Fitch Affs Kern River Funding at 'A-'; Outlook Revised to Negative.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 24, 2003

Kern River Funding Corp.'s (KRFC) outstanding $482 million 6.676% amortizing senior notes due 2016 are affirmed at 'A-' by Fitch Ratings.

In addition, Fitch expects to assign an 'A-' rating to KRFC's planned issuance of new senior notes in May 2003 to refinance the 2003 Expansion project's construction credit facility. The Rating Outlook for KRFC has been revised to Negative from Stable.

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 standalone 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 current operating and financing strategies including KRGT's 2003 Expansion project scheduled to commence commercial operations on May 1, 2003. The 2003 Expansion project will approximately double KRGT's capacity by adding 886 million cubic feet per day of additional transmission capacity along existing rights of way. KRGT has initially funded the $1.2 billion construction cost with a construction credit facility provided by a syndicate of banks and supported by a completion guarantee from MEHC. Pursuant to terms under its existing indenture, KRGT plans to permanently finance the expansion with 70% non-recourse project debt and a 30% equity contribution from MEHC. In addition, KRGT has executed long-term binding agreements with shippers for 100% of the expansion capacity.

The revised rating outlook reflects the diminished credit quality of KRGT's underlying customer base. Several of the shippers on KRGT consist of 'BB' and 'B'-rated energy merchants and independent power producers, which originally subscribed for capacity on KRGT to serve new gas-fired generation in the Southwest and California. As a result, the blended credit quality of KRGT's shipper base has fallen to the 'BBB' range versus an historical level in the 'A' range. Fitch believes that KRGT has taken appropriate measures to mitigate near-term counterparty credit risk. In particular, KRGT has received either letters of credit or cash collateral equal to one year's transportation revenues for most sub-investment grade shippers and recently Occidental Energy Marketing replaced PG&E Generating Co. and Questar Energy Trading replaced NRG Energy, Inc. as long-term shippers. In addition, the project's six-month debt service reserve account provides an added layer of creditor protection in a downside scenario.

KRGT's strong competitive position further mitigates ongoing capacity turnback risk. As the only interstate system providing a direct interconnection between growing low cost 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 re-market capacity in the event of shipper default.

KRGT should continue 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 last several years has approximated 1.9 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. 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.