MIDAMERICAN FUNDING LLC - 10-Q Quarterly Report

Back to GetFilings.com

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, 2002
------------------

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
---

As of October 31, 2002, all of the member's equity of MidAmerican Funding, LLC
was held by MidAmerican Energy Holdings Company.

As of October 31, 2002, 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
AND
MIDAMERICAN ENERGY COMPANY
FORM 10-Q

This combined Form 10-Q is separately filed by MidAmerican Funding, LLC and
MidAmerican Energy Company. Information herein relating to each individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, MidAmerican Energy makes no representation as to
information relating to any other subsidiary of MidAmerican Funding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION PAGE NO.

ITEM 1. Financial Statements

Independent Accountants' Reports................................... 3

MidAmerican Energy Company

Consolidated Statements of Income.................................. 5
Consolidated Balance Sheets........................................ 6
Consolidated Statements of Cash Flows.............................. 7
Notes to Consolidated Financial Statements......................... 8

MidAmerican Funding, LLC

Consolidated Statements of Income.................................. 15
Consolidated Balance Sheets........................................ 16
Consolidated Statements of Cash Flows.............................. 17
Notes to Consolidated Financial Statements......................... 18

ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 23

ITEM 4. Controls and Procedures............................................ 42

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings ................................................. 43

ITEM 6. Exhibits and Reports on Form 8-K................................... 44

Signatures.................................................................. 45

Officer Certifications...................................................... 46

Exhibit Index............................................................... 54

-2-

INDEPENDENT ACCOUNTANTS' REPORT

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

We have reviewed the accompanying consolidated balance sheet of MidAmerican
Energy Company and subsidiaries (the Company) as of September 30, 2002, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 2002 and 2001, and the related consolidated
statements of cash flows for the nine-month periods ended September 30, 2002 and
2001. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 review, we are not aware of any material modifications that should
be made to such consolidated 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, 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, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

DELOITTE & TOUCHE LLP

Des Moines, Iowa
October 25, 2002

-3-

INDEPENDENT ACCOUNTANTS' REPORT

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, 2002, and the
related consolidated statements of income for the three-month and nine-month
periods ended September 30, 2002 and 2001, and the related consolidated
statements of cash flows for the nine-month periods ended September 30, 2002 and
2001. These financial statements are the responsibility of the Company's
management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 review, we are not aware of any material modifications that should
be made to such consolidated 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 auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, 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, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

DELOITTE & TOUCHE LLP

Des Moines, Iowa
October 25, 2002

-4-

MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-5-

The accompanying notes are an integral part of these statements.

-6-

MIDAMERICAN ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-7-

MIDAMERICAN ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GENERAL:

The consolidated financial statements included herein have been prepared by
MidAmerican Energy Company, 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 been eliminated. Although MidAmerican Energy believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Energy's latest Annual Report on Form 10-K.

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

B. ENVIRONMENTAL MATTERS:

(1) MANUFACTURED GAS PLANT FACILITIES -

The United States Environmental Protection Agency 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 an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.

MidAmerican Energy estimates the range of possible costs for investigation,
remediation and monitoring for the sites discussed above to be $16 million to
$30 million. MidAmerican Energy's estimate of the probable cost for these sites
as of September 30, 2002 was $18 million. The estimate consists of $1 million
for investigation costs, $6 million for remediation costs, $9 million for ground
water treatment and monitoring costs and $2 million for closure and
administrative costs. This estimate has been recorded as a liability and a
regulatory asset for future recovery. MidAmerican Energy projects that these
amounts will be paid or incurred over the next 5 years.

The estimate of probable remediation costs is established on a
site-specific basis. Initially, a determination is made as to whether
MidAmerican Energy has potential remedial liability for the site and whether
information exists to indicate that contaminated wastes remain at the site. When
a potential remedial liability exists, the best estimate of projected site
closure costs are accrued. The estimates are evaluated and revised quarterly as
appropriate based on additional information obtained during

-8-

investigation and remedial activities. The estimated recorded liabilities for
these properties include incremental direct costs of the remediation effort and
oversight by the appropriate regulatory authority, costs for future monitoring
at sites and costs of compensation to employees for time expected to be spent
directly on the remediation effort. The estimated recorded liability 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, and are recorded as a regulatory liability. Additionally, as viable
potentially responsible parties are identified, those parties are evaluated for
potential contributions, and cost recovery is pursued when appropriate.

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.

(2) AIR QUALITY -

In July 1997, the Environmental Protection Agency (EPA) adopted revisions
to the National Ambient Air Quality Standards for ozone and a new standard for
fine particulate matter. Based on data to be obtained from monitors located
throughout each state, the EPA will determine which states have areas that do
not meet the air quality standards (i.e., areas that are classified as
nonattainment). The standards were subjected to legal proceedings, and in
February 2001, the United States Supreme Court upheld the constitutionality of
the standards, though remanding the issue of implementation of the ozone
standard to the EPA. As a result of a decision rendered by the U.S. Circuit
Court of Appeals for the District of Columbia, the EPA is moving forward in
implementation of the standard and analyzing existing monitored data to
determine attainment status.

The impact of the new standards on MidAmerican Energy is currently unknown.
MidAmerican Energy's generating stations may be subject to emission reductions
if the stations are located in nonattainment areas or contribute to
nonattainment areas in other states. As part of an overall state plan to achieve
attainment of the standards, MidAmerican Energy could be required to install
control equipment on its generating stations or decrease the number of hours
during which these stations operate.

The ozone and fine particulate matter standards could, in whole or in part,
be superceded by one of a number of multi-pollutant emission reduction proposals
currently under consideration at the federal level. In July 2002, legislation
was introduced in Congress to implement the Bush Administration's "Clear Skies
Initiative" calling for reduction in emissions of sulfur dioxide, nitrogen
oxides and mercury through a cap-and-trade system. Reductions would begin in
2008 with additional emission reductions being phased in through 2018.

While legislative action is necessary for the Clear Skies Initiative or
other multi-pollutant emission reduction initiatives to become effective,
MidAmerican Energy has implemented a planning process that forecasts the
site-specific controls and actions required to meet emissions reductions of this
nature. On April 1, 2002, in accordance with Iowa law passed in 2001,
MidAmerican Energy filed with the Iowa Utilities Board its first multi-year plan
and budget (the Plan) for managing regulated emissions from its generating
facilities in a cost-effective manner. MidAmerican Energy expects the Iowa
Utilities Board to rule on the prudence of the Plan in 2003.

-9-

C. RATE MATTERS:

Under a settlement agreement approved by the Iowa Utilities Board (IUB) on
December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on
December 31, 2000, are effectively frozen through December 31, 2005. In
approving that settlement, the IUB specifically allows the filing of electric
rate design and/or cost of service rate changes that are intended to keep
overall company revenues unchanged but could result in changes to individual
tariffs. Additionally, the 2001 settlement agreement reinstates, with
modifications, the revenue sharing provisions of the 1997 pricing plan
settlement agreement, which expired on December 31, 2000. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
will be recorded as a regulatory liability to be used to offset a portion of the
cost to Iowa customers of future generating plant investments. An amount equal
to the regulatory liability will be recorded as a regulatory charge in
depreciation and amortization expense when the liability is accrued. Interest
expense is accrued on the portion of the regulatory liability related to prior
years. Beginning in 2002, the liability is being relieved as it is credited
against allowance for funds used during construction, or capitalized financing
costs, associated with generating plant additions. As of September 30, 2002, the
related regulatory liability reflected on the Consolidated Balance Sheet totaled
$95.0 million.

On September 11, 2002, MidAmerican Energy received a final order from the
Illinois Commerce Commission to increase its Illinois natural gas rates by $2.2
million annually.

On March 15, 2002, MidAmerican Energy made a filing with the IUB requesting
an increase in rates of approximately $26.6 million for its Iowa retail natural
gas customers. As part of the filing, MidAmerican Energy requested an interim
rate increase of approximately $20.4 million annually. On June 12, 2002, the IUB
issued an order granting an interim rate increase of approximately $13.8 million
annually, effective immediately and subject to refund with interest. On July 15,
2002, MidAmerican Energy and the Office of Consumer Advocate filed a proposed
settlement agreement with the IUB. The proposed settlement agreement provides
for an increase in rates of $17.7 million annually for MidAmerican Energy's Iowa
retail natural gas customers and freezes such rates for two years after the date
the IUB approves tariffs implementing the proposed settlement agreement.
MidAmerican Energy anticipates implementing the new rates in the fourth quarter
of 2002.

D. DERIVATIVE FINANCIAL INSTRUMENTS:

MidAmerican Energy is exposed to market risk, including changes in the
market price of certain commodities and interest rates. To manage the price
volatility relating to these exposures, MidAmerican Energy enters into various
financial derivative instruments. Senior management provides the overall
direction, structure, conduct and control of MidAmerican Energy's risk
management activities, including the use of financial derivative instruments,
authorization and communication of risk management policies and procedures,
strategic hedging program guidelines, appropriate market and credit risk limits,
and appropriate systems for recording, monitoring and reporting the results of
transactional and risk management activities.

SFAS Nos. 133/138 require an entity to recognize all of its derivatives as
either assets or liabilities in its statement of financial position and measure
those instruments at fair value. If the conditions specified in SFAS Nos.
133/138 are met, those instruments may be designated as hedges. Only the
ineffectiveness of hedge instruments impacts earnings.

MidAmerican Energy uses hedge accounting for derivative instruments
pertaining to its natural gas purchasing and wholesale electricity activities.

-10-

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

MidAmerican Energy enters into natural gas futures and swap agreements to
mitigate a portion of the market price risk retained by its regulated gas
customers through the purchased gas adjustment clause. These instruments are
recorded as hedge transactions, with net amounts exchanged or accrued under swap
agreements and realized gains or losses on futures contracts included in the
cost of gas sold and recovered in revenues from regulated gas customers.

MidAmerican Energy also derives revenues from nonregulated sales of natural
gas. Pricing provisions are individually negotiated with these customers and may
include fixed prices or prices based on a daily or monthly market index.
MidAmerican Energy enters into natural gas futures and swap agreements to offset
the financial impact of variations in natural gas commodity prices for physical
delivery to nonregulated customers. These financial derivative activities are
also recorded as hedge accounting transactions.

MidAmerican Energy uses natural gas and electric derivative instruments for
trading purposes as defined by Emerging Issues Task Force (EITF) Issue No. 98-10
under strict value-at-risk limits outlined by senior management. Unrealized
gains or losses on such trading transactions are reported in earnings and
totaled a gain of $1.3 million as of September 30, 2002. Approximately 57% of
the trading unrealized gain at September 30, 2002, is scheduled to be realized
in the next twelve months. In accordance with EITF Issue No. 02-3, effective
September 30, 2002, for MidAmerican Energy, all trading revenues are reported
net of the costs of such sales on the Consolidated Statements of Income.
Previously, such amounts were recorded gross. All prior periods have been
reclassified to conform to the net presentation.

MidAmerican Energy is exposed to variations in the price of fuel for
generation and the price of purchased power in its Iowa jurisdiction, which
accounts for approximately 89% of electric operating revenues. Fuel price risk
is mitigated through forward contracts. Under typical operating conditions,
MidAmerican Energy has sufficient generation to supply its retail electric
needs. A loss of such generation at a time of high market prices could subject
MidAmerican Energy to losses on its energy sales. MidAmerican Energy uses
electricity forward contracts to hedge anticipated sales or purchases of
wholesale electric power.

MidAmerican Energy and its customers are exposed to the effect of
variations in weather conditions on sales and purchases, respectively, of
electricity and natural gas. For the 2001-2002 heating season, MidAmerican
Energy entered into several degree day swaps to offset a portion of the
financial impact of those variations on MidAmerican Energy and its customers.

Unrealized gains and losses on cash flow hedges of future transactions are
recorded in other comprehensive income. Only hedges that are highly effective in
offsetting the risk of variability in future cash flows are accounted for in
this manner. Future transactions include purchases of gas for resale to
regulated and nonregulated customers, purchases of gas for storage, and
purchases and sales of wholesale electric energy. When the associated hedged
future transaction occurs or when a forecasted transaction is no longer probable
of occurring, the unrealized gains and losses are reversed from other
comprehensive income and recognized in net income. Realized gains on cash flow
hedges are recorded in Cost of Gas

-11-

Sold, Regulated Cost of Fuel, Energy and Capacity or Nonregulated Operating
Revenues, depending upon the nature of the physical transaction being hedged.

Unrealized gains and losses on fair value hedges of firm commitments are
recognized in income as either Nonregulated Operating Revenues or Cost of Gas
Sold depending upon the nature of the item being hedged. Purchase and sales
commitments hedged by fair value hedges are recorded at fair value, with the
changes in values also recognized in income and substantially offsetting the
impact of the hedges on earnings.

E. 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 wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale and delivery of regulated retail electricity
and natural gas. The transmission segment obtains most of its revenue from the
sale of 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, income
tax expense and equity in the net income or loss of investees are allocated to
each segment.

-12-

The following table provides MidAmerican Energy's operating revenues and
income before income taxes on an operating segment basis (in thousands):

As of
--------------------------------
September 30, December 31,
2002 2001
------------- ------------
Total Assets:
Generation..................... $1,341,702 $1,282,677
Energy delivery................ 2,206,775 2,107,598
Transmission................... 230,735 226,251
Marketing & sales.............. 51,644 51,164
---------- ----------
Total........................ 3,830,856 3,667,690
Reclassifications and
intersegment eliminations(a) (85,859) (89,798)
---------- ----------
Consolidated................... $3,744,997 $3,577,892
========== ==========

(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.

-13-

F. TOTAL COMPREHENSIVE INCOME:

For the nine months ended September 30, 2002 and 2001, MidAmerican Energy's
total comprehensive income was $137.8 million and $147.2 million, respectively.
For the three months ended September 30, 2002 and 2001, MidAmerican Energy's
total comprehensive income was $68.5 million and $54.8 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 loss, net, which also includes recognition of the minimum pension
liability adjustment, was $6.5 million and $3.8 million as of September 30,
2002, and December 31, 2001, respectively.

G. POWER PURCHASE CONTRACT RESTRUCTURING:

On July 31, 2002, MidAmerican Energy and Nebraska Public Power District
(NPPD) signed an agreement on the restructuring of the power purchase contract
for Cooper Nuclear Station (Cooper). Under the terms of the restructured
contract, MidAmerican Energy will pay NPPD through December 31, 2004, a
scheduled amount per unit for 380 megawatts of the accredited capacity of Cooper
and a minimum of approximately 1.2 million megawatt-hours (MWh) in the last five
months of 2002 and approximately 2.5 million MWh in each of 2003 and 2004. NPPD
also paid MidAmerican Energy $39.1 million on August 1, 2002.

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

Finally, both parties agreed to release each other from any and all claims,
past or present, each might have or assert against the other with respect to
Cooper on or before July 31, 2002, and to file for dismissal of the litigation
then pending in U.S. District Court.

Under the terms of MidAmerican Energy's power purchase contract with NPPD
prior to its restructuring, MidAmerican Energy paid NPPD one-half of the fixed
and operating costs of Cooper, excluding depreciation but including debt
service, and MidAmerican Energy's share of the nuclear fuel cost, including
Department of Energy disposal fees, based on energy delivered. In addition,
prior to December 2000, MidAmerican Energy contributed toward payment of
one-half of Cooper's projected decommissioning costs based on an assumed 2004
shutdown of the plant.

-14-

MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-15-

MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-16-

MIDAMERICAN FUNDING, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-17-

MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. GENERAL:

The consolidated financial statements included herein have been prepared by
MidAmerican Funding, LLC, 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 been eliminated. Although MidAmerican Funding believes that
the disclosures are adequate to make the information presented not misleading,
it is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in MidAmerican
Funding's latest Annual Report on Form 10-K.

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

B. ENVIRONMENTAL MATTERS:

Refer to Note B of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's environmental
matters.

C. RATE MATTERS:

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

D. DERIVATIVE FINANCIAL INSTRUMENTS:

Refer to Note D of MidAmerican Energy's Notes to Consolidated Financial
Statements, for information regarding MidAmerican Funding's derivative financial
instruments. The first paragraph of MidAmerican Energy's Note D is also
applicable to MidAmerican Funding as a whole.

In addition, MidAmerican Capital is exposed to market value risk from
changes in interest rates on its preferred stock investments. MidAmerican
Capital reviews the interest rate sensitivity of these securities and purchases
put options in order to reduce related interest rate risk. MidAmerican Capital's
intent is to manage the risk arising from changes in the general level of
interest rates with a change in market value of the hedging instruments. As
permitted by SFAS No. 133, MidAmerican Capital accounts for these hedging
instruments as trading securities.

-18-

E. 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 wholesale electricity and nonregulated
wholesale and retail natural gas. The energy delivery segment derives its
revenue principally from the sale and delivery of regulated retail electricity
and natural gas. The transmission segment obtains most of its revenue from the
sale of 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, income
tax expense and equity in the net income or loss of investees are allocated to
each segment.

-19-

The following table provides MidAmerican Funding's operating revenues and
income before income taxes on an operating segment basis (in thousands):

(a) Other includes the combined amounts for all segments that do not meet
the requirements for being a reportable segment. It includes
MidAmerican Capital, Midwest Capital, MidAmerican Services, MEC
Construction and amounts of the parent companies.

-20-

(b) Total assets by operating segment reflect the assignment of goodwill to
applicable reporting units in accordance with SFAS No. 142. Refer to
Note H for further discussion of SFAS No. 142 and the assignment of
goodwill.

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

F. TOTAL COMPREHENSIVE INCOME:

Total comprehensive income for MidAmerican Funding is shown in the table
below. The differences from Net Income to total comprehensive income for
MidAmerican Funding are due to unrealized holding gains and losses of marketable
securities during the periods and the effective portion of net gains and losses
of derivative instruments classified as cash flow hedges. Accumulated other
comprehensive loss, net, which is a component of common equity and also includes
recognition of the minimum pension liability adjustment, was $6.5 million and
$0.6 million as of September 30, 2002, and December 31, 2001, respectively.

G. POWER PURCHASE CONTRACT RESTRUCTURING:

Refer to Note G of MidAmerican Energy's Notes to Consolidated Financial
Statements for information regarding MidAmerican Funding's power purchase
contract restructuring.

H. EXCESS OF COST OVER FAIR VALUE OF ASSETS ACQUIRED, NET:

On January 1, 2002, MidAmerican Funding adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which dictates the accounting for acquired goodwill
and other intangible assets. SFAS No. 142 requires that amortization of goodwill
and indefinite-lived intangible assets be discontinued and that entities
disclose net income for prior periods adjusted to exclude such amortization and
related income tax effects, as well as a reconciliation from the originally
reported net income to the adjusted net income. MidAmerican Funding's related
amortization consisted solely of goodwill amortization, which had no income tax
effect. Following is a reconciliation of net income as originally reported for
the periods ended September 30, 2001, to adjusted net income (in thousands):

Three Nine
Months Months
-------- --------
Net income as originally reported $ 41,403 $102,469
Goodwill amortization ........... 8,605 25,811
-------- --------
Net income as adjusted .......... $ 50,008 $128,280
======== ========

-21-

MidAmerican Funding has completed the initial goodwill impairment test as
required by SFAS No. 142, and no impairment was indicated. As of January 1,
2002, and September 30, 2002, goodwill has been assigned to MidAmerican
Funding's reportable segments as follows (in thousands):

Generation ........ $ 927,892
Energy delivery ... 267,173
Transmission ...... 84,178
Marketing & sales.. -
----------
$1,279,243
==========

-22-

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

INTRODUCTION
------------

MidAmerican Funding, LLC is an Iowa limited liability company formed in
March 1999. The sole member of MidAmerican Funding is MidAmerican Energy
Holdings Company. MidAmerican Funding owns all of the outstanding common stock
of MHC Inc. MHC's principal subsidiary is MidAmerican Energy, a public utility
with electric and gas operations. Other direct, wholly owned subsidiaries of MHC
include MidAmerican Capital Company, Midwest Capital Group, Inc., MEC
Construction Services Co. and MidAmerican Services Company.

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

FORWARD-LOOKING STATEMENTS

From time to time, MidAmerican Funding, or one of its subsidiaries
individually, 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 and revenues, fuel prices, fuel
transportation and other operating uncertainties, acquisition uncertainty,
uncertainties relating to economic and political conditions and uncertainties
regarding the impact of regulations, changes in government policy, utility
industry deregulation and competition. Neither MidAmerican Funding, nor any one
of its subsidiaries individually, assumes any responsibility to update
forward-looking information contained herein.

-23-

RESULTS OF OPERATIONS
---------------------

REGULATED GROSS MARGIN

Regulated Electric Gross Margin -

Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
(In millions)
Operating revenues .............. $ 420 $ 390 $1,052 $1,025
Cost of fuel, energy and capacity 111 88 256 215
------ ------ ------ ------
Electric gross margin ........... $ 309 $ 302 $ 796 $ 810
====== ====== ====== ======

Electric gross margin for the third quarter of 2002 increased $7 million
compared to the third quarter of 2001.

Temperature conditions during the three months ended September 30, 2002,
were hotter than in the third quarter of 2001, resulting in a $9 million
increase in electric margin. Other usage factors not dependent on weather
increased electric margin by $14.9 million compared to the third quarter of
2001. In total, retail electric sales volumes increased 6.6% for the three
months ended September 30, 2002.

MidAmerican Energy's gross margin on wholesale sales decreased $20.6
million, excluding the effect of restructuring the contract related to Cooper
Nuclear Station, due primarily to a decline in prices. The price declines were
somewhat offset by a 41.4% increase in wholesale sales volumes compared to the
2001 quarter. Wholesale sales are the sales of energy to other utilities,
municipalities and marketers outside of MidAmerican Energy's delivery system.

MidAmerican Energy sells and purchases electric capacity. The net margin
from those sales and purchases increased $9.6 million compared to the third
quarter of 2001. Additionally, a change in the mix of fuel sources and in the
average cost per unit of coal and natural gas decreased fuel costs related to
Iowa retail electric sales by $12.1 million, excluding the effect of
restructuring the contract related to Cooper Nuclear Station, further increasing
electric margin relative to the three months ended September 30, 2001.

Electric gross margin decreased by $12.0 million compared to the third
quarter of 2001 due to a change in the classification of costs for energy and
capacity purchased from Cooper Nuclear Station under a contract with the
Nebraska Public Power District. Prior to August 1, 2002, only the fuel costs for
energy purchased from Cooper Nuclear Station were included in Cost of Fuel,
Energy and Capacity. Other costs under the contract were included in Other
Operating Expenses. As a result of a contract restructuring on July 31, 2002,
all current costs for energy and capacity purchased under that contract are
included in Cost of Fuel, Energy and Capacity, as with other purchased power.
Other Operating Expenses reflects a decrease accordingly. Refer to Note G of
Notes to Consolidated Financial Statements for a discussion of the contract
restructuring.

Electric revenues from the recovery of energy efficiency program costs
decreased $4.8 million compared to the quarter ended September 30, 2001. The
decrease in the third quarter of 2002 was due to completion in the third quarter
of 2001 of the final recovery phase for deferred energy efficiency costs.
Deferred energy efficiency costs were costs previously incurred by MidAmerican
Energy, which, in accordance with rate treatment, were not charged to expense
until recovery from customers began. Recovery of deferred energy efficiency
costs occurred over a four-year period from the date collection began for each
phase. The decrease in recovery of deferred costs was reduced partially by an
increase in

-24-

the recovery of current energy efficiency costs. Changes in these revenues are
substantially matched with corresponding changes in other operating expenses.

For the nine months ended September 30, 2002, compared to the first nine
months of 2001, electric gross margin decreased $14 million. MidAmerican
Energy's gross margin on wholesale sales decreased $38.3 million, excluding the
effect of the Cooper Nuclear Station contract restructuring, compared to the
first nine months of 2001 due to price declines. The impact of price declines
was partially offset by an 18.0% increase in wholesale sales volumes.

Electric margin decreased $12.0 million compared to the nine months ended
September 30, 2001, due to the change in classification of costs for energy and
capacity purchased from Cooper Nuclear Station due to the contract restructuring
discussed above.

Electric revenues from the recovery of energy efficiency program costs
decreased $15.7 million compared to the nine months ended September 30, 2001. As
discussed above, changes in these revenues are substantially matched with
corresponding changes in other operating expenses.

MidAmerican Energy's gains from sales of emission allowances decreased $3.2
million due to a gain on a sale in the nine-month period ended September 30,
2001. Additionally, fuel costs related to Iowa retail sales decreased $8.0
million, excluding the effect of the Cooper Nuclear Station contract
restructuring, increasing electric margin for the first nine months of 2002, due
principally to a change in the mix of fuel sources compared to the first nine
months of 2001.

The impact of temperature conditions resulted in a $9 million increase in
electric margin compared to the nine months ended September 30, 2001, due to the
hotter temperatures in the third quarter of 2002. Electricity usage factors not
dependent on weather increased electric margin by $33.6 million compared to the
first nine months of 2001. An increase in the average retail rate increased
electric margin by $5.9 million. In total, retail electric sales volumes
increased 6.0% for the nine months ended September 30, 2002.

Regulated Gas Gross Margin -

Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Operating revenues.... $ 96 $101 $442 $736
Cost of gas sold ..... 62 70 297 596
---- ---- ---- ----
Gas gross margin ..... $ 34 $ 31 $145 $140
==== ==== ==== ====

Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from most of
its 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 purchase gas adjustment clauses. A decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold by
approximately $214 million for the first nine months of 2002.

Temperature conditions during the three months ended September 30, 2002,
were warmer than those in the third quarter of 2001, resulting in a $1 million
decrease in gas gross margin. Other usage factors increased gross margin by $1.3
million compared to the third quarter of 2001. Total retail gas sales volumes
decreased 6.3% for the three months ended September 30, 2002.

-25-

An increase in retail rates improved gas margin by $1.9 million compared to
the third quarter of 2001. On February 20, 2002, the South Dakota Public Utility
Commission approved a settlement agreement allowing increased natural gas rates
of $3.1 million annually, effective immediately. On June 12, 2002, the Iowa
Utilities Board issued an order granting an interim rate increase of
approximately $13.8 million annually, effective immediately and subject to
refund with interest. On September 11, 2002, MidAmerican Energy received a final
order from the Illinois Commerce Commission to increase its Illinois natural gas
rates by $2.2 million annually. Refer to the "Rate Matters" discussion in the
"Liquidity and Capital Resources" section of MD&A for comments on the Iowa gas
rate proceeding.

Revenues from the recovery of energy efficiency costs increased gas margin
by $0.9 million compared to the three months ended September 30, 2001, due to an
increase in the recovery of current on-going energy efficiency costs. Refer to
the "Regulated Electric Gross Margin" section above for a discussion of energy
efficiency revenues.

Compared to the first nine months of 2001, gas gross margin increased $5
million. Milder temperature conditions in the first and third quarters of 2002
compared to the same quarters in 2001, offset partially by colder temperature
conditions in the second quarter of 2002, resulted in a $7 million reduction in
gas gross margin. Other usage factors not dependent on weather increased gas
margin by $7.8 million. Total natural gas retail sales volumes decreased 14.3%.

The increase in retail rates improved gas margin by $6.0 million compared
to the first nine months of 2001.

A decrease in revenues from the recovery of energy efficiency costs
reduced gas margin by $1.4 million compared to the nine months ended September
30, 2001.

REGULATED OPERATING EXPENSES

Regulated other operating expenses for the third quarter of 2002 decreased
$19.6 million compared to the third quarter of 2001. As discussed under
"Regulated Electric Gross Margin" above, MidAmerican Energy's contract related
to Cooper Nuclear Station was restructured July 31, 2002. Because of that
restructuring, Cooper Nuclear Station costs reflected in Other Operating
Expenses decreased $15.9 million compared to the third quarter of 2001. Other
significant items contributing to the decrease were a $3.1 million decrease in
the provision for uncollectible accounts receivable and a $2.3 million decrease
in energy efficiency program costs. Refer to the "Regulated Electric Gross
Margin" section for discussion regarding energy efficiency costs. The decreases
were partially offset by a $4.4 million increase in pension and other
postretirement costs.

Regulated other operating expenses for the nine months ended September 30,
2002, decreased $15.2 million for MidAmerican Energy and $14.0 million for
MidAmerican Funding compared to the 2001 period. The more significant decreases
included $12.3 million in energy efficiency program costs, $11.7 million in
Cooper Nuclear Station costs and $5.9 million in the provision for uncollectible
accounts receivable. The decrease in Cooper Nuclear Station costs was due
primarily to the related contract restructuring. Numerous less substantive
decreases also contributed to the total decrease in other operating expenses.
Compared to the nine months ended September 30, 2001, pension and other
postretirement costs increased $14.0 million; health care and other benefit
costs increased $3.3 million; and property and liability insurance increased
$2.1 million due to greater premium refunds in the 2001 period. The increase in
pension and postretirement costs is due principally to a change in the assumed
discount rate beginning in the fourth quarter of 2001.

-26-

Maintenance expenses decreased $4.7 million for the three months ended
September 30, 2002, and $3.0 million for the nine months ended September 30,
2002, compared to the respective 2001 periods due primarily to decreases in
electric distribution maintenance expenses. Fossil-fuel generation maintenance
expenses decreased $2.4 million for the 2002 quarter and increased $1.6 million
for the nine-month 2002 period.

Depreciation and amortization expense increased $12.6 million compared to
the third quarter of 2001 due to a $9.4 million increase in the regulatory
charge related to the establishment of a regulatory liability for the electric
revenue sharing arrangement in Iowa. Utility plant depreciation increased, in
part, due to a change in the estimated useful life of general utility plant
assets. Also, as a result of the restructuring of the Cooper Nuclear Station
contract, MidAmerican Energy wrote off the power purchase contract liabilities
and related assets, resulting in a $2.9 million gain. The gain is due to the
prior period, accelerated write-off of assets and liabilities as permitted by
Illinois deregulation rules. Depreciation and amortization expense increased
$17.0 million compared to the first nine months of 2001 due to an increase in
utility plant depreciation and an $8.8 million increase in the regulatory charge
related to the revenue sharing arrangement in Iowa.

NONREGULATED GROSS MARGIN

Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
2002 2001 2002 2001
------- ------- -------- --------
(In millions)
MidAmerican Energy -
Operating revenues:
Energy trading gross revenues $ 60.4 $ 79.1 $ 186.6 $ 341.6
Energy trading cost of sales 59.8 78.0 183.4 335.5
------- ------- -------- --------
Net energy trading revenues 0.6 1.1 3.2 6.1
Other revenues .............. 20.5 13.1 81.2 113.1
------- ------- -------- --------
Total operating revenues .. 21.1 14.2 84.4 119.2
Cost of sales ................. 14.4 10.2 63.2 100.3
------- ------- -------- --------
Gross margin ............ $ 6.7 $ 4.0 $ 21.2 $ 18.9
======= ======= ======== ========

MidAmerican Funding Consolidated -
Operating revenues:
Energy trading gross revenues... $ 60.4 $ 79.1 $ 186.6 $ 341.6
Energy trading cost of sales.... 59.8 78.0 183.4 335.5
------- ------- -------- --------
Net energy trading revenues... 0.6 1.1 3.2 6.1
Other revenues.................. 22.4 15.0 85.0 129.9
------- ------- -------- --------
Total operating revenues...... 23.0 16.1 88.2 136.0
Cost of sales................... 14.9 11.1 64.1 113.8
------- ------- -------- --------
Gross margin...............$ 8.1 $ 5.0 $ 24.1 $ 22.2
======= ======= ======== ========

-27-

MidAmerican Energy -

The Emerging Issues Task Force (EITF) recently issued EITF Issue No. 02-3,
"Recognition and Reporting of Gains and Losses on Energy Trading Contracts under
Issues No. 98-10 and 00-17." In accordance with EITF Issue No. 02-3, all gains
and losses on energy trading contracts must be reported net on the income
statement, effective for reporting periods ending after July 15, 2002, with all
prior periods presented being reclassified to a consistent presentation.
MidAmerican Energy's nonregulated wholesale gas and electric marketing
activities qualify as "energy trading" contracts under the guidance of EITF
Issue No. 98-10. The preceding tables provide the gross revenues and cost of
sales for those activities for discussion purposes. For the nine months ended
September 30, 2002, approximately 95% of MidAmerican Energy's gross revenues
from energy trading activities were from natural gas trading operations.

Gross margin for MidAmerican Energy's nonregulated wholesale natural gas
operations decreased $1.0 million for the third quarter of 2002. The decline in
gross margin was due to a decrease in sales volumes. Revenues from nonregulated
wholesale natural gas marketing operations decreased $23.1 million compared to
the third quarter of 2001 to $56.0 million for the third quarter of 2002. Sales
volumes decreased 9 million MMBtus (34%) resulting in a $26.6 million decrease
in revenues. The decrease due to sales volumes was partially offset by an
increase in the average price per unit sold, reflective of an 8% increase in the
average cost of gas. Cost of sales decreased $22.1 million to $56.0 million for
the three months ended September 30, 2002, due to the decrease in sales volumes.

Gross margin for MidAmerican Energy's nonregulated wholesale natural gas
operations decreased $4.8 million for the nine months ended September 30, 2002.
The decline in gross margin was due to decreases in the price per unit sold and
sales volumes. Revenues from nonregulated wholesale natural gas marketing
operations decreased $163.5 million to $177.9 million compared to the nine-month
period ended September 30, 2001. A decrease in the average price per unit sold,
reflective of a 35% decrease in the average cost of gas, resulted in a $99.3
million decrease in revenues. Sales volumes decreased 15 million MMBtus (19%)
resulting in a $64.2 million decrease in revenues. Cost of sales decreased
$158.7 million to $176.8 million for the nine months ended September 30, 2002,
due to the decreases in the per-unit cost of gas and in sales volumes.

Other nonregulated revenues and cost of sales consist substantially of
nonregulated retail natural gas marketing operations. Gross margin for
MidAmerican Energy's nonregulated retail natural gas operations for the third
quarter of 2002 was relatively unchanged from the third quarter of 2001.
Revenues from nonregulated retail natural gas marketing operations decreased
$1.1 million compared to the third quarter of 2001 to $14.1 million for the
third quarter of 2002. A decrease in the average price per unit sold, reflective
of a 9% decrease in the average cost of gas, resulted in a $1.4 million decrease
in revenues. Sales volumes increased slightly (2%) resulting in a $0.3 million
increase in revenues. Cost of sales decreased $1.2 million to $13.6 million for
the three months ended September 30, 2002.

Gross margin for MidAmerican Energy's nonregulated retail natural gas
operations increased $0.2 million compared to the first nine months of 2001 to
$1.7 million for the first nine months of 2002. The improvement in gross margin
reflects an increase in margin per unit and sales volumes. Revenues from
nonregulated retail natural gas operations decreased $31.8 million to $62.4
million for the first nine months of 2002. A decrease in the average price per
unit sold, reflective of a 40% decrease in the average cost of gas, accounted
for a $40.4 million decrease in revenues. Sales volumes increased 1 million
MMBtus (9%) resulting in an $8.6 million increase in revenues. Cost of sales
decreased $32.0 million to $60.7 million for the nine months ended September 30,
2002, due to the decrease in price per unit sold.

-28-

All retail customers in Illinois are allowed to select their electric power
supplier. For the three months ended September 30, 2002, compared to the three
months ended September 30, 2001, related gross margin increased $4.9 million to
$3.6 million. For the nine months ended September 30, 2002, compared to the nine
months ended September 30, 2001, gross margin increased $7.5 million to $7.7
million. The improvement in margin was due to an increase in sales volumes as a
result of the addition of customers and an increase in margin per unit sold as a
result of decreases in the related cost of energy.

Nonregulated revenues for the nine months ended September 30, 2001, include
$6.2 million from MidAmerican Energy's market access service project. Related
costs of sales totaled $5.4 million. The pilot project, which concluded in May
2001, allowed larger Iowa customers that were participating in the project to
choose their electric power supplier. MidAmerican Energy's revenues from project
participants related to non-supply services, such as distribution and
transmission, are reflected in regulated electric revenues.

MidAmerican Energy's nonregulated revenues in the nine months ended
September 30, 2002, include $1.8 million of pre-tax income from an award for
successful performance under an incentive gas procurement program. Similar
awards of $1.9 million and $2.1 million were recorded in the third and second
quarters of 2001, respectively.

Additionally, revenues for the first nine months of 2002 include $1.2
million for emergency storm restoration work performed outside of MidAmerican
Energy's service territory during the first quarter of 2002. Related costs are
reflected in "Nonregulated Operating Expenses: Other".

MidAmerican Funding:

During 2001, a subsidiary of MidAmerican Capital had nonregulated retail
natural gas marketing operations. For the third quarter of 2001, those
operations had revenues and costs of sales totaling $0.5 million and $0.5
million, respectively. For the nine months ended September 30, 2001, related
revenues and costs of sales totaled $11.6 million and $11.8 million,
respectively. All contracts of that subsidiary have terminated.

NONREGULATED OPERATING EXPENSES: OTHER

MidAmerican Energy -

Nonregulated other operating expenses increased $1.4 million for the nine
months ended September 30, 2002, due largely to $1.0 million of costs related to
the emergency storm restoration work discussed above.

MidAmerican Funding -

MidAmerican Funding's nonregulated other operating expenses, inclusive of
MidAmerican Energy amounts, decreased $8.0 million and $24.5 million for three
months and nine months ended September 30, 2002, respectively, compared to the
2001 periods. MidAmerican Funding's goodwill is no longer being amortized as a
result of the adoption of Statement of Financial Accounting Standards (SFAS) No.
142 on January 1, 2002. Amortization of MidAmerican Funding's goodwill totaled
$8.6 million for the third quarter of 2001 and $25.8 million first nine months
of 2001.

-29-

INTEREST AND DIVIDEND INCOME

MidAmerican Energy -

The decreases in interest income compared to the 2001 periods presented
were due principally to decreases in interest income on a note receivable
related to MidAmerican Energy's accounts receivable sold. Related interest
income decreased $0.8 million for the quarter and $5.6 million for the nine
months ended September 30, 2002. The decreases related to the note receivable
were partially offset by MidAmerican Energy's favorable cash position due to the
issuance of $400 million of medium-term notes in February 2002.

MidAmerican Funding -

Interest income for MidAmerican Funding for the quarter and nine months
ended September 30, 2002, includes $5.0 million from the settlement of an
investment in a communications company. Dividend income decreased $1.3 million
to $0.6 million for nine months ended September 30, 2002, due to partial
liquidation of the preferred stock investment portfolio in the past twelve
months.

MARKETABLE SECURITIES GAINS AND LOSSES, NET

MidAmerican Funding -

Net losses on marketable securities increased $1.4 million for the third
quarter of 2002 and $3.7 million for the nine-month period ended September 30,
2002, compared to the respective 2001 periods. In the third quarter of 2002,
MidAmerican Capital recorded a $1.4 million loss for other-than-temporary
declines in its available-for-sale common stock investments. The nine-month
period also includes a $2.9 million loss related to other-than-temporary
declines in two of its available-for-sale common stock investments. The first
quarter of 2001 includes a $2.4 million pre-tax loss related to the
re-characterization of marketable securities to "trading" as allowed by
Statement of Financial Accounting Standards No. 133.

OTHER INCOME AND EXPENSE

MidAmerican Energy -

As a regulated public utility, MidAmerican Energy is allowed to capitalize,
and record as income, a cost of construction for equity funds used, based on
guidelines set forth by the Federal Energy Regulatory Commission. Accordingly,
other income includes income for the capitalized allowance on equity funds used
during construction of $2.2 million and $5.4 million for the three months and
nine months ended September 30, 2002, respectively, and $0.8 million for the
three months and nine months ended September 30, 2001. MidAmerican Energy
anticipates recording income from the allowance on equity funds used during
construction over the next several years while the announced generating plants
are constructed.

Other income includes net earnings related to the cash surrender value of
corporate-owned life insurance policies. Three months ended September 30, 2002,
includes a net loss of $0.7 million, while the comparable period in 2001
reflects income of $0.4 million. For the nine-month periods ended September 30,
the 2002 period reflects a loss of $0.6 million and the 2001 period includes
income of $0.7 million.

-30-

Other income for the three months and nine months ended September 30, 2002,
reflects a $0.9 million gain on the sale of utility property. Other income for
the first nine months of 2001 reflects a $1.4 million gain on the sale of
MidAmerican Energy rail cars.

Other income includes income from a subservicer fee charged to MidAmerican
Energy Funding Corporation for servicing MidAmerican Energy's accounts
receivable sold to them. Subservicer fee income totaled $0.5 million and $0.7
million for the three months ended September 30, 2002 and 2001, respectively,
and $1.2 million and $2.5 million for the nine-month periods ended September 30,
2002 and 2001, respectively.

Other expense includes a discount on sold accounts receivable. The discount
is designed to cover the expenses of MidAmerican Energy Funding Corporation,
including bad debt expense, subservicer fees, monthly administrative costs and
interest. The discount is recorded in Other Expense because it is not reflected
in utility cost of service for regulatory purposes. The discount totaled $2.2
million and $3.8 million in the third quarter of 2002 and 2001, respectively,
and $5.8 million and $14.4 million for the nine-month periods ended September
30, 2002 and 2001, respectively. The related arrangement terminated October 29,
2002. Refer to "Accounts Receivable Sold" in the "Financing Activities, Plans
and Availability" section later in MD&A for further discussion.

MidAmerican Funding -

Other income of MidAmerican Funding reflects a net loss on MidAmerican
Capital's equity method investments of $4.6 million for the third quarter of
2002 compared to income of $0.9 million for the third quarter of 2001. The third
quarter of 2002 includes a $5.1 million loss for the permanent impairment of an
equity method investment. Income from MidAmerican Capital's equity investments
totaled $1.4 million for the nine-month period ended September 30, 2002, and
$3.9 million for nine months ended September 30, 2001. Equity income for the
2002 nine-month period includes the recognition of $5.3 million of income for a
distribution of common stock held by one of MidAmerican Capital's venture
capital fund investments in the first quarter. The 2001 period reflects $2.3
million of equity income related to a gain on a common stock distribution by one
of MidAmerican Capital's venture capital fund investments.

Other income for the third quarter of 2002 also includes a $2.6 million
gain on the sale of an investment in a communications company and losses
totaling $1.5 million from permanent impairments on three of MidAmerican
Capital's venture capital fund investments.

Additionally, MidAmerican Funding recorded $0.4 million of income in the
first quarter of 2002 for a distribution related to MidAmerican Capital's
investments in energy projects.

-31-

FIXED CHARGES AND PREFERRED DIVIDENDS

MidAmerican Energy -

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

Other interest expense decreased for three months ended September 30, 2002,
compared to the third quarter of 2001 due principally to interest in the third
quarter of 2001 on an income tax audit payable. The nine months ended September
30, 2001, includes additional interest recorded in the second quarter of 2001
related to another income tax audit payable. Additionally, other interest
expense decreased due to a reduction in short-term debt outstanding at
MidAmerican Energy. Other interest expense increased in the 2002 periods for
interest on regulatory liabilities associated with the electric revenue sharing
arrangement in Iowa and the restructuring of MidAmerican Energy's contract
related to Cooper Nuclear Station.

MidAmerican Energy's preferred dividends of its subsidiary trust decreased
due to the reacquisition of all of the related preferred securities on March 11,
2002. Dividends for MidAmerican Energy's preferred securities, which are
reflected after Net Income for MidAmerican Energy, decreased due to preferred
securities reacquired in May and November 2001 and May 2002. Preferred dividends
for the nine months ended September 30, 2002, reflect a $0.6 million loss on
reacquisition of preferred securities.

MidAmerican Funding -

MidAmerican Funding also retired $200 million of long-term debt and issued
$200 million of long-term debt in the first quarter of 2001, resulting in a
relative increase in interest on long-term debt for the first nine months of
2002. The increase is due to the period of time between the retirement of the
former debt series and the issuance of the current debt series, which reduced
interest expense in the first quarter of 2001. Also, interest expense for the
first nine months of 2002 reflects a full nine months of interest expense for
the new series of debt, which has a higher interest rate than the previous debt.

-32-

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

MidAmerican Funding and MidAmerican Energy 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 from operating activities was $396 million and $461
million for the nine months ended September 30, 2002 and 2001, respectively.
MidAmerican Funding's net cash provided from operating activities was $359
million and $440 million for the nine months ended September 30, 2002 and 2001,
respectively.

INVESTING ACTIVITIES AND PLANS

Utility Construction Expenditures -

MidAmerican Energy's primary need for capital is utility construction
expenditures. For the first nine months of 2002, utility construction
expenditures totaled $229 million, including allowance for funds used during
construction, or capitalized financing costs, and Quad Cities Station nuclear
fuel purchases. All such expenditures were met with cash generated from utility
operations, net of dividends.

Forecasted utility construction expenditures, including allowance for funds
used during construction are $382 million for 2002 and $1.614 billion for 2003
through 2006. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. Through 2007, MidAmerican
Energy plans to develop and construct two electric generating plants in Iowa.
Both plants would provide service to regulated retail electricity customers and
be included in regulated rate base in Iowa, Illinois and South Dakota. Wholesale
sales may also be made from the plants to the extent the power is not needed for
regulated retail service. MidAmerican Energy expects to invest approximately
$1.2 billion in the two plants, including the cost of related transmission
facilities and allowance for funds used during construction. The two plants may
provide up to 950 megawatts of generating capacity for MidAmerican Energy
depending on management's on-going assessment of energy needs and related
factors.

The first project is a 500-megawatt (based on expected accreditation)
natural gas-fired combined cycle unit with an estimated cost of $415 million.
MidAmerican Energy will own 100% of the plant and operate it. MidAmerican Energy
has received a certificate from the Iowa Utilities Board (IUB) allowing it to
construct the plant. Also, on May 29, 2002, the IUB issued an order that
provides the ratemaking principles for the gas-fired plant, thus limiting the
regulatory risk of constructing the plant. As a result of that order,
MidAmerican Energy is proceeding with the construction of the plant. It is
anticipated that the first phase of the project will be completed in 2003,
resulting in an additional 310 megawatts of accredited capacity, with the
remainder being completed in 2005.

The second plant is expected to be a 750-megawatt super-critical-
temperature, coal-fired plant fueled with low-sulfur coal. MidAmerican Energy
has made a filing with the IUB for a certificate to construct the plant and
expects to make a filing for approval of ratemaking principles for the second
project during the fourth quarter of 2002.

-33-

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.

Based on information presently available, MidAmerican Energy expects to
contribute approximately $41 million during the period 2002 through 2006 to
external trusts established for the investment of funds for decommissioning Quad
Cities Station. Approximately 55% 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 in Depreciation and
Amortization in the Consolidated Statements of Income. 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.

As a result of a July 31, 2002 restructuring of the power purchase contract
between MidAmerican Energy and the Nebraska Public Power District, MidAmerican
Energy will no longer be accruing for decommissioning costs related to Cooper
Nuclear Station. Refer to Note G of MidAmerican Energy's Notes to Financial
Statements for a discussion of the contract restructuring.

FINANCING ACTIVITIES, PLANS AND AVAILABILITY

Debt Authorizations and Credit Facilities -

MidAmerican Energy has authority from the Federal Energy Regulatory
Commission to issue through April 14, 2003 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 16, 2003. In addition,
MidAmerican Energy has a $5 million line of credit, which expires July 1, 2003.

On February 8, 2002, MidAmerican Energy issued $400 million of 6.75%
medium-term notes due in 2031. The proceeds are being used to refinance existing
debt and preferred securities and for other corporate purposes. On March 11,
2002, MidAmerican Energy redeemed all $100 million of its 7.98%
MidAmerican-obligated preferred securities of subsidiary trust at 100% of the
principal amount plus accrued interest.

On May 1, 2002, MidAmerican Energy reacquired all $26.68 million of its
$7.80 series of preferred securities. The first $13.32 million of preferred
securities were redeemed at 100% of the principal amount plus accrued dividends,
and the remaining $13.36 million was redeemed at 103.9% of the principal amount
plus accrued dividends.

MidAmerican Energy has on file with the Securities and Exchange Commission
a registration statement for $500 million in various forms of senior and
subordinated, unsecured long-term debt and preferred securities, $100 million of
which remains available following the issuance of the $400 million of
medium-term notes discussed above.

MidAmerican Energy has authorization from the Federal Energy Regulatory
Commission (FERC) to issue, through November 30, 2002, up to an additional $100
million in various forms of long-term debt following the issuance of the $400

-34-

million of medium-term notes discussed above. MidAmerican Energy has filed an
application with the FERC for authorization to issue, through November 30, 2004,
up to $700 million in various forms of long-term debt.

MidAmerican Energy will also need authorization from the Illinois Commerce
Commission (ICC) prior to issuing any securities. If 90% or more of the proceeds
from a securities issuance are used for refinancing purposes, MidAmerican Energy
need only provide the ICC with an "informational statement" prior to the
issuance which sets forth the type, amount and use of the proceeds of the
securities to be issued. If less than 90% of the proceeds are used for
refinancing, MidAmerican must file a comprehensive application seeking
authorization prior to issuance. The ICC is required to hold a hearing before
issuing its authorization. MidAmerican Energy currently has authority from the
ICC to issue up to approximately $150 million of medium-term notes and has filed
an informational statement requesting authority to issue additional medium-term
notes of approximately $190 million.

Accounts Receivable Sold -

In 1997, MidAmerican Energy entered into a revolving agreement, which
expired on October 29, 2002, to sell all of its right, title and interest in the
majority of its billed accounts receivable to MidAmerican Energy Funding
Corporation, a special purpose entity established to purchase accounts
receivable from MidAmerican Energy. MidAmerican Energy Funding Corporation in
turn sold receivable interests to outside investors. In consideration for the
sale, MidAmerican Energy received cash and a subordinated note, bearing interest
at 8%, from MidAmerican Energy Funding Corporation. As of September 30, 2002,
the revolving cash balance was $36 million and the amount outstanding under the
subordinated note was $89.2 million. The agreement was structured as a true
sale, under which the creditors of MidAmerican Energy Funding Corporation were
entitled to be satisfied out of the assets of MidAmerican Energy Funding
Corporation prior to any value being returned to MidAmerican Energy or its
creditors. Therefore, the accounts receivable sold are not reflected on
MidAmerican Energy's or MidAmerican Funding's Consolidated Balance Sheets. As of
September 30, 2002, $126.0 million of accounts receivable, net of reserves, was
sold under the agreement. MidAmerican Energy did not extend or replace this
agreement.

Other Information -

MHC has a $4 million line of credit, expiring July 1, 2003, to provide for
short-term financing needs, none of which was outstanding at September 30, 2002.

MidAmerican Capital had $23.3 million of long-term debt outstanding at
September 30, 2002, which matured in October 2002.

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 equity 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

-35-

recommendation to buy, sell or hold securities, and there is no assurance that a
particular credit rating will continue for any given period of time. Other than
the energy trading agreements discussed below, neither MidAmerican Funding nor
MidAmerican Energy has any credit agreements that require termination or a
material change in collateral requirements or payment schedule in the event of a
downgrade in the credit ratings of the respective company's securities.
MidAmerican Funding's long-term debt agreements require that no additional debt
can be issued by MidAmerican Funding if doing so would cause a downgrade in
MidAmerican Funding's credit ratings.

In conjunction with its wholesale marketing and trading activities,
MidAmerican Energy must meet credit quality standards as required by counter
parties. 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 counter parties 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, 2002,
MidAmerican Energy's estimated potential collateral requirements totaled
approximately $33 million, of which $5 million related to energy trading
agreements with specific requirements that MidAmerican Energy maintain
investment grade credit ratings. 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.

RATE MATTERS

Under a settlement agreement approved by the Iowa Utilities Board (IUB) on
December 21, 2001, MidAmerican Energy's Iowa retail electric rates in effect on
December 31, 2000, are effectively frozen through December 31, 2005. In
approving that settlement, the IUB specifically allows the filing of electric
rate design and/or cost of service rate changes that are intended to keep
overall company revenues unchanged but could result in changes to individual
tariffs. Additionally, the 2001 settlement agreement reinstates, with
modifications, the revenue sharing provisions of the 1997 pricing plan
settlement agreement, which expired on December 31, 2000. Under the 2001
settlement agreement, an amount equal to 50% of revenues associated with Iowa
retail electric returns on equity between 12% and 14%, and 83.33% of revenues
associated with Iowa retail electric returns on equity above 14%, in each year
will be recorded as a regulatory liability to be used to offset a portion of the
cost to Iowa customers of future generating plant investments. An amount equal
to the regulatory liability will be recorded as a regulatory charge in
depreciation and amortization expense when the liability is accrued. Interest
expense is accrued on the portion of the regulatory liability related to prior
years. Beginning in 2002, the liability is being relieved as it is credited
against allowance for funds used during construction, or capitalized financing
costs, associated with generating plant additions. As of September 30, 2002, the
related regulatory liability reflected on the Consolidated Balance Sheet totaled
$95.0 million.

On September 11, 2002, MidAmerican Energy received a final order from the
Illinois Commerce Commission to increase its Illinois natural gas rates by $2.2
million annually.

On March 15, 2002, MidAmerican Energy made a filing with the IUB requesting
an increase in rates of approximately $26.6 million for its Iowa retail natural
gas customers. As part of the filing, MidAmerican Energy requested an interim
rate increase of approximately $20.4 million annually. On June 12, 2002, the IUB
issued an order granting an interim rate increase of approximately $13.8 million
annually, effective immediately and subject to refund with interest. On July 15,
2002, MidAmerican Energy and the Office of Consumer Advocate filed a proposed
settlement agreement with the IUB. The proposed settlement agreement provides
for an increase in rates of $17.7 million annually for MidAmerican Energy's Iowa
retail natural gas customers and freezes such rates for two years after the

-36-

date the IUB approves tariffs implementing the proposed settlement agreement.
MidAmerican Energy anticipates implementing the new rates in the fourth quarter
of 2002.

LEGISLATIVE AND REGULATORY EVOLUTION

Electric Deregulation -

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

Illinois law also provides for Illinois electric earnings above a computed
level of return on common equity to be shared equally between 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 through 2006. The
two-year average above which sharing must occur for 2001 was 14.34%. The law
allows MidAmerican Energy to mitigate the sharing of earnings above the
threshold return on common equity through accelerated recovery of regulatory
assets.

The energy crisis and related events in California have heightened concerns
nationally about deregulation of the electric utility industry. Accordingly, the
pace of deregulation in Iowa and elsewhere has slowed considerably.

Regional Transmission Organizations -

In December 1999, the Federal Energy Regulatory Commission (FERC)
issued Order No. 2000 establishing, among other things, minimum characteristics
and functions for regional transmission organizations. Public utilities that
were not a member of an independent system operator at the time of the order
were required to submit a plan by which its transmission facilities would be
transferred to a regional transmission organization. On September 28, 2001,
MidAmerican Energy and five other electric utilities filed with the FERC a plan
to create TRANSLink Transmission Company LLC and to integrate their electric
transmission systems into a single, coordinated system operating as a for-profit
independent transmission company in conjunction with a FERC-approved regional
transmission organization. On April 25, 2002, the FERC issued an order approving
the transfer of control of MidAmerican Energy and other utilities' transmission
assets to TRANSLink in conjunction with TRANSLink's participation in the Midwest
Independent Transmission System Operator, Inc. regional transmission
organization. State regulatory approval is also required from states in which
TRANSLink will be operating. MidAmerican Energy expects to file applications for
state regulatory approval in the fourth quarter of 2002. Transferring the
operations and control of MidAmerican Energy's transmission assets to other
entities could increase costs for MidAmerican Energy; however, the actual impact
of TRANSLink on MidAmerican Energy's future transmission costs is not yet known.

Standard Electricity Market Design -

On July 31, 2002, the FERC issued a notice of proposed rulemaking with
respect to Standard Market Design. The FERC has characterized the proposal as
portending "sweeping changes" to the use and expansion of the interstate
transmission and wholesale bulk power systems in the United States. The proposal
includes numerous proposed changes to the current regulation of transmission and
generation facilities designed "to promote economic efficiency" and replace the
"obsolete patchwork we have today," according to the FERC's chairman. The final
rule, if adopted as currently proposed, would

-37-

require all public utilities operating transmission facilities subject to the
FERC jurisdiction to file revised open access transmission tariffs that would
require changes to the basic services these public utilities currently provide.
The proposed rule may impact the pricing of MidAmerican Energy's electricity and
transmission products. The FERC does not envision that a final rule will be
fully implemented until September 30, 2004. MidAmerican Energy is still
evaluating the proposed rule and recognizes the final rule could vary
considerably from the initial proposal. Accordingly, the likely impact of the
proposed rule on MidAmerican Energy's transmission and generation businesses is
unknown.

ENVIRONMENTAL MATTERS

The U.S. Environmental Protection Agency, or 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. MidAmerican Energy's estimate of the probable costs for these
sites as of September 30, 2002, was $18 million. This estimate has been recorded
as a liability and a regulatory asset for future recovery through the regulatory
process. Refer to Note B(1) of Notes to Consolidated Financial Statements for
further discussion of MidAmerican Energy's environmental activities related to
manufactured gas plant sites and cost recovery.

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

In July 1997, the EPA adopted revisions to the National Ambient Air Quality
Standards for ozone and a new standard for fine particulate matter. In February
2001, the United States Supreme Court upheld the constitutionality of the
standards, though remanding the issue of implementation of the ozone standard to
the EPA. The impact of the new standards on MidAmerican Energy is currently
unknown. These standards could be superceded, in whole or in part, by a variety
of multi-pollutant emission reduction initiatives. Refer to Note B(2) of Notes
to Consolidated Financial Statements for further discussion of this issue.

In 2001, the state of Iowa passed legislation that, in part, requires
rate-regulated utilities to develop a multi-year plan and budget for managing
regulated emissions from their generating facilities in a cost-effective manner.
MidAmerican Energy's proposed plan and associated budget (the Plan) was filed
with the Iowa Utilities Board (IUB) on April 1, 2002, in accordance with state
law. MidAmerican Energy expects the IUB to rule on the prudence of the Plan in
2003. MidAmerican Energy is required to file Plan updates at least every two
years.

The Plan provides MidAmerican Energy's projected air emission reductions
considering the current proposals that are being debated at the federal level
and describes a coordinated long-range plan to achieve these air emission
reductions. The Plan provides specific actions to be taken at each coal-fired
generating facility and the related costs and timing for each action.

The Plan outlines $732.0 million in environmental investments to existing
coal-fired generating units, some of which are jointly owned, over a nine-year
period from 2002 through 2010. MidAmerican

-38-

Energy's share of these investments is $546.6 million, $67.9 million of which is
projected to be incurred during the 2002-2005 rate freeze period. The Plan also
identifies expenses that will be incurred at the generating facilities to
operate and maintain the environmental equipment installed as a result of the
Plan.

Following the expiration of the 2001 settlement agreement on December 31,
2005, the Plan proposes the use of an adjustment mechanism for recovery of Plan
costs, similar to the tracker mechanisms for cost recovery of renewable energy
and energy efficiency expenditures that are presently part of MidAmerican
Energy's electric regulated rates.

GENERATING CAPABILITY

In July 2002, retail customer usage of electricity caused a new record
hourly peak demand of 3,887 megawatts (MW) on MidAmerican Energy's energy
system, surpassing the previous record peak of 3,833 MW set in July 1999.
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.

MidAmerican Energy believes it has adequate electric capacity reserve
through 2003 and continues to manage its generating resources to ensure an
adequate reserve in the future. MidAmerican Energy has announced plans to add a
500-megawatt (based on MAPP rating criteria) natural gas-fired combined cycle
unit to be completed in two phases between 2003 and 2005. Up to an additional
450 megawatts of coal-fired generation is expected to be operational by the
summer of 2007. 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 no longer recovers fluctuations in 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.

-39-

CRITICAL ACCOUNTING POLICIES

MidAmerican Energy's and MidAmerican Funding's significant accounting
policies are described in Note (1) of Notes to Consolidated Financial Statements
in their respective Annual Reports on Form 10-K for the year ended December 31,
2001.

Accounting for Regulated Entities -

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

Revenue Recognition -

Revenues are recorded as services are rendered to customers. MidAmerican
Energy records unbilled revenues representing the estimated amount customers
will be billed for services rendered between the meter-reading dates in a
particular month and the end of that month. The unbilled revenues estimate is
reversed in the following month. To the extent the estimated amount differs from
the amount subsequently billed, the timing of revenues will be affected.

Accounting for Derivatives and Energy Trading Activities -

MidAmerican Energy accounts for its energy trading activities in accordance
with Emerging Issues Task Force (EITF) Issue No. 98-10 and SFAS No. 133, as
amended and interpreted, which require certain energy trading and energy
derivative contracts to be accounted for at fair value.

In accordance with EITF Issue No. 02-3, effective September 30, 2002, for
MidAmerican Energy, all of MidAmerican Energy's trading revenues are reported
net of the costs of the related sales on the Consolidated Statements of Income.
Previously, the revenues and costs were recorded gross. All prior periods have
been reclassified to conform to the net presentation.

Accounting for derivatives continues to evolve through guidance issued by
the Derivatives Implementation Group (DIG) and the EITF of the Financial
Accounting Standards Board (FASB). To the extent that changes by the DIG modify
current guidance, including the normal purchases and normal sales determination,
the accounting treatment for derivatives may change.

See Note D in Notes to Consolidated Financial Statements for further
discussion related to accounting for derivatives.

-40-

Contingent Liabilities -

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

NEW ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, "Accounting For Asset
Retirement Obligations." SFAS No. 143 requires recognition on the balance sheet
of legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation
of such assets. Additionally, at the time an asset retirement obligation (ARO)
is recognized, an ARO asset of the same amount is recorded and depreciated. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. MidAmerican
Funding is evaluating the impact of this pronouncement and estimates that
additional assets and liabilities will be added to its balance sheet, but does
not believe adoption will have a material impact on its results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MidAmerican Funding, including MidAmerican Energy, is exposed to market
risk from changes in factors such as the market price of certain commodities and
interest rates. To manage the price volatility relating to these exposures,
MidAmerican Funding enters into various financial derivative instruments. Senior
management provides the overall direction, structure, conduct and control of
MidAmerican Funding's risk management activities, including the use of financial
derivative instruments, authorization and communication of risk management
policies and procedures, strategic hedging program guidelines, appropriate
market and credit risk limits, and appropriate systems for recording, monitoring
and reporting the results of transactional and risk management activities.
MidAmerican Funding regularly performs sensitivity analysis of its outstanding
positions and adheres to strict value-at-risk parameters. MidAmerican Funding
uses hedge accounting for derivative instruments pertaining to its natural gas
purchasing, wholesale electricity activities and financing activities. Refer to
Note D in Notes to Consolidated Financial Statements for further discussion of
price risk and the accounting for derivative instruments.

-41-

PART I - FINANCIAL INFORMATION (CONTINUED)

ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------

MidAmerican Funding's and MidAmerican Energy's respective chief executive
officer and chief financial officer have established "disclosure controls and
procedures" (as defined in Rule 13a-14(c) and Rule 15d-14(c) of the Securities
and Exchange Act of 1934) to ensure that material information of the companies
and their subsidiaries is made known to them by others within the respective
companies. Under their supervision, an evaluation of the disclosure controls and
procedures was performed within 90 days prior to the filing of this quarterly
report. Based on that evaluation, the above-mentioned officers have concluded
that, as of the date of the evaluation, the disclosure controls and procedures
were operating effectively. Additionally, the above-mentioned officers find that
there have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date of
that evaluation.

-42-

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
- --------------------------

MidAmerican Funding and its subsidiaries have no material legal proceedings
except for the following:

Environmental Matters
- ---------------------

For information on MidAmerican Energy's environmental matters, reference is
made to Note B of Notes to Consolidated Financial Statements.

Cooper Litigation
- -----------------

As previously disclosed in MidAmerican Energy's and MidAmerican Funding's
respective Annual Report on Form 10-K for the year ended December 31, 2001, and
in their respective Quarterly Report on Form 10-Q for June 30, 2002, MidAmerican
Energy has been involved in litigation with the Nebraska Public Power District
regarding issues related to Cooper Nuclear Station.

The parties have settled the above-mentioned litigation with the execution
of a Settlement Agreement and Release which became effective on August 1, 2002.
Under the terms of the Settlement Agreement and Release, MidAmerican Energy will
continue purchasing power and energy from the Nebraska Public Power District
through December 31, 2004, at prices that are fixed in the Settlement Agreement
and Release. In addition, the Nebraska Public Power District paid MidAmerican
Energy a lump sum payment of $39.1 million on August 1, 2002. Further,
MidAmerican Energy will make no payments for Cooper's decommissioning for the
period December 2000 through December 2004; however, the Nebraska Public Power
District will retain the payments for decommissioning MidAmerican Energy had
made prior to December 2000. Under the terms of the Settlement Agreement and
Release, the parties mutually release each other from all claims, pending or not
pending, with respect to Cooper and the power purchase agreement.

-43-

Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------

(A) EXHIBITS

15 Awareness Letter of Independent Accountants

(B) REPORTS ON FORM 8-K

On August 1, 2002, MidAmerican Funding and MidAmerican Energy each filed a
Current Report on Form 8-K dated August 1, 2002. The filing announced that on
July 31, 2002, MidAmerican Energy had entered into an agreement to resolve all
disputes with the Nebraska Public Power District concerning Cooper Nuclear
Station. A copy of the related press release was attached as an exhibit.

On August 14, 2002, MidAmerican Funding and MidAmerican Energy filed a
joint Current Report on Form 8-K with certification of their respective chief
executive officer and chief financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

-44-

SIGNATURES

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

MIDAMERICAN FUNDING, LLC
------------------------
(Registrant)

Date November 12, 2002 /s/ Patrick J. Goodman
------------------- ---------------------------------
Patrick J. Goodman
Vice President and Treasurer

MIDAMERICAN ENERGY COMPANY
--------------------------
(Registrant)

Date November 12, 2002 /s/ Thomas B. Specketer
------------------- -----------------------------------
Thomas B. Specketer
Vice President and Controller
-45-

SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------

I, David L. Sokol, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding,
LLC;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

-46-

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ David L. Sokol
-----------------------
David L. Sokol
Chief Executive Officer

-47-

SECTION 302 CERTIFICATION FOR FORM 10-Q

CERTIFICATIONS
- --------------

I, Patrick J. Goodman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Funding,
LLC;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

-48-

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ Patrick J. Goodman
-----------------------
Patrick J. Goodman
Vice President and Treasurer
(chief financial officer)

-49-

SECTION 302 CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
- --------------

I, David L. Sokol, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

-50-

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ David L. Sokol
-----------------------
David L. Sokol
Chairman
(chief executive officer)

SECTION 302 CERTIFICATION FOR FORM 10-Q

CERTIFICATIONS
- --------------

I, Thomas B. Specketer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MidAmerican Energy
Company;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

-52-

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

/s/ Thomas B. Specketer
-----------------------
Thomas B. Specketer
Vice President and Controller
(chief financial officer)

-53-

EXHIBIT INDEX

Exhibit No.
- -----------

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

15 Awareness Letter of Independent Accountants

-54-