Fitch Affirms Kern River Funding Corp.; Outlook Stable

CHICAGO--(Business Wire)--
Fitch has affirmed the 'A-' Issuer Default Rating (IDR) and 'A-'
senior unsecured rating for Kern River Funding Corp. (KRFC). The
Rating Outlook for the company is Stable. Approximately $1.017 billion
of debt is affected.

KRFC serves as a financing vehicle for the long-term debt
obligations of Kern River Gas Transmission Co. (KRGT). KRFC's debt
obligations are unconditionally guaranteed by KRGT. KRGT owns and
operates a 1,680-mile modern and efficient interstate pipeline
delivering primarily Rocky Mountain gas from Wyoming to markets in
California, Utah and Nevada, mainly for electric generation and
steam-enhanced oil recovery projects. KRGT and KRFC are wholly owned
subsidiaries of MidAmerican Energy Holdings Co., (MEHC; Fitch IDR of
'BBB+'; Stable Outlook).

The 'A-' rating reflects KRFC/KRGT on a standalone basis, separate
from MEHC, due to the specific legal and financial structural
separations. KRGT's underlying credit quality benefits from a
portfolio of binding long-term transportation contracts, a competitive
market position, access to abundant natural gas supplies, and its
solid operating track record. KRGT continues to generate predictable
cash flows and solid debt service coverage (DSCR) measures, with the
ratio of EBITDA to debt service payment projected to be slightly above
2 times (x) over the next five years. Fitch expects project economics
to remain relatively consistent with historical levels over the life
of the debt.

Currently, the blended credit quality of KRGT shippers
approximates 'BBB+', and includes several sub-investment grade energy
merchant companies that signed on following KRGT's 2003 expansion. As
a result, non-investment grade or unrated entities now account for 39%
of all shippers by volume of total capacity. The company's credit
policy requires that sub-investment grade shippers post either letters
of credit or cash collateral equal to one-year's reservation charges.
Around 95% of KRGT's revenues are from firm transportation customers
under long-dated contracts, with 15% of contracts maturing between
2011-2013, 40% in 2016-2017 and 45% after 2018.

Rating concerns facing the company primarily relate to the pending
rate case before the FERC, as well as competitive risks surrounding
the potential for the development of competing pipeline systems and/or
LNG import terminals serving the California market.

KRGT's 2004 general rate case hearing concluded in August 2005. On
March 2, 2006, the company received an initial decision on the case
from the administrative law judge. On Oct. 19, 2006, the FERC issued
an order that modified certain aspects of the administrative law
judge's initial decision, including changing the allowed return on
equity from 9.34% to 11.2%. On April 18, 2008, the FERC issued an
order denying rehearing on the issues raised by KRGT except the
company's request to include gas pipeline master limited partnerships
in the proxy group for determining the allowed return on equity. The
FERC established a procedural schedule requiring all parties to have
their submissions completed by Aug. 1, 2008. The Stable Outlook for
KRGT reflects Fitch's expectation that the company will receive a
reasonable outcome in its rate case. A final order is expected in late
2008 or early 2009.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Karen Anderson, +1-312-368-3165 (Chicago)
Philip Smyth, CFA, +1-212-908-0531 (New York)
Sandro Scenga, +1-212-908-0278
(Media Relations, New York)

Copyright Business Wire 2008