20051130Quarterly debt report.pdf

825 E. Mu/tnomah St.
Portland OR 97232
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PACIFIC POWER UTAH POWER ; 'Ul3UC
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November 28, 2005
Idaho Public Utilities Commission
472 West Washington
Boise, Idaho 83702-5983
Attn: Ms. Jean D. Jewell
Commission Secretary
Re:Quarterly Debt Report
Pursuant to Case No. P AC-05-, PacifiCorp (the Company) hereby files an original and eight
copies of its debt report for the period ended September 30, 2005 as well as recent write-ups
from major bond rating agencies.
Long-Term Debt Activity:
Amount outstanding at June 30, 2005 029 158 000
Issuances
None
Maturities
None
Amount outstanding at September 30, 2005 $4.029.158.000
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Long-Term Debt Authorization:
Amount authorized May 17, 2005 by Order No. 29787 000 000 000
Issuances
June 13 , 2005 issuance of 5.250% FMBs due June 2035 (300 000 000)
Remaining authorization at September 30, 2005 $700.000.000
If you have any questions regarding this summary, please call me at [phone].
Sincerely,:t~
Matt Fechner
Treasury Analyst
Enclosures
, !
Credit F AQ: PacifiCorp s Rate Case Ruling
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Credit FAQ: PacifiCorp s Rate Case Ruling
PrImary Credit Ana\y$t
Anne Selling, San Francisco (1) 415-311-5009;
anne - selting Qstandardandpool'$.com
Quick Links
Frequently Asked Questions
Public8tion date: 07 ..Qct.Q6. 16:68:16 EST
Reprinted from RatingsDirect
PacifiCorp (A-J\Natch NegJA-2) received e disappointing ruling
from the Oregon Public Utilities Comrrission (OPUC) on Sept.
, 2005, that cut in half the $52.5 millon retail rate increase
negotiated as part of a stipulated settlement with various parties,
including staff. The decision authorized just $25.9 milUon, or a
retail rate increase of about 3.20..-b, which became effective Oct. 4,
2005.
The $26 million disallowance reflects adjustments the OPUC
made in the amount of income taxes that PacifiCorp may collect
in its retail electric rates related to recently enacted legislation.
Senate Bin (S6) 408. Oregon constitutes about 30% of
PacifiCorps retail market While the ruHng is adverse for credit
quality, no near-term rating action is foreseen at this time as
Scottish Power supports PacifiCorp s ratings. Longer-term. there
could be an adverse ratings action, deperKfing on factors that are
discussed in detail below.
Frequently Asked Questions
VVhat is sa 408?
sa 408 addresses concerns that Oregon uti&ties may be
collecting income tax expenses in retail electric and natural
gas rates that are not ultimately paid by either the utility or itS
affiUate (such as a parent) to taxing authorities. A utility's
federal and state income taxes are considered an operating
expense for rate making purposes. In Oregon, as in many
other states, retail rates are set at levels designed to cover
operating expenses, including income taxes, over an agreed
upon test period. But differences frequently arise between
amounts that an electric or gas utiHty collects that are
attributable to i1:$ stand-alone tax obligations and amounts that
the cons06dated company actually pays in taxes. Such
differences arise for a number of reasons; For example, a
utility's positive stand-alone tax obligation could be properly
combined with the generation of income 8$ well as losses
within the parent company's federal tax return. Tax payments
reflect aU the combined income and loss positions of the
consolidated entity.
The essence of S8 408 is that it overturns the precedent of
calculating utility taxes on a stand-alone basis and instead
requires the OPUC to track taxes collected by utilities in rates
and compare this amount against taxes ultimately paid by the
utility or the consolidated corporation to state, federal and
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Credit F AQ: PacifiCorp s Rate t;ase Ruhng 1-'age 2 of ~
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local governments. The legislation authorizes the
8$tablishment of a mechanism that automatically flows back
to retail ratepayen!) any differences in income taxes collected
versus income taXe$ actually paid by the fiting company that
are attributable to regulated operations.
The genesis of SB 408, which passed by a significant margin
in the Oregon Legislature, has to do with issues surrounding
Enron s ownership of Portland General Electric (PGE;
BBB/Stable/-). Consumer advocates have charged that while
the utility collected rril60ns of dollars in retail rates for PGE'
estimated tax obligations, offsetting losses in other Enron
operations resulted in its paying no federal or state income
taxes for several years. As a result, PacifiCorp has found itself
drawn into a sensitive poticy issue that has generated
widespread concern throughout the state.
How does sa 408 affect PacifiCorp and Scottish
Power?
S8 408 applies to investor-owned electric and natural gas
utilities that are regulated by the OPUC and selVe more than
50,000 customers. Other utilities that are potentially affected
are PGE, Northwest Natural Gas (A+/Stable/A-1), Avista
(BB+lStabIelB-1) and PacifiCorp.
While all four of these investor-owed utilities will be required to
file tax information, those most vulnerable to actual income
tax-based adjustments appear to be PGE and PacifiCorp.
PacifiCorp s potential SB 408 tax adjustments stem principally
from:
. The ability of its U.S. holding company to deduct
interest expenses on its federal and state income tax
filings, which it piiJys to Scottish Power in association
with its acquisition indebtedness; and
. The U.S. holding company s ability to utilize tax
deductions from PacifiCorps non-regulated affili;:ites.
Scottish Power purchased PacifiCorp in 1999. Subsequent to
the acquisition, Scottish Power created PacifiCorp Holdings
Inc. (PHI), a non-operating, indirect, wholly owned subsidiary.
PHI is the parent of PacifiCorp and of Scottish Power's three
other U.S. subsidiaries. including PPM Energy.
The interest that PHI pays to Scottish Power that is
associated with an inter-company loan is deductible on the
consolidated tax returns that PHI files on behalf of PacifiCorp
and the other three subsidiaries. At fiscal year end March 31
2005, PHI reflected an inter-company loan balance of about
$2.4 billion, and PHI paid to Scottish Power approximately
$160 million in related interest. This constituted a direct offset
to PHI's consolidated tax liability, and thus reduced the
consoDdated groups taxable income. SB 408 will likely mean
that until Scottish Power sells PacifiCorp, the utiUty could face
future retail rate deductions induced by the automatic
adjustment mechanism, unless PHI debt is reduced.
How is the automatic tax adjustment mechanism
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CredIt ,FAQ: PacifiCorp s Rate Case Ruling
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expected to work?
SB 408 applies to income taxes collected from ratepayers and
paid to governments beginning Jan. 1 , 2006. The legislation
specifies that beginning in 2005, utilities must file an annual
tax report on October 15. For the three preceding fiscal years
the report must provide: A) the amount of taxes paid by the
utility, or the consorldated entity's income taxes paid that are
attributable'" to regulated operations; and B) the amount of
taxes authorized for coDection in the utility's retail rates. The
tesser of item A is then compared to item B. and if the
difference is at least $100 000, an adjustment Is triggered.
sa 408 appears to apply the adjustment symmetrically
allowing for the possibi6ty of an increase in retail rates due to
higher tax obligations of the stand-alone utility. But a concern
from a credit perspective is that the OPUC may suspend the
adjuster if it is found to have a materiaUy adverse effect on
ratepayers. This suggests that in its application, the
mechanism would more commonly be used to reduce retail
rates rather than to pass through rate increases to
consumers. Many of the details ofthe mechanism are 1eft to
the OPUC.
When will the details of the mechanism be finalized?
The OPUC issued interim ru les on Sept. 15 to enable the Oct.
15 filings. These rules have proved difficult to decipher and
have sparked significant concem of the utilities, because there
is a potentia1 for unintended consequences. For example, the
temporary rules seem to apply a tax adjustment even in cases
where the consolidated tax payments far exceed the amount
of taxes coP8Cted and paid by the utility. Troubling for the
pending MidAmerican Energy Holdings Co. (MEHC)
acquisition of PacifiCorp is interim ru1e language that would
allow the OPUC to allocate the tax benefits of losses at
unregulated affiliates owned by BeJ1lshire Hathaway to
Oregon ratepayers in the form of a rate reduction.
Permanent rules are expected to be in place by mid-January
2006. The content of these permanent rules will be critical for
credit quality-open-ended rules that introduce a wide set of
circumstances in which a rate reduction could be required will
increase regulatory risk and potentially increase the variability
of regulated cash flows. Also unknown is when the tax trigger
should begin. It is PacifiCorp s position (and that of some
intervenors) that filings made in 2005 and 2006 are to be used
for information purposes only, and that only in late 2007
should the filings be used trigger an actual adjustment. But
until permanent rules are in place, it is difficult to determine
how the details will work.
How is it that S8 408 formed the basis of reductions in
PacifiCorp s rate case?
Treatment of taxes was a contested issue in PacifiCorp
general rate case. and no stipulations were reached with
parties on this issue. While the case was pending before theOPUC, sa 408 was passed on an emergency basis, which
means the bill became effective when the state's governor
signed it on Sept. 2, 2005. The Industrial Customers of
Northwest Utilities (lCNU) argued that SB 408 should be
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Credi t FA Q: Pacifi Corp's Rate Case Rulang
considered in the context of PacifiCorp s general rate case
decision. The OPUC agreed.
Because it was not expected that the OPUC would apply the
principles of SB 408 until after permanent rules were adopted
for taxes paid after Jan. 1, 2006, the ruling was a surprise.
The OPUC appears to have predicated it$ authority to apply
sa 408 to the general rate case on the fact that PacifiCorp
retail rates are based on a forward 2006 test year, and
therefore some portion of the authorized rate increase is to
cover expected 2006 expenses, including income taxes. The
OPUC noted in its decision that it is not -bound to maintain
our practice of stand-alone calculations, particularly when
new statute comes into play." In reducing the settlement by
half, the OPUC did not formally apply an adjustment
mechanism but followed a methodology presented by the
Citizen s Utility Board, 8 ratepayer advocate. More balanced
rules proposed by staff were rejected.
VVhat are the immediate credit implications for
PaciftCorp?
In the short run, Standard & Poor's is taking no rating action.
Critical to understanding this decision is the fad that
PacifiCorps current '' corporate credit rating (CCR) is based
on the consofidated credit quality of Scottish Power. Thus,
rating action, if it were to occur, wou1d reflect the impact of the
OPUC rate case decision and the future risks of SB 408 on
the consolidated operations.
PacifiCorp represents about 45% of Scottish Power's
operating profit, with the Oregon market being the second-
largest service area behind Utah. Scottish Power produced
about (1.2 bilfton (or $2.2 bUnon) of funds from operations
(FFO) in fiscal 2005 (ending March 31). so the pre-tax $26
milRon disanowance represents about 1% of cons06dated
cash flows. Thus, the immediate consequences of the rate
ca$8 are nominal from the cons06dated perspective. Key
consoftdated cash flow ratios for fiscal 2005 were appropriate
for the. rating, with funds from operation (FFO) interest
coverage of about 4.0x and adjusted FFO to total debt of
20%.
What are the longer-term credit implications?
In the long run, the credit imp6cations are more complex, and
win be a function of a number of unknowns. For example. until
permanent rules are in place, it is difficult to assess the full
impact of S6 408 on future utility financial performance. In
addition. PacifiCorp has vigorously disputed OPUC'
appfication of SB 408 to the rate case proceeding, calling the
OPUC decision premature, ill advised, and possibly illegal. If
the company takes legal action regarding the rate case and
prevails, it could recoup the rate reductions, though not for
some time, and 5B 408 will continue to apply to Mure
revenues earned by the utility. Also, While the legislation
applies only to Oregon, there is potential for this issue to
become a policy concern in other states, especially in Utah
which is PacifiCorp s largest market, accounting for 40% of
the company s retail electric revenues. On Od. 6, 2005 the
Committee of Consumer Services issued a letter calling on
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Credit F AQ: PacifiCorp s Rate Case Ruling
the Utah Public Service Commission to investigate
consofidated tax issues.
Most importantly, Scottish Power is in the process of selling
PacifiCorp. As a result, PacifiCorps ratings are on
CreditWatch with negative Implications, reflecting PacifiCorp
weak credit metrics, which would not support its current CCR
were it rated on a stand-alone basis. The OPUC decision will
reduce after-tax cash flows by about $16 million. And absent
any changes in PHI's debt and tax arrangements, stand-alone
performance will be weaker than forecast These Impacts
could be ephemeral, if it is completed. However, the extent to
which sa 408 may impact PacifiCorp following the sale to
MEHC is also uncertain and is dependent on the permanent
decision. For example, given the broad nature of Berkshire
businesses. it is likely that loss-making companies will exist in
any given year, which under the temporary rules could result
in rate reductions to Oregon customers.
VVhat effect could this have on the sale of PacifiCorp
to MEHC?
While the parties have made no public statements in this
regard, it is clear that the legislation could influence whether
MEHC proceeds with the sale because the permanent rules
have the potential to affect the future profitability of PaciflCorp.
MEHC's offer was made before SB 408 was passed and,
since then, it has closely followed the developments. After the
temporary rules were announced, MEHC met with multiple
parties, including the state governor. The compants pubUc
statements have expressed significant concern about the
interim rules. Standard & Poor's is monitoring the situation
and will comment further as conditions warrant.
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I STAN
DARD
&POOR'S IRATINGSDIRECT
Return ID Regular FormatResearch:
Research Update: PacifiCorp s First Mortgage Bonds Assigned '
Preliminary Rating
Publication date: 2O-Sep-2005
Primary Credit Analyst(s): Anne Selting, San Francisco (1) 415-371-5009;
anne - sel1ing~sta ndarda ndpoors. com
Credit Rating: A-N'Jatch Neg/A-
. Rationale
on Sept. 20, 2005, Standard & Poor s Ratings Services assigned its '
preliminary rating to PacifiCorp s first mortgage bonds and its 'BBB+'
rating to senior unsecured obligations under a mixed shelf registration
filed by the company on Sept. 6, 2005. The filing permits the issuance of
up to $700 million in senior secured and unsecured debt.
The '' corporate credit rating on PacifiCorp reflects the
consolidated credit quality of the utility s parent, Scottishpower PLC
(A-/Stable/A-2) . Ratings of PacifiCorp remain on CreditWatch with negative
implications following the May 2005 announcement that the Oregon-based
utility is to be sold to MidAmerican Energy Holdings Inc. (MERC:
BBB-/Watch pos/--) for $9.4 billion, including $5.1 billion in cash, and
the assumption of $4.3 billion in net debt and preferred stock. The
purchase will be effectuated by the purchase of the outstanding shares of
common stock of the utility, which is currently held by PacifiCorp
Holdings Inc. (PHI; A- ICW Developing). PHI is the indirect holding company
for scottishpower s u.s. interests, which, in addition to PacifiCorp,
include PPM Energy Inc., Pacific Klamath Energy, and pacifiCorp GroupHoldings (PGHC).
pacifiCorp is a vertically integrated electric utility that serves
about 1.6 million customers in portions of Utah, Oregon, Wyoming,
Washington, Idaho, and California. Utah and Oregon accounted for about 70%
of retail electric revenues in fiscal 2005 (ended March 31). The company
is regulated by the state utility commissions in each of these states.PacifiCorp s satisfactory business profile score of '5' (on a 10-point
scale, where '1' is the strongest) reflects a predominately coal-fired
generation fleet that provided about 80% of energy requirements in fiscal
2005, low retail electric rates relative to other investor-owned utilities
in the western U. S., and a regulatory profile that has been improving,
although the utility lacks a fuel and purchased power adjustment mechanism
in any of the jurisdictions it serves. However, persistently poor
financial performance caused by a variety of factors, including the
California power crisis, historic disallowances for purchased power,
regulatory lag, issues with plant performance, and large capital
expenditures prompted scottishPower to sell pacifiCorp, which it acquired
in 1999.
The CreditWatch with negative implications status reflects that the
current '' corporate credit rating on pacifiCorp is based on
scottishPower s consolidated credit profile, whose solid financial
performance has compensated for its weaker U.s. utility, which constitutes
about 45% of cash flows. On a stand-alone basis, PacifiCorp s debt
leverage and cash coverage ratios are solidly in the
I BBB' category. For
the first quarter ending June 30, 2005, funds from operations (FFO) to
interest and FFO to total adjusted debt was 3.3x and 16.3%, respectively.
standalone debt to total capitalization was 58.9%, adjusted for
PacifiCorp s purchased power obligations. Thus, how the acquisition is
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structured will materially affect PacifiCorp s ratings if the transaction
closes. In regulatory filings, MERC has stated its intent to create a
limited liability company, PPW Holdings LLC, which will be a direct
subsidiary of MEHC. MEHC has indicated that no new debt will be issued at
PPW, and that existing utility debt of $3.9 billion and $86.3 million inpreferred stock (both as of June 30) will reside at PacifiCorp.
PacifiCorp I s cash flows have been volatile for an investor-owned
utility, but have stabilized somewhat in recent years, with FFO reaching
$805 million in fiscal 2005, in line with fiscal 2004. But due to steady
increases in debt driven largely by rising capital expenditures, financial
metrics deteriorated slightly in fiscal 2005 relative to fiscal 2004, but
are significantly improved over performance from fiscals 2001 through
2003. In the first quarter of fiscal 2006, PacifiCorp issued $300 million
in first mortgage bonds to pay down the utility s commercial paper
balances. This increased leverage was partially offset by an equity
contribution of $125 million from PHI made on June 30, 2005, as discussed
further in the short-term. ratings section below. .
Capital expenditures are a substantial cha11~nge for the utility, and
largely account for the utility's negative free operating cash flow
position of $141 million at year-end fiscal 2005, when capital
expenditures totaled $852 million. The company estimates that for the next
five years, more than $1 billion will be needed each year for new plant
construction, emissions and environmental compliance, and invest~nt in
infrastructure, particularly in Utah, where retail customer growth isforecast to be about 3% per annum.
The transaction does face some regulatory risk; the Federal Energy
Regulatory commission and all six state commissions must approve the sale.
However, the companies will not require Securities and Exchange Conmdssionapproval, which could have been a meaningful hurdle, because the Energy
Policy Act of 2005 repealed the Public Utilities Holding Company Act
(PUHCA) in August. scottishPower shareholders approved the sale in July
2005.
PacifiCorp has asked the six commissions to rule by February 2006 to
enable the transaction to close by the end of Pacificorp ' s fiscal year
ending March 31, 2006. The terms of the purchase provide that the sale
must be completed by May 2006; however, if all conditions are satisfied
except the regulatory approvals, either the buyer or seller may extend the
purchase agreement until February 2007.
Short-term rating factors
The short-term rating on Scottishpower, Scottish Power U.K. PLC, and
PacifiCorp is I A-. ScottishPower ' 6 consolidated liquidity is good,
owing to a steady, predictable net cash flow stream produced by
regulated businesses, minimal debt maturities over the next few
years, and good credit facility capacity. Cash and other short-termdeposits, which amounted to about ~1. 75 billion ($3.2 billion) at
March 31, 2005, are held in a variety of quickly accessible funds.
Full capacity exists under a $1 billion revolving credit facility,
split between a $625 million facility and a $375 million facility,
both due in 2008. ScottishPower U. K. maintains a $2 billion
Euro-commercial paper program, which is undrawn.
PacifiCorp provides for its own liquidity needs. Its cash and
cash equivalent position was $168 million as of June 30, down from
the $199 million as of year-end fiscal 2005. In addition, it has an
$800 million commercial paper program that is backstopped by a
currently undrawn revolving credit agreement that terminates in Nay
2007. Short-term debt balances totaled $314 million as of the same
date. Regulatory authorities limit PacifiCorp from issuing more than
$1.5 billion in short-term debt.
Additional cash will be provided in the coming year in the form
of planned equity contributions from PHI. The purchase agreement
specifies that scottisbPower via PHI make a common equity
contribution to PacifiCorp in quarterly amounts that total $500
million per year for fiscal 2006, rising to $526 million in fiscal
2007. (The latter year amount will be refunded to PHI in terms of an
increased sale price to ScottishPower if the transaction closes.) Net
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of dividends from the utility, which are capped in the acquisition
agreement, in fiscal 2006 PHI/ScottishPower cash equity contributions
to PacifiCorp will be roughly $285.2 million. In contrast, in fiscal
2005, PacifiCorp s dividends paid to PHI totaled about $195 millioh,
and no equity investments were made.
Future maturities of $289 million in fiscal 2006 are in line
with historic obligations. Affiliate transaction rules restrict
PacifiCorp from lending to any of PHI I s subsidiaries or U.
affiliates.
. Ratings List
PacifiCorp
Corp credit rating A-/Watch Neg/A-Z
Ratings assigned
First mortgage bonds
Senior unsecuredobligations
A-/Watch Neg
BBB+/Watch Neg
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?acifiCorp
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Page 1 of 2
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Moody'a ""'_ton s.rwe.
Global Credit Research
Liquidity Risk Assessment
7 SEP2005
Liquidity Risk Assessment: PacifiCorp
PacifiCorp
Portland, Oregon, United States
Broad Industry:
Specific Industry:
Short Term Rating:
Public Utility
Utility/Diversified Holding Company
Contacts
Analyst
J. Sabatelie/New York
Kevin G, Rose/New York
Daniel Gates/New York
Phone
212,553.1653
Opinion
PacifiCorp s Prime-2 short-term rating for commercial paper reflects the predictable cash flow of this well-
positioned vertically integrated utility. Operating cash flow has strengthened over the past few years due to the
receipt of favorable regulatory decisions relating to recovery of purchased power costs. Operating cash flow
being used to finance a growing capital expenditure program intended to enhance reliability and supply
requirements for the utility s service territory.
During fiscal year 2005 (March 31st), cash from operations of about $840 million covered nearly 70% of
PacifiCorp s capital requirements, including capital expenditures incurred at the utility and the payment of
dividends. Through 12 months ended June 30, 2005, cash from operations remained in the $840 million range
representing nearly 75% of the company s capital requirements, PacifiCorp has met the remaining funding
requirements through the incurrence of short-term debt, principally commercial paper, and from equity provided
by PacifiCorp s parent, PacifiCorp Holdings, Inc. (PHI),
On May 23, 2005, Scottish Power (SP) and PHI executed a Stock Purchase Agreement providing for the sale of
all PacifiCorp common stock held by PHI to MidAmerican Energy Holdings Company (MidAmerican) for about
$9.4 billion, consisting of approximately $5.1 billion in cash plus approximately $4.3 billion in net debt and
preferred stock, which will remain outstanding at PacifiCorp, The closing of the sale of PacifiCorp is subject to a
number of conditions, including approvals from various state and federal regulatory authorities. Pursuant to the
Stock Purchase Agreement, SP has agreed to cause PacifiCorp to not pay dividends to PHI in excess of $214,
million in the aggregate during fiscal 2006 and $242,3 million in the aggregate during fiscal 2007. Additionally,
while the sale of PacifiCorp is pending and the Stock Purchase Agreement is in effect, PHI has agreed to make
common equity contributions to PacifiCorp of $125 million at the end of each quarter in fiscal 2006 and $131,
million at the end of each quarter in fiscal 2007.
PacifiCorp had outstanding commercial paper of $314,6 million and $468.8 million at June 30,2005 and at March
, 2005, respectively, PacifiCorp s short-term borrowings and other financing arrangements are supported by
$800 million revolving credit agreement, which expires in August 2010, Additionally, the company had $167.
million and $199.3 million in cash and cash equivalents at June 30,2005 and at March 31 , 2005, respectively,
PacifiCorp relies upon its revolving credit agreement to backstop its commercial paper program and for daily
liquidity requirements, if any, for $38 million of unenhanced pollution control revenue bonds. The facility does not
contain rating triggers that would cause acceleration or make the facilities unavailable, but does contain rating
sensitive pricing, The facility contains a financial covenant that limits debt to 65% of total cap italization. At June
30, 2005, PacifiCorp was in compliance with this covenant.
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~acifiCorp Page 2 of2
On June 13, 2005, PacifiCorp issued $300 million of 5.25% first mortgage bonds due 2035 using the proceeds to
reduce short-term debt.
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MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and
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Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy,
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