Fitch Affirms Kern River Funding at 'A-'; Stable Outlook.

NEW YORK -- Fitch Ratings has affirmed Kern River Funding Corp.'s (KRFC) outstanding $1.215 billion amortizing senior notes at 'A-'. The Rating Outlook for KRFC has been revised to Stable from Negative by Fitch.

KRFC serves as a special purpose financing vehicle for Kern River Gas Transmission Corp. (KRGT), one of two FERC-regulated natural gas interstate pipelines wholly owned by MidAmerican Energy Holdings Co. (MEHC; senior unsecured rated 'BBB' by Fitch). KRFC's debt obligations are unconditionally guaranteed by KRGT. KRGT owns and operates a modern and efficient natural gas interstate pipeline delivering primarily Rocky Mountain natural gas to markets in California, Utah, and Nevada, primarily for electric generation and steam-enhanced oil recovery projects. The 'A-' rating reflects KRFC/KRGT on a stand-alone basis, separate from MEHC, due to the specific legal and financial structuring of KRGT and KRFC's corporate structure and debt obligations.

The affirmation of KRGT's rating follows Fitch's review of recent operating and financial performance, including results of KRGT's 2003 expansion project, which commenced commercial operations in May 2003. The 2003 expansion project doubled KRGT's capacity by adding 886 million cubic feet per day of additional transmission capacity along existing rights of way. Consistent with the terms of KRGT's debt agreements, the $1.2 billion expansion project was financed with 70% debt and a 30% equity contribution from MEHC and is backed by a portfolio of firm long-term transportation agreements for 100% of the expansion capacity.

The revised Rating Outlook reflects the stabilization of KRGT's shipper base, the credit quality of which eroded following the 2002 collapse of the energy merchant sector. In particular, KRGT's 2003 expansion shipper base includes several energy merchants/IPPs, which now carry sub-investment-grade ratings. In mitigation, KRGT has received either LCs or cash collateral equal to one year's transportation revenues for all financially distressed shippers. In addition, ongoing efforts to re-assign capacity held by certain financially stressed shippers has been successful. Fitch also notes that the project's six-month debt service reserve account provides an added layer of creditor protection in a downside scenario.

KRGT's competitive position further mitigates ongoing capacity turnback risk. As the only interstate system providing a direct interconnection between growing Rocky Mountain gas production and end-user markets in Southern California, KRGT enables shippers to minimize higher cost-rate stacking and bottlenecks on California's various intrastate systems. In addition, KRGT provides service to other attractive markets along its system, including Las Vegas and Salt Lake City. These factors have combined to create demand for shipping service on KRGT that has enabled KRGT to consistently operate at or above its design capacity since 1993 and should enable KRGT to effectively remarket capacity in the event of shipper default.

KRGT continues to generate predictable cash flows and debt service coverage measures due to its levelized rate structure, which increases depreciation as interest expense declines. Debt service coverage over the past several years has approximated 2.0 times (x), which is ahead of original base case estimates. Fitch expects project economics to remain relatively consistent with historical levels over the life of KRGT's proposed expansion debt. The final outcome of KRGT's rate case with FERC could have a modest impact on future cash flows. In addition, stress test analysis demonstrates KRGT's ability to maintain an acceptable level of debt service coverage under more adverse operating conditions, including a scenario under which 40% of KRGT's shippers default, with only 50% of lost revenues recaptured in the interruptible market.