Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY STRUCTURE

MidAmerican Energy Holdings Company (Holdings or the Company) is an exempt public utility holding company headquartered in Des Moines, Iowa. Effective December 1, 1996, Holdings became the parent company of MidAmerican Energy Company (MidAmerican), MidAmerican Capital Company (MidAmerican Capital) and Midwest Capital Group, Inc. (Midwest Capital). Prior to December 1, 1996, MidAmerican Capital and Midwest Capital were subsidiaries of MidAmerican.

MidAmerican is a public utility with electric and natural gas operations and is the principal subsidiary of Holdings. MidAmerican Capital, Midwest Capital and MidAmerican Realty Services Company (MidAmerican Realty) are Holdings' nonregulated subsidiaries. MidAmerican Capital manages marketable securities and passive investment activities, nonregulated retail natural gas businesses, security services and other energy-related, nonregulated activities. Midwest Capital functions as a regional business development company in MidAmerican's utility service territory. MidAmerican Realty includes the Company's recently acquired real estate operations.

In May 1998, MidAmerican Realty completed its purchase of AmerUs Home Services Inc. During the third quarter of 1998, the Company purchased HOME Real Estate (HOME) and CBS Real Estate Company (CBS), the No. 1 and No. 2 residential brokerage organizations in Omaha, Nebraska, and J. C. Nichols Real Estate, a market leader in residential brokerage in the Kansas City metropolitan area. HOME and CBS have combined and now operate as CBS HOME Real Estate. The acquired companies are now subsidiaries of MidAmerican Realty and include real estate operations in Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and Wisconsin. On a consolidated basis, MidAmerican Realty has more than 1,150 employees and 4,500 sales agents and comprises the nation's second largest independent residential real estate brokerage organization. In addition to residential brokerage, MidAmerican Realty offers relocation, title, abstract and mortgage services.

DESCRIPTION OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's Discussion and Analysis (MD&A) addresses the financial statements of Holdings and MidAmerican as presented in this joint filing. Discussions related to MidAmerican also relate to Holdings. Information related to MidAmerican Capital, Midwest Capital and MidAmerican Realty pertains only to the discussion of the financial condition and results of operations of Holdings. To the extent necessary, certain discussions have been segregated to allow the reader to identify information applicable only to Holdings.

The consolidated financial statements of MidAmerican present amounts related to MidAmerican Capital and Midwest Capital as discontinued operations for the twelve months ended September 30, 1997, in order to reflect their transfer to Holdings in December 1996.

FORWARD-LOOKING STATEMENTS

From time to time, the Company 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 the Company 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 the Company's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of the Company and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, fuel prices, fuel transportation, competitive factors, general economic conditions in the Company's service territory, interest rates, inflation and federal and state regulatory actions.

MERGER ANNOUNCEMENT

On August 11, 1998, a definitive merger agreement was entered into between the Company and CalEnergy Company, Inc. (CalEnergy), a global provider of energy services. Under the terms of the agreement, the shareholders of the Company will receive $27.15 cash for each share of their common stock reflecting a 36 percent premium over the August 11, 1998, closing price. The Company and CalEnergy each held a special shareholders meeting on October 30, 1998, at which the shareholders of each respective company approved the agreement and plan of merger. Additionally, the pre-merger notification period under the Hart-Scott-Rodino Antitrust Improvements Act has expired. The companies have made filings with, and are awaiting favorable orders from, the Federal Energy Regulatory Commission (FERC), the Nuclear Energy Regulatory Commission (NRC), and the Iowa Utilities Board (IUB), which has the right to review the merger and to disapprove it only if found not in the public interest. State regulators in Illinois, Nebraska and South Dakota have been notified of the merger. Management believes completion of the merger could occur during the first quarter of 1999.

                                                Periods Ended September 30
                                                --------------------------
                                    Three Months       Nine Months         Twelve Months
                                  ---------------    ---------------     ----------------
                                   1998     1997      1998     1997       1998      1997
                                  ------   ------    ------   ------     ------    ------
Net Income (in millions)
  Continuing operations
    Utility                       $ 48.3   $ 49.0    $ 97.4   $102.0     $114.8    $145.6
    Nonregulated operations          5.3      0.7      16.0      6.0       29.8      (7.8)
  Discontinued operations              -     (2.8)        -     (2.6)      (1.6)     (3.9)
                                  ------   ------    ------   ------     ------    ------
    Consolidated earnings         $ 53.6   $ 46.9    $113.4   $105.4     $143.0    $133.9
                                  ======   ======    ======   ======     ======    ======

Earnings Per Common Share -
Basic and Diluted
  Continuing operations
    Utility                       $ 0.51   $ 0.50    $ 1.03   $ 1.03     $ 1.21    $ 1.47
    Nonregulated operations         0.06     0.01      0.17     0.06       0.31     (0.08)
  Discontinued operations              -    (0.03)        -    (0.02)     (0.01)    (0.04)
                                  ------   ------    ------   ------     ------    ------
    Consolidated earnings         $ 0.57   $ 0.48    $ 1.20   $ 1.07     $ 1.51    $ 1.35
                                  ======   ======    ======   ======     ======    ======

                                              Periods Ended September 30
                                              --------------------------
                                    Three Months        Nine Months        Twelve Months
                                   --------------     --------------     ----------------
                                    1998     1997      1998     1997      1998      1997
                                   -----    -----     -----    -----     ------    ------
                                                      (in millions)
Earnings on Common Stock
  Continuing operations            $48.3    $49.0     $97.4   $102.0     $114.8    $145.6
  Discontinued operations*             -        -         -        -          -      (1.6)
                                   -----    -----     -----   ------     ------    ------
  Consolidated earnings            $48.3    $49.0     $97.4   $102.0     $114.8    $144.0
                                   =====    =====     =====   ======     ======    ======

* Discontinued operations for twelve months ended September 30, 1997, includes the loss of MidAmerican Capital and Midwest Capital prior to their transfer to Holdings on December 1, 1996.

EARNINGS DISCUSSION

Below is a list of some of the significant factors resulting in the variances in earnings. The amounts represent the variance between the 1998 and 1997 periods. Therefore, a factor that had a negative impact on earnings in both periods, but which had less of a negative impact in the 1998 period than in the 1997 period, would be displayed as a positive factor for comparison purposes. The discussion that follows addresses these factors as well as other items affecting the Company's results of operations.

In the second half of 1997, MidAmerican began charging to expense additional amortization of deferred energy efficiency costs, ongoing energy efficiency costs and certain Cooper Nuclear Station costs consistent with ratemaking treatment. These items have had a significant impact on other operating expenses. In conjunction with expensing these items, MidAmerican began recovery of these costs from its customers, which is reflected in revenues. However, for purposes of the following table, these expenses are netted against the related revenues. As a result, the "Other O&M expenses" line does not reflect the impact of these items, and the net effect of the revenues and expenses is included on the "Other factors" line under gross margin.

                                 Approximate Net Income Variances:  1998 vs 1997
                                 ---------------------------------  ------------
                                             For Periods Ended September 30
                                             ------------------------------
                                        Three Months  Nine Months  Twelve Months
                                        ------------  -----------  -------------
                                                    ($ In Millions)
MidAmerican:
  Variation in electric and gas
    gross margin due to -
      Variation in the effect of weather       $11.5     $  2.0      $  1.9
      Customer growth                            1.4        4.4         6.7
      Electric retail rates and accruals        (1.9)      (4.4)       (4.3)
      Off-system sales                           5.2        7.4         8.0
      Other factors                             (4.9)       8.9         9.4
  Nuclear O&M expenses                           1.3        2.5         2.2
  1996 inventory adjustment                        -          -        (3.7)
  Storm repair expense                          (1.8)      (2.1)       (3.2)
  Other O&M expenses                            (7.3)     (16.1)      (37.0)
  Recognition of deferred energy
    efficiency income                           (0.9)      (2.7)       (3.0)
  1996 gain on sale of storage gas                 -          -        (2.4)
  Utility nonregulated activities               (0.6)      (1.5)       (2.5)
  1997 settlement of NPPD lawsuit               (1.3)      (1.3)       (1.3)
Nonregulated subsidiaries:
  Write-downs of certain assets                    -          -         7.4
  Realized gain on sale of McLeodUSA
    Incorporated common stock                      -          -         5.2
  Donation of appreciated stock                    -       (2.4)       (2.4)
  Gains on sales of certain assets                 -        3.2         9.2
  Income from a venture capital investment         -        1.2         1.2
  Realty operations                              4.6        6.3         6.3
  Reduction of interest on long-term debt          -          -         2.2

Discontinued operations                          2.8        2.6         2.3

Average shares outstanding for 1997 period 97,097 98,752 99,213

Improved margins resulted in an increase in utility earnings for the third quarter of 1998. The increase was offset by expenses for repair of damage from storms in late June 1998 and by expenses for customer service, information technology and marketing in preparation for a competitive utility environment.

In the past two years, the Company's strategic realignment of operations has significantly affected earnings of nonregulated subsidiaries. During 1997 and the first quarter of 1998, the Company divested a number of its interests in nonregulated assets which did not align with the corporate vision of becoming the leading regional provider of energy and complementary services. Earnings for the twelve months ended September 30, 1998, include 6 cents per share from the sale of assets of railcar leasing and repair businesses in the fourth quarter of 1997. During the first nine months of 1998, the Company recorded earnings of 3 cents per share for the sale of its interest in a financial management company and the liquidation of a partnership that owned commercial office buildings. Losses from discontinued operations reduced earnings in each twelve-month period shown above, though to a lesser degree in 1998 than in the 1997 period.

Although utility earnings for the current twelve-month period were lower than in the prior year, a reduction was anticipated because of the electric pricing settlements achieved in 1996 and 1997 in Iowa and Illinois. Additionally, utility operating expenses increased as the Company continued its strategic realignment which included strengthening its marketing and customer service capabilities and adding to its information technology resources.

The Company's evaluation of its nonregulated investments has resulted in write-downs of certain assets, primarily investments in alternative energy projects, during the past two years. The write-downs, which reflect declines in the value of those nonregulated investments, reduced earnings by approximately $2.0 million, or 2 cents per share, and $9.4 million, or 9 cents per share, in the twelve months ended September 30, 1998 and 1997, respectively.

Discontinued Operations -

During 1996, the Company discontinued some of its nonregulated operations. The Consolidated Statements of Income reflect the income or loss from those operations and the losses on disposal. Net assets of the discontinued operations are presented separately in the Consolidated Balance Sheets as Investment in Discontinued Operations.

In January 1997, the Company completed the sale of a portion of its nonregulated operations, including its oil and gas exploration and development operations. The twelve months ended September 30, 1997, reflects a $1.0 million after-tax loss for the transaction. The original estimated loss was recorded in September 1996.

In October 1997, the Company also divested a subsidiary that developed and operated a computerized information system which facilitated real-time exchange of power in the electric industry. The Company recorded an anticipated after-tax loss on disposal of those operations in September 1996. An additional $3.2 million after-tax loss on disposal was recorded in September 1997 and is reflected in the twelve months ended September 30, 1997.

                                               Periods Ended September 30
                                               --------------------------
                                      Three Months    Nine Months     Twelve Months
                                      ------------    -----------    ----------------
                                       1998   1997    1998   1997     1998      1997
                                       ----   ----    ----   ----    ------    ------
                                                     (In millions)

Operating revenues                     $364   $334    $907   $850    $1,183    $1,109
Cost of fuel, energy and capacity*       72     67     176    179       233       235
                                       ----   ----    ----   ----    ------    ------
Electric gross margin                  $292   $267    $731   $671    $  950    $  874
                                       ====   ====    ====   ====    ======    ======

*Amounts shown are from the MidAmerican Consolidated Statements of Income. The amounts on Holdings' Consolidated Statements of Income reflect an intercompany elimination.

A variety of factors contributed to the increase in MidAmerican's electric gross margin for the 1998 periods compared to the 1997 periods. An increase in revenues from energy efficiency cost recovery accounted for $9.0 million, $26.9 million and $35.9 million of the increase in margin for the three-, nine- and twelve-month comparisons, respectively. Revenues from the Cooper Tracker (discussed below) contributed $0.1 million, $3.3 million and $5.3 million to the increases for the three, nine and twelve months ended September 30, 1998, respectively. The increases in revenues from these factors are substantially offset by increases in other operating expenses.

Regarding the increase in energy efficiency revenues, on September 29, 1997, MidAmerican began collection of its remaining deferred energy efficiency costs and current, ongoing energy efficiency costs. Including an allowed return on the deferred costs, the annual increase in electric revenues is approximately $36.1 million. The effect on earnings of this increase in revenues and gross margin is partially offset by a corresponding increase in other operating expenses of approximately $31.1 million annually for currently incurred electric energy efficiency costs and amortization of previously incurred costs.

The Cooper Tracker allows MidAmerican to collect on a current basis the Iowa portion of expenses for Cooper capital improvement advances. Prior to the Cooper Tracker, capital improvement advances were capitalized when incurred and amortized over future periods in accordance with ratemaking treatment.

The effect of temperatures contributed $21 million to the increase in margin for the third quarter of 1998 compared to 1997. Compared to normal, 1998 third quarter temperatures resulted in an increase in gross margin of $14 million, while the 1997 third quarter was cooler than normal, resulting in a decrease in margin of $7 million. Moderate customer growth resulted in a $2.2 million increase in electric gross margin compared to the 1997 third quarter. Total retail sales of electricity increased 7.2%. A reduction in other usage factors and sales mix reduced gross margin compared to the 1997 quarter.

The average cost of fuel, energy and capacity per unit in the third quarter of 1998 was above the 1997 level and resulted in a decrease to gross margin compared to the third quarter of 1997. Prior to July 11, 1997, MidAmerican was allowed to recover its energy costs from most of its electric utility customers through Energy Adjustment Clauses (EACs) included in revenues. Effective July 11, 1997, the EAC was eliminated for Iowa customers as part of a new Iowa pricing plan. Previously, variations in energy costs did not affect gross margin or net income due to corresponding changes in revenues collected through the EACs. With the elimination of the Iowa EAC, fluctuations in energy costs now have an impact on gross margin and net income.

Reductions of electric retail rates resulted in a $3.2 million decrease in revenues and gross margin compared to the third quarter of 1997.

Sales for resale decreased 7.7% for the quarter comparison. However, margins on off-system sales, which account for most of MidAmerican's sales for resale, contributed $8.8 million more to gross margin in the 1998 quarter than the sales in the third quarter of 1997. Refer to the discussion of the energy market under "Competition" in the Operating Activities and Other Matters section of MD&A.

For the comparison of the nine-month periods ended September 30, the variance in temperatures resulted in a $16 million increase in electric gross margin. Compared to normal, the 1998 temperatures resulted in an increase in gross margin of $6 million, while the 1997 period reflects a $10 million decrease in margin. An increase in sales not dependent on weather also contributed to the increase in margin. Moderate but steady customer growth improved gross margin by $6.2 million compared to the 1997 nine-month period. Total retail sales of electricity increased 4.1% compared to nine months ended September 30, 1997.

Reductions of electric retail rates, including the effect of a 1997 accrual for a then potential refund, resulted in a $7.4 million decrease in revenues and gross margin compared to the first nine months of 1997.

Year-to-date sales for resale decreased 9.0% compared to the nine months ended September 30, 1997. However, margins on off-system sales contributed $12.5 million more to gross margin in the 1998 period than the sales in the same period of 1997.

For the twelve months ended September 30 comparison, the effect of temperatures increased gross margin by $19 million in the 1998 period compared to the 1997 period. When compared to normal, the impact of temperatures resulted in a $11 million increase in electric gross margin for the 1998 twelve-month period compared to an $8 million reduction in gross margin for the twelve months ended September 30, 1997. Moderate but steady growth in the number of customers increased gross margin $8.7 million compared to the 1997 period. An increase in sales that are not dependent on weather also contributed to the increase in gross margin. Electric retail sales increased 3.5% for the 1998 twelve-month period compared to the twelve months ended September 30, 1997.

Retail rate reductions, including the effect of an accrual for a potential refund, reduced electric gross margin by approximately $7.3 million compared to the twelve months ended September 30, 1997. Refer to "Rate Matters" in Liquidity and Capital Resources later in this discussion for further information regarding the Iowa proceeding.

Sales for resale decreased 9.1% for the twelve months ended September 30 comparison, while margins on the off-system sales increased approximately $13.6 million.

                              Periods Ended September 30
                              --------------------------
                       Three Months   Nine Months  Twelve Months
                       ------------   -----------  -------------
                        1998   1997   1998   1997   1998   1997
                        ----   ----   ----   ----   ----   ----
                                     (In millions)

Operating revenues      $63    $60    $304   $353   $487   $535
Cost of gas sold         33     34     171    221    296    347
                        ---    ---    ----   ----   ----   ----
  Gas gross margin      $30    $26    $133   $132   $191   $188
                        ===    ===    ====   ====   ====   ====

Revenues include purchase gas adjustment clauses (PGAs) through which MidAmerican has been 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 in revenues from PGAs. A decrease in the per-unit cost of gas compared to 1997 reduced revenues and cost of gas sold in each of the 1998 periods shown above. MidAmerican recently made a filing with the IUB which would modify the use of the PGA beginning May 1, 2000. Refer to Small Volume Gas Transportation under the Operating Activities and Other Matters section of MD&A for further discussion.

Recovery of gas energy efficiency costs resulted in a $3.1 million increase in revenues and gross margin for the quarter. As discussed in the electric gross margin section, on September 29, 1997, MidAmerican began recovery of its energy efficiency costs which had not previously been approved for recovery. Including an allowed return on deferred costs, the annual increase in gas revenues is approximately $12.8 million. The effect on earnings of this increase is partially offset by a corresponding increase in other operating expenses of approximately $11.1 million annually for deferred and ongoing gas energy efficiency costs.

Temperatures in the third quarter of 1998 were warmer than normal resulting in a $2 million decrease in gas gross margin for the period, while temperatures in the third quarter of 1997 were close to normal.

Energy efficiency revenues increased $9.3 million for the nine months ended September 30, 1998, compared to the same period in 1997, while customer growth accounted for $1.1 million of the increase in gas margin. The mix of sales also contributed to the increase compared to the 1997 period. The variance in temperatures between the 1998 and 1997 nine-month periods resulted in a $12 million decrease in gas margin. Temperatures in the nine months ended September 30, 1998, were 15.7% warmer than normal yielding in an $11 million decrease in gas gross margin for the period. Colder-than-normal temperatures in the nine months ended September 30, 1997, increased margin in that period by approximately $1 million. Retail sales in 1998 decreased 12.3% compared to the 1997 nine-month period.

Mild temperatures resulted in a $16 million decrease in gas gross margin for the twelve months ended September 30, 1998, compared to the twelve months ended September 30, 1997. When compared to normal, the impact of temperatures resulted in an $12 million reduction in gas gross margin in the 1998 twelve-month period compared to a $4 million increase in gas gross margin for the twelve months ended September 30, 1997.

The increase in recovery of gas energy efficiency costs for the twelve-month period recovered approximately $12.5 million of the loss in revenues and margin resulting from milder temperatures. Moderate customer growth, contributing $2.7 million to gross margin, and an increase from other usage factors also helped offset the decrease in gross margin due to the weather.

UTILITY OPERATING EXPENSES

Other Operating Expenses -

Utility other operating expenses increased $19.6 million, $45.8 million and $94.6 million for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods in 1997.

As mentioned in the gross margin discussions, on September 29, 1997, MidAmerican began additional recovery of deferred energy efficiency costs and current recovery of ongoing costs. As the deferred costs are recovered in revenues, they are amortized to expense. In addition, ongoing energy efficiency costs, which historically were deferred until future periods, are now charged to expense currently. The increase in energy efficiency costs accounted for $10.7 million, $32.2 million and $43.1 million of the increase in other operating

expenses for the three, nine and twelve months ended September 30, 1998, respectively, compared to the same periods in 1997.

In addition to the energy efficiency expense increase, operating expenses related to Cooper increased due in part to the ratemaking treatment for Cooper capital improvements. As a result of 1996 and 1997 rate settlements, Cooper capital improvements are now expensed when incurred, instead of being capitalized. As mentioned in the Electric Gross Margin section, MidAmerican is recovering on a current basis the Iowa portion of these costs from its Iowa electric customers through the Cooper Tracker. Recovery in Illinois is included in base rates. This change accounted for increases of $1.3 million and $3.1 million for the nine-month and twelve-month comparisons, respectively. Excluding these currently recovered Cooper costs, nuclear operations expenses decreased $4.7 million, $10.6 million and $6.9 million, respectively, for the three-month, nine-month and twelve-month comparisons due to reductions in expenses at the Quad Cities Station.

Continued restructuring of the Company in preparation for a competitive industry has required additional expenses. MidAmerican has increased its emphasis on marketing-related efforts, as well as customer service operations, resulting in increases in consulting costs, advertising, employee incentive compensation and other related expenses. Increases in such expenses accounted for a majority of the remaining increases for the quarter and nine-month period comparisons. In addition, the 1998 twelve-month period reflects increases in certain employee benefits expenses, customer assistance and energy efficiency administrative costs, manufactured gas plant site clean-up costs and rent expense.

Maintenance -

Maintenance expenses increased $3.3 million and $10.5 million for the 1998 three-month and nine-month periods ended September 30 compared to the same periods ended September 30, 1997. Increased maintenance costs at the Quad Cities Station accounted for $2.5 million and $6.2 million of the three-month and nine-month increases, respectively. Additionally, the Company incurred repair costs for storms in June 1998, totalling $3.1 million and $3.5 million for the three months and nine months ended September 30, 1998, respectively. A decrease in other generation maintenance expenses partially offset the increases for the quarter.

Maintenance expenses for the twelve months ended September 30, 1998, were $18.3 million greater than in the comparable 1997 period. In the fourth quarter of 1996, MidAmerican made an adjustment to align power plant inventory accounting of predecessor companies. That adjustment reduced expenses by $6.2 million for the twelve-month period ended September 30, 1997. In addition, the Company incurred $2.0 million in maintenance expenses for restoration following a snow storm in October 1997 and $3.5 million for costs related to the June 1998 storms. Maintenance expenses at the Quad Cities Station increased $3.1 million in the twelve-month period ended September 30, 1998, compared to the twelve months ended September 30, 1997. Refer to the discussion of Quad Cities Nuclear Station in the Liquidity and Capital Resources section of MD&A for information regarding the status of Quad Cities Station.

NONREGULATED OPERATING REVENUES AND OPERATING EXPENSES

Revenues of nonregulated subsidiaries increased $44.9 million for the three-month period ended September 30, 1998, and decreased $31.0 million and $66.4 million for the nine months and twelve months ended September 30, 1998, compared to their respective 1997 periods.

Revenues from the natural gas marketing subsidiaries decreased $22.6 million, $111.7 million and $148.6 million for the 1998 three-month, nine-month and twelve-month periods, respectively. Related sales volumes decreased 8 million MMBtu's (61%), 35 million MMBtu's (55%) and 55 million MMBtu's (54%) compared to the sales volumes in the 1997 periods. The decrease in sales volumes is due primarily to the expiration of wholesale contracts which have not been replaced. Additionally, nonregulated retail sales volumes have decreased, but the remaining sales are at improved margin levels. A decrease in the average price per unit, reflective of a decrease in the cost of gas sold, also reduced revenues in each of the periods ended September 30, 1998.

Cost of sales related to natural gas marketing for the 1998 periods reflects decreases in the average cost of gas per unit as well as the effect of reduced sales volumes. Total gross margin (total price less cost of gas) on nonregulated natural gas sales increased $1.7 million, $0.3 million and $1.0 million for the 1998 three, nine, and twelve months ended September 30, respectively, compared to the 1997 periods.

The Company has acquired several real estate brokerage operations in 1998. Nonregulated revenues for the 1998 quarter reflect $69.5 million from the real estate brokerage operations. For the nine-month and twelve-month periods, real estate brokerage revenues totaled $87.8 million. Nonregulated cost of sales for the third quarter of 1998 includes $37.4 million related to the real estate brokerage companies. For the nine months and twelve months ended September 30, 1998, real estate brokerage cost of sales totaled $43.9 million. Other operating expenses for those operations were $23.7 million for the three-month period and $32.1 million for the nine- and twelve-month periods in 1998.

Nonregulated other operating expenses for the 1998 twelve-month period reflect a decrease of approximately $4.0 million due primarily to administrative costs in the 1997 period which are no longer incurred because of the absence of operations the Company sold in early 1997.

NON-OPERATING INCOME AND INTEREST EXPENSE

Interest and Dividend Income -

Interest income increased in each 1998 comparative period due to an increase in temporary cash investments.

Other, Net -

In the fourth quarter of 1997, MidAmerican sold a portion of its accounts receivable. Other, Net for the quarter, nine months and twelve months ended September 30, 1998, includes deductions for discounts on receivables sold, net of related subservicer fees, totaling $1.4 million, $4.4 million and $4.7 million, respectively. Refer to the Financing Activities section of Liquidity and Capital Resources later in MD&A for a discussion of the receivables sale.

Recognition of deferred income from energy efficiency programs totaled zero, $0.2 million and $0.4 million for the 1998 three-month, nine-month and twelve-month periods ended September 30, respectively. The comparable 1997 periods reflect income of $1.5 million, $4.8 million and $5.4 million, respectively. The decrease is due to the additional recovery of energy efficiency costs begun September 29, 1997, as discussed in the Utility Gross Margin section of MD&A.

Other, Net for the nine-month and twelve-month periods ended September 30, 1997, includes a reduction for net losses on reacquired long-term debt of $0.9 million and $0.2 million, respectively.

In September 1997, MidAmerican received a $15 million cash payment from Nebraska Public Power District (NPPD) as settlement for a lawsuit filed by MidAmerican against NPPD. Approximately $12 million was refunded to MidAmerican's customers. The remaining amount was retained by MidAmerican for recovery of litigation costs in the lawsuit. Other, Net for each 1997 period reflects $2.2 million of pre-tax income for recovery of litigation costs incurred in pre-1997 years.

MidAmerican was awarded pre-tax income in each nine-month and twelve-month period presented for performance under its incentive gas procurement program. In the second quarter of 1998 and 1997, MidAmerican received $2.0 million and $1.7 million, respectively. Twelve months ended September 30, 1998 and 1997, reflect amounts of $5.3 million and $4.4 million, respectively.

As part of its preparation for a competitive electric utility environment, the Company is investigating and developing new products to offer customers. The impact of these activities and other nonregulated activities reduced Other, Net by $1.1 million, $2.6 million and $4.3 million for the 1998 three, nine and twelve months ended September 30, 1998, respectively, compared to the 1997 periods.

In the fourth quarter of 1996, MidAmerican recorded an initial pre-tax gain of $3.2 million on its sale of certain storage gas supplies which is reflected in the twelve months ended September 30, 1997. MidAmerican recorded an additional $0.8 million gain in the second quarter of 1997, which is also reflected in the twelve months ended September 30, 1997, after receiving favorable treatment on the transaction from the IUB.

The twelve months ended September 30, 1997, also includes $2.2 million of income from the reversal of a reserve after successful resolution of a dispute with a vendor.

Fixed Charges -

Interest on long-term debt decreased for the nine months and twelve months ended September 30, 1998, due to long-term debt reduction and refinancing activities. Other interest expense increased due to short-term debt at Holdings, which resulted in interest being allocated to MidAmerican. Preferred securities of a subsidiary trust were issued in December 1996 resulting in the twelve months ended September 30, 1997, including only a partial year of dividends. MidAmerican preferred shares were reacquired at the same time, resulting in a decrease in other preferred dividends. Preferred dividends include net gains or losses on the reacquisition of MidAmerican preferred shares. Net losses on reacquisitions totaled $1.4 million and 2.7 million for the nine-month and twelve-month periods ended September 30, 1997, respectively.

Dividend Income -

Dividend income decreased for each of the periods ended September 30, 1998, compared to the respective 1997 periods due to MidAmerican Capital's reduced holdings of preferred stock portfolios.

Realized Gains and Losses on Securities, Net -

Net realized gains on securities for twelve months ended September 30, 1998, includes an $8.0 million pre-tax gain on the sale of shares of McLeodUSA common stock.

Other, Net -

The first nine months of 1998 includes $4.7 million from the divestment of nonregulated assets in the first quarter, including the sale of the Company's interest in a financial management company, the sale of a commercial office building and liquidation of a partnership interest concurrent with the sale of its commercial property. In addition, the Company recorded $2.1 million of income from an equity investment in a venture capital fund.

In addition to the above items, the twelve months ended September 30 periods were affected by several additional factors. During the twelve months ended September 30, 1998, the Company sold all of the assets of its railcar repair services subsidiary and most of the assets of its railcar leasing subsidiary and recorded pre-tax gains totaling $10.0 million. Write-downs of nonregulated investments, as discussed in the Earnings Discussion section at the beginning of Results of Operations, decreased Other, Net by $3.4 million and $15.6 million for the twelve-month periods ended September 30, 1998 and 1997, respectively.

Interest Charges -

Interest on long-term debt of nonregulated subsidiaries decreased $3.7 million for the twelve-month comparison due primarily to the reduction in MidAmerican Capital's long-term debt in early 1997.

INCOME TAXES

During the second quarter of 1997, the Company contributed part of an appreciated common stock investment to its tax exempt foundation and realized $2.9 million of tax benefit.

The Company has 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 of September 30, 1998, common equity represented 50.4% of the Company's total capitalization compared to 51.7% and 51.6% as of December 31, 1997, and September 30, 1997, respectively. A reduction in accumulated comprehensive income, reflective of a decrease in the market value of an investment in McLeodUSA common stock, and the Company's common stock repurchase program reduced common equity since September 30, 1997.

As reflected on the Consolidated Statements of Cash Flows, Holdings had net cash provided from operating activities of $339 million for the first nine months of 1998 compared to $334 million for the same period in 1997. MidAmerican's net cash provided from operating activities was $343 million for the first nine months of 1998 and $278 million for the first nine months of 1997.

INVESTING ACTIVITIES AND PLANS

Utility Construction Expenditures -

MidAmerican's primary need for capital is utility construction expenditures. For the first nine months of 1998, utility construction expenditures totaled $114 million, including allowance for funds used during construction (AFUDC) and Quad Cities Station nuclear fuel purchases. All such expenditures were met with cash generated from utility operations, net of dividends.

Beginning with July 1997 expenditures, advances for Cooper capital improvements are no longer included in utility construction expenditures but are expensed when incurred in other operating expenses. Previously, MidAmerican capitalized these expenses in accordance with then applicable rate regulation. As part of the 1997 settlement of MidAmerican's electric pricing proposal, MidAmerican is recovering on a current basis the Iowa portion of expenses for Cooper capital improvements advances from its Iowa electric customers through a tracking mechanism.

Forecasted utility construction expenditures, including AFUDC, for 1998 are $201 million and $609 million for 1999 through 2002. Capital expenditure needs are reviewed regularly by MidAmerican's management and may change significantly as a result of such reviews. MidAmerican presently expects that all utility construction expenditures for the next five years will be met with cash generated from utility operations, net of dividends. The actual level of cash generated from utility operations is affected by, among other things, economic conditions in the utility service territory, weather and federal and state regulatory actions.

Deferred Energy Efficiency Expenditures -

The Company stopped reflecting costs of its energy efficiency programs as an investing activity on its Consolidated Statement of Cash Flows following the IUB's approval in September 1997 of the current recovery of ongoing energy efficiency program costs. Under prior energy efficiency regulations, program costs were deferred for several years prior to beginning their recovery over a four-year period, and accordingly, the Company reflected them as an investing activity.

Nuclear Decommissioning -

Operators of a nuclear facility are required to set aside funds to provide for costs of future decommissioning of their nuclear facility. In general, decommissioning of a nuclear facility means to safely remove the facility from service and restore the property to a condition allowing unrestricted use by the operator. Based on information presently available, MidAmerican expects to contribute approximately $50 million during the period 1999 through 2003 to an external trust established for the investment of funds for decommissioning the Quad Cities Station. Approximately 55% of the trust's funds are now invested in domestic corporate debt and common equity securities. The remainder is invested in investment grade municipal and U.S. Treasury bonds.

In addition, MidAmerican makes payments to NPPD related to decommissioning Cooper. These payments are reflected in other operating expenses in the Consolidated Statements of Income. NPPD estimates call for MidAmerican to pay approximately $57 million to NPPD for Cooper decommissioning during the period 1999 through 2003. NPPD invests the funds predominately in U.S. Treasury Bonds. MidAmerican's obligation for Cooper decommissioning may be affected by the actual plant shutdown date and the status of the power purchase contract at that time. In July 1997, NPPD filed a lawsuit in United States District Court for the District of Nebraska naming MidAmerican as the defendant and seeking a declaration of MidAmerican's rights and obligations in connection with Cooper nuclear decommissioning funding.

MidAmerican currently recovers Quad Cities Station decommissioning costs charged to Illinois customers through a rate rider on customer billings. Cooper and Quad Cities Station decommissioning costs charged to Iowa customers are included in base rates, and recovery of increases in those amounts must be sought through the normal ratemaking process.

Nonregulated Capital Expenditures -

Capital expenditures of MidAmerican Capital, Midwest Capital and MidAmerican Realty totaled $20 million for the first nine months of 1998. Capital expenditures of these subsidiaries depend primarily upon the availability of suitable investment opportunities which meet the Company's objectives. The Company continues to evaluate nonregulated investments and may redeploy certain assets in the future. External financing may also be used to provide for nonregulated capital expenditures.

As discussed in the Introduction section of MD&A, the Company has purchased several residential real estate brokerage organizations in the second and third quarters of 1998 for a total of approximately $105 million. The acquired companies are now the subsidiaries of MidAmerican Realty. Total assets of MidAmerican Realty as of September 30, 1998, were $123 million. The line items significantly affected on the Company's Consolidated Balance Sheet as of September 30, 1998, are as follows ($ in millions): Receivables ($18.2); Nonutility Property and Investments ($19.0); Other Assets ($80.5); and Other Current Liabilities ($13.7). For the nine months ended September 30, 1998, the combined total closed buyer/seller transactions of all MidAmerican Realty companies, including transactions prior to their acquisition, was approximately 52,800 transactions. Many factors affect the residential real estate market, and there is no assurance that the same transaction volume, or the revenues thereon, will be achieved in the future.

During the second quarter of 1998, the Company also acquired the assets of two security services companies in the Midwest.

Investments -

MidAmerican Capital invests in a variety of marketable securities which it holds for indefinite periods of time. In the Consolidated Statements of Cash Flows, the lines Purchase of Securities and Proceeds from Sale of Securities consist primarily of the gross amounts of these activities, including realized gains and losses on investments in marketable securities.

Included in investments on the Consolidated Balance Sheets is the Company's investment in common stock of McLeodUSA. McLeodUSA common stock has been publicly traded since June 14, 1996. Investor agreements related to McLeodUSA's initial public offering and subsequent merger with Consolidated Communications Inc. prohibited the Company from selling or otherwise disposing of any of the common stock of McLeodUSA prior to September 24, 1998, without the approval of McLeodUSA's board of directors. As a result of the agreements, the Company's investment was considered restricted stock and, as such, was recorded at cost in all periods prior to September 1997. Beginning in September 1997, the investment is no longer considered restricted for accounting purposes and is recorded at fair value. As of September 30, 1998, the cost and fair value of the McLeodUSA investment were $45.2 million and $176.3 million, respectively. The unrealized gain is recorded, net of income taxes, as accumulated comprehensive income in common shareholders' equity. As of September 30, 1998, the unrealized gain and deferred income taxes for this investment were $131.1 million and $45.9 million, respectively.

FINANCING ACTIVITIES, PLANS AND AVAILABILITY

MidAmerican currently has authority from the FERC to issue short-term debt in the form of commercial paper and bank notes aggregating $400 million. As of September 30, 1998, MidAmerican had a $250 million revolving credit facility agreement and a $5 million line of credit to provide short-term financing for utility operations. MidAmerican's commercial paper borrowings, which totaled $73.6 million at September 30, 1998, are supported by the revolving credit facility and the line of credit. MidAmerican also has a revolving credit facility which is dedicated to provide liquidity for its obligations under outstanding pollution control revenue bonds that are periodically remarketed.

In 1997, MidAmerican entered into a revolving agreement, which expires in 2002, to sell all of its right, title and interest in the majority of its billed accounts receivable to MidAmerican Energy Funding Corporation (Funding Corp.), a special purpose entity established to purchase accounts receivable from MidAmerican. Funding Corp. in turn sold receivable interests to outside investors. In consideration for the sale, MidAmerican received $70 million in cash and the remaining balance in the form of a subordinated note from Funding Corp. The agreement is structured as a true sale, as determined by Statement of Financial Accounting Standards (SFAS) No. 125, under which the creditors of Funding Corp. will be entitled to be satisfied out of the assets of Funding Corp. prior to any value being returned to MidAmerican or its creditors. Therefore, the accounts receivable sold are not reflected on Holdings' or MidAmerican's Consolidated Balance Sheets. As of September 30, 1998, $106.8 million, net of reserves, was sold under the agreement.

The following table displays the 1998 long-term debt retirements and issuances of MidAmerican Energy. Repayment of the February and October maturities was funded with short-term debt and cash from operations.

  Date              Issue                             Principal     Transaction
--------   ----------------------------------------  ------------   -----------
  2-1-98   6.25% First Mortgage Bonds, due 2-1-98    $ 75,000,000   Matured
 6-19-98   6.375% Medium Term Notes due 6-15-06       160,000,000   Issued
 7-15-98   8.125% General Mortgage Bonds due 2-1-03   100,000,000   Called at 105.23
 7-15-98   8% General Mortgage Bonds due 2-15-22       50,000,000   Called at 105.13
10-15-98   5.05% First Mortgage Bonds due 10-15-98     49,100,000   Matured

As of October 31, 1998, MidAmerican had $379 million of long-term debt maturities and sinking fund requirements for 1999 through 2003.

MidAmerican recently received authorization from the FERC to issue up to $500 million in various forms of debt. MidAmerican will also need authorization from the Illinois Commerce Commission (ICC) prior to issuing any securities. If 90% or more of the proceeds from a securities issuance are used for refinancing purposes, MidAmerican need only provide the ICC with an "informational statement" prior to the issuance which sets forth the type, amount and use of the proceeds of the securities to be issued. If less than 90% of the proceeds are used for refinancing, MidAmerican must file a comprehensive application seeking authorization prior to issuance. The ICC is required to hold a hearing before issuing its authorization.

Credit Ratings

MidAmerican's access to external capital and its cost of capital are influenced by the credit ratings of its securities. MidAmerican's credit ratings as of October 31, 1998, are shown in the table below. The ratings reflect only the views of such rating agencies, and each rating should be evaluated independently of any other rating. Generally, rating agencies base their ratings on information furnished to them by the issuing company and on investigation, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if in the judgment of the rating agency circumstances so warrant. Such ratings are not a recommendation to buy, sell or hold securities.

                                    Moody's
                                   Investors         Standard
                                    Service*         & Poor's *
                                   ---------         ----------

Mortgage Bonds                         A2                AA-
Unsecured Medium-Term Notes            A3                A
Preferred Stocks                       a3                A
Commercial Paper                       P-1               A-1

*Following the announcement of the Company's merger with CalEnergy, Moody's Investors Service placed its ratings of MidAmerican securities under review for possible downgrade. Standard & Poor's placed its ratings of MidAmerican on CreditWatch with negative implications pending further analysis.

As of September 30, 1998, Holdings had lines of credit totaling $140 million to provide for short-term financing needs, $136.6 million of which was outstanding.

In March 1997, Holdings announced its plan to repurchase up to $200 million of the Company's common stock. As of September 30, 1998, the Company had repurchased approximately 6.2 million shares for $114.8 million under the plan. Repurchasing the common stock reduced total common dividend requirements and aided in improving the Company's dividend payout ratio. In addition, a subsidiary of the Company holds approximately 437,000 shares of Holdings common stock which are also excluded from shares outstanding.

On October 28, 1998, Holdings' board of directors declared a quarterly dividend on common shares of $0.30 per share payable December 1, 1998. The dividend represents an annual rate of $1.20 per share.

Nonregulated Subsidiaries -

As of September 30, 1998, MidAmerican Capital had unsecured revolving credit facilities in the amount of $114 million, under which no debt was outstanding. MidAmerican Capital has $115 million of long-term debt maturities and sinking fund requirements for 1999 through 2003 related to debt outstanding at September 30, 1998. In October 1998, MidAmerican Capital paid off $20 million of its long-term debt which was reflected in current maturities of long-term debt at September 30, 1998.

Midwest Capital currently has a $25 million line of credit with MidAmerican, of which $5 million was outstanding at September 30, 1998.

In November 1998, MidAmerican Realty obtained a $25 million revolving credit facility and issued $35 million of 7.12% notes due 2010 through a private placement.

OPERATING ACTIVITIES AND OTHER MATTERS

Throughout the country, the utility industry continues to move towards a competitive environment. Although the extent of deregulation varies between states, increased competition is becoming a reality in virtually every region of the country. Numerous states have passed restructuring legislation, some of which initiated a phase-in of customer choice in 1998. Legislators and regulators in many other states are addressing the issue.

As part of many restructuring legislation packages, electric utilities are required to unbundle traditional services previously provided as a "packaged product" under their rate tariffs. Unbundling allows customers to choose their energy supplier and the level of energy delivery and retail services they desire. Gas utilities are also experiencing separation of the merchant and delivery functions for all classes of customers.

The generation and retail segments of the electric industry will be significantly impacted by competition. The introduction of competition in the wholesale market has resulted in a proliferation of power marketers and a substantial increase in market activity. As retail competition evolves, margins will be pressured by competition from other utilities, power marketers, and self-generation. Additionally, increased volatility in the energy marketplace can be expected.

As evidence of this, in late June 1998, utility energy markets in the Midwest experienced substantial price volatility due to a number of factors. The market volatility did not have a material impact on MidAmerican's energy costs. As the industry moves into a competitive utility environment, the Company expects such volatility to continue. MidAmerican cannot predict the effect of that volatility on its future revenues, energy costs or net income.

MidAmerican has been active in promoting and monitoring legislative and regulatory changes that affect the jurisdictions in which it operates. In order to successfully compete in the new environment, the Company believes it must become the leading regional provider of energy and complementary services. The Company is evaluating all aspects of its business to determine what adjustments are necessary to align them with this strategy. Aligning nonregulated businesses with the Company's strategy has resulted, and may continue to result in the next year, in negative impacts on Holdings' earnings in the form of write-downs for the sale, revaluation or discontinuance of nonregulated operations and investments. (Refer to the Results of Operations section of MD&A for comments on the earnings impact of such actions.) The following discussion further addresses changes affecting the industry and actions the Company is taking to implement its strategy.

Competition -

MidAmerican is subject to regulation by several utility regulatory agencies which significantly influences the operating environment and the recoverability of costs from utility customers. That regulatory environment has, in general, given MidAmerican an exclusive right to serve customers within its service territory and, in turn, the obligation to provide electric service to those customers.

Although the anticipated changes in the electric utility industry may create opportunities, they will also create additional challenges and risks for utilities. Competition is expected to put pressure on margins for traditional electric services. In order to lessen the impact of reduced margins, MidAmerican will focus on controlling the cost of traditional services. As part of an electric pricing settlement approved by the IUB in 1997, MidAmerican reduced its prices for most of its Iowa electric retail customers. In the IUB order approving the settlement, MidAmerican was also authorized to enter into long-term contracts with industrial and commercial electric customers. Refer to "Rate Matters" later in this discussion for further information. In addition, MidAmerican is positioning itself to offer complementary products and services as expected opportunities become available in a competitive utility retail market. Additional products and services may provide avenues to replace margins lost on traditional electric services. The Company anticipates its recently purchased real estate brokerage organizations to benefit its utility operations through the additional contact with customers and potential customers at times when the Company can meet a variety of their needs.

In December 1997, an Iowa industrial customer located within MidAmerican's IUB-approved exclusive electric service territory, filed a lawsuit against Holdings and MidAmerican in the United States District Court for the Southern District of Iowa (the Court) alleging various violations of federal antitrust laws. The lawsuit stemmed from a claim that because the customer is not free to choose its retail energy supplier, MidAmerican is engaging in illegal monopolistic behavior. In addition to damages, the customer sought the right to choose its electric retail supplier. MidAmerican maintains that its provision of retail electric service is in accordance with Iowa laws and regulations governing electric service territories, and all other applicable legal requirements. The Court issued a judgment in favor of MidAmerican. An Appeal filed by the customer is currently pending. A ruling in favor of the plaintiff could have the effect of accelerating retail competition in MidAmerican's Iowa service territory.

Legislative and Regulatory Evolution -

On December 16, 1997, the Governor of Illinois signed into law a bill to restructure Illinois' electric utility industry and transition it to a competitive market beginning October 1, 1999. MidAmerican is presently participating in proceedings which detail the new competitive environment and continues to evaluate the impact of the law on its operations.

The law required a 15% electric rate reduction for all Illinois residential customers in 1998. To satisfy its obligation, the law specifically permitted MidAmerican to receive credit for the $15.5 million, or

approximately 13%, rate reductions implemented in Illinois in 1996 and 1997. MidAmerican implemented an additional $0.9 million annual rate reduction for Illinois residential customers effective August 1, 1998. MidAmerican is also exempted from the requirement to join an independent system operator (ISO) or to form an in-state ISO.

In addition, the law provides for Illinois earnings above a certain level of return on equity (ROE) to be shared equally between customers and MidAmerican beginning in April 2000. The ROE level at which MidAmerican will be required to share earnings is a multi-step calculation of average 30-year Treasury Bond rates plus 5.50% for 1998 and 1999 and 6.50% for 2000 through 2004. If the resulting average Treasury Bond rate approximated rates which existed in 1997, the ROE level above which sharing must occur would be approximately 12%. The law allows for methods to mitigate the sharing of earnings above the threshold ROE which would reduce MidAmerican's earnings. MidAmerican continues to evaluate its strategy regarding the sharing mechanism.

Beginning October 1, 1999, larger non-residential customers and 33% of the remaining non-residential customers will be allowed to select their provider of electric supply services. All other non-residential customers will have supplier choice starting December 31, 2000. Residential customers all receive the opportunity to select their electric supplier on May 1, 2002. Customer choice will create opportunities for MidAmerican to add customers who are currently served by other utilities. At the same time, it will introduce the risk of losing current MidAmerican customers to other energy providers.

The law also addresses charges to customers for transition costs based on a lost-revenue approach. These transition fees, designed to help utilities address stranded costs, will end December 31, 2006, subject to possible extension.

MidAmerican's Iowa legislative priority for 1998 was utility property tax reform, a condition it considers precedent to utility industry restructuring. A bill to replace the current utility property tax system, which was supported by MidAmerican, was approved by the Iowa legislature and signed into law by the Governor. The legislation becomes effective on January 1, 1999.

Because energy costs are relatively low in Iowa, industry restructuring has not been an issue aggressively pursued in the state to date. During the 1998 Iowa legislative session, a group of industrial customers introduced legislation to allow retail service competition, but it did not develop further. With resolution of the utility property tax issue, MidAmerican intends to pursue the adoption of restructuring legislation in the 1999 Iowa legislative session.

Small Volume Gas Transportation -

In October 1997, the IUB adopted rules to encourage gas transportation service for small volume customers starting in 1999. MidAmerican filed its plan to unbundle service for its small volume customers on October 30, 1998. Under the plan, all of MidAmerican's small volume natural gas customers in Iowa, including residential customers, would be allowed to choose their own natural gas supplier/marketer, which may be MidAmerican's retail business unit, beginning May 1, 2000. If a customer does not expressly choose a supplier/marketer, then MidAmerican will provide the customer with market-priced service. With implementation of customer choice, the PGA (refer to the Gas Margin discussion of Results of Operations) would be modified to recover only the costs incurred by MidAmerican, as the distribution system operator, to balance the system and maintain system integrity.

Residential and Commercial Pilot Project -

On August 21, 1998, the IUB issued an Order approving, subject to the filing of appropriate compliance tariffs, MidAmerican's proposal to allow at least 15,000 Iowa families and 2,000 small businesses

to have the opportunity to select among competing electricity providers. The two-year program will allow participating retail customers in the selected test area to choose among several electricity providers, including MidAmerican, and to have that energy delivered by MidAmerican. MidAmerican expects customers will begin choosing among electricity providers in the first half of 1999. Businesses in the test area will be eligible for the program if their annual peak demand is less than four megawatts. New suppliers participating in the program will have to be certified by the IUB and meet specified requirements.

Accounting Effects of Industry Restructuring -

A possible consequence of competition in the utility industry is that SFAS 71 may no longer apply. SFAS 71 sets forth accounting principles for operations that are regulated and meet certain criteria. For operations that meet the criteria, SFAS 71 allows, among other things, the deferral of costs that would otherwise be expensed when incurred. A majority of MidAmerican's electric and gas utility operations currently meet the criteria required by SFAS 71, but its applicability is periodically reexamined. On December 16, 1997, MidAmerican's generation operations serving Illinois were no longer subject to the provisions of SFAS 71 due to passage of restructuring legislation in Illinois. Thus, MidAmerican was required to write off those amounts of regulatory assets and liabilities from its balance sheet related to its Illinois generation operations. These write-offs were not material. If other portions of its utility operations no longer meet the criteria of SFAS 71, MidAmerican could be required to write off the related regulatory assets and liabilities from its balance sheet, and thus, a material adjustment to earnings in that period could result. As of September 30, 1998, MidAmerican had $308 million of regulatory assets in its Consolidated Balance Sheet.

Energy Efficiency -

MidAmerican's regulatory assets as of September 30, 1998, included $79.3 million of deferred energy efficiency costs. Based on the current level of recovery, MidAmerican expects to recover these costs by the end of 2001. MidAmerican is also allowed to recover its ongoing energy efficiency costs on a current basis. Recovery of these costs is being collected from customers based on projected annual costs of $16.8 million, which may be adjusted annually. Amortization of the deferred energy efficiency costs and current expenditures for energy efficiency costs will be reflected in other operating expenses over the related periods of recovery. The total of such costs for the years 1999, 2000 and 2001, is estimated to be $43 million, $40 million and $35 million, respectively.

Rate Matters: Electric -

As a result of a negotiated settlement in Illinois, MidAmerican reduced its Illinois electric service rates by annual amounts of $13.1 million and $2.4 million, effective November 3, 1996, and June 1, 1997, respectively.

On June 27, 1997, the IUB approved a March 1997 settlement agreement between MidAmerican, the Iowa Office of Consumer Advocate (OCA) and other parties. Six major components of the settlement and their status are as follows:

1) On an annualized basis, prices for residential customers were reduced $8.5 million, $10.0 million and $5.0 million effective November 1, 1996, July 11, 1997, and June 1, 1998 respectively, for a total annual decrease of $23.5 million.

2) Rates for industrial customers will be reduced by $6 million annually and rates for commercial customers will be reduced by $4 million annually. MidAmerican has been given permission to implement these reductions through a retail access pilot project and through negotiated individual contracts. In the event that these contracts in the aggregate do not reduce rates by $6 million and $4 million, respectively, MidAmerican is required to apply any remaining amount to across-the-board rate reductions to customers who do not enter into contracts.

The effective date for these rate reductions was set for June 1, 1998, in the IUB Order approving the settlement. However, the IUB approved a MidAmerican request to extend the deadlines until September 1, 1998, for industrial customers and December 31, 1998, for commercial customers. The delay in deadlines includes an obligation to increase the amount of the reduction on a one-time basis to reflect the time value of money between June 1, 1998, and the new deadlines. MidAmerican estimates it will not have any interest obligation with respect to the industrial contracts, and will not incur any material interest obligation with respect to its commercial contracts.

The negotiated contracts have differing terms and conditions as well as prices. The contracts range in length from five to ten years, and some have price renegotiation and early termination provisions exercisable by either party. The vast majority of the contracts are for terms of seven years or less, although, some large customers have agreed to 10-year contracts. Prices are set as fixed prices; however, many contracts allow for potential price adjustments with respect to environmental costs, government imposed public purpose programs, tax changes, and transition costs. While the contract prices are fixed (except for the potential adjustment elements), the costs MidAmerican incurs to fulfill these contracts will vary. On an aggregate basis the annual revenues under contract are approximately $155 million.

The IUB has recently considered the contracting process in two proceedings. Its decisions in those proceedings allowed the contracting efforts to continue. Contracts remain subject to IUB regulation.

3) A tracking mechanism (Cooper Tracker) is being used to currently recover costs for capital improvements required by the Cooper Nuclear Station Power Purchase Contract. Revenues from the Cooper Tracker will total approximately $6 million in 1998. Other operating expenses will include a comparable amount for currently expensing the related costs.

4) Elimination of the Iowa energy adjustment clause (EAC). Prior to July 11, 1997, MidAmerican collected fuel costs from Iowa customers on a current basis through the EAC, and thus, fuel costs had little impact on net income. Since then, base rates for Iowa customers include a factor for recovery of a representative level of fuel costs. To the extent actual fuel costs vary from that factor, pre-tax earnings are impacted. The fuel cost factor will be reviewed in February 1999 and adjusted prospectively if actual 1998 fuel costs vary by more than 15% above or below the factor included in base rates.

5) If MidAmerican's annual Iowa electric jurisdictional return on common equity exceeds 12%, then an equal sharing between customers and shareholders of earnings above the 12% level begins; if it exceeds 14%, then two-thirds of MidAmerican's share of those earnings will be used for accelerated recovery of certain regulatory assets. The agreement permits MidAmerican to file for increased rates if the return falls below 9%. Other parties signing the agreement are prohibited from filing for reduced rates prior to 2001 unless the return, after reflecting credits to customers, exceeds 14%.

The IUB is reviewing MidAmerican's calculation of its 1997 return as a result of an objection by the OCA. MidAmerican does not expect the ultimate outcome of this issue to have a material impact on its financial condition or results of operations.

6) MidAmerican has developed a pilot program for a market access service which allows customers with at least 4 MW of load to choose energy suppliers. The pilot program is limited to 60 MW of participation the first year and can be expanded by 15 MW annually until the conclusion of the program. Any loss of revenues associated with the pilot program will be considered part of the $10 million annual reduction for commercial and industrial customers as described above, but may not be recovered from other customer classes. The program was filed with the IUB, which has approved it, and the FERC. The Company anticipates FERC acceptance by year end.

Rate Matters: Gas -

On October 27, 1998, MidAmerican made a filing with the IUB requesting a rate increase for its Iowa retail gas customers. The 4.5 percent increase represents approximately an $18.5 million increase in annual gas revenues. As part of the filing, MidAmerican requested an interim rate increase of approximately $16.3 million, annually. The IUB may adjust the requested interim amount and delay its implementation for up to ninety days. MidAmerican expects the final rates, which may differ from the requested amount, to be implemented in the summer of 1999.

Environmental Matters -

The United States Environmental Protection Agency (EPA) and state environmental agencies have determined that contaminated wastes remaining at certain 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.

The Company is evaluating 27 properties which were, at one time, sites of gas manufacturing plants in which it may be a potentially responsible party (PRP). The purpose of these evaluations is to determine whether waste materials are present, whether such materials constitute an environmental or health risk, and whether the Company has any responsibility for remedial action. The Company's present estimate of probable remediation costs for these sites is $24 million. This estimate has been recorded as a liability and a regulatory asset for future recovery through the regulatory process. Refer to Note B of Notes for further discussion of the Company's environmental activities related to manufactured gas plant sites and cost recovery.

Although the timing of potential incurred costs and recovery of such cost 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 the Company's financial position or results of operations.

Following recommendations provided by the Ozone Transport Assessment Group, the EPA, in November 1997, issued a Notice of Proposed Rulemaking which identified 22 states and the District of Columbia as making significant contribution to nonattainment of the ozone standard in downwind states in the eastern half of the United States. In September 1998, the EPA issued its final rules in this proceeding. Iowa is not subject to the emissions reduction requirements in the final rules, and, as such, MidAmerican's facilities are not subject to additional emissions reductions as a result of this initiative.

On July 18, 1997, the EPA adopted revisions to the NAAQS for ozone and a new standard for fine particulate matter. Based on data to be obtained from monitors located throughout the states, the EPA will make a determination of whether the states have any areas that do not meet the air quality standards
(i.e., areas that are classified as nonattainment). If a state has area(s)
classified as nonattainment area(s), the state is required to submit a State Implementation Plan specifying how it will reach attainment of the standards

through emission reductions or other means. In August 1998, the Iowa Environmental Protection Commission adopted by reference the NAAQS for ozone and fine particulate matter.

The impact of the new standards on MidAmerican will depend on the attainment status of the areas surrounding MidAmerican's operations and MidAmerican's relative contribution to the nonattainment status. The attainment status of areas in the state of Iowa will not be known for two to three years. However, if MidAmerican's operations are determined to contribute to nonattainment, the installation of additional control equipment, such as scrubbers and/or selective catalytic reduction, on MidAmerican's units could be required. The cost to install such equipment could be significant. MidAmerican will continue to follow the attainment status of the areas in which it operates and evaluate the potential impact of the status of these areas on MidAmerican under the new regulations.

In December 1997, negotiators from more than 150 nations met in Kyoto, Japan to negotiate an international agreement designed to address global climate change impacts by attempting to reduce so-called greenhouse gas emissions. Some scientists contend that these gases build up in the Earth's atmosphere and cause global temperatures to rise. The primary target of these emissions is carbon dioxide (CO2) which is formed by, among other things, the combustion of fossil fuels. The agreement currently calls for the United States to reduce its emissions of CO2 and other greenhouse gases to 7 percent below 1990 levels in the 2008-2012 time frame. In order for the agreement to become binding upon the United States, ratification by the U.S. Senate is necessary. The cost to the utility industry in general, and to MidAmerican, of reducing its CO2 emissions levels by 7 percent below 1990 levels would depend on available technology at the time, but could be material.

Quad Cities Nuclear Power Station-

Quad Cities Station, which is operated by and 75% owned by Commonwealth Edison Company (ComEd), began 1998 with Unit 1 and Unit 2 out of service under a Confirmatory Action Letter (CAL) addressing safety system concerns in the event of certain postulated fires. Also, in January, ComEd was informed by the Nuclear Regulatory Commission (NRC) that the performance of Quad Cities Station is trending adversely. The NRC lifted the CAL in May, and Unit 2 returned to service on May 26, 1998. On June 1, 1998, Unit 1 returned to service. During discussions with the NRC, ComEd made numerous commitments to the NRC with respect to additional long-term analysis and improvements related to those safety systems. ComEd has made significant changes in senior management positions in its nuclear program and at the Quad Cities Station since November 1997 in an effort to improve its nuclear operations.

A refueling outage is scheduled for Quad Cities Unit 1 in November 1998. No refueling outage is scheduled for either unit in 1999.

Coal Inventories -

MidAmerican continues to manage its coal inventory levels, which are significantly higher than those in early 1998. MidAmerican expects the coal inventory at each generating plant to be at or near management's desired level by year end.

Generating Capability -

In July, 1998, customer usage of electricity caused an hourly peak demand of 3,643 megawatts (MW) on MidAmerican's energy system. MidAmerican's previous record peak demand was 3,553 MW set in 1995. MidAmerican is interconnected with certain Iowa and neighboring utilities and is involved in an electric power pooling agreement known as Mid-Continent Area Power Pool (MAPP). Each MAPP participant is

required to maintain for emergency purposes a net generating capability reserve of at least 15% above its system peak demand. MidAmerican's reserve margin for 1998 was approximately 20%.

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

ACTIVITIES REGARDING YEAR 2000 DATE ISSUES

The Company's discussion of year 2000 issues addresses the Company's plans to address technical problems relating to calculations, manipulations, storage and other uses of date data which could cause some computer-controlled systems, applications and processes (hereinafter referred to as "Systems") to incorrectly process critical financial and operational information, or stop processing altogether. The discussion contains by necessity many forward-looking statements. The Company wishes to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and in order to do so includes the following meaningful cautionary statements with regard to the forward looking statements of its year 2000 plans. The Company's intentions, expectations, and predictions relating to its year 2000 efforts are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by such statements. Such risks and uncertainties include, among others, the effects of weather, competitive factors, federal and state regulatory actions, and other matters, many of which are beyond the Company's control.

Project Description -

The Company has undertaken an extensive ongoing project to address its information technology (IT) and non-IT (including embedded technology) Systems potentially affected by the year 2000 date change. The Company's approach is based on a five-phase project methodology - inventory, assessment, planning, resolution and implementation - designed to result in the identification, evaluation of potential problems, and remediation of the Company's Systems. The Company generally defines the five phases as follows:

1. Inventory Phase - The purpose of the inventory phase is to identify and document Systems used by the Company that may have a date function.

2. Assessment Phase - The purpose of the assessment phase is to collect information about inventoried Systems, including the business and technical context in which individual Systems operate, to make an informed judgment concerning an appropriate plan to mitigate year 2000 related risks.

3. Planning Phase - The purpose of the planning phase is to develop strategic and tactical plans for Systems that require replacement, repairs, upgrades or other appropriate resolutions (collectively referred to as "remedial actions").

4. Resolution Phase - The purpose of the resolution phase is to execute the plan developed during the preceding phases. Testing of Systems and/or components of Systems is commenced during this phase.

5. Implementation Phase - The purpose of the implementation phase is to perform integration testing and to verify that Systems will function properly in a production environment.

The Company's preparedness goal is to ensure high- and medium-priority Systems are suitable for continued use into the year 2000 and will perform correctly all functions that require accurate processing of

date data ("year 2000 ready" or "year 2000 readiness") by June 30, 1999. The Company classifies all Systems ranging from low- to high-priority based on their importance to carrying out the Company's business mission. System priority is based on potential impacts resulting from year 2000 problems on public and employee safety, prolonged and widespread service outages, long-term shareholder value, and ability to comply with regulatory requirements. In the case of low-priority Systems, year 2000 readiness may be delayed beyond January 1, 2000, or perhaps indefinitely. The Company plans to use the last six months of 1999 to perform post-implementation testing, address selected lower priority Systems and conduct preparedness exercises.

Vendors, customers and other third parties may affect the Company's ability to achieve year 2000 readiness. Because service reliability and financial stability are dependent on the Company's supply chain, a concerted effort is being made to investigate important third parties to assess their ability to continue to supply products or services to, or purchase products or services from, the Company. The investigation of third parties consists of documenting the nature of business relationships in correspondence and surveys to third parties and making determinations regarding their year 2000 readiness status based on the responses received. Ongoing communications with some third parties will be required for the Company to make such a determination.

State of Readiness -

Although it is difficult due to factors such as the overlapping nature of the project phases and the varying degree of complexity of the Systems being addressed to accurately determine the status of completion of a particular phase at any given point in time, the Company estimates that it has completed the process of inventorying over 90 percent of all Systems. The project is now generally in the assessment and planning phases with a focus on high- and medium-priority Systems. Detailed plans for remedial actions and testing for high- and medium-priority Systems will generally be completed by December 31, 1998. In the case of certain high-priority Systems, vendors have been retained to assist in the resolution phase, and certain high-priority Systems are currently in the implementation phase. An estimate of the actions required to be undertaken, a projected schedule regarding when those actions must be completed, and an updated estimate of the cost of resolving the year 2000 problems, including possible remedial actions with respect to such Systems, will be determined by December 31, 1998.

By December 31, 1998, the Company intends to renovate several high priority Systems (management information, materials management information, work management information, and others). Certain other Systems (customer service, electric outage management, meter control and inventory, and others) will be replaced to gain enhanced functionalities prior to the end of the first quarter of 1999. The requirement to develop and install a new customer service system ("CSS") and related applications was an outcome of the merger which created MidAmerican in July of 1995. Although potential year 2000 problems existing in the predecessor companies' CSS products were recognized, the decision to implement the new CSS was primarily in response to technical difficulties associated with application integration and the need for additional application functionalities. The costs of the new CSS and related applications are not reported herein as their development and installation was not driven by potential year 2000 concerns.

To date, the Company's investigation of third parties has focused primarily on vendors of Systems and System components. A large amount of valuable product information has been received in direct responses to the Company's inquiries, as well as indirectly through reference to Web sites hosted by vendors or representative associations such as the Electric Power Research Institute. However, information made available to the Company has not been uniform in terms of quality and quantity; i.e., information about products in which the Company has a specific interest has been definitive in some cases, while in other cases such information has been inconclusive. The Company will continue to pursue information about Systems and System components with the expectation of reaching decisions regarding the year 2000 status of all high- and medium-priority Systems by December 31, 1998, and to take appropriate corresponding actions. During the

fourth quarter of 1998, the Company will also focus substantial effort on the investigation of other third parties such as fuel suppliers, joint owners of generation and transmission facilities, rail transportation service providers, telecommunications service providers, wholesale (bulk power) customers, major retail customers, and companies that exchange electronic data with the Company, among others.

Costs -

To date, approximately $5.1 million in operating expenses have been incurred to carry out year 2000 activities. It is anticipated that an additional $8.6 million in operating expenses and $1.4 million in capital costs will need to be incurred to complete the project. Although additional unforeseen costs may be incurred, at this time the Company has not become aware of any material costs which may arise in order to achieve year 2000 readiness. Future progress toward achievement of year 2000 readiness could change this outlook.

Contingency Plans -

A comprehensive contingency plan identifying credible worst-case scenarios is being developed. The schedule for developing the plan is to complete the first draft by December 31, 1998, complete the second draft on or before June 30, 1999, and to have an operational plan in place no later than September 1, 1999.

The contingency plan comprises both mitigation and recovery aspects. Mitigation entails planning to reduce the impact of unresolved year 2000 problems and recovery entails planning to recover from problems that may occur. The Company's approach to contingency planning includes the following steps:
identify year 2000 operating risks; perform scenario risk analysis; develop risk management strategies; begin general preparations; implement power system operation planning; and implementation of year 2000 system operating plan.

Risks -

Despite the comprehensive nature of the Company's year 2000 project and the results the project is designed to produce, the Company may experience random, widespread and simultaneous failures in its generation, distribution and Systems during January 2000. Contingency plans for any known or reasonably anticipated risk of interruption to the generation or distribution of energy are being developed to plan for resources needed to be put in place to reduce the potential outage period to a minimum. Although the impact on future operations and revenues is unknown, failure of the Company's Systems to perform because of year 2000 implications could result in operating problems and costs material to the Company.

Although management believes the project will be completed sufficiently in advance of January 1, 2000, unforeseen and other factors could cause delays in the project, the results of which could likely have a material effect on the Company's results of operations. In addition, there is no assurance that the Company will not be affected by year 2000 problems experienced by third parties.

ACCOUNTING ISSUES

In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective for fiscal years beginning after June 15, 1999. SFAS 133 requires 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 certain conditions are met, such instruments may be designated as hedges. Changes in the value of hedge instruments would not impact earnings, except to the extent that the instrument is not perfectly effective as a hedge. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use in assessing the effectiveness of the

derivative. If the pronouncement was currently in effect, the Company believes it would not have a material impact on its results of operations or financial condition. The Company continues to analyze the pronouncement.

PART I. (CONTINUED)