MIDAMERICAN FUNDING LLC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2004

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

333-90553	MIDAMERICAN FUNDING, LLC	47-0819200
	(An Iowa Limited Liability Company)
	666 Grand Ave. PO Box 657
	Des Moines, Iowa 50303
	515-242-4300

1-11505	MIDAMERICAN ENERGY COMPANY	42-1425214
	(An Iowa Corporation)
	666 Grand Ave. PO Box 657
	Des Moines, Iowa 50303
	515-242-4300

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of October 25, 2004, all of the member’s equity of MidAmerican Funding, LLC was held by its parent company, MidAmerican Energy Holdings Company.

As of October 25, 2004, all 70,980,203 outstanding shares of MidAmerican Energy Company’s voting stock were held by its parent company, MHC Inc., a direct, wholly owned subsidiary of MidAmerican Funding, LLC.

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

TABLE OF CONTENTS

	Part I - Financial Information

Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

	Part II - Other Information

Item 1.	Legal Proceedings	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Security Holders	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures		40
Exhibit Index		41

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MidAmerican Energy Company

Report of Independent Registered Public Accounting Firm	4
Consolidated Balance Sheets	5
Consolidated Statements of Operations	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8

MidAmerican Funding, LLC

Report of Independent Registered Public Accounting Firm	16
Consolidated Balance Sheets	17
Consolidated Statements of Operations	18
Consolidated Statements of Cash Flows	19
Notes to Consolidated Financial Statements	20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder

MidAmerican Energy Company

Des Moines, Iowa

We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Company and subsidiary (the "Company") as of September 30, 2004, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, and of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Energy Company and subsidiary as of December 31, 2003, and the related consolidated statements of operations, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2004 (March 1, 2004 as to Notes (1)(b), (1)(c), (1)(j) and (12)), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated b alance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Des Moines, Iowa

November 1, 2004

MIDAMERICAN ENERGY COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands)

	As of
	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Utility Plant, Net
Electric	$	5,158,793		$	5,030,960
Gas		947,801			922,099
		6,106,594			5,953,059
Accumulated depreciation and amortization		(2,946,206	)		(2,810,336	)
		3,160,388			3,142,723
Construction work in progress		465,945			217,537
		3,626,333			3,360,260

Current Assets
Cash and cash equivalents		40,231			3,151
Receivables, net		218,691			300,643
Inventories		97,650			85,465
Other		45,609			42,459
		402,181			431,718

Investments and Nonregulated Property, Net		319,709			299,103
Regulatory Assets		258,601			261,696
Other Assets		87,817			51,657

Total Assets	$	4,694,641		$	4,404,434

CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholder’s equity	$	1,476,941		$	1,318,519
MidAmerican Energy preferred securities		30,329			31,759
Long-term debt, excluding current portion		982,269			1,072,496
		2,489,539			2,422,774
Current Liabilities
Notes payable		-			48,000
Current portion of long-term debt		90,629			56,151
Accounts payable		186,724			198,273
Taxes accrued		23,184			72,558
Interest accrued		14,370			10,235
Other		81,120			67,160
		396,027			452,377
Other Liabilities
Deferred income taxes		505,387			415,788
Investment tax credits		49,232			52,510
Asset retirement obligations		280,704			269,124
Regulatory liabilities		664,185			574,490
Other		309,567			217,371
		1,809,075			1,529,283

Total Capitalization and Liabilities	$	4,694,641		$	4,404,434

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

MIDAMERICAN ENERGY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
			(Unaudited)

Operating Revenues
Regulated electric	$	391,751		$	422,565		$	1,099,310		$	1,066,794
Regulated gas		117,190			110,882			684,430			679,736
Nonregulated		56,312			42,554			195,416			180,550
		565,253			576,001			1,979,156			1,927,080

Operating Expenses
Regulated:
Cost of fuel, energy and capacity		91,798			123,261			305,472			294,133
Cost of gas sold		82,490			76,125			526,707			517,399
Other operating expenses		93,916			91,157			274,538			263,026
Maintenance		38,225			37,947			120,241			103,676
Depreciation and amortization		71,618			56,260			221,685			202,542
Property and other taxes		19,429			19,693			60,756			59,623
		397,476			404,443			1,509,399			1,440,399
Nonregulated:
Cost of sales		48,416			36,056			170,861			156,805
Other		4,102			4,311			12,826			12,379
		52,518			40,367			183,687			169,184
Total operating expenses		449,994			444,810			1,693,086			1,609,583

Operating Income		115,259			131,191			286,070			317,497

Non-Operating Income
Interest and dividend income		1,130			633			2,360			3,142
Other income		6,920			3,239			16,838			13,138
Other expense		(699	)		(1,044	)		(2,775	)		(1,916	)
		7,351			2,828			16,423			14,364
Fixed Charges
Interest on long-term debt		16,516			17,871			51,141			54,441
Other interest expense		1,393			921			4,109			2,867
Allowance for borrowed funds		(2,205	)		(838	)		(5,404	)		(3,521	)
		15,704			17,954			49,846			53,787

Income Before Income Taxes		106,906			116,065			252,647			278,074
Income Taxes		40,748			51,760			93,031			121,945
Net Income		66,158			64,305			159,616			156,129
Preferred Dividends		312			327			933			1,091

Earnings on Common Stock	$	65,846		$	63,978		$	158,683		$	155,038

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

MIDAMERICAN ENERGY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months
	Ended September 30,
	2004			2003
	(Unaudited)

Net Cash Flows From Operating Activities
Net income	$	159,616		$	156,129
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization		222,625			203,403
Deferred income taxes and investment tax credit, net		78,782			1,816
Amortization of other assets and liabilities		5,001			17,508
Impact of changes in working capital:
Receivables, net		95,717			76,307
Inventories		(12,185	)		3,448
Accounts payable		(33,219	)		(74,482	)
Taxes accrued		(49,374	)		28,148
Other current assets and liabilities		28,916			26,079
Other		(753	)		(533	)
Net cash provided by operating activities		495,126			437,823

Net Cash Flows From Investing Activities
Utility construction expenditures		(424,185	)		(226,726	)
Non-cash and accrued utility construction expenditures		78,455			5,855
Quad Cities Station decommissioning trust fund		(6,224	)		(6,224	)
Other investing activities, net		17			11,481
Net cash used in investing activities		(351,937	)		(215,614	)

Net Cash Flows From Financing Activities
Dividends paid		(933	)		(173,591	)
Issuance of long-term debt, net of issuance cost		-			272,550
Retirement of long-term debt, including reacquisition cost		(56,021	)		(188,003	)
Reacquisition of preferred securities		(1,430	)		-
Collateral received		275			-
Net decrease in notes payable		(48,000	)		(55,000	)
Net cash used in financing activities		(106,109	)		(144,044	)

Net Increase in Cash and Cash Equivalents		37,080			78,165
Cash and Cash Equivalents at Beginning of Period		3,151			28,500
Cash and Cash Equivalents at End of Period	$	40,231		$	106,665

Supplemental Disclosure:
Interest paid, net of amounts capitalized	$	41,757		$	42,777
Income taxes paid	$	45,124		$	74,673

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

MIDAMERICAN ENERGY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

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

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

2. New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51" ("FIN No. 46"). FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest, or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued FASB Interpretation No. 46R, which served to clarify guidance in FIN No. 46. The provisions of FIN No. 46, as revised, were effective for public entities that had interests in variable interest entiti es or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. MidAmerican Energy has considered the provisions of FIN No. 46R for all of its power purchase, power sale or tolling agreements. Factors considered in the analysis include the duration of the agreements, how capacity and energy payments are determined, source and payment for fuel, as well as responsibility and payment for operating and maintenance expenses. Based upon this analysis, it was determined that no change in accounting for such agreements was necessary under FIN No. 46R.

In May 2004, the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("Act"). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of postretirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. When adopted, FSP 106-2 will supersede FSP 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was issued in January 2004 and permitted a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defe r accounting for the effects of the Act until more authoritative guidance on the accounting for the federal subsidy was issued, which MidAmerican Energy so elected. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2, including those who are unable to determine whether benefits provided under its plan are actuarially equivalent to Medicare Part D. MidAmerican Energy has determined that the effects of the Act are not significant to its postretirement plan and therefore do not constitute a significant event, as that term is defined in Statement of Financial Accounting Standards No. 106, "Employers’ Accounting for Postretirement Benefits Other Than Pensions." As such, MidAmerican Energy will adopt FSP 106-2 at its next measurement date, January 1, 2005.

3. Commitments and Contingencies

(a) Manufactured Gas Plant Facilities

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

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

MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be approximately $10 million to $23 million. As of September 30, 2004 and December 31, 2003, MidAmerican Energy had recorded a liability of $10.7 million and $14.0 million, respectively, for these sites and a corresponding regulatory asset for future recovery through the regulatory process. MidAmerican Energy projects that these amounts will be incurred or paid over the next four years.

The estimated liability is determined through a site-specific cost evaluation process. The estimate includes incremental direct costs of remediation, site monitoring costs and costs of compensation to employees for time expected to be spent directly on the remediation effort. The estimated recorded liabilities for these properties are based upon preliminary data. Thus, actual costs could vary significantly from the estimates. The estimate could change materially based on facts and circumstances derived from site investigations, changes in required remedial action and changes in technology relating to remedial alternatives. Insurance recoveries have been received for some of the sites under investigation. Those recoveries are intended to be used principally for accelerated remediation, as specified by the Iowa Utilities Board ("IUB") and are recorded as a regulatory liability.

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

(b) Air Quality

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

The EPA has in recent years implemented more stringent National Ambient Air Quality Standards for ozone and new standards for fine particulate matter. These standards set the minimum level of air quality that must be met throughout the United States. Areas that achieve the standards, as determined by ambient monitoring, are characterized as being in attainment of the standard. Areas that fail to meet the standard are designated as being nonattainment areas. Generally, once an area has been designated as a nonattainment area, sources of emissions in the area that contribute to the failure to achieve the ambient air quality standards are required to make emissions reductions. The EPA has concluded that the entire State of Iowa is in attainment of the ozone standards. The EPA has preliminarily determined that the entire S tate of Iowa is also in attainment with the fine particulate standards.

On December 4, 2003, the EPA announced the development of its Interstate Air Quality Rule, now known as the Clean Air Interstate Rule, a proposal to require coal-burning power plants in 29 states, including Iowa, and the District of Columbia to reduce emissions of sulfur dioxide ("SO₂") and nitrogen oxides ("NO_X") in an effort to reduce ozone and fine particulate matter in the Eastern United States. It is likely that MidAmerican Energy’s coal-bur ning facilities will be impacted by this proposal.

In December 2000, the EPA concluded that mercury emissions from coal-fired generating stations should be regulated. The EPA is currently considering two regulatory alternatives that would reduce emissions of mercury from coal-fired utilities. One of these alternatives would require reductions of mercury from all coal-fired facilities greater than 25 megawatts through application of Maximum Achievable Control Technology with compliance assessed on a facility basis. The other alternative would regulate the mercury emissions of coal-fired facilities that pose a health hazard through a market based cap-and-trade mechanism similar to the SO₂ allowance system. The EPA is currently under a deadline to finalize the mercury reduction rule by March 2005.

The Clean Air Interstate Rule or the mercury reduction rule could, in whole or in part, be superseded or made more stringent by one of a number of multi-pollutant emission reduction proposals currently under consideration at the federal level, including the "Clear Skies Initiative," and other pending legislative proposals that contemplate 70% to 90% reductions of SO₂, NO_X and mercury, as well as possible new federal regulation of carbon dioxide and other g ases that may affect global climate change.

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

MidAmerican Energy has implemented a planning process that forecasts the site-specific controls and actions that may be required to meet emissions reductions as contemplated by the EPA. In accordance with an Iowa law passed in 2001, MidAmerican Energy has on file with the IUB its current multi-year plan and budget for managing SO_2, and NO_X from its generating facilities in a cost-effective manner. The plan, which is required to be updated every two years, provides specific actions to be taken at each coal-fired generating facility and the related costs and timing for each action. On July 17, 2003, the IUB issued an order that affirmed an administrative law judge’s approval of the initial plan filed April 1, 2002, as amended. On October 4, 2004, the IUB issued an order approving MidAmerican Energy’s second biennial plan as revised in a settlement MidAmerican Energy entered into with the Iowa Consumer Advocate Division of the Department of Justice. That plan covers the time period from April 1, 2004 through December 31, 2006. Neither IUB order resulted in any changed electric rates for MidAmerican Energy. The effect of the orders is to approve the prudence of expenditures made consistent with the plans. Pursuant to an unrelated rate settlement agreement approved by the IUB on October 17, 2003, if prior to January 1, 2011, capital and operating expenditures to comply with environmental requirements cumulatively exceed $325 million, then MidAmerican Energy may seek to recover the additional expenditures from customers. At this time, MidAmerican Energy does not expect these expenditures to exceed such amount.

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

In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the NSR and the New Source Performance Standards of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy received requests from the EPA to provide documentation related to its capital projects from January 1, 1980, to April 2003 for a number of its generating plants. MidAmerican Energy has submitted information to the EPA in responses to these requests, and there are currently no outstanding data requests pending from the EPA. MidAmerican Energy cannot predict the outcome of these requests at this time. However, on August 27, 2003, the EPA announced cha nges to its NSR rules that clarify what constitutes routine repair, maintenance and replacement for purposes of triggering NSR requirements. The EPA concluded equipment that is repaired, maintained or replaced with an expenditure not greater than 20 percent of the value of the source will not trigger the New Source Revisions of the Clean Air Act. Since the NSR changes were announced, the EPA’s enforcement branch has indicated it would apply the clarified routine repair, maintenance and replacement rules to its pending investigation. However, a number of states and local air districts challenged the EPA’s clarifications of the rule, and a panel of the U.S. Circuit Court of Appeals for the District of Columbia Circuit issued an order on December 24, 2003, staying the EPA’s implementation of its clarifications of the equipment replacement rule. On July 1, 2004, the EPA published a notice of stay of the final equipment replacement rule in the Federal Register, consistent with the judicial stay. Additionally, on the same date, the EPA published a Notice of Reconsideration and Request for Comment on the equipment replacement rule in response to the Petitioners’ legal challenges, indicating that it plans to take final action on the issue in approximately 180 days. Until such time as the EPA takes final action on the equipment replacement rule, the previous rules without the clarified exemption remain in effect.

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

MidAmerican Energy’s share of expected decommissioning costs for Quad Cities Station, in 2003 dollars, is $260 million and is the asset retirement obligation for Quad Cities Station. Refer to Note (1) (j) of MidAmerican Energy’s most recently filed Form 10-K for a discussion of asset retirement obligations. MidAmerican Energy has established trusts for the investment of funds for decommissioning the Quad Cities Station. The fair value of the assets held in the trusts as of September 30, 2004, and December 31, 2003, was $197.7 million and $184.2 million, respectively, and is reflected in Investments and Nonregulated Property, Net.

(d) Electric Capacity Commitments

MidAmerican Energy has contracts with non-affiliated companies to purchase electric capacity. In January 2004, MidAmerican Energy and the Nebraska Public Power District ("NPPD") entered into a series of agreements that will result in MidAmerican Energy purchasing 250 megawatts of NPPD capacity for a five-year period commencing January 1, 2005. As of September 30, 2004, total non-affiliated electric capacity contracts, with expiration dates ranging from 2004 to 2028, required minimum payments of $9.7 million, $28.4 million, $25.1 million, $27.3 million and $35.8 million for October 1 - December 31, 2004, and the years 2005 through 2008, respectively, and $97.8 million for the total of the years thereafter.

4. Rate Matters

Under two settlement agreements approved by the IUB, MidAmerican Energy’s overall Iowa retail electric rates are effectively frozen through December 31, 2010. The settlement agreements specifically allow the filing of electric rate design or cost of service rate changes that could result in changes to rates for specific classes of customers but are intended to keep MidAmerican Energy’s overall Iowa retail electric revenue unchanged. The settlement agreements also each provide that portions of revenues associated with Iowa retail electric returns on equity within specified ranges will be recorded as a regulatory liability to be used to offset a portion of the cost to Iowa customers of future generating plant investment.

Under the first settlement agreement, which was approved by the IUB on December 21, 2001, and is effective through December 31, 2005, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year is recorded as a regulatory liability. The second settlement agreement, which was filed in conjunction with MidAmerican Energy’s application for ratemaking principles on a wind power project and was approved by the IUB on October 17, 2003, provides that during the period January 1, 2006 through December 31, 2010, an amount equal to 40% of revenues associated with returns on equity between 11.75% and 13%, 50% of revenues associated with returns on equity between 13% and 14%, and 83.3% of rev enues associated with returns on equity above 14%, in each year will be recorded as a regulatory liability. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Additionally, interest expense is accrued on the portion of the regulatory liability balance recorded in prior years. The liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction associated with generating plant additions. Future depreciation will be reduced as a result of the credit applied to generating plant balances from the reduction of the regulatory liability. As of September 30, 2004 and December 31, 2003, the related regulatory liability reflected on the Consolidated Balance Sheets was $206.1 million and $144.4 million, respectively.

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

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

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

5. Retirement Plans

MidAmerican Energy sponsors a noncontributory defined benefit pension plan covering substantially all employees of MidAmerican Energy Holdings Company and its domestic energy subsidiaries. MidAmerican Energy also currently sponsors certain postretirement health care and life insurance benefits covering substantially all retired employees of MidAmerican Energy Holdings Company and its domestic energy subsidiaries. Net periodic pension benefit cost, including supplemental retirement, and postretirement benefit cost included the following components for MidAmerican Energy and the aforementioned affiliates (in thousands):

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
		2004			2003			2004			2003
Pension
Components of net periodic benefit cost:
Service cost	$	6,312		$	5,610		$	19,256		$	19,121
Interest cost		8,696			7,956			26,463			26,621
Expected return on plan assets		(9,444	)		(8,707	)		(28,816	)		(29,749	)
Amortization of net transition balance		(196	)		(588	)		(597	)		(2,008	)
Amortization of prior service cost		690			684			2,070			2,076
Amortization of prior year loss		392			374			1,177			1,112
Regulatory expense		-			753			-			2,573
Net periodic cost	$	6,450		$	6,082		$	19,553		$	19,746

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003

Postretirement
Components of net periodic benefit cost:
Service cost	$	1,992		$	1,880		$	6,057		$	5,775
Interest cost		3,992			3,694			12,139			11,348
Expected return on plan assets		(2,143	)		(1,382	)		(6,517	)		(4,244	)
Amortization of net transition balance		834			945			2,536			2,904
Amortization of prior service cost		75			136			229			418
Amortization of prior year loss		838			855			2,547			2,625
Net periodic cost	$	5,588		$	6,128		$	16,991		$	18,826

MidAmerican Energy previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $5.1 million and $27.6 million in 2004 to its pension and postretirement plans, respectively. As of September 30, 2004, $3.8 million and $18.1 million of contributions have been made to the pension and postretirement plans, respectively.

6. Segment Information

MidAmerican Energy has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of electric transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on MidAmerican Energy allocators most related to the nature of the cost.

The energy delivery and transmission segments and substantially all of the generation segment are regulated as to rates, and other factors, related to services to external customers. Regulated electric retail revenues are billed to external customers by the energy delivery segment based on bundled tariffs that do not segregate components for the other segments. For internal segment reporting purposes, MidAmerican Energy has developed transfer prices to transfer the appropriate portion of those revenues to the other segments. The transfer prices are based on cost of service or tariffed rates, except for the generation segment which receives the residual.

MidAmerican Energy’s external revenues by product are displayed on the Consolidated Statements of Operations.

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

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
		2004			2003			2004			2003
Segment Profit Information
Operating revenues:
External revenues -
Generation	$	107,808		$	127,730		$	430,046		$	393,438
Energy delivery		397,853			400,954			1,343,548			1,345,689
Transmission		7,145			6,178			20,843			18,282
Marketing & sales		52,447			41,139			184,719			169,671
Total		565,253			576,001			1,979,156			1,927,080

Intersegment revenues -
Generation		205,400			216,625			505,515			495,669
Energy delivery		(220,171	)		(232,212	)		(549,828	)		(540,983	)
Transmission		14,771			14,487			44,313			43,460
Marketing & sales		-			1,100			-			1,854
Total		-			-			-			-
Consolidated	$	565,253		$	576,001		$	1,979,156		$	1,927,080

Income before income taxes:
Generation	$	79,994		$	97,299		$	124,254		$	160,259
Energy delivery		12,323			4,566			83,925			78,113
Transmission		13,348			11,393			39,282			34,440
Marketing & sales		929			2,480			4,253			4,171
Total		106,594			115,738			251,714			276,983
Preferred dividends		312			327			933			1,091
Consolidated	$	106,906		$	116,065		$	252,647		$	278,074


							As of
							September 30,			December 31,
							2004			2003
Segment Asset Information
Total assets:
Generation							$	1,969,479		$	1,639,541
Energy delivery								2,495,296			2,535,061
Transmission								261,944			242,435
Marketing & sales								37,268			56,743
Total								4,763,987			4,473,780
Reclassifications and intersegment eliminations (a)								(69,346	)		(69,346	)
Consolidated							$	4,694,641		$	4,404,434

(a)	Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables.

7. Total Comprehensive Income

MidAmerican Energy’s total comprehensive income for the three months ended September 30, 2004 and 2003, was $65.8 million and $59.0 million, respectively. MidAmerican Energy’s total comprehensive income for the nine months ended September 30, 2004 and 2003 was $158.3 million and $149.4 million, respectively. The differences from Earnings on Common Stock for the periods presented are due to the effective portion of net gains and losses on MidAmerican Energy’s derivative instruments classified as cash flow hedges. Accumulated other comprehensive income, net, was $- and $0.4 million as of September 30, 2004, and December 31, 2003, respectively.

8. Subsequent Event

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Managers and Member

MidAmerican Funding, LLC

Des Moines, Iowa

We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries (the "Company") as of September 30, 2004, and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2004 and 2003, and of cash flows for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Funding, LLC and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated February 9, 2004 (March 1, 2004 as to Notes (1)(b), (1)(c), (1)(j) and (12)), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet fr om which it has been derived.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Des Moines, Iowa

November 1, 2004

MIDAMERICAN FUNDING, LLC

CONSOLIDATED BALANCE SHEETS
(In thousands)

	As of
	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Utility Plant, Net
Electric	$	5,158,793		$	5,030,960
Gas		947,801			922,099
		6,106,594			5,953,059
Accumulated depreciation and amortization		(2,946,206	)		(2,810,336	)
		3,160,388			3,142,723
Construction work in progress		465,945			217,537
		3,626,333			3,360,260
Current Assets
Cash and cash equivalents		40,473			4,558
Receivables, net		228,649			305,198
Inventories		97,650			85,465
Other		46,170			43,572
		412,942			438,793

Investments and Nonregulated Property, Net		363,064			350,746
Goodwill		1,269,734			1,274,454
Regulatory Assets		258,601			261,696
Other Assets		87,826			51,665

Total Assets	$	6,018,500		$	5,737,614

CAPITALIZATION AND LIABILITIES
Capitalization
Member’s equity	$	1,998,742		$	1,863,769
MidAmerican Energy preferred securities		30,329			31,759
Long-term debt, excluding current portion		1,682,269			1,772,496
		3,711,340			3,668,024
Current Liabilities
Notes payable		-			48,000
Note payable to affiliate		40,250			10,450
Current portion of long-term debt		90,629			56,151
Accounts payable		188,738			200,549
Taxes accrued		28,836			79,304
Interest accrued		18,362			26,017
Other		81,234			68,044
		448,049			488,515
Other Liabilities
Deferred income taxes		541,624			453,320
Investment tax credits		49,232			52,510
Asset retirement obligations		280,704			269,124
Regulatory liabilities		664,185			574,490
Other		323,366			231,631
		1,859,111			1,581,075
Total Capitalization and Liabilities	$	6,018,500		$	5,737,614

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

MIDAMERICAN FUNDING, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
				(Unaudited)

Operating Revenues
Regulated electric	$	391,751		$	422,565		$	1,099,310		$	1,066,794
Regulated gas		117,190			110,882			684,430			679,736
Nonregulated		57,507			43,834			199,175			183,107
		566,448			577,281			1,982,915			1,929,637

Operating Expenses
Regulated:
Cost of fuel, energy and capacity		91,798			123,261			305,472			294,133
Cost of gas sold		82,490			76,125			526,707			517,399
Other operating expenses		93,916			91,157			274,538			263,026
Maintenance		38,225			37,946			120,241			103,675
Depreciation and amortization		71,618			56,260			221,685			202,542
Property and other taxes		19,429			19,693			60,756			59,623
		397,476			404,442			1,509,399			1,440,398
Nonregulated:
Cost of sales		48,691			36,381			171,856			157,277
Other		5,046			5,752			15,938			15,909
		53,737			42,133			187,794			173,186
Total operating expenses		451,213			446,575			1,697,193			1,613,584

Operating Income		115,235			130,706			285,722			316,053

Non-Operating Income
Interest and dividend income		1,156			667			2,440			3,132
Other income		7,972			4,297			20,990			16,307
Other expense		(755	)		(1,178	)		(3,029	)		(4,386	)
		8,373			3,786			20,401			15,053
Fixed Charges
Interest on long-term debt		28,293			29,653			86,423			89,786
Other interest expense		1,516			993			4,372			3,031
Preferred dividends of subsidiaries		312			327			933			1,091
Allowance for borrowed funds		(2,205	)		(838	)		(5,404	)		(3,521	)
		27,916			30,135			86,324			90,387

Income Before Income Taxes		95,692			104,357			219,799			240,719
Income Taxes		36,069			46,913			84,065			106,629

Net Income	$	59,623		$	57,444		$	135,734		$	134,090

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

MIDAMERICAN FUNDING, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months
	Ended September 30,
	2004			2003
	(Unaudited)

Net Cash Flows From Operating Activities
Net income	$	135,734		$	134,090
Adjustments to reconcile net income to net cash provided:
Depreciation and amortization		222,775			203,550
Deferred income taxes and investment tax credit, net		77,484			3,134
Amortization of other assets and liabilities		4,093			15,930
Loss from impairment of assets and investments		-			2,069
Impact of changes in working capital:
Marketable securities, trading		-			4,939
Receivables, net		90,314			75,212
Inventories		(12,185	)		3,448
Accounts payable		(33,481	)		(75,388	)
Taxes accrued		(50,468	)		25,539
Other current assets and liabilities		16,906			14,494
Other		6,261			692
Net cash provided by operating activities		457,433			407,709

Net Cash Flows From Investing Activities
Utility construction expenditures		(424,185	)		(226,726	)
Non-cash and accrued utility construction expenditures		78,455			5,855
Quad Cities Station decommissioning trust fund		(6,224	)		(6,224	)
Other investing activities, net		5,812			8,929
Net cash used in investing activities		(346,142	)		(218,166	)

Net Cash Flows From Financing Activities
Common dividends paid		-			(172,500	)
Issuance of long-term debt, net of issuance cost		-			272,550
Retirement of long-term debt, including reacquisition cost		(56,021	)		(188,003	)
Reacquisition of preferred securities		(1,430	)		-
Note payable to affiliate		29,800			31,200
Collateral received		275			-
Net decrease in notes payable		(48,000	)		(55,000	)
Net cash used in financing activities		(75,376	)		(111,753	)

Net Increase in Cash and Cash Equivalents		35,915			77,790
Cash and Cash Equivalents at Beginning of Period		4,558			28,915
Cash and Cash Equivalents at End of Period	$	40,473		$	106,705

Supplemental Disclosure:
Interest paid, net of amounts capitalized	$	89,081		$	90,003
Income taxes paid	$	33,884		$	60,666

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

MIDAMERICAN FUNDING, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

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

MidAmerican Funding is an Iowa limited liability company with MidAmerican Energy Holdings Company as its sole member. MidAmerican Funding’s direct, wholly owned subsidiary is MHC Inc. ("MHC"), which constitutes substantially all of MidAmerican Funding's assets, liabilities and business activities except those related to MidAmerican Funding's long-term debt securities. MHC, MidAmerican Funding and MidAmerican Energy Holdings Company are exempt public utility holding companies headquartered in Des Moines, Iowa. MHC’s principal subsidiary is MidAmerican Energy Company, a public utility with electric and natural gas operations. Other direct, wholly owned subsidiaries of MHC include InterCoast Capital Company, Midwest Capital Group, Inc., MidAmerican Services Company and MEC Construction Services Co.

2. New Accounting Pronouncements

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

3. Commitments and Contingencies

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

4. Rate Matters

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

5. Retirement Plans

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

6. Segment Information

MidAmerican Funding has identified four reportable operating segments based principally on management structure. The generation segment derives most of its revenue from the sale of regulated and nonregulated wholesale electricity and natural gas. The energy delivery segment derives its revenue principally from the sale and delivery of regulated retail electricity and natural gas, while the transmission segment obtains most of its revenue from the sale of electric transmission capacity. The marketing and sales segment receives its revenue principally from nonregulated retail sales of natural gas and electricity. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on MidAmerican Energy allocators most related to the nature of the cost.

MidAmerican Funding’s external revenues by product are displayed on the Consolidated Statements of Operations.

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

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003

Segment Profit Information
Operating revenues:
External revenues -
Generation	$	107,808		$	127,730		$	430,046		$	393,438
Energy delivery		397,853			400,954			1,343,548			1,345,689
Transmission		7,145			6,178			20,843			18,282
Marketing & sales		52,447			41,139			184,719			169,671
Other		1,195			1,280			3,759			2,557
Total		566,448			577,281			1,982,915			1,929,637

Intersegment revenues -
Generation		205,400			216,625			505,515			495,669
Energy delivery		(220,171	)		(232,212	)		(549,828	)		(540,983	)
Transmission		14,771			14,487			44,313			43,460
Marketing & sales		-			1,100			-			1,854
Total		-			-			-			-
Consolidated	$	566,448		$	577,281		$	1,982,915		$	1,929,637

Income before income taxes:
Generation	$	79,994		$	97,299		$	124,254		$	160,259
Energy delivery		12,323			4,566			83,925			78,113
Transmission		13,348			11,393			39,282			34,440
Marketing & sales		929			2,480			4,253			4,171
Other		(10,902	)		(11,381	)		(31,915	)		(36,264	)
Total	$	95,692		$	104,357		$	219,799		$	240,719


							As of
							September 30,			December 31,
							2004			2003
Segment Asset Information
Total assets (a):
Generation							$	2,893,537		$	2,567,022
Energy delivery								2,757,216			2,797,967
Transmission								345,700			326,502
Marketing & sales								37,268			56,743
Other								243,528			200,863
Total								6,277,249			5,949,097
Reclassifications and intersegment eliminations (b)								(258,749	)		(211,483	)
Consolidated							$	6,018,500		$	5,737,614

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

(b)	Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables.

7. Total Comprehensive Income

MidAmerican Funding’s total comprehensive income for the three months ended September 30, 2004 and 2003, was $59.4 million and $52.7 million, respectively. MidAmerican Funding's total comprehensive income for the nine months ended September 30, 2004 and 2003, was $135.0 million and $128.7 million, respectively. The differences from Net Income for the periods presented are due to the effective portion of net gains and losses on MidAmerican Energy’s derivative instruments classified as cash flow hedges and unrealized holding gains and losses on marketable securities. Accumulated other comprehensive income (loss), net, was $(0.1) million and $0.7 million as of September 30, 2004, and December 31, 2003, respectively.

8. Goodwill

For the nine months ended September 30, 2004, MidAmerican Funding adjusted goodwill for a change in deferred income taxes due to resolution of a tax issue existing at the time of its purchase of MHC. The following table shows the change in the carrying amount of goodwill by reportable operating segment for the nine months ended September 30, 2004 (in thousands):

				Energy
	Generation			Delivery			Transmission			Total

Balance at January 1, 2004	$	927,481		$	262,906		$	84,067		$	1,274,454
Income tax adjustment		(3,423	)		(986	)		(311	)		(4,720	)
Balance at September 30, 2004	$	924,058		$	261,920		$	83,756		$	1,269,734

9. Subsequent Event

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary within MidAmerican Funding, LLC ("MidAmerican Funding").

Management’s Discussion and Analysis ("MD&A") addresses the financial statements of MidAmerican Funding and MidAmerican Energy as presented in this joint filing. Information in MD&A related to MidAmerican Energy, whether or not segregated, also relates to MidAmerican Funding. Information related to other subsidiaries of MidAmerican Funding pertains only to the discussion of the financial condition and results of operations of MidAmerican Funding. Where necessary, discussions have been segregated and labeled to allow the reader to identify information applicable only to MidAmerican Funding.

MD&A should be read in conjunction with the financial statements included in this Form 10-Q and the notes to those statements, together with MD&A in MidAmerican Energy’s and MidAmerican Funding’s most recently filed Annual Report on Form 10-K.

Forward-Looking Statements

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

Executive Summary

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

In September 2004, the Iowa legislature passed legislation adopting a federal tax provision into Iowa law that provides accelerated tax depreciation for certain assets acquired after May 5, 2003 and before January 1, 2005. Accordingly, as a result of Iowa regulatory rules for utility income taxes, MidAmerican Energy’s income tax expense for 2004 will be reduced, but this lower cost will be largely offset by increased revenue sharing included in depreciation expense;
MidAmerican Energy is currently constructing three electric generation projects in Iowa and expects to invest approximately $1.4 billion in the projects through 2007. Through September 30, 2004, approximately $541 million of the $1.4 billion has been invested. On October 4, 2004, the President signed into law legislation that extends the federal production tax credit to electricity produced by wind energy facilities placed in service prior to January 1, 2006. Accordingly, MidAmerican Energy has begun construction on its $323 million wind power project, one of the three projects in progress;
On October 1, 2004, MidAmerican Energy issued $350 million of 4.65% medium-term notes due October 1, 2014. The proceeds will be used to for general corporate purposes.

Results of Operations for the Quarter Ended September 30, 2004 and 2003

Earnings Overview

MidAmerican Energy’s earnings on common stock increased $1.8 million to $65.8 million for the third quarter of 2004 compared to $64.0 million for the third quarter of 2003. MidAmerican Funding’s net income increased $2.2 million to $59.6 million for the third quarter of 2004 compared to $57.4 million for the third quarter of 2003.

Following is a discussion of various factors that affected earnings. Explanations include management's best estimate of the impact of weather, customer growth and other factors.

Regulated Electric Gross Margin

	Quarter Ended
	September 30,
	2004		2003
	(In millions)

Operating revenues	$	391.8	$	422.6
Less cost of fuel, energy and capacity		91.8		123.3
Electric gross margin	$	300.0	$	299.3

Electric gross margin for the third quarter of 2004 increased $0.7 million compared to the third quarter of 2003. The improvement in electric gross margin was attributable to a $6.1 million increase in net margin on MidAmerican Energy’s sales and purchases of electric capacity, a $1.1 million increase in gross margin on wholesale sales and a $1.0 million increase in transmission revenues. These increases were largely offset by a $7.8 million decrease in gross margin on electric retail sales.

The decrease in gross margin on electric retail sales was due principally to a 2.1% decrease in retail sales volumes principally as a result of cooler temperature conditions. The effect of temperature conditions during the third quarter of 2004 compared to the third quarter of 2003 resulted in approximately a $21.3 million decrease in electric retail gross margin. Electricity usage factors not dependent on weather, such as changes in individual customer usage patterns, increased electric margin by $7.2 million compared to the third quarter of 2003 while an increase in the average number of retail customers improved electric retail gross margin by $4.6 million. Additionally, a reduction in fuel costs related to Iowa retail electric sales increased electric retail gross margin by $1.7 million compared to the third quarte r of 2003.

Sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system are classified as wholesale. Gross margin on electric wholesale energy sales increased $1.1 million for the third quarter of 2004 compared to the third quarter of 2003. This increase is comprised of improved margins per unit sold, which increased electric wholesale gross margin by $8.9 million, partially offset by a 26.3% decrease in wholesale sales volumes, which decreased wholesale gross margin by $7.8 million.

Regulated Gas Gross Margin

	Quarter Ended
	September 30,
	2004		2003
	(In millions)

Operating revenues	$	117.2	$	110.9
Less cost of gas sold		82.5		76.1
Gas gross margin	$	34.7	$	34.8

Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations through the purchased gas adjustment clauses. Compared to the third quarter of 2003, MidAmerican Energy’s average per-unit cost of gas increased 22.5%, resulting in a $15.2 million increase in cost of gas sold for the quarter. That increase was partially offset by a decrease in retail and wholesale sales volumes.

Although wholesale sales can substantially affect revenues and cost of gas sold, they do not affect gas gross margin because most of the margin on such sales is passed on to retail customers through the purchased gas adjustment clauses. The portion of such margins retained by MidAmerican Energy through sharing arrangements under applicable state regulations and tariffs is reflected as nonregulated revenues.

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 have the same impact on gross margin.

	Quarter Ended
Increase (Decrease) in Gas	September 30,
Operating Revenues	2004 vs. 2003
		(In millions)
Change in cost of gas sold:
Price	$	15.2
Sales volumes		(8.8)
Total		6.4
Weather		(0.9)
Customer growth		0.6
Other usage factors		(0.6)
Energy efficiency cost recovery		0.9
Other		(0.1)
Total revenue variance	$	6.3

The decrease in gas gross margin due to weather was the result of mild temperature conditions in the third quarter of 2004 compared to the same quarter in 2003. Other gas usage factors, such as changes in individual customer usage patterns and reaction to prices, also decreased gas margin. MidAmerican Energy's average number of gas retail customers increased 1.3% compared to the third quarter of 2003.

Regulated Operating Expenses

Regulated other operating expenses for the third quarter of 2004 increased $2.8 million compared to the third quarter of 2003 due to a $2.3 million increase in energy efficiency program expenses. Changes in energy efficiency program expenses are substantially matched by changes in related revenues recovered through a rider mechanism.

Depreciation and amortization expense for the third quarter of 2004 increased $15.4 million compared to the third quarter of 2003 due principally to a $17.0 million increase in regulatory expense related to a revenue sharing arrangement in Iowa. Refer to the "Legislative and Utility Regulatory Matters" section for an explanation of the revenue sharing arrangement.

Nonregulated Gross Margin

	Quarter Ended
	September 30,
	2004		2003
	(In millions)
MidAmerican Energy -
Nonregulated operating revenues	$	56.3	$	42.6
Less nonregulated cost of sales		48.4		36.1
Nonregulated gross margin	$	7.9	$	6.5

MidAmerican Funding Consolidated -
Nonregulated operating revenues	$	57.5	$	43.8
Less nonregulated cost of sales		48.7		36.4
Nonregulated gross margin	$	8.8	$	7.4

Nonregulated gross margin increased due to a $1.9 million increase in gross margin for nonregulated electric and gas wholesale operations, offset partially by a $0.6 million decrease in nonregulated electric retail margin.

Electric retail customers in Illinois, except for those served by electric cooperatives and municipalities, are allowed to select their electric power supplier. MidAmerican Energy's nonregulated electric retail revenues include revenues related to these supply services provided to customers outside of MidAmerican Energy's delivery system who choose their energy supplier. Nonregulated electric retail revenues increased $11.0 million to $28.4 million for the third quarter of 2004, while the related cost of sales increased $11.6 million to $25.1 million. The reduction in the related gross margin was due to a decrease in margin per unit sold partially offset by an increase in sales volumes in the third quarter of 2004 compared to the third quarter of 2003.

Other Income

MidAmerican Energy -

As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the FERC. Other income for the capitalized allowance on equity funds used during construction totaled $5.2 million and $2.2 million in the third quarter of 2004 and 2003, respectively. MidAmerican Energy anticipates recording a significant amount of income for the allowance on equity funds used during construction through 2007 while the announced generating plants are constructed.

Other income also includes net earnings related to the cash surrender value of corporate-owned life insurance policies. Related net earnings increased $0.6 million to $1.4 million for the third quarter of 2004 compared to the third quarter of 2003.

Fixed Charges

The decrease in interest on long-term debt was due to maturities of higher rate debt in 2003. Other interest expense increased due to interest on the Iowa revenue sharing liability. Allowance for borrowed funds increased due to increased utility construction expenditures.

Income Taxes

In September 2004, the Iowa legislature passed legislation adopting a federal tax provision into Iowa law that provides accelerated tax depreciation for certain assets acquired after May 5, 2003 and before January 1, 2005. Accordingly, as a result of Iowa regulatory rules for utility income taxes, MidAmerican Energy’s income taxes for the third quarter of 2004 were reduced by approximately $9.5 million.

Results of Operations for the Nine Months Ended September 30, 2004 and 2003

Earnings Overview

MidAmerican Energy’s earnings on common stock improved $3.7 million to $158.7 million for the first nine months of 2004 compared to $155.0 million for the first nine months of 2003. MidAmerican Funding’s net income increased $1.6 million to $135.7 million for the first nine months of 2004 compared to $134.1 million for the first nine months of 2003.

Regulated Electric Gross Margin

	Nine Months
	Ended September 30,
	2004		2003
	(In millions)

Operating revenues	$	1,099.3	$	1,066.8
Less cost of fuel, energy and capacity		305.5		294.1
Electric gross margin	$	793.8	$	772.7

Electric gross margin for the first nine months of 2004 increased $21.1 million compared to the first nine months of 2003 due primarily to a $14.4 million increase in electric wholesale gross margin. Additionally, net margin on MidAmerican Energy’s sales and purchases of electric capacity increased $9.7 million and revenues from transmission services increased $2.6 million compared to the first nine months of 2003. These increases were partially offset by a $5.2 million decrease in gross margin on electric retail sales mainly as a result of higher fuel costs.

Sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system are classified as wholesale. Gross margin on electric wholesale energy sales increased $14.4 million for the first nine months of 2004 compared to the first nine months of 2003 due to improved margins per unit sold, which increased electric wholesale gross margin by $14.8 million.

Higher fuel costs related to Iowa retail electric sales decreased electric retail gross margin by $12.6 million compared to the first nine months of 2003. A majority of the increase in fuel costs was for purchases of higher priced power to replace energy from plants taken out of service in 2004 for preventive maintenance. Additionally, the Iowa portion of two events in 2003 accounted for a significant amount of the increase from 2003 to 2004. First, $10.9 million of cost recovery was recognized in the second quarter of 2003 for MidAmerican Energy’s coal purchase contract with Enron Corp. ("Enron") following resolution of related Enron bankruptcy proceedings. Second, $5.1 million of expense was recognized in the second quarter of 2003 related to the write-off of the remaining value of failed nuclear fuel assemblies at Quad Cities Station.

In total, electric retail sales volumes increased 2.3% for the first nine months of 2004 compared to the first nine months of 2003. Electricity usage factors not dependent on weather, such as changes in individual customer usage patterns, increased electric margin by $19.8 million compared to the first nine months of 2003. A 1.1% increase in the average number of retail customers improved electric gross margin by $13.7 million. The effect of temperature conditions, principally during the third quarter of 2004, resulted in a $22.2 million decrease in electric retail gross margin. The decrease in sales volumes due to temperature conditions primarily affected residential customers. Accordingly, a greater portion of total electric retail sales volumes in the first nine months of 2004 were to lower-priced commercial and ind ustrial customers than in the first nine months of 2003. Due in part to this shift in sales mix, the average retail rate per unit sold decreased compared to the first nine months of 2003, which reduced electric retail gross margin by $5.2 million.

Regulated Gas Gross Margin

	Nine Months
	Ended September 30,
	2004		2003
	(In millions)

Operating revenues	$	684.4	$	679.7
Less cost of gas sold		526.7		517.4
Gas gross margin	$	157.7	$	162.3

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 2.8% compared to the first nine months of 2003, resulting in a $14.2 million increase in cost of gas sold. The increase in cost of gas sold was reduced by a decrease in gas retail sales volumes partially offset by an increase in wholesale sales volumes compared to the first nine months of 2003.

	Nine Months
Increase (Decrease) in Gas	Ended September 30,
Operating Revenues	2004 vs. 2003
	(In millions)
Change in cost of gas sold:
Price	$	14.2
Sales volumes		(4.9)
Total		9.3
Weather		(4.8)
Weather derivative		2.1
Customer growth		3.2
Other usage factors		(3.8)
Other		(1.3)
Total revenue variance	$	4.7

The decrease in gas gross margin due to weather was the result of milder temperature conditions in the first nine months of 2004 compared to the same period in 2003. MidAmerican Energy may enter into degree day swaps to offset a portion of the financial impact of variations in weather conditions on its delivery margins for the winter heating season. The net gain on such weather derivative financial instruments partially offset the decreased delivery margins. MidAmerican Energy's average number of gas retail customers increased 1.3% compared to the first nine months of 2003. Other gas usage factors, such as changes in individual customer usage patterns and reaction to prices, also decreased gas margin. Total natural gas retail sales volumes decreased 7.4%.

Regulated Operating Expenses

Regulated other operating expenses for the first nine months of 2004 increased $11.5 million compared to the first nine months of 2003. Electric transmission and distribution operating expenses increased $8.2 million due in part to payments to other utilities for the transmission of energy and higher storm damage repair costs. Additionally, fossil fuel generation and Quad Cities Station operating expenses increased $6.2 million compared to the first nine months of 2003. A $3.0 million decrease in deferred compensation expenses partially offset these increases.

Maintenance expenses increased $16.6 million compared to the first nine months of 2003 due principally to a $12.5 million increase in fossil fuel generation preventive maintenance. Additionally, distribution maintenance costs increased $3.0 million.

Depreciation and amortization expense for the first nine months of 2004 increased $19.1 million compared to the first nine months of 2003 due to an increase in regulatory expense related to a revenue sharing arrangement in Iowa offset partially by a decrease in regulatory expense for a revenue sharing arrangement in Illinois. Refer to the "Legislative and Utility Regulatory Matters" section for an explanation of the revenue sharing arrangements.

Nonregulated Gross Margin

	Nine Months
	Ended September 30,
	2004		2003
	(In millions)
MidAmerican Energy -
Nonregulated operating revenues	$	195.4	$	180.5
Less nonregulated cost of sales		170.9		156.8
Nonregulated gross margin	$	24.5	$	23.7

MidAmerican Funding Consolidated -
Nonregulated operating revenues	$	199.2	$	183.1
Less nonregulated cost of sales		171.9		157.3
Nonregulated gross margin	$	27.3	$	25.8

Electric retail customers in Illinois, except for those served by electric cooperatives and municipalities, are allowed to select their electric power supplier. MidAmerican Energy's nonregulated electric retail revenues include revenues related to these supply services provided to customers outside of MidAmerican Energy's delivery system who choose their energy supplier. The improvement in the related gross margin was due primarily to a 53.7% increase in sales volumes. The increase from sales volumes was mostly offset by a reduction in the margin per unit sold in the first nine months of 2004 compared to the first nine months of 2003. Nonregulated electric retail revenues increased $21.9 million to $70.3 million for the first nine months of 2004, while the related cost of sales increased $20.4 million to $60.1 million.

Gross margin on nonregulated electric and gas wholesale operations increased $2.3 million compared to the first nine months of 2003.

Nonregulated operations include earnings from sharing arrangements under applicable state regulations and tariffs filed with the Iowa Utilities Board ("IUB") and the South Dakota Public Utilities Commission for MidAmerican Energy's regulated natural gas operations. Under these arrangements, MidAmerican Energy is allowed to retain a portion of the benefits of gas wholesale sales and capacity release transactions. Earnings from these arrangements decreased $2.5 million for the first nine months of 2004 compared to the first nine months of 2003.

Interest and Dividend Income

Interest income decreased compared to the first nine months of 2003 due to a reduction in MidAmerican Energy's short-term investments.

Other Income

MidAmerican Energy -

As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the FERC. Other income for the capitalized allowance on equity funds used during construction totaled $13.0 million and $8.7 million in the first nine months of 2004 and 2003, respectively. MidAmerican Energy anticipates recording a significant amount of income for the allowance on equity funds used during construction through 2007 while the announced generating plants are constructed.

MidAmerican Funding -

Other income for the first nine months of 2004 includes $2.1 million of income from the receipt of cash and common stock distributed by several of MidAmerican Funding's venture capital fund investments. Income from equity method investments decreased $1.8 million compared to the first nine months of 2003. Other expense for the first nine months of 2003 reflects a $2.1 million impairment of a separate venture capital investment.

Fixed Charges

The decrease in interest on long-term debt was due to maturities of higher rate debt in 2003 offset partially by interest on $275 million of MidAmerican Energy 5.125% notes issued in January 2003. Other interest expense increased due to interest on the Iowa revenue sharing liability. Allowance for borrowed funds increased due to an increase in utility construction expenditures.

Income Taxes

During the first quarter of 2004, MidAmerican Energy settled an income tax audit with the Internal Revenue Service. Accordingly, MidAmerican Energy recorded as income a tax reserve previously established for the settled issue. As a result, income tax expense for the first nine months of 2004 was reduced by $8.5 million at MidAmerican Energy.

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

In September 2004, the Iowa legislature passed legislation adopting a federal tax provision into Iowa law that provides accelerated tax depreciation for certain assets acquired after May 5, 2003 and before January 1, 2005. Accordingly, as a result of Iowa regulatory rules for utility income taxes, MidAmerican Energy’s income taxes for the first nine months of 2004 were reduced by approximately $9.5 million.

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 $495.1 million and $437.8 million for the first nine months of 2004 and 2003, respectively. MidAmerican Funding’s net cash provided by operating activities was $457.4 million and $407.7 million for the first nine months of 2004 and 2003, respectively.

Utility Construction Expenditures

MidAmerican Energy’s primary need for capital is utility construction expenditures. For the first nine months of 2004, utility construction expenditures totaled $424.2 million, including allowance for funds used during construction and Quad Cities Station nuclear fuel purchases. Utility construction expenditures include non-cash and accrued amounts, the most significant of which for the first nine months of 2004 is $57.6 million for MidAmerican Energy’s share of deferred payments related to the second generation project discussed below. Under a contract with the general contractor on that project, MidAmerican Energy is allowed to defer payments, including the other owners’ shares, for up to $200 million of billed construction costs through the end of the project. Another non-cash expenditure included in utility construction expenditures relates to a computed cost of equity funds. As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the FERC.

Forecasted utility construction expenditures, including allowance for funds used during construction and completion of the wind power project discussed below, are $765 million for 2004. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. MidAmerican Energy expects to meet these capital expenditures with cash flows from operations and the issuance of long-term debt.

MidAmerican Energy anticipates a continuing increase in demand for electricity from its regulated customers. To meet anticipated demand and ensure adequate electric generation in its service territory, MidAmerican Energy is currently constructing three electric generating projects in Iowa. Upon completion, the projects will provide service to regulated retail electricity customers. MidAmerican Energy has obtained regulatory approval to include the actual costs of the generation projects in its Iowa rate base as long as actual costs do not exceed the agreed caps that MidAmerican Energy has deemed to be reasonable. If the caps are exceeded, MidAmerican Energy has the right to demonstrate the prudence of the expenditures above the caps, subject to regulatory review. Wholesale sales may also be made from the projects to th e extent the power is not needed for regulated retail service. MidAmerican Energy expects to invest approximately $1.4 billion in the three projects, of which approximately $541 million has been invested through September 30, 2004.

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

The second project is currently under construction and will be a 790-MW (based on expected accreditation) super-critical-temperature, low-sulfur coal-fired plant. MidAmerican Energy will operate the plant and hold an undivided ownership interest as a tenant in common with the other owners of the plant. MidAmerican Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican Energy expects its share of the estimated cost of the project to be approximately $713 million, excluding allowance for funds used during construction. Municipal, cooperative and public power utilities will own the remainder, which is a typical ownership arrangement for large base-load plants in Iowa. On May 29, 2003, the IUB issued an order approving the ratemaking principles for the plant, and on June 27, 2003, MidAme rican Energy received a certificate from the IUB allowing MidAmerican Energy to construct the plant. On September 9, 2003, MidAmerican Energy began construction of the plant, which it expects to be completed in the summer of 2007. MidAmerican Energy is also seeking an order from the IUB approving construction of the associated transmission facilities.

The third project consists of wind power facilities totaling 310 MW based on the nameplate rating. Generally speaking, accredited capacity ratings for wind power facilities are considerably less than the nameplate ratings due to the varying nature of wind. The current projected accredited capacity for these wind power facilities is approximately 53 MW. MidAmerican Energy will own and operate these facilities, which are expected to cost approximately $323 million. MidAmerican Energy’s plan to construct the wind project is in conjunction with a settlement agreement that extends, through December 31, 2010, an Iowa retail electric rate freeze that was previously scheduled to expire at the end of 2005. The settlement agreement, which was filed with the IUB as part of MidAmerican Energy’s application for ratem aking principles for the wind project, was approved by the IUB on October 17, 2003. MidAmerican Energy has also received authorization from the IUB to construct the wind power project. The settlement agreement provides that the obligation of MidAmerican Energy to construct the wind project may be terminated by MidAmerican Energy if the federal production tax credit applicable to the wind energy facilities is not available at a rate of 1.8 cents per kWh for a period of at least ten years after the facilities begin generating electricity. On October 4, 2004, the President signed into law legislation that extends the federal production tax credit to electricity produced by wind energy facilities placed in service prior to January 1, 2006. The credit is allowable for production during the 10-year period after a facility is originally placed in service. Accordingly, MidAmerican Energy has begun construction of the wind power facilities and anticipates approximately one half of the facilities will be gen erating electricity by the end of 2004. The remaining facilities are expected to be completed by the middle of 2005. MidAmerican Energy does not construct the wind power facilities by December 31, 2006, the rate extension from January 1, 2006 through December 31, 2010, may terminate. Refer to the "Rate Matters" discussion below for more information regarding the rate aspects of the settlement.

Nuclear Decommissioning

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

MidAmerican Energy currently contributes $8.3 million annually to trusts established for the investment of funds for decommissioning Quad Cities Station. Approximately 70% of the fair value of the trusts’ funds is now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds. Funding for Quad Cities Station nuclear decommissioning is reflected as depreciation expense in the Consolidated Statements of Operations. Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process.

Contractual Obligations and Commercial Commitments

MidAmerican Energy and MidAmerican Funding have various contractual obligations and commercial commitments. There have been no material changes in the amount of such obligations and commitments from what was disclosed in the "Liquidity and Capital Resources" section of MD&A in MidAmerican Energy’s and MidAmerican Funding’s most recently filed Form 10-K other than electric capacity commitments as disclosed in Note 3(d) of Notes to Consolidated Financial Statements in this Form 10-Q.

Debt Redemption and Issuance

MidAmerican Energy’s 7.7% series of mortgage bonds, totaling $55.6 million, matured on May 17, 2004. On October 1, 2004, MidAmerican Energy issued $350 million of 4.65% medium-term notes due October 1, 2014. The proceeds will be used for general corporate purposes.

Debt Authorizations and Credit Facilities

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

After reflecting the issuance of the $350 million of medium-term notes described above, MidAmerican Energy has the following authorizations to issue additional long-term securities. MidAmerican Energy currently has on file with the Securities and Exchange Commission registration statements providing for the issuance of $530 million in various forms of senior and subordinated long-term debt and preferred securities. MidAmerican Energy currently has authorization from the FERC to issue various forms of long-term debt in the amount of $530 million through November 30, 2004, and $455 million for December 1, 2004 through November 30, 2005. Under the FERC authorization, such funds would be used to refinance ma turing debt and to finance a portion of the cost of the generation projects noted above. MidAmerican Energy currently has authority from the Illinois Commerce Commission ("ICC") to issue up to $545 million of long-term debt for refinancing purposes and capital expenditures.

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

Other Financing Information

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

Credit Ratings Risks

Debt and preferred securities of MidAmerican Funding and MidAmerican Energy are rated by nationally recognized credit rating agencies. Assigned credit ratings are based on each rating agency’s assessment of MidAmerican Funding’s or MidAmerican Energy’s ability to, in general, meet the obligations of the debt or preferred securities issued by the rated company. The credit ratings are not a recommendation to buy, sell or hold securities, and there is no assurance that a particular credit rating will continue for any given period of time. Other than the energy trading agreements discussed below, neither MidAmerican Funding nor MidAmerican Energy has any credit agreements that require termination or a material change in collateral requirements or payment schedule in the event of a downgrade in the credit rat ings of the respective company’s securities.

In conjunction with its wholesale marketing and trading activities, MidAmerican Energy must meet credit quality standards as required by counterparties. MidAmerican Energy has energy trading agreements that, in accordance with industry practice, either specifically require it to maintain investment grade credit ratings or provide the right for counterparties to demand "adequate assurances" in the event of a material adverse change in MidAmerican Energy’s creditworthiness. If one or more of MidAmerican Energy’s credit ratings decline below investment grade, MidAmerican Energy may be required to post cash collateral, letters of credit or other similar credit support to facilitate ongoing wholesale marketing and trading activities. As of September 30, 2004, MidAmerican Energy’s estimated potential coll ateral requirements totaled approximately $87 million. MidAmerican Energy’s collateral requirements could fluctuate considerably due to seasonality, market price volatility, a loss of key MidAmerican Energy generating facilities or other related factors.

Legislative and Utility Regulatory Matters

Electric Deregulation

Under Illinois law, as of December 31, 2000, all non-residential customers in Illinois are allowed to select their provider of electric supply services. Residential customers all received the opportunity to select their electric supplier beginning May 1, 2002. Currently in Iowa, deregulation is not being actively pursued.

Rate Matters

Under the first settlement agreement, which was approved by the IUB on December 21, 2001, and is effective through December 31, 2005, an amount equal to 50% of revenues associated with returns on equity between 12% and 14%, and 83.33% of revenues associated with returns on equity above 14%, in each year is recorded as a regulatory liability. The second settlement agreement, which was filed in conjunction with MidAmerican Energy’s application for ratemaking principles on a wind power project and was approved by the IUB on October 17, 2003, provides that during the period January 1, 2006 through December 31, 2010, an amount equal to 40% of revenues associated with returns on equity between 11.75% and 13%, 50% of revenues associated with returns on equity between 13% and 14%, and 83.3% of revenues asso ciated with returns on equity above 14%, in each year will be recorded as a regulatory liability. An amount equal to the regulatory liability is recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Additionally, interest expense is accrued on the portion of the regulatory liability balance recorded in prior years. The liability is being reduced as it is credited against plant in service in amounts equal to the allowance for funds used during construction associated with generating plant additions. As a result of the credit applied to generating plant balances from the reduction of the regulatory liability, future depreciation will be reduced. As of September 30, 2004 and December 31, 2003, the related regulatory liability reflected on the Consolidated Balance Sheets was $206.1 million and $144.4 million, respectively.

The second settlement agreement also provides that if Iowa retail electric returns on equity fall below 10% in any consecutive 12-month period after January 1, 2006 through December 31, 2010, MidAmerican Energy may seek to file for a general increase in rates. However, prior to filing for a general increase in rates, MidAmerican Energy is required by the settlement agreement to conduct 30 days of good faith negotiations with all of the signatories to the settlement agreement to attempt to avoid a general increase in rates.

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

The ICC staff has questioned the legality of MidAmerican Energy’s nonregulated sales of gas to retail customers within the State of Illinois in conjunction with purchased gas adjustment ("PGA") reconciliation proceedings. In its direct testimony in the PGA proceeding covering 2001, the ICC staff expressed its position that MidAmerican Energy must reduce gas costs recovered from Illinois regulated gas customers through the PGA by the gross margins earned from MidAmerican Energy’s Illinois nonregulated retail customers from 2001, or approximately $1.0 million. Gross margin is the difference between the revenue and the related cost of gas for MidAmerican Energy’s nonregulated sales of gas to retail customers in the entire State of Illinois. If a similar adjustment is made in subsequent PGA reconciliation pr oceedings, the total cumulative adjustment, including the adjustment for 2001, would be approximately $6.7 million. In a related proceeding, the ICC issued a declaratory ruling on May 11, 2004, finding that MidAmerican Energy cannot lawfully sell competitive, or nonregulated, gas anywhere in Illinois. In that same decision, the ICC decided to open a separate proceeding to determine an appropriate remedy for such sales. That matter is now before the ICC on rehearing.

The Illinois legislature passed a bill, SB 2525 that, if enacted into law, would allow the continuation of competitive gas sales in Illinois by MidAmerican Energy subject to ICC regulation. The Senate approved the bill on a 55 to 0 vote. The House of Representatives approved the bill on a 104 to 7 vote. On July 30, 2004, the Illinois Governor vetoed the bill. The Illinois legislature could reconsider the bill in a legislative session currently scheduled for November 2004. For any vetoed bill to become law in Illinois, it must pass both chambers by 60% majorities. Regardless of whether or not any such legislation passes, the ICC will resolve the historical issues in the on-going PGA proceedings.

Transmission Developments

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

If implemented, the FERC’s July 2002 proposed rule for SMD would require sweeping changes to the use and expansion of the interstate transmission and wholesale bulk power systems in the United States. However, it is unclear when or even whether the FERC will issue a final rule and what form the final rule would ultimately take. In response to significant criticism of its proposed rule, the FERC subsequently indicated that it had changed its proposal and would adopt a flexible approach to SMD that would accommodate regional differences. Any final rule on SMD or similar FERC action may impact the costs of MidAmerican Energy’s electricity and transmission products. Such FERC action could directly or indirectly influence how transmission services are priced, the availability of transmission services, and how tran smission services are obtained. In addition, the FERC could affect how wholesale electricity is bought and sold, as well as the geographic scope of the wholesale marketplace in which MidAmerican Energy buys and sells electricity. MidAmerican Energy recognizes there is considerable uncertainty as to the timing and outcome of these transmission policy issues and will continue to evaluate evolving FERC policies. Transferring the operations and control of MidAmerican Energy’s transmission assets to other entities could increase costs for MidAmerican Energy; however, the actual effect of any such transaction on MidAmerican Energy’s future transmission costs, or alternate RTO strategies, is not yet known.

On June 3, 2004, the FERC’s Division of Operational Investigations of the Office of Market Oversight and Investigations informed MidAmerican Energy that it was commencing an audit to determine whether and how MidAmerican Energy and its subsidiaries and affiliates are complying with (1) requirements of the standards of conduct and open access same-time information system of the FERC’s regulations; (2) Codes of Conduct; and (3) Transmission Practices. The FERC has commenced several such audits of utilities in 2003 and 2004. The audit is on-going, and MidAmerican Energy does not expect it to be completed for several months.

Environmental Matters

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

MidAmerican Energy has evaluated or is evaluating 27 properties that were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party. The purpose of these evaluations is to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. As of September 30, 2004, MidAmerican Energy has recorded a $10.7 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. Refer to Note 3(a) of Notes to Consolidated Financial Statements in this Form 10-Q for further discussion of MidAmerican Energy’s environmental activities related to manufactured gas plant sites and cost recovery.

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

Generation Matters

In August 2003, retail customer usage of electricity caused a new record hourly peak demand of 3,935 MW on MidAmerican Energy’s electric system. For the 2004 cooling season, MidAmerican Energy’s hourly peak demand was 3,894 MW on July 20, 2004. MidAmerican Energy is interconnected with Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool ("MAPP"). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. For the 2004 cooling season, MidAmerican Energy’s reserve was approximately 26% above its system peak demand.

MidAmerican Energy believes it has adequate electric capacity reserve through 2004 and continues to manage its generating resources to ensure an adequate reserve in the future. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican Energy’s reserve to fall below the 15% minimum. If MidAmerican Energy fails to maintain the appropriate reserve, significant penalties could be contractually imposed by MAPP.

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

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

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

New Accounting Pronouncements

Critical Accounting Policies and Estimates

MidAmerican Energy’s and MidAmerican Funding’s significant accounting policies are described in their respective Note (1) of Notes to Consolidated Financial Statements in Item 8 of their most recently filed Annual Report on Form 10-K. For a discussion of their critical accounting policies and estimates, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in their most recently filed Annual Report on Form 10-K. MidAmerican Energy’s and MidAmerican Funding’s critical accounting policies have not changed materially since December 31, 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

MidAmerican Energy’s exposure to market risk has not changed materially from its risk as of December 31, 2003. The scope of its use of financial instruments for both hedging and proprietary trading purposes has also not changed materially from December 31, 2003. MidAmerican Energy trades financial instruments that are almost entirely exchange-traded or have prices that are actively quoted. Reference is made to MidAmerican Energy’s and MidAmerican Funding’s most recently filed Form 10-K, and in particular, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, and Notes (1) (i) and (9) in Notes to Consolidated Financial Statements in Item 8 of that report.

Item 4.

Controls and Procedures.

With the supervision and participation of MidAmerican Funding’s and MidAmerican Energy’s management, including the respective persons acting as chief executive officer and chief financial officer, each company performed an evaluation regarding the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2004. Based on that evaluation, MidAmerican Funding’s and MidAmerican Energy’s management, including the respective persons acting as chief executive officer and chief financial officer, concluded that their respective disclosure controls and procedures were effective. There have been no significant changes during the quarter covered by this report i n MidAmerican Funding’s or MidAmerican Energy’s internal controls or in other factors that could significantly affect internal controls.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

MidAmerican Energy is one of dozens of companies named as defendants in a January 20, 2004 consolidated class action lawsuit filed in the U.S. District Court for the Southern District of New York. The suit alleges that the defendants have engaged in unlawful manipulation of the prices of natural gas futures and options contracts traded on the New York Mercantile Exchange ("NYMEX") during the period of January 1, 2000 to December 31, 2002. MidAmerican Energy is mentioned as a company that has engaged in wash trades on Enron Online (an electronic trading platform) that had the effect of distorting prices for gas trades on the NYMEX. The plaintiffs to the class action do not specify the amount of alleged damages. At this time MidAmerican Energy does not believe that it has any material exposure in this laws uit.

The original complaint in this matter, Cornerstone Propane Partners, L.P. v. Reliant, et al. ("Cornerstone"), was filed on August 18, 2003 in the United States District Court, Southern District of New York naming MidAmerican Energy. On October 1, 2003, a second complaint , Roberto, E. Calle Gracey, et al. ("Calle Gracey"), was filed in the same court but did not name MidAmerican Energy. On November 14, 2003, a third complaint, Dominick Viola ("Viola"), et al., was filed in the same court and named MidAmerican Energy as a defendant. On December 5, 2003, the court entered Pretrial Order No. 1, which among other procedural matters, ordered the consolidation of the Cornerstone, Calle Gracey and Viola complaints and permitted plaintiffs to file an amended complaint in this matter. On January 20, 2004, plaintiffs filed In Re: Natural Gas Commodity Litiga tion as the amended complaint reasserting their previous allegations. On February 19, 2004, MidAmerican Energy filed a Motion to Dismiss and joined with several other defendants to file a joint Motion to Dismiss. The plaintiffs’ filed a response on May 19, 2004, contesting both Motions to Dismiss. On September 24, 2004, the pending motions to dismiss were denied. MidAmerican Energy will continue to coordinate with the other defendants and vigorously defend the allegations against it.

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5.

Other Information.

None.

Item 6.

Exhibits.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		MIDAMERICAN FUNDING, LLC
		MIDAMERICAN ENERGY COMPANY
		(Registrants)





Date: November 4, 2004		/s/ Patrick J. Goodman
		Patrick J. Goodman
		Vice President and Treasurer
		of MidAmerican Funding, LLC
		(principal financial and accounting officer)





		/s/ Thomas B. Specketer
		Thomas B. Specketer
		Vice President and Controller
		of MidAmerican Energy Company
		(principal financial and accounting officer)

EXHIBIT INDEX

Exhibit No.

MidAmerican Energy

15	Awareness Letter of Registered Public Accounting Firm

31.1	Chief executive officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Chief financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Chief executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	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 2002

31.4	Chief financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.3	Chief executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.4	Chief financial officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002