Fitch Affirms MEHC and Subsidiary Ratings; Outlook Stable; NNG Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed MidAmerican Energy Holdings Company's (MEHC) long-term Issuer Default Rating (IDR) at 'BBB+' and its short-term IDR at 'F2'. MEHC's individual security ratings have also been affirmed. The Rating Outlook is Stable.

Fitch has also affirmed all the IDRs and individual security ratings on the following MEHC subsidiaries: MidAmerican Funding, LLC (MF); MidAmerican Energy Company (MEC); PacifiCorp (PPW); Kern River Funding Corporation (KRF); and Northern Natural Gas Company (NNG).

Fitch has revised NNG's Rating Outlook to Negative from Stable. The Outlook on MEHC's other subsidiaries remains Stable.

A complete list of all rating actions is provided at the end of this release.

Approximately $20.4 billion of debt is affected by these rating actions.

NNG's Outlook Revision:

The revision of NNG's Outlook to Negative from Stable reflects Fitch's expectations for debt to EBITDA to remain greater than 2.8x. The weakening of this leverage metric over the past few years has been partly due to the reduction in natural gas prices and narrowing of basis differentials, which has negatively impacted interruptible transportation prices. In addition, the uncertainty resulting from changing North American natural gas supply dynamics has somewhat lessened the competitive stronghold of pipelines such as NNG that are sourced from the more traditional supply basins.

A downgrade of NNG's ratings would likely occur if the company does not decrease its debt to EBITDA metric below 2.5x on a sustainable basis under Fitch's financial projections.

Key Rating Factors:

--The underlying financial strength and relative predictability of MEHC's core U.S.-based electric utility and natural gas pipeline companies and U.K. electric distribution utilities;

--The salutary financial effects of MEHC's affiliation with Berkshire Hathaway Inc. (BRK; IDR 'AA-' with a Stable Outlook);

--Moderately high consolidated debt leverage;

--Regulatory outcomes in pending and future rate case proceedings;

--MEC, PPW, KRF, and NNG have been ring-fenced by special purpose entities to preserve the credit quality of each operating company.

Diversified Stable Businesses:

MEHC's ratings and Stable Outlook reflect the company's stable cash flows from five relatively low-risk regulated utilities and natural gas pipelines located in the U.S. and U.K. The company's U.S. renewable energy operations also provide a good financial return and platform for growth.

The electric and gas utility operations of PPW and MEC are diversified across several states and geographic regions, limiting exposure to any one regulatory jurisdiction or to the effects of extreme weather. NNG's pipeline operations provide essential natural gas supply under long-term contracts to utilities in the Midwest, and Kern River Gas Transmission Company (KRGT; parent of KRF) serves growing areas in Salt Lake City, southern Nevada, and Southern and Central California.

Affiliation with Berkshire Hathaway:

MEHC's ratings also reflect BRK's 90% ownership of the company and its strategic commitment to use MEHC to expand its investments in power and gas assets. Fitch views MEHC's affiliation with BRK as being beneficial to MEHC's credit quality, mitigating concern about MEHC's moderately high consolidated financial leverage and large consolidated capital expenditure program.

BRK has opportunistically provided capital and financing to MEHC to pursue acquisitions, including the PacifiCorp (PPW) acquisition in March 2006 and the attempted Constellation Energy Group (CEG) acquisition in 2008. MEHC's CEG acquisition bid was ultimately rejected, but as a result of the termination of the transaction MEHC received net cash proceeds of approximately $725 million.

Unlike most utility holding companies, MEHC benefits significantly from capital retained as the direct result of BRK's financial strength, which obviates the need to upstream dividends.

In addition, MEHC and BRK have a $2 billion equity commitment agreement (ECA) through February 2014. ECA equity contributions may only be used for the purpose of paying MEHC debt obligations when due and funding the general corporate purposes and capital requirements of MEHC's regulated subsidiaries.

Moderately High Consolidated Debt Leverage:

MEHC's consolidated financial metrics are relatively weak compared to similarly rated companies. For 2011, MEHC's funds flow from operations (FFO) to debt was 16.2% and its debt to EBITDA was 5.1x.

Fitch expects these leverage metrics to remain roughly at these levels through 2013, before improving in 2014 following the conclusion of significant capital expenditure projects at the utilities and recovery of these expenditures through rate case filings. Fitch expects MEHC's FFO to debt to strengthen to around 17% in 2014 and debt to EBITDA to improve to around 4.5x.

Growth in EBITDA and FFO from utility projects along with the current low interest rate environment should result in improvements to interest coverage metrics. Fitch projects EBITDA interest coverage to approach 4x by 2014, from 3.3x at 2011, and FFO interest coverage to also be around 4x in 2014, from 3.7x in 2011.

Good Liquidity:

MEHC's liquidity position is good, with $880 million of cash and cash equivalents on its consolidated balance sheet as of June 30, 2012, and sufficient availability under the revolving credit facilities of the parent and each subsidiary.

In addition, MEHC's equity credit agreement with BRK, as described above, provides up to $2 billion through February 2014. The consolidated company has roughly $2.7 billion of long-term debt scheduled to mature in the years 2013-2015, which Fitch views to be a manageable amount of near-term maturities given the scale and strength of MEHC's consolidated operations.

MF and MEC:

Fitch's affirmation of MF's 'BBB+' long-term IDR and MEC's 'A-' long-term IDR reflects MEC's relatively low business risk profile and solid credit metrics. The ratings also consider the utility's constructive Iowa regulatory environment.

Commodity price risk at MEC is mitigated by the utility's long generating capacity position. However, the combined effects of cyclical downturn and a prolonged recovery and low wholesale power prices and off-system sales have pressured MEC's operating results.

MF is an intermediate holding company that is a wholly owned subsidiary of MEHC and the indirect parent of MEC. MF's ratings are based on the credit quality of MEC, which is the primary source of cash flow to service its debt obligations and also benefits from the support of its ultimate corporate parent, BRK.

PPW:

The affirmation of PPW's 'BBB' long-term IDR considers the company's solid financial position, competitive resource base, and relatively balanced and diversified regulatory environment.

The current ratings and Stable Outlook assume PPW continues to benefit from parent company support and reasonable outcomes in pending and future rate proceedings to recover anticipated, significant capital investment.

Rating concerns for PPW investors include execution and recovery of its capex program. Emergence of more stringent environmental rules and regulations are also a concern.

KRF:

Fitch's affirmation of KRF's 'A-' long-term IDR reflects the pipeline's relatively predictable and strong earnings and cash flow metrics, reasonable regulatory oversight, and manageable capital expenditure plans. KRF is a financing vehicle for the long-term debt obligations of KRGT.

KRF's debt is unconditionally guaranteed by KRGT, which owns and operates a 1,700 mile interstate pipeline delivering primarily Rocky Mountain gas from Wyoming to markets in Utah, Nevada, and California. Customers are under long-term contracts, and the pipeline has access to relatively low-cost natural gas supply and a solid operating track record.

KRF's 'A-' rating reflects KRF/KRGT's standalone credit quality as the result of specific legal and structural separations from its parent, MEHC.

NNG:

The affirmation of NNG's 'A' long-term IDR reflects the pipeline's strong business profile as an essential supplier of natural gas to many Midwest utilities under long-term contracts, favorable operating characteristics, and low regulatory risk. However, NNG's weakened debt leverage metrics, as previously discussed, place strain on the company's credit ratings.

NNG's competitive position is strong, with access to five major supply basins and a customer base primarily comprised of local distribution companies. NNG's competitive pressures are mitigated by the pipeline's stable customer base and geographic location.

Fitch has affirmed the following ratings with a Stable Outlook:

MidAmerican Energy Holdings Company (MEHC)

--Long-term IDR at 'BBB+';

--Senior unsecured debt at 'BBB+';

--Preferred stock at 'BBB-';

--Short-term IDR at 'F2'.

MidAmerican Funding, LLC (MF)

--Long-term IDR at 'BBB+';

--Senior secured debt at 'A-'.

MidAmerican Energy Company (MEC)

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A';

--Preferred stock at 'BBB+';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

PacifiCorp (PPW)

--Long-term IDR at 'BBB';

--Senior secured debt at 'A-';

--Senior unsecured debt at 'BBB+';

--Preferred stock at 'BBB-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Kern River Funding Corporation (KRF)

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-'.

Fitch has affirmed the following ratings and revised the Outlook to Negative from Stable:

Northern Natural Gas Company (NNG)

--Long-term IDR at 'A';

--Senior unsecured debt at 'A'.

Rating Triggers

MEHC: Given the moderately high debt leverage of the consolidated entity, a positive rating action on MEHC is remote. A negative rating action on MEHC is unlikely, but could occur if FFO to debt were to decrease and be sustained below 16%. In addition, a negative rating action on MEHC would likely occur if there were a meaningful change in the relationship with owner BRK.

MF and MEC: The one-notch separation in long-term IDRs between MF and MEC is due to the extra layer of debt held at MF. If MF were to redeem its parent-level debt, its long-term IDR would likely be upgraded to that of MEC. Otherwise, a positive rating action on MF and MEC is remote, due to the already strong ratings of MEC. A negative rating action on either entity could occur if FFO to debt were to decrease and be sustained below 20%.

PPW: A positive rating action on PPW could occur if FFO to debt were to increase and be sustained near 20%. A negative rating action on PPW could occur if FFO to debt were to decrease and be sustained below 16%.

KRF: A positive rating action on KRF is remote given the company's strong rating, the pipeline's limited scope, and competitive pressures on the system. A negative rating action is also unlikely at this time.

NNG: A positive rating action on NNG is remote, given the aforementioned negative pressures on the credit rating. A ratings downgrade would be likely if NNG's debt to EBITDA is not decreased below 2.5x under Fitch's financial projections.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);

--'Rating North American Utilities, Power, Gas, and Water Companies' (May 16, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677735

Rating North American Utilities, Power, Gas, and Water Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=625129

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