10-Q 1 llcmec93012form10-q.htm 10-Q LLC/MEC 9.30.12 Form 10-Q


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 September 30, 2012

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 Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
 
 
 
333-15387
 
MIDAMERICAN ENERGY COMPANY
 
42-1425214
 
 
(An Iowa Corporation)
 
 
 
 
666 Grand Avenue, Suite 500
 
 
 
 
Des Moines, Iowa 50309-2580
 
 
 
 
 
 
 
(515) 242-4300
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
MidAmerican Funding, LLC
Yes S No £
 
MidAmerican Energy Company
Yes S  No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
MidAmerican Funding, LLC
Yes S No £
 
MidAmerican Energy Company
Yes S  No £

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers or smaller reporting companies. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer £
Accelerated filer £
Non-accelerated filer S
Smaller reporting company £

Indicate by check mark whether either registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  £            No  S




All of the member's equity of MidAmerican Funding, LLC was held by its parent company, MidAmerican Energy Holdings Company as of October 31, 2012.

All common stock of MidAmerican Energy Company is held by its parent company, MHC Inc., which is a direct, wholly owned subsidiary of MidAmerican Funding, LLC. As of October 31, 2012, 70,980,203 shares of MidAmerican Energy Company common stock, without par value, were outstanding.

MidAmerican Funding, LLC and MidAmerican Energy Company 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 subsidiaries, MidAmerican Energy Company makes no representation as to information relating to any other subsidiary of MidAmerican Funding, LLC.


TABLE OF CONTENTS

PART I



i



Definition of Abbreviations and Industry Terms

When used in Part I, Items 2 through 4, and Part II, Items 1 through 6, the following terms have the definitions indicated.
Companies
 
 
MEHC
 
MidAmerican Energy Holdings Company
MidAmerican Funding
 
MidAmerican Funding, LLC
MidAmerican Energy
 
MidAmerican Energy Company
Berkshire Hathaway
 
Berkshire Hathaway Inc. and its subsidiaries
 
 
 
Certain Industry Terms
 
 
AFUDC
 
Allowance for Funds Used During Construction
Dodd-Frank Reform Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
DSM
 
Demand-side Management
Dth
 
Decatherms
EPA
 
United States Environmental Protection Agency
FERC
 
Federal Energy Regulatory Commission
GHG
 
Greenhouse Gases
GWh
 
Gigawatt Hours
IUB
 
Iowa Utilities Board
MW
 
Megawatts

Forward-Looking Statements

This report contains statements that do not directly or exclusively relate to historical facts. These statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can typically be identified by the use of forward-looking words, such as "will," "may," "could," "project," "believe," "anticipate," "expect," "estimate," "continue," "intend," "potential," "plan," "forecast" and similar terms. These statements are based upon MidAmerican Funding's and MidAmerican Energy's current intentions, assumptions, expectations and beliefs and are subject to risks, uncertainties and other important factors. Many of these factors are outside the control of MidAmerican Funding or MidAmerican Energy and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include, among others:

general economic, political and business conditions, as well as, changes in laws and regulations affecting MidAmerican Energy's operations or related industries;
changes in, and compliance with, environmental laws, regulations, decisions and policies that could, among other items, increase operating and capital costs, reduce generating facility output, accelerate generating facility retirements or delay generating facility construction or acquisition;
the outcome of general rate cases and other proceedings conducted by regulatory commissions or other governmental and legal bodies and MidAmerican Energy's ability to recover costs in rates in a timely manner;
changes in economic, industry, competition or weather conditions, as well as demographic trends, that could affect customer growth and usage, electricity and natural gas supply or MidAmerican Energy's ability to obtain long-term contracts with customers and suppliers;
a high degree of variance between actual and forecasted load that could impact MidAmerican Energy's hedging strategy and the cost of balancing its generation resources with its retail load obligations and wholesale transactions;
performance and availability of MidAmerican Energy's generating facilities, including the impacts of outages and repairs, transmission constraints, weather and operating conditions;
changes in prices, availability and demand for both purchases and sales of wholesale electricity, coal, natural gas, other fuel sources and fuel transportation that could have a significant impact on generating capacity and energy costs;

ii



the financial condition and creditworthiness of MidAmerican Energy's significant customers and suppliers;
changes in business strategy or development plans;
availability, terms and deployment of capital, including reductions in demand for investment grade commercial paper, debt securities and other sources of debt financing and volatility in the London Interbank Offered Rate, the base interest rate for MidAmerican Energy's credit facilities;
changes in MidAmerican Energy's credit ratings;
risks relating to nuclear generation;
the impact of derivative contracts used to mitigate or manage volume, price and interest rate risk, including increased collateral requirements, and changes in commodity prices, interest rates and other conditions that affect the fair value of derivative contracts;
the impact of inflation on costs and MidAmerican Energy's ability to recover such costs in regulated rates;
increases in employee healthcare costs;
the impact of investment performance and changes in interest rates, legislation, healthcare cost trends, mortality and morbidity on pension and other postretirement benefits expense and funding requirements;
unanticipated construction delays, changes in costs, receipt of required permits and authorizations, ability to fund capital projects and other factors that could affect future generating facilities and infrastructure additions;
the impact of new accounting guidance or changes in current accounting estimates and assumptions on MidAmerican Funding's or MidAmerican Energy's consolidated financial results;
other risks or unforeseen events, including the effects of storms, floods, fires, explosions, litigation, wars, terrorism, embargoes and other catastrophic events; and
other business or investment considerations that may be disclosed from time to time in MidAmerican Funding's or MidAmerican Energy's filings with the United States Securities and Exchange Commission or in other publicly disseminated written documents.
Further details of the potential risks and uncertainties affecting MidAmerican Funding or MidAmerican Energy are described in their filings with the United States Securities and Exchange Commission, including Part II, Item 1A and other discussions contained in this Form 10-Q. MidAmerican Funding and MidAmerican Energy undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing factors should not be construed as exclusive.


iii



PART I

Item 1.
Financial Statements


MidAmerican Energy Company and Subsidiaries

1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholder of
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, 2012, and the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011, and of changes in equity and cash flows for the nine-month periods ended September 30, 2012 and 2011. 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 consolidated statement of capitalization (not presented herein) of MidAmerican Energy Company and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, cash flows, changes in equity, and comprehensive income for the year then ended (not presented herein); and in our report dated February 27, 2012, 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, 2011 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
November 2, 2012

2



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)
 
As of
 
September 30,
2012
 
December 31,
2011
ASSETS
Utility plant, net:
 
 
 
Electric
$
11,020

 
$
10,587

Gas
1,284

 
1,255

Gross utility plant in service
12,304

 
11,842

Accumulated depreciation and amortization
(4,336
)
 
(4,120
)
Utility plant in service, net
7,968

 
7,722

Construction work in progress
414

 
173

Total utility plant, net
8,382

 
7,895

Current assets:
 
 
 
Cash and cash equivalents
375

 
1

Receivables, net
370

 
373

Income taxes receivable
10

 
272

Inventories
236

 
201

Other
51

 
57

Total current assets
1,042

 
904

Other assets:
 
 
 
Investments and nonregulated property, net
544

 
503

Regulatory assets
867

 
831

Other
146

 
177

Total other assets
1,557

 
1,511

Total assets
$
10,981

 
$
10,310

CAPITALIZATION AND LIABILITIES
Capitalization:
 

 
 

MidAmerican Energy common shareholder's equity
$
3,546

 
$
3,244

Preferred securities
27

 
27

Noncontrolling interests
1

 
1

Long-term debt
3,154

 
3,115

Total capitalization
6,728

 
6,387

Current liabilities:
 
 
 
Accounts payable
364

 
313

Taxes accrued
237

 
107

Interest accrued
29

 
34

Other
137

 
119

Total current liabilities
767

 
573

Other liabilities:
 
 
 
Deferred income taxes
2,083

 
1,918

Asset retirement obligations
311

 
293

Regulatory liabilities
747

 
719

Other
345

 
420

Total other liabilities
3,486

 
3,350

Total capitalization and liabilities
$
10,981

 
$
10,310


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

3



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating revenue:
 
 
 
 
 
 
 
Regulated electric
$
511

 
$
487

 
$
1,295

 
$
1,276

Regulated gas
87

 
99

 
441

 
562

Nonregulated
227

 
280

 
672

 
811

Total operating revenue
825

 
866

 
2,408

 
2,649

 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
Regulated:
 
 
 
 
 
 
 
Cost of fuel, energy and capacity
136

 
146

 
345

 
383

Cost of gas sold
44

 
56

 
275

 
378

Other operating expenses
107

 
97

 
309

 
304

Maintenance
52

 
48

 
150

 
142

Depreciation and amortization
106

 
78

 
299

 
247

Property and other taxes
27

 
29

 
86

 
87

Total regulated operating costs and expenses
472

 
454

 
1,464

 
1,541

Nonregulated:
 
 
 
 
 
 
 
Cost of sales
207

 
256

 
612

 
740

Other
7

 
8

 
20

 
21

Total nonregulated operating costs and expenses
214

 
264

 
632

 
761

Total operating costs and expenses
686

 
718

 
2,096

 
2,302

 
 
 
 
 
 
 
 
Operating income
139

 
148

 
312

 
347

 
 
 
 
 
 
 
 
Non-operating income:
 
 
 
 
 
 
 
Interest income

 

 
1

 
1

Allowance for equity funds
5

 
7

 
10

 
12

Other, net
3

 
(1
)
 
7

 
2

Total non-operating income
8

 
6

 
18

 
15

 
 
 
 
 
 
 
 
Fixed charges:
 
 
 
 
 
 
 
Interest on long-term debt
34

 
40

 
107

 
117

Other interest expense

 

 
1

 
1

Allowance for borrowed funds
(2
)
 
(3
)
 
(4
)
 
(5
)
Total fixed charges
32

 
37

 
104

 
113

 
 
 
 
 
 
 
 
Income before income tax (benefit) expense
115

 
117

 
226

 
249

Income tax (benefit) expense
(25
)
 
10

 
(69
)
 
19

 
 
 
 
 
 
 
 
Net income
140

 
107

 
295

 
230

Preferred dividends

 

 
1

 
1

 
 
 
 
 
 
 
 
Earnings on common stock
$
140

 
$
107

 
$
294

 
$
229


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

4



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Amounts in millions)

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income
$
140

 
$
107

 
$
295

 
$
230

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gains on available-for-sale securities, net of tax of $-, $-, $1 and $-
1

 

 
1

 
1

Unrealized gains on cash flow hedges, net of tax of $10, $3, $4 and $12
14

 
4

 
7

 
16

Total other comprehensive income, net of tax
15

 
4

 
8

 
17

 
 
 
 
 
 
 
 
Comprehensive income
$
155

 
$
111

 
$
303

 
$
247


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


5



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(Amounts in millions)

 
MidAmerican Energy Shareholders' Equity
 
 
 
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss, Net
 
Preferred
Securities
 
Noncontrolling
Interests
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2010
$
562

 
$
2,398

 
$
(29
)
 
$
27

 
$
1

 
$
2,959

Net income

 
230

 

 

 

 
230

Other comprehensive income

 

 
17

 

 

 
17

Preferred dividends

 
(1
)
 

 

 

 
(1
)
Balance, September 30, 2011
$
562

 
$
2,627

 
$
(12
)
 
$
27

 
$
1

 
$
3,205

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
$
562

 
$
2,716

 
$
(34
)
 
$
27

 
$
1

 
$
3,272

Net income

 
295

 

 

 

 
295

Other comprehensive income

 

 
8

 

 

 
8

Preferred dividends

 
(1
)
 

 

 

 
(1
)
Balance, September 30, 2012
$
562

 
$
3,010

 
$
(26
)
 
$
27

 
$
1

 
$
3,574


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

6



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in millions)

 
Nine-Month Periods
 
Ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
295

 
$
230

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
299

 
247

Deferred income taxes and amortization of investment tax credits
90

 
166

Changes in other assets and liabilities
35

 
23

Other, net
(9
)
 
(7
)
Changes in other operating assets and liabilities:
 
 
 
Receivables, net
44

 
57

Inventories
(36
)
 
(27
)
Derivative collateral, net
9

 
(11
)
Contributions to pension and other postretirement benefit plans, net
(54
)
 
(42
)
Accounts payable
2

 
(43
)
Taxes accrued
416

 
(39
)
Other current assets and liabilities
13

 
11

Net cash flows from operating activities
1,104

 
565

 
 
 
 
Cash flows from investing activities:
 
 
 
Utility construction expenditures
(445
)
 
(397
)
Purchases of available-for-sale securities
(46
)
 
(64
)
Proceeds from sales of available-for-sale securities
32

 
61

Other, net
13

 
11

Net cash flows from investing activities
(446
)
 
(389
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Dividends
(1
)
 
(1
)
Repayments of long-term debt
(283
)
 

Net cash flows from financing activities
(284
)
 
(1
)
 
 
 
 
Net change in cash and cash equivalents
374

 
175

Cash and cash equivalents at beginning of period
1

 
203

Cash and cash equivalents at end of period
$
375

 
$
378


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


7



MIDAMERICAN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)
General

MidAmerican Energy Company ("MidAmerican Energy") is a public utility with electric and natural gas operations and is the principal subsidiary of MHC Inc. ("MHC"). MHC is a holding company that conducts no business other than the ownership of its subsidiaries, which include the following nonregulated subsidiaries: Midwest Capital Group, Inc. and MEC Construction Services Co. MHC is the direct, wholly owned subsidiary of MidAmerican Funding, LLC ("MidAmerican Funding"), which is an Iowa limited liability company with MidAmerican Energy Holdings Company ("MEHC") as its sole member. MEHC is a consolidated subsidiary of Berkshire Hathaway Inc.

The unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the United States Securities and Exchange Commission's rules and regulations for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements. Management believes the unaudited Consolidated Financial Statements contain all adjustments (consisting only of normal recurring adjustments) considered necessary for the fair presentation of the Consolidated Financial Statements as of September 30, 2012, and for the three- and nine-month periods ended September 30, 2012 and 2011. The results of operations for the three- and nine-month periods ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year.

The preparation of the unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the period. Actual results may differ from the estimates used in preparing the unaudited Consolidated Financial Statements. Note 2 of Notes to Consolidated Financial Statements included in MidAmerican Energy's Annual Report on Form 10-K for the year ended December 31, 2011, describes the most significant accounting policies used in the preparation of the Consolidated Financial Statements. There have been no significant changes in MidAmerican Energy's assumptions regarding significant accounting estimates and policies during the nine-month period ended September 30, 2012.

(2)
New Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11, which amends FASB Accounting Standards Codification ("ASC") Topic 210, "Balance Sheet." The amendments in this guidance require an entity to provide quantitative disclosures about offsetting financial instruments and derivative instruments. Additionally, this guidance requires qualitative and quantitative disclosures about master netting agreements or similar agreements when the financial instruments and derivative instruments are not offset. This guidance is effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those fiscal years. MidAmerican Energy is currently evaluating the impact of adopting this guidance on its disclosures included within Notes to Consolidated Financial Statements.

In June 2011, the FASB issued ASU No. 2011-05, which amends FASB ASC Topic 220, "Comprehensive Income." ASU No. 2011-05 provides an entity with the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of the option chosen, this guidance also requires presentation of items on the face of the financial statements that are reclassified from other comprehensive income to net income. This guidance does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income or how tax effects of each item of other comprehensive income are presented. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, which also amends FASB ASC Topic 220 to defer indefinitely the ASU No. 2011-05 requirement to present items on the face of the financial statements that are reclassified from other comprehensive income to net income. ASU No. 2011-12 is also effective for interim and annual reporting periods beginning after December 15, 2011. MidAmerican Energy adopted this guidance on January 1, 2012 and elected the two separate but consecutive statements option.


8



In May 2011, the FASB issued ASU No. 2011‑04, which amends FASB ASC Topic 820, "Fair Value Measurements and Disclosures." The amendments in this guidance are not intended to result in a change in current accounting. ASU No. 2011‑04 requires additional disclosures relating to fair value measurements categorized within Level 3 of the fair value hierarchy, including quantitative information about unobservable inputs, the valuation process used by the entity and the sensitivity of unobservable input measurements. Additionally, entities are required to disclose the level of the fair value hierarchy for assets and liabilities that are not measured at fair value in the balance sheet, but for which disclosure of the fair value is required. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011. MidAmerican Energy adopted ASU No. 2011‑04 on January 1, 2012. The adoption of this guidance did not have a material impact on MidAmerican Energy's disclosures included within Notes to Consolidated Financial Statements.

(3)
Fair Value Measurements

The carrying value of MidAmerican Energy's cash, certain cash equivalents, receivables, payables, accrued liabilities and short-term borrowings approximates fair value because of the short-term maturity of these instruments. MidAmerican Energy has various financial assets and liabilities that are measured at fair value on the Consolidated Financial Statements using inputs from the three levels of the fair value hierarchy. A financial asset or liability classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are as follows:

Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that MidAmerican Energy has the ability to access at the measurement date.

Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 — Unobservable inputs reflect MidAmerican Energy's judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. MidAmerican Energy develops these inputs based on the best information available, including its own data.

The following table presents MidAmerican Energy's assets and liabilities recognized on the Consolidated Balance Sheets and measured at fair value on a recurring basis (in millions):

 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of September 30, 2012
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
1

 
$
29

 
$
12

 
$
(31
)
 
$
11

Money market mutual funds(2)
 
223

 

 

 

 
223

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
103

 

 

 

 
103

International government obligations
 

 
1

 

 

 
1

Corporate obligations
 

 
30

 

 

 
30

Municipal obligations
 

 
6

 

 

 
6

Agency, asset and mortgage-backed obligations
 

 
7

 

 

 
7

Auction rate securities
 

 

 
18

 

 
18

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
187

 

 

 

 
187

International companies
 
2

 

 

 

 
2

 
 
$
516

 
$
73

 
$
30

 
$
(31
)
 
$
588

 
 
 
 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
 
$
(11
)
 
$
(105
)
 
$
(7
)
 
$
42

 
$
(81
)



9



 
 
Input Levels for Fair Value Measurements
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Other(1)
 
Total
As of December 31, 2011
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
 
$
1

 
$
47

 
$
26

 
$
(45
)
 
$
29

Debt securities:
 
 
 
 
 
 
 
 
 
 
United States government obligations
 
89

 

 

 

 
89

International government obligations
 

 
1

 

 

 
1

Corporate obligations
 

 
30

 

 

 
30

Municipal obligations
 

 
12

 

 

 
12

Agency, asset and mortgage-backed obligations
 

 
7

 

 

 
7

Auction rate securities
 

 

 
16

 

 
16

Equity securities:
 
 
 
 
 
 
 
 
 
 
United States companies
 
166

 

 

 

 
166

International companies
 
1

 

 

 

 
1

 
 
$
257

 
$
97

 
$
42

 
$
(45
)
 
$
351

 
 
 
 
 
 
 
 
 
 
 
Liabilities - commodity derivatives
 
$
(37
)
 
$
(148
)
 
$
(4
)
 
$
78

 
$
(111
)

(1)
Represents netting under master netting arrangements and a net cash collateral receivable of $11 million and $33 million as of September 30, 2012 and December 31, 2011, respectively.
(2)
Amounts are included in cash and cash equivalents and investments and nonregulated property, net on the Consolidated Balance Sheets. The fair value of these money market mutual funds approximates cost.
Derivative contracts are recorded on the Consolidated Balance Sheets as either assets or liabilities and are stated at fair value unless they are designated as normal purchases or normal sales and qualify for the exception afforded by GAAP. When available, the fair value of derivative contracts is estimated using unadjusted quoted prices for identical contracts in the market in which MidAmerican Energy transacts. When quoted prices for identical contracts are not available, MidAmerican Energy uses forward price curves. Forward price curves represent MidAmerican Energy's estimates of the prices at which a buyer or seller could contract today for delivery or settlement at future dates. MidAmerican Energy bases its forward price curves upon market price quotations, when available, or internally developed and commercial models, with internal and external fundamental data inputs. Market price quotations are obtained from independent energy brokers, exchanges, direct communication with market participants and actual transactions executed by MidAmerican Energy. Market price quotations for certain major electricity and natural gas trading hubs are generally readily obtainable for the applicable term of MidAmerican Energy's outstanding derivative contracts; therefore, MidAmerican Energy's forward price curves for those locations and periods reflect observable market quotes. Market price quotations for other electricity and natural gas trading hubs are not as readily obtainable due to the length of the contract. Given that limited market data exists for these contracts, as well as for those contracts that are not actively traded, MidAmerican Energy uses forward price curves derived from internal models based on perceived pricing relationships to major trading hubs that are based on unobservable inputs. The estimated fair value of these derivative contracts is a function of underlying forward commodity prices, interest rates, related volatility, counterparty creditworthiness and duration of contracts. Refer to Note 4 for further discussion regarding MidAmerican Energy's risk management and hedging activities.

MidAmerican Energy's investments in money market mutual funds and debt and equity securities are accounted for as available-for-sale securities and are stated at fair value. When available, a readily observable quoted market price or net asset value of an identical security in an active market is used to record the fair value. In the absence of a quoted market price or net asset value of an identical security, the fair value is determined using pricing models or net asset values based on observable market inputs and quoted market prices of securities with similar characteristics. The fair value of MidAmerican Energy's investments in auction rate securities, where there is no current liquid market, is determined using pricing models based on available observable market data and MidAmerican Energy's judgment about the assumptions, including liquidity and nonperformance risks, which market participants would use when pricing the asset.


10



The following table reconciles the beginning and ending balances of MidAmerican Energy's assets and liabilities measured at fair value on a recurring basis using significant Level 3 inputs (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
Commodity
Derivatives
 
Auction Rate
Securities
 
Commodity
Derivatives
 
Auction Rate Securities
2012
 
 
 
 
 
 
 
Beginning balance
$
8

 
$
17

 
$
22

 
$
16

Changes included in earnings(1)
(2
)
 

 
7

 

Changes in fair value recognized in other comprehensive income
1

 
1

 
(3
)
 
2

Changes in fair value recognized in net regulatory assets
(3
)
 

 
(1
)
 

Settlements
1

 

 
(20
)
 

Ending balance
$
5

 
$
18

 
$
5

 
$
18

 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
Beginning balance
$
7

 
$
16

 
$
14

 
$
20

Changes included in earnings(1)
6

 

 
10

 

Changes in fair value recognized in other comprehensive income

 

 

 
1

Changes in fair value recognized in net regulatory assets
(1
)
 

 
3

 

Sales

 

 

 
(5
)
Settlements
(3
)
 

 
(18
)
 

Transfers from Level 2
1

 

 
1

 

Ending balance
$
10

 
$
16

 
$
10

 
$
16


(1)
Changes included in earnings are reported as nonregulated operating revenue on the Consolidated Statements of Operations. For commodity derivatives held as of September 30, 2012 and 2011, net unrealized (losses) gains included in earnings for the three-month periods ended September 30, 2012 and 2011, totaled $(2) million and $4 million, respectively, and for the nine-month periods ended September 30, 2012 and 2011, totaled $3 million and $5 million, respectively.
MidAmerican Energy's long-term debt is carried at cost on the Consolidated Financial Statements. The fair value of MidAmerican Energy's long-term debt is a Level 2 fair value measurement and has been estimated based upon quoted market prices, where available, or at the present value of future cash flows discounted at rates consistent with comparable maturities with similar credit risks. The carrying value of MidAmerican Energy's variable-rate long-term debt approximates fair value because of the frequent repricing of these instruments at market rates. The following table presents the carrying value and estimated fair value of MidAmerican Energy's long-term debt (in millions):

 
As of September 30, 2012
 
As of December 31, 2011
 
Carrying
Value
 
Fair
 Value
 
Carrying
Value
 
Fair
 Value
 
 
 
 
 
 
 
 
Long-term debt
$
3,154

 
$
3,665

 
$
3,115

 
$
3,620


11




(4)
Risk Management and Hedging Activities

MidAmerican Energy is exposed to the impact of market fluctuations in commodity prices and interest rates. MidAmerican Energy is principally exposed to electricity, natural gas, coal and fuel oil commodity price risk as it has an obligation to serve retail customer load in its regulated service territory. MidAmerican Energy also provides nonregulated retail electricity and natural gas services in competitive markets. MidAmerican Energy's load and generating facilities represent substantial underlying commodity positions. Exposures to commodity prices consist mainly of variations in the price of fuel required to generate electricity, wholesale electricity that is purchased and sold, and natural gas supply for retail customers. Commodity prices are subject to wide price swings as supply and demand are impacted by, among many other unpredictable items, weather; market liquidity; generating facility availability; customer usage; storage; and transmission and transportation constraints. Interest rate risk exists on variable-rate debt and future debt issuances. MidAmerican Energy does not engage in a material amount of proprietary trading activities.

MidAmerican Energy has established a risk management process that is designed to identify, assess, monitor, report, manage and mitigate each of the various types of risk involved in its business. To mitigate a portion of its commodity price risk, MidAmerican Energy uses commodity derivative contracts, which may include forwards, futures, options, swaps and other agreements, to effectively secure future supply or sell future production generally at fixed prices. MidAmerican Energy manages its interest rate risk by limiting its exposure to variable interest rates primarily through the issuance of fixed-rate long-term debt and by monitoring market changes in interest rates. Additionally, MidAmerican Energy may from time to time enter into interest rate derivative contracts, such as interest rate swaps or locks, to mitigate its exposure to interest rate risk. MidAmerican Energy does not hedge all of its commodity price and interest rate risks, thereby exposing the unhedged portion to changes in market prices.
 
There have been no significant changes in MidAmerican Energy's accounting policies related to derivatives. Refer to Note 3 for additional information on derivative contracts.

The following table, which reflects master netting arrangements and excludes contracts that have been designated as normal under the normal purchases or normal sales exception afforded by GAAP, summarizes the fair value of MidAmerican Energy's derivative contracts, on a gross basis, and reconciles those amounts to the amounts presented on a net basis on the Consolidated Balance Sheets (in millions):

 
Current
Assets -
Other
 
Other
Assets -
Other
 
Current
Liabilities -
Other
 
Other
Liabilities -
Other
 
Total
As of September 30, 2012
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1):
 
 
 
 
 
 
 
 
 
Commodity assets
$
12

 
$
2

 
$
21

 
$
4

 
$
39

Commodity liabilities
(3
)
 

 
(64
)
 
(21
)
 
(88
)
Total
9

 
2

 
(43
)
 
(17
)
 
(49
)
 
 
 
 
 
 
 
 
 
 
Designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Commodity assets

 

 
2

 
1

 
3

Commodity liabilities

 

 
(20
)
 
(15
)
 
(35
)
Total

 

 
(18
)
 
(14
)
 
(32
)
 
 
 
 
 
 
 
 
 
 
Total derivatives
9

 
2

 
(61
)
 
(31
)
 
(81
)
Cash collateral receivable

 

 
9

 
2

 
11

Total derivatives - net basis
$
9

 
$
2

 
$
(52
)
 
$
(29
)
 
$
(70
)

12



 
Current
Assets -
Other
 
Other
Assets -
Other
 
Current
Liabilities -
Other
 
Other
Liabilities -
Other
 
Total
As of December 31, 2011
 
 
 
 
 
 
 
 
 
Not designated as hedging contracts(1):
 
 
 
 
 
 
 
 
 
Commodity assets
$
60

 
$
6

 
$
6

 
$
1

 
$
73

Commodity liabilities
(29
)
 
(2
)
 
(73
)
 
(41
)
 
(145
)
Total
31

 
4

 
(67
)
 
(40
)
 
(72
)
 
 
 
 
 
 
 
 
 
 
Designated as hedging contracts:
 
 
 
 
 
 
 
 
 
Commodity assets

 

 
1

 

 
1

Commodity liabilities
(6
)
 

 
(21
)
 
(17
)
 
(44
)
Total
(6
)
 

 
(20
)
 
(17
)
 
(43
)
 
 
 
 
 
 
 
 
 
 
Total derivatives
25

 
4

 
(87
)
 
(57
)
 
(115
)
Cash collateral receivable

 

 
28

 
5

 
33

Total derivatives - net basis
$
25

 
$
4

 
$
(59
)
 
$
(52
)
 
$
(82
)
(1)
MidAmerican Energy's commodity derivatives not designated as hedging contracts are generally included in regulated rates, and as of September 30, 2012 and December 31, 2011, a net regulatory asset of $49 million and $73 million, respectively, was recorded related to the net derivative liability of $49 million and $72 million, respectively.

Not Designated as Hedging Contracts

The following table reconciles the beginning and ending balances of MidAmerican Energy's net regulatory assets and summarizes the pre-tax gains and losses on commodity derivative contracts recognized in net regulatory assets, as well as amounts reclassified to earnings (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Beginning balance
$
63

 
$
20

 
$
73

 
$
27

Changes in fair value recognized in net regulatory assets
(4
)
 
29

 
7

 
39

Net gains (losses) reclassified to operating revenue
(2
)
 
(2
)
 
18

 
(3
)
Net gains reclassified to cost of fuel, energy and capacity
1

 
1

 
2

 
6

Net losses reclassified to cost of gas sold
(9
)
 
(2
)
 
(51
)
 
(23
)
Ending balance
$
49

 
$
46

 
$
49

 
$
46


The following table summarizes the pre-tax gains (losses) included on the Consolidated Statements of Operations associated with MidAmerican Energy's derivative contracts not designated as hedging contracts and not recorded as a net regulatory asset or liability (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Nonregulated operating revenue
$
(1
)
 
$
5

 
$
6

 
$
8

Nonregulated cost of sales
2

 
(4
)
 
(3
)
 
(4
)
Total
$
1

 
$
1

 
$
3

 
$
4



13



Designated as Hedging Contracts

MidAmerican Energy uses derivative contracts accounted for as cash flow hedges to hedge electricity and natural gas commodity prices for delivery to nonregulated customers.

The following table reconciles the beginning and ending balances of MidAmerican Energy's accumulated other comprehensive loss (pre-tax) and summarizes pre-tax gains and losses on derivative contracts designated and qualifying as cash flow hedges recognized in other comprehensive income ("OCI"), as well as amounts reclassified to earnings (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Beginning balance
$
56

 
$
13

 
$
43

 
$
34

Changes in fair value recognized in OCI
(20
)
 
(10
)
 
20

 
(24
)
Net (losses) gains reclassified to nonregulated cost of sales
(4
)
 
3

 
(31
)
 
(4
)
Ending balance
$
32

 
$
6

 
$
32

 
$
6


Realized gains and losses on hedges and hedge ineffectiveness are recognized in income as nonregulated operating revenue or nonregulated cost of sales depending upon the nature of the item being hedged. For the three- and nine-month periods ended September 30, 2012 and 2011, hedge ineffectiveness was insignificant. As of September 30, 2012, MidAmerican Energy had cash flow hedges with expiration dates extending through December 2016, and $18 million of pre-tax net unrealized losses are forecasted to be reclassified from accumulated other comprehensive loss into earnings over the next twelve months as contracts settle.

Derivative Contract Volumes

The following table summarizes the net notional amounts of outstanding commodity derivative contracts with fixed price terms that comprise the mark-to-market values as of (in millions):

 
Unit of
 
September 30,
 
December 31,
 
Measure
 
2012
 
2011
 
 
 
 
 
 
Electricity purchases
Megawatt hours
 
5

 
8

Natural gas purchases
Decatherms
 
44

 
62

Fuel purchases
Gallons
 

 
2



14



Credit Risk

MidAmerican Energy extends unsecured credit to other utilities, energy marketing companies, financial institutions and other market participants in conjunction with its wholesale energy supply and marketing activities. Credit risk relates to the risk of loss that might occur as a result of nonperformance by counterparties on their contractual obligations to make or take delivery of electricity, natural gas or other commodities and to make financial settlements of these obligations. Credit risk may be concentrated to the extent that one or more groups of counterparties have similar economic, industry or other characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in market or other conditions. In addition, credit risk includes not only the risk that a counterparty may default due to circumstances relating directly to it, but also the risk that a counterparty may default due to circumstances involving other market participants that have a direct or indirect relationship with the counterparty.

MidAmerican Energy analyzes the financial condition of each significant wholesale counterparty before entering into any transactions, establishes limits on the amount of unsecured credit to be extended to each counterparty and evaluates the appropriateness of unsecured credit limits on an ongoing basis. To mitigate exposure to the financial risks of wholesale counterparties, MidAmerican Energy enters into netting and collateral arrangements that may include margining and cross-product netting agreements and obtains third-party guarantees, letters of credit and cash deposits. Counterparties may be assessed fees for delayed payments. If required, MidAmerican Energy exercises rights under these arrangements, including calling on the counterparty's credit support arrangement.

MidAmerican Energy also has potential indirect credit exposure to other market participants in the regional transmission organization ("RTO") markets where it actively participates, including the Midwest Independent Transmission System Operator, Inc. and the PJM Interconnection, L.L.C. In the event of a default by a RTO market participant on its market-related obligations, losses are allocated among all other market participants in proportion to each participant's share of overall market activity during the period of time the loss was incurred, diversifying MidAmerican Energy's exposure to credit losses from individual participants. Transactional activities of MidAmerican Energy and other participants in organized RTO markets are governed by credit policies specified in each respective RTO's governing tariff or related business practices. Credit policies of RTO's, which have been developed through extensive stakeholder participation, generally seek to minimize potential loss in the event of a market participant default without unnecessarily inhibiting access to the marketplace. MidAmerican Energy's share of historical losses from defaults by other RTO market participants has not been material.

Collateral and Contingent Features

In accordance with industry practice, certain wholesale derivative contracts contain provisions that require MidAmerican Energy to maintain specific credit ratings from one or more of the major credit rating agencies on its senior unsecured debt. These derivative contracts may either specifically provide bilateral rights to demand cash or other security if credit exposures on a net basis exceed specified rating-dependent threshold levels ("credit-risk-related contingent features") or provide the right for counterparties to demand "adequate assurance" in the event of a material adverse change in MidAmerican Energy's creditworthiness. These rights can vary by contract and by counterparty. As of September 30, 2012, MidAmerican Energy's credit ratings from the three recognized credit rating agencies were investment grade.

The aggregate fair value of MidAmerican Energy's derivative contracts in liability positions with specific credit-risk-related contingent features totaled $89 million and $122 million as of September 30, 2012 and December 31, 2011, respectively, for which MidAmerican Energy had posted collateral of $- million. If all credit-risk-related contingent features for derivative contracts in liability positions had been triggered as of September 30, 2012 and December 31, 2011, MidAmerican Energy would have been required to post $75 million and $109 million, respectively, of additional collateral. MidAmerican Energy's collateral requirements could fluctuate considerably due to market price volatility, changes in credit ratings, changes in legislation or regulation, or other factors.

15




(5)
Recent Financing Transactions

In June 2012, MidAmerican Energy redeemed $275 million of its 5.125% senior notes due January 2013 at a redemption price determined in accordance with the terms of the indenture. The $8 million call premium was deferred as a regulatory asset and will be amortized through 2015, consistent with the treatment of such amounts in establishing rates.

In conjunction with the construction of wind-powered generating facilities in 2012, MidAmerican Energy has accrued as construction work in progress amounts it is not contractually obligated to pay until December 2015. The amounts ultimately payable are discounted at 1.43% and recognized upon delivery of the equipment as long-term debt. The discount is being amortized as interest expense over the period until payment is due using the effective interest method. As of September 30, 2012, $306 million of such debt from the 2012 wind-powered generation projects, net of associated discount, was outstanding.

(6)
Employee Benefit Plans

MidAmerican Energy sponsors a noncontributory defined benefit pension plan covering a majority of all employees of MEHC and its domestic energy subsidiaries other than PacifiCorp. MidAmerican Energy also sponsors certain postretirement healthcare and life insurance benefits covering substantially all retired employees of MEHC and its domestic energy subsidiaries other than PacifiCorp. Net periodic benefit cost for the pension and other postretirement benefit plans included the following components (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Pension:
 
 
 
 
 
 
 
Service cost
$
4

 
$
4

 
$
13

 
$
13

Interest cost
9

 
10

 
27

 
30

Expected return on plan assets
(11
)
 
(10
)
 
(33
)
 
(32
)
Net amortization
1

 

 
3

 

Net periodic benefit cost
$
3

 
$
4

 
$
10

 
$
11

 
 
 
 
 
 
 
 
Other postretirement:
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
3

 
$
3

Interest cost
2

 
3

 
6

 
8

Expected return on plan assets
(4
)
 
(4
)
 
(10
)
 
(10
)
Net amortization

 
(1
)
 
(2
)
 
(2
)
Net periodic benefit cost
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
(1
)

Employer contributions to the pension and other postretirement benefit plans are expected to be $65 million and $- million, respectively, during 2012. As of September 30, 2012, $63 million and $- million of contributions had been made to the pension and other postretirement benefit plans, respectively.

16




(7)
Income Taxes

A reconciliation of the federal statutory income tax rate to the effective income tax rate applicable to income before income tax (benefit) expense is as follows:

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Federal statutory income tax rate
35
 %
 
35
 %
 
35
 %
 
35
 %
Income tax credits
(52
)
 
(29
)
 
(52
)
 
(28
)
State income tax, net of federal income tax benefit
8

 
6

 
8

 
7

Income tax method change

 

 
(8
)
 

Effects of ratemaking
(12
)
 
(7
)
 
(13
)
 
(6
)
Other, net
(1
)
 
4

 
(1
)
 

Effective income tax rate
(22
)%
 
9
 %
 
(31
)%
 
8
 %

Income tax credits primarily relate to production tax credits. MidAmerican Energy's wind-powered generating facilities are eligible for federal renewable electricity production tax credits for 10 years from the date the facilities were placed in service.

MidAmerican Energy changed the method by which it determines current income tax deductions for repair costs related to its regulated utility electric transmission and distribution assets based on new guidance published by the Internal Revenue Service. Application of this guidance results in current deductibility for those costs, which are capitalized for book purposes. MidAmerican Energy retroactively applied the method change, deducted amounts related to prior years' costs on its 2011 tax return and recognized the change in the second quarter of 2012. State utility rate regulation in Iowa requires that the tax effect of certain temporary differences be flowed through immediately to customers. Therefore, amounts that would otherwise have been recognized in income tax expense have been included as changes in regulatory assets. Accordingly, MidAmerican Energy's earnings for the nine-month period ended September 30, 2012, reflect $18 million of income tax benefits recognized in connection with this method change for income tax years prior to 2012.

(8)
Commitments and Contingencies

MidAmerican Energy is party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. MidAmerican Energy does not believe that such normal and routine litigation will have a material impact on its consolidated financial results.

(9)
Components of Accumulated Other Comprehensive Loss, Net

The following table shows the change in accumulated other comprehensive loss by each component of other comprehensive income, net of applicable income taxes, for the nine-month period ended September 30, 2012 (in millions):

 
 
Unrealized
 
Unrealized
 
Accumulated
 
 
Losses on
 
Losses on
 
Other
 
 
Available-For-Sale
 
Cash Flow
 
Comprehensive
 
 
Securities
 
Hedges
 
Loss, Net
 
 
 
 
 
 
 
Balance, December 31, 2011
 
$
(8
)
 
$
(26
)
 
$
(34
)
Other comprehensive income
 
1

 
7

 
8

Balance, September 30, 2012
 
$
(7
)
 
$
(19
)
 
$
(26
)

17




(10)
Segment Information

MidAmerican Energy has identified three reportable segments: regulated electric, regulated gas and nonregulated energy. The regulated electric segment derives most of its revenue from regulated retail sales of electricity to residential, commercial, and industrial customers and from wholesale sales. The regulated gas segment derives most of its revenue from regulated retail sales of natural gas to residential, commercial, and industrial customers and also obtains revenue by transporting gas owned by others through its distribution system. Pricing for regulated electric and regulated gas sales are established separately by regulatory agencies; therefore, management also reviews each segment separately to make decisions regarding allocation of resources and in evaluating performance. The nonregulated energy segment derives most of its revenue from nonregulated retail electric and gas activities. Common operating costs, interest income, interest expense and income tax expense are allocated to each segment based on certain factors, which primarily relate to the nature of the cost.

The following tables provide information on a reportable segment basis (in millions):

 
Three-Month Periods
 
Nine-Month Periods
 
Ended September 30,
 
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Operating revenue:
 
 
 
 
 
 
 
Regulated electric
$
511

 
$
487

 
$
1,295

 
$
1,276

Regulated gas
87

 
99

 
441

 
562

Nonregulated energy
227

 
280

 
672

 
811

Total operating revenue
$
825

 
$
866

 
$
2,408

 
$
2,649

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Regulated electric
$
97

 
$
70

 
$
272

 
$
221

Regulated gas
9

 
8

 
27

 
26

Total depreciation and amortization
$
106

 
$
78

 
$
299

 
$
247

 
 

 
 

 
 

 
 

Operating income:
 
 
 
 
 
 
 
Regulated electric
$
129

 
$
133

 
$
243

 
$
248

Regulated gas
(3
)
 
(1
)
 
28

 
48

Nonregulated energy
13

 
16

 
41

 
51

Total operating income
$
139

 
$
148

 
$
312

 
$
347


 
As of
 
September 30,
2012
 
December 31,
2011
Total assets:
 
 
 
Regulated electric
$
9,718

 
$
9,016

Regulated gas
1,124

 
1,159

Nonregulated energy
139

 
135

Total assets
$
10,981

 
$
10,310


18





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Managers and Member of
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, 2012, and the related consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011, and of changes in equity and cash flows for the nine-month periods ended September 30, 2012 and 2011. 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 consolidated statement of capitalization (not presented herein) of MidAmerican Funding, LLC and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, cash flows, changes in equity, and comprehensive income for the year then ended (not presented herein); and in our report dated February 27, 2012, 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, 2011 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
November 2, 2012

19



MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amounts in millions)
 
As of
 
September 30,
2012
 
December 31,
2011
ASSETS
Utility plant, net:
 
 
 
Electric
$
11,020

 
$
10,587

Gas
1,284

 
1,255

 Gross utility plant in service
12,304

 
11,842

Accumulated depreciation and amortization
(4,336
)
 
(4,120
)
 Utility plant in service, net
7,968

 
7,722

Construction work in progress
414

 
173

Total utility plant, net
8,382

 
7,895

Current assets:
 
 
 
Cash and cash equivalents
375

 
1

Receivables, net
373

 
376

Income taxes receivable
10

 
270

Inventories
236

 
201

Other
51

 
58

Total current assets
1,045

 
906

Other assets:
 
 
 
Investments and nonregulated property, net
570

 
528

Goodwill
1,270

 
1,270

Regulatory assets
867

 
831

Other
144

 
175

Total other assets
2,851

 
2,804

Total assets
$
12,278

 
$
11,605

CAPITALIZATION AND LIABILITIES
Capitalization:
 

 
 

MidAmerican Funding member's equity
$
4,264

 
$
3,972

Noncontrolling interests
28

 
28

Long-term debt
3,479

 
3,440

Total capitalization
7,771

 
7,440

Current liabilities:
 
 
 
Note payable to affiliate
246

 
231

Accounts payable
364

 
314

Taxes accrued
242

 
107

Interest accrued
31

 
41

Other
137

 
120

Total current liabilities
1,020

 
813

Other liabilities:
 
 
 
Deferred income taxes
2,082

 
1,918

Asset retirement obligations
311

 
293

Regulatory liabilities
747

 
719

Other
347

 
422

Total other liabilities
3,487

 
3,352

Total capitalization and liabilities
$
12,278

 
$
11,605


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

20



MIDAMERICAN FUNDING, LLC AND SUBSIDIARIES