Net
      income
    
    
    64,887
    
    
    28,571
    
    
    66,158
    
    
    50,839Earnings
      on common stock
    
    
    64,578
    
    
    28,259
    
    
    65,846
    
    
    50,52720031st
      Quarter
    
    
    2nd
      Quarter
    
    
    3rd
      Quarter
    
    
    4th
      Quarter(In
      thousands)Operating
      revenues
    
    $
    815,196
    
    $
    535,883
    
    $
    576,001
    
    $
    668,732Operating
      income
    
    
    116,158
    
    
    70,148
    
    
    131,191
    
    
    53,323Net
      income
    
    
    58,692
    
    
    33,132
    
    
    64,305
    
    
    32,468Earnings
      on common stock
    
    
    58,255
    
    
    32,805
    
    
    63,978
    
    
    32,143





Quarterly
data reflect seasonal variations common in the utility industry.










78


**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM**








To the
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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, 2004 and 2003, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 2004, 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 (14) 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
25, 2005










79





**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATEDBALANCE SHEETS**


(In
thousands)





**As
      of December 31,****2004**
    
    **2003****ASSETS****Utility
      Plant, Net**Electric
    
    $
    5,498,878
    
    $
    5,030,960Gas
    
    
    957,011
    
    
    922,0996,455,889
    
    
    5,953,059Accumulated
      depreciation and amortization
    
    
    (2,956,856
    )
    
    (2,810,336
    )3,499,033
    
    
    3,142,723Construction
      work in progress
    
    
    369,406
    
    
    217,5373,868,439
    
    
    3,360,260**Current
      Assets**Cash
      and cash equivalents
    
    
    127,867
    
    
    4,558Receivables,
      less reserves of $8,748 and $7,554, respectively
    
    
    337,333
    
    
    305,198Inventories
    
    
    89,646
    
    
    85,465Other
    
    
    22,585
    
    
    43,572577,431
    
    
    438,793**Investments
      and Nonregulated Property, Net**
    
    
    375,230
    
    
    350,746**Goodwill**
    
    
    1,268,082
    
    
    1,274,454**Regulatory
      Assets**
    
    
    227,997
    
    
    261,696**Other
      Assets**
    
    
    110,065
    
    
    51,665**Total
      Assets**
    
    $
    6,427,244
    
    $
    5,737,614**CAPITALIZATION
      AND LIABILITIES****Capitalization**Member’s
      equity
    
    $
    2,042,403
    
    $
    1,863,769MidAmerican
      Energy preferred securities
    
    
    30,329
    
    
    31,759Long-term
      debt, excluding current portion
    
    
    2,031,509
    
    
    1,772,4964,104,241
    
    
    3,668,024**Current
      Liabilities**Notes
      payable
    
    
    -
    
    
    48,000Note
      payable to affiliate
    
    
    31,500
    
    
    10,450Current
      portion of long-term debt
    
    
    91,018
    
    
    56,151Accounts
      payable
    
    
    242,966
    
    
    200,549Taxes
      accrued
    
    
    77,388
    
    
    79,304Interest
      accrued
    
    
    29,612
    
    
    26,017Other
    
    
    84,032
    
    
    68,044556,516
    
    
    488,515**Other
      Liabilities**Deferred
      income taxes
    
    
    518,004
    
    
    453,320Investment
      tax credits
    
    
    48,143
    
    
    52,510Asset
      retirement obligations
    
    
    166,845
    
    
    269,124Regulatory
      liabilities
    
    
    677,489
    
    
    574,490Other
    
    
    356,006
    
    
    231,6311,766,487
    
    
    1,581,075**Total
      Capitalization and Liabilities**
    
    $
    6,427,244
    
    $
    5,737,614





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





80





**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002****Operating
      Revenues**Regulated
      electric
    
    $
    1,421,709
    
    $
    1,397,997
    
    $
    1,353,431Regulated
      gas
    
    
    1,010,909
    
    
    947,393
    
    
    695,799Nonregulated
    
    
    269,082
    
    
    254,849
    
    
    191,6492,701,700
    
    
    2,600,239
    
    
    2,240,879**Operating
      Expenses**Regulated:Cost
      of fuel, energy and capacity
    
    
    399,959
    
    
    397,727
    
    
    346,685Cost
      of gas sold
    
    
    789,975
    
    
    720,633
    
    
    482,837Other
      operating expenses
    
    
    378,645
    
    
    360,090
    
    
    394,436Maintenance
    
    
    177,087
    
    
    153,405
    
    
    135,487Depreciation
      and amortization
    
    
    264,952
    
    
    279,650
    
    
    266,983Property
      and other taxes
    
    
    81,192
    
    
    80,122
    
    
    76,0252,091,810
    
    
    1,991,627
    
    
    1,702,453Nonregulated:Cost
      of sales
    
    
    231,953
    
    
    216,175
    
    
    159,391Other
    
    
    21,990
    
    
    24,569
    
    
    29,047253,943
    
    
    240,744
    
    
    188,438Total
      operating expenses
    
    
    2,345,753
    
    
    2,232,371
    
    
    1,890,891**Operating
      Income**
    
    
    355,947
    
    
    367,868
    
    
    349,988**Non-Operating
      Income**Interest
      and dividend income
    
    
    4,509
    
    
    4,975
    
    
    19,636Marketable
      securities gains (losses), net
    
    
    480
    
    
    204
    
    
    (5,094
    )Other
      income
    
    
    29,541
    
    
    24,527
    
    
    26,972Other
      expense
    
    
    (5,267
    )
    
    (10,096
    )
    
    (31,273
    )29,263
    
    
    19,610
    
    
    10,241**Fixed
      Charges**Interest
      on long-term debt
    
    
    119,004
    
    
    119,333
    
    
    119,129Other
      interest expense
    
    
    6,184
    
    
    4,061
    
    
    3,431Preferred
      dividends of subsidiaries
    
    
    1,245
    
    
    1,416
    
    
    4,507Allowance
      for borrowed funds
    
    
    (7,816
    )
    
    (4,586
    )
    
    (3,336
    )118,617
    
    
    120,224
    
    
    123,731**Income
      Before Income Taxes**
    
    
    266,593
    
    
    267,254
    
    
    236,498**Income
      Taxes**
    
    
    87,336
    
    
    110,078
    
    
    99,782**Net
      Income**
    
    $
    179,257
    
    $
    157,176
    
    $
    136,716





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




80





****


**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Net
      Income**
    
    $
    179,257
    
    $
    157,176
    
    $
    136,716**Other
      Comprehensive Income (Loss)**Unrealized
      gains (losses) on available-for-sale securities:Unrealized
      holding gains (losses) during period-Before
      income taxes
    
    
    136
    
    
    384
    
    
    (9,512
    )Income
      tax (expense) benefit
    
    
    (48
    )
    
    (135
    )
    
    3,32988
    
    
    249
    
    
    (6,183
    )Less
      realized gains (losses) reflected in net income during
    period-Before
      income taxes
    
    
    480
    
    
    71
    
    
    (4,735
    )Income
      tax benefit
    
    
    (168
    )
    
    (25
    )
    
    1,657312
    
    
    46
    
    
    (3,078
    )Net
      unrealized gains (losses)
    
    
    (224
    )
    
    203
    
    
    (3,105
    )Unrealized
      gains (losses) on cash flow hedges:Unrealized
      gains (losses) during period-Before
      income taxes
    
    
    -
    
    
    (7,372
    )
    
    (2,458
    )Income
      tax (expense) benefit
    
    
    -
    
    
    3,065
    
    
    1,022-
    
    
    (4,307
    )
    
    (1,436
    )Less
      realized gains (losses) reflected in net income during
    period-Before
      income taxes
    
    
    682
    
    
    5,513
    
    
    2,277Income
      tax (expense) benefit
    
    
    (283
    )
    
    (2,292
    )
    
    (946
    )399
    
    
    3,221
    
    
    1,331Less
      net unrealized gains (losses) reclassified to regulatory
      assetsand
      liabilities -Before
      income taxes
    
    
    -
    
    
    (12,369
    )
    
    -Income
      tax benefit
    
    
    -
    
    
    5,142
    
    
    --
    
    
    (7,227
    )
    
    -Net
      unrealized gains (losses)
    
    
    (399
    )
    
    (301
    )
    
    (2,767
    )Other
      comprehensive income (loss)
    
    
    (623
    )
    
    (98
    )
    
    (5,872
    )**Comprehensive
      Income**
    
    $
    178,634
    
    $
    157,078
    
    $
    130,844





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




82





**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


(In
thousands)


**Years
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002****Net
      Cash Flows From Operating Activities**Net
      income
    
    $
    179,257
    
    $
    157,176
    
    $
    136,716Adjustments
      to reconcile net income to net cash provided:Depreciation
      and amortization
    
    
    266,409
    
    
    281,001
    
    
    269,412Deferred
      income taxes and investment tax credit, net
    
    
    30,263
    
    
    4,558
    
    
    (74,561
    )Amortization
      of other assets and liabilities
    
    
    17,199
    
    
    30,998
    
    
    40,412Gain
      on sale of securities, assets and other investments
    
    
    (316
    )
    
    (151
    )
    
    (3,840
    )Loss
      from impairment of assets and investments
    
    
    1,735
    
    
    6,375
    
    
    23,584Income
      on equity investments
    
    
    -
    
    
    (1,755
    )
    
    (7,919
    )Power
      purchase contract restructuring receipt
    
    
    -
    
    
    -
    
    
    39,100Cash
      outflows of accounts receivable securitization
    
    
    -
    
    
    -
    
    
    (44,000
    )Impact
      of changes in working capital-Marketable
      securities, trading
    
    
    -
    
    
    4,939
    
    
    15,804Receivables,
      net
    
    
    (28,717
    )
    
    16,500
    
    
    (109,729
    )Inventories
    
    
    (4,181
    )
    
    3,027
    
    
    (5,153
    )Accounts
      payable
    
    
    28,164
    
    
    (48,691
    )
    
    40,477Taxes
      accrued
    
    
    (1,916
    )
    
    (6,683
    )
    
    24,718Other
      current assets and liabilities
    
    
    9,231
    
    
    (1,704
    )
    
    17,007Other
    
    
    (3,548
    )
    
    (28,915
    )
    
    3,587Net
      cash provided by operating activities
    
    
    493,580
    
    
    416,675
    
    
    365,615**Net
      Cash Flows From Investing Activities**Utility
      construction expenditures
    
    
    (631,962
    )
    
    (344,137
    )
    
    (331,287
    )Quad
      Cities Station decommissioning trust fund
    
    
    (8,299
    )
    
    (8,299
    )
    
    (8,299
    )Proceeds
      from sale of assets and other investments
    
    
    1,511
    
    
    326
    
    
    12,138Note
      receivable from affiliate
    
    
    -
    
    
    -
    
    
    151,888Other
      investing activities, net
    
    
    4,791
    
    
    9,654
    
    
    11,481Net
      cash used in investing activities
    
    
    (633,959
    )
    
    (342,456
    )
    
    (164,079
    )**Net
      Cash Flows From Financing Activities**Common
      dividends paid
    
    
    -
    
    
    (172,500
    )
    
    (233,493
    )Issuance
      of long-term debt, net
    
    
    347,769
    
    
    272,550
    
    
    391,352Retirement
      of long-term debt, including reacquisition cost
    
    
    (56,168
    )
    
    (202,076
    )
    
    (187,290
    )Note
      payable to affiliate
    
    
    21,050
    
    
    10,450
    
    
    -Net
      decrease in notes payable
    
    
    (48,000
    )
    
    (7,000
    )
    
    (36,780
    )Reacquisition
      of preferred securities
    
    
    (1,430
    )
    
    -
    
    
    (126,680
    )Other
    
    
    467
    
    
    -
    
    
    -Net
      cash provided by (used in) financing activities
    
    
    263,688
    
    
    (98,576
    )
    
    (192,891
    )**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    123,309
    
    
    (24,357
    )
    
    8,645**Cash
      and Cash Equivalents at Beginning of Year**
    
    
    4,558
    
    
    28,915
    
    
    20,270**Cash
      and Cash Equivalents at End of Year**
    
    $
    127,867
    
    $
    4,558
    
    $
    28,915**Supplemental
      Disclosure:**Interest
      paid, net of amounts capitalized
    
    $
    108,470
    
    $
    112,434
    
    $
    116,185Income
      taxes paid
    
    $
    54,275
    
    $
    117,566
    
    $
    124,002





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




83


**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
STATEMENTS OF CAPITALIZATION**


(In
thousands, except share amounts)





**As
      of December 31,****2004**
    **2003****Member’s
      Equity**Paid
      in capital
    
    $
    1,669,753
    
    
    
    
    $
    1,669,753Retained
      earnings
    
    
    372,604
    
    
    
    
    
    193,347Accumulated
      other comprehensive income, net:Unrealized
      gain on securities
    
    
    46
    
    
    
    
    
    270Unrealized
      gain on cash flow hedges
    
    
    -
    
    
    
    
    
    3992,042,403
    
    
    49.8
    %
    
    1,863,769
    
    
    50.8
    %**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, 35,697 and 50,000 shares, respectively
    
    
    3,570
    
    
    
    
    
    5,000$4.80
      Series, 49,898 shares
    
    
    4,990
    
    
    
    
    
    4,99030,329
    
    
    0.7
    %
    
    31,759
    
    
    0.9
    %**Long-Term
      Debt**MidAmerican
      Energy:Mortgage
      bonds -7.0%
      Series, due 2005
    
    
    -
    
    
    
    
    
    90,500Pollution
      control revenue obligations -6.1%
      Series due 2007
    
    
    1,000
    
    
    
    
    
    1,0005.95%
      Series, due 2023 (secured by general mortgage bonds)
    
    
    29,030
    
    
    
    
    
    29,030Variable
      rate series -Due
      2016 and 2017, 2.05% and 1.26%, respectively
    
    
    37,600
    
    
    
    
    
    37,600Due
      2023 (secured by general mortgage bonds),2.05%
      and 1.26%, respectively
    
    
    28,295
    
    
    
    
    
    28,295Due
      2023, 2.05% and 1.26%, respectively
    
    
    6,850
    
    
    
    
    
    6,850Due
      2024, 2.05% and 1.26%, respectively
    
    
    34,900
    
    
    
    
    
    34,900Due
      2025, 2.05% and 1.26%, respectively
    
    
    12,750
    
    
    
    
    
    12,750Notes
      -6.375%
      Series, due 2006
    
    
    160,000
    
    
    
    
    
    160,0005.125%
      Series, due 2013
    
    
    275,000
    
    
    
    
    
    275,0004.65%
      Series, due 2014
    
    
    350,000
    
    
    
    
    
    -6.75%
      Series, due 2031
    
    
    400,000
    
    
    
    
    
    400,000Obligation
      under capital lease
    
    
    1,524
    
    
    
    
    
    2,060Unamortized
      debt premium and discount, net
    
    
    (5,440
    )
    
    
    
    
    (5,489
    )Total
      MidAmerican Energy
    
    
    1,331,509
    
    
    32.4
    %
    
    1,072,496
    
    
    29.2
    %MidAmerican
      Funding parent:6.339%
      Senior Secured Notes Due 2009
    
    
    175,000
    
    
    
    
    
    175,0006.75%
      Senior Secured Notes Due 2011
    
    
    200,000
    
    
    
    
    
    200,0006.927%
      Senior Secured Notes Due 2029
    
    
    325,000
    
    
    
    
    
    325,000Total
      MidAmerican Funding parent
    
    
    700,000
    
    
    17.1
    %
    
    700,000
    
    
    19.1
    %2,031,509
    
    
    49.5
    %
    
    1,772,496
    
    
    48.3
    %**Total
      Capitalization**
    
    $
    4,104,241
    
    
    100.0
    %
    $
    3,668,024
    
    
    100.0
    %





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





84







**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
STATEMENTS OF RETAINED EARNINGS**


(In
thousands)





**Years
      Ended December 31,****2004**
    
    
    **2003**
    
    
    **2002****Beginning
      of Year**
    
    $
    193,347
    
    $
    208,671
    
    $
    305,448**Net
      Income**
    
    
    179,257
    
    
    157,176
    
    
    136,716**Deduct
      Dividends Declared**
    
    
    -
    
    
    172,500
    
    
    233,493**End
      of Year**
    
    $
    372,604
    
    $
    193,347
    
    $
    208,671








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




85







**MIDAMERICAN
FUNDING, LLC**


**NOTESTO CONSOLIDATED FINANCIAL
STATEMENTS**





**INDEX**





(1)
    Summary of Significant Accounting Policies
    87(2)
    Jointly Owned Utility Plant
    90(3)
    Inventories
    90(4)
    Commitments and Contingencies
    90(5)
    Rate Matters
    90(6)
    Long-Term Debt
    92(7)
    Short-Term Borrowing
    92(8)
    Preferred Securities
    92(9)
    Retirement Plans
    92(10)
    Segment Information
    93(11)
    Income Taxes
    96(12)
    Risk Management and Energy Trading
    97(13)
    Concentration of Credit Risk
    97(14)
    Asset Retirement Obligations
    97(15)
    Fair Value of Financial Instruments
    97(16)
    Non-Operating Other Income and Expense
    98(17)
    Affiliated Company Transactions
    98(18)
    Unaudited Quarterly Operating Result
    99





86





**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”), 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 2004 are different than that of prior years. Accordingly, historical
amounts have been reclassified.





(c)  Accounting
for the Effects of Certain Types of 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.





87








(f)  Investments
and Nonregulated Property, Net





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





2004
    
    2003Nuclear
      decommissioning trust fund
    
    $
    207,464
    
    $
    184,171Rabbi
      trusts
    
    
    111,944
    
    
    99,957Equipment
      leases
    
    
    25,910
    
    
    29,549Coal
      transportation property, net of accumulated depreciation of $2,287 and
      $1,996, respectively
    
    
    9,632
    
    
    9,923MidAmerican
      Energy non-utility property, net of accumulated depreciation of $3,124 and
      $2,169,   respectively
    
    
    8,063
    
    
    8,727Real
      estate, net of accumulated depreciation of $562 and $526,
      respectively
    
    
    5,605
    
    
    5,755Energy
      projects
    
    
    2,468
    
    
    7,567Other
      venture capital investments
    
    
    1,677
    
    
    2,596Marketable
      securities, available-for-sale
    
    
    845
    
    
    533Other
    
    
    1,622
    
    
    1,968Total
    
    $
    375,230
    
    $
    350,746





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 or Regulatory Liabilities 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
      of2004
    
    2003
    
    TerminationAircraft
    
    $
    18,229
    
    $
    20,926
    
    
    2008/2009Electric
      generation station
    
    
    7,309
    
    
    8,191
    
    
    2015Safe
      harbor
    
    
    372
    
    
    432
    
    
    periodically
      through 2015Total
    
    $
    25,910
    
    $
    29,549





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.


88





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.





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, 2004, 46.1% of the development
available for sale had been sold.





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.





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 2005 through 2007.  At the time of fund termination, any
remaining investments in the fund are liquidated and distributions are made to
investors.





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 an
original 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)  Income
Taxes





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





89





(k)  Goodwill





Goodwill
resulting from past business combinations is not amortized. Periodically, such
balances are evaluated for possible impairment.





Based on
MidAmerican Funding’s annual goodwill impairment test completed as of
October 31, 2004, no impairment was indicated for goodwill. In 2003 and
2004, 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, 2004 and 2003 (in
thousands):








Generation
    
    Delivery
    
    Transmission
    
    TotalBalance
      at January 1, 2003
    
    $
    927,819
    
    $
    263,152
    
    $
    84,172
    
    $
    1,275,143Income
      tax adjustment
    
    
    (338
    )
    
    (246
    )
    
    (105
    )
    
    (689
    )Balance
      at December 31, 2003
    
    
    927,481
    
    
    262,906
    
    
    84,067
    
    
    1,274,454Income
      tax adjustment
    
    
    (4,622
    )
    
    (1,331
    )
    
    (419
    )
    
    (6,372
    )Balance
      at December 31, 2004
    
    $
    922,859
    
    $
    261,575
    
    $
    83,648
    
    $
    1,268,082





**(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, 2004. 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)**  **Rate Matters**





Refer to
Note (5) of MidAmerican Energy’s Notes to Consolidated Financial
Statements.





**(6)**  **Long-Term Debt**





MidAmerican
Funding's annual sinking fund requirements and maturities of long-term debt for
2005 through 2009 are approximately $91 million, $161 million, $2 million, zero
and $175 million, 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 Capitalization is the weighted average interest rate
as of December 31, 2004 and 2003. MidAmerican Energy maintains a revolving
credit facility agreement to provide liquidity for holders of these
issues.




90


The
indenture pertaining to MidAmerican Energy’s unsecured senior notes 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, 2004, MidAmerican Energy was in
compliance with all of its applicable long-term debt covenants.





On
October 1, 2004, MidAmerican Energy issued $350 million of 4.65%
medium-term notes due in 2014. The proceeds were used for general corporate
purposes.





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





·  are the
direct senior secured obligations of MidAmerican Funding;


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


·  rank
senior to all of MidAmerican Funding’s existing and future subordinated
indebtedness; and


·  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:





·  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





·  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. At that time, 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 from 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, 2004, MidAmerican Funding was in compliance with all of its
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. As of December 31, 2004,
substantially all of the former Midwest Power Systems Inc., a predecessor
company, electric utility property in Iowa, or approximately 49% of MidAmerican
Energy’s gross utility plant, was pledged to secure $147.8 million in mortgage
bonds, of which $90.5 million matured on February 15, 2005. The remaining $57.3
million matures on May 1, 2023.





91





**(7)**  **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):





2004
    
    2003Balance
      at year-end
    
    $
    -
    
    $
    48,000Weighted
      average interest rate on year-end balance
    
    
    -
    %
    
    1.0
    %Average
      daily amount outstanding during the year
    
    $
    3,579
    
    $
    1,960Weighted
      average interest rate on average daily amount outstanding during the
      year
    
    
    1.1
    %
    
    1.2
    %





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 $425.0 million revolving credit facility
expiring November 18, 2009, which supports its $304.6 million commercial
paper program and its variable rate pollution control revenue obligations. The
related credit agreement requires that MidAmerican Energy’s ratio of
consolidated debt to total capitalization, including current maturities, not
exceed 0.65 to 1 as of the last day of any quarter. In addition, MidAmerican
Energy has a $5.0 million line of credit, which expires July 1, 2005. As of
December 31, 2004, MidAmerican Energy had no commercial paper or bank notes
outstanding. MHC has a $4.0 million line of credit, expiring July 1, 2005, under
which zero was outstanding at December 31, 2004. As of December 31,
2004, InterCoast Capital had a $5.1 million line of credit expiring July 1,
2005, 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. As of December 31, 2004, MidAmerican Funding and its
subsidiaries were in compliance with all covenants related to their respective
short-term borrowings.





**(8)**  **Preferred Securities**





Refer to
Note (8) of MidAmerican Energy’s Notes to Consolidated Financial
Statements.





**(9)**  **Retirement Plans**





Refer to
Note (9) 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):





2004
    
    2003
    
    2002Pension
      costs
    
    $
    11.4
    
    $
    11.6
    
    $
    8.1Postretirement
      costs
    
    
    3.1
    
    
    4.2
    
    
    1.5





92





**(10)**  **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.







93








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





2004
    
    
    2003
    
    
    2002Segment
      Profit InformationOperating
      revenues:External
      revenues -Generation
    
    $
    579,251
    
    $
    522,349
    
    $
    415,921Energy
      delivery
    
    
    1,839,289
    
    
    1,812,547
    
    
    1,625,600Transmission
    
    
    29,088
    
    
    25,916
    
    
    20,721Marketing
      & sales
    
    
    248,725
    
    
    235,000
    
    
    173,917Other
    
    
    5,347
    
    
    4,427
    
    
    4,720Total
    
    
    2,701,700
    
    
    2,600,239
    
    
    2,240,879Intersegment
      revenues -Generation
    
    
    643,334
    
    
    629,939
    
    
    651,342Energy
      delivery
    
    
    (702,418
    )
    
    (690,126
    )
    
    (708,953
    )Transmission
    
    
    59,084
    
    
    57,946
    
    
    55,207Marketing
      & sales
    
    
    -
    
    
    2,241
    
    
    2,404Total
    
    
    -
    
    
    -
    
    
    -Consolidated
    
    $
    2,701,700
    
    $
    2,600,239
    
    $
    2,240,879Depreciation
      and amortization expense (a):Generation
    
    $
    144,643
    
    $
    145,645
    
    $
    139,054Energy
      delivery
    
    
    111,172
    
    
    121,296
    
    
    117,893Transmission
    
    
    9,470
    
    
    11,641
    
    
    8,972Marketing
      & sales
    
    
    922
    
    
    2,221
    
    
    2,527Other
    
    
    202
    
    
    198
    
    
    966Total
    
    $
    266,409
    
    $
    281,001
    
    $
    269,412Interest
      and dividend income:Generation
    
    $
    2,349
    
    $
    2,284
    
    $
    3,783Energy
      delivery
    
    
    1,844
    
    
    2,307
    
    
    4,468Transmission
    
    
    204
    
    
    346
    
    
    530Marketing
      & sales
    
    
    4
    
    
    19
    
    
    51Other
    
    
    326
    
    
    117
    
    
    12,283Total
    
    
    4,727
    
    
    5,073
    
    
    21,115Intersegment
      eliminations
    
    
    (218
    )
    
    (98
    )
    
    (1,479
    )Consolidated
    
    $
    4,509
    
    $
    4,975
    
    $
    19,636Fixed
      charges:Generation
    
    $
    33,575
    
    $
    30,364
    
    $
    29,989Energy
      delivery
    
    
    33,225
    
    
    37,745
    
    
    40,737Transmission
    
    
    4,252
    
    
    4,416
    
    
    4,892Marketing
      & sales
    
    
    54
    
    
    325
    
    
    366Other
    
    
    47,729
    
    
    47,472
    
    
    49,226Total
    
    
    118,835
    
    
    120,322
    
    
    125,210Intersegment
      eliminations
    
    
    (218
    )
    
    (98
    )
    
    (1,479
    )Consolidated
    
    $
    118,617
    
    $
    120,224
    
    $
    123,731




94








2004
    
    
    2003
    
    
    2002Segment
      Profit Information (continued)Income
      before income taxes:Generation
    
    $
    135,899
    
    $
    153,046
    
    $
    150,040Energy
      delivery
    
    
    116,418
    
    
    111,089
    
    
    101,176Transmission
    
    
    53,916
    
    
    47,364
    
    
    40,403Marketing
      & sales
    
    
    5,132
    
    
    6,943
    
    
    1,499Other
    
    
    (44,772
    )
    
    (51,188
    )
    
    (56,620
    )Total
    
    $
    266,593
    
    $
    267,254
    
    $
    236,498Segment
      Asset InformationCapital
      expenditures:Generation
    
    $
    540,873
    
    $
    215,952
    
    $
    197,666Energy
      delivery
    
    
    164,957
    
    
    143,507
    
    
    151,178Transmission
    
    
    34,095
    
    
    16,759
    
    
    7,504Marketing
      & sales
    
    
    457
    
    
    1,257
    
    
    1,110Other
    
    
    1,388
    
    
    1,055
    
    
    736Total
    
    $
    741,770
    
    $
    378,530
    
    $
    358,194Total
      assets (b):Generation
    
    $
    3,153,106
    
    $
    2,567,022
    
    $
    2,472,346Energy
      delivery
    
    
    2,886,213
    
    
    2,797,967
    
    
    2,716,623Transmission
    
    
    361,524
    
    
    326,502
    
    
    323,497Marketing
      & sales
    
    
    42,725
    
    
    56,743
    
    
    52,143Other
    
    
    227,258
    
    
    200,863
    
    
    179,141Total
    
    
    6,670,826
    
    
    5,949,097
    
    
    5,743,750Reclassifications
      and intersegment eliminations (c)
    
    
    (243,582
    )
    
    (211,483
    )
    
    (192,003
    )Consolidated
    
    $
    6,427,244
    
    $
    5,737,614
    
    $
    5,551,747





(a)
    Depreciation
      and amortization expense above includes depreciation related to
      nonregulated operations, which is 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.





95





**(11)**  **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. Accordingly, all of MidAmerican Funding’s accrued and
deferred income taxes are payable to MidAmerican Energy Holdings.





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





2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    62,222
    
    $
    79,848
    
    $
    129,922State
    
    
    (5,148
    )
    
    25,672
    
    
    44,42157,074
    
    
    105,520
    
    
    174,343Deferred:Federal
    
    
    40,079
    
    
    8,471
    
    
    (54,193
    )State
    
    
    (5,450
    )
    
    463
    
    
    (15,962
    )34,629
    
    
    8,934
    
    
    (70,155
    )Investment
      tax credit, net
    
    
    (4,367
    )
    
    (4,376
    )
    
    (4,406
    )Total
    
    $
    87,336
    
    $
    110,078
    
    $
    99,782





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:





2004
    
    2003
    
    2002Statutory
      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
    
    
    7
    
    
    7Effect
      of ratemaking
    
    
    (3
    )
    
    3
    
    
    3Other
    
    
    (3
    )
    
    (2
    )
    
    (1
    )Effective
      federal and state income tax rate
    
    
    33
    %
    
    41
    %
    
    42
    %





Deferred
Income Taxes on the Consolidated Balance Sheets included the following as of
December 31 (in thousands):





2004
    
    2003Deferred
      tax assets related to:Revenue
      sharing
    
    $
    79,903
    
    $
    63,243Pensions
    
    
    39,799
    
    
    35,410Investment
      tax credits
    
    
    32,196
    
    
    35,213Nuclear
      reserves and decommissioning
    
    
    27,111
    
    
    35,956Unrealized
      losses, net
    
    
    2,941
    
    
    1,002Accrued
      liabilities
    
    
    979
    
    
    6,989Other
    
    
    8,193
    
    
    7,743191,122
    
    
    185,556Deferred
      tax liabilities related to:Depreciable
      property
    
    
    536,114
    
    
    477,749Income
      taxes recoverable through future rates
    
    
    163,108
    
    
    142,598Fuel
      cost recoveries
    
    
    6,028
    
    
    12,864Reacquired
      debt
    
    
    3,876
    
    
    5,665709,126
    
    
    638,876Net
      deferred income tax liability
    
    $
    518,004
    
    $
    453,320




96


**(12)**  **Risk Management and Energy Trading**





Refer to
Note (12) of MidAmerican Energy’s Notes to Consolidated Financial Statements for
a discussion of MidAmerican Funding’s commodity price, energy trading and
weather risks.





**(13)**  **Concentration of Credit Risk**





Refer to
Note (13) 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), InterCoast Capital has provided equity capital for
five commercial aircraft leased to major domestic airlines. As of
December 31, 2004, the receivables for expected lease payments under these
agreements totaled $18.1 million.





**(14)**  **Asset Retirement Obligations**





Refer to
Note (14) of MidAmerican Energy’s Notes to Consolidated Financial
Statements.





**(15)**  **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):





2004
    
    2003Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueFinancial
      instruments owned:Equity
      investments carried at cost
    
    $
    3,404
    
    $
    11,015
    
    $
    3,960
    
    $
    7,684Financial
      instruments issued:Long-term
      debt, including current portion
    
    $
    2,122,527
    
    $
    2,264,706
    
    $
    1,828,647
    
    $
    1,931,086





Substantially
all of MidAmerican Funding’s investments in debt and equity securities as of
December 31, 2004 and 2003, relate to its Quad Cities Station
decommissioning trust. Refer to Note (15) in MidAmerican Energy’s Notes to
Consolidated Financial Statements for additional information.





97





**(16)**  **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):





2004
    
    
    2003
    
    
    2002Other
      income:Allowance
      for equity funds used during construction
    
    $
    18,949
    
    $
    11,377
    
    $
    8,621Corporate-owned
      life insurance income
    
    
    5,447
    
    
    6,317
    
    
    1,330Income
      from energy projects and venture capital investments
    
    
    2,540
    
    
    332
    
    
    766Income
      from equity method investments
    
    
    513
    
    
    1,755
    
    
    7,919Lawsuit
      settlement
    
    
    -
    
    
    3,083
    
    
    -Gain
      on sale of assets, net
    
    
    -
    
    
    57
    
    
    4,212Fee
      for sold receivables
    
    
    -
    
    
    -
    
    
    1,340Other
    
    
    2,092
    
    
    1,606
    
    
    2,784Total
    
    $
    29,541
    
    $
    24,527
    
    $
    26,972Other
      expense:Write-down
      of impaired airplane leases
    
    $
    1,735
    
    $
    -
    
    $
    12,634Write-down
      of equity method investments
    
    
    -
    
    
    4,307
    
    
    5,118Write-down
      of other venture capital investments
    
    
    -
    
    
    2,068
    
    
    1,468Discount
      on sold receivables
    
    
    -
    
    
    -
    
    
    6,397Write-off
      of interest receivable related to a venture capital
    investment
    
    
    -
    
    
    -
    
    
    2,718Other - primarily items not recoverable from MidAmerican Energy's
      regulated utility customers
    
    
    3,532
    
    
    3,721
    
    
    2,938Total
    
    $
    5,267
    
    $
    10,096
    
    $
    31,273





The
impairment of airplane leases in 2002 was the result of the financial decline of
United Air Lines, Inc.





**(17)**  **Affiliated Company Transactions**





The
companies identified as affiliates of MidAmerican Funding 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 $11.4 million,
$12.2 million and $10.4 million in 2004, 2003 and 2002, respectively, for its
allocated share of corporate expenses.





MidAmerican
Funding was reimbursed for charges incurred on behalf of its affiliates. The
majority of these reimbursed expenses were 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 reimbursements was $56.4 million, $46.2
million and $29.8 million for 2004, 2003 and 2002, respectively.





MidAmerican
Energy had 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 operations in
June 2001. The agreement, which terminated in May 2004, provided for MidAmerican
Energy to purchase up to 50% of the net capacity of the plant and to supply the
fuel stock required to generate the energy purchased. MidAmerican Energy’s
payment for monthly capacity charges totaled $12.7 million, for 2004, $26.6
million for 2003, $21.2 million for 2002.





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 natural gas
transportation and storage capacity from NNG totaling $48.3 million in 2004,
$53.5 million in 2003 and $17.9 million in August through December
2002.





MHC has a
$200 million revolving credit arrangement carrying interest at the 30-day LIBOR
rate plus 25 basis points to borrow from MidAmerican Energy Holdings.
Outstanding balances are unsecured and due on demand. The outstanding balance
was $31.5 million at an interest rate of 2.56% as of December 31, 2004, and
$10.5 million at an interest rate of 1.42% as of December 31, 2003, and is
reflected as Note Payable to Affiliate on the Consolidated Balance
Sheet.




98





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 throughout 2004 and 2003. In 2002, a subsidiary of MHC had a note
receivable from MidAmerican Energy Holdings carrying interest of 5.75% annually.
The outstanding balance was zero throughout 2004 and 2003. MidAmerican Funding’s
interest income from the notes totaled $4.7 million in 2002.





MidAmerican
Funding had accounts receivable from affiliates of $7.3 million and $11.3
million as of December 31, 2004 and 2003, respectively, included in
Receivables on the Consolidated Balance Sheets. MidAmerican Funding also had
accounts payable to affiliates of $2.1 million and $1.4 million as of
December 31, 2004 and 2003, 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+.





**(18)**  **Unaudited Quarterly Operating Result**





20041st
      Quarter
    
    2nd
      Quarter
    
    3rd
      Quarter
    
    4th
      Quarter(In
      thousands)Operating
      revenues
    
    $
    840,946
    
    $
    575,521
    
    $
    566,448
    
    $
    718,785Operating
      income
    
    
    111,065
    
    
    59,422
    
    
    115,235
    
    
    70,225Net
      income
    
    
    54,357
    
    
    21,754
    
    
    59,623
    
    
    43,523





20031st
      Quarter
    
    2nd
      Quarter
    
    3rdQuarter
    
    4th
      Quarter(In
      thousands)Operating
      revenues
    
    $
    815,916
    
    $
    536,440
    
    $
    577,281
    
    $
    670,602Operating
      income
    
    
    115,743
    
    
    69,604
    
    
    130,706
    
    
    51,815Net
      income
    
    
    50,353
    
    
    26,293
    
    
    57,444
    
    
    23,086





Quarterly
data reflect seasonal variations common in the utility industry




99





**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, 2004. 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 during the fourth quarter of
2004 in MidAmerican Funding’s or MidAmerican Energy’s internal controls or in
other factors that could significantly affect internal controls.





**Item 9B.** **Other
Information**





None


**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
      asAge
      as of
    
    Present
    
    Present
    
    DirectorName
    
    January
      1, 2005
    
    Position
    
    Position
      Since
    
    SinceKeith
      D. Hartje
    
    54
    
    Senior
      Vice President
    
    1999Todd
      M. Raba
    
    47
    
    President
      and Director
    
    2004
    
    2002Brian
      K. Hankel
    
    42
    
    Vice
      President, Treasurer and Director
    
    1999
    
    2002Thomas
      B. Specketer
    
    47
    
    Vice
      President and Controller
    
    1999Steven
      R. Weiss
    
    50
    
    Vice
      President, General Counseland
      Director
    
    2000
    
    2005





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





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
President of MidAmerican Energy since August 2004 and Director of MidAmerican
Energy since September 2002. Mr. Raba served as Senior Vice President of
MidAmerican Energy from July 2001 to August 2004. 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.




100







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 1999 and held various other tax and accounting
management positions for MidAmerican Energy and its predecessors for more than
five years prior to that.





STEVEN R.
WEISS has been Director of MidAmerican Energy since January 2005 and Vice
President and General Counsel of MidAmerican Energy since July 2000. Mr. Weiss
served as Assistant General Counsel from July 1999 to June 2000 and held various
other legal and management positions for MidAmerican Energy and its predecessors
and affiliates 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
      asAge
      as of
    
    
    
    Present
    
    ManagerName
    
    January
      1, 2005
    
    Present
      Position
    
    Position
      Since
    
    SinceDavid
      L. Sokol
    
    48
    
    Chief
      Executive Officer and Manager
    
    1999
    
    1999Gregory
      E. Abel
    
    42
    
    President
      and Chief Operating Officer and Manager
    
    1999
    
    2001Douglas
      L. Anderson
    
    46
    
    Vice
      President and General Counsel
    
    2002Patrick
      J. Goodman
    
    38
    
    Vice
      President and Treasurer
    
    1999Ronald
      W. Roskens
    
    72
    
    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, 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.




101


**Audit
Committee and Audit Committee Financial Expert**





During
the fiscal year ended December 31, 2004 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**





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.





102





**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, 2004 and 2003, by their principal accounting firm, Deloitte
& Touche LLP and the member firms of Deloitte Touche Tohmatsu, and their
respective affiliates (collectively, "Deloitte & Touche"), are set forth
below. The audit committee of MidAmerican Energy Holdings has considered whether
the provision of the non-audit services described below is compatible with
maintaining the principal accountant's independence.





MidAmerican
      Funding
    
    MidAmerican
      Energy2004
    
    2003
    
    2004
    
    2003(In
      thousands)Audit
      Fees(1)
    
    $
    779.5
    
    $
    626.0
    
    $
    701.6
    
    $
    563.4Audit-Related
      Fees(2)
    
    
    36.6
    
    
    32.3
    
    
    32.9
    
    
    29.1Tax
      Fees(3)
    
    
    321.6
    
    
    282.0
    
    
    292.1
    
    
    253.8All
      Other Fees(4)
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      aggregate fees billed
    
    $
    1,137.7
    
    $
    940.3
    
    $
    1,026.6
    
    $
    846.3





(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.”





103








**PART
IV**





**Item 15.** **Exhibits
and Financial Statement Schedules**





(a)(1)
    Financial
      Statements (included herein)Consolidated
      financial statements of MidAmerican Energy and MidAmerican Funding, as
      well as the Report of Independent Registered Public Accounting Firm, are
      included in Item 8 of this Form 10-K.(a)(2)
    Financial
      Statement SchedulesThe
      following schedules should be read in conjunction with the aforementioned
      financial statements.PageMidAmerican
      Energy Company Consolidated Valuation and Qualifying Accounts (Schedule
      II)
    105MidAmerican
      Funding, LLC Consolidated Valuation and Qualifying Accounts (Schedule
      II)
    106





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)
    Exhibits





See
Exhibits Index on page 109.





104





**SCHEDULE
II**








**MIDAMERICAN
ENERGY COMPANY**


**CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 200** **4**


**(In
thousands)**





Column B
    
    Column C
    
    
    
    Column EBalance
      at
    
    Additions
    
    
    
    BalanceColumn A
    
    Beginning
    
    Charged
    
    Column D
    
    at
      EndDescription
    
    of
      Year
    
    to
      Income
    
    Deductions
    
    of
      YearReserves
      Deducted From Assets To Which They Apply:Reserve
      for uncollectible accounts receivable:Year
      ended 2004
    
    $
    7,484
    
    $
    9,902
    
    $
    (8,708
    )
    $
    8,678Year
      ended 2003
    
    $
    7,615
    
    $
    9,909
    
    $
    (10,040
    )
    $
    7,484Year
      ended 2002
    
    $
    627
    
    $
    8,982
    
    $
    (1,994
    )
    $
    7,615Reserves
      Not Deducted From Assets (1):Year
      ended 2004
    
    $
    8,779
    
    $
    3,562
    
    $
    (2,937
    )
    $
    9,404Year
      ended 2003
    
    $
    8,198
    
    $
    3,427
    
    $
    (2,846
    )
    $
    8,779Year
      ended 2002
    
    $
    7,802
    
    $
    2,798
    
    $
    (2,402
    )
    $
    8,198





(1)
    Reserves
      not deducted from assets include estimated liabilities for losses retained
      by MidAmerican Energy for workers compensation, public liability and
      property damage claims.





105





**SCHEDULE
II**








**MIDAMERICAN
FUNDING, LLC**


**CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS**


**FOR
THE THREE YEARS ENDED DECEMBER 31, 200** **4**


**(In
thousands)**





Column A
      Description
    
    Column B
      Balance
      at
      Beginning
      of
      Year
    
    Column C
      Additions
      Charged
      to
      Income
    
    Column
      D
      Deductions
    
    Column E
      Balance
      at
      End
      of
      YearReserves
      Deducted From Assets To Which They Apply:Reserve
      for uncollectible accounts receivable:Year
      ended 2004
    
    $
    7,554
    
    $
    9,902
    
    $
    (8,708
    )
    $
    8,748Year
      ended 2003
    
    $
    7,685
    
    $
    9,909
    
    $
    (10,040
    )
    $
    7,554Year
      ended 2002
    
    $
    733
    
    $
    8,946
    
    $
    (1,994
    )
    $
    7,685Reserves
      Not Deducted From Assets (1):Year
      ended 2004
    
    $
    9,737
    
    $
    4,048
    
    $
    (2,937
    )
    $
    10,848Year
      ended 2003
    
    $
    9,166
    
    $
    3,427
    
    $
    (2,856
    )
    $
    9,737Year
      ended 2002
    
    $
    8,770
    
    $
    2,798
    
    $
    (2,402
    )
    $
    9,166





(1)
    Reserves
      not deducted from assets include estimated liabilities for losses retained
      by MHC for workers compensation, public liability and property damage
      claims.





106





**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 COMPANYRegistrantDate:
      February 28, 2005
    By:
    /s/
      Todd M. Raba*(Todd
      M. Raba)President(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:





Signatures
    
    Title
    
    Date/s/Thomas
      B. Specketer*
    
    Vice
      President and Controller
    
    February
      28, 2005(Thomas
      B. Specketer)
    
    (principal
      financial and accounting officer)/s/Brian
      K. Hankel*
    
    Vice
      President and Director
    
    February
      28, 2005(Brian
      K. Hankel)/s/Todd
      M. Raba*
    
    President
      and Director
    
    February
      28, 2005(Todd
      M. Raba)/s/Steven
      R. Weiss*
    
    Vice
      President and Director
    
    February
      28, 2005(Steven
      R. Weiss)*By: 
      /s/ Douglas L. Anderson
    
    Attorney-in-Fact
    
    February
      28, 2005(Douglas L. Anderson)





107








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, LLCRegistrantDate:
      February 28, 2005
    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:





Signatures
    
    Title
    
    Date/s/David
      L. Sokol*
    
    Chief
      Executive Officer
    
    February
      28, 2005(David
      L. Sokol)/s/Patrick
      J. Goodman*
    
    Vice
      President and Treasurer
    
    February
      28, 2005(Patrick
      J. Goodman)
    
    (principal
      financial and accounting officer)/s/Gregory
      E. Abel*
    
    Manager
    
    February
      28, 2005(Gregory
      E. Abel)/s/Ronald
      W. Roskens*
    
    Manager
    
    February
      28, 2005(Ronald
      W. Roskens)*By: 
      /s/  Douglas L. Anderson
    
    Attorney-in-Fact
    
    February
      28, 2005(Douglas
      L. Anderson)





108





**EXHIBIT INDEX**





**Exhibits
Filed Herewith**





MidAmerican
Energy





23
    Consent
      of Deloitte & Touche LLP24.1
    Power
      of Attorney31.1
    Chief
      executive officer certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
    Chief
      financial officer certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
    Chief
      executive officer certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
    Chief
      financial officer certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002





MidAmerican
Funding





24.2
    Power
      of  Attorney31.3
    Chief
      executive officer certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.4
    Chief
      financial officer certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.3
    Chief
      executive officer certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.4
    Chief
      financial officer certification pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002






MidAmerican
Energy and MidAmerican Funding


4.1
    Third
      Supplemental Indenture, dated as of October 1, 2004, by and between
      MidAmerican Energy Company and The Bank Of New York, as
      Trustee4.2
    Second
      Supplemental Indenture, dated as of January 14, 2003, by and between
      MidAmerican Energy Company and The Bank Of New York, as
      Trustee4.3
    First
      Supplemental Indenture, dated as of February 8, 2002, by and between
      MidAmerican Energy Company and The Bank of New York, as
      Trustee





**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.)14
    Code
      of Ethics for Chief Executive Officer, Chief Financial Officer and Chief
      Accounting Officer. (Filed as Exhibit 14.1 to MidAmerican Energy's Annual
      Report on Form 10-K for the year ended December 31, 2003, Commission
      File No. 1-11505.)





109





MidAmerican
Funding





3.1
    Articles
      of Organization of MidAmerican Funding, LLC3.2
    Operating
      Agreement of MidAmerican Funding, LLC4.1
    Indenture,
      dated as of March 11, 1999, by and between MidAmerican Funding, LLC
      and IBJ Whitehall Bank & Trust Company, as Trustee (Filed as Exhibit
      4.1 to MidAmerican Funding’s Registration Statement on Form S-4,
      Registration No. 333-90553)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 (Filed as Exhibit 4.2 to MidAmerican Funding’s Registration
      Statement on Form S-4, Registration No. 333-90553)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 on Form S-3,
      Registration 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. (Filed as
      Exhibit 4.2 to MidAmerican Funding’s Registration Statement on Form S-4,
      Registration No. 333-90553)14
    Code
      of Ethics for Chief Executive Officer, Chief Financial Officer and Chief
      Accounting Officer. (Filed as Exhibit 14.2 to MidAmerican Funding's Annual
      Report on Form 10-K for the year ended December 31, 2003, Commission
      File No. 333-90553.)





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.)





110








4.7
    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.)4.8
    Indenture
      dated as of December 1, 1996, between MidAmerican Energy and The First
      National Bank of Chicago, as Trustee. (Filed as Exhibit 4(l) to
      MidAmerican Energy’s Registration Statement on Form S-3, Registration No.
      333-15387.)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.)10.9
    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.)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 there under does not exceed 10% of total assets of the Company,
      but hereby agrees to furnish to the Commission on request any such
      instruments.





111