MidAmerican accord to buy Kern River system from Williams seen benefiting both firms

By the OGJ Online Staff
HOUSTON, Mar. 8 -- Analysts see benefits for both firms in an agreement between Berkshire Hathaway Inc. unit MidAmerican Energy Holdings Co., Des Moines, Iowa, and Tulsa-based Williams Cos. Inc. to purchase the latter's Kern River Gas Transmission Co. for $960 million in cash and debt. The firms announced the definitive agreement late Thursday.
Based on terms of the deal, Williams will receive $450 million in cash, and MidAmerican would assume $510 million in debt for the Kern River system. In addition, MidAmerican will continue Kern River's scheduled expansions, Williams said. In August 2001, Williams had filed with the Federal Energy Regulatory Commission to more than double the Kern River system's capacity to 1.7 bcfd by May 2003 (OGJ, Feb. 4, 2002, p. 22).

Williams said it is selling the 926 mile pipeline to raise much-needed capital and to reduce its capital expenditure requirements by nearly $1.26 billion over the next 1½ years. "We are taking this decisive step to strengthen our balance sheet to meet the more conservative requirements of the rating agencies, which now require companies like Williams to reduce debt and increase cash flow to maintain an investment-grade credit rating," said Steve Malcolm, president and CEO of Williams.

In addition to the sale of the Kern River unit, Williams also announced the sale of $275 million of 9 7/8% convertible preferred stock to MidAmerican.

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Shortly following the companies' joint announcement, Moody's Investors Service confirmed Kern River Funding Corp.'s A2 senior unsecured debt rating. Moody's viewed the transaction as a positive for both Williams and the MidAmerican unit, saying "While the pipeline will not represent a significant portion of [MidAmerican's] cash flow, it does reflect a diversification in its source of cash flow from a high-quality, regulated asset going forward."

Moody's added that it sees the Kern River asset as being in a "strong competitive position," given its lower tariff rates compared with alternative gas transmission systems serving to California. The pipeline is relatively new as well, requiring little maintenance, Moody's said.

Fitch Ratings, meanwhile, currently rates Williams's outstanding senior notes and debentures as BBB, and its commercial paper as F2. "Although the sale will remove both a valuable asset and stable cash flow source from [Williams's] credit profile, the expected drop in consolidated [earnings before interest, tax, depreciation, and amortization] contribution from regulated pipelines should be offset by the associated reduction in debt and capital spending requirements," Fitch said.

Regarding Williams's divestment of the Kern River system, UBS Warburg analyst Ronald Barone said, "However, it should be noted that several long-term capacity contracts for Kern River were recently renegotiated, lowering fees and extending the depreciation of the system."