MIDAMERICAN FUNDING LLC - 10-Q Quarterly Report

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
------------------

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

333-90553 MIDAMERICAN FUNDING, LLC 47-0819200
(AN IOWA LIMITED LIABILITY COMPANY)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300

1-11505 MIDAMERICAN ENERGY COMPANY 42-1425214
(AN IOWA CORPORATION)
666 GRAND AVE. PO BOX 657
DES MOINES, IOWA 50303
515-242-4300

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

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

As of October 31, 2002, all 70,980,203 outstanding shares of MidAmerican Energy
Company's voting stock were held by its parent company, MHC Inc., a direct,
wholly owned subsidiary of MidAmerican Funding, LLC.

MIDAMERICAN FUNDING, LLC
AND
MIDAMERICAN ENERGY COMPANY
FORM 10-Q

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION PAGE NO.

ITEM 1. Financial Statements

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

MidAmerican Energy Company

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

MidAmerican Funding, LLC

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

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

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

PART II. OTHER INFORMATION

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

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

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

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

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

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INDEPENDENT ACCOUNTANTS' REPORT

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

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

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Energy Company
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

DELOITTE & TOUCHE LLP

Des Moines, Iowa
October 25, 2002

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INDEPENDENT ACCOUNTANTS' REPORT

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

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

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet and
statement of capitalization (not presented herein) of MidAmerican Funding, LLC
and subsidiaries as of December 31, 2001, and the related consolidated
statements of income, comprehensive income, retained earnings, and cash flows
for the year then ended (not presented herein); and in our report dated January
17, 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2001 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

DELOITTE & TOUCHE LLP

Des Moines, Iowa
October 25, 2002

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

The accompanying notes are an integral part of these statements.

-5-

The accompanying notes are an integral part of these statements.

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

The accompanying notes are an integral part of these statements.

-7-

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

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

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

B. ENVIRONMENTAL MATTERS:

(1) MANUFACTURED GAS PLANT FACILITIES -

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

MidAmerican Energy has evaluated or is evaluating 27 properties that were,
at one time, sites of gas manufacturing plants in which it may be a potentially
responsible party. The purpose of these evaluations is to determine whether
waste materials are present, whether the materials constitute an environmental
or health risk, and whether MidAmerican Energy has any responsibility for
remedial action. Investigations of the sites are at various stages, and
MidAmerican Energy has conducted ten removal actions to date. MidAmerican Energy
is continuing to evaluate several of the sites to determine the appropriate site
remedies, if any, necessary to obtain site closure from the agencies.

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

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

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investigation and remedial activities. The estimated recorded liabilities for
these properties include incremental direct costs of the remediation effort and
oversight by the appropriate regulatory authority, costs for future monitoring
at sites and costs of compensation to employees for time expected to be spent
directly on the remediation effort. The estimated recorded liability could
change materially based on facts and circumstances derived from site
investigations, changes in required remedial action and changes in technology
relating to remedial alternatives. Insurance recoveries have been received for
some of the sites under investigation. Those recoveries are intended to be used
principally for accelerated remediation, as specified by the Iowa Utilities
Board, and are recorded as a regulatory liability. Additionally, as viable
potentially responsible parties are identified, those parties are evaluated for
potential contributions, and cost recovery is pursued when appropriate.

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

(2) AIR QUALITY -

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

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

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

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

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C. RATE MATTERS:

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

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

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

D. DERIVATIVE FINANCIAL INSTRUMENTS:

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

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

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

-10-

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

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

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

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

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

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

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

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

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

E. SEGMENT INFORMATION:

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

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

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

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

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F. TOTAL COMPREHENSIVE INCOME:

For the nine months ended September 30, 2002 and 2001, MidAmerican Energy's
total comprehensive income was $137.8 million and $147.2 million, respectively.
For the three months ended September 30, 2002 and 2001, MidAmerican Energy's
total comprehensive income was $68.5 million and $54.8 million, respectively.
The differences from Earnings on Common Stock for the periods presented are due
to the effective portion of net gains and losses on MidAmerican Energy's
derivative instruments classified as cash flow hedges. Accumulated other
comprehensive loss, net, which also includes recognition of the minimum pension
liability adjustment, was $6.5 million and $3.8 million as of September 30,
2002, and December 31, 2001, respectively.

G. POWER PURCHASE CONTRACT RESTRUCTURING:

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

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

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

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

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

The accompanying notes are an integral part of these statements.

-15-

MIDAMERICAN FUNDING, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

The accompanying notes are an integral part of these statements.

-16-

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

The accompanying notes are an integral part of these statements.

-17-

MIDAMERICAN FUNDING, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. GENERAL:

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

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

B. ENVIRONMENTAL MATTERS:

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

C. RATE MATTERS:

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

D. DERIVATIVE FINANCIAL INSTRUMENTS:

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

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

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E. SEGMENT INFORMATION:

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

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

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

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

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

F. TOTAL COMPREHENSIVE INCOME:

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

G. POWER PURCHASE CONTRACT RESTRUCTURING:

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

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

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

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

-21-

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

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

-22-

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

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

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

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

FORWARD-LOOKING STATEMENTS

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

-23-

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

REGULATED GROSS MARGIN

Regulated Electric Gross Margin -

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

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

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

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

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

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

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

-24-

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

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

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

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

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

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

Regulated Gas Gross Margin -

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

Regulated gas revenues include purchase gas adjustment clauses through
which MidAmerican Energy is allowed to recover the cost of gas sold from most of
its gas utility customers. Consequently, fluctuations in the cost of gas sold do
not affect gross margin or net income because revenues reflect comparable
fluctuations through the purchase gas adjustment clauses. A decrease in the
per-unit cost of gas compared to 2001 decreased revenues and cost of gas sold by
approximately $214 million for the first nine months of 2002.

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

-25-

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

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

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

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

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

REGULATED OPERATING EXPENSES

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

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

-26-

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

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

NONREGULATED GROSS MARGIN

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

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

-27-

MidAmerican Energy -

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

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

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

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

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

-28-

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

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

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

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

MidAmerican Funding:

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

NONREGULATED OPERATING EXPENSES: OTHER

MidAmerican Energy -

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

MidAmerican Funding -

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

-29-

INTEREST AND DIVIDEND INCOME

MidAmerican Energy -

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

MidAmerican Funding -

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

MARKETABLE SECURITIES GAINS AND LOSSES, NET

MidAmerican Funding -

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

OTHER INCOME AND EXPENSE

MidAmerican Energy -

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

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

-30-

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

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

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

MidAmerican Funding -

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

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

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

-31-

FIXED CHARGES AND PREFERRED DIVIDENDS

MidAmerican Energy -

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

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

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

MidAmerican Funding -

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

-32-

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

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

As reflected on the Consolidated Statements of Cash Flows, MidAmerican
Energy's net cash provided from operating activities was $396 million and $461
million for the nine months ended September 30, 2002 and 2001, respectively.
MidAmerican Funding's net cash provided from operating activities was $359
million and $440 million for the nine months ended September 30, 2002 and 2001,
respectively.

INVESTING ACTIVITIES AND PLANS

Utility Construction Expenditures -

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

Forecasted utility construction expenditures, including allowance for funds
used during construction are $382 million for 2002 and $1.614 billion for 2003
through 2006. Capital expenditure needs are reviewed regularly by management and
may change significantly as a result of such reviews. Through 2007, MidAmerican
Energy plans to develop and construct two electric generating plants in Iowa.
Both plants would provide service to regulated retail electricity customers and
b