10-Q 1 mecjune-10q.htm MIDAMERICAN FUNDING - MIDAMERICAN ENERGY 10-Q 6-30-2005 MidAmerican Funding - MidAmerican Energy 10-Q 6-30-2005



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

FORM 10-Q


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

For the quarterly period ended June 30, 2005

or

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

For the transition period from _________to _________


Commission
 
Exact name of registrant as specified in its charter
 
IRS Employer
File Number
 
State or other jurisdiction of incorporation or organization
 
Identification No.
 
333-90553
 
MIDAMERICAN FUNDING, LLC
 
47-0819200
   
(An Iowa Limited Liability Company)
   
   
666 Grand Ave. PO Box 657
   
   
Des Moines, Iowa 50303
   
 
333-15387
 
MIDAMERICAN ENERGY COMPANY
 
42-1425214
   
(An Iowa Corporation)
   
   
666 Grand Ave. PO Box 657
   
   
Des Moines, Iowa 50303
   
         
         
(515) 242-4300
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)


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 T No ¨

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

As of July 25, 2005, all of the member’s equity of MidAmerican Funding, LLC was held by its parent company, MidAmerican Energy Holdings Company.

As of July 25, 2005, all 70,980,203 outstanding shares of MidAmerican Energy Company’s voting stock were held by its parent company, MHC Inc., a direct, wholly owned subsidiary of MidAmerican Funding, LLC.





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

TABLE OF CONTENTS







 
2




Item 1 





 

3





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

We have reviewed the accompanying consolidated balance sheet of MidAmerican Energy Company and subsidiary (the “Company”) as of June 30, 2005, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2005 and 2004, and of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Energy Company and subsidiary as of December 31, 2004, and the related consolidated statements of operations, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2005, 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, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ Deloitte & Touche LLP

Des Moines, Iowa
August 10, 2005


 
4


MIDAMERICAN ENERGY COMPANY AND SUBSIDIARY
(In thousands)

   
As of
 
   
June 30,
 
December 31,
 
   
2005
 
2004
 
 
   
(Unaudited) 
       
ASSETS
Utility Plant, Net
             
Electric
 
$
5,609,276
 
$
5,498,878
 
Gas
   
974,897
   
957,011
 
     
6,584,173
   
6,455,889
 
Accumulated depreciation and amortization
   
(3,040,039
)
 
(2,956,856
)
     
3,544,134
   
3,499,033
 
Construction work in progress
   
581,484
   
369,406
 
     
4,125,618
   
3,868,439
 
               
Current Assets
             
Cash and cash equivalents
   
8,655
   
88,113
 
Short-term investments
   
-
   
39,500
 
Receivables, net
   
264,085
   
332,759
 
Inventories
   
47,070
   
89,646
 
Other
   
27,781
   
22,080
 
     
347,591
   
572,098
 
               
Investments and Nonregulated Property, Net
   
348,079
   
333,360
 
Regulatory Assets
   
223,832
   
227,997
 
Other Assets
   
117,035
   
110,057
 
Total Assets
 
$
5,162,155
 
$
5,111,951
 
 
CAPITALIZATION AND LIABILITIES
Capitalization
             
Common shareholder’s equity
 
$
1,612,531
 
$
1,527,468
 
MidAmerican Energy preferred securities
   
30,329
   
30,329
 
Long-term debt, excluding current portion
   
1,171,667
   
1,331,509
 
     
2,814,527
   
2,889,306
 
Current Liabilities
             
Current portion of long-term debt
   
160,265
   
91,018
 
Accounts payable
   
174,742
   
241,836
 
Taxes accrued
   
98,087
   
70,810
 
Interest accrued
   
11,565
   
13,842
 
Other
   
83,369
   
83,949
 
     
528,028
   
501,455
 
Other Liabilities
             
Deferred income taxes
   
476,669
   
486,970
 
Investment tax credits
   
46,052
   
48,143
 
Asset retirement obligations
   
171,615
   
166,845
 
Regulatory liabilities
   
727,067
   
677,489
 
Other
   
398,197
   
341,743
 
     
1,819,600
   
1,721,190
 
Total Capitalization and Liabilities
 
$
5,162,155
 
$
5,111,951
 
 
 
The accompanying notes are an integral part of these financial statements.

 
5


MIDAMERICAN ENERGY COMPANY AND SUBSIDIARY
(In thousands)

   
Three Months
 
Six Months
 
   
Ended June 30,
 
Ended June 30,
 
   
2005
 
2004
 
2005
 
2004
 
 
       
(Unaudited)
     
Operating Revenues
                         
Regulated electric
 
$
347,269
 
$
344,375
 
$
659,848
 
$
707,559
 
Regulated gas
   
209,978
   
173,669
   
677,443
   
567,240
 
Nonregulated
   
61,223
   
55,927
   
136,315
   
139,104
 
     
618,470
   
573,971
   
1,473,606
   
1,413,903
 
                           
Operating Expenses
                         
Regulated:
                         
Cost of fuel, energy and capacity
   
102,587
   
98,679
   
191,350
   
212,913
 
Cost of gas sold
   
166,941
   
133,442
   
553,953
   
444,217
 
Other operating expenses
   
95,391
   
93,511
   
185,784
   
182,553
 
Maintenance
   
40,164
   
46,376
   
71,814
   
74,394
 
Depreciation and amortization
   
73,646
   
67,539
   
137,048
   
150,067
 
Property and other taxes
   
23,236
   
22,852
   
47,682
   
47,779
 
     
501,965
   
462,399
   
1,187,631
   
1,111,923
 
Nonregulated:
                         
Cost of sales
   
53,651
   
47,641
   
120,077
   
122,445
 
Other
   
4,124
   
4,569
   
7,707
   
8,724
 
     
57,775
   
52,210
   
127,784
   
131,169
 
Total operating expenses
   
559,740
   
514,609
   
1,315,415
   
1,243,092
 
                           
Operating Income
   
58,730
   
59,362
   
158,191
   
170,811
 
                           
Non-Operating Income
                         
Interest and dividend income
   
1,239
   
631
   
2,405
   
1,230
 
Other income
   
7,245
   
5,553
   
12,522
   
9,918
 
Other expense
   
(1,152
)
 
(1,315
)
 
(1,752
)
 
(2,076
)
     
7,332
   
4,869
   
13,175
   
9,072
 
Fixed Charges
                         
Interest on long-term debt
   
19,371
   
17,046
   
39,317
   
34,625
 
Other interest expense
   
2,037
   
1,479
   
3,859
   
2,716
 
Allowance for borrowed funds
   
(2,626
)
 
(1,877
)
 
(4,572
)
 
(3,199
)
     
18,782
   
16,648
   
38,604
   
34,142
 
                           
Income Before Income Taxes
   
47,280
   
47,583
   
132,762
   
145,741
 
Income Taxes
   
15,066
   
19,012
   
44,199
   
52,283
 
Net Income
   
32,214
   
28,571
   
88,563
   
93,458
 
Preferred Dividends
   
311
   
312
   
623
   
621
 
                           
Earnings on Common Stock
 
$
31,903
 
$
28,259
 
$
87,940
 
$
92,837
 
 

 
The accompanying notes are an integral part of these financial statements.
 
 
6


MIDAMERICAN ENERGY COMPANY AND SUBSIDIARY
(In thousands)

   
Six Months
 
   
Ended June 30,
 
   
2005
 
2004
 
   
(Unaudited)
 
               
Net Cash Flows From Operating Activities
             
Net income
 
$
88,563
 
$
93,458
 
Adjustments to reconcile net income to net cash provided:
             
Depreciation and amortization
   
137,700
   
150,691
 
Deferred income taxes and investment tax credit, net
   
(9,906
)
 
52,521
 
Amortization of other assets and liabilities
   
13,081
   
3,418
 
Impact of changes in working capital:
             
Receivables, net
   
83,088
   
46,044
 
Inventories
   
42,576
   
29,964
 
Accounts payable
   
(79,571
)
 
(53,373
)
Taxes accrued
   
27,277
   
(11,064
)
Other current assets and liabilities
   
(109
)
 
15,789
 
Other, net
   
2,791
   
518
 
Net cash provided by operating activities
   
305,490
   
327,966
 
               
Net Cash Flows From Investing Activities
             
Utility construction expenditures
   
(331,306
)
 
(225,725
)
Quad Cities Station decommissioning trust fund
   
(4,150
)
 
(4,150
)
Purchases of available-for-sale securities
   
(125,502
)
 
-
 
Proceeds from sales of available-for-sale securities
   
165,002
   
-
 
Other, net
   
(130
)
 
127
 
Net cash used in investing activities
   
(296,086
)
 
(229,748
)
               
Net Cash Flows From Financing Activities
             
Dividends paid
   
(623
)
 
(621
)
Retirement of long-term debt, including reacquisition cost
   
(90,766
)
 
(55,892
)
Reacquisition of preferred securities
   
-
   
(1,430
)
Net decrease in notes payable
   
-
   
(39,000
)
Other
   
2,527
   
1,200
 
Net cash used in financing activities
   
(88,862
)
 
(95,743
)
               
Net Increase (Decrease) in Cash and Cash Equivalents
   
(79,458
)
 
2,475
 
Cash and Cash Equivalents at Beginning of Period
   
88,113
   
3,151
 
Cash and Cash Equivalents at End of Period
 
$
8,655
 
$
5,626
 
               
Supplemental Disclosure:
             
Interest paid, net of amounts capitalized
 
$
38,405
 
$
31,988
 
Income taxes paid
 
$
27,976
 
$
12,096
 
 
 
The accompanying notes are an integral part of these financial statements.

 
7


MIDAMERICAN ENERGY COMPANY AND SUBSIDIARY
(Unaudited)

1.
General

The consolidated financial statements included herein have been prepared by MidAmerican Energy Company (“MidAmerican Energy”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Energy, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation, including the reclassification of auction rate securities. 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.

The accompanying Consolidated Balance Sheet as of December 31, 2004, reflects a $39.5 million reclassification of instruments used in MidAmerican Energy’s cash management program from Cash and Cash Equivalents to Short-Term Investments. This reclassification is to present auction rate securities as short-term investments rather than as cash equivalents due to the stated maturities of these investments. These instruments are classified as available-for-sale securities as management does not intend to hold them to maturity nor are they bought and sold with the objective of generating profits on short-term differences in price. The carrying value of these instruments approximates their fair value.

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

2.
New Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. MidAmerican Energy and MidAmerican Funding are required to adopt the provisions of FIN 47 by December 2005. Adoption of FIN 47 is not expected to have a material effect on MidAmerican Energy’s or MidAmerican Funding’s financial position, results of operations or cash flows.

3.    
Commitments and Contingencies

 
(a)
Air Quality

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

The EPA has in recent years implemented more stringent national ambient air quality standards for ozone and new standards for fine particulate matter. These standards set the minimum level of air quality that must be met throughout the United States. Areas that achieve the standards, as determined by ambient monitoring, are characterized as being in attainment of the standard. Areas that fail to meet the standard are designated as being nonattainment areas. Generally, once an area has been designated as a nonattainment area, sources of emissions in the area that contribute to the failure to achieve the ambient air quality standards are required to make emissions reductions. The EPA has concluded that the entire state of Iowa is in attainment of the ozone standards and the fine particulate matter standards.
 
8

 
On March 10, 2005, the EPA released the final Clean Air Interstate Rule (“CAIR”), calling for reductions of sulfur dioxide (“SO2”) and nitrogen oxides (“NOx”) in the eastern United States through a market-based cap and trade system. While the state of Iowa has been determined to be in attainment of the ozone and fine particulate standards, Iowa has been found to significantly contribute to nonattainment of the fine particulate standard in Cook County, Illinois; Lake County, Indiana; Madison County, Illinois; St. Clair County, Illinois; and Marion County, Indiana. The EPA has also concluded that emissions from Iowa significantly contribute to ozone nonattainment in Kenosha and Sheboygan counties in Wisconsin and Macomb County, Michigan. Under the final CAIR, the first phase reductions of SO2 emissions are effective on January 1, 2010, with the second phase reductions effective January 1, 2015. For NOx, the first phase emissions reductions are effective January 1, 2009, and the second phase reductions are effective January 1, 2015. The CAIR calls for overall reductions of SO2 and NOx in Iowa of 68% and 67%, respectively, by 2015. The CAIR will impact MidAmerican Energy’s generating facilities and will require MidAmerican Energy to either reduce emissions from those facilities through the installation of emission controls or purchase additional emission allowances, or some combination thereof.

On March 15, 2005, the EPA released the final Clean Air Mercury Rule (“CAMR”). The CAMR utilizes a market-based cap and trade mechanism to reduce mercury emissions from coal-burning power plants from the current nationwide level of 48 tons to 15 tons at full implementation. The CAMR’s two-phase reduction program requires initial reductions of mercury emission in 2010 and an overall reduction in mercury emissions from coal-burning power plants of 70% by 2018. The CAMR will impact MidAmerican Energy’s coal-burning generating facilities and will require MidAmerican Energy to either reduce emissions from those facilities through the installation of emission controls or purchase additional emission allowances, or some combination thereof.

The CAIR or the CAMR could, in whole or in part, be superseded or made more stringent by one of a number of multi-pollutant emission reduction proposals currently under consideration at the federal level, including the “Clear Skies Initiative,” and other pending legislative proposals that contemplate 70% to 90% reductions of SO2, NOX and mercury, as well as possible new federal regulation of carbon dioxide and other gases that may affect global climate change. In addition to any federal legislation that could be enacted by Congress to supersede the CAIR and the CAMR, the rules could be changed or overturned as a result of litigation. Both the CAIR and CAMR have been legally challenged in the United States District Court for the District of Columbia. In addition, some challengers have petitioned for a stay of the mercury delisting rule pending the outcome of the underlying challenge to the rule, and the EPA has indicated it will reopen the delisting determination for public comment. Until the court makes a determination regarding the merits of the challenges to the CAIR and CAMR, the full impact of the rules on MidAmerican Energy cannot be determined.

MidAmerican Energy has implemented a planning process that forecasts the site-specific controls and actions that may be required to meet emissions reductions as promulgated by the EPA. In accordance with an Iowa law passed in 2001, MidAmerican Energy has on file with the Iowa Utilities Board (“IUB”) its current multi-year plan and budget for managing SO2 and NOX from its generating facilities in a cost-effective manner. The plan, which is required to be updated every two years, provides specific actions to be taken at each coal-fired generating facility and the related costs and timing for each action. On July 17, 2003, the IUB issued an order that affirmed an administrative law judge’s approval of the initial plan filed April 1, 2002, as amended. On October 4, 2004, the IUB issued an order approving MidAmerican Energy’s second biennial plan as revised in a settlement MidAmerican Energy entered into with the Iowa Office of Consumer Advocate (“OCA”). That plan covers the time period from April 1, 2004 through December 31, 2006. Neither IUB order resulted in any changes to electric rates for MidAmerican Energy. The effect of the orders is to approve the prudence of expenditures made consistent with the plans. Pursuant to an unrelated rate settlement agreement approved by the IUB on October 17, 2003, if prior to January 1, 2011, capital and operating expenditures to comply with environmental requirements cumulatively exceed $325 million, then MidAmerican Energy may seek to recover the additional expenditures from customers. Based on a review of the final CAIR and CAMR, MidAmerican Energy does not expect the qualified expenditures to exceed $325 million through January 1, 2011.
 
9

 
Under the New Source Review (“NSR”) provisions of the Clean Air Act, a utility is required to obtain a permit from the EPA or a state regulatory agency prior to (1) beginning construction of a new major stationary source of an NSR-regulated pollutant or (2) making a physical or operational change to an existing facility that potentially increases emissions, unless the changes are exempt under the regulations (including routine maintenance, repair and replacement of equipment). In general, projects subject to NSR regulations are subject to pre-construction review and permitting under the Prevention of Significant Deterioration (“PSD”) provisions of the Clean Air Act. Under the PSD program, a project that emits threshold levels of regulated pollutants must undergo a Best Available Control Technology analysis and evaluate the most effective emissions controls. These controls must be installed in order to receive a permit. Violations of NSR regulations, which may be alleged by the EPA, states, and environmental groups, among others, potentially subject a utility to material expenses for fines and other sanctions and remedies including requiring installation of enhanced pollution controls and funding supplemental environmental projects.
 
In recent years, the EPA has requested from several utilities information and support regarding their capital projects for various generating plants. The requests were issued as part of an industry-wide investigation to assess compliance with the NSR and the New Source Performance Standards of the Clean Air Act. In December 2002 and April 2003, MidAmerican Energy received requests from the EPA to provide documentation related to its capital projects from January 1, 1980, to April 2003 for a number of its generating plants. MidAmerican Energy has submitted information to the EPA in responses to these requests, and there are currently no outstanding data requests pending from the EPA. MidAmerican Energy cannot predict the outcome of these requests at this time.

In 2002 and 2003, the EPA proposed various changes to its NSR rules that clarify what constitutes routine repair, maintenance and replacement for purposes of triggering NSR requirements. These changes have been subject to legal challenge and, until such time as the legal challenges are resolved and the rules are effective, MidAmerican Energy will continue to manage projects at its generating plants in accordance with the rules in effect prior to 2002. 

 
(b)
Nuclear Decommissioning Costs

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

MidAmerican Energy’s share of estimated decommissioning costs for Quad Cities Station as of June 30, 2005, was $158.6 million and is reflected in Asset Retirement Obligations on the  Consolidated Balance Sheet. Refer to Note (14) of MidAmerican Energy’s most recently filed Form 10-K for a discussion of asset retirement obligations. MidAmerican Energy has established trusts for the investment of funds for decommissioning the Quad Cities Station. The fair value of the assets held in the trusts as of June 30, 2005 and December 31, 2004, was $218.1 million and $207.5 million, respectively, and is reflected in Investments and Nonregulated Property, Net on the Consolidated Balance Sheets.

 
(c)
Manufactured Gas Plant Facilities

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

MidAmerican Energy has evaluated all known properties that were, at one time, sites of gas manufacturing plants for which it may be a potentially responsible party. The purpose of these evaluations was to determine whether waste materials are present, whether the materials constitute a health or environmental risk, and whether MidAmerican Energy has any responsibility for remedial action. MidAmerican Energy has actively worked with the regulatory agencies and has received regulatory closure on fourteen sites. MidAmerican Energy is continuing to work with the agencies to obtain regulatory closure on an additional ten sites.

MidAmerican Energy estimates the range of possible costs for investigation, remediation and monitoring for the sites discussed above to be approximately $4 million to $11 million. As of June 30, 2005 and December 31, 2004, MidAmerican Energy had recorded a liability of $5.4 million and $9.3 million, respectively, for these sites and a corresponding regulatory asset for future recovery through the regulatory process. MidAmerican Energy projects that these amounts will be incurred or paid over the next two years.

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

10

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

4.
Rate Matters

Under three settlement agreements between MidAmerican Energy, the OCA and other intervenors approved by the IUB, MidAmerican Energy has agreed not to seek a general increase in electric rates prior to 2012 unless, beginning in 2006, its Iowa jurisdictional electric return on equity for any year falls below 10%. Prior to filing for a general increase in electric rates, MidAmerican Energy is required to conduct 30 days of good faith negotiations with the signatories to the settlement agreements to attempt to avoid a general increase in such rates. As a party to the settlement agreements, the OCA has agreed not to request or support any decrease in MidAmerican Energy’s Iowa electric rates prior to January 1, 2012. The settlement agreements specifically allow the IUB to approve or order electric rate design or cost of service rate changes that could result in changes to rates for specific customers as long as such changes do not result in an overall increase in revenues for MidAmerican Energy. The settlement agreements also each provide that portions of revenues associated with Iowa retail electric returns on equity within specified ranges will be recorded as a regulatory liability.

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

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

The regulatory liabilities created by the three settlement agreements are recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Additionally, interest expense is accrued on the portion of the regulatory liability balance recorded in prior years. The regulatory liabilities created for the years through 2010 are expected to be reduced as they are credited against plant in service associated with generating plant additions. As a result of the credit applied to generating plant balances from the reduction of the regulatory liabilities, future depreciation will be reduced. As of June 30, 2005 and December 31, 2004, the related regulatory liability reflected on the Consolidated Balance Sheets was $207.2 million and $181.2 million, respectively. The regulatory liability accrued for 2011, if any, will be credited to customer bills in 2012.

Illinois bundled electric rates are frozen until 2007, subject to certain exceptions allowing for increases, at which time bundled rates may be increased or decreased by the ICC. Illinois law provides that, through 2006, Illinois earnings above a computed level of return on common equity are to be shared equally between regulated retail electric customers and MidAmerican Energy. MidAmerican Energy’s computed level of return on common equity is based on a rolling two-year average of the Monthly Treasury Long-Term Average Rate, as published by the Federal Reserve System, plus a premium of 8.5% for 2000 through 2004 and a premium of 12.5% for 2005 and 2006. The two-year average above which sharing must occur for 2004 was 13.57%. The law allows MidAmerican Energy to mitigate the sharing of earnings above the threshold return on common equity through accelerated recovery of electric assets.
 
 
11


5.    
Retirement Plans

MidAmerican Energy sponsors a noncontributory defined benefit pension plan covering substantially all employees of MidAmerican Energy Holdings Company and its domestic energy subsidiaries. MidAmerican Energy also sponsors certain postretirement health care and life insurance benefits covering substantially all retired employees of MidAmerican Energy Holdings Company and its domestic energy subsidiaries. Non-union employees hired after June 30, 2004, are not eligible for postretirement benefits other than pensions. Net periodic benefit cost for the pension, including supplemental retirement, and postretirement benefit plans of MidAmerican Energy and the aforementioned affiliates included the following components for the three months and six months ended June 30, (in thousands):

   
Three Months
 
Six Months
 
   
Ended June 30,
 
Ended June 30,
 
   
2005
 
2004
 
2005
 
2004
 
Pension
                         
Components of net periodic benefit cost:
                         
Service cost
 
$
6,672
 
$
6,346
 
$
13,358
 
$
12,944
 
Interest cost
   
9,231
   
9,067
   
18,403
   
17,767
 
Expected return on plan assets
   
(9,527
)
 
(9,738
)
 
(19,054
)
 
(19,372
)
Amortization of net transition balance
   
-
   
(203
)
 
-
   
(401
)
Amortization of prior service cost
   
678
   
693
   
1,349
   
1,380
 
Amortization of prior year loss
   
358
   
366
   
767
   
785
 
Net periodic benefit cost
 
$
7,412
 
$
6,531
 
$
14,823
 
$
13,103
 
                           
Postretirement
                         
Components of net periodic benefit cost:
                         
Service cost
 
$
1,647
 
$
2,103
 
$
3,295
 
$
4,065
 
Interest cost
   
3,588
   
3,964
   
7,177
   
8,147
 
Expected return on plan assets
   
(2,321
)
 
(2,512
)
 
(4,642
)
 
(4,373
)
Amortization of net transition balance
   
614
   
674
   
1,228
   
1,702
 
Amortization of prior service cost
   
-
   
5
   
-
   
153
 
Amortization of prior year loss
   
421
   
876
   
842
   
1,710
 
Net periodic benefit cost
 
$
3,949
 
$
5,110
 
$
7,900
 
$
11,404
 

MidAmerican Energy expects to contribute $6.6 million and $15.8 million in 2005 to its pension and postretirement plans, respectively. For the six months ended June 30, 2005, $2.9 million and $8.4 million of contributions were made to the pension and postretirement plans, respectively.

6.
Segment Information

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

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

MidAmerican Energy’s external revenues by product and service are displayed on the Consolidated Statements of Operations.
 
12

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

   
Three Months
 
Six Months
 
   
Ended June 30,
 
Ended June 30,
 
   
2005
 
2004
 
2005
 
2004
 
Segment Profit Information
                         
Operating revenues:
                         
External revenues -
                         
Generation
 
$
153,169
 
$
143,367
 
$
312,066
 
$
322,238
 
Energy delivery
   
399,786
   
371,268
   
1,017,213
   
945,695
 
Transmission
   
8,209
   
7,070
   
16,190
   
13,698
 
Unregulated retail services
   
57,306
   
52,266
   
128,137
   
132,272
 
Total
   
618,470
   
573,971
   
1,473,606
   
1,413,903
 
                           
Intersegment revenues -
                         
Generation
   
165,156
   
156,908
   
304,269
   
300,115
 
Energy delivery
   
(179,837
)
 
(171,679
)
 
(333,631
)
 
(329,657
)
Transmission
   
14,681
   
14,771
   
29,362
   
29,542
 
Total
   
-
   
-
   
-
   
-
 
Consolidated
 
$
618,470
 
$
573,971
 
$
1,473,606
 
$
1,413,903
 
                           
Earnings on common stock:
                         
Generation
 
$
10,763
 
$
11,445
 
$
19,037
 
$
33,279
 
Energy delivery
   
12,023
   
8,826
   
49,738
   
43,154
 
Transmission
   
8,850
   
7,333
   
17,737
   
14,480
 
Unregulated retail services
   
267
   
655
   
1,428
   
1,924
 
Consolidated
 
$
31,903
 
$
28,259
 
$
87,940
 
$
92,837
 

   
As of
 
   
June 30,
 
December 31,
 
   
2005
 
2004
 
Segment Asset Information
             
Total assets:
             
Generation
 
$
2,401,949
 
$
2,229,909
 
Energy delivery
   
2,477,169
   
2,625,081
 
Transmission
   
308,692
   
277,771
 
Unregulated retail services
   
37,880
   
42,725
 
Total
   
5,225,690
   
5,175,486
 
Reclassifications and intersegment eliminations (a)
   
(63,535
)
 
(63,535
)
Consolidated
 
$
5,162,155
 
$
5,111,951
 

(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


7.
Total Comprehensive Income

MidAmerican Energy’s total comprehensive income for the three months ended June 30, 2005 and 2004, was $31.9 million and $28.3 million, respectively. MidAmerican Energy’s total comprehensive income for the six months ended June 30, 2005 and 2004, was $85.1 million and $92.4 million, respectively. The difference from Earnings on Common Stock for the six months ended June 30, 2004, was due to the effective portion of net gains and losses on MidAmerican Energy’s derivative instruments classified as cash flow hedges. For the six months ended June 30, 2005, the difference from Earnings on Common Stock was due to a minimum pension liability adjustment. Accumulated other comprehensive loss, net, was $2.9 million and $- million as of June 30, 2005, and December 31, 2004, respectively.
 
 
14






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

We have reviewed the accompanying consolidated balance sheet of MidAmerican Funding, LLC and subsidiaries (the “Company”) as of June 30, 2005, and the related consolidated statements of operations for the three-month and six-month periods ended June 30, 2005 and 2004, and of cash flows for the six-month periods ended June 30, 2005 and 2004. These interim financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet and statement of capitalization (not presented herein) of MidAmerican Funding, LLC and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, comprehensive income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2005, 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, 2004 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ Deloitte & Touche LLP

Des Moines, Iowa
August 10, 2005


 
15


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
(In thousands)

   
As of
 
   
June 30,
 
December 31,
 
   
2005
 
2004
 
   
(Unaudited)
     
ASSETS
Utility Plant, Net
             
Electric
 
$
5,609,276
 
$
5,498,878
 
Gas
   
974,897
   
957,011
 
     
6,584,173
   
6,455,889
 
Accumulated depreciation and amortization
   
(3,040,039
)
 
(2,956,856
)
     
3,544,134
   
3,499,033
 
Construction work in progress
   
581,484
   
369,406
 
     
4,125,618
   
3,868,439
 
Current Assets
             
Cash and cash equivalents
   
9,184
   
88,367
 
Short-term investments
   
-
   
39,500
 
Receivables, net
   
269,153
   
337,333
 
Inventories
   
47,070
   
89,646
 
Other
   
28,316
   
22,585
 
     
353,723
   
577,431
 
               
Investments and Nonregulated Property, Net
   
384,159
   
375,230
 
Goodwill
   
1,265,979
   
1,268,082
 
Regulatory Assets
   
223,832
   
227,997
 
Other Assets
   
117,044
   
110,065
 
Total Assets
 
$
6,470,355
 
$
6,427,244
 
               
CAPITALIZATION AND LIABILITIES
Capitalization
             
Member’s equity
 
$
2,121,122
 
$
2,042,403
 
MidAmerican Energy preferred securities
   
30,329
   
30,329
 
Long-term debt, excluding current portion
   
1,871,667
   
2,031,509
 
     
4,023,118
   
4,104,241
 
Current Liabilities
             
Note payable to affiliate
   
39,750
   
31,500
 
Current portion of long-term debt
   
160,265
   
91,018
 
Accounts payable
   
175,549
   
242,966
 
Taxes accrued
   
105,832
   
77,388
 
Interest accrued
   
27,384
   
29,612
 
Other
   
83,588
   
84,032
 
     
592,368
   
556,516
 
Other Liabilities
             
Deferred income taxes
   
498,378
   
518,004
 
Investment tax credits
   
46,052
   
48,143
 
Asset retirement obligations
   
171,615
   
166,845
 
Regulatory liabilities
   
727,067
   
677,489
 
Other
   
411,757
   
356,006
 
     
1,854,869
   
1,766,487
 
Total Capitalization and Liabilities
 
$
6,470,355
 
$
6,427,244
 
 
 
The accompanying notes are an integral part of these financial statements.

 
16


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
(In thousands)

   
Three Months
 
Six Months
 
   
Ended June 30,
 
Ended June 30,
 
   
2005
 
2004
 
2005
 
2004
 
       
(Unaudited)
     
Operating Revenues
                         
Regulated electric
 
$
347,269
 
$
344,375
 
$
659,848
 
$
707,559
 
Regulated gas
   
209,978
   
173,669
   
677,443
   
567,240
 
Nonregulated
   
62,467
   
57,477
   
138,701
   
141,668
 
     
619,714
   
575,521
   
1,475,992
   
1,416,467
 
                           
Operating Expenses
                         
Regulated:
                         
Cost of fuel, energy and capacity
   
102,587
   
98,679
   
191,350
   
212,913
 
Cost of gas sold
   
166,941
   
133,442
   
553,953
   
444,217
 
Other operating expenses
   
95,391
   
93,511
   
185,784
   
182,553
 
Maintenance
   
40,164
   
46,376
   
71,814
   
74,394
 
Depreciation and amortization
   
73,646
   
67,539
   
137,048
   
150,067
 
Property and other taxes
   
23,236
   
22,852
   
47,682
   
47,779
 
     
501,965
   
462,399
   
1,187,631
   
1,111,923
 
Nonregulated:
                         
Cost of sales
   
54,057
   
48,092
   
120,647
   
123,165
 
Other
   
5,122
   
5,608
   
9,793
   
10,892
 
     
59,179
   
53,700
   
130,440
   
134,057
 
Total operating expenses
   
561,144
   
516,099
   
1,318,071
   
1,245,980
 
                           
Operating Income
   
58,570
   
59,422
   
157,921
   
170,487
 
                           
Non-Operating Income
                         
Interest and dividend income
   
1,282
   
655
   
2,487
   
1,284
 
Other income
   
7,383
   
6,025
   
23,861
   
13,018
 
Other expense
   
(1,190
)
 
(1,409
)
 
(3,702
)
 
(2,274
)
     
7,475
   
5,271
   
22,646
   
12,028
 
Fixed Charges
                         
Interest on long-term debt
   
31,145
   
28,827
   
62,865
   
58,130
 
Other interest expense
   
2,365
   
1,568
   
4,421
   
2,856
 
Preferred dividends of subsidiaries
   
311
   
312
   
623
   
621
 
Allowance for borrowed funds
   
(2,626
)
 
(1,877
)
 
(4,572
)
 
(3,199
)
     
31,195
   
28,830
   
63,337
   
58,408
 
                           
Income Before Income Taxes
   
34,850
   
35,863
   
117,230
   
124,107
 
Income Taxes
   
9,641
   
14,109
   
35,664
   
47,996
 
                           
Net Income
 
$
25,209
 
$
21,754
 
$
81,566
 
$
76,111
 
 
 
The accompanying notes are an integral part of these financial statements.

 
17


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
(In thousands)

   
Six Months
 
   
Ended June 30,
 
   
2005
 
2004
 
   
(Unaudited)
 
               
Net Cash Flows From Operating Activities
             
Net income
 
$
81,566
 
$
76,111
 
Adjustments to reconcile net income to net cash provided:
             
Depreciation and amortization
   
137,801
   
150,792
 
Deferred income taxes and investment tax credit, net
   
(19,360
)
 
51,690
 
Amortization of other assets and liabilities
   
12,674
   
2,658
 
Gain on sale of securities, assets and other investments
   
(10,336
)
 
(316
)
Loss from impairment of assets and investments
   
1,876
   
-
 
Impact of changes in working capital:
             
Receivables, net
   
82,595
   
45,762
 
Inventories
   
42,576
   
29,964
 
Accounts payable
   
(79,894
)
 
(53,574
)
Taxes accrued
   
28,444
   
(12,403
)
Other current assets and liabilities
   
46
   
15,346
 
Other, net
   
7,111
   
7,128
 
Net cash provided by operating activities
   
285,099
   
313,158
 
               
Net Cash Flows From Investing Activities
             
Utility construction expenditures
   
(331,306
)
 
(225,725
)
Quad Cities Station decommissioning trust fund
   
(4,150
)
 
(4,150
)
Purchases of available-for-sale securities
   
(125,502
)
 
-
 
Proceeds from sales of available-for-sale securities
   
166,067
   
1,511
 
Proceeds from sales of assets and other investments
   
11,100
   
7
 
Other, net
   
(502
)
 
1,161
 
Net cash used in investing activities
   
(284,293
)
 
(227,196
)
               
Net Cash Flows From Financing Activities
             
Retirement of long-term debt, including reacquisition cost
   
(90,766
)
 
(55,892
)
Reacquisition of preferred securities
   
-
   
(1,430
)
Note payable to affiliate
   
8,250
   
10,550
 
Net decrease in notes payable
   
-
   
(39,000
)
Other
   
2,527
   
1,200
 
Net cash used in financing activities
   
(79,989
)
 
(84,572
)
               
Net Increase (Decrease) in Cash and Cash Equivalents
   
(79,183
)
 
1,390
 
Cash and Cash Equivalents at Beginning of Period
   
88,367
   
4,558
 
Cash and Cash Equivalents at End of Period
 
$
9,184
 
$
5,948
 
               
Supplemental Disclosure:
             
Interest paid, net of amounts capitalized
 
$
62,471
 
$
55,671
 
Income taxes paid
 
$
25,594
 
$
5,271
 
 
 
The accompanying notes are an integral part of these financial statements.
 
 
18


MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
(Unaudited)

1.
General

The consolidated financial statements included herein have been prepared by MidAmerican Funding, LLC (“MidAmerican Funding”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of MidAmerican Funding, all adjustments, consisting of normal recurring adjustments, have been made to present fairly the financial position, the results of operations and the changes in cash flows for the periods presented. Prior year amounts have been reclassified to a basis consistent with the current year presentation, including the reclassification of auction rate securities. 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.

The accompanying Consolidated Balance Sheet as of December 31, 2004, reflects a $39.5 million reclassification of instruments used in the MidAmerican Energy’s cash management program from Cash and Cash Equivalents to Short-Term Investments. This reclassification is to present auction rate securities as short-term investments rather than as cash equivalents due to the stated maturities of these investments. These instruments are classified as available-for-sale securities as management does not intend to hold them to maturity nor are they bought and sold with the objective of generating profits on short-term differences in price. The carrying value of these instruments approximates their fair value.

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

2.
New Accounting Pronouncements

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

3.
Commitments and Contingencies

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

4.
Rate Matters

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

5.
Retirement Plans

Refer to Note 5 of MidAmerican Energy’s Notes to Consolidated Financial Statements for information regarding MidAmerican Funding's retirement plans.
 
 
19


6.
Segment Information

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

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

MidAmerican Funding’s external revenues by product and service are displayed on the Consolidated Statements of Operations.
 
 
20


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

   
Three Months
 
Six Months
 
   
Ended June 30,
 
Ended June 30,
 
   
2005
 
2004
 
2005
 
2004
 
                           
Segment Profit Information
                         
Operating revenues:
                         
External revenues -
                         
Generation
 
$
153,169
 
$
143,367
 
$
312,066
 
$
322,238
 
Energy delivery
   
399,786
   
371,268
   
1,017,213
   
945,695
 
Transmission
   
8,209
   
7,070
   
16,190
   
13,698
 
Unregulated retail services
   
57,306
   
52,266
   
128,137
   
132,272
 
Other
   
1,244
   
1,550
   
2,386
   
2,564
 
Total
   
619,714
   
575,521
   
1,475,992
   
1,416,467
 
                           
Intersegment revenues -
                         
Generation
   
165,156
   
156,908
   
304,269
   
300,115
 
Energy delivery
   
(179,837
)
 
(171,679
)
 
(333,631
)
 
(329,657
)
Transmission
   
14,681
   
14,771
   
29,362
   
29,542
 
Total
   
-
   
-
   
-
   
-
 
Consolidated
 
$
619,714
 
$
575,521
 
$
1,475,992
 
$
1,416,467
 
                           
Net income:
                         
Generation
 
$
10,763
 
$
11,445
 
$
19,037
 
$
33,279
 
Energy delivery
   
12,023
   
8,826
   
49,738
   
43,154
 
Transmission
   
8,850
   
7,333
   
17,737
   
14,480
 
Unregulated retail services
   
267
   
655
   
1,428
   
1,924
 
Other
   
(6,694
)
 
(6,505
)
 
(6,374
)
 
(16,726
)
Consolidated
 
$
25,209
 
$
21,754
 
$
81,566
 
$
76,111
 
                           

   
As of
 
   
June 30,
 
December 31,
 
   
2005
 
2004
 
Segment Asset Information
             
Total assets (a):
             
Generation
 
$
3,323,282
 
$
3,153,106
 
Energy delivery
   
2,738,305
   
2,886,213
 
Transmission
   
392,202
   
361,524
 
Unregulated retail services
   
37,880
   
42,725
 
Other
   
244,435
   
227,258
 
Total
   
6,736,104
   
6,670,826
 
Reclassifications and intersegment eliminations (b)
   
(265,749
)
 
(243,582
)
Consolidated
 
$
6,470,355
 
$
6,427,244
 

(a)
Total assets by operating segment reflect the assignment of goodwill to applicable reporting units in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
   
(b)
Reclassifications and intersegment eliminations relate principally to the reclassification of income tax balances in accordance with generally accepted accounting principles and the elimination of intersegment accounts receivables and payables.

 
21


7.
Total Comprehensive Income

MidAmerican Funding’s total comprehensive income for the three months ended June 30, 2005 and 2004, was $25.1 million and $21.6 million, respectively. MidAmerican Funding’s total comprehensive income for the six months ended June 30, 2005 and 2004, was $78.7 million and $75.5 million, respectively. The difference from Net Income for the six months ended June 30, 2004, was due to the effective portion of net gains and losses on MidAmerican Energy’s derivative instruments classified as cash flow hedges. For the six months ended June 30, 2005, the difference from Net Income was substantially due to a minimum pension liability adjustment. Accumulated other comprehensive loss, net, was $2.8 million and $- million as of June 30, 2005, and December 31, 2004, respectively.

8.    
Goodwill

For the six months ended June 30, 2005, MidAmerican Funding adjusted goodwill for a change in deferred income taxes due to resolution of a tax issue existing at the time of its purchase of MHC. The following table shows the change in the carrying amount of goodwill by reportable operating segment for the six months ended June 30, 2005 (in thousands):

       
Energy
         
   
Generation
 
Delivery
 
Transmission
 
Total
 
                           
Balance at January 1, 2005
 
$
922,859
 
$
261,575
 
$
83,648
 
$
1,268,082
 
Income tax adjustment
   
(1,526
)
 
(439
)
 
(138
)
 
(2,103
)
Balance at June 30, 2005
 
$
921,333
 
$
261,136
 
$
83,510
 
$
1,265,979
 

 
22



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

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

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

Forward-Looking Statements

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

Executive Summary

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

·      
During the first quarter of 2005, MidAmerican Energy’s regulated electric gross margin was impacted by a 43.7% decrease in wholesale sales volumes. The timing of planned generation outages, mainly for the Louisa Generating Station, and the loss of generating capacity at the Ottumwa Generating Station Unit No. 1 (“OGS Unit No. 1”), which experienced a failure of its step-up transformer on February 20, 2005, resulted in lost wholesale sales opportunities and required MidAmerican Energy to generate or purchase more costly replacement power. OGS Unit No. 1 returned to service on May 3, 2005. These factors affected the second quarter to a lesser degree, which reflects a 6.8% decrease in wholesale sales volumes compared to the second quarter of 2004. For the first six months of 2005 compared to the first six months of 2004, the decrease in electric wholesale sales volumes resulted in a $19.0 million reduction to regulated electric gross margin. Additionally, a decrease in the average electric wholesale margin per megawatt hour sold reduced electric wholesale gross margin, principally in the first quarter of 2005. The decrease in margin per megawatt hour sold was due to a change in the mix of higher-priced on-peak and lower-priced off-peak sales and a higher cost of energy. As a result, regulated electric gross margin for the first six months of 2005 decreased $23.3 million, of which $14.3 million relates to the first quarter.

23

 
Regulatory expense related to the Iowa revenue sharing arrangement decreased by $17.0 million for the six months ended June 30, 2005, compared to the six months ended June 30, 2004. Amounts under the arrangement are determined based upon projected Iowa electric returns on equity which were unfavorably impacted by the lower wholesale revenues. Iowa revenue sharing is recorded as depreciation and amortization in the accompanying consolidated statement of operations.

·      
MidAmerican Energy is currently constructing a 790-megawatt (“MW”)(expected accreditation) super-critical-temperature, coal-fired generation project and a 360-MW (nameplate rating) wind power project in Iowa and expects to invest approximately $1.1 billion in the projects through 2007. Through June 30, 2005, $525.3 million of the $1.1 billion had been invested. In December 2004, 160.5 MW of the wind power project was completed and placed in service. The remainder of the wind power project is expected to be completed in 2005.

Results of Operations for the Quarter Ended June 30, 2005 and 2004

Earnings Overview

MidAmerican Energy’s earnings on common stock increased $3.6 million to $31.9 million for the second quarter of 2005 compared to $28.3 million for the second quarter of 2004. MidAmerican Funding’s net income increased $3.4 million to $25.2 million for the second quarter of 2005 compared to $21.8 million for the second quarter of 2004.

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

Regulated Electric Gross Margin

   
Quarter
 
   
Ended June 30,
 
   
2005
 
2004
 
     
Gross margin (in millions):
             
Operating revenues
 
$
347.3
 
$
344.4
 
Less cost of fuel, energy and capacity
   
102.6
   
98.7
 
Electric gross margin
 
$
244.7
 
$
245.7
 
               
Sales (gigawatt-hours):
             
Residential
   
1,223
   
1,178
 
Small general service
   
997
   
954
 
Large general service
   
1,954
   
1,852
 
Other
   
355
   
331
 
Total retail
   
4,529
   
4,315
 
Wholesale
   
2,049
   
2,198
 
Total
   
6,578
   
6,513
 

Electric gross margin for the second quarter of 2005 decreased $1.0 million compared to the second quarter of 2004. Gross margin on electric wholesale sales decreased $8.8 million, while transmission revenues increased $1.1 million, MidAmerican Energy’s cost of sales for electric capacity purchases decreased $5.1 million, and gross margin on electric retail sales was unchanged.

In total, electric retail sales volumes increased 5.0% compared to the second quarter of 2004. The effect of temperature conditions during the second quarter of 2005 compared to the second quarter of 2004 resulted in a $7.7 million increase in electric retail gross margin. An increase in the average number of retail customers improved electric retail gross margin by $3.2 million compared to the second quarter of 2004. An increase in fuel costs related to Iowa retail electric sales, due in part to increased coal and related transportation costs, decreased electric retail gross margin by $11.8 million compared to the second quarter of 2004. Revenues from the recovery of energy efficiency program costs increased $1.1 million compared to the second quarter of 2004. Changes in energy efficiency revenues are substantially matched with corresponding changes in other operating expenses. Additionally, gains from the sales of emissions allowances increased $0.5 million.

24

 
Sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system are classified as wholesale. The decrease in gross margin on electric wholesale energy sales is due principally to a reduction in the average margin per megawatt hour sold as a result of a change in the mix of higher-priced on-peak and lower-priced off-peak sales, which lowered gross margin by $7.2 million. Additionally, a 6.8% decrease in wholesale sales volumes compared to the second quarter of 2004 resulted in a $1.6 million decrease in electric wholesale gross margin. The decrease in wholesale sales volumes was in part due to a reduction in the availability of competitively priced generation as a result of an increased demand for MidAmerican Energy’s retail sales.

Regulated Gas Gross Margin

   
Quarter
 
   
Ended June 30,
 
   
2005
 
2004
 
     
Gross margin (in millions)
             
Operating revenues
 
$
210.0
 
$
173.7
 
Less cost of gas sold
   
166.9
   
133.4
 
Gas gross margin
 
$
43.1
 
$
40.3
 
               
Sales (000’s decatherms):
             
Residential
   
5,792
   
5,361
 
Small general service
   
2,858
   
2,623
 
Large general service
   
1,019
   
377
 
Other
   
8
   
84
 
Total retail
   
9,677
   
8,445
 
Wholesale
   
13,687
   
12,194
 
Total
   
23,364
   
20,639
 

Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations through the purchased gas adjustment clauses. Compared to the second quarter of 2004, MidAmerican Energy’s average per-unit cost of gas sold increased 10.5%, resulting in a $15.9 million increase in cost of gas sold for the quarter. The remainder of the increase in cost of gas sold was due to an increase in sales volumes.

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

 
25


 
   
Quarter Ended
 
   
June 30,
 
   
2005 vs. 2004
 
 
   
(In millions)
 
Change in cost of gas sold:
       
Cost per unit
 
$
15.9
 
Sales volumes
   
17.6
 
Total
   
33.5
 
Other gas usage factors
   
1.4
 
Energy efficiency cost recovery
   
0.8
 
Customer growth
   
0.6
 
Total revenue variance
 
$
36.3
 

Other gas usage factors, such as changes in individual customer usage patterns and reaction to prices, increased gas margin. MidAmerican Energy's average number of gas retail customers increased 1.5% compared to the second quarter of 2004. Changes in energy efficiency revenues are substantially matched with corresponding changes in other operating expenses.

Regulated Operating Expenses

Other operating expenses increased $1.9 million compared to the second quarter of 2004 due to a $1.9 million increase in costs related to energy efficiency programs, which was substantially matched by increases in related electric and gas revenues.

Maintenance expenses for the second quarter of 2005 decreased $6.2 million compared to the second quarter of 2004 due to a $6.2 million decrease in fossil fuel generating maintenance as a result of the timing of preventive maintenance.

Depreciation and amortization expense for the second quarter of 2005 increased $6.1 million compared to the second quarter of 2004 in part due to a $3.5 million increase in regulatory expense related to a revenue sharing arrangement in Iowa due to higher Iowa electric returns on equity. Refer to the “Utility Regulatory Matters” section for an explanation of the revenue sharing arrangement. Additionally, utility plant depreciation and amortization increased $2.3 million in part due to phase two of the Greater Des Moines Energy Center and a portion of the wind power facilities being placed in service in December 2004.

Nonregulated Gross Margin

   
Quarter
 
   
Ended June 30,
 
   
2005
 
2004
 
 
 
(In millions)
MidAmerican Energy -
             
Nonregulated operating revenues
 
$
61.2
 
$
55.9
 
Less nonregulated cost of sales
   
53.7
   
47.6
 
Nonregulated gross margin
 
$
7.5
 
$
8.3
 
               
MidAmerican Funding Consolidated -
             
Nonregulated operating revenues
 
$
62.5
 
$
57.5
 
Less nonregulated cost of sales
   
54.1
   
48.1
 
Nonregulated gross margin
 
$
8.4
 
$
9.4
 

MidAmerican Energy’s nonregulated retail electric marketing services provide electric supply services to retail customers in Illinois, Ohio and Michigan. An 11.7% increase in nonregulated retail electric sales volumes combined with increases in the average revenue and cost per megawatt hour sold resulted in increases in related revenues and cost of sales totaling $6.9 million and $7.6 million, respectively.

MidAmerican Energy’s nonregulated retail gas marketing services operate in Iowa, Illinois, Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third party marketers and sells it directly to large commercial end-users. In addition, MidAmerican Energy manages gas supplies for a number of smaller commercial end-users, which includes the sale of gas to these customers to meet their supply requirements. An 18.7% decrease in nonregulated retail gas sales volumes compared to the second quarter of 2004, offset partially by increases in the revenue and cost per unit sold, resulted in decreases in related revenues and cost of sales of $1.9 million and $1.5 million, respectively. The decrease in nonregulated retail gas sales volumes was due in large part to the non-renewal of sales contracts as a result of a related regulatory issue in Illinois. Refer to “Rate Matters” for a discussion of the issue.

26

 
Other Income

MidAmerican Energy -

As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the Federal Energy Regulatory Commission (“FERC”). Other income for the capitalized allowance on equity funds used during construction totaled $5.5 million and $4.4 million in the second quarter of 2005 and 2004, respectively. MidAmerican Energy expects to continue to record income for the allowance on equity funds used during construction through 2007 while the announced generating facilities are constructed.

Fixed Charges

The increase in interest on long-term debt was due to the effect of $350.0 million of MidAmerican Energy long-term debt issued on October 1, 2004, offset partially by maturities of higher rate debt in 2004 and 2005. Other interest expense increased due to a higher balance of the Iowa revenue sharing liability. MidAmerican Energy is allowed to capitalize, and record as a reduction to fixed charges, a cost of construction for debt funds used, based on guidelines set forth by the FERC. Allowance for borrowed funds increased due to increased utility construction expenditures. MidAmerican Energy expects to continue to record allowance for borrowed funds used during construction through 2007 while the announced generating facilities are constructed.

Income Taxes

In October 2004, the President signed into law legislation that extends the federal production tax credit for electricity produced by wind energy facilities placed in service prior to January 1, 2006. Accordingly, in 2005, MidAmerican Energy’s income taxes for the three months ended June 30, 2005, were reduced $1.8 million by the production tax credits related to energy produced by its wind power facilities.

State utility rate regulation in Iowa requires that the tax effect of certain timing differences be flowed through immediately to customers. Accordingly, amounts that would otherwise have been recognized in income tax expense have been included as changes in regulatory assets. This flow-through treatment of such timing differences impacts the effective tax rates from year to year, particularly as it related to the federal bonus depreciation deductions associated with the significant generation plant additions in 2004.

Results of Operations for the Six Months Ended June 30, 2005 and 2004

Earnings Overview

MidAmerican Energy’s earnings on common stock decreased $4.9 million to $87.9 million for the first six months of 2005 compared to $92.8 million for the first six months of 2004. MidAmerican Funding’s net income increased $5.5 million to $81.6 million for the first six months of 2005 compared to $76.1 million for the first six months of 2004. The decreased earnings on common stock at MidAmerican Energy was more than offset by gains on the sales of interests in non-strategic, passive investments at MidAmerican Funding.
 
Following is a discussion of various factors that affected earnings. Explanations include management's best estimate of the impact of weather, customer growth and other factors.
 
 
27


Regulated Electric Gross Margin

   
Six Months
 
   
Ended June 30,
 
   
2005
 
2004
 
     
Gross margin (in millions):
             
Operating revenues
 
$
659.8
 
$
707.6
 
Less cost of fuel, energy and capacity
   
191.3
   
212.9
 
Electric gross margin
 
$
468.5
 
$
494.7
 
               
Sales (gigawatt-hours):
             
Residential
   
2,592
   
2,571
 
Small general service
   
1,957
   
1,917
 
Large general service
   
3,684
   
3,547
 
Other
   
708
   
671
 
Total retail
   
8,941
   
8,706
 
Wholesale
   
3,768
   
5,250
 
Total
   
12,709
   
13,956
 

Electric gross margin for the first six months of 2005 decreased $26.2 million compared to the first six months of 2004 due primarily to a $25.2 million decrease in the first quarter of 2005. For the first six months of 2005, gross margin on wholesale sales decreased $42.3 million, and gross margin on retail sales decreased $1.3 million. These decreases were partially offset by a $2.5 million increase in transmission revenues and a $13.4 million decrease in MidAmerican Energy’s cost of sales for electric capacity purchases.

Sales of energy to other utilities, municipalities and marketers inside and outside of MidAmerican Energy's delivery system are classified as wholesale. A change in the mix of higher-priced on-peak and lower-priced off-peak sales and a higher average cost of energy caused a decrease in the average electric wholesale margin per megawatt hour sold, reducing electric wholesale gross margin by $23.3 million compared to the first six months of 2004. Additionally, a 28.2% decrease in wholesale sales volumes reduced electric wholesale gross margin by $19.0 million. The timing of planned generation outages, mainly for the Louisa Generating Station, and the loss of generating capacity at the OGS Unit No. 1, which experienced a failure of its step-up transformer on February 20, 2005, resulted in lost wholesale sales opportunities. OGS Unit No. 1 returned to service on May 3, 2005. An increase in electric retail sales also reduced the availability of competitively priced generation, contributing to the decrease in wholesale sales volumes.

In total, electric retail sales volumes increased 2.7% compared to the first six months of 2004. The effect of temperature conditions during the first six months of 2005 compared to the first six months of 2004 resulted in a $5.0 million increase in electric retail gross margin. An increase in the average number of retail customers improved electric retail gross margin by $6.3 million compared to the first six months of 2004, while electricity usage factors not dependent on weather, such as changes in individual customer usage patterns, increased electric margin by $3.9 million. An increase in fuel costs related to Iowa retail electric sales decreased electric retail gross margin by $18.4 million compared to the first six months of 2004 due in part to the cost of replacement power as a result of the generating station outages mentioned above. Revenues from the recovery of energy efficiency program costs increased $2.5 million compared to the first six months of 2004. Changes in these revenues are substantially matched with corresponding changes in other operating expenses.

 
28


Regulated Gas Gross Margin

   
Six Months
 
   
Ended June 30,
 
   
2005
 
2004
 
               
Gross margin (in millions)
             
Operating revenues
 
$
677.4
 
$
567.2
 
Less cost of gas sold
   
554.0
   
444.2
 
Gas gross margin
 
$
123.4
 
$
123.0
 
               
Sales (000’s decatherms):
             
Residential
   
28,685
   
30,507
 
Small general service
   
13,738
   
14,295
 
Large general service
   
2,614
   
1,395
 
Other
   
35
   
174
 
Total retail
   
45,072
   
46,371
 
Wholesale
   
30,942
   
25,882
 
Total
   
76,014
   
72,253
 

Regulated gas revenues include purchased gas adjustment clauses through which MidAmerican Energy is allowed to recover the cost of gas sold from its retail gas utility customers. Consequently, fluctuations in the cost of gas sold do not affect gross margin or net income because revenues reflect comparable fluctuations through the purchased gas adjustment clauses. Compared to the first six months of 2004, MidAmerican Energy’s average per-unit cost of gas sold increased 18.5%, resulting in a $86.6 million increase in cost of gas sold for the first six months. The remainder of the increase in cost of gas sold was due to an increase in sales volumes.

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

   
Six Months
 
   
Ended June 30,
 
   
2005 vs. 2004
 
 
   
(In millions)
 
Change in cost of gas sold:
       
Cost per unit
 
$
86.6
 
Sales volumes
   
23.2
 
Total
   
109.8
 
Weather
   
(2.8
)
Other gas usage factors
   
(1.4
)
Energy efficiency cost recoveries
   
1.7
 
Customer growth
   
2.1
 
Other
   
0.8
 
Total revenue variance
 
$
110.2
 

The decrease in gas gross margin due to weather was the result of mild temperature conditions in the first six months of 2005 compared to the first six months in 2004. Other gas usage factors, such as changes in individual customer usage patterns and reaction to prices, also decreased gas margin. MidAmerican Energy's average number of gas retail customers increased 1.6% compared to the first six months of 2004. Changes in energy efficiency revenues are substantially matched with corresponding changes in other operating expenses.


 
29


Regulated Operating Expenses

Other operating expenses increased $3.2 million compared to the first six months of 2004 due to a $4.2 million increase in costs related to energy efficiency programs and a $2.0 million increase in manufactured gas plant cleanup costs. These increases were partially offset by a $3.5 million decrease in postretirement benefit expense compared to the first six months of 2004 due to the impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 and a plan amendment effective July 1, 2004. Increases in energy efficiency programs costs are substantially matched by increases in related electric and gas revenues.

Maintenance expenses for the first six months of 2005 decreased $2.6 million compared to the first six months of 2004 due principally to a $4.3 million decrease in fossil fuel generating maintenance, mostly as a result of the timing of preventive maintenance, and a $1.1 million increase in distribution maintenance.

Depreciation and amortization expense for the first six months of 2005 decreased $13.0 million compared to the first six months of 2004 due to a $17.0 million decrease in regulatory expense related to a revenue sharing arrangement in Iowa due to lower Iowa electric returns on equity primarily due to lower electric margins. Refer to the “Utility Regulatory Matters” section for an explanation of the revenue sharing arrangement. The decrease in regulatory expense was partially offset by a $4.4 million increase in utility plant depreciation due in part to phase two of the Greater Des Moines Energy Center and a portion of the wind power facilities being placed in service in December 2004.

Nonregulated Gross Margin

   
Six Months
 
   
Ended June 30,
 
   
2005
 
2004
 
 
 
(In millions)
MidAmerican Energy -
             
Nonregulated operating revenues
 
$
136.3
 
$
139.1
 
Less nonregulated cost of sales
   
120.1
   
122.4
 
Nonregulated gross margin
 
$
16.2
 
$
16.7
 
               
MidAmerican Funding Consolidated -
             
Nonregulated operating revenues
 
$
138.7
 
$
141.7
 
Less nonregulated cost of sales
   
120.6
   
123.2
 
Nonregulated gross margin
 
$
18.1
 
$
18.5
 

MidAmerican Energy’s nonregulated retail electric marketing services provide electric supply services to retail customers in Illinois, Ohio and Michigan. Increases in the average revenue and cost per megawatt hour sold combined with a 2.6% increase in nonregulated retail electric sales volumes resulted in increases in related revenues and cost of sales totaling $12.2 million and $13.0 million, respectively.

MidAmerican Energy’s nonregulated gas retail marketing services operate in Iowa, Illinois, Ohio and South Dakota. MidAmerican Energy purchases gas from producers and third party marketers and sells it directly to large commercial end-users. In addition, MidAmerican Energy manages gas supplies for a number of smaller commercial end-users, which includes the sale of gas to these customers to meet their supply requirements. A 29.6% decrease in nonregulated retail gas sales volumes compared to the first six months of 2004, offset partially by increases in the revenue and cost per unit sold, resulted in decreases in related revenues and cost of sales of $16.2 million and $15.2 million, respectively. The decrease in nonregulated retail gas sales volumes was due in large part to the non-renewal of sales contracts as a result of a related regulatory issue in Illinois. Refer to “Rate Matters” for a discussion of the issue.

The decreases in nonregulated gross margin due to nonregulated retail electric and gas sales operations were partially offset by an increase in the gross margin on nonregulated wholesale gas sales and increases in earnings from sharing arrangements related to MidAmerican Energy’s regulated natural gas operations.
 
 
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Other Income

MidAmerican Energy -

As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the FERC. Other income for the capitalized allowance on equity funds used during construction totaled $9.9 million and $7.7 million in the first six months of 2005 and 2004, respectively. MidAmerican Energy expects to continue to record income for the allowance on equity funds used during construction through 2007 while the announced generating facilities are constructed.

MidAmerican Funding -

Other income for the first six months of 2005 includes $9.9 million of gains from the sale of two non-strategic, passive investments. These gains were partially offset by a decrease in income from other alternative energy capital investments.

Fixed Charges

The increase in interest on long-term debt was due to the effect of $350.0 million of MidAmerican Energy long-term debt issued on October 1, 2004, offset partially by maturities of higher rate debt in 2004 and 2005. Other interest expense increased due to a higher balance of the Iowa revenue sharing liability. MidAmerican Energy is allowed to capitalize, and record as a reduction to fixed charges, a cost of construction for debt funds used, based on guidelines set forth by the FERC. Allowance for borrowed funds increased due to increased utility construction expenditures. MidAmerican Energy expects to continue to record allowance for borrowed funds used during construction through 2007 while the announced generating facilities are constructed.

Income Taxes

MidAmerican Energy -

In October 2004, the President signed into law legislation that extends the federal production tax credit for electricity produced by wind energy facilities placed in service prior to January 1, 2006. Accordingly, in 2005, MidAmerican Energy’s income taxes for the six months ended June 30, 2005, were reduced $4.6 million by the production tax credits related to energy produced by its wind power facilities.

State utility rate regulation in Iowa requires that the tax effect of certain timing differences be flowed through immediately to customers. Accordingly, amounts that would otherwise have been recognized in income tax expense have been included as changes in regulatory assets. This flow-through treatment of such timing differences impacts the effective tax rates from year to year, particularly as it related to the federal bonus depreciation deductions associated with the significant generation plant additions in 2004.

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

MidAmerican Funding -

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

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

As reflected on the Consolidated Statements of Cash Flows, MidAmerican Energy’s net cash provided by operating activities was $305.5 million and $328.0 million for the first six months of 2005 and 2004, respectively. MidAmerican Funding’s net cash provided by operating activities was $285.1 million and $313.2 million for the first quarter of 2005 and 2004, respectively. The decrease in cash provided by operating activities for the first six months of 2005 compared to the first six months of 2004 is principally due to an increase in income taxes paid as benefits from bonus depreciation in 2004 were greater than benefits from production tax credits in 2005.

Utility Construction Expenditures

MidAmerican Energy’s primary need for capital is utility construction expenditures. For the first six months of 2005, utility construction expenditures incurred totaled $331.3 million, including allowance for funds used during construction and Quad Cities Station nuclear fuel purchases. Utility construction expenditures include non-cash and accrued amounts, which include $27.3 million in the first six months of 2005 for MidAmerican Energy’s share of deferred payments related to the Council Bluffs Energy Center Unit No. 4 (“CBEC Unit 4”) generation project. Under a contract with the general contractor on that project, MidAmerican Energy is allowed to defer payments, including the other owners’ shares, for up to $200.0 million of billed construction costs through the end of the project. Another non-cash expenditure included in utility construction expenditures relates to a computed cost of equity funds. As a regulated public utility, MidAmerican Energy is allowed to capitalize, and record as income, a cost of construction for equity funds used, based on guidelines set forth by the FERC.

Forecasted utility construction expenditures, including allowance for funds used during construction and completion of the wind power project discussed below, are $856 million for 2005. Capital expenditure needs are reviewed regularly by management and may change significantly as a result of such reviews. MidAmerican Energy expects to meet these capital expenditures with cash flows from operations and the issuance of long-term debt.

MidAmerican Energy anticipates a continuing increase in demand for electricity from its regulated customers. To meet anticipated demand and ensure adequate electric generation in its service territory, MidAmerican Energy is currently constructing CBEC Unit 4, a 790-MW (expected accreditation) super-critical-temperature, coal-fired facility, and a 360-MW (nameplate rating) wind power project in Iowa. The projects will provide service to regulated retail electricity customers. MidAmerican Energy has obtained regulatory approval to include the Iowa portion of the actual costs of the generation projects in its Iowa rate base as long as actual costs do not exceed the agreed caps that MidAmerican Energy has deemed to be reasonable. If the caps are exceeded, MidAmerican Energy has the right to demonstrate the prudence of the expenditures above the caps, subject to regulatory review. Wholesale sales may also be made from the projects to the extent the power is not immediately needed for regulated retail service. MidAmerican Energy expects to invest approximately $1.1 billion in the CBEC Unit 4 and wind generation projects, of which $525.3 million has been invested through June 30, 2005.

MidAmerican Energy will operate CBEC Unit 4 and hold an undivided ownership interest as a tenant in common with the other owners of the plant. MidAmerican Energy's ownership interest is 60.67%, equating to 479 MW of output. MidAmerican Energy expects its share of the estimated cost of the project, including transmission facilities, to be approximately $737 million, excluding allowance for funds used during construction. Municipal, cooperative and public power utilities will own the remainder, which is a typical ownership arrangement for large base-load plants in Iowa. On February 12, 2003, MidAmerican Energy executed a contract with Mitsui & Co. Energy Development, Inc. for engineering, procurement and construction of the plant. On September 9, 2003, MidAmerican Energy began construction of the plant, which it expects to be completed in the summer of 2007. On December 29, 2004, MidAmerican Energy received an order from the IUB approving construction of the associated transmission facilities and is proceeding with construction.

The wind power project currently under construction consists of wind power facilities located at two sites in north central Iowa totaling 360 MW (nameplate rating), including an expected 50-MW expansion of the original project. As of December 31, 2004, wind turbines totaling 160.5 MW at one of the sites were completed and in service. The remaining turbines are expected to be completed in the second half of 2005. Generally speaking, accredited capacity ratings for wind power facilities are considerably less than the nameplate ratings due to the varying nature of wind. The current projected accredited capacity for the 360 MW of wind power facilities is approximately 61 MW. MidAmerican Energy will own and operate these facilities, which, including transmission facilities, are expected to cost approximately $386 million, excluding allowance for funds used during construction. On January 31, 2005, the IUB approved ratemaking principles related to the expansion of the wind power project. Refer to the “Rate Matters” discussion below for information regarding the rate aspects of related settlement agreements.
 
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 Nuclear Decommissioning

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

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

Contractual Obligations and Commercial Commitments

MidAmerican Energy and MidAmerican Funding have various contractual obligations and commercial commitments. There have been no material changes in the amount of such obligations and commitments from what was disclosed in the “Liquidity and Capital Resources” section of MD&A in MidAmerican Energy’s and MidAmerican Funding’s most recently filed Form 10-K.

Debt Redemption and Issuance

MidAmerican Energy’s 7% series of mortgage bonds, totaling $90.5 million, matured on February 15, 2005. MidAmerican Energy expects to issue long-term debt in 2005 to support construction of its electric generation projects and for general corporate purposes.

Debt Authorizations and Credit Facilities

MidAmerican Energy has authority from the FERC to issue through April 14, 2007, short-term debt in the form of commercial paper and bank notes aggregating $500.0 million. MidAmerican Energy currently has in place a $425.0 million revolving credit facility that supports its $304.6 million commercial paper program and its variable rate pollution control revenue obligations. The facility expires November 18, 2009.

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

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

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

Credit Ratings Risks

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

In conjunction with its wholesale marketing and trading activities, MidAmerican Energy must meet credit quality standards as required by counterparties. MidAmerican Energy has energy trading agreements that, in accordance with industry practice, either specifically require it to maintain investment grade credit ratings or provide the right for counterparties to demand “adequate assurances” in the event of a material adverse change in MidAmerican Energy’s creditworthiness. If one or more of MidAmerican Energy’s credit ratings decline below investment grade, MidAmerican Energy may be required to post cash collateral, letters of credit or other similar credit support to facilitate ongoing wholesale marketing and trading activities. As of June 30, 2005, MidAmerican Energy’s estimated potential collateral requirements totaled approximately $104 million. MidAmerican Energy’s collateral requirements could fluctuate considerably due to seasonality, market price volatility, and a loss of key MidAmerican Energy generating facilities or other related factors.

Utility Regulatory Matters

Rate Matters

Under three settlement agreements between MidAmerican Energy, the Iowa Office of Consumer Advocate (“OCA”) and other intervenors approved by the IUB, MidAmerican Energy has agreed not to seek a general increase in electric rates prior to 2012 unless, beginning in 2006, its Iowa jurisdictional electric return on equity for any year falls below 10%. Prior to filing for a general increase in electric rates, MidAmerican Energy is required to conduct 30 days of good faith negotiations with the signatories to the settlement agreements to attempt to avoid a general increase in such rates. As a party to the settlement agreements, the OCA has agreed not to request or support any decrease in MidAmerican Energy’s Iowa electric rates prior to January 1, 2012. The settlement agreements specifically allow the IUB to approve or order electric rate design or cost of service rate changes that could result in changes to rates for specific customers as long as such changes do not result in an overall increase in revenues for MidAmerican Energy. The settlement agreements also each provide that portions of revenues associated with Iowa retail electric returns on equity within specified ranges will be recorded as a regulatory liability.

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

The third settlement agreement was approved by the IUB on January 31, 2005, in conjunction with MidAmerican Energy’s proposed expansion of its wind power project by up to 90 MW. This settlement extended through 2011 MidAmerican Energy’s commitment not to seek a general increase in electric rates unless its Iowa jurisdictional electric return on equity falls below 10%. It also extended the revenue sharing mechanism through 2011. In addition, the OCA agreed to commit not to seek any decrease in Iowa electric base rates to become effective before January 1, 2012. The total capacity added as the result of the wind expansion project is currently projected to be 50 MW.
 
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The regulatory liabilities created by the three settlement agreements are recorded as a regulatory charge in depreciation and amortization expense when the liability is accrued. Additionally, interest expense is accrued on the portion of the regulatory liability balance recorded in prior years. The regulatory liabilities created for the years through 2010 are expected to be reduced as they are credited against plant in service associated with generating plant additions. As a result of the credit applied to generating plant balances from the reduction of the regulatory liabilities, future depreciation will be reduced. As of June 30, 2005 and December 31, 2004, the related regulatory liability reflected on the Consolidated Balance Sheets was $207.2 million and $181.2 million, respectively. The regulatory liability accrued for 2011, if any, will be credited to customer bills in 2012.

In an order issued September 27, 2004, the IUB requires MidAmerican Energy to file various plans to fully equalize and consolidate its class zonal electric rates by the end of each of the years 2007 through 2010. On October 18, 2004, MidAmerican Energy filed a motion for reconsideration opposing full rate equalization and proposing a series of rate reductions. On March 21, 2005, the IUB required MidAmerican Energy to file additional information about potential rate changes concerning phased equalization or consolidation of existing zonal rate differences that could have the effect of bringing rates together on a basis designed to have no impact on the overall revenues MidAmerican Energy receives from its Iowa electric customers. MidAmerican Energy filed the requested information on April 11, 2005. In the same proceeding, MidAmerican Energy has a pending request to reduce rates for some residential customers by approximately $4.0 million in 2008 and $3.0 million in 2009 for a total annualized reduction of $7.0 million in addition to the reductions to be offset by cost decreases related to existing contracts. The $7.0 million reduction in revenues may begin to be offset by a rate increase for other residential customers starting in 2011. The IUB has not taken any action subsequent to MidAmerican Energy’s April 11, 2005 filing.

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

In 2004, the ICC issued a declaratory ruling finding that MidAmerican Energy’s competitive sales of gas to retail customers within the state of Illinois were not authorized under the Illinois Public Utilities Act. In its ruling, the ICC left for subsequent proceedings issues related to the financial implications of these sales. To date, these issues have been addressed by ICC staff in its testimony in the purchased gas adjustment reconciliation proceedings covering 2001 and 2002. In that testimony, the ICC staff expressed its position that MidAmerican Energy must reduce gas costs recovered from Illinois regulated gas customers through the purchased gas adjustment by the gross margins earned from MidAmerican Energy’s Illinois nonregulated retail customers since 1996. Gross margin is the difference between the revenue and the related cost of gas for MidAmerican Energy’s nonregulated sales of gas to retail customers in the entire state of Illinois. The ICC has not yet ruled in either case. In addition, MidAmerican Energy believes it is possible that the gross margins earned in earlier periods in final purchased gas adjustment reconciliation proceedings back to 1996 may be subject to challenge. If the ICC accepts the adjustments proposed by its staff and makes the same adjustment for the years 2003 - 2004, the total cumulative adjustment through November 30, 2004, including the adjustments since 1996, would be $7.8 million. In its declaratory ruling, the ICC decided to open a separate proceeding, in addition to the purchased gas adjustment reconciliation proceedings, to determine an appropriate remedy to impose upon MidAmerican Energy for making competitive sales throughout the state of Illinois without statutory or regulatory authorization. In its order initiating this separate proceeding, the ICC stated there would not be any further litigation of the ICC conclusions arrived at in the declaratory ruling proceeding, despite the lack of an evidentiary hearing in that proceeding. The ruling of the ICC in the declaratory ruling proceeding, including its determination not to conduct an evidentiary hearing, is now on appeal in the Illinois Appellate Court. Additional grounds of appeal are whether the ICC misinterpreted its authority in ruling that the Illinois Public Utilities Act does not authorize competitive sales of gas, whether MidAmerican Energy was retroactively authorized to make these sales as a result of passage of SB 2525, and whether the ruling interferes with MidAmerican Energy’s rights to use nonpublic utility assets.
 
35

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

Transmission Developments

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

If implemented, the FERC’s July 2002 proposed rule for SMD would have required sweeping changes to the use and expansion of the interstate transmission and wholesale bulk power systems in the United States. On July 19, 2005, the FERC issued an order terminating the rulemaking. Nevertheless, it is likely that there will be further regulatory actions by the FERC impacting the provision of transmission services. Any FERC action could impact the costs of MidAmerican Energy’s electricity and transmission products. Such FERC action could directly or indirectly influence how transmission services are priced, the availability of transmission services, how transmission services are obtained, and market prices for electricity in markets in which MidAmerican Energy buys and sells electricity. Although MidAmerican Energy is not presently a member of an RTO, three RTO’s - Midwest Independent Transmission System Operator, Inc., PJM Interconnection L.L.C. and Southwest Power Pool, Inc. - are directly interconnected with MidAmerican Energy’s transmission facilities. MidAmerican Energy cannot predict what impact, if any, the evolution of these RTO’s, or others, may have on how transmission services and wholesale electricity is bought and sold, as well as the geographic scope of the marketplace in which MidAmerican Energy buys and sells transmission services and wholesale electricity.

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

On June 22, 2005, MidAmerican Energy made a filing with the FERC requesting its approval to establish a transmission service coordinator (“TSC”). The TSC would be an outsource administrator of various MidAmerican Energy Open Access Transmission Tariff-related functions for transmission service. If approved, MidAmerican Energy will enter into a contract with a to-be-determined independent contractor that would become responsible for many day-to-day transmission operation services. In addition, the TSC would assume some oversight responsibilities and participate in the transmission planning process. MidAmerican Energy envisions entering into a three-year contract with a TSC. While the costs of entering into a contract with the TSC are unknown, at this time, MidAmerican Energy does not believe that the incremental costs will have a material impact on its results of operations, financial position or cash flows. Any TSC selected would not likely commence service until the latter half of 2006.

Electric Trading Developments

On July 13, 2004, the FERC issued an order requiring MidAmerican Energy to conduct a study to determine whether MidAmerican Energy or its affiliates possess generation market power. MidAmerican Energy is being required to show the absence of generation market power in order to be allowed to continue to sell wholesale electric power at market-based rates. The FERC order is intended to have MidAmerican Energy conform to what has become the FERC’s general practice for utilities given authorization to make wholesale market-based sales. Under this general practice, utilities authorized to make market-based electric sales must submit a new market power study to the FERC every three years. MidAmerican Energy filed the required study on October 29, 2004. On June 1, 2005, the FERC issued an order setting for investigation the reasonableness of MidAmerican Energy’s market-based rates within its control area. The order also terminated the previously established November 1, 2004, refund date and required market-based sales made by MidAmerican Energy within its control area beginning August 7, 2005, be subject to refund until the matter is resolved. The FERC also required MidAmerican Energy to file additional information by August 1, 2005. MidAmerican Energy does not expect the outcome of this issue to have a material effect on its results of operations, financial position or cash flows.
 
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Environmental Matters

MidAmerican Energy’s generating facilities are subject to applicable provisions of the Clean Air Act and related air quality standards promulgated by the United States Environmental Protection Agency (“EPA”). The Clean Air Act provides the framework for regulation of certain air emissions and permitting and monitoring associated with those emissions. MidAmerican Energy believes it is in material compliance with current air quality requirements. Refer to Note (3)(a) of Notes to Consolidated Financial Statements in this Form 10-Q for further discussion of air quality standards affecting MidAmerican Energy.

On February 16, 2005, the Kyoto Protocol became effective, requiring 35 developed countries to reduce greenhouse gas emissions by approximately 5% between 2008 and 2012. While the United States did not ratify the protocol, the ratification and implementation of its requirements in other countries has resulted in increased attention on the climate change issue in the United States. Several amendments were introduced to the Senate energy bill relating to climate change. A proposed amendment to include the Climate Stewardship Act was defeated in the Senate that would have mandated reductions in greenhouse emissions. The Senate did, however, adopt a “sense of the Senate” resolution that puts the Senate on record that Congress should enact a comprehensive and effective national program of mandatory, market-based limits and incentives on emissions of greenhouse gases that slow, stop, and reverse the growth of such emissions at a rate and in a manner that will not significantly harm the United States economy; and will encourage comparable action by other nations that are major trading partners and key contributors to global emissions. It is anticipated that the resolution will be further addressed in the fall of 2005.

The United States Circuit Court of Appeals for the District of Columbia dismissed a lawsuit on July 15, 2005, that sought to force the EPA to issue mandatory controls for carbon dioxide and other greenhouse gas emissions from new cars and trucks. Litigation is currently pending before the federal district court for the southern district of New York seeking to require reductions of carbon dioxide emissions from generating facilities of five large electric utilities. While debate continues at the national level over the direction of domestic climate policy, several states are developing state-specific or regional legislative initiatives to reduce greenhouse gas emissions. The outcome of climate change litigation and federal and state initiatives cannot be determined at this time; however, adoption of stringent limits on greenhouse gas emissions could significantly impact MidAmerican Energy’s facilities and, therefore, its results of operations.

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

MidAmerican Energy has evaluated all known properties that were, at one time, sites of gas manufacturing plants for which it may be a potentially responsible party. The purpose of these evaluations was to determine whether waste materials are present, whether the materials constitute an environmental or health risk, and whether MidAmerican Energy has any responsibility for remedial action. As of June 30, 2005, MidAmerican Energy has recorded a $5.4 million liability for these sites and a corresponding regulatory asset for future recovery through the regulatory process. Refer to Note (3)(c) of Notes to Consolidated Financial Statements in this Form 10-Q for further discussion of MidAmerican Energy’s environmental activities related to manufactured gas plant sites and cost recovery.

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

Generating Capability

In August 2003, retail customer usage of electricity caused a record hourly peak demand of 3,935 MW on MidAmerican Energy’s electric system. For the 2004 cooling season, MidAmerican Energy’s hourly peak demand was 3,894 MW on July 20, 2004. MidAmerican Energy is interconnected with Iowa and neighboring utilities and is party to an electric generation and transmission pooling agreement administered by the Mid-Continent Area Power Pool (“MAPP”). Each MAPP participant is required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. For the 2004 cooling season, MidAmerican Energy’s reserve was approximately 26% above its system peak demand.
 
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MidAmerican Energy believes it has adequate electric capacity reserve through 2009, including capacity provided by the generating projects discussed above. However, significantly higher-than-normal temperatures during the cooling season could cause MidAmerican Energy’s reserve to fall below the 15% minimum. If MidAmerican Energy fails to maintain the appropriate reserve, significant penalties could be contractually imposed by the MAPP.

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

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

New Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies that the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. MidAmerican Energy and MidAmerican Funding are required to adopt the provisions of FIN 47 by December 2005. Adoption of FIN 47 is not expected to have a material effect on MidAmerican Energy’s or MidAmerican Funding’s financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

MidAmerican Energy’s and MidAmerican Funding’s significant accounting policies are described in their respective Note (1) of Notes to Consolidated Financial Statements in Item 8 of their most recently filed Annual Report on Form 10-K. For a discussion of their critical accounting policies and estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in their most recently filed Annual Report on Form 10-K. MidAmerican Energy’s and MidAmerican Funding’s critical accounting policies have not changed materially since December 31, 2004.


MidAmerican Energy’s exposure to market risk has not changed materially from its risk as of December 31, 2004. The scope of its use of financial instruments for both hedging and proprietary trading purposes has also not changed materially from December 31, 2004. MidAmerican Energy trades financial instruments that are almost entirely exchange-traded or have prices that are actively quoted. Reference is made to MidAmerican Energy’s and MidAmerican Funding’s most recently filed Form 10-K, and in particular, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, and Notes (1)(i) and (12) in Notes to Consolidated Financial Statements in Item 8 of that report.


With the supervision and participation of MidAmerican Funding’s and MidAmerican Energy’s management, including the respective persons acting as chief executive officer and chief financial officer, each company performed an evaluation regarding the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2005. Based on that evaluation, MidAmerican Funding’s and MidAmerican Energy’s management, including the respective persons acting as chief executive officer and chief financial officer, concluded that their respective disclosure controls and procedures were effective. There have been no changes during the quarter covered by this report in MidAmerican Funding’s or MidAmerican Energy’s internal control over financial reporting that has materially affected, or is reasonably likely to material affect, its internal control over financial reporting.
 
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MidAmerican Energy is one of dozens of companies named as defendants in a January 20, 2004 consolidated class action lawsuit filed in the United States District Court for the Southern District of New York. The suit alleges that the defendants have engaged in unlawful manipulation of the prices of natural gas futures and options contracts traded on the New York Mercantile Exchange (“NYMEX”) during the period of January 1, 2000 to December 31, 2002. MidAmerican Energy is mentioned as a company that has engaged in wash trades on Enron Online (an electronic trading platform) that had the effect of distorting prices for gas trades on the NYMEX. The plaintiffs to the class action do not specify the amount of alleged damages. At this time MidAmerican Energy does not believe that it has any material exposure in this lawsuit.

The original complaint in this matter, Cornerstone Propane Partners, L.P. v. Reliant, et al. (“Cornerstone”), was filed on August 18, 2003 in the United States District Court, Southern District of New York naming MidAmerican Energy. On October 1, 2003, a second complaint, Roberto, E. Calle Gracey, et al. (“Calle Gracey”), was filed in the same court but did not name MidAmerican Energy. On November 14, 2003, a third complaint, Dominick Viola (“Viola”), et al., was filed in the same court and named MidAmerican Energy as a defendant. On December 5, 2003, the court entered Pretrial Order No. 1, which among other procedural matters, ordered the consolidation of the Cornerstone, Calle Gracey and Viola complaints and permitted plaintiffs to file an amended complaint in this matter. On January 20, 2004, plaintiffs filed In Re: Natural Gas Commodity Litigation as the amended complaint reasserting their previous allegations. On February 19, 2004, MidAmerican Energy filed a Motion to Dismiss and joined with several other defendants to file a joint Motion to Dismiss. The plaintiffs filed a response on May 19, 2004, contesting both Motions to Dismiss. On September 24, 2004, the pending motions to dismiss were denied. On October 14, 2004, plaintiffs filed an amended complaint to add certain defendants’ affiliates as defendants and reasserted their previous allegations. MidAmerican Energy and the other defendants filed their respective answers to the complaint on October 28, 2004. Plaintiffs filed a motion for class actions certification on January 25, 2005, and defendants filed their opposition on April 8, 2005. MidAmerican Energy will continue to coordinate with the other defendants and vigorously defend the allegations against it.

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


Not applicable.


Not applicable.


Not applicable.


Not applicable.

Item 6.

Reference is made to the accompanying Exhibit Index for a list of exhibits filed as a part of this Quarterly Report.
 
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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
 
MIDAMERICAN ENERGY COMPANY
 
(Registrants)
   
   
   
Date: August 10, 2005
/s/ Patrick J. Goodman
 
Patrick J. Goodman
 
Vice President and Treasurer
 
of MidAmerican Funding, LLC
 
(principal financial and accounting officer)
   
   
   
 
/s/ Thomas B. Specketer
 
Thomas B. Specketer
 
Vice President and Controller
 
of MidAmerican Energy Company
 
(principal financial and accounting officer)


 
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Exhibit No.
Description
   
MidAmerican Energy
   
15
Awareness Letter of Independent Registered Pubic Accounting Firm
   
31.1
Chief executive officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Chief financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Chief executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Chief financial officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
MidAmerican Funding
   
31.3
Chief executive officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.4
Chief financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.3
Chief executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.4
Chief financial officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
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