**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-K**








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





For
      the
      fiscal year ended December 31, 2006





or





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





For
      the
      transition period from  to





Commission
            
            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. Suite 500****Des
                Moines, Iowa 50309-2580****515-242-4300****333-15387**
            
            **MIDAMERICAN
                ENERGY COMPANY**
            
            **42-1425214****(An
                Iowa Corporation)****666
                Grand Ave., Suite 500****Des
                Moines, Iowa 50309-2580****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 valuePreferred
                Stock, $3.75 Series, no par valuePreferred
                Stock, $3.90 Series, no par valuePreferred
                Stock, $4.20 Series, no par valuePreferred
                Stock, $4.35 Series, no par valuePreferred
                Stock, $4.40 Series, no par valuePreferred
                Stock, $4.80 Series, no par value(Title
                of each Class)





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





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





MidAmerican
                Funding, LLC
            YesTNo ̈
            MidAmerican
                Energy Company
            Yes ̈NoT









Indicate
      by check mark whether the registrants (1) have filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrants were
      required to file such reports), and (2) have been subject to such filing
      requirements for the past 90 days.





MidAmerican
                Funding, LLC
            Yes ̈NoT
            MidAmerican
                Energy Company
            YesTNo ̈





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





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





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerT





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


Yes  ̈  No T





All
      of
      the member’s equity of MidAmerican Funding, LLC is held by its parent company,
      MidAmerican Energy Holdings Company, as of February 15, 2007.





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 15, 2007, 70,980,203 shares of MidAmerican Energy Company
      common stock, without par value, were outstanding.





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




2


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
                1A.
            Risk
                Factors
            20Item
                1B.
            Unresolved
                Staff Comments
            27Item
                2.
            Properties
            27Item
                3.
            Legal
                Proceedings
            28Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            28**PART
                II**Item
                5.
            Market
                for the Registrant’s Common Equity, Related
                Stockholder Matters and IssuerPurchases
                of Equity Securities
            29Item
                6.
            Selected
                Financial Data
            29Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            31Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            52Item
                8.
            Financial
                Statements and Supplementary
                Data
            55Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            114Item
                9A.
            Controls
                and Procedures
            114Item
                9B.
            Other
                Information
            114**PART
                III**Item
                10.
            Directors
                and Executive Officers of the
                Registrant
            115Item
                11.
            Executive
                Compensation
            116Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related
            116Stockholder
                MattersItem
                13.
            Certain
                Relationships and Related
                Transactions
            116Item
                14.
            Principal
                Accountant Fees and Services
            117**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement
                Schedules
            118Signatures
            
            121Exhibit
                Index
            
            123





3





**PART
      I**





**Item
      1.**  **Business**





MidAmerican
      Funding, LLC (“MidAmerican Funding”), which was formed on March 12, 1999,
      is an Iowa limited liability company whose 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. MHC, MidAmerican Funding and MidAmerican Energy Holdings are holding
      companies headquartered in Des Moines, Iowa.





On
      February 9, 2006, following the effective date of the repeal of the Public
      Utility Holding Company Act of 1935, Berkshire Hathaway Inc. converted its
      41.3 million shares of MidAmerican Energy Holdings’ no par zero-coupon
      convertible preferred stock into an equal number of shares of MidAmerican Energy
      Holdings’ common stock. Presently, Berkshire Hathaway Inc. owns 87.8% of the
      common stock of MidAmerican Energy Holdings and consolidates MidAmerican Energy
      Holdings in its financial statements as a majority-owned subsidiary. Following
      the conversion, Walter Scott, Jr., David L. Sokol and Gregory E. Abel are the
      minority owners of MidAmerican Energy Holdings.





On
      March  1,
      2006,
      MidAmerican Energy Holdings and Berkshire Hathaway entered into an Equity
      Commitment Agreement pursuant to which Berkshire Hathaway has agreed to purchase
      up to $3.5 billion of common equity of MidAmerican Energy Holdings upon any
      requests authorized from time to time by the Board of Directors of MidAmerican
      Energy Holdings. The proceeds of any such equity contribution may only be used
      by MidAmerican Energy Holdings for the purpose of (i) paying when due its debt
      obligations and (ii) funding the general corporate purposes and capital
      requirements of its regulated subsidiaries, including MidAmerican Energy.
      Berkshire Hathaway will have up to 180 days to fund such request. MidAmerican
      Energy has no right to make or to cause MidAmerican Energy Holdings to make
      any
      equity contribution requests. The Berkshire Hathaway equity commitment will
      expire on February 28, 2011.





FORWARD-LOOKING
      STATEMENTS





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





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





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





·
            governmental,
                statutory, legislative, regulatory or administrative initiatives,
                proceedings or decisions, including those relating to the Energy
                Policy
                Act of 2005;





·
            weather
                effects on sales and revenues;




4




·
            changes
                in expected customer growth or usage of electricity or
                gas;





·
            economic
                or industry trends that could impact electricity or gas
                usage;





·
            increased
                competition in the power generation, electric or gas
                industries;





·
            fuel,
                fuel transportation and power costs and
                availability;





·
            changes
                in business strategy, development plans or customer or vendor
                relationships;





·
            availability,
                term and deployment of capital;





·
            availability
                of qualified personnel;





·
            unscheduled
                generation outages or repairs;





·
            risks
                relating to nuclear generation;





·
            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 (“SEC”), the Federal Energy
                Regulatory Commission and similar entities with regulatory
                oversight;





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





·
            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 SEC filings or in
                other publicly disseminated written
                documents.





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








MIDAMERICAN
      FUNDING AND MHC





Both
      MidAmerican Funding and MHC are holding companies. MidAmerican Funding conducts
      no business other than activities related to 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, which accounts for the predominant part of
      MHC’s assets and earnings, is primarily engaged in the business of generating,
      transmitting, distributing and selling electricity and in distributing, selling
      and transporting natural gas. Substantially all of MidAmerican Funding’s
      consolidated operating revenues are from MidAmerican Energy. Financial
      information on MidAmerican Funding’s segments of business is included in
      Note (18) of Notes to Consolidated Financial Statements in
      Item 8.





As
      of
      December 31, 2006, MidAmerican Funding and its subsidiaries had 3,694
      employees.




5





MIDAMERICAN
      ENERGY





MidAmerican
      Energy is a public utility company headquartered in Iowa with $6.5 billion
      of assets as of December 31, 2006, and operating revenues for 2006 totaling
      $3.4 billion. MidAmerican Energy is principally engaged in the business of
      generating, transmitting, distributing and selling electricity 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, 2006, MidAmerican Energy had approximately 714,000 regulated
      retail electric customers and 696,000 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.





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





MidAmerican
      Energy has a diverse customer base consisting of residential, agricultural,
      and
      a variety of commercial and industrial customer groups. Some of the larger
      industrial groups served by MidAmerican Energy include the processing and sales
      of food products; the manufacturing, processing and fabrication of primary
      metals; farm and other non-electrical machinery; real estate; and cement and
      gypsum products.





MidAmerican
      Energy also conducts a number of nonregulated business activities. Refer to
      the
“Nonregulated Operations” section later in Item 1 for further
      discussion.





Financial
      information on MidAmerican Energy’s segments of business is included in Note
      (18) of Notes to Consolidated Financial Statements in Item 8.





For
      the
      years ended December 31, MidAmerican Energy derived its gross operating
      revenues from the following business activities.





Gross
                Operating RevenuesBy
                Business Activity2006
            
            2005
            
            2004Regulated
                electric
            
            
            51.6
            %
            
            47.9
            %
            
            52.7
            %Regulated
                gas
            
            
            32.2
            
            
            41.8
            
            
            37.5Nonregulated
            
            
            16.2
            
            
            10.3
            
            
            9.8100.0
            %
            
            100.0
            %
            
            100.0
            %





As
      of
      December 31, 2006, MidAmerican Energy had 3,694 employees, of which 1,781
      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
      April 30, 2009, and covers 1,699 employee members.





6


**Regulated
      Electric Operations**





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





Total
                Regulated Electric SalesBy
                Customer Class2006
            
            2005
            
            2004Residential
            
            
            18.6
            %
            
            21.3
            %
            
            19.6
            %Small
                general service(1)
            
            
            13.1
            
            
            15.0
            
            
            14.5Large
                general service(2)
            
            
            27.6
            
            
            27.9
            
            
            26.7Wholesale(3)
            
            
            36.0
            
            
            30.5
            
            
            34.2Other
            
            
            4.7
            
            
            5.3
            
            
            5.0100.0
            %
            
            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 State2006
            
            2005
            
            2004Iowa
            
            
            89.5
            %
            
            89.0
            %
            
            88.7
            %Illinois
            
            
            9.5
            
            
            10.1
            
            
            10.3South
                Dakota
            
            
            1.0
            
            
            0.9
            
            
            1.0100.0
            %
            
            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.





The
      annual hourly peak demand on MidAmerican Energy’s electric system usually occurs
      as a result of air conditioning use during the cooling season. On July 31,
      2006, retail customer usage of electricity caused a new record hourly peak
      demand of 4,136 megawatts (“MW”) on MidAmerican Energy’s electric system, an
      increase of 137 MW from the previous record set in 2005.





MidAmerican
      Energy’s total accredited net generating capability in the summer of 2006 was
      5,032 MW, including 354 MW of net capacity purchases and sales. 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 and the net amount of capacity purchases and sales.
      Accredited capacity may vary from the nameplate, or design, capacity ratings,
      particularly for wind turbines whose output is dependent upon wind levels at
      any
      given time. Additionally, the actual amount of generating capacity available
      at
      any time may be less than the accredited capacity 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 information related to MidAmerican Energy’s electric
      generating facilities for summer 2006 accreditation.


**Facility
                  Net****Energy**
              
              **Year**
              
              **Capacity**
              
              **Net
                  MW****Generating
                  Facility**
              
              **Location**
              
              **Source**
              
              **Installed**
              
              **(MW)****(1)**
              
              **Owned****(1)**COAL:Council
                  Bluffs Unit No. 1
              
              Council
                  Bluffs, IA
              
              Coal
              
              1954
              
              45
              
              45Council
                  Bluffs Unit No. 2
              
              Council
                  Bluffs, IA
              
              Coal
              
              1958
              
              88
              
              88Council
                  Bluffs Unit No. 3
              
              Council
                  Bluffs, IA
              
              Coal
              
              1978
              
              690
              
              546Neal
                  Unit No. 1
              
              Sergeant
                  Bluff, IA
              
              Coal
              
              1964
              
              135
              
              135Neal
                  Unit No. 2
              
              Sergeant
                  Bluff, IA
              
              Coal
              
              1972
              
              300
              
              300Neal
                  Unit No. 3
              
              Sergeant
                  Bluff, IA
              
              Coal
              
              1975
              
              515
              
              371Neal
                  Unit No. 4
              
              Salix,
                  IA
              
              Coal
              
              1979
              
              632
              
              256Louisa
              
              Muscatine,
                  IA
              
              Coal
              
              1983
              
              700
              
              616Ottumwa
              
              Ottumwa,
                  IA
              
              Coal
              
              1981
              
              672
              
              349Riverside
                  Unit No. 3
              
              Bettendorf,
                  IA
              
              Coal
              
              1925
              
              4
              
              4Riverside
                  Unit No. 5
              
              Bettendorf,
                  IA
              
              Coal
              
              1961
              
              130
              
              1303,911
              
              2,840NATURALGAS AND OTHER:Greater
                  Des Moines
              
              Pleasant
                  Hill, IA
              
              Gas
              
              2003-04
              
              491
              
              491Coralville
              
              Coralville,
                  IA
              
              Gas
              
              1970
              
              64
              
              64Electrifarm
              
              Waterloo,
                  IA
              
              Gas/Oil
              
              1975-78
              
              200
              
              200Moline
              
              Moline,
                  IL
              
              Gas
              
              1970
              
              64
              
              64Parr
              
              Charles
                  City, IA
              
              Gas
              
              1969
              
              32
              
              32Pleasant
                  Hill
              
              Pleasant
                  Hill, IA
              
              Gas/Oil
              
              1990-94
              
              163
              
              163River
                  Hills
              
              Des
                  Moines, IA
              
              Gas
              
              1966-67
              
              120
              
              120Sycamore
              
              Johnston,
                  IA
              
              Gas/Oil
              
              1974
              
              149
              
              14928
                  portable power modules
              Various
              
              Oil
              
              2000
              
              56
              
              561,339
              
              1,339NUCLEAR:Quad
                  Cities Unit No. 1
              
              Cordova,
                  IL
              
              Uranium
              
              1972
              
              872
              
              218Quad
                  Cities Unit No. 2
              
              Cordova,
                  IL
              
              Uranium
              
              1972
              
              876
              
              2191,748
              
              437WIND(2):Intrepid
              
              Schaller,
                  IA
              
              Wind
              
              2004-05
              
              32
              
              32Century
              
              Blairsburg,
                  IA
              
              Wind
              
              2005
              
              27
              
              27Victory
              
              Westside,
                  IA
              
              Wind
              
              2006
              
              -
              
              -59
              
              59HYDROELECTRIC:Moline
                  Unit Nos. 1-4
              
              Moline,
                  IL
              Mississippi River
              1941
              
              3
              
              3ACCREDITED
                  GENERATING CAPACITY
              
              
              
              
              
              7,060
              
              4,678WIND
                  INCREMENTAL CAPACITY(3):Intrepid
              
              
              
              
              
              144
              
              144Century
              
              
              
              
              
              158
              
              158Victory
              
              
              
              
              
              99
              
              99401
              
              4017,461
              
              5,079


(1)
            Facility
                Net Capacity (MW) represents total plant accredited net generating
                capacity from the summer of 2006 based on MidAmerican Energy’s
                accreditation approved by the Mid-Continent Area Power Pool. Actual
                MW may
                vary depending on operating conditions and plant design. Net MW Owned
                indicates MidAmerican Energy’s ownership of Facility Net
                Capacity.




8




(2)
            MidAmerican
                Energy owned 459.5 MW (nameplate, or design capacity, ratings) of
                wind-powered generation as of December 31, 2006. The 59 MW of
                accredited capacity for these facilities in the table is considerably
                less
                than the nameplate rating due to the varying nature of wind and to
                the
                fact that the Victory wind-powered generation facilities were placed
                in
                service after the 2006 summer accreditation.(3)
            The
                wind incremental capacity represents the difference between the summer
                2006 accreditation of the facilities and the nameplate
                ratings.





On
      April 18, 2006, the Iowa Utilities Board (“IUB”) approved a settlement
      agreement between MidAmerican Energy and the Iowa Office of Consumer Advocate
      (“OCA”) regarding ratemaking principles for up to 545 MW (nameplate ratings) of
      wind-powered generation capacity in Iowa to be installed in 2006 and 2007.
      In
      the fourth quarter of 2006, MidAmerican Energy placed in service 99 MW
      (nameplate ratings) of wind-powered generation at its Victory wind site, and
      in
      June 2006, MidAmerican Energy entered into agreements to add an additional
      123
      MW (nameplate ratings) of wind-powered generation by the end of 2007.
      MidAmerican Energy continues to pursue additional cost effective wind-powered
      generation.





MidAmerican
      Energy is currently constructing Council Bluffs Energy Center Unit No. 4
      (“CBEC Unit 4”), a 790-MW (based on expected accreditation)
      super-critical-temperature, coal-fired generating plant. MidAmerican Energy
      will
      operate the plant and hold an undivided ownership interest as a tenant in common
      with the other owners of the plant. MidAmerican Energy’s current ownership
      interest is 60.67%, equating to 479 MW of output. Municipal, cooperative
      and public power utilities own the remainder, which is a typical ownership
      arrangement for large base-load plants in Iowa. The plant will provide service
      to regulated retail electricity customers. Wholesale sales may also be made
      from
      the plant to the extent the power is not immediately needed for regulated retail
      service. MidAmerican Energy has obtained regulatory approval to include the
      Iowa
      portion of the actual cost of CBEC Unit 4 in its Iowa rate base as long as
      the
      actual cost does not exceed the agreed cap that MidAmerican Energy has deemed
      to
      be reasonable. If the cap is exceeded, MidAmerican Energy has the right to
      demonstrate the prudence of the expenditures above the cap, subject to
      regulatory review. MidAmerican Energy expects to invest approximately
      $870 million in CBEC Unit 4, including transmission facilities and
      approximately $64 million of non-cash allowance for equity funds used
      during construction. Through December 31, 2006, MidAmerican Energy has
      invested $785.9 million in the plant, including $121.3 million for
      MidAmerican Energy’s share of deferred payments allowed by the construction
      contract and $49.2 million of non-cash allowance for equity funds used
      during construction.





MidAmerican
      Energy is interconnected with utilities in Iowa and neighboring states.
      MidAmerican Energy is also a party to an electric generation reserve sharing
      pool and regional transmission group administered by the Mid-Continent Area
      Power Pool (“MAPP”). 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 performs functions including
      administration of its short-term regional Open-Access Transmission Tariff,
      coordination of regional planning and operations, and operation of the
      generation reserve sharing pool.





Each
      MAPP
      generation reserve participant is required to maintain for emergency purposes
      a
      net generating capability reserve, including net capacity purchases and sales,
      of at least 15% above its system peak demand for each month. MidAmerican
      Energy’s reserve margin at peak demand for 2006 was approximately 22%.
      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 can transact with a substantial number of parties through its
      participation in MAPP and through its direct interconnections to the Midwest
      ISO, Southwest Power Pool and PJM Regional Transmission Organizations (RTOs)
      and
      several other major transmission-owning utilities in the region. 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:





2006
            
            2005
            
            2004MidAmerican
                Energy - owned generation
            
            
            72.1
            %
            
            78.9
            %
            
            76.5
            %Energy
                purchased under long-term contracts
            
            
            7.2
            
            
            7.9
            
            
            12.6Energy
                purchased - other
            
            
            20.7
            
            
            13.2
            
            
            10.9100.0
            %
            
            100.0
            %
            
            100.0
            %





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





2006
            
            2005
            
            2004Coal
            
            
            76.8
            %
            
            79.3
            %
            
            84.2
            %Nuclear
            
            
            14.5
            
            
            14.7
            
            
            14.8Wind
            
            
            4.9
            
            
            2.7
            
            
            -Gas
            
            
            3.7
            
            
            3.2
            
            
            0.9Oil/Hydro
            
            
            0.1
            
            
            0.1
            
            
            0.1100.0
            %
            
            100.0
            %
            
            100.0
            %





MidAmerican
      Energy is exposed to fluctuations in energy costs relating to retail sales
      in
      Iowa as it does not have an energy adjustment clause. Under its Illinois
      electric tariffs through December 31, 2006, and its current South Dakota
      electric tariffs, MidAmerican Energy is allowed to recover fluctuations in
      the
      cost of all fuels and purchased energy used for retail electric generation
      through a fuel cost adjustment clause. In November 2006, the Illinois Commerce
      Commission (“ICC”) approved a proposal to eliminate MidAmerican Energy’s monthly
      Illinois fuel adjustment clause. Base rates have been adjusted to include
      recoveries at average 2004/2005 cost levels beginning January 1, 2007. The
      elimination of the fuel adjustment clause exposes MidAmerican Energy to monthly
      market price changes for fuel and purchased power costs in Illinois, with rate
      case approval required for any base rate changes. MidAmerican Energy may not
      petition for reinstatement of the Illinois fuel adjustment clause until November
      2011.





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 short-term and
      multi-year agreements of varying quantities. MidAmerican Energy’s coal supply
      portfolio has 100% of its expected 2007 requirements under fixed-price
      contracts. MidAmerican Energy regularly monitors the western coal market looking
      for opportunities to enhance its coal supply portfolio. Well-publicized
      operational delays in rail transportation out of the Powder River Basin during
      2005 and 2006 have resulted in the reduction of coal inventories below targeted
      ranges. MidAmerican Energy believes the transportation issues have largely
      been
      resolved and that its coal inventories will be restored to their target ranges
      during 2007. Additional information regarding MidAmerican Energy’s coal supply
      contracts is included in Note (15) of Notes to Consolidated Financial
      Statements in Item 8.





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.




10




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 all of its uranium requirements for Quad
      Cities Station through 2009 and part of the requirements through 2015 can be
      met
      under existing supplies or commitments. Additionally, under existing supplies
      and commitments, uranium conversion requirements can be met through 2009 and
      part of 2010 and enrichment requirements can be met through 2011. Commitments
      for fuel fabrication have been obtained for the next four reloads, or eight
      years. MidAmerican Energy has been advised by Exelon Generation that it does
      not
      anticipate it will have difficulty in contracting for uranium, conversion,
      enrichment or fabrication of nuclear fuel needed to operate Quad Cities Station.





**Regulated
      Natural Gas Operations**





MidAmerican
      Energy is engaged in the procurement, transportation, storage and distribution
      of natural gas for customers in the Midwest. MidAmerican Energy purchases
      natural gas from various suppliers, transports it from the production areas
      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 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 2006, 47.2% 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 Class2006
            
            2005
            
            2004Residential
            
            
            37.2
            %
            
            37.5
            %
            
            40.0
            %Small
                general service(1)
            
            
            18.1
            
            
            18.2
            
            
            19.8Large
                general service(1)
            
            
            3.6
            
            
            4.1
            
            
            2.2Wholesale(2)
            
            
            41.1
            
            
            40.2
            
            
            38.0100.0
            %
            
            100.0
            %
            
            100.0
            %





11





(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 end-use
                customers.





Regulated
                Retail Gas Sales By State2006
            
            2005
            
            2004Iowa
            
            
            77.3
            %
            
            77.4
            %
            
            77.7
            %South
                Dakota
            
            
            12.0
            
            
            11.7
            
            
            11.5Illinois
            
            
            9.8
            
            
            10.0
            
            
            9.9Nebraska
            
            
            0.9
            
            
            0.9
            
            
            0.9100.0
            %
            
            100.0
            %
            
            100.0
            %





Fuel
      Supply and Capacity





MidAmerican
      Energy purchases gas supplies from producers and third party marketers. To
      enhance 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 wholesale 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 clauses 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 released 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 released capacity, with the remaining 70% being returned
      to customers through the purchased gas adjustment clauses.





MidAmerican
      Energy is allowed to recover its cost of gas from all of its regulated gas
      customers through purchased gas adjustment clauses. Accordingly, as long as
      MidAmerican Energy is prudent in its procurement practices, MidAmerican Energy’s
      regulated gas customers retain the risk associated with the market price of
      gas.
      MidAmerican Energy uses several strategies designed 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 off-peak months when the demand for gas is
      historically 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. MidAmerican Energy can deliver approximately
      50%
      of its design day sales requirements from its storage and peak shaving supply
      sources.





In
      1995,
      the IUB gave initial approval of MidAmerican Energy’s Incentive Gas Supply
      Procurement Program. In December 2006, the IUB extended the program through
      October 31, 2010. 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 a 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, 2010. 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.




12




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 March 1, 2007, MidAmerican Energy’s 2006/2007 winter heating
      season peak-day delivery of 1,071,380 Dths was reached on February 5,
      2007. This peak-day delivery included 68% traditional sales service and 32%
      transportation service.





The
      supply sources utilized by MidAmerican Energy to meet its 2006/2007 winter
      heating season peak-day deliveries to its traditional sales service customers
      were:





Thousands
            
            Percentof
            
            ofDths
            
            TotalLeased
                storage and peak shaving plants
            
            
            253.0
            
            
            34.9
            %Firm
                supply
            
            
            471.9
            
            
            65.1724.9
            
            
            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, including electric and gas
      sales and income-sharing arrangements.





Nonregulated
      electric includes nonregulated retail and wholesale operations. MidAmerican
      Energy’s nonregulated retail electric marketing services provide electric supply
      services to retail customers in Illinois, Ohio, Michigan and Maryland.
      Nonregulated wholesale operations buy from, and sell to, other utilities and
      marketers.





MidAmerican
      Energy’s nonregulated gas marketing services operate in Iowa, Illinois,
      Michigan, 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.





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 of Item 1 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 accounting policies and practices,
      electricity wholesale rates, the establishment and regulation of electric
      interconnections and transmission services, the acquisition and disposition
      of
      utility assets and securities over threshold amounts 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, aspects of competitive gas sales in Illinois,
      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





Under
      a
      series of electric settlement agreements between MidAmerican Energy, the Iowa
      Office of Consumer Advocate (“OCA”) and other intervenors approved by the IUB in
      2001, 2003, 2005 and 2006, MidAmerican Energy has agreed not to seek a general
      increase in electric base rates to become effective prior to January 1,
      2013, unless its Iowa jurisdictional electric return on equity in any year
      falls
      below 10%. 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
      seek any decrease in MidAmerican Energy’s Iowa electric base rates prior to
      January 1, 2013. The settlement agreements specifically allow the IUB to
      approve or order electric rate design or cost of service rate changes that
      could
      result in changes to rates for specific customers as long as such changes do
      not
      result in an overall increase in revenues for MidAmerican Energy. Additionally,
      under the incentive regulation aspects of the settlements, earnings exceeding
      a
      return on equity of 11.75% are shared with customers. See Note (14) of
      Notes to Consolidated Financial Statements in Item 8 for additional
      discussion of these settlements.





Under
      Iowa law, there are two options for temporary collection of higher rates
      following the filing of a request for a rate increase. Collection can begin,
      subject to refund, either (1) within 10 days of filing, without IUB review,
      or
      (2) 90 days after filing, with approval by the IUB. Under the 10-day option,
      Iowa law provides that if the utility is later required to make refunds, the
      refunds may be 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.
      Under the 90-day option, Iowa law provides that the IUB shall prescribe the
      manner of refunding the difference between final rates 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 become final and
      any difference between the requested rate increase and the temporary rates
      may
      then be collected subject to refund until receipt of a final order. 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, which is updated monthly to reflect changes in actual
      costs.




14




South
      Dakota law authorizes the SDPUC 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. MidAmerican Energy’s cost of gas is
      reflected in its Illinois gas rates through the Illinois Uniform Purchased
      Gas
      Adjustment Clause. The adjustment clause is updated on a monthly basis to
      reflect changes in actual costs.





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 transitioned portions of the traditional electric services to a
      competitive environment. Electric base rates in Illinois were generally frozen
      until January 1, 2007, but are now subject to cost-based
      ratemaking.





The
      FERC
      regulates MidAmerican Energy’s rates charged to wholesale customers for
      electricity 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. A December 2006
      decision of the United States Court of Appeals for the Ninth Circuit changed
      the
      interpretation of the relevant standard which the FERC should apply when
      reviewing wholesale contracts for electricity or capacity. The decision raises
      some concerns regarding the finality of contract prices, particularly from
      the
      sellers’ side of the transactions. Parties to this proceeding are seeking review
      before the U.S. Supreme Court. Whether the U.S. Supreme Court will hear the
      case
      or the outcome of its ruling should it decide to consider the matter, cannot
      be
      predicted at this time. All sellers subject to the FERC’s jurisdiction,
      including MidAmerican Energy, are currently subject to increased risk as a
      result of this decision.





The
      FERC
      conducts 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.





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





Refer
      to
      the “Utility Regulatory Matters” section of Management’s Discussion and Analysis
      in Item 7 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.




15




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





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





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 2017. 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 has been billing the DOE, and the DOE is obligated
      to reimburse the station for all station costs incurred due to the DOE’s delay.
      Exelon Generation has completed construction of 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. The first storage in a dry cask commenced in
      November 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.





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, which was amended and extended by the Energy Policy
      Act
      of 2005. The general types of coverage are: nuclear liability, property coverage
      and nuclear worker liability.





Exelon
      Generation purchases private market 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, as amended and extended by the Energy
      Policy Act of 2005, 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
      $7.5 million annually.




16




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 purchases 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 purchases extra expense
      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 $9.5 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 of workers in nuclear-related
      industries.





Environmental
      Regulations





MidAmerican
      Energy is subject to a number of federal, state and local environmental laws
      and
      environmentally related laws and regulations affecting many aspects of its
      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 has five jointly owned, and six wholly owned, coal-fired generating
      units, which represented 56.4% of MidAmerican Energy’s accredited net generating
      capability for summer 2006 and the source of 76.8% of the electric energy
      generated in 2006. 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”). The Clean Air
      Act provides the framework for protecting and improving the nation’s air
      quality, and controlling mobile and stationary sources of air emissions.
      MidAmerican Energy believes it is in material compliance with current air
      quality requirements.





The
      EPA
      implements national ambient air quality standards for ozone and fine particulate
      matter, as well as for other criteria pollutants that set the minimum level
      of
      air quality for the United States. Areas that achieve the standards, as
      determined by ambient air quality monitoring, are characterized as being in
      attainment while those that fail to meet the standards are designated as being
      nonattainment areas. Generally, sources of emissions in a nonattainment area
      are
      required to make emissions reductions. The EPA has determined that the entire
      state of Iowa, where MidAmerican Energy’s major emission sources are located, is
      in attainment of the ambient air quality standards. A new, more stringent
      standard for fine particulate matter became effective on December 18, 2006,
      but is under legal challenge in the United States Court of Appeals for the
      District of Columbia Circuit. Air quality modeling and preliminary air quality
      monitoring data indicate that portions of the states in which MidAmerican Energy
      has major emission sources may not meet the new standards. Until three years
      of
      data are collected and attainment designations under the new fine particulate
      standard are made, the impact of these new standards on MidAmerican Energy
      will
      not be known.




17




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





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





The
      CAMR
      or the CAIR could, in whole or in part, be superseded or made more stringent
      by
      current or future regulatory and legislative proposals at the federal or state
      levels that would result in significant reductions of SO 2 ,
      NO X and
      mercury, as well as carbon dioxide and other gases that may affect global
      climate change. In addition to any federal legislation that could be enacted,
      the CAMR and the CAIR, the rules could be changed or overturned as a result
      of
      litigation. The sufficiency of the standards established by both the CAMR and
      the CAIR has been legally challenged in the United States District Court of
      Appeals for the District of Columbia Circuit.





The
      EPA
      has initiated a regional haze program intended to improve visibility at specific
      federally protected areas. Some of MidAmerican Energy’s plants meet the
      threshold applicability criteria under the Clean Air Visibility Rules.
      MidAmerican Energy and other stakeholders are participating in the Central
      States Regional Air Partnership to help develop the technical and policy tools
      needed to comply with this program.





MidAmerican
      Energy has implemented a planning process that forecasts the site-specific
      controls and actions that may be required to meet emissions reductions as
      promulgated by the EPA. In accordance with an Iowa law passed in 2001,
      MidAmerican Energy has on file with the IUB its current multi-year plan and
      budget for managing SO 2 ,
      NO X and
      mercury from its generating facilities in a cost-effective manner. The plan,
      which is required to be updated every two years, provides specific actions
      to be
      taken at each coal-fired generating facility and the related costs and timing
      for each action.





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




18




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





As
      a
      result of increased attention to climate change in the United States, numerous
      bills have been introduced in the current session of the United States Congress
      that would reduce greenhouse gas emissions in the United States. Congressional
      leadership has made climate change legislation a priority, and many
      congressional observers expect to see the passage of climate change legislation
      within the next several years. While debate continues at the national level
      over
      the direction of domestic climate policy, several states have developed
      state-specific or regional legislative initiatives to reduce greenhouse gas
      emissions. The outcome of federal and state climate change legislation cannot
      be
      determined at this time; however, adoption of stringent limits on greenhouse
      emissions could significantly impact the Company’s fossil-fueled facilities,
      and, therefore, its financial results.





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





Water
      Quality -





The
      Clean
      Water Act establishes the framework for maintaining and improving water quality
      in the United States through a program that regulates, among other things,
      discharges to and withdrawals from waterways. The Clean Water Act requires
      that
      cooling water intake structures reflect the “best technology available for
      minimizing adverse environmental impact” to aquatic organisms. In July 2004, the
      EPA established significant new national technology-based performance standards
      for existing electric generating facilities that take in more than
      50 million gallons of water a day. These rules are aimed at minimizing the
      adverse environmental impacts of cooling water intake structures by reducing
      the
      number of aquatic organisms lost as a result of water withdrawals. In response
      to a legal challenge to the rule, in January 2007, the Second Circuit Court
      of
      Appeals remanded almost all aspects of the rule to the EPA, leaving companies
      with cooling water intake structures uncertain regarding compliance with these
      requirements. Compliance and the potential costs of compliance, therefore,
      cannot be ascertained until such time as further action is taken by the EPA.
      In
      the event that MidAmerican Energy’s existing intake structures require
      modification or alternative technology is required by new rules, expenditures
      to
      comply with these requirements could be significant.





INTERCOAST
      CAPITAL





InterCoast
      Capital is a wholly owned nonregulated subsidiary of MHC primarily engaged
      in
      investment activities, which it manages through its nonregulated investment
      subsidiaries. As of December 31, 2006, InterCoast Capital had total assets
      of $7.2 million.





InterCoast
      Capital had equity participations in equipment leases totaling $5.7 million
      and $7.4 million at December 31, 2006 and 2005, respectively.
      Approximately $5.4 million of the December 31, 2006, investment in
      equipment leases related to a seven percent undivided interest in an electric
      generating station leased to a utility located in Arizona. Refer to
      Note (5) of MidAmerican Funding’s Notes to Consolidated Financial
      Statements in Item 8 for additional discussion of equipment leases.





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




19




MIDWEST
      CAPITAL





Midwest
      Capital is a wholly owned nonregulated subsidiary of MHC with total assets
      of
      $6.8 million as of December 31, 2006. 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, 2006, 53.0% of the development available for sale had been
      sold.





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





MidAmerican
      Energy and MidAmerican Funding are subject to certain risks in their business
      operations, some of which are described below. These risks should be carefully
      considered before making an investment decision relating to MidAmerican Energy
      or MidAmerican Funding. Additional risks and uncertainties not presently known
      or that are currently deemed immaterial may also impair the business operations
      of MidAmerican Energy or MidAmerican Funding.





***MidAmerican
      Energy is subject to extensive regulations that affect its operations and costs.
      These regulations are complex, dynamic and subject to
      change.***





MidAmerican
      Energy is subject to numerous regulations and laws enforced by regulatory
      agencies. These regulatory agencies include, among others, the FERC, the EPA,
      the NRC, the IUB, the ICC and other federal, state and local agencies.





Regulations
      affect almost every aspect of MidAmerican Energy’s business and limits its
      ability to independently make and implement management decisions regarding,
      among other items, business combinations, constructing, acquiring or disposing
      of operating assets, setting rates charged to customers, establishing capital
      structures and issuing equity or debt securities, and engaging in transactions
      between MidAmerican Energy and its affiliates. Regulations are subject to
      on-going policy initiatives, and MidAmerican Energy cannot predict the future
      course of changes in regulatory laws, regulations and orders, or the ultimate
      effect that regulatory changes may have on MidAmerican Energy. However, such
      changes could materially impact MidAmerican Energy’s financial results. For
      example, such changes could result in, but are not limited to, increased retail
      competition within its service territories, new environmental requirements,
      and
      the acquisition by a municipality or other quasi-governmental body of its
      distribution facilities (by negotiation, legislation or condemnation).





Federal
      and state regulation changes are emerging as the most challenging aspect of
      managing utility operations. New and expanded regulations imposed by policy
      makers, court systems, and industry restructuring have provided the most change
      and challenge in the industry since the start of utility
      regulation.





The
      Energy Policy Act of 2005, or the Energy Policy Act, impacts many segments
      of
      the energy industry. Congress granted the FERC additional authority in the
      Energy Policy Act which expanded its regulatory role from a regulatory body
      to
      an enforcement agency. To implement the law, the FERC has and will continue
      to
      issue new regulations and regulatory decisions addressing electric system
      reliability, electric transmission expansion and pricing, regulation of utility
      holding companies, and enforcement authority, including the ability to assess
      civil penalties of up to $1.0 million per violation per day per infraction
      for non-compliance. The full impact of those decisions remains uncertain,
      however, the FERC has recently exercised its enforcement authority by imposing
      significant civil penalties for violations of its rules and regulations. In
      addition, as a result of past events affecting electric reliability, the Energy
      Policy Act requires federal agencies, working together with non-governmental
      organizations charged with electric reliability responsibilities, to adopt
      and
      implement measures designed to ensure the reliability of electric transmission
      and distribution systems effective June 1, 2007. Under the new regime, a
      transmission owner’s reliability compliance issues could result in financial
      penalties. Such measures could impose more comprehensive or stringent
      requirements on MidAmerican Energy, which would result in increased compliance
      costs and could adversely affect its financial results.




20




***Recovery
      of MidAmerican Energy’s costs is subject to regulatory review and approval, and
      the inability to recover costs may adversely affect MidAmerican Energy’s
      financial results.***





*State
      Rate Proceedings*





MidAmerican
      Energy establishes rates for its regulated retail service through state
      regulatory proceedings. These proceedings typically involve multiple parties,
      including government bodies and officials and various consumers of energy,
      who
      have differing concerns, but who generally have the common objective of limiting
      rate increases. Decisions are subject to appeal, potentially leading to
      additional uncertainty associated with the approval proceedings.  Each
      state sets retail rates based in part upon the state utility commission’s
      acceptance of an allocated share of total utility costs. When states adopt
      different methods to calculate inter-jurisdictional cost allocations, some
      costs
      may not be incorporated into rates of any state. Ratemaking is also generally
      done on the basis of estimates of normalized costs, so if a given year’s
      realized costs are higher than normal, rates will not be sufficient to cover
      those costs. State commissions also decide the allowed rate of return
      MidAmerican Energy will be given an opportunity to earn on MidAmerican Energy’s
      equity investment. They also decide the allowed levels of expense and investment
      that they deem is just and reasonable in providing service. The state
      commissions may disallow recovery in rates for any costs that do not meet such
      standard.





In
      Iowa,
      MidAmerican Energy has agreed not to seek a general increase in electric base
      rates to become effective prior to January 1, 2013, unless its Iowa
      jurisdictional electric return on equity for any year falls below 10%.
      MidAmerican Energy expects to continue to make significant capital expenditures
      to maintain and improve the reliability of its generation, transmission and
      distribution facilities, to reduce emissions and to support new business and
      customer growth. As a result, MidAmerican Energy’s financial results may be
      adversely affected if it is not able to deliver electricity in a cost-efficient
      manner and is unable to offset inflation and the cost of infrastructure
      investments with cost savings or additional sales.





In
      Iowa
      and Illinois, MidAmerican Energy’s electric fuel costs are embedded in its base
      rates. Accordingly, MidAmerican Energy is not permitted to pass through fuel
      price increases in its electric rates in those states without regulatory
      approval. In Iowa, MidAmerican Energy is prohibited from seeking reinstatement
      of a fuel adjustment clause for electric rates to become effective until
      January 1, 2013, unless its Iowa jurisdictional electric return on equity
      for any year falls below 10%. In Illinois, MidAmerican Energy is prohibited
      by
      law from seeking reinstatement of a fuel adjustment clause for electric rates
      until November 2011. Any significant increase in fuel costs or purchased power
      costs for electricity generation could have a negative impact on MidAmerican
      Energy, despite efforts to minimize the impact through the use of hedging
      instruments. Any of these consequences could adversely affect MidAmerican
      Energy’s financial results.





While
      rate regulation is premised on providing MidAmerican Energy a fair opportunity
      to obtain a reasonable rate of return on invested capital, state regulatory
      commissions do not guarantee that MidAmerican Energy will be able to realize
      a
      reasonable rate of return.





*FERC
      Jurisdiction*





The
      FERC
      establishes cost-based tariffs under which MidAmerican Energy provides
      transmission services to wholesale markets and retail markets in states that
      allow retail competition. The FERC also has responsibility for approving both
      cost- and market-based rates under which MidAmerican Energy sells electricity
      at
      wholesale. The FERC may impose price limitations, bidding rules and other
      mechanisms to address some of the volatility of these markets or may (pursuant
      to pending or future proceedings) revoke or restrict MidAmerican Energy’s
      ability to sell electricity at market-based rates, which could adversely affect
      MidAmerican Energy’s financial results. The FERC may also impose substantial
      civil penalties for any non-compliance with the Federal Power Act or the FERC’s
      rules or orders.




21




***MidAmerican
      Energy is actively pursuing, developing and constructing new facilities, the
      completion and expected cost of which is subject to significant risk, and it
      has
      significant funding needs related to its planned capital
      expenditures.***





MidAmerican
      Energy is constructing a new coal-fired electric generating plant and
      wind-powered generating facilities in Iowa, and, in the future, may pursue
      the
      development, construction, ownership and operation of additional new or expanded
      facilities. The completion of any of these projects is subject to substantial
      risks, including fluctuations in the price and availability of commodities,
      manufactured goods, equipment, labor and other items over a multi-year
      construction period. These risks may result in higher-than-expected costs to
      complete an asset and place it into service. Additionally, MidAmerican’s major
      new generation facility additions are subject to a soft price cap in Iowa.
      If
      actual capital costs exceed the cap, MidAmerican will not be able to recover
      those additional costs without an IUB determination that such additional costs
      are prudently incurred. It is also possible that additional generation needs
      may
      be obtained through power purchase agreements, which could impose long-term
      purchase obligations on MidAmerican Energy and force it to rely on the operating
      performance of a third party. The inability to successfully and timely complete
      a project, avoid unexpected costs or to recover any such costs through
      ratemaking decisions may materially affect MidAmerican Energy’s financial
      results.





Furthermore,
      MidAmerican Energy depends upon both internal and external sources of liquidity
      to provide working capital and to fund capital requirements. If MidAmerican
      Energy is unable to obtain funding from external sources, it may need to
      postpone or cancel planned capital expenditures. Failure to construct these
      projects could limit opportunities for revenue growth and increase operating
      costs.





***MidAmerican
      Energy is subject to numerous environmental, health, safety, and other laws,
      regulations and requirements that may adversely affect its financial
      results.***





*Operational
      Standards*





MidAmerican
      Energy is subject to numerous environmental, health, safety, and other laws,
      regulations and requirements affecting many aspects of MidAmerican Energy’s
      present and future operations, including, among others:





·
            the
                EPA’s CAIR, which established cap and trade programs to reduce
                SO2and NOx emissions starting in 2009 to address alleged contributions
                to
                downwind non-attainment with the revised National Ambient Air Quality
                Standards;





·
            the
                EPA’s CAMR, which establishes a cap and trade program to reduce mercury
                emissions from coal-fired power plants starting in 2010;
                and





·
            other
                laws or regulations that establish standards for greenhouse gas emissions,
                water quality, wastewater discharges, solid waste and hazardous
                waste.





These
      and
      related laws, regulations and orders generally require MidAmerican Energy to
      obtain and comply with a wide variety of environmental licenses, permits,
      inspections and other approvals.





Compliance
      with environmental, health, safety, and other laws, regulations and requirements
      can necessitate significant capital and operating expenditures, including
      expenditures for new equipment, inspection, clean-up costs, damages arising
      out
      of contaminated properties, and fines, penalties and injunctive measures
      affecting operating assets for failure to comply with environmental regulations.
      Compliance activities pursuant to regulations could be prohibitively expensive.
      As a result, some facilities may be required to shut down or alter their
      operations. Further, MidAmerican Energy may not be able to obtain or maintain
      all required environmental regulatory approvals for its operating assets or
      development projects. Delays in obtaining any required environmental or
      regulatory permits, failure to comply with the terms and conditions of the
      permits or increased regulatory or environmental requirements may increase
      its
      costs or prevent or delay MidAmerican Energy from operating its facilities
      or
      developing new facilities. If MidAmerican Energy fails to comply with all
      applicable environmental requirements, it may be subject to penalties and fines
      or other sanctions. The costs of complying with current or new environmental,
      health, safety, and other laws, regulations and requirements could adversely
      affect MidAmerican Energy’s financial results. Proposals for voluntary
      initiatives and mandatory controls are being discussed in the United States
      and
      worldwide to reduce so-called ‘‘greenhouse gases’’ such as carbon dioxide, a
      by-product of burning fossil fuels; methane, the primary component of natural
      gas; and methane leaks from pipelines. These actions could result in increased
      costs for MidAmerican Energy to (i) operate and maintain its facilities, (ii)
      install new emission controls on its facilities and (iii) administer and manage
      any greenhouse gas emissions program. These actions could also impact the
      consumption of natural gas, thereby affecting MidAmerican Energy’s
      operations.




22




Further,
      the regulatory rate structure or long-term customer contracts may not
      necessarily allow MidAmerican Energy to recover all costs incurred to comply
      with new environmental requirements. Although MidAmerican Energy believes that,
      in most cases, it is legally entitled to recover these kinds of costs, the
      inability to fully recover such costs in a timely manner could adversely affect
      its financial results.





*Site
      Clean-up and Contamination*





Environmental,
      health, safety, and other laws, regulations and requirements also impose
      obligations to remediate contaminated properties or to pay for the cost of
      such
      remediation, often by parties that did not actually cause the contamination.
      MidAmerican Energy is generally responsible for on-site liabilities, and in
      some
      cases off-site liabilities, associated with the environmental condition of
      MidAmerican Energy’s assets, including power generation facilities, and electric
      transmission and electric and natural gas distribution assets that it has
      acquired or developed, regardless of when the liabilities arose and whether
      they
      are known or unknown. In connection with acquisitions, MidAmerican Energy may
      obtain or require indemnification against some environmental liabilities. If
      MidAmerican Energy incurs a material liability, or the other party to a
      transaction fails to meet its indemnification obligations, it could suffer
      material losses. MidAmerican Energy has established liabilities to recognize
      its
      estimated obligations for known remediation liabilities, but such estimates
      may
      change materially over time. In addition, future events, such as changes in
      existing laws or policies or their enforcement, or the discovery of currently
      unknown contamination, may give rise to additional remediation liabilities
      which
      may be material. MidAmerican Energy is also required to fund its portion of
      the
      costs for decommissioning the Quad Cities Station when it is retired from
      service, which may include site remediation or decontamination.





***Inflation,
      changes in commodity prices and fuel transportation costs may adversely affect
      MidAmerican Energy’s financial results.***





Inflation
      affects MidAmerican Energy through increased operating costs and increased
      capital costs for plant and equipment. As a result of existing rate agreements
      and competitive price pressures, MidAmerican Energy may not be able to pass
      the
      costs of inflation on to its electric customers. If MidAmerican Energy is unable
      to manage cost increases or pass them on to its customers, MidAmerican Energy’s
      financial results could be adversely affected.





MidAmerican
      Energy is also heavily exposed to changes in prices and availability of coal
      and
      natural gas and the transportation of coal and natural gas because a substantial
      majority of its generation capacity utilizes these fossil fuels. MidAmerican
      Energy currently has contracts of varying durations for the supply and
      transportation of coal for its existing generation capacity. When these
      contracts expire or if they are not honored, MidAmerican Energy may not be
      able
      to purchase or transport coal on terms as favorable as the current contracts.
      MidAmerican Energy has similar exposures regarding the market price of natural
      gas. Changes in the cost of coal or natural gas supply or transportation and
      changes in the relationship between such costs and the market price of power
      will affect its financial results. Since the sales price MidAmerican Energy
      receives for power may not change at the same rate as MidAmerican Energy’s coal
      or natural gas supply or transportation costs, it may be unable to pass on
      the
      changes in costs to its customers. In addition, the overall prices MidAmerican
      Energy charges its retail customers in Iowa are frozen, as described above,
      and
      MidAmerican Energy does not have fuel recovery mechanisms in Iowa and
      Illinois.




23




***A
      significant decrease in demand for natural gas in the markets served by
      MidAmerican Energy’s gas distribution system may adversely affect MidAmerican
      Energy’s financial results.***





A
      sustained decrease in demand for natural gas in the markets served by
      MidAmerican Energy’s gas distribution system would significantly reduce its
      operating revenue and adversely affect its financial results. Factors that
      could
      lead to a decrease in market demand include, among others:





·
            a
                recession or other adverse economic condition that results in a lower
                level of economic activity or reduced spending by consumers on natural
                gas;





·
            an
                increase in the market price of natural gas or a decrease in the
                price of
                other competing forms of energy, including electricity, coal and
                fuel
                oil;





·
            efforts
                by customers to reduce their consumption of natural gas through various
                conservation measures and programs;





·
            higher
                fuel taxes or other governmental or regulatory actions that increase,
                directly or indirectly, the cost of natural gas or that limit the
                use of
                natural gas; and





·
            a
                shift to more fuel-efficient or alternative fuel machinery or an
                improvement in fuel economy, whether as a result of technological
                advances
                by manufacturers, legislation proposing to mandate higher fuel economy,
                price differentials, incentives or
                otherwise.





***MidAmerican
      Energy’s financial results may be adversely affected if it is unable to obtain
      adequate, reliable and affordable access to transmission
      service.***





MidAmerican
      Energy depends on transmission facilities owned and operated by utilities to
      transport electricity and natural gas to both wholesale and retail markets,
      as
      well as natural gas purchased to supply some of MidAmerican Energy’s electric
      generation facilities. If adequate transmission is unavailable, MidAmerican
      Energy may be unable purchase or sell and deliver products. Such unavailability
      could also hinder MidAmerican Energy from providing adequate or economical
      electricity or natural gas to its wholesale and retail electric and gas
      customers and could adversely affect MidAmerican Energy’s financial
      results.





The
      different regional power markets have varying and dynamic regulatory structures,
      which could affect MidAmerican Energy’s growth and performance. In addition, the
      independent system operators who oversee the transmission systems in regional
      power markets have imposed in the past, and may impose in the future, price
      limitations and other mechanisms to counter volatility in the power markets.
      These types of price limitations and other mechanisms may adversely affect
      MidAmerican Energy’s financial results.





***MidAmerican
      Energy is subject to market risk, counterparty performance risk and other risks
      associated with wholesale energy markets.*** ****





In
      general, wholesale market risk is the risk of adverse fluctuations in the market
      price of wholesale electricity and fuel, including natural gas and coal, which
      is compounded by volumetric changes affecting the availability of or demand
      for
      electricity and fuel. MidAmerican Energy purchases electricity and fuel in
      the
      open market or pursuant to short-term or variable-priced contracts as part
      of
      its normal operating business. If market prices rise, especially in a time
      when
      larger than expected volumes must be purchased at market or short-term prices,
      MidAmerican Energy may incur significantly greater expense than anticipated.
      Likewise, if electricity market prices decline in a period when MidAmerican
      Energy is a net seller of electricity in the wholesale market, MidAmerican
      Energy will earn less revenue.




24




MidAmerican
      Energy’s total accredited net generating capability exceeds its historical peak
      load. As a result, MidAmerican Energy has less exposure to wholesale electricity
      market price fluctuations. The actual amount of generation capacity available
      at
      any time, however, may be less than the accredited capacity due to regulatory
      restrictions, transmission constraints, fuel restrictions and generating units
      being temporarily out of service for inspection, maintenance, refueling,
      modifications or other reasons. In such circumstances, MidAmerican Energy may
      need to purchase energy in the wholesale markets and MidAmerican Energy may
      not
      recover in rates all of the additional costs that may be associated with such
      purchases. 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, including price fluctuations.





MidAmerican
      Energy is also exposed to risks related to performance of contractual
      obligations by wholesale suppliers and customers. MidAmerican Energy relies
      on
      suppliers to deliver commodities, including natural gas, coal and electricity,
      in accordance with short-term and long-term contracts. Failure or delay by
      suppliers to provide these commodities pursuant to existing contracts could
      disrupt the delivery of electricity and require MidAmerican Energy to incur
      additional expenses to meet customer needs. In addition, when these contractual
      agreements terminate, MidAmerican Energy may be unable to purchase the
      commodities on terms equivalent to the terms of current contractual agreements.
      MidAmerican Energy also relies on wholesale customers to take delivery of the
      energy they have committed to purchase and to pay for the energy on a timely
      basis. Failure of wholesale customers to take delivery may require MidAmerican
      Energy to find other customers to take the energy at lower prices than the
      original customers committed to pay. At certain times of the year, prices paid
      by MidAmerican Energy for energy needed to satisfy its customers’ energy needs
      may exceed the amounts received through retail rates from these customers.
      If
      the strategy used to hedge these risk exposures is ineffective, significant
      losses could result.





***MidAmerican
      Energy’s operating results may fluctuate on a seasonal and quarterly
      basis.***





The
      sale
      of electricity and natural gas are generally seasonal businesses. In the markets
      in which MidAmerican Energy operates, demand for electricity peaks during the
      hot summer months when cooling needs are higher. Market prices for electric
      supply also generally peak at that time. In addition, demand for gas and other
      fuels generally peaks during the winter when heating needs are higher. Further,
      extreme weather conditions such as heat waves or winter storms could cause
      these
      seasonal fluctuations to be more pronounced.





As
      a
      result, MidAmerican Energy’s overall financial results may fluctuate
      substantially on a seasonal and quarterly basis. MidAmerican Energy has
      historically sold less power, and consequently earned less income, when weather
      conditions are mild. Unusually mild weather in the future may adversely affect
      MidAmerican Energy’s financial results through lower revenues or increased
      energy costs. Conversely, unusually extreme weather conditions could increase
      MidAmerican Energy’s costs to provide power and adversely affect its financial
      results. The extent of fluctuation in financial results may change depending
      on
      a number of factors related to MidAmerican Energy’s regulatory environment and
      contractual agreements, including MidAmerican Energy’s ability to recover power
      costs, the existence of revenue sharing provisions and terms of the power sale
      contracts.





***MidAmerican
      Energy is subject to operating uncertainties which may adversely affect its
      financial results.***





The
      operation of a complex electric and gas utility (including generation,
      transmission and distribution) systems involves many operating uncertainties
      and
      events beyond MidAmerican Energy’s control. These potential events include the
      breakdown or failure of power generation equipment, compressors, pipelines,
      transmission and distribution lines or other equipment or processes, unscheduled
      plant outages, work stoppages, a shortage of qualified labor, transmission
      and
      distribution system constraints or outages, fuel shortages or interruption,
      unavailability of critical equipment, materials and supplies, performance below
      expected levels of output, capacity or efficiency, operator error, and
      catastrophic events such as severe storms, fires, earthquakes or explosions.
      A
      casualty occurrence might result in injury or loss of life, extensive property
      damage or environmental damage. Any of these risks or other operational risks
      could significantly reduce or eliminate MidAmerican Energy’s revenues or
      significantly increase its expenses. Further, MidAmerican Energy self-insures
      many risks and current and future insurance coverage may not be sufficient
      to
      replace lost revenue or cover repair and replacement costs. Any reduction of
      revenues for such reason, or any other reduction of MidAmerican Energy’s
      revenues or increase in its expenses resulting from operational risks could adversely
      affect MidAmerican Energy’s financial
      results.




25




***Potential
      terrorist activities or military or other actions could adversely affect
      us.***





The
      continued threat of terrorism since September 11, 2001, and the impact of
      military and other actions by the United States and its allies may lead to
      increased political, economic and financial market instability and subject
      MidAmerican Energy’s gas or electric operations to increased risk of acts of
      terrorism. The United States government has issued warnings that energy assets,
      specifically nuclear generation and other electric utility infrastructure,
      are
      potential targets of terrorist organizations. Political, economic or financial
      market instability or damage to MidAmerican Energy’s operating assets or the
      assets of its customers or suppliers may result in business interruptions,
      lost
      revenues, higher commodity prices, disruption in fuel supplies, lower energy
      consumption and unstable markets, particularly with respect to natural gas
      and
      electric energy, increased security, repair or other costs that may materially
      adversely affect MidAmerican Energy in ways that cannot be predicted at this
      time. Any of these risks could materially affect MidAmerican Energy’s financial
      results. Furthermore, instability in the financial markets as a result of
      terrorism or war could also materially adversely affect the ability to raise
      capital.





The
      insurance industry changed in response to these events. As a result, insurance
      covering risks MidAmerican Energy typically insures against may decrease in
      scope and availability, and it may elect to self-insure against many such risks.
      In addition, the available insurance may have higher deductibles, higher
      premiums and more restrictive policy terms.





***MidAmerican
      Energy is subject to the unique risks associated with nuclear
      generation.***





The
      ownership and operation of nuclear power plants, such as MidAmerican Energy’s
      25% ownership interest in the Quad Cities Station involves certain risks. These
      risks include, among other items, mechanical or structural problems, inadequacy
      or lapses in maintenance protocols, the impairment of reactor operation and
      safety systems due to human error, the costs of storage, handling and disposal
      of nuclear materials, limitations on the amounts and types of insurance coverage
      commercially available, and uncertainties with respect to the technological
      and
      financial aspects of decommissioning nuclear facilities at the end of their
      useful lives. The prolonged unavailability of the Quad Cities Station could
      materially affect MidAmerican Energy’s financial results, particularly when the
      cost to produce power at the plant is significantly less than market wholesale
      power prices. The following are among the more significant of these risks:




·
            Operational
                Risk - Operations at any nuclear power plant could degrade to the
                point
                where the plant would have to be shut down. If such degradations
                were to
                occur, the process of identifying and correcting the causes of the
                operational downgrade to return the plant to operation could require
                significant time and expense, resulting in both lost revenue and
                increased
                fuel and purchased power expense to meet supply commitments. Rather
                than
                incurring substantial costs to restart the plant, the plant could
                be shut
                down. Furthermore, a shut-down or failure at any other nuclear plant
                could
                cause regulators to require a shut-down or reduced availability at
                the
                Quad Cities Station.




·
            Regulatory
                Risk - The NRC may modify, suspend or revoke licenses and impose
                civil
                penalties for failure to comply with the Atomic Energy Act, applicable
                regulations or the terms of the licenses of nuclear facilities. Unless
                extended, the NRC operating licenses for the Quad Cities Station
                will
                expire in 2032. Changes in regulations by the NRC could require a
                substantial increase in capital expenditures or result in increased
                operating or decommissioning costs.




·
            Nuclear
                Accident Risk - Accidents and other unforeseen problems have occurred
                at
                nuclear facilities other than the Quad Cities Station, both in the
                United
                States and elsewhere. The consequences of an accident can be severe
                and
                include loss of life and property damage. Any resulting liability
                from a
                nuclear accident could exceed MidAmerican Energy’s resources, including
                insurance coverage.




***MidAmerican
      Energy is involved in numerous legal proceedings, the outcomes of which are
      uncertain and could negatively affect its financial
      results.***





MidAmerican
      Energy is party to numerous legal proceedings. Litigation is subject to many
      uncertainties, and MidAmerican Energy cannot predict the outcome of individual
      matters. It is reasonably possible that the final resolution of some of the
      matters in which MidAmerican Energy is involved could result in additional
      payments in excess of established reserves over an extended period of time
      and
      in amounts that could have a material adverse effect on our financial results.
      Similarly, it is also reasonably possible that the terms of resolution could
      require that MidAmerican Energy change business practices and procedures, which
      could also have a material adverse effect on its financial results.




26




***Potential
      changes in accounting standards might cause MidAmerican Energy to revise its
      financial results and disclosure in the future, which may change the way
      analysts measure its business or financial
      performance.***





Accounting
      irregularities discovered in the past few years in various industries have
      caused regulators and legislators to take a renewed look at accounting
      practices, financial disclosures, companies’ relationships with their
      independent auditors and retirement plan practices. Because it is still unclear
      what laws or regulations will ultimately develop, we cannot predict the ultimate
      impact of any future changes in accounting regulations or practices in general
      with respect to public companies or the energy industry or in our operations
      specifically. In addition, the Financial Accounting Standards Board, or FASB,
      the FERC or the SEC could enact new or revised accounting standards or FERC
      orders that might impact how we are required to record revenues, expenses,
      assets and liabilities.





***MidAmerican
      Energy’s indirect parent, MidAmerican Energy Holdings, could exercise control
      over MidAmerican Energy in a manner that would benefit MidAmerican Energy
      Holdings to the detriment of MidAmerican Energy’s creditors and preferred
      stockholders.***





MidAmerican
      Energy Holdings is MidAmerican Energy’s indirect parent and the direct parent of
      MidAmerican Funding and, accordingly, has control over all decisions requiring
      shareholder approval, including the election of directors. In circumstances
      involving a conflict of interest between MidAmerican Energy Holdings and
      MidAmerican Energy’s or MidAmerican Funding’s creditors and preferred
      stockholders, MidAmerican Energy Holdings could exercise its control in a manner
      that would benefit MidAmerican Energy Holdings to the detriment of our creditors
      and preferred stockholders.




**Item
      1B.**  **Unresolved
      Staff Comments**





None.





**Item
      2.**  **Properties**





MidAmerican
      Energy’s regulated 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 individually significant properties are its electric
      generation facilities. For information regarding these facilities, please refer
      to the “Regulated Electric Operations” discussion in Item 1. Additional
      electric property consists primarily of transmission and distribution
      facilities.





The
      electric transmission system of MidAmerican Energy at December 31, 2006,
      included 969 miles of 345-kilovolt (“kV”) lines and 1,129 miles of 161-kV lines.
      MidAmerican Energy’s electric distribution system included 384 substations at
      December 31, 2006.





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, 2006, included approximately 22,200
      miles of gas mains and service pipelines. In addition, gas property includes
      three liquefied natural gas plants and two propane-air plants. Refer to the
      “Regulated Natural Gas Operations” discussion in Item 1 for information
      regarding these facilities.




27




Utility
      plant, including construction work in progress and net of accumulated
      depreciation, by operating segment is as follows as of December 31 (in
      thousands):





2006
            
            2005ElectricGeneration
            
            $
            2,551,230
            
            $
            2,089,369Transmission
            
            
            370,066
            
            
            333,653Distribution
            
            
            1,418,192
            
            
            1,356,413Gas
                distribution
            
            
            663,583
            
            
            646,311$
            5,003,071
            
            $
            4,425,746





Refer
      to
      Note (18) of MidAmerican Energy’s Notes to Consolidated Financial Statements in
      Item 8 for a discussion of operating segments.





**Item
      3.**  **Legal
      Proceedings**





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





All
      of
      the wrongful death, personal injury and property damage claims arising from
      this
      incident have been settled by CenterPoint. MidAmerican Energy’s exposure, if
      any, to these settlements is covered under its liability insurance to which
      a
      $2.0 million retention applies.





Two
      lawsuits naming MidAmerican Energy as a third party defendant have been filed
      by
      CenterPoint Energy Resources Corp. in the U.S. District Court, District of
      Minnesota, related to this incident. The complaints seek reimbursement of all
      sums associated with CenterPoint’s replacement of all service lines in the
      MidAmerican Energy predecessor company’s properties located in Minnesota at a
      cost of approximately $39 million according to publicly available reports.
      A Report and Recommendation on MidAmerican Energy’s motion for summary judgment
      in both of these actions was issued on January 16, 2007, recommending that
      CenterPoint’s third party claims based upon negligent installation be barred
      against MidAmerican Energy and its third party claims based upon negligent
      operation and maintenance of the gas pipeline be allowed to continue. The
      parties timely objected to the Report and Recommendation and filed an appeal.
      MidAmerican Energy intends to vigorously defend its position in these claims
      and
      believes their ultimate outcome will not have a material impact on its financial
      results.





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.





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





None




28




**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.





**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 and with Management’s Discussion and Analysis of
      Financial Condition and Results of Operations in Item 7.





**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**SELECTED
      FINANCIAL DATA**


**(In
      thousands)**





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of Operations Data:**Revenues
            $
            3,447,931
            
            $
            3,160,337
            
            $
            2,696,353
            
            $
            2,595,812
            
            $
            2,236,159Operating
                income
            
            421,175
            
            
            381,124
            
            
            356,396
            
            
            370,820
            
            
            354,997Net
                income
            
            266,676
            
            
            221,297
            
            
            210,455
            
            
            188,597
            
            
            175,821Earnings
                on common stock
            
            265,429
            
            
            220,050
            
            
            209,210
            
            
            187,181
            
            
            172,888**As
                of December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****Balance
                Sheet Data:**Total
                assets
            $
            6,509,593
            
            $
            5,864,137
            
            $
            5,111,951
            
            $
            4,404,434
            
            $
            4,209,642Long-term
                debt (a)
            
            1,821,009
            
            
            1,631,760
            
            
            1,422,527
            
            
            1,128,647
            
            
            1,053,418Short-term
                borrowings
            
            -
            
            
            -
            
            
            -
            
            
            48,000
            
            
            55,000Preferred
                securities not subject to mandatory redemption
            
            30,329
            
            
            30,329
            
            
            30,329
            
            
            31,759
            
            
            31,759Common
                shareholder’s equity
            
            1,950,779
            
            
            1,744,882
            
            
            1,527,468
            
            
            1,318,519
            
            
            1,319,139





(a)
            Includes
                amounts due within one year.




29


**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**SELECTED
      FINANCIAL DATA**


**(In
      thousands)**





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of Operations Data:**Revenues
            $
            3,452,794
            
            $
            3,166,084
            
            $
            2,701,700
            
            $
            2,600,239
            
            $
            2,240,879Operating
                income
            
            420,618
            
            
            381,083
            
            
            355,947
            
            
            367,868
            
            
            349,988Net
                income (a)
            
            288,241
            
            
            195,069
            
            
            179,257
            
            
            157,176
            
            
            136,716**As
                of December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****Balance
                Sheet Data:**Total
                assets
            $
            7,794,491
            
            $
            7,157,416
            
            $
            6,427,244
            
            $
            5,737,614
            
            $
            5,551,747Long-term
                debt (b)
            
            2,521,009
            
            
            2,331,760
            
            
            2,122,527
            
            
            1,828,647
            
            
            1,753,418Short-term
                borrowings
            
            -
            
            
            -
            
            
            -
            
            
            48,000
            
            
            55,000Preferred
                securities not subject to mandatory redemption
            
            30,329
            
            
            30,329
            
            
            30,329
            
            
            31,759
            
            
            31,759Member’s
                equity
            
            2,513,402
            
            
            2,234,837
            
            
            2,042,403
            
            
            1,863,769
            
            
            1,879,191





(a)
            In
                2002, MidAmerican Funding recorded after-tax losses of $14.3 million
                for write-downs of impaired assets and investments, including an
                $8.2 million after-tax write-down of airplane leases. In 2005,
                MidAmerican Funding recorded after-tax losses totaling $7.0 million
                for write-downs of impaired airplane leases and $8.4 million of
                after-tax gains on the sales of assets and investments. Net income
                for
                2006 reflects a $19.3 million reduction of income taxes due to the
                resolution of a potential tax matter and after-tax gains totaling
                $29.6 million on the sales and restructurings of MidAmerican Funding
                nonstrategic passive investments.(b)
            Includes
                amounts due within one year.





30


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





**INDEX**








General
            32Executive
                Summary
            32Results
                of Operations for the Years Ended
                December 31, 2006 and 2005
            33Results
                of Operations for the Years Ended
                December 31, 2005 and 2004
            37Liquidity
                and Capital Resources
            42Credit
                Ratings Risks
            45Utility
                Regulatory Matters
            46Environmental
                Matters
            48Generating
                Capability
            48Critical
                Accounting Policies and
                Estimates
            49








31





**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. MHC, MidAmerican Funding and
      MidAmerican Energy Holdings are 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 of the factors that had an effect on MidAmerican Energy’s and
      MidAmerican Funding’s operating results, liquidity and capital
      resources:





·
            MidAmerican
                Energy’s regulated electric gross margin increased $70.9 million for
                2006 compared to 2005 due to a $31.4 million increase in gross margin
                for electric wholesale sales, driven primarily by a 33.3% increase
                in
                sales volumes, and a $21.3 million increase in electric retail gross
                margin as a result of customer growth, in particular, the addition
                of a
                large industrial customer in the fourth quarter of 2005.





·
            MidAmerican
                Energy is currently constructing a 790-megawatt (“MW”) (expected
                accreditation) super-critical-temperature, coal-fired generation
                project
                and expects to invest approximately $870 million in the project
                through 2007, including transmission facilities. Through December 31,
                2006, $785.9 million had been invested, including $121.3 million
                for MidAmerican Energy’s share of deferred payments allowed by contract.





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





·
            On
                October 6, 2006, MidAmerican Energy issued $350.0 million of
                5.8% medium-term notes due October 15, 2036.





·
            During
                2006, MidAmerican Funding recognized pre-tax gains of $48.1 million,
                or $29.6 million after-tax, on the sales and restructurings of
                nonstrategic, passive investments.





·
            In
                the fourth quarter of 2006, MidAmerican Funding reduced its income
                tax
                expense by $19.3 million due to the resolution of a potential tax
                matter.




32




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.





**Results
      of Operations for the Years Ended December 31,
      2006 and 2005**





Earnings
      Overview





MidAmerican
      Energy -





MidAmerican
      Energy’s earnings on common stock improved $45.4 million to
      $265.4 million for 2006 compared to $220.0 million for 2005. Operating
      income increased $40.1 million due primarily to improved regulated electric
      margins. Also, an increase in income taxes due to greater pre-tax income in
      2006
      was partially offset by the resolution of a potential tax matter and by
      additional renewable electricity production tax credits as a result of greater
      wind-powered generation.





MidAmerican
      Funding -





MidAmerican
      Funding’s net income for 2006 increased $93.1 million to
      $288.2 million for 2006 compared to $195.1 million for 2005. In
      addition to the items discussed for MidAmerican Energy, MidAmerican Funding’s
      net income for 2006 reflects a $19.3 million reduction in income tax
      expense due to the resolution of a potential tax matter and $29.6 million
      of after-tax income from gains on the sales and restructurings of a number
      of
      nonstrategic, passive investments.





Regulated
      Electric Gross Margin





2006
            
            2005Gross
                margin (in millions):Operating
                revenues
            
            $
            1,779.5
            
            $
            1,513.2Less
                cost of fuel, energy and capacity
            
            
            672.0
            
            
            476.6Electric
                gross margin
            
            $
            1,107.5
            
            $
            1,036.6Sales
                (GWh):Retail
            
            
            19,831
            
            
            19,044Wholesale
            
            
            11,168
            
            
            8,378Total
            
            
            30,999
            
            
            27,422





Electric
      gross margin for 2006 increased $70.9 million compared to 2005 due to a
      $31.4 million increase in gross margin on wholesale sales due primarily to
      an increase in related sales volumes. Gross margin on retail sales increased
      $21.3 million due principally to customer growth. Additionally,
      transmission revenues increased $14.0 million due to an increase in the use
      of MidAmerican Energy’s transmission services.





Sales
      of
      energy to other utilities, municipalities and marketers inside and outside
      of
      MidAmerican Energy’s delivery system are classified as wholesale. The increased
      availability of MidAmerican Energy-owned base load generation, in part due
      to
      the effect of newly added wind-powered generation to supply retail customers,
      and greater market opportunities contributed to a 33.3% increase in wholesale
      sales volumes during 2006, resulting in a $29.4 million increase in
      wholesale gross margin. An increase in the average electric wholesale margins
      per megawatt hour sold due to higher market prices improved electric wholesale
      gross margin by $2.0 million compared to 2005.





Gross
      margin on electric retail sales increased $21.3 million, with electric
      retail sales volumes increasing 4.1% compared to 2005. An increase in the
      average number of retail customers, in particular the addition of a large steel
      manufacturer in the fourth quarter of 2005, improved electric retail gross
      margin by $30.4 million compared to 2005. Electricity usage factors not
      dependent on weather, such as changes in individual customer usage patterns,
      increased electric margin by $11.0 million. The effect of temperature
      conditions during 2006 compared to 2005 resulted in an $18.3 million
      decrease in electric retail gross margin. An increase in fuel costs related
      to
      Iowa retail electric sales decreased electric retail gross margin by
      $8.8 million compared to 2005 due in part to an increase in the cost of
      energy purchased to serve the retail load. Recoveries of energy efficiency
      program costs increased electric retail gross margin by $7.1 million
      compared to 2005. Changes in revenues from the recovery of energy efficiency
      program costs are substantially matched with corresponding changes in other
      operating expenses.




33




Regulated
      Gas Gross Margin





2006
            
            2005Gross
                margin (in millions):Operating
                revenues
            $
            1,111.6
            
            $
            1,322.7Less
                cost of gas sold
            
            888.5
            
            
            1,098.4Gas
                gross margin
            $
            223.1
            
            $
            224.3Sales
                (000’s Dths):Retail
            
            70,587
            
            
            76,942Wholesale
            
            49,209
            
            
            51,655Total
            
            119,796
            
            
            128,597





Gas
      gross
      margin for 2006 decreased $1.2 million compared to 2005.





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 decreased 13.2% compared to 2005 resulting in a
      $134.7 million decrease in cost of gas sold. In addition, a 6.8% decrease
      in sales volumes compared to 2005 reduced cost of gas sold by
      $75.2 million.





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





2006
                vs. 2005Change
                in recoveries of cost of gas sold:Average
                cost per unit
            
            $
            (134.7
            )Sales
                volumes
            
            
            (75.2
            )Total
                change in cost of gas sold
            
            
            (209.9
            )Change
                in margin:Weather
            
            
            (5.8
            )Other
                usage factors
            
            
            (4.1
            )Customer
                growth
            
            
            2.3Energy
                efficiency cost recovery
            
            
            6.5Other
            
            
            (0.1
            )Total
                revenue variance
            
            $
            (211.1
            )





The
      decrease in gas margin due to weather was the result of warmer temperature
      conditions during the heating seasons of 2006 compared to 2005. Other gas usage
      factors, such as changes in individual customer usage patterns, decreased gas
      margin. MidAmerican Energy’s average number of gas retail customers increased
      1.2% compared to 2005. Changes in revenues from the recovery of energy
      efficiency program costs are substantially matched with corresponding changes
      in
      other operating expenses. Total natural gas retail sales volumes decreased
      8.3%.




34




Regulated
      Operating Expenses





Other
      operating expenses of $402.0 million increased $21.1 million for 2006
      compared to 2005 due primarily to a $13.6 million increase in energy
      efficiency program costs. Changes in energy efficiency program costs are
      substantially matched with changes in related electric and gas revenues.
      Additionally, steam generating plant operating costs increased
      $4.7 million, while electric and gas distribution costs increased
      $3.7 million.





Maintenance
      expenses for 2006 increased $5.5 million compared to 2005. Maintenance
      costs for the Quad Cities Station increased $1.8 million, while maintenance
      costs related to wind-powered generating facilities increased $1.7 million.
      Maintenance costs for the electric and gas distribution systems increased a
      total of $2.0 million compared to 2005.





Depreciation
      and amortization expense for 2006 increased $5.9 million compared to 2005
      due to an increase in utility plant depreciation principally as a result of
      wind-powered generating facilities placed in service in the third quarter of
      2005 and the last half of 2006, offset partially by a decrease in amortization
      of software.





Property
      and other taxes increased $2.1 million due to an increase in property taxes
      as a result of higher levels of electricity generated and delivered during
      the
      measurement period.





Nonregulated
      Gross Margin





2006
            
            2005(In
                millions)MidAmerican
                Energy −Nonregulated
                operating revenues
            
            $
            556.8
            
            $
            324.4Less
                nonregulated cost of sales
            
            
            522.1
            
            
            290.9Nonregulated
                gross margin
            
            $
            34.7
            
            $
            33.5MidAmerican
                Funding Consolidated −Nonregulated
                operating revenues
            
            $
            561.7
            
            $
            330.1Less
                nonregulated cost of sales
            
            
            523.4
            
            
            292.5Nonregulated
                gross margin
            
            $
            38.3
            
            $
            37.6





MidAmerican
      Energy’s nonregulated gross margin for 2006 increased $1.2 million compared
      to 2005. The following table presents the margins related to various
      nonregulated activities (in millions):





2006
            
            2005Nonregulated
                electric
            
            $
            13.4
            
            $
            12.9Nonregulated
                gas
            
            
            10.9
            
            
            7.5Income
                sharing arrangements under regulated gas tariffs
            
            
            5.9
            
            
            5.6Incentive
                gas supply procurement program award
            
            
            1.1
            
            
            3.4Other
            
            
            3.4
            
            
            4.1$
            34.7
            
            $
            33.5





Nonregulated
      revenues and cost of sales for 2006 increased due primarily to a change in
      the
      management strategy related to certain end-use gas contracts that resulted
      in
      recording prospectively the related revenues and cost of sales on a gross,
      rather than net, basis in accordance with Emerging Issues Task Force Issue
      No.
      02-3, “Recognition and Reporting of Gains and Losses on Energy Trading Contracts
      Under Issues No. 98-10 and 00-17.” For 2005, cost of sales totaling
      $289.2 million was netted in nonregulated operating revenues for such
      end-use gas contracts. The increase in nonregulated gross margin compared to
      2005 was principally due to higher realized gas margins, partially offset by
      an
      increase in unrealized net losses on gas financial instruments. Beginning in
      the
      second half of 2006, MidAmerican Energy began recognizing unrealized gains
      and
      losses on certain electric and gas positions in other comprehensive income,
      reducing a portion of future market volatility on margins.




35




Nonregulated
      operations also include earnings from sharing arrangements under applicable
      state regulations and tariffs filed with the IUB and the South Dakota Public
      Utilities Commission (“SDPUC”) for MidAmerican Energy’s regulated natural gas
      operations. Under these arrangements, MidAmerican Energy is allowed to keep
      a
      portion of the benefits of gas sales for resale and capacity release
      transactions. MidAmerican Energy also has an Incentive Gas Supply Procurement
      Program (“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 and the South Dakota program extend through
      October 31, 2010.





Non-Operating
      Income





MidAmerican
      Energy -





MidAmerican
      Energy’s non-operating income increased $19.5 million compared to 2005 due
      primarily to a $12.8 million increase in allowance for equity funds as a
      result of the increase in construction work in progress. 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”). MidAmerican Energy expects to
      continue to record higher-than-normal income for the allowance on equity funds
      used during construction through 2007 while the announced generating facilities
      are constructed.





Interest
      and dividend income increased $2.9 million compared to 2005 due to a more
      favorable cash position and higher interest rates. Other income increased due
      to
      a $2.0 million increase in income from corporate-owned life insurance
      policies.





MidAmerican
      Funding -





MidAmerican
      Funding’s non-operating income increased $68.2 million for 2006 compared to
      2005. In addition to the MidAmerican Energy items discussed above, MidAmerican
      Funding’s non-operating income reflects the following significant
      factors.





Other
      income for MidAmerican Funding increased $40.2 million due principally to
      $27.6 million of pre-tax gains from sales of MidAmerican Funding’s shares
      of common stock of an electronic energy and metals trading exchange and
      $4.5 million of pre-tax gain on MidAmerican Funding’s remaining shares of
      that common stock, which it donated to a charitable foundation. Other expense
      for 2006 reflects $4.5 million of expense for the donation of the
      shares.





Other
      income for 2006 also includes an $8.5 million pre-tax gain on the sale of
      MidAmerican Funding’s non-controlling interest in a non-utility gas-fired
      cogeneration plant and a $6.8 million pre-tax gain on the sale of a
      commercial passenger aircraft. Additionally, other income reflects
      $5.2 million of pre-tax income resulting from changes in a financing
      arrangement related to a non-strategic investment in a hydroelectric generating
      plant. Other income for 2005 includes $9.9 million of pre-tax gains from
      the sale of two non-strategic, passive investments and a $3.4 million
      pre-tax gain on the sale of MidAmerican Funding’s shares of common stock of the
      electronic energy and metals trading exchange discussed above.





Other
      expense for MidAmerican Funding decreased $12.1 million for 2006 compared
      to 2005 due primarily to write-downs in 2005 of some of MidAmerican Funding’s
      investments in commercial passenger aircraft. MidAmerican Funding’s evaluation
      of its investments in these aircraft resulted in $15.6 million of pre-tax
      write-downs in 2005. The write-downs reflected a continued deterioration in
      the
      airline industry, including the bankruptcy filings of two major carriers during
      2005.




36




Fixed
      Charges





The
      $12.9 million increase in MidAmerican Energy’s interest on long-term debt
      was due to the issuance of MidAmerican Energy long-term debt in the amount
      of
      $300.0 million on November 1, 2005, and $350.0 million on
      October 6, 2006, offset partially by maturities of higher interest rate
      debt in 2005 and 2006. Other interest expense increased $3.4 million due
      principally to a higher balance of the Iowa revenue sharing liability.
      MidAmerican Energy is allowed to capitalize, and record as a reduction to fixed
      charges, a cost of construction for debt funds used, based on guidelines set
      forth by the FERC. The $5.6 million increase in allowance for borrowed
      funds for 2006 was due to the increase in construction work in progress compared
      to 2005. MidAmerican Energy expects to continue to record higher-than-normal
      allowance for borrowed funds used during construction through 2007 while the
      announced generating facilities are constructed.





Income
      Taxes





MidAmerican
      Energy -





Federal
      law currently provides for federal production tax credits for energy produced
      by
      renewable electricity generation projects, including wind-powered generating
      facilities for ten years after the in-service date. MidAmerican Energy’s income
      taxes for 2006 include $10.2 million of additional production tax credits
      compared to 2005 due to additional wind-powered generation.





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





MidAmerican
      Funding -





In
      2006,
      MidAmerican Funding reduced its income tax expense by $19.3 million due to
      the resolution of a potential tax matter.





**Results
      of Operations for the Years Ended December 31, 2005 and
      2004**





Earnings
      Overview





MidAmerican
      Energy -





MidAmerican
      Energy’s earnings on common stock improved $10.8 million to
      $220.0 million for 2005 compared to $209.2 million for 2004. Operating
      income increased $24.7 million due primarily to improved margins. The
      improvement in operating income was partially offset by a comparative increase
      in income taxes due to benefits recognized in 2004 as a result of changes in
      state and federal income tax laws in 2004 and the benefits from a settlement
      with the Internal Revenue Service of an income tax audit issue in
      2004.




37


MidAmerican
      Funding -





MidAmerican
      Funding’s net income for 2005 increased $15.8 million to
      $195.1 million for 2005 compared to $179.3 million for 2004. In
      addition to the items discussed for MidAmerican Energy, MidAmerican Funding’s
      net income for 2004 reflects additional income tax expense due to an adjustment
      to goodwill as a result of the settlement of the income tax audit issue
      above.





Regulated
      Electric Gross Margin





2005
            
            2004Gross
                margin (in millions):Operating
                revenues
            
            $
            1,513.2
            
            $
            1,421.7Less
                cost of fuel, energy and capacity
            
            
            476.6
            
            
            404.6Electric
                gross margin
            
            $
            1,036.6
            
            $
            1,017.1Sales
                (GWh):Retail
            
            
            19,044
            
            
            17,865Wholesale
            
            
            8,378
            
            
            9,260Total
            
            
            27,422
            
            
            27,125





Electric
      gross margin for 2005 increased $19.5 million compared to 2004 due to a
      $24.5 million increase in retail gross margin as a result of warmer weather
      in the third quarter of 2005 and customer growth. A $17.1 million decrease
      in MidAmerican Energy’s cost of sales for electric capacity purchases and a
      $7.9 million increase in transmission revenues also contributed to the
      increase in electric gross margin. The improvement in gross margin as a result
      of these factors was partially offset by a $29.4 million decrease in gross
      margin on wholesale sales, primarily as a result of generation outages in the
      first quarter of 2005.





Gross
      margin on electric retail sales increased $24.5 million, with electric
      retail sales volumes increasing 6.6% compared to 2004. The effect of temperature
      conditions during 2005 compared to 2004 resulted in a $38.2 million
      increase in electric retail gross margin. A 1.3% increase in the average number
      of retail customers improved electric retail gross margin by $14.7 million
      compared to 2004, while electricity usage factors not dependent on weather,
      such
      as changes in individual customer usage patterns, increased electric margin
      by
      $6.0 million. Revenues from the recovery of energy efficiency program costs
      increased $3.4 million compared to 2004. Changes in these revenues are
      substantially matched with corresponding changes in other operating expenses.
      An
      increase in fuel costs related to Iowa retail electric sales decreased electric
      retail gross margin by $37.2 million compared to 2004 due in part to the
      cost of replacement power as a result of the generating station outages
      mentioned below.





Sales
      of
      energy to other utilities, municipalities and marketers inside and outside
      of
      MidAmerican Energy’s delivery system are classified as wholesale. A change in
      the mix of higher-priced on-peak and lower-priced off-peak sales and a higher
      average cost of energy caused a decrease in the average electric wholesale
      margin per megawatt hour sold, reducing electric wholesale gross margin by
      $18.4 million compared to 2004. Additionally, a 9.5% decrease in wholesale
      sales volumes reduced electric wholesale gross margin by $11.0 million. The
      timing of planned generation outages, mainly for the Louisa Generating Station,
      and the loss of generating capacity at the Ottumwa Generating Station Unit
      No. 1 (“OGS Unit No. 1”), which experienced a failure of its step-up
      transformer on February 20, 2005, resulted in lost wholesale sales
      opportunities. OGS Unit No. 1 returned to service on May 3, 2005. An
      increase in electric retail sales also reduced the availability of competitively
      priced generation, contributing to the decrease in wholesale sales
      volumes.





38


Regulated
      Gas Gross Margin





2005
            
            2004Gross
                margin (in millions):Operating
                revenues
            
            $
            1,322.7
            
            $
            1,010.9Less
                cost of gas sold
            
            
            1,098.4
            
            
            790.0Gas
                gross margin
            
            $
            224.3
            
            $
            220.9Sales
                (000’s Dths):Retail
            
            
            76,942
            
            
            76,242Wholesale
            
            
            51,655
            
            
            46,630Total
            
            
            128,597
            
            
            122,872





Gas
      gross
      margin for 2005 increased $3.4 million compared to 2004.





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 32.8% compared to 2004 resulting in a
      $271.6 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.





2005
                vs. 2004(In
                millions)Change
                in cost of gas sold:Average
                cost per unit
            
            $
            271.6Sales
                volumes
            
            
            36.8Total
                change in cost of gas sold
            
            
            308.4Weather
            
            
            0.8Energy
                efficiency cost recovery
            
            
            2.5Customer
                growth
            
            
            3.2Other
                usage factors
            
            
            (3.9
            )Other
            
            
            0.8Total
                revenue variance
            
            $
            311.8





Overall
      weather conditions during the heating seasons of 2005 were relatively unchanged
      compared to 2004. MidAmerican Energy’s average number of gas retail customers
      increased 1.4% compared to 2004. Other gas usage factors, such as changes in
      individual customer usage patterns and reaction to historically high prices,
      decreased gas margin. Changes in revenues from the recovery of energy efficiency
      program costs are substantially matched with corresponding changes in other
      operating expenses. Total natural gas retail sales volumes increased 0.9%.





Regulated
      Operating Expenses





Other
      operating expenses increased $6.0 million compared to 2004 due to a
      $5.9 million increase in costs related to energy efficiency programs and a
      $5.6 million increase in health care benefits and pension costs. These
      increases were partially offset by a $6.0 million decrease in
      postretirement benefit expense compared to 2004 due to the impact of the
      Medicare Prescription Drug, Improvement and Modernization Act of 2003 and a
      plan
      amendment effective July 1, 2004. Increases in energy efficiency programs
      costs are substantially matched by increases in related electric and gas
      revenues.




39




Maintenance
      expenses for 2005 decreased $14.1 million compared to 2004 due principally
      to a $19.4 million decrease in steam generating maintenance, mostly as a
      result of additional preventive maintenance in 2004. The decrease was offset
      partially by a $3.3 million increase in other generating maintenance
      related to wind facilities and combustion turbines.





Depreciation
      and amortization expense for 2005 increased $2.7 million compared to 2004
      due to an $11.7 million increase in utility plant depreciation due in part
      to the second phase of the Greater Des Moines Energy Center and wind power
      facilities placed in service in December 2004, and wind power facilities placed
      in service in the third quarter of 2005. These and other increases in utility
      plant depreciation were partially offset by a decrease in utility plant
      depreciation that began in November 2004 as a result of a 20-year extension
      to
      the operating license for the Quad Cities Station. The increase in utility
      plant
      depreciation was partially offset by a $9.9 million decrease in regulatory
      expense related to a revenue sharing arrangement in Iowa due to lower Iowa
      electric equity returns. Refer to the “Utility Regulatory Matters” section for
      an explanation of the revenue sharing arrangement.





Nonregulated
      Gross Margin





2005
            
            2004(In
                millions)MidAmerican
                Energy -Nonregulated
                operating revenues
            
            $
            324.4
            
            $
            263.7Less
                nonregulated cost of sales
            
            
            290.9
            
            
            230.6Nonregulated
                gross margin
            
            $
            33.5
            
            $
            33.1MidAmerican
                Funding Consolidated -Nonregulated
                operating revenues
            
            $
            330.1
            
            $
            269.1Less
                nonregulated cost of sales
            
            
            292.5
            
            
            232.0Nonregulated
                gross margin
            
            $
            37.6
            
            $
            37.1





MidAmerican
      Energy’s nonregulated gross margin for 2005 increased $0.4 million compared
      to 2004. The following table presents the margins related to various
      nonregulated activities (in millions):





2005
            
            2004Nonregulated
                electric
            
            $
            12.9
            
            $
            16.8Nonregulated
                gas
            
            
            7.5
            
            
            7.2Income
                sharing arrangements under regulated gas tariffs
            
            
            5.6
            
            
            3.7Incentive
                gas supply procurement program award
            
            
            3.4
            
            
            2.4Other
            
            
            4.1
            
            
            3.0$
            33.5
            
            $
            33.1





Gross
      margin for nonregulated electric marketing services decreased due to a reduction
      in the margin per unit sold in 2005 compared to 2004, partially offset by an
      increase in related sales volumes. The margin per unit decreased in 2005
      compared to 2004 due to higher costs for wholesale energy and limited ability
      to
      pass such costs on to customers due to the level of bundled rates offered by
      the
      local utility companies. Nonregulated gas gross margin increased due to an
      increase in the margin per unit sold compared to 2004. A small decrease in
      nonregulated gas sales volumes was due in large part to the non-renewal of
      the
      sales contracts as a result of a related regulatory issue in Illinois. Refer
      to
“Utility Regulatory Matters” for a discussion of the issue.





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.




40





Non-Operating
      Income





MidAmerican
      Energy -





MidAmerican
      Energy’s non-operating income increased $7.3 million for 2005 compared to
      2004 due principally to a $5.5 million increase in income for capitalized
      allowance for equity funds used during construction as a result of an increase
      in construction work in progress compared to 2004.





MidAmerican
      Funding -





MidAmerican
      Funding’s other income for 2005 includes $13.3 million of gains from the
      sale of three non-strategic, passive investments. During 2005 and 2004,
      MidAmerican Funding received distributions totaling $1.2 million and
      $2.5 million, respectively, from several of its investments in energy
      projects and venture capital funds.





Other
      expense for 2005 includes write-downs of MidAmerican Funding’s investments in
      commercial passenger aircraft, which it accounts for as leveraged leases.
      MidAmerican Funding’s evaluation of its investments in these aircraft resulted
      in $15.6 million of pre-tax write-downs in 2005. The write-downs reflect a
      continued deterioration in the airline industry, including the bankruptcy
      filings of two major carriers during 2005. Other expense for 2004 includes
      losses totaling $1.7 million for write-downs related to two commercial
      passenger aircraft investments.





Fixed
      Charges





The
      increase in interest on long-term debt was due to interest on MidAmerican Energy
      long-term debt issuances of $350.0 million on October 1, 2004 and
      $300.0 million on November 1, 2005, offset partially by maturities of
      higher rate debt, totaling $90.5 million and $55.6 million in 2005 and
      2004, respectively. Other interest expense increased due to a higher balance
      of
      the Iowa revenue sharing liability. Allowance for borrowed funds increased
      due
      to increased utility construction expenditures. MidAmerican Energy expects
      to
      continue to record higher-than-normal allowance for borrowed funds used during
      construction through 2007 while the announced generating facilities are
      constructed.





Income
      Taxes





MidAmerican
      Energy -





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. 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.





In
      2005,
      MidAmerican Energy’s income taxes included $11.1 million of the production
      tax credits related to energy produced by its wind-powered generating
      facilities, the first of which were placed in service December 31,
      2004.





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





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




41




MidAmerican
      Funding -





A
      significant portion of MidAmerican Energy’s tax liability for the
      $8.5 million settled issue above was originally established in 1999 when
      MidAmerican Energy’s parent company, MHC Inc., was acquired by MidAmerican
      Funding. This change in estimate of an income tax uncertainty that resulted
      from
      a purchase business combination was accounted for as an adjustment to the
      remaining balance of goodwill attributable to the acquisition. Accordingly,
      in
      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. The net result
      of
      the reduction at MidAmerican Energy and the goodwill adjustment at MidAmerican
      Funding was a $3.8 million decrease in consolidated income tax expense for
      2004.






**Liquidity
      and Capital Resources**





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





As
      reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy’s net
      cash provided by operating activities was $560.0 million,
      $463.2 million and $523.5 million for 2006, 2005 and 2004,
      respectively. MidAmerican Funding’s net cash provided by operating activities
      was $515.3 million, $423.7 million and $493.6 million for 2006,
      2005 and 2004, respectively. The increase in cash provided by operating
      activities for 2006 compared to 2005 is due principally to improved earnings,
      a
      reduction in income taxes and interest paid and a number of working capital
      variances. The decrease in cash provided by operating activities for 2005
      compared to 2004 was principally due to an increase in income taxes paid as
      tax
      depreciation was unusually high due to benefits from bonus depreciation in
      2004.





Utility
      Construction Expenditures





MidAmerican
      Energy’s primary need for capital is utility construction expenditures. For
      2006, utility cash construction expenditures totaled $757.3 million,
      including Quad Cities Station nuclear fuel purchases. MidAmerican Energy’s
      capital requirements for 2007, which exclude the non-cash allowance for equity
      funds used during construction, are estimated to be approximately
      $926 million, which includes $375 million for the coal-fired and
      wind-powered generation projects discussed below, $150 million for
      emissions control equipment to address current and anticipated air quality
      regulations and $401 million for ongoing operational projects, including
      connections for new customers and facilities to accommodate load growth. Capital
      expenditure needs are reviewed regularly by management and may change
      significantly as a result of such reviews. MidAmerican Energy expects to meet
      these capital expenditures with cash flows from operations and the issuance
      of
      long-term debt.





MidAmerican
      Energy anticipates a continuing increase in demand for electricity from its
      regulated customers. To meet anticipated demand and ensure adequate electric
      generation in its service territory, MidAmerican Energy is currently
      constructing Council Bluffs Energy Center Unit No. 4 (“CBEC Unit 4”), a 790-MW
      (expected accreditation) super-critical-temperature, coal-fired generating
      plant. MidAmerican Energy will operate the plant and hold an undivided ownership
      interest as a tenant in common with the other owners of the plant. MidAmerican
      Energy’s current ownership interest is 60.67%, equating to 479 MW of output.
      Municipal, cooperative and public power utilities own the remainder, which
      is a
      typical ownership arrangement for large base-load plants in Iowa. The plant
      will
      provide service to regulated retail electricity customers. Wholesale sales
      may
      also be made from the plant to the extent the power is not immediately needed
      for regulated retail service. MidAmerican Energy has obtained regulatory
      approval to include the Iowa portion of the actual cost of CBEC Unit 4 in its
      Iowa rate base as long as the actual cost does not exceed the agreed cap that
      MidAmerican Energy has deemed to be reasonable. If the cap is exceeded,
      MidAmerican Energy has the right to demonstrate the prudence of the expenditures
      above the cap, subject to regulatory review. MidAmerican Energy expects to
      invest approximately $870 million in CBEC Unit 4, including transmission
      facilities and approximately $64 million of non-cash allowance for equity
      funds used during construction. Through December 31, 2006, MidAmerican
      Energy has invested $785.9 million in the plant, including
      $121.3 million for MidAmerican Energy’s share of deferred payments allowed
      by the construction contract and $49.2 million of non-cash allowance for
      equity funds used during construction and expects to pay approximately
      $191 million for CBEC Unit 4 cash construction costs in 2007.




42


On
      April 18, 2006, the IUB approved a settlement agreement between MidAmerican
      Energy and the Iowa Office of Consumer Advocate (“OCA”) regarding ratemaking
      principles for up to 545 MW (nameplate ratings) of wind-powered generation
      capacity in Iowa to be installed in 2006 and 2007. Generally speaking,
      accredited capacity ratings for wind-powered generation facilities are
      considerably less than the nameplate ratings due to the varying nature of wind.
      In the fourth quarter of 2006, MidAmerican Energy placed in service 99 MW
      (nameplate ratings) of wind-powered generation, and in June 2006, MidAmerican
      Energy entered into agreements to add an additional 123 MW (nameplate ratings)
      of wind-powered generation by the end of 2007. Refer to “Utility Regulatory
      Matters” below for more information regarding the rate aspects of the settlement
      agreement. MidAmerican Energy continues to pursue additional cost effective
      wind-powered generation.





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





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. Pending
      regulatory approvals, funding is expected to be reduced to $1.6 million annually
      beginning in 2007. The change in funding results from a recent evaluation of
      the
      funded status, estimated decommissioning costs and useful life of the plant.
      As
      of December 31, 2006, approximately 56.1% of the fair value of the trusts’
funds was invested in domestic common equity securities, 13.3% in domestic
      corporate debt and the remainder in investment grade municipal and U.S. Treasury
      bonds. Funding for Quad Cities Station nuclear decommissioning is reflected
      as
      depreciation expense in the Consolidated Statements of Operations. Future
      funding levels are subject to a variety of factors and are periodically
      reviewed.





43





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,
      2006, the material cash obligations of MidAmerican Energy and MidAmerican
      Funding (in millions).





Period
                Payments are Due2008-
            
            2010-
            
            AfterType
                of Obligation
            Total
            
            2007
            
            2009
            
            2011
            
            2011MidAmerican
                Energy:Long-term
                debt, excluding unamortized
              debt
                premium and discount, net
            $
            1,826.6
            
            $
            1.6
            
            $
            0.5
            
            $
            -
            
            $
            1,824.5Operating
                leases, easements and
              maintenance
                contracts (1)
            
            107.3
            
            
            12.8
            
            
            13.9
            
            
            7.2
            
            
            73.4Coal,
                electricity and natural gas contract
              commitments
                (1)
            
            652.6
            
            
            203.4
            
            
            200.6
            
            
            69.6
            
            
            179.0Deferred
                costs on construction contract (2)
            
            200.0
            
            
            200.0
            
            
            -
            
            
            -
            
            
            -Interest
                payments on long-term debt (3)
            
            2,035.0
            
            
            93.8
            
            
            193.3
            
            
            193.3
            
            
            1,554.64,821.5
            
            
            511.6
            
            
            408.3
            
            
            270.1
            
            
            3,631.5MidAmerican
                Funding parent:Long-term
                debt
            
            700.0
            
            
            -
            
            
            175.0
            
            
            200.0
            
            
            325.0Interest
                payments on long-term debt
            
            595.0
            
            
            47.1
            
            
            88.7
            
            
            65.3
            
            
            393.91,295.0
            
            
            47.1
            
            
            263.7
            
            
            265.3
            
            
            718.9Total
            $
            6,116.5
            
            $
            558.7
            
            $
            672.0
            
            $
            535.4
            
            $
            4,350.4





(1)
            The
                operating leases, easements and maintenance contracts, and coal,
                electricity and natural gas commitments are not reflected on the
                Consolidated Balance Sheets. Refer to Note (15) in Notes to
                Consolidated Financial Statements in Item 8 for a discussion of the
                nature of these commitments.(2)
            MidAmerican
                Energy is allowed to defer up to $200.0 million in payments to the
                contractor under its contract to build CBEC Unit 4. Refer to Note
                (15) in
                Notes to Consolidated Financial Statements in Item 8 for a discussion
                of this commitment. Approximately 39.3% of this commitment is expected
                to
                be funded by the joint owners of CBEC Unit 4.(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.





·
            Construction
                expenditures: Refer to the “Utility Construction Expenditures” section
                above.





·
            Residual
                guarantees on operating leases (see Note
                (15))





·
            Pension
                and postretirement plans (see Note
                (16))




44





Debt
      Redemption and Issuance





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





Debt
      Authorizations and Credit Facilities





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





MidAmerican
      Energy currently has the necessary authorizations from the Securities and
      Exchange Commission to issue up to $480.0 million of additional long-term
      securities; from the FERC to issue up to $600.0 million of additional
      long-term securities through November 30, 2008; and from the Illinois
      Commerce Commission (“ICC”) to issue up to $480.0 million of additional
      long-term debt securities through July 12, 2011.





In
      conjunction with the March 1999 merger, MidAmerican Energy committed to the
      IUB
      to use commercially reasonable efforts to maintain an investment grade rating
      on
      its long-term debt and to maintain its common equity level above 42% of total
      capitalization unless circumstances beyond its control result in the common
      equity level decreasing to below 39% of total capitalization. MidAmerican Energy
      must seek the approval of the IUB of a reasonable utility capital structure
      if
      MidAmerican Energy’s common equity level decreases below 42% of total
      capitalization, unless the decrease is beyond the control of MidAmerican Energy.
      MidAmerican Energy is also required to seek the approval of the IUB if
      MidAmerican Energy’s equity level decreases to below 39%, even if the decrease
      is due to circumstances beyond the control of MidAmerican Energy. If MidAmerican
      Energy’s common equity level were to drop below the required thresholds,
      MidAmerican Energy’s ability to issue debt could be restricted. As of
      December 31, 2006, MidAmerican Energy’s common equity ratio was 53.6%
      computed on a basis consistent with its commitment.





Other
      Financing Information





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





**Credit
      Ratings Risks**





Debt
      and
      preferred securities of MidAmerican Funding and MidAmerican Energy are rated
      by
      nationally recognized credit rating agencies. Assigned credit ratings are based
      on each rating agency’s assessment of MidAmerican Funding’s or MidAmerican
      Energy’s ability to, in general, meet the obligations of the debt or preferred
      securities issued by the rated company. The credit ratings are not a
      recommendation to buy, sell or hold securities, and there is no assurance that
      a
      particular credit rating will continue for any given period of time. As of
      February 3, 2007, MidAmerican Energy’s senior unsecured debt credit ratings
      were as follows: Fitch Ratings, “A/stable;” Moody’s Investor Service,
“A2/stable;” and Standard and Poor’s, “A-/stable.” Other than the energy supply
      and marketing agreements discussed below, neither MidAmerican Funding nor
      MidAmerican Energy has any credit agreements that require termination or a
      material change in collateral requirements or payment schedule in the event
      of a
      downgrade in the credit ratings of the respective company’s
      securities.




45




In
      conjunction with its risk management activities, MidAmerican Energy must meet
      credit quality standards as required by counterparties. In accordance with
      industry practice, master agreements that govern MidAmerican Energy’s energy
      supply and marketing activities either specifically require it to maintain
      investment grade credit ratings or provide the right for counterparties to
      demand “adequate assurances” in the event of a material adverse change in
      MidAmerican Energy’s creditworthiness. If one or more of MidAmerican Energy’s
      credit ratings decline below investment grade, MidAmerican Energy may be
      required to post cash collateral, letters of credit or other similar credit
      support to facilitate ongoing wholesale energy supply and marketing activities.
      As of December 31, 2006, MidAmerican Energy’s estimated potential
      collateral requirements totaled approximately $249 million. MidAmerican
      Energy’s potential collateral requirements could fluctuate considerably due to
      seasonality, market price volatility, and a loss of key MidAmerican Energy
      generating facilities or other related factors.




**Utility
      Regulatory Matters**





Rate
      Matters





Under
      a
      series of electric settlement agreements between MidAmerican Energy, the Iowa
      Office of Consumer Advocate (“OCA”) and other intervenors approved by the IUB,
      MidAmerican Energy has agreed not to seek a general increase in electric base
      rates to become effective prior to January 1, 2013, unless its Iowa
      jurisdictional electric return on equity in any year falls below 10%. As a
      party
      to the settlement agreements, the OCA has agreed not to seek any decrease in
      MidAmerican Energy’s Iowa electric base rates prior to
      January 1, 2013. Illinois bundled electric rates were frozen until
      2007, subject to certain exceptions allowing for increases, at which time
      bundled rates may be increased or decreased by the ICC. Refer to Note (14)
      of
      MidAmerican Energy’s Notes to Consolidated Financial Statements for further
      discussion of these rate matters.





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





In
      2004,
      the ICC issued a declaratory ruling finding that MidAmerican Energy’s
      competitive sales of gas to retail customers within the state of Illinois were
      not authorized under the Illinois Public Utilities Act. In its ruling, the
      ICC
      left for purchased gas adjustment reconciliation proceedings issues related
      to
      the financial implications of these sales. In its testimony in such proceedings
      for the years 2001 and 2002, the ICC staff had expressed its position that
      MidAmerican Energy must reduce gas costs recovered from Illinois regulated
      gas
      customers through the purchased gas adjustment. “Gross margin” for the purpose
      of this adjustment 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. Under Illinois law, it could have been possible
      to
      reopen proceedings as far back as 1996 to restate reconciliation results
      consistent with staff’s position. On January 24, 2007, the ICC approved
      final orders which conclude the 2001 and 2002 PGA reconciliation proceedings;
      interim orders, which conclude consideration of the competitive gas issue for
      2003 and 2004, and dismissed a remedies proceeding that sought to impose
      penalties against MidAmerican for its competitive gas business prior to
      January 1, 2005, the effective date of SB2525, an Illinois law that allows
      MidAmerican Energy to continue its competitive gas business in Illinois subject
      to ICC requirements for separation of the function from regulated operations.
      An
      integral part of the orders issued by the ICC is a settlement agreement between
      all parties to the proceedings that requires MidAmerican Energy to credit to
      its
      regulated gas customers, through the purchased gas adjustment clause,
      $5.1 million as soon as possible. The credit was included in the February
      2007 PGA. In addition to agreeing to submission of the orders mentioned above,
      the settlement agreement binds the parties to not seek reopening of any prior
      final proceeding in which the issue of MidAmerican Energy’s competitive gas
      business could be raised.




46




In
      November 2006, the ICC approved a proposal to eliminate MidAmerican Energy’s
      monthly fuel adjustment clause. Effective January 1, 2007, Illinois base
      rates have been adjusted to include recoveries at average 2004/2005 cost levels.
      The elimination of the fuel adjustment clause exposes MidAmerican Energy to
      monthly market price changes for fuel and purchased power costs in Illinois,
      with rate case approval required for any base rate changes. MidAmerican Energy
      may not petition for reinstatement of the Illinois fuel adjustment clause until
      November 2011.





Transmission
      Developments





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





On
      February 16, 2007, the FERC adopted a final rule designed to strengthen the
      proforma OATT by providing greater specificity and increasing transparency.
      The
      most significant revisions to the pro forma OATT relate to the development
      of
      more consistent methodologies for calculating available transfer capability,
      changes to the transmission planning process, changes to the pricing of certain
      generator and energy imbalances to encourage efficient scheduling behavior
      and
      to exempt intermittent generators, and changes regarding long-term
      point-to-point transmission service, including the addition of conditional
      firm
      long-term point-to-point transmission service, and generation redispatch. As
      transmission providers with OATT’s on file with FERC, MidAmerican Energy
      will be required to comply with the requirements of the new rule. Certain
      details related to the rule, such as the precise methodology that will be used
      to calculate available transfer capability, will be determined prospectively
      and
      thus, it is difficult to make a precise determination of the effect of this
      new
      rule on MidAmerican Energy’s transmission operations. In addition, it is
      difficult to determine the effect of this new rule once fully implemented on
      the
      availability and price of transmission service from the perspective of the
      wholesale marketing function. However, at least on a preliminary basis, the
      rule
      is not anticipated to have a significant impact on MidAmerican Energy’s
      financial results.





Electric
      Market Developments





On
      July 13, 2004, the FERC issued an order requiring MidAmerican Energy to
      conduct a study to determine whether MidAmerican Energy or its affiliates
      possess generation market power. MidAmerican Energy is being required to show
      the absence of generation market power in order to be allowed to continue to
      sell wholesale electric power at market-based rates. The FERC order is intended
      to have MidAmerican Energy conform to what has become the FERC’s general
      practice for utilities given authorization to make wholesale market-based sales.
      Under this general practice, utilities authorized to make market-based electric
      sales must submit a new market power study to the FERC every three years.
      MidAmerican Energy filed the required study on October 29, 2004. On
      June 1, 2005, the FERC issued an order setting for investigation the
      reasonableness of MidAmerican Energy’s market-based rates within its control
      area. The order also terminated the previously established November 1,
      2004, refund date and instead required that market-based sales made by
      MidAmerican Energy within its control area beginning August 7, 2005, be
      subject to refund until the matter is resolved. The FERC also required
      MidAmerican Energy to file additional information by July 1, 2005, and
      August 1, 2005. In its August 1, 2005 filing, MidAmerican Energy filed
      a proposed cost-based sales tariff (“CBST”) applicable to sales made within its
      control area to replace its market-based sales tariff. On March 17, 2006,
      the FERC issued an order (“March 17 Order”) accepting MidAmerican Energy’s
      commitment not to make sales using market-based rates in its control area but
      rejected the proposed applicable tariff language. The FERC directed MidAmerican
      Energy to file revised tariff language by April 17, 2006. MidAmerican
      Energy made such filing together with a request for clarification, or in the
      alternative, rehearing (“Request for Clarification”) of the March 17 Order.
      On November 9, 2006, the FERC approved a settlement agreement among
      MidAmerican Energy and the other parties to the proceeding for rates to be
      charged under the CBST and ordered that refunds be paid to customers within
      30
      days for certain sales transactions in the control area on or after
      August 7, 2005. MidAmerican Energy timely made the refunds of an immaterial
      amount. Any actual remaining refund will depend upon the FERC’s ruling on the
      Request for Clarification and the applicability of the CBST to certain sales
      made within the control area for delivery outside the control area. MidAmerican
      Energy estimates that its maximum potential refund obligation is
      $9.2 million for the period August 7, 2005 through December 31,
      2006. MidAmerican Energy does not believe at this time that the ultimate outcome
      of this issue will have a material impact on its financial results.




47




**Environmental
      Matters**





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





The
      EPA
      has in recent years implemented and proposed more stringent national ambient
      air
      quality standards. Additionally, legislation is pending, and could be proposed
      in the future, that may impact MidAmerican Energy if enacted. MidAmerican Energy
      has implemented a planning process that forecasts the site-specific controls
      and
      actions that may be required to meet emissions reductions as promulgated by
      the
      EPA. The plan allows MidAmerican Energy to more effectively manage its
      expenditures required to comply with emissions standards. On April 1, 2006,
      MidAmerican Energy submitted to the IUB an updated plan, as required every
      two
      years by Iowa law, which increased its estimate of required expenditures.
      MidAmerican Energy currently estimates that the incremental capital expenditures
      for emission control equipment to comply with air quality requirements will
      total approximately $540 million for January 1, 2007, through
      December 31, 2015. Additionally, MidAmerican Energy expects to incur
      significant incremental operating costs in conjunction with the utilization
      of
      the emissions control equipment. Estimates of the environmental capital and
      operating requirements may change significantly at any time as a result of,
      among other factors, changes in related regulations, prices of products used
      to
      meet the requirements and management’s strategies for achieving compliance with
      the regulations. Refer to Item 1 - Business for further discussion of air
      quality standards affecting MidAmerican Energy.





On
      February 16, 2005, the Kyoto Protocol became effective, requiring 35
      developed countries to reduce greenhouse gas emissions by approximately 5%
      between 2008 and 2012. While the United States did not ratify the protocol,
      the
      ratification and implementation of its requirements in other countries has
      resulted in increased attention on the climate change issue in the United
      States. Congressional leadership in the 110 th Congress
      has made climate legislation a priority; many congressional observers expect
      to
      see the passage of climate change legislation within the next several
      years.





While
      debate continues at the national level over the direction of domestic climate
      policy, several states are developing state-specific or regional legislative
      initiatives to reduce greenhouse gas emissions. The outcome of climate change
      litigation and federal and state initiatives cannot be determined at this time;
      however, adoption of stringent limits on greenhouse gas emissions could
      significantly impact MidAmerican Energy’s fossil-fueled facilities and,
      therefore, its results of operations.





**Generating
      Capability**





On
      July 31, 2006, retail customer usage of electricity caused a new record
      hourly peak demand of 4,136 MW on MidAmerican Energy’s electric system, 137 MW
      greater than the previous record set in 2005. MidAmerican Energy is
      interconnected with Iowa utilities and utilities in neighboring states.
      MidAmerican Energy is also a party to an electric generation reserve sharing
      pool and regional transmission group administered by the Mid-Continent Area
      Power Pool (“MAPP”). Each MAPP generation reserve participant is required to
      maintain for emergency purposes a net generating capability reserve of at least
      15% above its system peak demand on a 12-month rolling basis. MidAmerican
      Energy’s reserve margin at peak demand for 2006 was approximately
      22%.





MidAmerican
      Energy believes it has adequate electric capacity reserve through 2009,
      including capacity provided by the generating projects discussed in the “Utility
      Construction Expenditures” section 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.




48




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, and
      beginning in 2007, Illinois. Although MidAmerican Energy believes it has
      sufficient generation under typical operating conditions for its retail electric
      needs, a loss of adequate generation by MidAmerican Energy requiring the
      purchase of replacement power at a time of high market prices could subject
      MidAmerican Energy to losses on its energy sales.




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





All
      of
      the coal-fired generating stations operated by MidAmerican Energy are fueled
      by
      low-sulfur, western coal from the Powder River Basin. MidAmerican Energy’s coal
      supply portfolio includes multiple suppliers and mines under short-term and
      multi-year agreements of varying quantities. MidAmerican Energy’s coal supply
      portfolio has 100% of its expected 2007 requirements under fixed-price
      contracts. MidAmerican Energy regularly monitors the western coal market,
      looking for opportunities to enhance its coal supply portfolio. Well-publicized
      operational delays in rail transportation out of the Powder River Basin during
      2005 and 2006 have resulted in the reduction of coal inventories below targeted
      ranges. MidAmerican Energy believes the transportation issues have largely
      been
      resolved and that its coal inventories will be restored to their target ranges
      during 2007. Additional information regarding MidAmerican Energy’s coal supply
      contracts is included in Note (15) of Notes to Consolidated Financial Statements
      in Item 8.





**New
      Accounting Pronouncements**




For
        a
        discussion of new accounting pronouncements affecting MidAmerican Energy
        and
        MidAmerican Funding, refer to Note (2) of Notes to Consolidated financial
        statements in Item 8.





**Critical
      Accounting Policies and
      Estimates**





Certain
      accounting policies require management to make estimates and judgments
      concerning transactions that will be settled in the future. Amounts recognized
      in the financial statements from such estimates are necessarily based on
      numerous assumptions involving varying and potentially significant degrees
      of
      judgment and uncertainty. Accordingly, the amounts currently reflected in the
      financial statements will likely increase or decrease in the future as
      additional information becomes available.





*Accounting
      for the Effects of Certain Types of Regulation*





MidAmerican
      Funding and MidAmerican Energy prepare their financial statements in accordance
      with the provisions of SFAS No. 71, “Accounting for the Effects of Certain
      Types of Regulation” (“SFAS No. 71”) which differs in certain respects from the
      application of accounting principles generally accepted in the United States
      of
      America (“GAAP”) by nonregulated businesses. In general, SFAS No. 71 recognizes
      that accounting for rate-regulated enterprises should reflect the economic
      effects of regulation. As a result, a regulated entity is required to defer
      the
      recognition of costs or income if it is probable that, through the rate-making
      process, there will be a corresponding increase or decrease in future rates.
      Accordingly, MidAmerican Funding and MidAmerican Energy have deferred certain
      costs and income that will be recognized in earnings over various future
      periods.





Management
      continually evaluates the applicability of SFAS No. 71 and assesses whether
      its
      regulatory assets are probable of future recovery by considering factors such
      as
      a change in the regulator’s approach to setting rates from cost-based rate
      making to another form of regulation, other regulatory actions or the impact
      of
      competition which could limit MidAmerican Energy’s ability to recover its costs.
      Based upon this continual assessment, management believes the application of
      SFAS No. 71 continues to be appropriate and its existing regulatory assets
      are
      probable of recovery. The assessment reflects the current political and
      regulatory climate at both the state and federal levels and is subject to change
      in the future. If it becomes probable that these costs will not be recovered,
      the assets and liabilities would be written off and recognized in operating
      income. Total regulatory assets were $273.2 million and total regulatory
      liabilities were $989.0 million as of December 31, 2006. Refer to Note
      6 of Notes to Consolidated Financial Statements included in Item 8 for
      additional information regarding regulatory assets and liabilities.




49




*Goodwill*





MidAmerican
      Funding’s Consolidated Balance Sheet as of December 31, 2006, includes
      goodwill from the acquisition of MHC Inc. totaling $1.3 billion. Goodwill
      is allocated to each reporting unit and is tested for impairment using a variety
      of methods, principally discounted projected future net cash flows, at least
      annually and impairments, if any, are charged to earnings. MidAmerican Funding
      completed its annual review as of October 31. A significant amount of
      judgment is required in performing goodwill impairment tests. Key assumptions
      used in the testing include, but are not limited to, the use of an appropriate
      discount rate and estimated future cash flows. Estimated future cash flows
      are
      impacted by, among other factors, growth rates, changes in regulations and
      rates, ability to renew contracts and estimates of future commodity prices.
      In
      estimating cash flows, MidAmerican Funding incorporates current market
      information as well as historical factors.





*Accrued
      Pension and Postretirement Expense*





MidAmerican
      Energy sponsors defined benefit pension and other postretirement benefit plans
      that cover substantially all of the employees of MidAmerican Energy Holdings
      and
      its domestic energy subsidiaries, other than PacifiCorp. Effective with the
      adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
      Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,
      and
      132(R)” as of December 31, 2006, the funded status of defined benefit
      pension and postretirement plans must be recognized in the balance sheet. Funded
      status is the fair value of plan assets minus the benefit obligation as of
      the
      measurement date. As of December 31, 2006, MidAmerican Energy recognized an
      asset totaling $66.6 million for the over-funded status and a liability
      totaling $37.7 million for the under-funded status of MidAmerican Energy’s
      defined benefit other postretirement benefit plans.





The
      expense and benefit obligations relating to these pension and other
      postretirement benefit plans are based on actuarial valuations. Inherent in
      these valuations are key assumptions, including discount rates, expected returns
      on plan assets, and health care cost trend rates. These actuarial assumptions
      are reviewed annually and modified as appropriate. MidAmerican Energy believes
      that the assumptions utilized in recording obligations under the plans are
      reasonable based on prior experience, market conditions and the advice of plan
      actuaries. Refer to Note (16) of the Consolidated Financial Statements in Item
      8
      for disclosures about MidAmerican Energy’s pension and other postretirement
      benefit plans, including key assumptions used to calculate the funded status
      and
      net periodic cost for these plans as of and for the year ended December 31,
      2006.





In
      establishing its assumption as to the expected return on assets, MidAmerican
      Energy reviews the expected asset allocation and develops return assumptions
      for
      each asset class based on historical performance and independent advisors’
forward-looking views of the financial markets. Pension and other postretirement
      benefit expenses increase as the expected rate of return on retirement plan
      and
      other postretirement benefit plan assets decreases. MidAmerican Energy regularly
      reviews its actual asset allocations and periodically rebalances its investments
      to its targeted allocations when considered appropriate.





MidAmerican
      Energy chooses a discount rate based upon high quality fixed-income investment
      yields in effect as of the measurement date. The pension and other
      postretirement benefit liabilities, as well as expenses, increase as the
      discount rate is reduced.





MidAmerican
      Energy chooses a health care cost trend rate that reflects the near and
      long-term expectations of increases in medical costs and corresponds to the
      expected benefit payment periods. The health care cost trend rate gradually
      declines to 5.00% by 2010 at which point the rate is assumed to remain constant. Refer
      to
      Note (16) of Notes to Consolidated Financial Statements included in Item 8
      for
      health care cost trend rate sensitivity disclosures.




50




The
      actuarial assumptions used may differ materially from period to period due
      to
      changing market and economic conditions. These differences may result in a
      significant impact to the amount of pension and other postretirement benefit
      expense, assets and liabilities recorded. If changes were to occur for the
      following assumptions, the approximate effect on the financial statements of
      the
      total plan before allocations to affiliates would be as follows (in thousands):





Other
                PostretirementPension
                Plans
            
            Benefit
                Plans+0.5%
            
            -0.5%
            
            +0.5%
            
            -0.5%Effect
                on December 31, 2006, benefit obligations:Discount
                rate
            $
            (34,377
            )
            $
            37,574
            
            $
            (13,570
            )
            $
            14,936Effect
                on periodic benefit cost:Discount
                rate
            
            (980
            )
            
            1,022
            
            
            (879
            )
            
            830Expected
                return on assets
            
            (2,746
            )
            
            2,746
            
            
            (740
            )
            
            740





A
      variety
      of factors, including the plan funding practices of MidAmerican Energy, have
      an
      affect on the funded status of the plans. The Pension Protection Act of 2006
      imposed generally more stringent funding requirements for defined benefit
      pension plans, particularly for those significantly underfunded, and allowed
      for
      greater tax deductible contributions to such plans than previous rules permitted
      under the Employee Retirement Income Security Act. As a result of the Pension
      Protection Act of 2006, MidAmerican Energy does not anticipate any significant
      changes to the amount of funding previously anticipated through 2007; however,
      depending upon a variety of factors that impact the funded status of the plan,
      including actual asset returns, discount rates and plan changes, it may be
      required to accelerate contributions to its pension plans for periods after
      2007, and there may be more volatility in annual contributions than historically
      experienced, which could have a material impact on financial
      results.





*Income
      Taxes*





In
      determining MidAmerican Energy’s and MidAmerican Funding’s tax liabilities,
      management is required to interpret complex tax laws and regulations.
      MidAmerican and Energy and MidAmerican Funding are subject to continuous
      examinations by federal, state and local tax authorities that may give rise
      to
      different interpretations of these complex laws and regulations. Due to the
      nature of the examination process, it generally takes years before these
      examinations are completed and these matters are resolved. The Internal Revenue
      Service has closed examination of MidAmerican Energy and MidAmerican Funding
      through 2001. Although the ultimate resolution of their federal and state tax
      examinations is uncertain, each believes it has made adequate provisions for
      its
      tax positions, and the aggregate amount of any additional tax liabilities that
      may result from these examinations, if any, will not have a material adverse
      affect on MidAmerican Energy’s or MidAmerican Funding’s financial results.





MidAmerican
      Energy is required to pass income tax benefits related to certain accelerated
      tax depreciation and other property-related basis differences on to its
      customers in Iowa. These amounts were recognized as regulatory assets, which
      totaled $164.8 million and $146.0 million as of December 31, 2006
      and 2005, respectively, and will be included in rates when the temporary
      differences reverse. Management believes the existing regulatory assets are
      probable of recovery. If it becomes no longer probable that these costs will
      be
      recovered, the assets would be written-off and recognized in
      earnings.





MidAmerican
      Funding and MidAmerican Energy recognize deferred tax assets and liabilities
      based on differences between the financial statement and tax bases of assets
      and
      liabilities using estimated tax rates in effect for the year in which the
      differences are expected to reverse.




51




*Revenue
      Recognition - Unbilled Revenue*





Revenue
      from electric customers is recognized as electricity is delivered to customers
      and includes amounts for services rendered. Revenue from the sale,
      transportation and distribution of natural gas is recognized when either the
      service is provided or the product is delivered.





For
      MidAmerican Energy, the determination of sales to individual customers is based
      on the reading of their meters, which is performed on a systematic basis
      throughout the month. At the end of each month, MidAmerican Energy records
      unbilled revenues representing an estimate of the amount customers will be
      billed for energy provided between the meter-reading dates and the end of that
      month. This estimate is reversed in the following month and actual revenue
      is
      recorded based on subsequent meter readings.





The
      monthly unbilled revenues of MidAmerican Energy are determined by the estimation
      of unbilled energy provided during the period, the assignment of unbilled energy
      provided to customer classes and the average rate per customer class. Factors
      that can impact the estimate of unbilled energy provided include, but are not
      limited to, seasonal weather patterns, historical trends, line losses, economic
      impacts and composition of customer classes. Unbilled revenues were
      $94.3 million as of December 31, 2006.





**Item
      7A.**  **Quantitative
      and Qualitative Disclosures About Market Risk**





MidAmerican
      Energy’s Consolidated Balance Sheets include assets and liabilities whose fair
      values are subject to market risks. MidAmerican Energy’s significant market
      risks are primarily associated with commodity prices and interest rates and
      are
      addressed below. MidAmerican Energy is also subject to credit risk related
      to
      its wholesale energy marketing activities, as discussed below. Refer to Note
      (11) of Notes to Consolidated Financial Statements in Item 8 for additional
      information regarding MidAmerican Energy’s accounting for derivative contracts.





Commodity
      Price Risk





MidAmerican
      Energy is subject to significant commodity risk. Exposures include variations
      in
      the price of wholesale electricity that is purchased and sold, fuel costs to
      generate electricity, and natural gas supply for regulated retail gas customers.
      Electricity and natural gas prices are subject to wide price swings as demand
      responds to, among many other items, changing weather, limited storage,
      transmission and transportation constraints, and lack of alternative supplies
      from other areas. To mitigate a portion of the risk, MidAmerican Energy uses
      derivative instruments, including forwards, futures, options and other
      over-the-counter agreements, to effectively secure future supply or sell future
      production at fixed prices. The settled cost of these contracts is generally
      recovered from customers in regulated rates. Accordingly, the net unrealized
      gains and losses associated with interim price movements on contracts that
      are
      accounted for as derivatives, and amounts that are probable of recovery in
      retail rates, are recorded as regulatory net assets or liabilities. Financial
      results may be negatively impacted if the costs of wholesale electricity, fuel
      and or natural gas are higher than what is permitted to be recovered in
      regulated retail rates.


MidAmerican
      Energy also uses futures, options and swap agreements to economically hedge
      gas
      and electric commodity prices for physical delivery to nonregulated customers.
      MidAmerican Energy does not engage in a material amount of proprietary trading
      activities.





The
      table
      that follows summarizes MidAmerican Energy’s commodity risk on energy derivative
      contracts as of December 31, 2006, and shows the effects of a hypothetical
      10% increase and a 10% decrease in market prices as of that date. The selected
      hypothetical change does not reflect what could be considered the best or worst
      case scenarios (in millions):




52







Fair
                Value
            
            Hypothetical
                Price Change
            
            Estimated
                Fair Value after Hypothetical Change in PriceAs
                of December 31, 2006
            $
            (42.2
            )
            
            10%
                increase
            
            $
            (31.1
            )10%
                decrease
            
            $
            (53.4
            )





Interest
      Rate Risk





MidAmerican
      Energy -





As
      of
      December 31, 2006, MidAmerican Energy had fixed-rate long-term debt
      totaling $1.71 billion with a fair value of $1.72 billion. Because of
      their fixed interest rates, these instruments 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
      $101 million if interest rates were to increase by 10% from their levels at
      December 31, 2006. Comparatively, as of December 31, 2005, MidAmerican
      Energy had fixed-rate long-term debt totaling $1.52 billion with a fair
      value of $1.56 billion. The fair value of these instruments would have
      decreased by approximately $78 million if interest rates had increased by
      10% from their levels at December 31, 2005. 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, 2006 and 2005, 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 as of December 31, 2006. The carrying
      value of the long-term floating rate obligations as of December 31, 2006,
      approximated fair value. If the floating interest rates were to increase by
      10%
      from December 31, levels, it would not have a material effect on
      MidAmerican Energy’s interest expense for either year.





MidAmerican
      Funding -





As
      of
      December 31, 2006, MidAmerican Funding had fixed-rate long-term debt
      totaling $700 million with a fair value of $754 million. Because of
      their fixed interest rates, these instruments 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
      $30 million if interest rates were to increase by 10% from their levels at
      December 31, 2006. Comparatively, as of December 31, 2005, MidAmerican
      Funding had fixed-rate long-term debt totaling $700 million with a fair
      value of $757 million. The fair value of these instruments would have
      decreased by approximately $32 million if interest rates had increased by
      10% from their levels at December 31, 2005. 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.




53




Credit
      Risk





MidAmerican
      Energy extends unsecured credit to other utilities, energy marketers, financial
      institutions and certain commercial and industrial end-users in conjunction
      with
      wholesale energy marketing 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, 2006, 82.6% of MidAmerican Energy’s credit
      exposure, net of collateral, from wholesale operations was with counterparties
      having “investment grade” credit ratings from Moody’s or Standard & Poor’s,
      while an additional 14.9% of MidAmerican Energy’s credit exposure, net of
      collateral, from wholesale operations was with counterparties having financial
      characteristics deemed equivalent to “investment grade” by MidAmerican Energy
      based on internal review. MidAmerican Energy had credit exposure to a single
      counterparty of 19.1% of aggregate credit exposure, net of collateral, to all
      wholesale counterparties as of December 31, 2006. The counterparty has
      investment grade credit ratings from both Moody’s and Standard & Poor’s, and
      MidAmerican Energy is not aware of any factors that would likely result in
      a
      downgrade of the counterparty’s credit ratings to below investment grade over
      the remaining term of transactions outstanding as of December 31,
      2006.




MidAmerican
      Energy’s credit exposure with respect to wholesale natural gas, electricity, and
      derivatives transactions is summarized below as of December 31, 2006
      (dollars in thousands).





%
                ofCredit
                Rating Equivalent
            
            Credit
            
            Collateral
            
            Credit
                Exposure,
            
            Credit
                Exposure,(Standard
                & Poor’s/Moody’s)
            
            Exposure
            
            Held
            
            Net
                of Collateral
            
            Net
                of CollateralAA-/Aa3
                and above
            
            $
            12,184
            
            $
            -
            
            $
            12,184
            
            
            26.2
            %A-/A3
                to A+/A1
            
            
            9,924
            
            
            -
            
            
            9,924
            
            
            21.3BBB-/Baa3
                to BBB+/Baa1
            
            
            16,353
            
            
            -
            
            
            16,353
            
            
            35.1BB-/Ba3
                to BB+/Ba1
            
            
            907
            
            
            -
            
            
            907
            
            
            2.0B+/B1
                or lower
            
            
            3,631
            
            
            4,500
            
            
            -
            
            
            -Unrated
            
            
            11,258
            
            
            7,150
            
            
            7,180
            
            
            15.4Total
                credit exposure
            
            $
            54,257
            
            $
            11,650
            
            $
            46,548
            
            
            100.0
            %






54




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





MidAmerican
        Energy Company and Subsidiary
 
 
 Report
                  of Independent Registered Public
                  Accounting Firm
              56Consolidated
                  Balance Sheets
              57Consolidated
                  Statements of
                  Operations
              58Consolidated
                  Statements of Comprehensive
                  Income
              59Consolidated
                  Statements of Cash Flows
              60Consolidated
                  Statements of
                  Capitalization
              61Consolidated
                  Statements of Retained
                  Earnings
              62Notes
                  to Consolidated Financial
                  Statements
              63MidAmerican
                  Funding, LLC and SubsidiariesReport
                  of Independent Registered Public
                  Accounting Firm
              92Consolidated
                  Balance Sheets
              93Consolidated
                  Statements of
                  Operations
              94Consolidated
                  Statements of Comprehensive
                  Income
              95Consolidated
                  Statements of Cash
                  Flows
              96Consolidated
                  Statements of
                  Capitalization
              97Consolidated
                  Statements of Retained
                  Earnings
              98Notes
                  to Consolidated Financial
                  Statements
              99
 
 55





**REPORT
      OF 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 subsidiary (the “Company”)
      as of December 31, 2006 and 2005, and the related consolidated statements
      of operations, comprehensive income, cash flows and retained earnings for each
      of the three years in the period ended December 31, 2006. Our audits also
      included the 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included 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 subsidiary
      as
      of December 31, 2006 and 2005, and the results of their operations and
      their cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America. Also, in our opinion, such 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 2 to the consolidated financial statements, the Company
      adopted Statement of Financial Accounting Standards No. 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)”, as of
      December 31, 2006.





/s/
      Deloitte & Touche LLP





Des
      Moines, Iowa


February
      27, 2007




56




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


(In
      thousands)





**As
                of December 31,****2006**
            
            **2005****ASSETS****Utility
                Plant, Net**Electric
            
            $
            6,366,054
            
            $
            5,933,387Gas
            
            
            1,031,341
            
            
            992,8347,397,395
            
            
            6,926,221Accumulated
                depreciation and amortization
            
            
            (3,261,001
            )
            
            (3,096,933
            )4,136,394
            
            
            3,829,288Construction
                work in progress
            
            
            866,677
            
            
            596,4585,003,071
            
            
            4,425,746**Current
                Assets**Cash
                and cash equivalents
            
            
            8,765
            
            
            70,914Short-term
                investments
            
            
            15,000
            
            
            25,425Receivables,
                less allowances of $9,565 and $10,872, respectively
            
            
            393,504
            
            
            463,630Inventories
            
            
            113,343
            
            
            84,923Other
            
            
            163,192
            
            
            60,921693,804
            
            
            705,813**Investments
                and Nonregulated Property, Net**
            
            
            409,533
            
            
            359,690**Regulatory
                Assets**
            
            
            273,242
            
            
            237,201**Other
                Assets**
            
            
            129,943
            
            
            135,687**Total
                Assets**
            
            $
            6,509,593
            
            $
            5,864,137**CAPITALIZATION
                AND LIABILITIES****Capitalization**Common
                shareholder’s equity
            
            $
            1,950,779
            
            $
            1,744,882MidAmerican
                Energy preferred securities
            
            
            30,329
            
            
            30,329Long-term
                debt, excluding current portion
            
            
            1,819,389
            
            
            1,471,2513,800,497
            
            
            3,246,462**Current
                Liabilities**Current
                portion of long-term debt
            
            
            1,620
            
            
            160,509Accounts
                payable
            
            
            497,672
            
            
            359,496Taxes
                accrued
            
            
            99,150
            
            
            84,122Interest
                accrued
            
            
            32,407
            
            
            14,488Other
            
            
            171,391
            
            
            106,337802,240
            
            
            724,952**Other
                Liabilities**Deferred
                income taxes
            
            
            471,369
            
            
            460,056Investment
                tax credits
            
            
            40,569
            
            
            43,962Asset
                retirement obligations
            
            
            173,204
            
            
            191,117Regulatory
                liabilities
            
            
            989,044
            
            
            763,155Other
            
            
            232,670
            
            
            434,4331,906,856
            
            
            1,892,723**Total
                Capitalization and Liabilities**
            
            $
            6,509,593
            
            $
            5,864,137





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




57




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Operating
                Revenues**Regulated
                electric
            
            $
            1,779,482
            
            $
            1,513,239
            
            $
            1,421,709Regulated
                gas
            
            
            1,111,635
            
            
            1,322,717
            
            
            1,010,909Nonregulated
            
            
            556,814
            
            
            324,381
            
            
            263,7353,447,931
            
            
            3,160,337
            
            
            2,696,353**Operating
                Expenses**Regulated:Cost
                of fuel, energy and capacity
            
            
            672,040
            
            
            476,618
            
            
            404,615Cost
                of gas sold
            
            
            888,470
            
            
            1,098,410
            
            
            789,975Other
                operating expenses
            
            
            401,958
            
            
            380,811
            
            
            374,810Maintenance
            
            
            156,199
            
            
            150,740
            
            
            164,821Depreciation
                and amortization
            
            
            273,565
            
            
            267,628
            
            
            264,952Property
                and other taxes
            
            
            97,199
            
            
            95,064
            
            
            92,6372,489,431
            
            
            2,469,271
            
            
            2,091,810Nonregulated:Cost
                of sales
            
            
            522,108
            
            
            290,890
            
            
            230,567Other
            
            
            15,217
            
            
            19,052
            
            
            17,580537,325
            
            
            309,942
            
            
            248,147Total
                operating expenses
            
            
            3,026,756
            
            
            2,779,213
            
            
            2,339,957**Operating
                Income**
            
            
            421,175
            
            
            381,124
            
            
            356,396**Non-Operating
                Income**Interest
                and dividend income
            
            
            8,965
            
            
            6,016
            
            
            4,401Allowance
                for equity funds
            
            
            37,241
            
            
            24,433
            
            
            18,949Other
                income
            
            
            9,658
            
            
            7,128
            
            
            6,340Other
                expense
            
            
            (2,988
            )
            
            (4,198
            )
            
            (3,615
            )52,876
            
            
            33,379
            
            
            26,075**Fixed
                Charges**Interest
                on long-term debt
            
            
            93,368
            
            
            80,485
            
            
            71,949Other
                interest expense
            
            
            11,846
            
            
            8,409
            
            
            5,728Allowance
                for borrowed funds
            
            
            (16,109
            )
            
            (10,544
            )
            
            (7,816
            )89,105
            
            
            78,350
            
            
            69,861**Income
                Before Income Taxes**
            
            
            384,946
            
            
            336,153
            
            
            312,610**Income
                Taxes**
            
            
            118,270
            
            
            114,856
            
            
            102,155**Net
                Income**
            
            
            266,676
            
            
            221,297
            
            
            210,455**Preferred
                Dividends**
            
            
            1,247
            
            
            1,247
            
            
            1,245**Earnings
                on Common Stock**
            
            $
            265,429
            
            $
            220,050
            
            $
            209,210





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




58





**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE
      INCOME**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Earnings
                on Common Stock**
            
            $
            265,429
            
            $
            220,050
            
            $
            209,210**Other
                Comprehensive Income (Loss)**Unrealized
                gains (losses) on cash flow hedges:Unrealized
                gains (losses) during period-Before
                income taxes
            
            
            (22,402
            )
            
            -
            
            
            -Income
                tax benefit
            
            
            8,912
            
            
            -
            
            
            -(13,490
            )
            
            -
            
            
            -Less
                realized gains (losses) reflected in net income
              during
                period-Before
                income taxes
            
            
            (2,215
            )
            
            -
            
            
            682Income
                tax (expense) benefit
            
            
            893
            
            
            -
            
            
            (283
            )(1,322
            )
            
            -
            
            
            399Net
                unrealized gains (losses)
            
            
            (12,168
            )
            
            -
            
            
            (399
            )Minimum
                pension liability adjustment:Before
                income taxes
            
            
            (22
            )
            
            (4,512
            )
            
            -Income
                tax (expense) benefit
            
            
            9
            
            
            1,876
            
            
            -(13
            )
            
            (2,636
            )
            
            -Other
                comprehensive income (loss)
            
            
            (12,181
            )
            
            (2,636
            )
            
            (399
            )**Comprehensive
                Income**
            
            $
            253,248
            
            $
            217,414
            
            $
            208,811





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




59




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Net
                Cash Flows From Operating Activities**Net
                income
            
            $
            266,676
            
            $
            221,297
            
            $
            210,455Adjustments
                to reconcile net income to net cash provided:Depreciation
                and amortization
            
            
            274,622
            
            
            268,943
            
            
            266,207Deferred
                income taxes and investment tax credit, net
            
            
            (1,714
            )
            
            (569
            )
            
            35,531Amortization
                of other assets and liabilities
            
            
            25,984
            
            
            27,667
            
            
            18,210Impact
                of changes in working capital-Receivables,
                net
            
            
            59,585
            
            
            (116,922
            )
            
            (28,697
            )Inventories
            
            
            (28,420
            )
            
            5,023
            
            
            (4,181
            )Accounts
                payable
            
            
            (75,709
            )
            
            90,895
            
            
            29,310Taxes
                accrued
            
            
            15,574
            
            
            (5,602
            )
            
            (1,748
            )Other
                current assets and liabilities
            
            
            34,381
            
            
            (8,144
            )
            
            9,436Other,
                net
            
            
            (10,984
            )
            
            (19,422
            )
            
            (11,029
            )Net
                cash provided by operating activities
            
            
            559,995
            
            
            463,166
            
            
            523,494**Net
                Cash Flows From Investing Activities**Utility
                construction expenditures
            
            
            (757,327
            )
            
            (699,061
            )
            
            (631,962
            )Quad
                Cities Station decommissioning trust fund
            
            
            (8,299
            )
            
            (8,299
            )
            
            (8,299
            )Purchases
                of available-for-sale securities
            
            
            (852,931
            )
            
            (563,330
            )
            
            (748,801
            )Proceeds
                from sales of available-for-sale securities
            
            
            850,628
            
            
            564,025
            
            
            691,133Other,
                net
            
            
            16,654
            
            
            17,635
            
            
            18,004Net
                cash used in investing activities
            
            
            (751,275
            )
            
            (689,030
            )
            
            (679,925
            )**Net
                Cash Flows From Financing Activities**Dividends
                paid
            
            
            (51,247
            )
            
            (1,247
            )
            
            (1,245
            )Issuance
                of long-term debt, net of issuance cost
            
            
            346,144
            
            
            296,466
            
            
            347,769Retirement
                of long-term debt, including reacquisition cost
            
            
            (160,591
            )
            
            (90,850
            )
            
            (56,168
            )Net
                decrease in notes payable
            
            
            -
            
            
            -
            
            
            (48,000
            )Other
            
            
            (5,175
            )
            
            4,296
            
            
            (963
            )Net
                cash provided by financing activities
            
            
            129,131
            
            
            208,665
            
            
            241,393**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (62,149
            )
            
            (17,199
            )
            
            84,962**Cash
                and Cash Equivalents at Beginning of Year**
            
            
            70,914
            
            
            88,113
            
            
            3,151**Cash
                and Cash Equivalents at End of Year**
            
            $
            8,765
            
            $
            70,914
            
            $
            88,113**Supplemental
                Disclosure:**Interest
                paid, net of amounts capitalized
            
            $
            57,641
            
            $
            66,441
            
            $
            56,985Income
                taxes paid
            
            $
            106,873
            
            $
            125,531
            
            $
            68,348





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




60




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF
      CAPITALIZATION**


(In
      thousands, except share amounts)





**As
                of December 31,****2006**
            
            **2005****Common
                Shareholder’s Equity**Common
                shares, no par; 350,000,000 shares
              authorized;
                70,980,203 shares outstanding
            
            $
            561,162
            
            
            
            
            $
            561,162Retained
                earnings
            
            
            1,401,785
            
            
            
            
            
            1,186,356Accumulated
                other comprehensive income:Unrealized
                loss on cash flow hedges
            
            
            (12,168
            )
            
            
            
            
            -Minimum
                pension liability adjustment
            
            
            -
            
            
            
            
            
            (2,636
            )1,950,779
            
            
            51.3
            %
            
            1,744,882
            
            
            53.8
            %**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 shares
            
            
            3,570
            
            
            
            
            
            3,570$4.80
                Series, 49,898 shares
            
            
            4,990
            
            
            
            
            
            4,99030,329
            
            
            0.8
            %
            
            30,329
            
            
            0.9
            %**Long-Term
                Debt, Excluding Current Portion**Pollution
                control revenue obligations:6.1%
                Series due 2007
            
            
            -
            
            
            
            
            
            1,0005.95%
                Series, due 2023 (general mortgage
              bond-secured)
            
            
            29,030
            
            
            
            
            
            29,030Variable
                rate series (2006- 3.97%, 2005- 3.59%) -Due
                2016 and 2017
            
            
            37,600
            
            
            
            
            
            37,600Due
                2023 (general mortgage bond-secured)
            
            
            28,295
            
            
            
            
            
            28,295Due
                2023
            
            
            6,850
            
            
            
            
            
            6,850Due
                2024
            
            
            34,900
            
            
            
            
            
            34,900Due
                2025
            
            
            12,750
            
            
            
            
            
            12,750Notes:5.125%
                Series, due 2013
            
            
            275,000
            
            
            
            
            
            275,0004.65%
                Series, due 2014
            
            
            350,000
            
            
            
            
            
            350,0006.75%
                Series, due 2031
            
            
            400,000
            
            
            
            
            
            400,0005.75%
                Series, due 2035
            
            
            300,000
            
            
            
            
            
            300,0005.8%
                Series, due 2036
            
            
            350,000
            
            
            
            
            
            -Obligation
                under capital lease
            
            
            578
            
            
            
            
            
            1,184Unamortized
                debt premium and discount, net
            
            
            (5,614
            )
            
            
            
            
            (5,358
            )1,819,389
            
            
            47.9
            %
            
            1,471,251
            
            
            45.3
            %**Total
                Capitalization**
            
            $
            3,800,497
            
            
            100.0
            %
            $
            3,246,462
            
            
            100.0
            %





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




61




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF RETAINED
      EARNINGS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Beginning
                of Year**
            
            $
            1,186,356
            
            $
            966,306
            
            $
            757,096**Net
                Income**
            
            
            266,676
            
            
            221,297
            
            
            210,455**Deduct:**Dividends
                declared on preferred shares
            
            
            1,247
            
            
            1,247
            
            
            1,245Dividends
                declared on common shares
            
            
            50,000
            
            
            -
            
            
            -51,247
            
            
            1,247
            
            
            1,245**End
                of Year**
            
            $
            1,401,785
            
            $
            1,186,356
            
            $
            966,306





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




62




**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**INDEX**




(1)
              Company
                  Organization
              64(2)
              Summary
                  of Significant Accounting Policies
              64(3)
              Jointly
                  Owned Utility Plant
              70(4)
              Inventories
              71(5)
              Investments
                  and Nonregulated Property,****Net
              71(6)
              Regulatory
                  Assets and Liabilities
              73(7)
              Preferred
                  Securities
              74(8)
              Long-Term
                  Debt
              74(9)
              Short-Term
                  Borrowings
              74(10)
              Asset
                  Retirement Obligations
              75(11)
              Risk
                  Management
              76(12)
              Income
                  Taxes
              78(13)
              Non-Operating
                  Other Income and Expense
              79(14)
              Rate
                  Matters
              79(15)
              Commitments
                  and Contingencies
              80(16)
              Employee
                  Benefit Plans
              83(17)
              Fair
                  Value of Financial Instruments
              88(18)
              Segment
                  Information
              88(19)
              Related
                  Party Transactions
              90(20)
              Unaudited
                  Quarterly Operating Results
              91




63





**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**(1)**
            **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. MidAmerican Energy Holdings is 87.8% owned by Berkshire Hathaway Inc.
      (“Berkshire Hathaway”).





**(2)**  **Summary
      of Significant Accounting Policies**





*Principles
      of Consolidation*





The
      Consolidated Financial Statements include the accounts of MidAmerican Energy
      and
      the subsidiary under its control. In accordance with accounting principles
      generally accepted in the United States of America (“GAAP”), the subsidiary,
      which is less than 100% owned but greater than 50% owned, is consolidated with
      a
      minority interest. All significant intercompany accounts and transactions have
      been eliminated, other than those between rate-regulated operations.





*Reclassifications*





Certain
      amounts in the 2005 and 2004 Consolidated Financial Statements and supporting
      note disclosures have been reclassified to conform to the 2006 presentation.
      The
      Consolidated Statements of Operations reflect the reclassification of electric
      transmission wheeling costs from Other Operating Expenses to Cost of Fuel,
      Energy and Capacity totaling $8.5 million for 2005 and $6.0 million
      for 2004. These reclassifications had no effect on previously reported net
      income. The Consolidated Balance Sheet as of December 31, 2005, reflects
      the reclassification of the current portion of deferred income taxes to Current
      Liabilities - Other totaling $11.8 million.





*Use
      of Estimates in Preparation of Financial Statements*





The
      preparation of the Consolidated Financial Statements in conformity with GAAP
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the period. These estimates
      include, but are not limited to, unbilled receivables, asset retirement
      obligations, valuation of energy contracts, the effects of regulation, the
      accounting for contingencies, including income tax, environmental and regulatory
      matters, and certain assumptions made in accounting for pension and
      postretirement benefits. Actual results may differ from the estimates used
      in
      preparing the Consolidated Financial Statements.





A *ccounting
      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 GAAP applicable to rate-regulated enterprises
      and reflect the effects of the ratemaking process.





MidAmerican
      Energy prepares its financial statements in accordance with the provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting
      for the Effects of Certain Types of Regulation” (“SFAS No. 71”), which differs
      in certain respects from the application of GAAP by nonregulated businesses.
      In
      general, SFAS No. 71 recognizes that accounting for rate-regulated
      enterprises should reflect the economic effects of regulation. As a result,
      a
      regulated entity is required to defer the recognition of expenses or income
      if
      it is probable that, through the rate-making process, there will be a
      corresponding increase or decrease in future rates. Accordingly, MidAmerican
      Energy has deferred certain expenses and income that will be recognized in
      earnings over various future periods.




64




Management
      continually evaluates the applicability of SFAS No. 71 and assesses whether
      its regulatory assets are probable of future recovery by considering factors
      such as a change in the regulator’s approach to setting rates from cost-based
      rate making to another form of regulation, other regulatory actions or the
      impact of competition, which could limit MidAmerican Energy’s ability to recover
      its costs. Based upon this continual assessment, management believes the
      application of SFAS No. 71 continues to be appropriate and its existing
      regulatory assets are probable of recovery. If it becomes no longer probable
      that these costs will be recovered, the regulatory assets and regulatory
      liabilities would be written off and recognized in operating
      income.





*Cash
      Equivalents*





Cash
      equivalents consist of funds invested in commercial paper, money market
      securities and in other investments with a maturity of three months or less
      when
      purchased.





*Short-term
      Investments*





Short-term
      investments consist of auction rate securities, which are classified as
      available-for-sale securities as management does not intend to hold them to
      maturity nor are they bought and sold with the objective of generating profits
      on short-term differences in price. Auction rate securities are not considered
      cash equivalents due to their stated maturities.





*Investments*





MidAmerican
      Energy’s management determines the appropriate classification of investments in
      debt securities and equity securities at the acquisition date and re-evaluates
      the classifications at each balance sheet date. Substantially all of MidAmerican
      Energy’s investments in debt and equity securities recorded on the Consolidated
      Balance Sheets are held in nuclear decommissioning trusts. Refer to Note (5)
      for
      additional discussion of MidAmerican Energy’s investments.





*Allowance
      for Doubtful Accounts*





The
      allowance for doubtful accounts is based on MidAmerican Energy’s assessment of
      the collectibility of payments from its customers. This assessment requires
      judgment regarding the outcome of pending disputes, arbitrations and the ability
      of customers to pay the amounts owed to MidAmerican Energy.





*Derivatives*





MidAmerican
      Energy employs a number of different derivative instruments in connection with
      its electric and natural gas and interest rate risk management activities,
      including forward purchases and sales, futures, swaps and options. Derivative
      instruments are recorded in the Consolidated Balance Sheets at fair value as
      either assets or liabilities unless they are designated as, and qualify for,
      the
      normal purchases and normal sales exemptions afforded by GAAP. Contracts that
      qualify as normal purchases or normal sales are not marked to
      market.





For
      all
      contracts designated as hedge relationships (“hedge contracts”), MidAmerican
      Energy maintains formal documentation of the hedge. In addition, at inception
      and on a quarterly basis, MidAmerican Energy formally assesses whether the
      hedge
      contracts are highly effective in offsetting changes in cash flows or fair
      values of the hedged items. MidAmerican Energy documents hedging activity by
      transaction type and risk management strategy.




65




Changes
      in the fair value of a derivative designated and qualified as a cash flow hedge,
      to the extent effective, are included in the Consolidated Balance Sheets and
      the
      Consolidated Statements of Capitalization as a component of Common Shareholder’s
      Equity, until the hedged item is recognized in income. MidAmerican Energy
      discontinues hedge accounting prospectively when it has determined that a
      derivative no longer qualifies as an effective hedge, or when it is no longer
      probable that the hedged forecasted transaction will occur. When hedge
      accounting is discontinued because the derivative no longer qualifies as an
      effective hedge, future changes in the value of the derivative are charged
      to
      earnings. Gains and losses related to discontinued hedges that were previously
      recorded in Accumulated Other Comprehensive Income (“AOCI”) will remain there
      until the hedged item is realized, unless it is probable that the hedged
      forecasted transaction will not occur, at which time associated deferred amounts
      in AOCI are immediately recognized in current earnings.





Certain
      derivative electric and gas contracts utilized by the regulated operations
      of
      MidAmerican Energy are recoverable through rates. Accordingly, unrealized
      changes in fair value of these contracts are deferred as regulatory assets
      or
      liabilities pursuant to SFAS No. 71.





Derivative
      contracts for commodities used in MidAmerican Energy’s normal business
      operations that are settled by physical delivery, among other criteria, are
      eligible for and may be designated as normal purchases and normal sales pursuant
      to the exemption provided by GAAP. Recognition of these contracts in operating
      revenue or cost of sales in the Consolidated Statements of Operations occurs
      when the contracts settle.





When
      available, quoted market prices or prices obtained through external sources
      are
      used to measure a contract’s fair value. For contracts without available quoted
      market prices, fair value is determined based on internally developed modeled
      prices.





*Inventories*





Inventories
      are valued at the lower of average cost or market, except for natural gas in
      storage, which is valued at the lower of last-in-first-out or market. Refer
      to
      Note (4) for detail of inventories as of December 31, 2006 and
      2005.





*Utility
      Plant, Net*





*General*





Utility
      plant is recorded at historical cost. MidAmerican Energy capitalizes all
      construction related material, direct labor costs and contract services, as
      well
      as indirect construction costs, which include an allowance for funds used during
      construction, as discussed below. The cost of major additions and betterments
      are capitalized, while costs for replacements, maintenance, and repairs that
      do
      not improve or extend the lives of the respective assets are charged to
      maintenance expense.





When
      MidAmerican Energy retires utility plant, it charges the original cost to
      accumulated depreciation. The cost of removal is charged against the cost of
      removal regulatory liability that was established through depreciation rates.
      Generally, when regulated assets are sold, the cost is removed from the property
      accounts and the related accumulated depreciation and amortization accounts
      are
      reduced, and the residual gain or loss is deferred and subsequently amortized
      through future depreciation rates. Any gain or loss on disposals of nonregulated
      assets is recorded in income or expense.





MidAmerican
      Energy records an allowance for funds used during construction (“AFUDC”), which
      represents the estimated debt and equity costs of capital funds necessary to
      finance the construction of regulated facilities. AFUDC is computed based on
      guidelines set forth by the FERC and capitalized as a component of utility
      plant
      cost, with offsetting credits to earnings. After construction is completed,
      MidAmerican Energy is permitted to earn a return on these costs by their
      inclusion in rate base, as well as recover these costs through depreciation
      expense over the useful life of the related assets.




66




Depreciation
      and amortization for MidAmerican Energy’s utility operations are based on
      straight-line composite rates. In November 2004, MidAmerican Energy changed
      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. As a result
      of the change in estimated useful life, net income for 2005 was increased by
      $6.7 million, prior to the effect of the Iowa revenue sharing arrangement.
      The average depreciation and amortization rates applied to depreciable utility
      plant for the years ended December 31 were as follows:





2006
            
            2005
            
            2004Electric
            3.7%
            
            3.8%
            
            4.0%Gas
            3.3%
            
            3.4%
            
            3.4%





Depreciation
      and amortization expense for 2006, 2005 and 2004 also includes
      $42.4 million, $40.9 million and $50.8 million, respectively, for
      a regulatory charge pursuant to the terms of a series of electric rate
      settlement agreements in Iowa. Refer to Note (14) for further discussion.
      Additionally, depreciation expense for each year presented includes an
      $8.3 million charge, which is equal to the level of MidAmerican Energy’s
      funding into external trusts for the estimated annual decommissioning costs
      of
      the Quad Cities Station.





*Asset
      Retirement Obligations*





MidAmerican
      Energy recognizes legal asset retirement obligations (“ARO”), mainly related to
      the decommissioning of nuclear generation assets. The fair value of a liability
      for a legal ARO is recognized in the period in which it is incurred, if a
      reasonable estimate of fair value can be made. The fair value of the liability
      is added to the carrying amount of the associated asset, which is then
      depreciated over the remaining useful life of the asset. Subsequent to the
      initial recognition, the liability is adjusted for any revisions to the expected
      value of the retirement obligation (with corresponding adjustments to utility
      plant) and for accretion of the liability due to the passage of time. The
      difference between the ARO liability, the corresponding ARO asset included
      in
      utility plant and amounts recovered in rates to satisfy such liabilities is
      recorded as a regulatory asset or liability. Estimated removal costs that
      MidAmerican Energy recovers through approved depreciation rates but that do
      not
      meet the requirements of a legal ARO are accumulated in asset retirement removal
      costs within regulatory liabilities in the Consolidated Balance
      Sheets.





*Impairment*





MidAmerican
      Energy evaluates long-lived assets, including utility plant, when events or
      changes in circumstances indicate that the carrying value of these assets may
      not be recoverable or the assets meet the criteria of held for sale. Upon
      the
      occurrence of a triggering event, the asset is reviewed to assess whether the
      estimated undiscounted cash flows expected from the use of the asset plus
      residual value from the ultimate disposal exceeds the carrying value of the
      asset. If the carrying value exceeds the estimated recoverable amounts, the
      asset is written down to the estimated discounted present value of the expected
      future cash flows from using the asset. The resulting impairment loss is
      reflected in the Consolidated Statement of Operations. The
      impacts of regulation are considered when evaluating the carrying value of
      regulated assets.





*Revenue
      Recognition*





Revenue
      from electric customers is recognized as electricity is delivered to customers
      and includes amounts for services rendered. Revenue from the sale,
      transportation and distribution of natural gas is recognized when either the
      service is provided or the product is delivered. Amounts recognized include
      unbilled as well as billed amounts.





Unbilled
      revenues are an estimate of the 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 $94.3 million and
      $91.7 million at December 31, 2006 and 2005, respectively, and are
      included in Receivables on the Consolidated Balance Sheets.





All
      of
      MidAmerican Energy’s regulated 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, 2006 and 2005, was $33.9 million and
      $89.5 million, respectively.




67




In
      2006,
      MidAmerican Energy changed its management strategy with regard to certain
      nonregulated end-use gas contracts. This change resulted in recording
      prospectively the related revenues and cost of sales on a gross, rather than
      net, basis in accordance with Emerging Issues Task Force Issues No. 02-3,
“Recognition and Reporting of Gains and Losses on Energy Trading Contracts Under
      Issues No. 98-10 and 00-17.” Cost of sales netted in revenues for such
      end-use gas contracts totaled $289.2 million and $193.8 million for
      2005 and 2004, respectively.





*Sales
      and Excise Tax*





MidAmerican
      Energy collects from its customers sales and excise taxes assessed by
      governmental authorities on transactions with customers and later remits the
      collected taxes to the appropriate authority. If the obligation to pay a
      particular tax resides with the customer, MidAmerican Energy reports such taxes
      collected on a net basis and, accordingly, they do not affect the Consolidated
      Statement of Operations. Taxes for which the obligation resides with MidAmerican
      Energy are reported on a gross basis in operating revenues and operating
      expenses. The amounts reported on a gross basis are not material.





*Unamortized
      Debt Premiums, Discounts and Financing Costs*





Premium,
      discounts and financing costs incurred during the issuance of long-term debt
      are
      amortized over the term of the related financing.





*Income
      Taxes*





Effective
      February of 2006, MidAmerican Energy Holdings and subsidiaries will be included
      in the Berkshire Hathaway consolidated U.S. federal and certain consolidated
      state income tax returns. This resulted from Berkshire Hathaway, converting
      its
      convertible preferred stock of MidAmerican Energy Holdings into shares of
      MidAmerican Energy Holdings common stock on February 9, 2006. MidAmerican
      Energy’s and MidAmerican Funding’s income tax liability is computed on a
      stand-alone basis.





Deferred
      tax assets and liabilities are based on differences between the financial
      statements and tax bases of assets and liabilities using the estimated rates
      in
      effect for the year in which the differences are expected to reverse. Changes
      in
      deferred income tax assets and liabilities that are associated with components
      of other comprehensive income are charged or credited directly to other
      comprehensive income. Other changes in deferred income tax assets and
      liabilities are included as a component of income tax expense.





MidAmerican
      Energy is required to pass income tax benefits related to certain accelerated
      tax depreciation and other property-related basis differences on to its
      customers in Iowa. These amounts were recognized as a regulatory asset totaling
      $164.8 million and $146.0 million as of December 31, 2006 and
      2005, respectively, and will be included in rates when the temporary differences
      reverse. Management believes the existing regulatory asset is probable of
      recovery. If it becomes probable that these costs will not be recovered, the
      asset would be written off and recognized in earnings.





Investment
      tax credits are generally deferred and amortized over the estimated useful
      lives
      of the related properties or as prescribed by various regulatory
      jurisdictions.





In
      determining MidAmerican Energy’s and MidAmerican Funding’s tax liabilities,
      management is required to interpret complex tax laws and regulations.
      MidAmerican Energy and MidAmerican Funding are subject to continuous
      examinations by federal, state and local tax authorities that may give rise
      to
      different interpretations of these complex laws and regulations. Due to the
      nature of the examination process, it generally takes years before these
      examinations are completed and these matters are resolved. The Internal Revenue
      Service has closed examination of MidAmerican Energy and MidAmerican Funding
      through 2001. Although the ultimate resolution of their federal and state tax
      examinations is uncertain, each believes it has made adequate provisions for
      its
      tax positions and that the aggregate amount of additional tax liabilities that
      may result from these examinations, if any, will not have a material adverse
      affect on MidAmerican Energy’s or MidAmerican Funding’s financial results.
      MidAmerican Energy’s and MidAmerican Funding’s provisions for tax uncertainties
      are included
      in taxes accrued and other long-term liabilities, as appropriate, in their
      respective Consolidated Balance Sheets.




68




*New
      Accounting Pronouncements*





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
      defines fair value, establishes a framework for measuring fair value and expands
      disclosures about fair value measurements. SFAS No. 157 does not impose
      fair value measurements on items not already accounted for at fair value; rather
      it applies, with certain exceptions, to other accounting pronouncements that
      either require or permit fair value measurements. SFAS No. 157 is effective
      for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. MidAmerican Funding and MidAmerican Energy are
      currently evaluating the impact of adopting SFAS No. 157 on their
      respective consolidated financial position and results of
      operations.





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





MidAmerican
      Energy adopted SFAS No. 158 as of December 31, 2006. The incremental
      impact of adopting SFAS No. 158 on the Consolidated Balance Sheets of
      MidAmerican Energy and MidAmerican Funding as of December 31, 2006, is as
      follows (in millions):





Increase
                (Decrease)Regulatory
                assets
            
            $
            34.5Other
                assets
            
            
            73.6Common
                shareholder’s/Member’s equity(1)
            
            
            2.6Deferred
                income taxes
            
            
            (21.7
            )Regulatory
                liabilities
            
            
            122.2Other
                Liabilities - Other
            
            
            5.0





(1)
            Common
                shareholder’s equity relates to MidAmerican Energy, and Member’s equity
                relates to MidAmerican Funding. Pursuant to SFAS No. 158, the impact
                on accumulated other comprehensive income of adopting SFAS No. 158 is
                reflected as a cumulative change and is not recognized in comprehensive
                income in the year of adoption.




69




In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109” ** (“FIN 48”) *.* FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in accordance with SFAS No. 109, “Accounting for Income Taxes,” and
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a return. Guidance is also provided on de-recognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. MidAmerican Energy is required to adopt FIN 48 in the first
      quarter of 2007. MidAmerican Energy is currently evaluating the impact and,
      based on its assessment to date, does not believe the adoption of FIN 48
      will have a material effect on its financial results.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial ** Liabilities”
      (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure many
      financial instruments and certain other items at fair value. Upon adoption
      of
      SFAS No. 159, an entity may elect the fair value option for eligible items
      that
      exist at the adoption date. Subsequent to the initial adoption, the election
      of
      the fair value option may only be made at initial recognition of the asset
      or
      liability or upon a re-measurement event that gives rise to new-basis
      accounting. The decision about whether to elect the fair value option is applied
      on an instrument-by-instrument basis, is irrevocable and is applied only to
      an
      entire instrument and not only to specified risks, cash flows or portions of
      that instrument. SFAS No. 159 does not affect any existing accounting literature
      that requires certain assets and liabilities to be carried at fair value nor
      does it eliminate disclosure requirements included in other accounting
      standards. SFAS No. 159 is effective for fiscal years beginning after November
      15, 2007. MidAmerican Energy is currently evaluating the impact of adopting
      SFAS
      No. 159 on its financial results.





**(3)**  **Jointly
      Owned Utility Plant**





Under
      joint ownership agreements with other utilities, MidAmerican Energy, as a tenant
      in common, has undivided interests in jointly owned generation and transmission
      facilities. MidAmerican Energy accounts for its proportional share of each
      facility, and each joint owner has provided financing for its share of each
      generating plant or transmission line. 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 facilities.





The
      amounts (in millions) shown in the table below represent MidAmerican Energy’s
      share in each jointly owned facility as of December 31, 2006.





Company
            
            Plant
                in
            
            Accumulated
            
            ConstructionShare
            
            Service
            
            Depreciation
            
            Work
                in ProgressLouisa
                Unit No. 1
            
            
            88.0
            %
            $
            563.8
            
            $
            333.4
            
            $
            71.8Council
                Bluffs Unit No. 3
            
            
            79.1
            
            
            332.2
            
            
            218.4
            
            
            11.8Quad
                Cities Unit Nos. 1 & 2
            
            
            25.0
            
            
            311.4
            
            
            150.5
            
            
            9.2Ottumwa
                Unit No. 1
            
            
            52.0
            
            
            231.9
            
            
            143.7
            
            
            12.0Neal
                Unit No. 4
            
            
            40.6
            
            
            169.0
            
            
            118.2
            
            
            0.1Neal
                Unit No. 3
            
            
            72.0
            
            
            142.8
            
            
            99.6
            
            
            -Transmission
                facilities (a)
            
            
            Various
            
            
            152.9
            
            
            43.7
            
            
            0.1Total
            
            
            
            
            $
            1,904.0
            
            $
            1,107.5
            
            $
            105.0





(a)  Transmission
      facilities include 345 and 161 kilovolt transmission lines.




70





**(4)**  **Inventories**





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





2006
            
            2005Materials
                and supplies, at average cost
            
            $
            48,966
            
            $
            41,034Natural
                gas in storage, at LIFO cost
            
            
            33,567
            
            
            23,174Coal
                stocks, at average cost
            
            
            25,575
            
            
            17,668Fuel
                oil, at average cost
            
            
            4,438
            
            
            2,747Emission
                allowances, at average cost
            
            
            797
            
            
            300Total
            
            $
            113,343
            
            $
            84,923





The
      current cost of natural gas in storage at December 31, 2006 and 2005 prices
      was $110.0 million and $148.2 million, respectively.





**(5)**  **Investments
      and Nonregulated Property, Net**





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





2006
            
            2005Nuclear
                decommissioning trusts
            
            $
            258,816
            
            $
            228,070Rabbi
                trusts
            
            
            124,158
            
            
            115,267Non-utility
                property, net of accumulated depreciation of $4,823 and $4,058,
              respectively
            
            
            17,115
            
            
            6,967Coal
                transportation property, net of accumulated depreciation of $2,871
                and
              $2,579,
                respectively
            
            
            9,048
            
            
            9,340Other
            
            
            396
            
            
            46Total
            
            $
            409,533
            
            $
            359,690





*General*





Investments
      held by the nuclear decommissioning trusts 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 Regulatory Liabilities on the Consolidated Balance Sheets. Funds
      are invested in the trusts in accordance with applicable federal investment
      guidelines and are restricted for use as reimbursement for costs of
      decommissioning Quad Cities Station.





The
      investment in Rabbi trusts represents the cash surrender 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 hold
      investments used to fund the obligations of various nonqualified executive
      and
      director compensation plans and to pay the costs of the trusts.





Non-utility
      property consists of property such as land, computer software and other assets
      not recoverable for regulated utility purposes. In 2006, MidAmerican Energy
      constructed $9.2 million of currently non-recoverable utility transmission
      assets, which are being depreciated over 55 years. Other depreciable property
      consists primarily of computer software, which is amortized on a straight-line
      basis over five years.





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.





71





*Investments
      in Debt and Equity Securities*





MidAmerican
      Energy’s investments in debt and equity securities, other than auction rate
      securities, consist of the investments in the Quad Cities Station nuclear
      decommissioning trusts. The amortized cost, gross unrealized gains and losses
      and estimated fair value of these investments as of December 31 were as
      follows (in thousands):





2006Amortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueAvailable-for-sale:Equity
                securities
            $
            88,824
            
            $
            56,907
            
            $
            (662
            )
            $
            145,069Municipal
                bonds
            
            23,682
            
            
            382
            
            
            (60
            )
            
            24,004U.
                S. Government securities
            
            54,094
            
            
            461
            
            
            (374
            )
            
            54,181Corporate
                securities
            
            34,174
            
            
            415
            
            
            (125
            )
            
            34,464Cash
                equivalents
            
            1,098
            
            
            -
            
            
            -
            
            
            1,098$
            201,872
            
            $
            58,165
            
            $
            (1,221
            )
            $
            258,816





2005Amortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueAvailable-for-sale:Equity
                securities
            $
            85,221
            
            $
            44,537
            
            $
            (2,087
            )
            $
            127,671Municipal
                bonds
            
            21,309
            
            
            319
            
            
            (131
            )
            
            21,497U.
                S. Government securities
            
            47,024
            
            
            520
            
            
            (402
            )
            
            47,142Corporate
                securities
            
            31,243
            
            
            527
            
            
            (581
            )
            
            31,189Cash
                equivalents
            
            571
            
            
            -
            
            
            -
            
            
            571$
            185,368
            
            $
            45,903
            
            $
            (3,201
            )
            $
            228,070





As
      of
      December 31, 2006, the debt securities held by the Quad Cities Station
      nuclear decommissioning trusts had the following maturities (in thousands):





Available-For-SaleAmortized
            
            FairCost
            
            ValueWithin
                1 year
            
            $
            3,363
            
            $
            3,3461
                through 5 years
            
            
            35,220
            
            
            35,0565
                through 10 years
            
            
            25,912
            
            
            26,041Over
                10 years
            
            
            47,455
            
            
            48,206





The
      proceeds and gross realized gains and losses on the disposition of
      available-for-sale securities in the Quad Cities Station nuclear decommissioning
      trusts are shown in the following table (in thousands). Realized and unrealized
      gains and losses in the trusts are recorded in the regulatory liability related
      to the Quad Cities Station asset retirement obligation and do not impact
      earnings. Realized gains and losses are determined by specific
      identification.





Years
                Ended December 31,2006
            
            2005
            
            2004Proceeds
                from sales
            
            $
            159,444
            
            $
            90,041
            
            $
            83,726Gross
                realized gains
            
            
            3,937
            
            
            2,602
            
            
            2,725Gross
                realized losses
            
            
            (1,566
            )
            
            (2,174
            )
            
            (822
            )




72




**(6)**  **Regulatory
      Assets and Liabilities**





Regulatory
      assets represent costs that are expected to be recovered in future charges
      to
      utility customers. Of the regulatory assets listed below, only the nuclear
      generation assets are included in rate base and earn a return. Recovery of
      the
      assets is estimated to be over the periods shown. MidAmerican Energy’s
      regulatory assets reflected on the Consolidated Balance Sheets consist of the
      following as of December 31 (in thousands):





AverageRemaining
                Life
            
            2006
            
            2005Deferred
                income taxes, net(1)
            
            27
                years
            
            $
            164,769
            
            $
            145,967Employee
                benefit plans(2)
            
            16
                years
            
            
            45,748
            
            
            11,694Unrealized
                loss on regulated derivatives
            
            1
                year
            
            
            35,793
            
            
            45,431Debt
                refinancing costs
            
            8
                years
            
            
            9,816
            
            
            11,998Asset
                retirement obligations
            
            9
                years
            
            
            7,423
            
            
            9,208Nuclear
                generation assets
            
            13
                years
            
            
            6,246
            
            
            6,487Environmental
                costs
            
            1
                year
            
            
            1,490
            
            
            4,907Other
            
            Various
            
            
            1,957
            
            
            1,509Total
            
            
            
            $
            273,242
            
            $
            237,201





(1)
            Amounts
                represent income tax benefits related to certain accelerated tax
                depreciation and property-related basis differences that were previously
                flowed through to customers and will be included in rates when the
                differences reverse.(2)
            Amount
                represents unrecognized components of benefit plan funded status
                that are
                recoverable in rates when recognized in net periodic benefit
                costs.





Regulatory
      liabilities represent income to be recognized or returned to customers in future
      periods. MidAmerican Energy’s regulatory liabilities reflected on the
      Consolidated Balance Sheets consist of the following as of December 31 (in
      thousands):





AverageRemaining
                Life
            
            2006
            
            2005Cost
                of removal accrual(1)
            
            27
                years
            
            $
            466,171
            
            $
            448,493Iowa
                electric settlement accrual
            
            1
                year
            
            
            259,263
            
            
            213,135Employee
                benefit plans(2)
            
            16
                years
            
            
            122,193
            
            
            -Asset
                retirement obligations
            
            31
                years
            
            
            117,705
            
            
            65,966Unrealized
                gain on regulated derivatives
            
            1
                year
            
            
            21,437
            
            
            29,648Nuclear
                insurance reserve
            
            47
                years
            
            
            2,275
            
            
            2,419Environmental
                insurance recovery
            
            -
            
            
            -
            
            
            3,494Total
            
            
            
            $
            989,044
            
            $
            763,155





(1)
            Amounts
                represent the remaining cost of removing (exclusive of ARO liabilities)
                electric and gas assets and have been accrued through depreciation
                rates,
                in accordance with generally accepted regulatory
                practices.(2)
            Amount
                represents unrecognized components of benefit plan funded status
                that are
                recoverable in rates when recognized in net periodic benefit
                costs.




73




**(7)**
            **Preferred
                Securities**





The
      total
      outstanding cumulative preferred securities of MidAmerican Energy are not
      subject to mandatory redemption requirements and may be redeemed at the option
      of MidAmerican Energy at prices which, in the aggregate, total
      $31.1 million. The aggregate total the holders of all preferred securities
      outstanding at December 31, 2006, are entitled to upon involuntary
      bankruptcy is $30.3 million plus accrued dividends. Annual dividend
      requirements for all preferred securities outstanding at December 31, 2006,
      total $1.2 million.





**(8)**
            **Long-Term
                Debt**





MidAmerican
      Energy’s annual sinking fund requirements and maturities of long-term debt
      through 2011 are $1.6 million, $0.4 million and $0.1 million for
      2007, 2008 and 2009, 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
      floating or fixed rate alternatives. The interest rates shown in the
      Consolidated Statements of Capitalization are the weighted average interest
      rates as of December 31, 2006 and 2005. 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, 2006, MidAmerican Energy was in
      compliance with all of its applicable long-term debt covenants.





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





On
      October 6, 2006, MidAmerican Energy issued $350 million of 5.8%
      medium-term notes due in 2036. The proceeds are being used to support
      construction of electric generation projects and for general corporate
      purposes.





**(9)**
            **Short-Term
                Borrowings**





Interim
      financing of working capital needs and the construction program is obtained
      from
      unaffiliated parties through the sale of commercial paper or short-term
      borrowing from banks.





MidAmerican
      Energy has in place a $500.0 million unsecured revolving credit facility
      expiring in July 2011, which supports its $379.6 million commercial
      paper program and its variable rate pollution control revenue obligations.
      The
      credit facility has a variable interest rate based on the London Interbank
      Offered Rate (“LIBOR”) plus 0.115%, that varies based on MidAmerican Energy’s
      credit ratings for its senior unsecured long-term debt securities. The related
      credit agreement requires that MidAmerican Energy’s ratio of consolidated debt
      to total capitalization, including current maturities, not exceed 0.65 to 1.0
      as
      of the last day of any quarter. In addition, MidAmerican Energy has a
      $5.0 million line of credit, which expires in June 2007, and has a
      variable interest rate based on LIBOR plus 0.25%. As of December 31, 2006
      and 2005, MidAmerican Energy had no commercial paper or bank notes outstanding,
      and the full amount of the revolving credit facility and line of credit was
      available. As of December 31, 2006, MidAmerican Energy was in compliance
      with all covenants related to its short-term borrowings. MidAmerican Energy
      has
      authority from the FERC to issue through April 14, 2007, short-term debt in
      the form of commercial paper and bank notes aggregating $500.0 million.





74




**(10)**  **Asset
      Retirement Obligations**





MidAmerican
      Energy records an asset retirement obligation (“ARO”) for legal obligations
      related to the retirement of long-lived physical assets. MidAmerican Energy
      estimates its ARO liabilities based upon detailed engineering calculations
      of
      the amount and timing of the future cash spending for a third party to perform
      the required work. Spending estimates are escalated for inflation and discounted
      at a credit-adjusted, risk-free rate. MidAmerican Energy then records an ARO
      asset associated with the liability. The ARO assets are depreciated over their
      expected lives, and the ARO liabilities are accreted to the projected spending
      date. Changes in estimates could occur due to plan revisions, changes in
      estimated costs of nuclear decommissioning and other costs and changes in timing
      of the performance of reclamation activities.





On
      December 31, 2005, MidAmerican Energy adopted FASB Interpretation
      No. 47, “Accounting for Conditional Asset Retirement Obligations, an
      interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies
      that the term *conditional
      asset retirement obligation* as used
      in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a
      legal obligation to perform an asset retirement activity in which the timing
      and/or method of settlement are conditional on a future event that may or may
      not be within the control of the entity. Accordingly, MidAmerican Energy is
      required to recognize a liability for the fair value of a conditional ARO if
      the
      fair value of the liability can be reasonably estimated. Uncertainty about
      the
      timing or method of settlement of a conditional ARO should be factored into
      the
      measurement of the liability when sufficient information exists.





In
      conjunction with the adoption of FIN 47, MidAmerican Energy recorded as of
      December 31, 2005, $10.8 million of ARO liabilities related to
      conditional ARO’s; $0.2 million of associated ARO assets, net of
      accumulated depreciation; and a $10.6 million reduction of regulatory
      liabilities. Adoption of FIN 47 did not impact net income. The total ARO
      liability, computed on a pro forma basis as if FIN 47 had been applied
      during each of the periods presented in the consolidated financial statements,
      would have been $279.4 million as of January 1, 2004 and
      $177.4 million as of December 31, 2004.





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





2006
            
            2005Balance
                January 1
            
            $
            191,117
            
            $
            166,845Adoption
                of FIN 47
            
            
            -
            
            
            10,787Revision
                to nuclear decommissioning ARO liability
            
            
            (30,320
            )
            
            -Addition
                for new wind power facilities
            
            
            1,713
            
            
            3,897Accretion
            
            
            11,046
            
            
            9,588Other
            
            
            (352
            )
            
            -Balance
                December 31
            
            $
            173,204
            
            $
            191,117





As
      of
      December 31, 2006, $142.1 million of the total ARO liability pertained
      to the decommissioning of Quad Cities Station, and $258.8 million of assets
      reflected in Investments and Nonregulated Property, Net, were restricted for
      satisfying the Quad Cities Station ARO liability. The 2006 revision to the
      nuclear decommissioning ARO liability is a result of a new valuation that was
      conducted by the operator of Quad Cities Station, consistent with its practice
      of periodically performing such studies. The revision increased regulatory
      liabilities and did not impact net income.





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 $466.2 million and $448.5 million at
      December 31, 2006 and 2005, respectively.





75




**(11)**  **Risk
      Management**





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





The
      following table summarizes the various derivative mark-to-market positions
      included in the consolidated balance sheet as of December 31, 2006 (in
      thousands):





AccumulatedRegulatory
            
            OtherNet
                Assets (Liabilities)
            
            Net
                Asset
            
            ComprehensiveAssets
            
            Liabilities
            
            Total
            
            (Liability)
            
            Income
                (Loss)(1)Regulated
                electric
            
            $
            35,744
            
            $
            (14,307
            )
            $
            21,437
            
            $
            (21,437
            )
            $
            -Regulated
                gas
            
            
            1,760
            
            
            (44,728
            )
            
            (42,968
            )
            
            35,793
            
            
            -Nonregulated
            
            
            35,934
            
            
            (56,648
            )
            
            (20,714
            )
            
            -
            
            
            20,187Total
            
            $
            73,438
            
            $
            (115,683
            )
            $
            (42,245
            )
            $
            14,356
            
            $
            20,187Current
            
            $
            67,581
            
            $
            (109,406
            )
            $
            (41,825
            )Non-current
            
            
            5,857
            
            
            (6,277
            )
            
            (420
            )Total
            
            $
            73,438
            
            $
            (115,683
            )
            $
            (42,245
            )





(1)  Before
      income taxes.





The
      following table summarizes the various derivative mark-to-market positions
      included in the consolidated balance sheet as of December 31, 2005 (in
      thousands):





AccumulatedRegulatory
            
            OtherNet
                Assets (Liabilities)
            
            Net
                Asset
            
            ComprehensiveAssets
            
            Liabilities
            
            Total
            
            (Liability)
            
            Income
                (Loss)(1)Regulated
                electric
            
            $
            17,421
            
            $
            (34,202
            )
            $
            (16,781
            )
            $
            16,781
            
            $
            -Regulated
                gas
            
            
            15,289
            
            
            (13,396
            )
            
            1,893
            
            
            (998
            )
            
            -Nonregulated
            
            
            25,826
            
            
            (25,083
            )
            
            743
            
            
            -
            
            
            -Total
            
            $
            58,536
            
            $
            (72,681
            )
            $
            (14,145
            )
            $
            15,783
            
            $
            -Current
            
            $
            52,641
            
            $
            (61,608
            )
            $
            (8,967
            )Non-current
            
            
            5,895
            
            
            (11,073
            )
            
            (5,178
            )Total
            
            $
            58,536
            
            $
            (72,681
            )
            $
            (14,145
            )





(1)  Before
      income taxes.





76




*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 assigned to 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 wholesale power to be purchased or sold. 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
      liabilities and assets, except for regulated weather hedges, which are recorded
      in income. Unrealized gains or losses on nonregulated derivative financial
      instruments are recognized in income or as other comprehensive income if
      designated and qualifying as cash flow hedges.





Certain
      nonregulated derivatives included in the table above have been designated as
      cash flow hedges and are used to mitigate changes in future cash flows for
      forecasted purchases. Changes in the effective portion of the value of such
      instruments are reported in accumulated other comprehensive income (“AOCI”), net
      of income taxes, until the associated forecasted transaction occurs, at which
      time such amounts are removed from AOCI and reflected in net income. As of
      December 31, 2006, $10.3 million of AOCI, net of income taxes, is
      expected to be reclassified to net income within the next twelve
      months.





77




**(12)**  **Income
      Taxes**





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





2006
            
            2005
            
            2004Current:Federal
            
            $
            91,039
            
            $
            91,055
            
            $
            64,827State
            
            
            28,945
            
            
            24,370
            
            
            1,797119,984
            
            
            115,425
            
            
            66,624Deferred:Federal
            
            
            12,583
            
            
            7,144
            
            
            46,848State
            
            
            (10,905
            )
            
            (3,532
            )
            
            (6,950
            )1,678
            
            
            3,612
            
            
            39,898Investment
                tax credit, net
            
            
            (3,392
            )
            
            (4,181
            )
            
            (4,367
            )Total
            
            $
            118,270
            
            $
            114,856
            
            $
            102,155





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:





2006
            
            2005
            
            2004Statutory
                federal income tax rate
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %Amortization
                of investment tax credit
            
            (0.9
            )
            
            (1.2
            )
            
            (1.4
            )State
                income tax, net of federal income tax benefit
            
            4.9
            
            
            4.7
            
            
            5.8Resolution
                of potential tax matter
            
            -
            
            
            -
            
            
            (2.7
            )Renewable
                electricity production tax credits
            
            (5.6
            )
            
            (3.3
            )
            
            -Effects
                of ratemaking
            
            (2.1
            )
            
            (1.7
            )
            
            (2.4
            )Other
            
            (0.6
            )
            
            0.7
            
            
            (1.6
            )Effective
                federal and state income tax rate
            
            30.7
            %
            
            34.2
            %
            
            32.7
            %





78







The
      Consolidated Balance Sheets included the following deferred income taxes as
      of
      December 31 (in thousands):





2006
            
            2005Deferred
                tax assets related to:Regulatory
                liabilities
            $
            136,462
            
            $
            69,888Revenue
                sharing
            
            109,863
            
            
            92,040Employee
                benefits
            
            51,125
            
            
            54,041Nuclear
                reserves and decommissioning
            
            22,778
            
            
            17,913Unrealized
                gains / losses
            
            13,986
            
            
            6,561Fuel
                cost recoveries
            
            5,347
            
            
            -Other
            
            10,938
            
            
            5,637350,499
            
            
            246,080Deferred
                tax liabilities related to:Depreciable
                property
            
            577,335
            
            
            496,725Regulatory
                assets
            
            233,433
            
            
            208,879Fuel
                cost recoveries
            
            -
            
            
            9,896Reacquired
                debt
            
            2,559
            
            
            2,472813,327
            
            
            717,972Net
                deferred income tax liability
            $
            462,828
            
            $
            471,892





The
      net
      deferred income tax liability was reflected as follows on the Consolidated
      Balance Sheets as of December 31, (in thousands).





2006
            
            2005Current
                assets - Other
            $
            8,541
            
            $
            -Current
                liabilities - Other
            
            -
            
            
            11,836Deferred
                income taxes
            
            471,369
            
            
            460,056Net
                deferred income tax liability
            $
            462,828
            
            $
            471,892





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





Non-Operating
      Income - Other Income, as shown on the Consolidated Statements of Operations,
      includes primarily corporate-owned life insurance income totaling
      $7.1 million, $5.2 million and $5.4 million for 2006, 2005 and
      2004, respectively.





Non-Operating
      Income - Other Expense consists primarily of items not recoverable from
      MidAmerican Energy’s regulated utility customers.





**(14)**
            **Rate
                Matters**





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




79




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





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





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





2006
            
            2005Balance
                January 1
            
            $
            213,135
            
            $
            181,188Current
                year revenue sharing
            
            
            42,412
            
            
            40,904Interest
                costs
            
            
            10,312
            
            
            6,850Amounts
                applied to utility plant in service
            
            
            (6,596
            )
            
            (15,807
            )Balance
                December 31
            
            $
            259,263
            
            $
            213,135





**(15)**  **Commitments
      and Contingencies**





*Environmental
      Matters*





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




80




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





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





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





MidAmerican
      Energy has implemented a planning process that forecasts the site-specific
      controls and actions that may be required to meet emissions reductions as
      promulgated by the EPA. In accordance with an Iowa law passed in 2001,
      MidAmerican Energy has on file with the IUB its current multi-year plan and
      budget for managing SO 2 ,
      NO X and
      mercury from its generating facilities in a cost-effective manner. The plan,
      which is required to be updated every two years, provides specific actions
      to be
      taken at each coal-fired generating facility and the related costs and timing
      for each action.





81




*Unconditional
      Purchase Obligations*





MidAmerican
      Energy had the following unconditional purchase obligations as of
      December 31, 2006 (in millions):





Minimum
                payments required forAfterContract
                type
            2007
            
            2008
            
            2009
            
            2010
            
            2011
            
            2011
            
            TotalCoal
                and natural gas for generation
            $
            118.3
            
            $
            48.2
            
            $
            44.4
            
            $
            25.6
            
            $
            8.6
            
            $
            7.5
            
            $
            252.6Electric
                capacity
            
            28.0
            
            
            35.8
            
            
            28.9
            
            
            9.4
            
            
            9.4
            
            
            155.9
            
            
            267.4Natural
                gas for gas operations
            
            57.1
            
            
            25.3
            
            
            18.0
            
            
            9.3
            
            
            7.3
            
            
            15.6
            
            
            132.6Operating
                leases, easements and
              maintenance contracts
            
            12.8
            
            
            9.5
            
            
            4.4
            
            
            3.8
            
            
            3.4
            
            
            73.4
            
            
            107.3Deferred
                construction payments
            
            200.0
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            200.0$
            416.2
            
            $
            118.8
            
            $
            95.7
            
            $
            48.1
            
            $
            28.7
            
            $
            252.4
            
            $
            959.9





*Coal,
      Energy and Natural Gas Commitments*





MidAmerican
      Energy has coal supply and related transportation contracts for its coal-fired
      generating stations. The contracts have expiration dates ranging from 2007
      to
      2012. MidAmerican Energy expects to supplement these coal contracts with
      additional contracts and spot market purchases to fulfill its future coal supply
      needs. Additionally, MidAmerican Energy has a natural gas transportation
      contract, which expires in 2012, for a natural gas-fired generating plant.





MidAmerican
      Energy has contracts to purchase electric capacity to meet its electric system
      energy requirements. The contracts have expiration dates ranging from 2007
      to
      2028.





MidAmerican
      Energy also has various natural gas supply and transportation contracts for
      its
      gas operations that have expiration dates ranging from 2007 to 2017.





*Operating
      Leases, Easements and Maintenance Contracts*





MidAmerican
      Energy has non-cancelable operating leases with expiration dates from 2007
      to
      2015 primarily for computer equipment, office space and rail cars. MidAmerican
      Energy also has non-cancelable easements for land in northwest Iowa on which
      its
      wind-farm turbines are located, as well as non-cancelable maintenance contracts
      for the turbines. The easements have expiration dates from 2034 to 2057, and
      the
      maintenance contracts expire in 2007 and 2008. Payments on non-cancelable
      operating leases, easements and maintenance contracts totaled $11.7 million
      for 2006, $9.8 million for 2005 and $8.3 million for 2004.





*Deferred
                Construction Payments*





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




82




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





Net
      deferred payments added to Construction Work in Progress on the Consolidated
      Balance Sheets, but excluded from Utility Construction Expenditures on the
      Consolidated Statements of Cash Flows, totaled zero, $28.9 million and
      $78.2 million for 2006, 2005 and 2004, respectively.





*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, 2006, the
      maximum amount of such guarantees specified in these leases totaled
      $28.5 million. These guarantees are not reflected on the Consolidated
      Balance Sheets.





*Other
      Commitments and Contingencies*





MidAmerican
      Energy is involved in a number of 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 MidAmerican
      Energy’s financial results.





**(16)**
            **Employee
                Benefit Plans**





MidAmerican
      Energy sponsors a noncontributory defined benefit pension plan covering
      substantially all employees of MidAmerican Energy Holdings and its domestic
      energy subsidiaries, other than PacifiCorp. Benefit obligations under the plan
      are based on a cash balance arrangement for salaried employees and certain
      union
      employees and final average pay formulas for most union employees. Funding
      to
      the established trust is based upon the actuarially determined costs of the
      plan
      and the requirements of the Internal Revenue Code, the Employee Retirement
      Income Security Act and the Pension Protection Act of 2006. MidAmerican Energy
      also maintains noncontributory, nonqualified defined benefit supplemental
      executive retirement plans (“SERP”) 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, other than PacifiCorp. Under
      the
      plans, substantially all employees of the participating companies may become
      eligible for these benefits if they reach retirement age while working at their
      respective companies. The other postretirement benefit plan was amended for
      non-union employees on July 1, 2004, and substantially all union
      participants on July 1, 2006. As a result, non-union employees hired after
      June 30, 2004, and union employees hired after June 30, 2006, are not
      eligible for postretirement benefits other than pensions. The plan, as amended,
      establishes retiree medical accounts for participants to which MidAmerican
      Energy makes fixed contributions until the employee’s retirement. 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 has been allowed to recover accrued pension and other
      postretirement benefit costs pursuant to SFAS No. 87 and SFAS No. 106
      in its electric and gas service rates.





MidAmerican
      Energy bills to and is reimbursed currently for affiliates’ share of the net
      periodic benefit costs from all plans such affiliates participate in, as
      determined by MidAmerican Energy’s actuaries. In 2006, 2005 and 2004,
      MidAmerican Energy’s share of pension cost was $18.1 million,
      $16.8 million and $14.5 million, respectively. MidAmerican Energy’s
      share of other postretirement cost in 2006, 2005 and 2004 totaled
      $13.9 million, $12.6 million and $18.9 million, respectively. 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.





83


Net
      periodic benefit cost for the pension, including supplemental retirement, and
      other postretirement benefits plans of MidAmerican Energy and the aforementioned
      affiliates included the following components for the years ended
      December 31 (in thousands):


Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2004
              
              2006
              
              2005
              
              2004Service
                  cost
              $
              25,490
              
              $
              25,840
              
              $
              25,568
              
              $
              7,358
              
              $
              6,669
              
              $
              7,842Interest
                  cost
              
              38,186
              
              
              36,518
              
              
              35,159
              
              
              14,401
              
              
              13,455
              
              
              15,716Expected
                  return on plan assets
              
              (38,541
              )
              
              (38,188
              )
              
              (38,258
              )
              
              (10,353
              )
              
              (9,611
              )
              
              (8,437
              )Net
                  amortization
              
              3,792
              
              
              4,037
              
              
              3,535
              
              
              4,170
              
              
              3,957
              
              
              6,878Net
                  periodic benefit cost
              $
              28,927
              
              $
              28,207
              
              $
              26,004
              
              $
              15,576
              
              $
              14,470
              
              $
              21,999
 
 The
        following table is a reconciliation of the fair value of plan assets as of
        December 31 (in thousands):
 
 Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2006
              
              2005Plan
                  assets at fair value, beginning of year
              $
              612,829
              
              $
              591,628
              
              $
              190,900
              
              $
              179,375Employer
                  contributions
              
              5,912
              
              
              5,786
              
              
              17,919
              
              
              16,615Participant
                  contributions
              
              -
              
              
              -
              
              
              9,240
              
              
              9,096Actual
                  return on plan assets
              
              82,222
              
              
              46,966
              
              
              15,641
              
              
              5,958Benefits
                  paid and other
              
              (36,732
              )
              
              (31,551
              )
              
              (20,231
              )
              
              (20,144
              )Plan
                  assets at fair value, end of year
              $
              664,231
              
              $
              612,829
              
              $
              213,469
              
              $
              190,900
 
 The
        SERP
        has no assets; however, MidAmerican Energy and MidAmerican Energy Holdings
        have
        Rabbi trusts that hold corporate-owned life insurance and other investments
        to
        provide funding for the future cash requirements of the SERP. The cash surrender
        value of all of the policies included in the Rabbi trusts, net of amounts
        borrowed against the cash surrender value, plus the fair market value of
        other
        Rabbi trust investments was $109.3 million and $102.9 million as of
        December 31, 2006 and 2005, respectively, of which $73.7 million and
        $70.6 million was held by MidAmerican Energy as of December 31, 2006
        and 2005, respectively, with the remainder held by MidAmerican Energy Holdings.
        These assets are not included in the plan assets in the above table.
 
 The
        following table is a reconciliation of the benefit obligation as of
        December 31 (in thousands):
 
 Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2006
              
              2005Benefit
                  obligation, beginning of year
              $
              678,112
              
              $
              657,406
              
              $
              249,558
              
              $
              256,044Service
                  cost
              
              25,490
              
              
              25,840
              
              
              7,358
              
              
              6,669Interest
                  cost
              
              38,186
              
              
              36,518
              
              
              14,401
              
              
              13,455Participant
                  contributions
              
              -
              
              
              -
              
              
              9,240
              
              
              9,096Plan
                  change
              
              3,701
              
              
              (3,184
              )
              
              (16,035
              )
              
              (421
              )Actuarial
                  (gain) loss
              
              (4,103
              )
              
              (6,917
              )
              
              13,224
              
              
              (15,141
              )Benefits
                  paid and other
              
              (36,732
              )
              
              (31,551
              )
              
              (20,231
              )
              
              (20,144
              )Benefit
                  obligation, end of year
              $
              704,654
              
              $
              678,112
              
              $
              257,515
              
              $
              249,558Accumulated
                  benefit obligation, end of year
              $
              642,524
              
              $
              608,435
 
 The
        portion of the pension projected benefit obligation related to the SERP was
        $107.0 million and $105.7 million as of December 31, 2006 and
        2005, respectively. The SERP accumulated benefit obligation totaled
        $103.4 million and $102.2 million as of December 31, 2006 and 2005,
        respectively.
  84
  As
        of
        December 31, 2006, the funded status of the pension and other
        postretirement plans was recorded in the Consolidated Balance Sheet as required
        under the adoption of SFAS No. 158. Balance sheet amounts recorded as of
        December 31, 2005, did not include the unrecognized net actuarial losses
        (gains), prior service costs and net transition obligations of
        ($42.1) million for the pension plans and $46.5 million for the other
        postretirement plans. A minimum pension liability of $28.1 million was recorded
        at December 31, 2005 related to MidAmerican Energy’s SERP. The funded status of
        the plans and the net amount recognized in the accompanying Consolidated
        Balance
        Sheets as of December 31 is as follows (in thousands):
 
 Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2006
              
              2005Plan
                  assets at fair value, end of year
              $
              664,231
              
              $
              612,829
              
              $
              213,469
              
              $
              190,900Less
                  - Benefit obligation, end of year
              
              704,654
              
              
              678,112
              
              
              257,515
              
              
              249,558Funded
                  status
              
              (40,423
              )
              
              (65,283
              )
              
              (44,046
              )
              
              (58,658
              )Unrecognized
                  net actuarial (gain) loss
                and
                  other
              
              -
              
              
              (42,078
              )
              
              -
              
              
              46,545Net
                  liability recognized in the Consolidated Balance Sheets
              $
              (40,423
              )
              $
              (107,361
              )
              $
              (44,046
              )
              $
              (12,113
              )Net
                  liability recognized in the Consolidated Balance Sheets:Other
                  current liabilities
              $
              (6,866
              )
              $
              (6,691
              )
              $
              (404
              )
              $
              (83
              )Other
                  assets
              
              66,569
              
              
              -
              
              
              -
              
              
              -Other
                  liabilities
              
              (100,126
              )
              
              (128,815
              )
              
              (43,642
              )
              
              -Intangible
                  assets
              
              -
              
              
              11,939
              
              
              -
              
              
              -Regulatory
                  assets
              
              -
              
              
              11,694
              
              
              -
              
              
              -Accumulated
                  other comprehensive loss
              
              -
              
              
              4,512
              
              
              -
              
              
              -Liability
                  of affiliate company
              
              -
              
              
              -
              
              
              -
              
              
              (12,030
              )Net
                  liability recognized
              $
              (40,423
              )
              $
              (107,361
              )
              $
              (44,046
              )
              $
              (12,113
              )
 
 MidAmerican
        Energy sponsors pension and other postretirement plans on behalf of certain
        of
        its affiliates in addition to itself, and therefore, the portion of the funded
        status of the respective plans that has not yet been recognized in net periodic
        cost is attributable to multiple entities. Additionally, substantially all
        of
        MidAmerican Energy’s portion of such amounts is either refundable to or
        recoverable from its customers and is reflected as regulatory liabilities
        and
        regulatory assets. The portion of the funded status of the plans not yet
        recognized in net periodic cost and its recognition in the Consolidated Balance
        Sheets as of December 31 is as follows (in thousands):
 
 Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2006
              
              2005Amounts
                  not yet recognized as components of
                net
                  periodic benefit cost:Net
                  loss (gain)
              $
              (100,293
              )
              $
              (51,285
              )
              $
              34,715
              
              $
              29,725Prior
                  service cost
              
              10,340
              
              
              9,207
              
              
              (3,842
              )
              
              -Net
                  transition obligation
              
              -
              
              
              -
              
              
              3,269
              
              
              16,820Total
              $
              (89,953
              )
              $
              (42,078
              )
              $
              34,142
              
              $
              46,545Amounts
                  not yet recognized as components of
                net
                  periodic benefit cost are recorded as
                followsin
                  the Consolidated Balance Sheets:Regulatory
                  assets
              $
              18,291
              
              
              
              
              $
              27,457Receivable
                  from affiliates
              
              13,975
              
              
              
              
              
              2,295Regulatory
                  liabilities
              
              (122,193
              )
              
              
              
              
              -Payable
                  to affiliates
              
              (26
              )
              
              
              
              
              (19,197
              )Deferred
                  income taxes
              
              -
              
              
              
              
              
              23,587Total
              $
              (89,953
              )
              
              
              
              $
              34,142
  
 85
  The
        net
        loss, prior service cost and transition obligation that will be amortized
        in
        2007 into net periodic benefit cost are estimated to be as follows (in
        thousands):
 
 Net
              
              Prior
                  Service
              
              TransitionLoss
              
              Cost
              
              Cost
              
              TotalPension
              
              $
              1,072
              
              $
              2,777
              
              $
              -
              
              $
              3,849Other
                  postretirement
              
              
              2,290
              
              
              (232
              )
              
              545
              
              
              2,603
 
 *Plan
        Assumptions*
 
 Assumptions
        used to determine benefit obligations as of December 31 and net benefit
        cost for the years ended December 31 are as follows:
 
 Pension
              
              Other
                  Postretirement2006
              
              2005
              
              2004
              
              2006
              
              2005
              
              2004Benefit
                  obligations as of December 31:Discount
                  rate
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %Rate
                  of compensation increase
              
              4.50
              %
              
              5.00
              %
              
              5.00
              %
              Not
                  applicableNet
                  benefit cost for the years ended
                December 31:Discount
                  rate
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %
              
              5.75
              %Expected
                  return on plan assets(1)
              
              7.00
              %
              
              7.00
              %
              
              7.00
              %
              
              7.00
              %
              
              7.00
              %
              
              7.00
              %Rate
                  of compensation increase
              
              5.00
              %
              
              5.00
              %
              
              5.00
              %
              Not
                  applicable
 
 (1)
              Amounts
                  reflected are pre-tax values. Assumed after-tax returns for a taxable,
                  non-union other postretirement plan were 4.27% for all years
                  presented.
 
 2006
              
              2005Assumed
                  health care cost trend rates as of December 31:Health
                  care cost trend rate assumed for next year
              
              8.00
              %
              
              9.00
              %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
              
              $
              1,840
              
              $
              (1,527
              )Effect
                  on other postretirement benefit obligation
              
              $
              17,381
              
              $
              (14,806
              )
 
 *Contributions
        and Benefit Payments*
 
 Employer
        contributions to the pension and other postretirement plans are expected
        to be
        $6.9 million and $10.2 million, respectively, for 2007. MidAmerican
        Energy’s policy is to contribute the minimum required amount to the pension plan
        and the net periodic cost to its other postretirement plans. The Pension
        Protection Act of 2006 changed funding rules that may have the effect of
        making
        minimum pension funding requirements more volatile than they have been
        historically. Accordingly, MidAmerican Energy continually evaluates its funding
        strategies.
  86
  Net
        periodic benefit costs assigned to MidAmerican Energy affiliates are reimbursed
        currently in accordance with its intercompany administrative services
        agreements. MidAmerican Energy’s expected benefit payments to participants from
        its pension and other postretirement plans for 2007 through 2011 and for
        the
        five years thereafter are summarized below (in thousands):
 
 Projected
                  Benefit PaymentsOther
                  PostretirementPension
              
              Gross
              
              Medicare
                  Subsidy
              
              Net
                  of Subsidy2007
              
              $
              46,775
              
              $
              15,785
              
              $
              2,567
              
              $
              13,2182008
              
              
              49,590
              
              
              17,378
              
              
              2,750
              
              
              14,6282009
              
              
              53,733
              
              
              18,719
              
              
              2,915
              
              
              15,8042010
              
              
              41,985
              
              
              20,118
              
              
              3,057
              
              
              17,0612011
              
              
              45,125
              
              
              21,368
              
              
              3,188
              
              
              18,1802012-16
              
              
              275,016
              
              
              124,838
              
              
              18,766
              
              
              106,072
 
 *Investment
        Policy and Asset Allocation*
 
 MidAmerican
        Energy’s investment policy for its pension and other postretirement plans is to
        balance risk and return through a diversified portfolio of high-quality equity
        securities, fixed income securities and other alternative investments. Asset
        allocation for the pension and other 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 AssetsTarget2006
              
              2005
              
              RangeEquity
                  securities
              
              70
              %
              
              66
              %
              
              65-75
              %Debt
                  securities
              
              24
              
              
              26
              
              
              20-30Real
                  estate
              
              5
              
              
              6
              
              
              0-10Other
              
              1
              
              
              2
              
              
              0-5Total
              
              100
              %
              
              100
              %
 
 MidAmerican
        Energy’s other postretirement benefit plan asset allocation as of
        December 31, was as follows:
 
 Percentage
                  of Plan AssetsTarget2006
              
              2005
              
              RangeEquity
                  securities
              
              52
              %
              
              50
              %
              
              45-55
              %Debt
                  securities
              
              47
              
              
              48
              
              
              45-55Other
              
              1
              
              
              2
              
              
              0-10Total
              
              100
              %
              
              100
              %
 
 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 MidAmerican
        Energy contributions were $9.6 million, $9.3 million and
        $8.7 million for 2006, 2005 and 2004, respectively.
 
 87




**(17)**  **Fair
      Value of Financial Instruments**





The
      carrying amount of cash and cash equivalents, notes payable and short-term
      investments approximates fair value because of the short-term maturity or
      frequent remarketing of these instruments. Quad Cities Station nuclear
      decommissioning trust funds are carried at fair value, which is based on quoted
      market prices of the investments held by the fund.





The
      fair
      value of MidAmerican Energy’s long-term debt is estimated based on the quoted
      market prices for the same or similar issues or on the current rates offered
      to
      MidAmerican Energy for debt of the same remaining maturities. 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):





2006
            
            2005Carrying
                amount
            $
            1,821,009
            
            $
            1,631,760Estimated
                fair value
            
            1,834,590
            
            
            1,676,760





**(18)**  **Segment
      Information**





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





88




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





2006
            
            2005
            
            2004Segment
                Profit InformationOperating
                revenues:Regulated
                electric
            
            $
            1,779,482
            
            $
            1,513,239
            
            $
            1,421,709Regulated
                gas
            
            
            1,111,635
            
            
            1,322,717
            
            
            1,010,909Nonregulated
                and other
            
            
            556,814
            
            
            324,381
            
            
            263,735Total
            
            $
            3,447,931
            
            $
            3,160,337
            
            $
            2,696,353Depreciation
                and amortization expense:Regulated
                electric
            
            $
            243,106
            
            $
            237,274
            
            $
            235,240Regulated
                gas
            
            
            30,460
            
            
            30,354
            
            
            29,712Nonregulated
                and other (a)
            
            
            1,057
            
            
            1,315
            
            
            1,255Total
            
            $
            274,623
            
            $
            268,943
            
            $
            266,207Operating
                income:Regulated
                electric
            
            $
            372,060
            
            $
            334,618
            
            $
            304,045Regulated
                gas
            
            
            36,396
            
            
            38,669
            
            
            42,371Nonregulated
                and other
            
            
            12,719
            
            
            7,837
            
            
            9,980Total
            
            $
            421,175
            
            $
            381,124
            
            $
            356,396Interest
                and dividend income:Regulated
                electric
            
            $
            7,313
            
            $
            5,112
            
            $
            3,809Regulated
                gas
            
            
            1,756
            
            
            1,039
            
            
            765Nonregulated
                and other
            
            
            15
            
            
            15
            
            
            8Total
            
            
            9,084
            
            
            6,166
            
            
            4,582Eliminations
            
            
            (119
            )
            
            (150
            )
            
            (181
            )Consolidated
            
            $
            8,965
            
            $
            6,016
            
            $
            4,401Fixed
                charges and preferred dividends:Regulated
                electric
            
            $
            77,397
            
            $
            68,782
            
            $
            60,950Regulated
                gas
            
            
            12,805
            
            
            10,694
            
            
            10,037Nonregulated
                and other
            
            
            269
            
            
            271
            
            
            300Total
            
            
            90,471
            
            
            79,747
            
            
            71,287Eliminations
            
            
            (119
            )
            
            (150
            )
            
            (181
            )Consolidated
            
            $
            90,352
            
            $
            79,597
            
            $
            71,106Income
                taxes:Regulated
                electric
            
            $
            105,199
            
            $
            100,788
            
            $
            93,122Regulated
                gas
            
            
            10,041
            
            
            11,300
            
            
            9,557Nonregulated
                and other
            
            
            3,030
            
            
            2,768
            
            
            (524
            )Total
            
            $
            118,270
            
            $
            114,856
            
            $
            102,155Earnings
                on common stock:Regulated
                electric
            
            $
            238,456
            
            $
            193,675
            
            $
            171,490Regulated
                gas
            
            
            17,859
            
            
            21,880
            
            
            27,825Nonregulated
                and other
            
            
            9,114
            
            
            4,495
            
            
            9,895Total
            
            $
            265,429
            
            $
            220,050
            
            $
            209,210





89




2006
            
            2005
            
            2004Segment
                Asset InformationCapital
                expenditures:Regulated
                electric
            
            $
            770,213
            
            $
            713,645
            
            $
            690,157Regulated
                gas
            
            
            48,504
            
            
            52,555
            
            
            49,768Nonregulated
                and other
            
            
            368
            
            
            1,893
            
            
            1,845Total
            
            $
            819,085
            
            $
            768,093
            
            $
            741,770Total
                assets:Regulated
                electric
            
            $
            5,484,726
            
            $
            4,698,923
            
            $
            4,214,700Regulated
                gas
            
            
            923,373
            
            
            1,052,978
            
            
            849,224Nonregulated
                and other
            
            
            101,494
            
            
            112,236
            
            
            48,027Total
            
            $
            6,509,593
            
            $
            5,864,137
            
            $
            5,111,951





(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.





**(19)**  **Related
      Party Transactions**





The
      companies identified as affiliates of MidAmerican Energy are Berkshire Hathaway
      and its subsidiaries, including 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 $70.6 million,
      $51.8 million and $58.9 million for 2006, 2005 and 2004,
      respectively.





MidAmerican
      Energy reimbursed MidAmerican Energy Holdings in the amount of
      $9.2 million, $16.3 million and $11.4 million in 2006, 2005 and
      2004, respectively, for its 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. 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.





Northern
      Natural Gas Company (“NNG”), an indirect, wholly owned subsidiary of MidAmerican
      Energy Holdings, 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
      $52.4 million in 2006, $52.6 million in 2005 and $48.3 million in
      2004.





MidAmerican
      Energy had accounts receivable from affiliates of $11.2 million and
      $3.2 million as of December 31, 2006 and 2005, respectively, that are
      included in Receivables on the Consolidated Balance Sheets. MidAmerican Energy
      also had accounts payable to affiliates of $9.0 million and
      $7.3 million as of December 31, 2006 and 2005, respectively, that are
      included in Accounts Payable on the Consolidated Balance Sheets.





MidAmerican
      Energy paid common dividends totaling $50.0 million to MHC in 2006.




90




On
      December 31, 2006, MidAmerican Energy adopted SFAS No. 158 and
      recognized the full amount of the funded status for its pension and
      postretirement plans. The funded status of such plans attributable to
      MidAmerican Energy’s affiliates that had not previously been recognized through
      income was recognized as an intercompany balance with such affiliates. As of
      December 31, 2006, amounts receivable from affiliates attributable to the
      funded status of employee benefit plans totaled $16.3 million and similar
      amounts payable to affiliates totaled $19.2 million. MidAmerican Energy
      will adjust these balances when changes to the funded status of the respective
      plans are recognized and does not intend to settle the balances currently.
      See
      Note (16) for further information pertaining to pension and postretirement
      accounting.





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.





**(20)**  **Unaudited
      Quarterly Operating Results**





20061st
                Quarter
            
            2nd
                Quarter
            
            3rd
                Quarter
            
            4th
                Quarter(In
                thousands)Operating
                revenues
            
            $
            1,041,182
            
            $
            760,271
            
            $
            765,360
            
            $
            881,118Operating
                income
            
            
            134,888
            
            
            79,206
            
            
            129,060
            
            
            78,021Net
                income
            
            
            86,968
            
            
            45,590
            
            
            84,669
            
            
            49,449Earnings
                on common stock
            
            
            86,656
            
            
            45,279
            
            
            84,357
            
            
            49,13720051st
                Quarter
            
            
            2nd
                Quarter
            
            
            3rd
                Quarter
            
            
            4th
                Quarter(In
                thousands)Operating
                revenues
            
            $
            855,136
            
            $
            618,470
            
            $
            721,657
            
            $
            965,074Operating
                income
            
            
            99,461
            
            
            58,730
            
            
            130,204
            
            
            92,729Net
                income
            
            
            56,349
            
            
            32,214
            
            
            82,368
            
            
            50,366Earnings
                on common stock
            
            
            56,037
            
            
            31,903
            
            
            82,056
            
            
            50,054





Quarterly
      data reflect seasonal variations common in the Midwest utility industry.





91








**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, 2006 and 2005, and the related consolidated statements
      of operations, comprehensive income, cash flows and retained earnings for each
      of the three years in the period ended December 31, 2006. Our audits also
      included the 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included 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, 2006 and 2005, and the results of their operations and
      their cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America. Also, in our opinion, such 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 2 to the consolidated financial statements, the Company
      adopted Statement of Financial Accounting Standards No. 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
      amendment of FASB Statements No. 87, 88, 106, and 132(R)” as of
      December 31, 2006.








/s/
      Deloitte & Touche LLP





Des
      Moines, Iowa


February
      27, 2007








92





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(In
      thousands)





**As
                of December 31,****2006**
            
            **2005****ASSETS****Utility
                Plant, Net**Electric
            
            $
            6,366,054
            
            $
            5,933,387Gas
            
            
            1,031,341
            
            
            992,8347,397,395
            
            
            6,926,221Accumulated
                depreciation and amortization
            
            
            (3,261,001
            )
            
            (3,096,933
            )4,136,394
            
            
            3,829,288Construction
                work in progress
            
            
            866,677
            
            
            596,4585,003,071
            
            
            4,425,746**Current
                Assets**Cash
                and cash equivalents
            
            
            9,124
            
            
            71,207Short-term
                investments
            
            
            15,000
            
            
            25,425Receivables,
                less allowances of $9,635 and $10,942, respectively
            
            
            390,836
            
            
            469,128Inventories
            
            
            113,343
            
            
            84,923Other
            
            
            163,450
            
            
            61,277691,753
            
            
            711,960**Investments
                and Nonregulated Property, Net**
            
            
            426,983
            
            
            380,835**Goodwill**
            
            
            1,269,667
            
            
            1,265,979**Regulatory
                Assets**
            
            
            273,242
            
            
            237,201**Other
                Assets**
            
            
            129,775
            
            
            135,695**Total
                Assets**
            
            $
            7,794,491
            
            $
            7,157,416**CAPITALIZATION
                AND LIABILITIES****Capitalization**Member’s
                equity
            
            $
            2,513,402
            
            $
            2,234,837MidAmerican
                Energy preferred securities
            
            
            30,329
            
            
            30,329Long-term
                debt, excluding current portion
            
            
            2,519,389
            
            
            2,171,2515,063,120
            
            
            4,436,417**Current
                Liabilities**Note
                payable to affiliate
            
            
            3,285
            
            
            54,283Current
                portion of long-term debt
            
            
            1,620
            
            
            160,509Accounts
                payable
            
            
            493,409
            
            
            360,225Taxes
                accrued
            
            
            97,972
            
            
            105,029Interest
                accrued
            
            
            48,130
            
            
            30,401Other
            
            
            171,583
            
            
            104,811815,999
            
            
            815,258**Other
                Liabilities**Deferred
                income taxes
            
            
            467,735
            
            
            458,451Investment
                tax credits
            
            
            40,569
            
            
            43,962Asset
                retirement obligations
            
            
            173,204
            
            
            191,117Regulatory
                liabilities
            
            
            989,044
            
            
            763,155Other
            
            
            244,820
            
            
            449,0561,915,372
            
            
            1,905,741**Total
                Capitalization and Liabilities**
            
            $
            7,794,491
            
            $
            7,157,416





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





93





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Operating
                Revenues**Regulated
                electric
            
            $
            1,779,482
            
            $
            1,513,239
            
            $
            1,421,709Regulated
                gas
            
            
            1,111,635
            
            
            1,322,717
            
            
            1,010,909Nonregulated
            
            
            561,677
            
            
            330,128
            
            
            269,0823,452,794
            
            
            3,166,084
            
            
            2,701,700**Operating
                Expenses**Regulated:Cost
                of fuel, energy and capacity
            
            
            672,040
            
            
            476,618
            
            
            404,615Cost
                of gas sold
            
            
            888,470
            
            
            1,098,410
            
            
            789,975Other
                operating expenses
            
            
            401,958
            
            
            380,811
            
            
            374,810Maintenance
            
            
            156,199
            
            
            150,740
            
            
            164,821Depreciation
                and amortization
            
            
            273,565
            
            
            267,628
            
            
            264,952Property
                and other taxes
            
            
            97,199
            
            
            95,064
            
            
            92,6372,489,431
            
            
            2,469,271
            
            
            2,091,810Nonregulated:Cost
                of sales
            
            
            523,374
            
            
            292,454
            
            
            231,953Other
            
            
            19,371
            
            
            23,276
            
            
            21,990542,745
            
            
            315,730
            
            
            253,943Total
                operating expenses
            
            
            3,032,176
            
            
            2,785,001
            
            
            2,345,753**Operating
                Income**
            
            
            420,618
            
            
            381,083
            
            
            355,947**Non-Operating
                Income**Interest
                and dividend income
            
            
            9,282
            
            
            6,203
            
            
            4,509Allowance
                for equity funds
            
            
            37,241
            
            
            24,433
            
            
            18,949Other
                income
            
            
            63,290
            
            
            23,088
            
            
            11,072Other
                expense
            
            
            (7,875
            )
            
            (20,007
            )
            
            (5,267
            )101,938
            
            
            33,717
            
            
            29,263**Fixed
                Charges**Interest
                on long-term debt
            
            
            140,464
            
            
            127,581
            
            
            119,004Other
                interest expense
            
            
            14,256
            
            
            10,077
            
            
            6,184Preferred
                dividends of subsidiaries
            
            
            1,247
            
            
            1,247
            
            
            1,245Allowance
                for borrowed funds
            
            
            (16,109
            )
            
            (10,544
            )
            
            (7,816
            )139,858
            
            
            128,361
            
            
            118,617**Income
                Before Income Taxes**
            
            
            382,698
            
            
            286,439
            
            
            266,593**Income
                Taxes**
            
            
            94,457
            
            
            91,370
            
            
            87,336**Net
                Income**
            
            $
            288,241
            
            $
            195,069
            
            $
            179,257





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




94





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE
      INCOME**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Net
                Income**
            
            $
            288,241
            
            $
            195,069
            
            $
            179,257**Other
                Comprehensive Income (Loss)**Unrealized
                gains (losses) on available-for-sale securities:Unrealized
                holding gains (losses) during period-Before
                income taxes
            
            
            32,049
            
            
            654
            
            
            136Income
                tax (expense) benefit
            
            
            (11,218
            )
            
            (229
            )
            
            (48
            )20,831
            
            
            425
            
            
            88Less
                realized gains (losses) reflected in net income during
                period-Before
                income taxes
            
            
            32,113
            
            
            653
            
            
            480Income
                tax (expense) benefit
            
            
            (11,240
            )
            
            (229
            )
            
            (168
            )20,873
            
            
            424
            
            
            312Net
                unrealized gains (losses)
            
            
            (42
            )
            
            1
            
            
            (224
            )Unrealized
                gains (losses) on cash flow hedges:Unrealized
                gains (losses) during period-Before
                income taxes
            
            
            (22,402
            )
            
            -
            
            
            -Income
                tax benefit
            
            
            8,912
            
            
            -
            
            
            -(13,490
            )
            
            -
            
            
            -Less
                realized gains (losses) reflected in net income
              during
                period-Before
                income taxes
            
            
            (2,215
            )
            
            -
            
            
            682Income
                tax (expense) benefit
            
            
            893
            
            
            -
            
            
            (283
            )(1,322
            )
            
            -
            
            
            399Net
                unrealized gains (losses)
            
            
            (12,168
            )
            
            -
            
            
            (399
            )Minimum
                pension liability adjustment:Before
                income taxes
            
            
            (22
            )
            
            (4,512
            )
            
            -Income
                tax (expense) benefit
            
            
            9
            
            
            1,876
            
            
            -(13
            )
            
            (2,636
            )
            
            -Other
                comprehensive income (loss)
            
            
            (12,223
            )
            
            (2,635
            )
            
            (623
            )**Comprehensive
                Income**
            
            $
            276,018
            
            $
            192,434
            
            $
            178,634





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




95





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Net
                Cash Flows From Operating Activities**Net
                income
            
            $
            288,241
            
            $
            195,069
            
            $
            179,257Adjustments
                to reconcile net income to net cash provided:Depreciation
                and amortization
            
            
            274,814
            
            
            269,142
            
            
            266,409Deferred
                income taxes and investment tax credit, net
            
            
            (3,233
            )
            
            (15,898
            )
            
            30,434Amortization
                of other assets and liabilities
            
            
            21,269
            
            
            26,229
            
            
            17,199Gain
                on sale of securities, assets and other investments
            
            
            (42,835
            )
            
            (13,954
            )
            
            (316
            )Loss
                from impairment of assets and other investments
            
            
            225
            
            
            15,641
            
            
            1,735Impact
                of changes in working capital-Receivables,
                net
            
            
            67,751
            
            
            (117,846
            )
            
            (28,717
            )Inventories
            
            
            (28,420
            )
            
            5,023
            
            
            (4,181
            )Accounts
                payable
            
            
            (80,701
            )
            
            90,494
            
            
            28,164Taxes
                accrued
            
            
            (7,012
            )
            
            (6,741
            )
            
            (2,087
            )Other
                current assets and liabilities
            
            
            34,243
            
            
            (7,724
            )
            
            9,231Other,
                net
            
            
            (9,029
            )
            
            (15,744
            )
            
            (3,548
            )Net
                cash provided by operating activities
            
            
            515,313
            
            
            423,691
            
            
            493,580**Net
                Cash Flows From Investing Activities**Utility
                construction expenditures
            
            
            (758,179
            )
            
            (699,061
            )
            
            (631,962
            )Quad
                Cities Station decommissioning trust fund
            
            
            (8,299
            )
            
            (8,299
            )
            
            (8,299
            )Proceeds
                from sale of assets and other investments
            
            
            17,249
            
            
            15,088
            
            
            -Purchases
                of available-for-sale securities
            
            
            (852,931
            )
            
            (563,330
            )
            
            (748,801
            )Proceeds
                from sales of available-for-sale securities
            
            
            878,271
            
            
            565,689
            
            
            692,644Other,
                net
            
            
            17,113
            
            
            16,367
            
            
            22,959Net
                cash used in investing activities
            
            
            (706,776
            )
            
            (673,546
            )
            
            (673,459
            )**Net
                Cash Flows From Financing Activities**Issuance
                of long-term debt, net
            
            
            346,144
            
            
            296,466
            
            
            347,769Retirement
                of long-term debt, including reacquisition cost
            
            
            (160,591
            )
            
            (90,850
            )
            
            (56,168
            )Note
                payable to affiliate
            
            
            (50,998
            )
            
            22,783
            
            
            21,050Net
                decrease in notes payable
            
            
            -
            
            
            -
            
            
            (48,000
            )Other
            
            
            (5,175
            )
            
            4,296
            
            
            (963
            )Net
                cash provided by (used in) financing activities
            
            
            129,380
            
            
            232,695
            
            
            263,688**Net
                Increase (Decrease) in Cash and Cash Equivalents**
            
            
            (62,083
            )
            
            (17,160
            )
            
            83,809**Cash
                and Cash Equivalents at Beginning of Year**
            
            
            71,207
            
            
            88,367
            
            
            4,558**Cash
                and Cash Equivalents at End of Year**
            
            $
            9,124
            
            $
            71,207
            
            $
            88,367**Supplemental
                Disclosure:**Interest
                paid, net of amounts capitalized
            
            $
            107,346
            
            $
            115,073
            
            $
            104,500Income
                taxes paid
            
            $
            107,050
            
            $
            118,499
            
            $
            54,275





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





96





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF
      CAPITALIZATION**


(In
      thousands, except share amounts)





**As
                of December 31,****2006**
            
            **2005****Member’s
                Equity**Paid-in
                capital
            
            $
            1,669,753
            
            
            
            
            $
            1,669,753Retained
                earnings
            
            
            855,914
            
            
            
            
            
            567,673Accumulated
                other comprehensive income, net:Unrealized
                loss on cash flow hedges
            
            
            (12,168
            )
            
            
            
            
            -Unrealized
                gain (loss) on securities
            
            
            5
            
            
            
            
            
            47Funded
                status of benefit plans
            
            
            (102
            )
            
            
            
            
            -Minimum
                pension liability adjustment
            
            
            -
            
            
            
            
            
            (2,636
            )2,513,402
            
            
            49.6
            %
            
            2,234,837
            
            
            50.4
            %**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 shares
            
            
            3,570
            
            
            
            
            
            3,570$4.80
                Series, 49,898 shares
            
            
            4,990
            
            
            
            
            
            4,99030,329
            
            
            0.6
            %
            
            30,329
            
            
            0.7
            %**Long-Term
                Debt, Excluding Current Portion**MidAmerican
                Energy:Pollution
                control revenue obligations -6.1%
                Series due 2007
            
            
            -
            
            
            
            
            
            1,0005.95%
                Series, due 2023 (general mortgage bond-secured)
            
            
            29,030
            
            
            
            
            
            29,030Variable
                rate series (2006- 3.97%, 2005- 3.59%)-Due
                2016 and 2017
            
            
            37,600
            
            
            
            
            
            37,600Due
                2023 (general mortgage bond-secured)
            
            
            28,295
            
            
            
            
            
            28,295Due
                2023
            
            
            6,850
            
            
            
            
            
            6,850Due
                2024
            
            
            34,900
            
            
            
            
            
            34,900Due
                2025
            
            
            12,750
            
            
            
            
            
            12,750Notes
                -5.125%
                Series, due 2013
            
            
            275,000
            
            
            
            
            
            275,0004.65%
                Series, due 2014
            
            
            350,000
            
            
            
            
            
            350,0006.75%
                Series, due 2031
            
            
            400,000
            
            
            
            
            
            400,0005.75%
                Series, due 2035
            
            
            300,000
            
            
            
            
            
            300,0005.8%
                Series, due 2036
            
            
            350,000
            
            
            
            
            
            -Obligation
                under capital lease
            
            
            578
            
            
            
            
            
            1,184Unamortized
                debt premium and discount, net
            
            
            (5,614
            )
            
            
            
            
            (5,358
            )Total
                MidAmerican Energy
            
            
            1,819,389
            
            
            36.0
            %
            
            1,471,251
            
            
            33.1
            %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
            
            
            13.8
            %
            
            700,000
            
            
            15.8
            %2,519,389
            
            
            49.8
            %
            
            2,171,251
            
            
            48.9
            %**Total
                Capitalization**
            
            $
            5,063,120
            
            
            100.0
            %
            $
            4,436,417
            
            
            100.0
            %





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





97





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF RETAINED
      EARNINGS**


(In
      thousands)





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Beginning
                of Year**
            
            $
            567,673
            
            $
            372,604
            
            $
            193,347**Net
                Income**
            
            
            288,241
            
            
            195,069
            
            
            179,257**End
                of Year**
            
            $
            855,914
            
            $
            567,673
            
            $
            372,604





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




98





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**





**INDEX**


(1)
              Company
                  Organization
              100(2)
              Summary
                  of Significant Accounting Policies
              100(3)
              Jointly
                  Owned Utility Plant
              101(4)
              Inventories
              101(5)
              Investments
                  and Nonregulated Property, Net
              101(6)
              Regulatory
                  Assets and Liabilities
              104(7)
              Preferred
                  Securities
              104(8)
              Long-Term
                  Debt
              104(9)
              Short-Term
                  Borrowings
              105(10)
              Asset
                  Retirement Obligations
              106(11)
              Risk
                  Management
              106(12)
              Income
                  Taxes
              106(13)
              Non-Operating
                  Other Income and Expense
              107(14)
              Rate
                  Matters
              108(15)
              Commitments
                  and Contingencies
              108(16)
              Employee
                  Benefit Plans
              108(17)
              Fair
                  Value of Financial Instruments
              109(18)
              Segment
                  Information
              109(19)
              Related
                  Party Transactions
              111(20)
              Unaudited
                  Quarterly Operating Results
              113
 
 99





**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**(1)**
            **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 Energy Holding’s is 87.8% owned by Berkshire Hathaway Inc.
      (“Berkshire Hathaway”). 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’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.





**(2)**  **Summary
      of Significant Accounting Policies**





In
      addition to the following significant accounting policies, refer to Note (2)
      of
      MidAmerican Energy’s Notes to Consolidated Financial Statements for significant
      accounting policies of MidAmerican Funding.





*Principles
      of*  *Consolidation*





The
      Consolidated Financial Statements include the accounts of MidAmerican Funding
      and its subsidiaries. All significant intercompany accounts and transactions
      have been eliminated, other than those between rate-regulated
      operations.





*Reclassifications*





Certain
      amounts in the 2005 and 2004 Consolidated Financial Statements and supporting
      note disclosures have been reclassified to conform to the 2006 presentation.
      The
      Consolidated Statements of Operations reflect the reclassification of electric
      transmission wheeling costs from Other Operating Expenses to Cost of Fuel,
      Energy and Capacity totaling $8.5 million for 2005 and $6.0 million
      for 2004. These reclassifications had no effect on previously reported net
      income. The Consolidated Balance Sheet as of December 31, 2005, reflects
      the reclassification of the current portion of deferred income taxes to Current
      Liabilities - Other totaling $10.1 million.





*Investments*





MidAmerican
      Funding’s management determines the appropriate classification of investments in
      debt securities and equity securities at the acquisition date and re-evaluates
      the classifications at each balance sheet date. MidAmerican Funding’s
      investments in debt and equity securities, a majority of which are held in
      nuclear decommissioning trusts, are primarily classified as
      available-for-sale.





Available-for-sale
      securities are stated at fair value with realized gains and losses, as
      determined on a specific identification basis, recognized in earnings and
      unrealized gains and losses recognized in accumulated other comprehensive income
      (“AOCI”), net of tax, except for realized and unrealized gains and losses on
      funds held by the Quad Cities Station nuclear decommissioning trusts. Realized
      and unrealized gains and losses on these trust funds are recorded as regulatory
      liabilities because MidAmerican Funding expects any difference between actual
      decommissioning costs and the funds available in the trusts to be reflected
      in
      future regulated rates.





*Goodwill*





Goodwill
      represents the difference between the purchase cost and the fair value of the
      net assets acquired when MidAmerican Funding purchased MHC. Goodwill is
      allocated to each reporting unit and is tested for impairment using a variety
      of
      methods, principally discounted projected future net cash flows, at least
      annually and impairments, if any, are charged to earnings. MidAmerican Funding
      completed its annual review as of October 31, 2006. Key assumptions used in
      the testing include, but are not limited to, the use of an appropriate discount
      rate and estimated future cash flows. In estimating cash flows, MidAmerican
      Funding incorporates current market information as well as historical
      factors.




100




MidAmerican
      Funding records goodwill adjustments for changes in the estimates of or the
      settlement of tax bases of acquired assets, liabilities and carry-forwards
      and
      items relating to acquired entities’ prior income tax returns.





**(3)**  **Jointly
      Owned Utility Plant**





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





**(4)**  **Inventories**





Refer
      to
      Note (4) of MidAmerican Energy’s Notes to Consolidated Financial
      Statements.





**(5)**  **Investments
      and Nonregulated Property, Net**





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





2006
            
            2005Nuclear
                decommissioning trusts
            
            $
            258,816
            
            $
            228,070Rabbi
                trusts
            
            
            128,617
            
            
            119,314MidAmerican
                Energy non-utility property, net of accumulated depreciation of
              $4,823
                and $4,058, respectively
            
            
            17,115
            
            
            6,967Coal
                transportation property, net of accumulated depreciation of $2,871
                and
              $2,579,
                respectively
            
            
            9,048
            
            
            9,340Equipment
                leases
            
            
            5,702
            
            
            7,400Real
                estate, net of accumulated depreciation of $639 and $603,
                respectively
            
            
            4,977
            
            
            5,264Other
                venture capital investments
            
            
            1,377
            
            
            1,508Energy
                projects
            
            
            -
            
            
            1,275Other
            
            
            1,331
            
            
            1,697Total
            
            $
            426,983
            
            $
            380,835





*General*





Investments
      held by the nuclear decommissioning trusts 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 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 Quad Cities
      Station.





The
      investment in Rabbi trusts represents the cash surrender 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 hold
      investments used to fund the obligations of various nonqualified executive
      and
      director compensation plans and to pay the costs of the trusts.





101




MidAmerican
      Energy non-utility property consists of property such as computer software,
      land
      and other assets not recoverable for regulated utility purposes. In 2006,
      MidAmerican Energy constructed $9.2 million of currently non-recoverable
      utility transmission assets, which are being depreciated over 55 years. Other
      depreciable property consists primarily of computer software, which is amortized
      on a straight-line basis over five years.





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.





Equipment
      leases as of December 31, 2006, which are accounted for as leveraged leases
      and held by InterCoast Capital, consist primarily of a seven percent undivided
      interest in an electric generating station leased to a utility located in
      Arizona. That lease terminates in 2015 and had a carrying pre-tax value of
      $5.4 million and $6.4 million as of December 31, 2006 and 2005,
      respectively. The investment is exposed to the credit risk of the lessee.





Equipment
      leases for 2005 also include leveraged leases related to equity financing
      provided for two commercial passenger aircraft leased to major domestic
      airlines. During 2006, InterCoast Capital disposed of the two aircraft. Refer
      to
      Note (13) for a discussion of the losses recognized in 2005 related to the
      aircraft leases.





The
      investment in real estate includes primarily a 1,920 acre planned residential
      and commercial development community located in the southeast corner of South
      Dakota. As of December 31, 2006, 53.0% of the development available for
      sale had been sold.





As
      of
      December 31, 2005, energy projects consisted of non-controlling interests
      in a gas-fired cogeneration plant and a hydroelectric generating plant. During
      2006, InterCoast Capital sold its partnership interest in the gas-fired
      cogeneration plant and changed a financing arrangement related to its investment
      in the hydroelectric generating plant. Refer to Note (13) regarding the income
      recognized by MidAmerican Funding.





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





102




*Investments
      in Debt and Equity Securities*





Substantially
      all of MidAmerican Funding’s investments in debt and equity securities, other
      than auction rate securities, consist of the investments in the Quad Cities
      Station nuclear decommissioning trusts. Refer to Note (17) of MidAmerican
      Energy’s Notes to Consolidated Financial Statements. The amortized cost, gross
      unrealized gains and losses and estimated fair value of MidAmerican Funding’s
      investments in debt and equity securities as of December 31 were as follows
      (in thousands):





2006Amortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueAvailable-for-sale:Equity
                securities
            
            $
            88,870
            
            $
            56,915
            
            $
            (662
            )
            $
            145,123Municipal
                bonds
            
            
            23,682
            
            
            382
            
            
            (60
            )
            
            24,004U.
                S. Government securities
            
            
            54,094
            
            
            461
            
            
            (374
            )
            
            54,181Corporate
                securities
            
            
            34,174
            
            
            415
            
            
            (125
            )
            
            34,464Cash
                equivalents
            
            
            1,098
            
            
            -
            
            
            -
            
            
            1,098$
            201,918
            
            $
            58,173
            
            $
            (1,221
            )
            $
            258,870





2005Amortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            Losses
            
            ValueAvailable-for-sale:Equity
                securities
            
            $
            85,267
            
            $
            44,609
            
            $
            (2,087
            )
            $
            127,789Municipal
                bonds
            
            
            21,309
            
            
            319
            
            
            (131
            )
            
            21,497U.
                S. Government securities
            
            
            47,024
            
            
            520
            
            
            (402
            )
            
            47,142Corporate
                securities
            
            
            31,243
            
            
            527
            
            
            (581
            )
            
            31,189Cash
                equivalents
            
            
            571
            
            
            -
            
            
            -
            
            
            571$
            185,414
            
            $
            45,975
            
            $
            (3,201
            )
            $
            228,188





As
      of
      December 31, 2006, the debt securities held by the Quad Cities Station
      nuclear decommissioning trusts had the following maturities (in thousands):





Available-For-SaleAmortized
            
            FairCost
            
            ValueWithin
                1 year
            
            $
            3,363
            
            $
            3,3461
                through 5 years
            
            
            35,220
            
            
            35,0565
                through 10 years
            
            
            25,912
            
            
            26,041Over
                10 years
            
            
            47,455
            
            
            48,206





103




The
      proceeds and gross realized gains and losses on the disposition of
      available-for-sale securities are shown in the following table (in thousands).
      Realized gains and losses in the Quad Cities Station nuclear decommissioning
      trusts are recorded in the regulatory liability related to the Quad Cities
      Station asset retirement obligation and do not impact earnings. Realized gains
      and losses are determined by specific identification. Refer to Note (13) for
      a
      discussion of the sale of marketable securities in 2006 resulting in a
      $27.6 million gain.





Years
                Ended December 31,2006
            
            2005
            
            2004Proceeds
                from sales
            
            $
            187,087
            
            $
            91,733
            
            $
            85,237Gross
                realized gains
            
            
            31,580
            
            
            3,256
            
            
            3,205Gross
                realized losses
            
            
            (1,566
            )
            
            (2,175
            )
            
            (822
            )





**(6)**  **Regulatory
      Assets and Liabilities**





Refer
      to
      Note (6) of MidAmerican Energy’s Notes to Consolidated Financial
      Statements.





**(7)**  **Preferred
      Securities**





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





**(8)**  **Long-Term
      Debt**





MidAmerican
      Funding’s annual sinking fund requirements and maturities of long-term debt for
      2007 through 2011 are $1.6 million, $0.4 million, $175.1 million,
      $- million and $200.0 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
      floating or fixed rate alternatives. The interest rates shown in the
      Consolidated Statements of Capitalization are the weighted average interest
      rates as of December 31, 2006 and 2005. 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, 2006, MidAmerican Energy was in
      compliance with all of its applicable long-term debt covenants.





On
      October 6, 2006, MidAmerican Energy issued $350.0 million of 5.8%
      medium-term notes due in 2036. The proceeds are being used to support
      construction of electric generation projects and 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.




104




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.





Subsidiaries
      of MidAmerican Funding 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, 2006, MidAmerican
      Energy’s common equity ratio was 53.6% computed on a basis consistent with its
      commitment.





As
      of
      December 31, 2006, 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.





**(9)**  **Short-Term
      Borrowings**





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.





MidAmerican
      Energy has in place a $500.0 million revolving credit facility expiring in
      July 2011, which supports its $379.6 million commercial paper program
      and its variable rate pollution control revenue obligations. The credit facility
      has a variable interest rate based on the London Interbank Offered Rate
      (“LIBOR”) plus 0.115% that varies based on MidAmerican Energy’s credit ratings
      for its senior unsecured long-term debt securities. The related credit agreement
      requires that MidAmerican Energy’s ratio of consolidated debt to total
      capitalization, including current maturities, not exceed 0.65 to 1.0 as of
      the
      last day of any quarter. In addition, MidAmerican Energy has a $5.0 million
      line of credit, which expires in June 2007 and has a variable interest rate
      based on LIBOR plus 0.25%. As of December 31, 2006 and 2005, MidAmerican
      Energy had no commercial paper or bank notes outstanding, and the full amount
      of
      the revolving credit facility and line of credit was available. MHC has a
      $4.0 million line of credit, expiring in June 2007, under which zero
      was outstanding at December 31, 2006. As of December 31, 2006,
      MidAmerican Funding and its subsidiaries were in compliance with all covenants
      related to their respective short-term borrowings. MidAmerican Energy has
      authority from the FERC to issue through April 14, 2007, short-term debt in
      the form of commercial paper and bank notes aggregating $500.0 million.





105




**(10)**  **Asset
      Retirement Obligations**





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





**(11)**  **Risk
      Management**





Refer
      to
      Note (11) of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      a discussion of MidAmerican Funding’s commodity price, and weather
      risks.





**(12)**  **Income
      Taxes**





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





2006
            
            2005
            
            2004Current:Federal
            
            $
            91,068
            
            $
            86,774
            
            $
            62,278State
            
            
            6,621
            
            
            20,494
            
            
            (5,376
            )97,689
            
            
            107,268
            
            
            56,902Deferred:Federal
            
            
            9,953
            
            
            (9,342
            )
            
            40,023State
            
            
            (9,793
            )
            
            (2,375
            )
            
            (5,222
            )160
            
            
            (11,717
            )
            
            34,801Investment
                tax credit, net
            
            
            (3,392
            )
            
            (4,181
            )
            
            (4,367
            )Total
            
            $
            94,457
            
            $
            91,370
            
            $
            87,336





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:





2006
            
            2005
            
            2004Statutory
                federal income tax rate
            
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %Amortization
                of investment tax credit
            
            
            (0.9
            )
            
            (1.5
            )
            
            (1.6
            )State
                income tax, net of federal income tax benefit
            
            
            4.4
            
            
            4.9
            
            
            5.9Renewable
                electricity production tax credits
            
            
            (5.6
            )
            
            (3.9
            )
            
            -Effects
                of ratemaking
            
            
            (2.1
            )
            
            (2.0
            )
            
            (2.8
            )Resolution
                of potential tax matter
            
            
            (4.6
            )
            
            -
            
            
            -Other
            
            
            (1.5
            )
            
            (0.6
            )
            
            (3.7
            )Effective
                federal and state income tax rate
            
            
            24.7
            %
            
            31.9
            %
            
            32.8
            %





106




The
      Consolidated Balance Sheets included the following deferred income taxes as
      of
      December 31 (in thousands):





2006
            
            2005Deferred
                tax assets related to:Regulatory
                liabilities
            
            $
            136,462
            
            $
            69,888Revenue
                sharing
            
            
            109,863
            
            
            92,040Pensions
            
            
            51,125
            
            
            54,022Nuclear
                reserves and decommissioning
            
            
            22,778
            
            
            17,912Unrealized
                losses, net
            
            
            22,619
            
            
            23,214Fuel
                cost recoveries
            
            
            5,347
            
            
            -Other
            
            
            18,404
            
            
            11,721366,598
            
            
            268,797Deferred
                tax liabilities related to:Depreciable
                property
            
            
            589,828
            
            
            516,100Regulatory
                assets
            
            
            233,433
            
            
            208,879Fuel
                cost recoveries
            
            
            -
            
            
            9,896Reacquired
                debt
            
            
            2,559
            
            
            2,472825,820
            
            
            737,347Net
                deferred income tax liability
            
            $
            459,222
            
            $
            468,550





The
      net
      deferred income tax liability was reflected as follows on the Consolidated
      Balance Sheets as of December 31, (in thousands).





2006
            
            2005Current
                assets - Other
            
            $
            8,513
            
            $
            -Current
                liabilities - Other
            
            
            -
            
            
            10,099Deferred
                income taxes
            
            
            467,735
            
            
            458,451Net
                deferred income tax liability
            
            $
            459,222
            
            $
            468,550





**(13)**  **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):





2006
            
            2005
            
            2004Other
                income:Marketable
                securities gains
            
            $
            32,187
            
            $
            4,041
            
            $
            480Gains
                on sales of assets and other investments
            
            
            15,277
            
            
            9,943
            
            
            -Corporate-owned
                life insurance income
            
            
            7,119
            
            
            5,151
            
            
            5,447Income
                from energy projects and venture capital investments
            
            
            5,196
            
            
            1,211
            
            
            2,540Other
            
            
            3,511
            
            
            2,742
            
            
            2,605Total
            
            $
            63,290
            
            $
            23,088
            
            $
            11,072





Marketable
      securities gains includes gains of $27.6 million in 2006 and
      $3.4 million in 2005 from the sale of the common shares MidAmerican Funding
      held of an electronic energy and metals trading exchange. Additionally, 2006
      includes $4.5 million for a gain recognized when MidAmerican Funding
      donated its remaining shares in the company to a charitable foundation. An
      offsetting other expense, shown below, was also recognized for the
      donation.




107




Gains
      on
      the sales of assets and other investments, net in 2006 includes an
      $8.5 million gain on the sale of MidAmerican Funding’s non-controlling
      interest in a nonregulated gas-fired cogeneration plant and a $6.8 million
      gain on the sale of a commercial passenger aircraft. Gains on sales of assets
      and other investments, net in 2005 reflects gains on the sales of two
      non-strategic, passive investments.





Income
      from energy projects and venture capital investments for 2006 is due to changes
      in a financing arrangement related to a non-strategic investment in a
      hydroelectric generating plant.





2006
            
            2005
            
            2004Other
                expense:Donation
                of investment in marketable securities
            
            $
            4,470
            
            $
            -
            
            $
            -Write-down
                of impaired airplane leases
            
            
            -
            
            
            15,641
            
            
            1,735Other
                - primarily items not recoverable from MidAmerican
              Energy’s
                regulated utility customers
            
            
            3,405
            
            
            4,366
            
            
            3,532Total
            
            $
            7,875
            
            $
            20,007
            
            $
            5,267





The
      write-downs of impaired airplane leases relate to MidAmerican Funding’s previous
      investments in commercial passenger aircraft leased to major domestic airlines.
      During 2005, the airline industry continued to deteriorate and two major airline
      carriers filed for bankruptcy. MidAmerican Funding evaluated its investments
      in
      commercial passenger aircraft and recognized the losses for other-than-temporary
      impairments of those investments.





**(14)**  **Rate
      Matters**





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





**(15)**  **Commitments
      and Contingencies**





Refer
      to
      Note (15) of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      MidAmerican Energy commitments and contingencies disclosures.





*Other
      Commitments and Contingencies*





MidAmerican
      Funding is involved in a number of 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
      MidAmerican Funding’s financial results.





**(16)**  **Employee
      Benefit Plans**





Refer
      to
      Note (16) of MidAmerican Energy’s Notes to Consolidated Financial Statements for
      additional information regarding MidAmerican Funding’s pension, supplemental
      retirement and postretirement benefit plans.





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





2006
            
            2005
            
            2004Pension
                costs
            
            $
            10.7
            
            $
            11.3
            
            $
            11.4Other
                postretirement costs
            
            
            1.7
            
            
            1.8
            
            
            3.1





108




**(17)**  **Fair
      Value of Financial Instruments**





The
      carrying amount of cash and cash equivalents, notes payable and short-term
      investments approximates fair value because of the short-term maturity or
      frequent remarketing of these instruments. Quad Cities Station nuclear
      decommissioning trust funds and other marketable securities are carried at
      fair
      value, which is based on quoted market prices.





The
      fair
      value of equity investments carried at cost is based on an estimate of
      MidAmerican Funding’s share of partnership equity, offers from unrelated third
      parties or the discounted value of the future cash flows expected to be received
      from these investments. The fair value of MidAmerican Funding’s long-term debt
      is estimated based on the quoted market prices for the same or similar issues
      or
      on the current rates offered to MidAmerican Energy for debt of the same
      remaining maturities. The following table presents the carrying amount and
      estimated fair value of the named financial instruments as of December 31
      (in thousands):





2006
            
            2005Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            ValueFinancial
                instruments owned:Equity
                investments carried at cost
            
            $
            1,435
            
            $
            1,275
            
            $
            2,138
            
            $
            21,690Financial
                instruments issued:Long-term
                debt, including current portion
            
            $
            2,521,009
            
            $
            2,588,752
            
            $
            2,331,760
            
            $
            2,433,348





**(18)**  **Segment
      Information**





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





109




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





2006
            
            2005
            
            2004Segment
                Profit InformationOperating
                revenues:Regulated
                electric
            
            $
            1,779,482
            
            $
            1,513,239
            
            $
            1,421,709Regulated
                gas
            
            
            1,111,635
            
            
            1,322,717
            
            
            1,010,909Nonregulated
                and other
            
            
            561,677
            
            
            330,128
            
            
            269,082Total
            
            $
            3,452,794
            
            $
            3,166,084
            
            $
            2,701,700Depreciation
                and amortization expense:Regulated
                electric
            
            $
            243,106
            
            $
            237,274
            
            $
            235,240Regulated
                gas
            
            
            30,460
            
            
            30,354
            
            
            29,712Nonregulated
                and other (a)
            
            
            1,248
            
            
            1,514
            
            
            1,457Total
            
            $
            274,814
            
            $
            269,142
            
            $
            266,409Operating
                income:Regulated
                electric
            
            $
            372,060
            
            $
            334,618
            
            $
            304,045Regulated
                gas
            
            
            36,396
            
            
            38,669
            
            
            42,371Nonregulated
                and other
            
            
            12,162
            
            
            7,796
            
            
            9,531Total
            
            $
            420,618
            
            $
            381,083
            
            $
            355,947Interest
                and dividend income:Regulated
                electric
            
            $
            7,313
            
            $
            5,112
            
            $
            3,809Regulated
                gas
            
            
            1,756
            
            
            1,039
            
            
            765Nonregulated
                and other
            
            
            2,893
            
            
            1,038
            
            
            334Total
            
            
            11,962
            
            
            7,189
            
            
            4,908Eliminations
            
            
            (2,680
            )
            
            (986
            )
            
            (399
            )Consolidated
            
            $
            9,282
            
            $
            6,203
            
            $
            4,509Fixed
                charges and preferred dividends:Regulated
                electric
            
            $
            77,397
            
            $
            68,782
            
            $
            60,950Regulated
                gas
            
            
            12,805
            
            
            10,694
            
            
            10,037Nonregulated
                and other
            
            
            52,336
            
            
            49,871
            
            
            48,029Total
            
            
            142,538
            
            
            129,347
            
            
            119,016Eliminations
            
            
            (2,680
            )
            
            (986
            )
            
            (399
            )Consolidated
            
            $
            139,858
            
            $
            128,361
            
            $
            118,617




Income
                taxes:Regulated
                electric
            
            $
            105,199
            
            $
            100,788
            
            $
            93,122Regulated
                gas
            
            
            10,041
            
            
            11,300
            
            
            9,557Nonregulated
                and other
            
            
            (20,783
            )
            
            (20,718
            )
            
            (15,343
            )Total
            
            $
            94,457
            
            $
            91,370
            
            $
            87,336Earnings
                on common stock:Regulated
                electric
            
            $
            238,456
            
            $
            193,675
            
            $
            171,490Regulated
                gas
            
            
            17,859
            
            
            21,880
            
            
            27,825Nonregulated
                and other
            
            
            31,926
            
            
            (20,486
            )
            
            (20,058
            )Total
            
            $
            288,241
            
            $
            195,069
            
            $
            179,257





110





2006
            
            2005
            
            2004Segment
                Asset InformationCapital
                expenditures:Regulated
                electric
            
            $
            770,213
            
            $
            713,645
            
            $
            690,157Regulated
                gas
            
            
            48,504
            
            
            52,555
            
            
            49,768Nonregulated
                and other
            
            
            1,220
            
            
            1,893
            
            
            1,845Total
            
            $
            819,937
            
            $
            768,093
            
            $
            741,770Total
                assets:Regulated
                electric
            
            $
            6,675,884
            
            $
            5,886,632
            
            $
            5,404,376Regulated
                gas
            
            
            1,001,882
            
            
            1,131,247
            
            
            927,629Nonregulated
                and other
            
            
            116,725
            
            
            139,537
            
            
            95,239Total
            
            $
            7,794,491
            
            $
            7,157,416
            
            $
            6,427,244





(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.





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, 2006, no
      impairment was indicated for goodwill. In 2005 and 2006, 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, 2006 and 2005 (in
      thousands):





Regulated
            
            RegulatedElectric
            
            Gas
            
            TotalBalance
                at January 1, 2005
            
            $
            1,189,676
            
            $
            78,406
            
            $
            1,268,082Income
                tax adjustment
            
            
            (1,966
            )
            
            (137
            )
            
            (2,103
            )Balance
                at December 31, 2005
            
            
            1,187,710
            
            
            78,269
            
            
            1,265,979Income
                tax adjustment
            
            
            3,450
            
            
            238
            
            
            3,688Balance
                at December 31, 2006
            
            $
            1,191,160
            
            $
            78,507
            
            $
            1,269,667





**(19)**  **Related
      Party Transactions**





The
      companies identified as affiliates of MidAmerican Funding are Berkshire Hathaway
      and its subsidiaries, including MidAmerican Energy Holdings and its
      subsidiaries. The basis for these charges is provided for in service agreements
      between MidAmerican Funding and its affiliates. MidAmerican Energy reimbursed
      MidAmerican Energy Holdings in the amount of $9.2 million,
      $16.3 million and $11.4 million in 2006, 2005 and 2004, 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 $61.7 million,
      $49.2 million and $56.4 million for 2006, 2005 and 2004,
      respectively.




111




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. 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.





Northern
      Natural Gas Company (“NNG”), a subsidiary of MidAmerican Energy Holdings, 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 $52.4 million in
      2006, $52.6 million in 2005 and $48.3 million in 2004.





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 $3.3 million at an interest rate of 5.60% as of December 31, 2006,
      and $54.3 million at an interest rate of 4.56% as of December 31,
      2005, and is reflected as Note Payable to Affiliate on the Consolidated Balance
      Sheet.





MidAmerican
      Energy Holdings has a $100 million revolving credit arrangement, carrying
      interest at the 30-day LIBOR rate plus 25 basis points, to borrow from MHC.
      Outstanding balances are unsecured and due on demand. The outstanding balance
      was zero throughout 2006 and 2005.





MidAmerican
      Funding had accounts receivable from affiliates of $10.1 million and
      $8.1 million as of December 31, 2006 and 2005, respectively, included
      in Receivables on the Consolidated Balance Sheets. MidAmerican Funding also
      had
      accounts payable to affiliates of $6.6 million and $7.1 million as of
      December 31, 2006 and 2005, respectively, which is included in Accounts
      Payable on the Consolidated Balance Sheets.





In
      2006,
      MHC received dividends totaling $50.0 million from MidAmerican Energy.





On
      December 31, 2006, MidAmerican Funding adopted SFAS No. 158 and
      recognized the full amount of the funded status for its pension and
      postretirement plans. The funded status of such plans attributable to
      MidAmerican Funding’s affiliates that had not previously been recognized through
      income was recognized as an intercompany balance with such affiliates. As of
      December 31, 2006, amounts receivable from affiliates attributable to the
      funded status of employee benefit plans totaled $16.1 million and similar
      amounts payable to affiliates totaled $19.2 million. MidAmerican Energy
      will adjust these balances when changes to the funded status of the respective
      plans are recognized and does not intend to settle the balances currently.
      See
      Note (16) for further information pertaining to pension and postretirement
      accounting.





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+.





112





**(20)**  **Unaudited
      Quarterly Operating Results**





20061st
                Quarter
            
            2nd
                Quarter
            
            3rd
                Quarter
            
            4th
                Quarter(In
                thousands)Operating
                revenues
            
            $
            1,041,717
            
            $
            761,582
            
            $
            766,785
            
            $
            882,710Operating
                income
            
            
            134,473
            
            
            79,179
            
            
            129,182
            
            
            77,784Net
                income
            
            
            86,628
            
            
            57,520
            
            
            78,622
            
            
            65,471





20051st
                Quarter
            
            2nd
                Quarter
            
            3rd
                Quarter
            
            4th
                Quarter(In
                thousands)Operating
                revenues
            
            $
            856,278
            
            $
            619,714
            
            $
            723,308
            
            $
            966,784Operating
                income
            
            
            99,351
            
            
            58,570
            
            
            130,246
            
            
            92,916Net
                income
            
            
            56,357
            
            
            25,209
            
            
            66,921
            
            
            46,582





Quarterly
      data reflect seasonal variations common in the Midwest utility
      industry.




113




**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, 2006. 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 changes during the fourth quarter of 2006 in
      MidAmerican Funding’s or MidAmerican Energy’s internal control over financial
      reporting that has materially affected, or is reasonably likely to materially
      affect, its internal control over financial reporting.





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





None




114











**PART
      III**





**Item
      10.**  **Directors
      and Executive Officers of the Registrant**





**MidAmerican
      Energy**





The
      current directors and executive officers of MidAmerican Energy, their ages
      as of
      February 16, 2007, and their business experience is discussed below. 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.





TODD
      M.
      RABA, 50, **** has
      been
      President of MidAmerican Energy since 2004 and Director of MidAmerican Energy
      since 2002. Mr. Raba served as Senior Vice President from 2001 to 2004 and
      as
      Vice President from 1997 to 2001.





KEITH
      D.
      HARTJE, 57, **** has
      been
      Senior Vice President of MidAmerican Energy since 1999 and held various
      executive and management positions with MidAmerican Energy and its predecessors
      prior to that.





BRIAN
      K.
      HANKEL, 44, **** has
      been
      Director of MidAmerican Energy since 2002 and Vice President and Treasurer
      of
      MidAmerican Energy since 1999. Mr. Hankel has been Vice President and Treasurer
      of MidAmerican Energy Holdings since January 1997.





THOMAS
      B.
      SPECKETER, 50, has been Vice President and Controller of MidAmerican Energy
      since 1999 and held various tax and accounting management positions with
      MidAmerican Energy and its predecessors prior to that.




STEVEN
        R.
        WEISS, 52, has been Director of MidAmerican Energy since 2005 and Senior
        Vice
        President since 2006. Mr. Weiss has been General Counsel of MidAmerican Energy
        since 2000 and served as Vice President from 2000 to 2006. Mr. Weiss served
        as
        Assistant General Counsel from 1999 to 2000 and held various other legal
        and
        management positions for MidAmerican Energy and its predecessors and affiliates
        prior to that.




**MidAmerican
      Funding**





The
      current managers and executive officers of MidAmerican Funding, their ages
      as of
      February 16, 2007, and their business experience is discussed below. 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.





GREGORY
      E. ABEL, 44, has been MidAmerican Funding’s President since 1999. Mr. Abel
      served as MidAmerican Funding’s Chief Operating Officer from 1999 to 2005. Mr.
      Abel joined MidAmerican Energy Holdings in 1992.





BRIAN
      K.
      HANKEL, 44, has been Vice President and Treasurer of MidAmerican Funding since
      2005. Mr. Hankel joined MidAmerican Energy Holdings in 1992.





THOMAS
      B.
      SPECKETER, 50, has been Vice President and Controller of MidAmerican Funding
      since 2005 and Vice President and Controller of MidAmerican Energy since 1999.





DOUGLAS
      L. ANDERSON, 48, has been a manager of MidAmerican Funding since 2005. Mr.
      Anderson served as MidAmerican Funding’s Vice President and General Counsel from
      2002 to 2005. Mr. Anderson joined MidAmerican Energy Holdings in
      1993.





PATRICK
      J. GOODMAN, 40, has been a manager of MidAmerican Funding since 2005. Mr.
      Goodman served as MidAmerican Funding’s Vice President and Treasurer from 1999
      to 2005. Mr. Goodman joined MidAmerican Energy Holdings in 1995.




115




RONALD
      W.
      ROSKENS, 74, 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
      Foods Inc.





**Audit
      Committee and Audit Committee Financial Expert**





During
      the fiscal year ended December 31, 2006, 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 MidAmerican Energy Holdings  is acting as the audit committee
      for the companies.





**Code
      of Ethics**





MidAmerican
      Funding and MidAmerican Energy each have adopted a code of ethics that applies
      to its principal executive officer or officers, principal financial officer
      and
      to its controller, or persons acting in such capacities. The code of ethics
      is
      filed as an exhibit to this annual report on Form 10-K.





**Item
      11.**  **Executive
      Compensation**





Information
      required by Item 11 is omitted pursuant to General Instruction I(2)(c) to
      Form 10-K.





**Item
      12.**  **Security
      Ownership of Certain Beneficial Owners and**  **Management
      and Related Stockholder Matters**





Information
      required by Item 12 is omitted pursuant to General Instruction I(2)(c) to
      Form 10-K.





**Item
      13.**  **Certain
      Relationships and Related Transactions**





Information
      required by Item 13 is omitted pursuant to General Instruction I(2)(c) to
      Form 10-K.





116






**Item
      14.**  **Principal
      Accountant Fees and Services**





The
      following table shows MidAmerican Funding’s (consolidated) and MidAmerican
      Energy’s fees paid or accrued for audit services and fees paid for
      audit-related, tax and all other services rendered by Deloitte & Touche LLP,
      the member firms of Deloitte Touche Tohmatsu, and their respective affiliates
      (collectively, the “Deloitte Entities”) for each of the last two years (in
      thousands):





MidAmerican
                Funding
            
            MidAmerican
                Energy2006
            
            2005
            
            2006
            
            2005Audit
                fees(1)
            
            $
            824.6
            
            $
            546.0
            
            $
            742.1
            
            $
            491.4Audit-related
                fees(2)
            
            
            124.4
            
            
            66.8
            
            
            111.9
            
            
            60.1Tax
                fees(3)
            
            
            304.3
            
            
            135.2
            
            
            273.9
            
            
            121.7All
                other fees
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                aggregate fees billed
            
            $
            1,253.3
            
            $
            748.0
            
            $
            1,127.9
            
            $
            673.2





(1)
            Audit
                fees include fees for the audit of MidAmerican Funding’s and MidAmerican
                Energy’s consolidated financial statements and interim reviews of their
                quarterly financial statements, audit services provided in connection
                with
                required statutory audits, and comfort letters, consents and other
                services related to Securities and Exchange Commission
                matters.(2)
            Audit-related
                fees primarily include fees for assurance and related services for
                any
                other statutory or regulatory requirements, audits of certain employee
                benefit plans and consultations on various accounting and reporting
                matters.(3)
            Tax
                fees include fees for services relating to tax compliance, tax planning
                and tax advice. These services include assistance regarding federal
                and
                state tax compliance, tax return preparation and tax
                audits.





The
      audit
      committee of MidAmerican Energy Holdings reviewed and approved the services
      rendered by the Deloitte Entities in and for fiscal 2006 as set forth in the
      above table and concluded that the non-audit services were compatible with
      maintaining the principal accountant’s independence. Under the Sarbanes-Oxley
      Act of 2002, all audit and non-audit services performed by the principal
      accountant require approval in advance by the audit committee in order to assure
      that such services do not impair the principal accountant’s independence from
      MidAmerican Funding and MidAmerican Energy. Accordingly, the audit committee
      has
      an Audit and Non-Audit Services Pre-Approval Policy (the “Policy”) which sets
      forth the procedures and the conditions pursuant to which services to be
      performed by the principal accountant are to be pre-approved. Pursuant to the
      Policy, certain services described in detail in the Policy may be pre-approved
      on an annual basis together with pre-approved maximum fee levels for such
      services. The services eligible for annual pre-approval consist of services
      that
      would be included under the categories of Audit Fees, Audit-Related Fees and
      Tax
      Fees. If not pre-approved on an annual basis, proposed services must otherwise
      be separately approved prior to being performed by the principal accountant.
      In
      addition, any services that receive annual pre-approval but exceed the
      pre-approved maximum fee level also will require separate approval by the audit
      committee prior to being performed. The Policy does not delegate the audit
      committee’s responsibilities to pre-approve services performed by the principal
      accountant to management.





117





**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)
            119MidAmerican
                Funding, LLC Consolidated Valuation and Qualifying Accounts (Schedule
                II)
            120





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 123.





118




**SCHEDULE
      II**








**MIDAMERICAN
      ENERGY COMPANY AND SUBSIDIARY**


**CONSOLIDATED
      VALUATION AND QUALIFYING ACCOUNTS**


**FOR
      THE THREE YEARS ENDED DECEMBER 31, 200** **6**


**(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 2006
            
            $
            10,872
            
            $
            9,043
            
            $
            (10,350
            )
            $
            9,565Year
                ended 2005
            
            $
            8,678
            
            $
            11,037
            
            $
            (8,843
            )
            $
            10,872Year
                ended 2004
            
            $
            7,484
            
            $
            9,902
            
            $
            (8,708
            )
            $
            8,678Reserves
                Not Deducted From Assets (1):Year
                ended 2006
            
            $
            11,037
            
            $
            2,741
            
            $
            (3,102
            )
            $
            10,676Year
                ended 2005
            
            $
            9,404
            
            $
            4,019
            
            $
            (2,386
            )
            $
            11,037Year
                ended 2004
            
            $
            8,779
            
            $
            3,562
            
            $
            (2,937
            )
            $
            9,404





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





119




**SCHEDULE
      II**








**MIDAMERICAN
      FUNDING, LLC AND SUBSIDIARIES**


**CONSOLIDATED
      VALUATION AND QUALIFYING ACCOUNTS**


**FOR
      THE THREE YEARS ENDED DECEMBER 31, 200** **6**


**(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 2006
            
            $
            10,942
            
            $
            9,043
            
            $
            (10,350
            )
            $
            9,635Year
                ended 2005
            
            $
            8,748
            
            $
            11,037
            
            $
            (8,843
            )
            $
            10,942Year
                ended 2004
            
            $
            7,554
            
            $
            9,902
            
            $
            (8,708
            )
            $
            8,748Reserves
                Not Deducted From Assets (1):Year
                ended 2006
            
            $
            12,481
            
            $
            2,741
            
            $
            (3,102
            )
            $
            12,120Year
                ended 2005
            
            $
            10,848
            
            $
            4,019
            
            $
            (2,386
            )
            $
            12,481Year
                ended 2004
            
            $
            9,737
            
            $
            4,048
            
            $
            (2,937
            )
            $
            10,848





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








120







**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:
                March 1, 2007
            /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
            
            March 1,
                2007(Thomas
                B. Specketer)
            
            (principal
                financial and accounting officer)/s/Brian
                K. Hankel
            
            Vice
                President and Director
            
            March 1,
                2007(Brian
                K. Hankel)/s/Todd
                M. Raba
            
            President
                and Director
            
            March 1,
                2007(Todd
                M. Raba)/s/Steven
                R. Weiss
            
            Vice
                President and Director
            
            March 1,
                2007(Steven
                R. Weiss)







121










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:
                March 1, 2007
            /s/
                Gregory E. Abel(Gregory
                E. Abel)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
            
            March 1,
                2007(Thomas
                B. Specketer)
            
            (principal
                financial and accounting officer)/s/Patrick
                J. Goodman
            
            Manager
            
            March 1,
                2007(Patrick
                J. Goodman)/s/Ronald
                W. Roskens
            
            Manager
            
            March 1,
                2007(Ronald
                W. Roskens)/s/Douglas
                L. Anderson
            
            Manager
            
            March 1,
                2007(Douglas
                L. Anderson)







122




**EXHIBIT
      INDEX**





**Exhibits
      Filed Herewith**





MidAmerican
      Energy





23
            Consent
                of Deloitte & Touche LLP31.1
            Chief
                executive officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            Chief
                financial officer certification pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            Chief
                executive officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 200232.2
            Chief
                financial officer certification pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002





MidAmerican
      Funding





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





**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.)





MidAmerican
      Funding





3.1
            Articles
                of Organization of MidAmerican Funding, LLC (Filed as Exhibit 3.1
                to
                MidAmerican Funding’s Registration Statement on Form S-4, Registration
                No. 333-90553.)3.2
            Operating
                Agreement of MidAmerican Funding, LLC (Filed as Exhibit 3.2 to MidAmerican
                Funding’s Registration Statement on Form S-4, Registration
                No. 333-90553.)4.1
            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.)




123




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.)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.)




124




4.9
            First
                Supplemental Indenture, dated as of February 8, 2002, by and between
                MidAmerican Energy Company and The Bank of New York, as Trustee.
                (Filed as
                Exhibit 4.3 to MidAmerican Energy’s Annual Report on Form 10-K for
                the year ended December 31, 2004, Commission File
                No. 333-15387.)4.10
            Second
                Supplemental Indenture, dated as of January 14, 2003, by and between
                MidAmerican Energy Company and The Bank of New York, as Trustee.
                (Filed as
                Exhibit 4.2 to MidAmerican Energy’s Annual Report on Form 10-K for
                the year ended December 31, 2004, Commission File
                No. 333-15387.)4.11
            Third
                Supplemental Indenture, dated as of October 1, 2004, by and between
                MidAmerican Energy Company and The Bank of New York, as Trustee.
                (Filed as
                Exhibit 4.1 to MidAmerican Energy’s Annual Report on Form 10-K for
                the year ended December 31, 2004, Commission File
                No. 333-15387.)4.12
            Fourth
                Supplemental Indenture, dated November 1, 2005, by and between
                MidAmerican Energy Company and the Bank of New York Trust Company,
                NA, as
                Trustee. (Filed as Exhibit 4.1 to MidAmerican Energy’s Annual Report on
                Form 10-K for the year ended December 31, 2005, Commission File
                No. 333-15387.)4.13
            Indenture,
                dated as of October 1, 2006 - Senior Debt Securities between
                MidAmerican Energy Company and The Bank of New York Trust Company,
                N.A.,
                as Trustee (Filed as Exhibit 4.1 to MidAmerican Energy’s Quarterly Report
                on Form 10-Q dated September 30, 2006, Commission File No.
                333-15387.)4.14
            First
                Supplemental Indenture, dated as of October 6, 2006 - 5.800% Notes
                due 2036 between MidAmerican Energy Company and The Bank of New York
                Trust
                Company, N.A., as Trustee (Filed as Exhibit 4.2 to MidAmerican Energy’s
                Quarterly Report on Form 10-Q dated September 30, 2006, Commission
                File
                No. 333-15387.)4.15
            Distribution
                Agreement, dated October 3, 2006 - Medium Term Notes between
                MidAmerican Energy Company and Credit Suisse Securities (USA) LLC,
                J. P.
                Morgan Securities, Inc., LaSalle Financial Services, Inc., and BNP
                Paribas
                Securities Corp. (Filed as Exhibit 4.2 to MidAmerican Energy’s Quarterly
                Report on Form 10-Q dated September 30, 2006, Commission File 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.)




125






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.)10.12
            Credit
                Agreement among MidAmerican Energy Company, the Lending Institutions
                Party
                Hereto, as Banks, Union Bank of California, N.A., as Syndication
                Agent,
                and JPMorgan Chase Bank, N.A., as Administrative Agent, dated as
                of
                November 18, 2004 Union Bank of California, N.A. and J.P. Morgan
                Securities, Inc. Co-Lead Arrangers and Co-Book Runners. (Filed as
                Exhibit
                10.1 to MidAmerican Energy’s Annual Report on Form 10-K dated
                December 31, 2005, Commission File No. 333-15387.)10.13
            Amended
                and Restated Credit Agreement among MidAmerican Energy Company, the
                lending institutions party hereto, as banks, JPMorgan Chase Bank,
                N.A., as
                Administrative Agent, Union Bank of California, N.A., as Syndication
                Agent, and The Royal Bank of Scotland plc, ABN Amro Bank N.V. and
                BNP
                Paribas, as Co-Documentation Agents, dated as of July 6, 2006. (Filed
                as Exhibit 10.1 to MidAmerican Energy’s Quarterly Report on Form 10-Q
                dated June 30, 2006, Commission File No. 333-15387.)10.14
            Stipulation
                and Agreement Dated December 20, 2004, in Regard to MidAmerican Energy
                Company Ratemaking Principles for the 2005 Wind Expansion Project,
                approved by the Iowa Utilities Board on January 31, 2005. (Filed
                as
                Exhibit 10.2 to MidAmerican Energy’s Quarterly Report on Form 10-Q dated
                June 30, 2006, Commission File No. 333-15387.)10.15
            Stipulation
                and Agreement Dated December 14, 2005, in Regard to MidAmerican Energy
                Company Ratemaking Principles for the 2006-2007 Wind Expansion Project,
                approved by the Iowa Utilities Board on April 18, 2006. (Filed as
                Exhibit
                10.3 to MidAmerican Energy’s Quarterly Report on Form 10-Q dated June 30,
                2006, Commission File No. 333-15387.)Note:
            Pursuant
                to (b) (4) (iii) (A) of Item 601 of Regulation S-K, MidAmerican
                Energy 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
                MidAmerican Energy, but hereby agrees to furnish to the Commission
                on
                request any such instruments.





126