20060609Quarterly debt report.pdf

~~E~Jf9~, ~ t I
' ! ,....-, , ,,-- '
J!j
-, -
June 8, 2006
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 March 31 , 2006 as well as recent
write-ups from major bond rating agencies.
Long-Term Debt Activity:
Amount outstanding at December 31 , 2005 009 424 000
Issuances
None
Maturities
120% Series G MTNs due Jan 2006 (100 000 000)
Amount outstanding at March 31 , 2006 $3.909.424.000
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)
$700.000.000Remaining authorization at March 31 , 2006
If you have any questions regarding this summary, please call me at [phone].
Sincerely,
\~rnt:~ck~p.l\
Matt Fechner
Treasury Analyst
Enclosures
.lc2Z-Mar-2006) Research Update: PacifiCorp s Short-Term Rating Raised To 'I' Follow...Page 1 of 3
I STAN
DARD
roo R'S
I RATINGS DIRECT
RESEARCH
Research Update: PacifiCorp s Short-Term Rating
Raised To '1' Following Sale To MidAmerican Energy
Holdings
Publication date:
Primary Credit Analyst:
22-Mar-2006
Anne Selting, San Francisco (1) 415-371-5009;
anne - selting~standa rdandpoors .com
Credit Rating:/Stable/A-
Rationale
On March 22, 2006, Standard & Poor s Ratings Services raised its
short-term rating to 'I' from '2' on PacifiCorp to reflect Scottish
Power pIc s sale of the company on March 21, 2006 to MidAmerican Energy
Holdings Company (MEHC; A-/Stable/--). The rating action reflects Standard
& Poor s conclusion that the utility s short-term rating benefits from the
explicit and implicit support that MEHC receives from its parent,
Berkshire Hathaway Inc. (AAA/Stable/A-1+).
The 1 A-' corporate credit rating (CCR) on PacifiCorp reflects the
consolidated credit profile of MERC. MERC's ratings reflect a strong
business risk profile score of '4' (on a 10-point scale where ' l'
excellent and '10' is vulnerable), a fairly aggressive financial profile,
and the support available to MERC from its parent Berkshire Hathaway.
MEHC's business risk profile reflects its ownership of primarily
regulated energy companies. In addition to PacifiCorp, MERC owns
MidAmerican Energy Co. (MEC; A-/Stable/A-1), an Iowa-based utility that
serves 1.3 million electric and gas customers; CE Electric U.K. Funding
Co. (BBB-/Stable/A-3) that serves 3.7 million electric customers (via the
distribution companies of Yorkshire Electricity and Northern Electric) ;
and two U.S. pipelines, Kern River Gas Transmission Co. (A-/CreditWatch
Neg) and Northern Natural Gas Co. (A/Stable/--), that are under the
jurisdiction of the FERC. In 2005, these regulated entities contributed
about 78 % of MEHC' s earnings. MEHC' s largest unregulated subsidiary is
real estate brokerage firm HomeServices (not rated), which in 2005
provided about 13% of its earnings. Through various subsidiaries MEHC also
owns additional independent power generation facilities, including
hydroelectric and geothermal assets in the Philippines. Collectively,
these unregulated energy companies contributed about 9% of 2005 earnings.
Going forward, about 35% of MEBC' s operating income is expected to come
from PacifiCorp, and will increase the proportion of MEBC' s operating
income earned from regulated businesses to about 91% by 2007.
PacifiCorp serves 1.6 million customers in six western states. Its
business profile is a satisfactory ' 5', reflecting strengths that include:
a predominantly coal-fired generation base that produces competitive, low
cost power; average markets, which by virtue of their disparate locations
provide a degree of economic and geographical diversity; and the potential
for improved operating efficiencies through MEHC' s ownership. Challenges
that are reflected in PacifiCorp s business risk include its exposure to
wholesale purchases and hydro variability (about 70% of PacifiCorp ' s 2005
energy requirements came from owned coal, 21% from purchases, 5% from
hydro and 4% from natural gas); an absence of fuel and purchased power
adjusters (although one was recently granted in Wyoming and applications
for adjusters are pending in the five other states the utility serves) ;
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f22-Mar-2006) Research Update: PacifiCorp s Short-Tenn Rating Raised To 'I' Follow...
and the sometimes difficult regulatory environments that the company
operates within. The company has been consistently unable to earn its
authorized return on equity, which ranges from 10% to 10.5%, depending on
the state. Regulatory and customer relationships are likely to be tested
this year in PacifiCorp ' s two most important markets, Utah and Oregon,
where sizable rate cases were recently filed. The company is seeking $197
million (an 11.4% increase) in Utah and $112 million (an 11.5% increase)
in Oregon.
MEHC has about $16.2 billion of consolidated debt and $l.6 billion oftrust-preferred securities outstanding at the holding company level. MERC
has set up a special purpose entity, PPW Holdings LLC, to directly own
PacifiCorp. PacifiCorp s total debt outstanding at Dec. 31, 2005 was $4.
billion. Standard & Poor s applies its consolidated rating methodology to
PacifiCorp. As a condition of approving the sale, the Oregon Public
Utilities commission (OPUC) required PacifiCorp to be ring-fenced from
MEHC. The ring-fencing includes structural protections, covenants, a
pledge of stock, and an independent director. Such provisions serve to
protect PPW Holdings LLC and PacifiCorp from an MEHC bankruptcy. Due to
the ring-fencing, PacifiCorp ' s CCR could potentially be as high as three
notches above MEHC I S rating, if its stand-alone credit quality supported
such an elevation. Currently, the utility s stand-alone credit quality
does not warrant a rating above MEHC's; its stand-alone credit metrics are
in the 'BBB' category.
As part of acquiring the needed regulatory approvals to complete the
acquisition of PacifiCorp, MEHC has agreed to refrain from dividending
cash flows from the utility to MEHC unless it maintains a common equity
ratio of 48.25% through 2008, decreasing annually to 44% by 2012. This
dividend restriction should also provide incentives to deleverage
PacifiCorp. (PacifiCorp I s adjusted debt to total capitalization was 56% at
Dec. 31, 2005, which reflects a debt equivalent of $537 million, resulting
primarily from the utility s substantial purchased power obligations.
PacifiCorp has a sizable capital program that Scottish Power has
estimated will be $6.4 billion over the next five years. Attaining
operational efficiencies to improve cash flows available to reinvest in
the utility will be an important focus. However, equity support from the
parent may also be required to support the utility s infrastructure
requirements.
Short-term rating factorsPacifiCorps '1' short-term rating reflects Standard & Poor
conclusion that the utility s CP rating benefits from the explicit
and implicit support that MEHC receives from Berkshire Hathaway.
Berkshire Hathaway s extremely strong liquidity position is assumed
to be available to PacifiCorp via MEHC in the unlikely event that
PacifiCorp could not repay its CP obligations.
Explicit support exists in the form of a $3.5 billion equity
commitment agreement between Berkshire Hathaway and MEHC that could
be called upon to support the liquidity requirements of MEHC' s
regulated subsidiaries, including PacifiCorp. In addition, Standard &
Poor s believes that due to Berkshire Hathaway I s increased voting
interest in MEHC and its strategic focus on utility investments, it
has incentives to treat PacifiCorp and MERC I s other regulated
investments as core to consolidated Berkshire Hathaway operations.
PacifiCorp provides for its own day-to-day liquidity needs. Its
cash and cash equivalent position was $l63.4 million as of Dec. 31,
2005, relative to $199 million as of year-end fiscal 2005 (March 31,
the end of Scottish Power s fiscal year). In addition, it has an $800
million CP program, with $2l5 million outstanding as of Dec. 31. The
program is backstopped by a revolving credit agreement that
terminates in August 2010. As of Dec. 31, the facility was undrawn.
Future maturities are in line with historic obligations. At Dec. 31,
2005, PacifiCorp s capital expenditures totaled $716 million, as
compared to $540 million at Dec. 31, 2004.
Outlook
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. .
Page 2 of 3
3/22/2006
.f12-Mar-2006) Research Update: PacitiCorp s Short-Term Rating Kalsea To 'A-I' t'0110W...1"age j or j
The stable outlook on PacifiCorp reflects Standard & Poor s expectation
that MEHC will deleverage PacifiCorp through the reinvestment of cash flow
into its extensive capital expenditures program and work to build
constructive regulatory relationships in the states PacifiCorp serves. It
is also assumed that Berkshire Hathaway, which holds an 86.6% economic
interest on a diluted basis in MERC, will provide credit support and
future investment capital as needed to PacifiCorp. PacifiCorp s rating
could fall to a level commensurate with its stand-alone credit quality if
MEHC's rating is lowered. PacifiCorp s rating has limited near-term
upside, as its credit metrics on a stand-alone basis fall well short of
the 'A' category.
Ratings List
Rating Raised From
PacifiCorp
Short-term corp credit rtg A-I
Ratings Affirmed
PacifiCorp
Long-term corp credit rtg
Senior secured debtSenior unsecured debt
Preferred stock
/StableA-
BBB+
BBB
MidAmerican Energy Holdings Co.
Corporate credit rating A-/Stable/--
Senior unsecured debt BBB+
Preferred stock BBB-
Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor s Web-based credit analysis system, at
www. ratingsdirect. com. All ratings affected by this rating action can be
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under Credit Ratings in the left navigation bar, select Find a Rating,
then Credit Ratings Search.
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Mid-American s Acquisition Of
PacifiCorp-Implications For
PacifiCorp s Bondholders
MidAmerican Energy Holdings Co. (MEHC; /Stable/-today closed its acquisition ofPacifiCorp.
(A-/StablelA-2). MEHC purchased all ofPacifiCorp s outstanding shares for about $5.1 billion in
cash from Scottish Power pic (A-/Stablel A-2), which was funded fton:t an investment by its parent
Berkshire Hathaway Inc. (AAAlStablel A-I +). Subsequent to the purchase, MEHC is expected to
repurchase $1.7 billion of Berkshire Hathaway s common stock in MEHC. PacifiCorp s long-tenn
debt and preferred stock, which stood at about $4.1 billion as ofOec. 31 2005, remains outstanding.
On March 6, in anticipation of the transaction being completed, Standard & Poor s affinned
the '' corporate credit rating (CCR) on PacifiCorp and removed its ratings from CreditWatch with
, negative implications. The outlook is stable. This article addresses in further detail the acquisition
from the perspective ofPacifiCorp s bondholders and discusses the expected ramifications ofthe sale
on PacifiCorp' s future credit quality.
Frequently Asked Questions
Q: How has PacifiCorp sfinancia/ peifol7Twnce been in recent years?
A: PacifiCorp s credit quality has benefited from the otherwise strong consolidated operations of
Scottish Power, which purchased the utility in 1999 for $10.7 billion. On a standalone basis, financial
perfonnance has been weak but recovering. Scottish Power purchased PacifiCorpjust prior to the
western U.S. energy crisis, which, given the company s sizable short position as well as unplanned
outages, resulted in deferred power costs of approximately $525 million, of which about $325 million
was ultimately authorized for recovery in retail customer rates. Since then, the company has struggled
to achieve cash flows commensurate with perfonnance seen before the crisis. Funds from operations
(FFO) has only stabilized in the last two fiscal years to levels on par with fisca12000,when FFO was
Mid-American 's Acquisition OfPacifiCorp-Implications For pacifiCorP 's Bondholders
$728 million; for the 12 months ending Dec. 31 2005, FFO improved to about $818 million. Earned return on
equity (ROE), which has been around 7% in the past two years, has fallen chronically short of authorized levels
which range trom 10%-10., depending on the state. With respect to cash coverage metrics, PacifiCorp s 12
months ending Dec. 31 adjusted FFO to interest coverage was 3., with adjusted FFO to total debt at 17.1 %.
?justed debt to total capitalization was 56%. These ratios consider PacifiCorp s substantial purchased power
obligations, which contributes to off balance sheet adjustments of$537 million for the purposes of credit ratio
calculations.
Multiple factors contributed to PacifiCorp s weakened financial perfonnance over the last five years, and
include the absence offuel and purchase adjusters, except in Wyoming, where one was approved in Febmary
2006; dry hydro conditions; increasing administrative and general costs, including escalating pension and health
care costs; and regulatory lag in resolving sizable general rate cases. In addition, Scottish Power has projected
that PacifiCorp requires $6,4 billion in capital expenditures over the next five years, which would have likely
necessitated higher leverage at the parent to support the utility s infi'astructure needs. These factors resulted in
Scottish Power s decision in May 2005 to sell PacifiCorp.
Q: Given these issues, why did MEHC buy PacifiCorp?
A: Berkshire Hathawayhas sizable amounts of equity to invest, and has identified regulated utility assets as
desirable because of the opportunity to deploy its capital in return for what the company expects will be
reasonable and stable returns. PacifiCorp is also attractive because of its earnings upside ifMEHC can improve
actual ROEs to allowed levels. '
The acquisition should fit well with MEHC's existing energy holdings, which are predominately in
the regulated space and consist ofMidAmerican Energy Co. (MEC; A-/StablelA-I), an IowA-based utility that
serves 1.3 million electric and gas customers; CE Electric U.K. Funding Co. (BBB-/StablelA-3), which serves
7 million electric customers (via the distribution companies of Yorkshire Electricity and Northern Electric);
and two U.S. pipelines, Kern River Gas Transmission Co. (A-/WatchNegl-)and Northern Natural Gas Co,
(AiStablel-) that are under the jurisdiction of the FERc. In 2005, these regulated entities contributed about
78% ofMEHC's earnings (MEC was 26%, the U.K. operations were 25%, and the two pipelines accOlmted for
27%). MEHC's largest unregulated subsidiary is a real estate brokerage finn, HomeServices (not rated), which
in 2005 provided about 13% ofeamings. Through various subsidiaries, MEHC also owns additional
independent power generation facilities, including hydroelectric and geothennaI assets in the Philippines.
Collectively, these unregulated energy companies contributed about 9% of2005 earnings.
Despite the significant number of companies under MEHC, PacifiCorp is a sizable acquisition, The
company operates under the legal names of Pacific Power and Utah Power, serving 1.6 million retail customcrs
in six western U.S. states. Its total assets were $12.8 billion at year-end 2005, and at the 12 months ending Dec.
3 1,2005, cash flow from operations was nearly $900 million. In comparison, MEHC's total asset value was
$20.2 billion in 2005, and cash flow trom operations was $1.Jbillion.
Going forward, about 35% ofMEHC's operating income is expected to come trom PacifiCorp.
PacifiCorp will push the proportion ofMEHC's operating income earned from regulated businesses to about
91% by 2007. The acquisition also provides MEHC with substantial U.S. market and regulatory diversification,
The majority ofMEC's retail revenues are from customers in Iowa, but the utility also operates in portions of
Illinois, South Dakota and Nebraska. PacifiCorp s territories include parts of Utah, Oregon, Wyoming,
Washington, Idaho, and California. As shown in Table I, while PacifiCorp s sales are concentrated in Utah and
Standard&Poor I CREDITFAQ
Mid-American 's Acquisition Of PacijiCorp-Implicatio.ns For PacijiCo,p 's Bondholders
Oregon, on a consolidated MEHC basis, the importance of each u.S. market is relatively well balanced, and
thus lacks the regulatory and market concentration that most U.S. utilities are exposed to.
Table 1
MEHC U.S. Utility Market Concentration
0(20D5 Retail Revenues
MfdAmerfcan Energy Co.PaclfiCorp Standalone MEHC Consolidated
Iowa 83.91 42.56
Illinois
South Dakota 5.78
Nebraska 0.38
Utah 41,13 20,
Oregon 28.14,
Wyoming 13.42
Washington
Idaho
California 116
Total 100.100.100,
. Excludes FERC-regulated assets owned by Kern River Gas and Northern Natural
Q: Can MEHC improve PacijiCorp 's peiforrrwnce?
A: This is certainly management's intent Ultimately, MERC's success will be driven by whether it can
achieve greater operational efficiencies and enhance PacifiCorp s existing regulatory relationships. These goals
are not dissimilar ftom those of Scottish Power when it purchased PacifiCorp seven years ago. However
Scottish Power s acquisition ofPacifiCorp proved untimely and largely beyond its control-the unexpected
events of the western U.S. power crisis resulted in the need to immediately appeal to state regulatory
commissions for rate relief. Yet PacifiCorp, as with many u.S. utilities, expected the deregulation of generation
would inevitably minimize the role of regulation and had not been before its regulatory bodies in some time. In
addition, Scottish Power, while achieving some significant regulatory milestones, perhaps underestimated the
complexities of managing six separate regulatory environments from its Glasgow, Scotland headquarters.
MEHC has a reputation as a competent operator of utility assets, and it has improved the financial
perfonnance of regulated businesses that it has acquired, most notably, MEC, which it purchased in 1999, and
Northern Natural Gas, which it purchased from Dynegy in 2002, shortly after Dynegy had purchased it ITom
Enron. In both of these businesses, MEHC cut costs, improved operations, built customer relationships and has
had constructive regulatory relationships. In Northern Natural's case, it recently entered long-term extensions
with two major customers, and MEC has consistently performed well in J.D. Power & Associates customer
satisfaction studies. Standard & Poor s also views MEC's regulatory compact as supportive of credit quality.
MEC has agreed not to request a general increase in rates before 2012 unless its Iowa jurisdictional electric
ROE falls below 10%. The Iowa Office ofthe Consumer Advocate has agreed not to request or support any rate
decreases before Jan. 1, 2012. In addition, earnings exceeding an ROE ofl1.75% for 2006 through 2011 will
be shared with customers. It remains to be seen whether and to what extent MEHC can replicate this with
PacifiCorp, but the speed with which MEHC was able to receive regulatory approval suggests that stakeholders
and regulators are supportive of the ownership change. This support may stem from the fact that Berkshire
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Mid-American 's Acquisition Of PacifiCorp-Implications For pacifiCorP 's Bondholders
Hathaway has a reputation for holding on to its investments, and the potential for management stability within
the company likely provides a degree of comfort to regulators and customers.
Q: Are these competencies why Standard Poor s qffirmed PacifiCorp 's CCR at the 'A-' level?
A: Standard & Poor s does view MEHC ownership as having a potentially stabilizing effect on PacifiCorp
financial perfonnance. However, the affinnation ofPacifiCorp s '' CCR was principally based on the
benefits PacifiCorp is afforded from the consolidated credit strength ofMEHC, whose CCR was raised three
notches to' A-' on March 6 (see "Research Update: MidAmerican Upgraded To ', PacifiCorp Ratings
Affinned; All Ratings Off Watch " RatingsDirect, March 6, 2005).
Q: What is the implication of PacifiCorp 's "ring-fencing" for its credit rating?
A: As a condition of approving the sale, the Oregon Public Utilities Commission (OPUC) required PacifiCorp
to be ring-fenced from MEHC. As part of this, MEHC has committed to refrain from dividending cash flows
from the utility to MEHC unless it maintains a common equity ratio of 48.25% through 2008, decreasing
annually to 44% by 2012.
The structural insulation or "ring-fencing" of an operating company is typically done to protect the
credit quality of the operating company from a weaker holding company. When an entity is ring-fenced,
Standard & Poor s may rate the operating company up to three notches above the CCR of the parent if its
standalone credit metries warrant the elevation. MEHC has ring fenced MEC, Kem River, Northem Natural
and CE Electric UK.; some of these companies have historically been rated higher than MEHC.
In PacifiCorp s case, MEHC has set up a special purpose entity, PPW Holdings, LLC that will
directly own PacifiCorp. The intent of this structure is to ensure that PacifiCorp is bankruptcy remote from
MEHC. Because PacifiCorp's stand-alone credit quality does not warrant a rating above MEHC', PacifiCorp
rating reflects MEHC's consolidated CCR, as is appropriate under the consolidated rating methodology. If the
utility's financial perfonnance improves significantly, it could potentially support a ratings improvement, due to
the ring fencing. In addition, it will be somewhat protected from credit deterioration below its own stand-alone
credit quality should MEHC's credit quality on a consolidated basis fall to alevel below that ofPacifiCorp s. In
this manner, PacifiCorp s bondholders are somewhat protected from a deterioration due to the failure of another
business venture.
Q: What are some of the challenges the new owners ofPacifiCorp will face?
A: Improvement in PacifiCorp s financial perfonnance and business risk is expected to be incremental. From
a bondholder perspective, PacifiCorp faces sometimes-difficult regulatory environments in each of the states it
SelVes. For example, in Oregon, PacifiCorp s second most important market, the senate overwhebningly passed
legislation last year, Senate Bill (SB) 408, which requires that utilities refund to their customers income taxes
collected in retail rates that are not paid by the parent S8 408 could provide a pennanent clawback mechanism
to reduce rate requests, as the OPUC did in September 2005 when it cut PacifiCorp s negotiated settlement by
$26 million. (The case is being reheard, and final ruJes are not expected until this summer.) Utah is considering
similar legislatiolL
As shown in Table 2, since 2002, PacifiCorp has initiated nearly annual rate cases in all states. The company
nearly always reaches settlements, which have historically awarded it 25% to 50% less than filed request~,
Regulatory support will continue to be tested, especially in the next few years. In February and March 2006, the
company filed large requests in its two most important markets, Oregon and Utah. In Oregon, the utility has
Standard Poor I CREDIT F AQ
Mid-American 's Acquisition OfPacifiCorp-lmplications For PacifiCorp 's Bondholders
, I
asked for $112 million, a 13.2% increase in retail rates, based on test year ending Dec. 2007. In Utah
PacifiCorp filed for a $197 million increase, or about 17%, based on a test year ending Sept 30 2007. The Utah
rate case comes on the heels of a 4.4% increase approved a year ago. While Utah has been more supportive of
PacifiCorp in past cases, most of the utility's growth is in this region, implying the importance of this case.
While both rate requests are sizable, on the other hand, PacifiCorp s retail rates are very competitive, suggesting~me room for compromise.
Table 2
PacifiCorp Rate Cases By StatE
, , " '.,
Utah Oregon Wyoming Washington Idaho California
2006
Date 3/8/2006 Filed 2/23/2006 2/23/06 (oral Filed 5/2005 To be determined Filed11120/2005
ruling)(TBD)
% rate inc.17,13.2 request 14.9 request TBD 15,6 request
$ increase $197 mil. request $112 mil. request $25 mil.!$40.$32.6 mil. request TBD $11,0 mil
mil.""request
Auth ROE 11.4 request 11.5 request Not specified 11.125 request TBD 11,8 request
(%)
2005
Date 3/112005 10/4/2005 9/15/2004 N/A 8/9/2005 N/A
% rate inc.4.40 3.20 N/A N/A
$ increase $51 mil.l$96 mil.~~$25.9 mil.l$52.$9.3 mil.N/A $5.8 mil.l$15,1 mil.N/A
mil."
Auth ROE 10.10.Not specified N/A Not specified N/A
(%)
2004
Date 4/1/2004 N/A 3/18/2004 11/2/2004 N/A N/A
% rate inc.N/A N/A N/A
$ increase $65 mil.l$125 mil.N/A $22.9 mil.l$34.4 $15 mil.!$25.7 mil.N/A N/A
mil.
Auth ROE 10.N/A 10.75 Not specified N/A N/A
(%)
2003
Date N/A 9/1912003 411/2003 N/A N/A 11/1/03
% rate inc.N/A Base 1.1: net 0.N/A N/A 13.60
$ increase N/A $8,5 mil.l$18 mil.$8,7 mil.l$20 N/A N/A $7,6 mil
mil.~~~
Auth ROE N/A 10.10.N/A N/A Not specified
(%)
201J2-None
2001
Date 11/2/2001 & 2/9/2001 10/19/2001 10/4/2001 N/A N/A N/A
% rate inc.1 perm" 9 temp Base 8.60: net .3.40 N/A N/A N/A
$ increase $40.2 mil.& $70 $64.4 mil.l$103 $8.9 mil. N/A N/A N/A
mil.!$142 mil,miLs
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Mid-American 's Acquisition OfPacifiCorp-Implications For pacifiCo,p 's Bandhalders
Table 2
PacifiCorp Rate Cases By State (cont. 'd)
" ", '
Utah
Auth ROE
(%)
2000
Date
% rate inc.
$ increase
Auth ROE
Year%
inc,
Oregon Wyoming Washington Idaho
10.75 Not specified N/A
California
11.N/A N/A
5/25/2000 10/512000 6/21/2000 8/16/2000 N/A N/A
1.8 7 (over 2001-03)N/A N/A
$17 mil.$13.6 mil./$21.7 $10.6 mil./$40.$13.1 mil./$25.N/A N/A
mil,"mil.mil.
10.11.Not specified N/A N/A
18.20.7 14.13.6
PacifiCocp reached settlment for $52.5 mil., but amount awarded reduced by about $26 mil. under application of SB40B. PacifiCorp is appealing this reduction,
ROE reduced to 10% from 10.5%. set in 2003. ~Majocity of reduction related to net power costs and retLlTl on equity, ~PacifiCorp sought 11,75% ROE. awarded
a 10.75% ROE. Of $39 mil. disallowed, $20 mil. related operating costs ($7 mil. pension! and $19 mil. re: rates of return, "Original request for $62 mil. but
lowered to $21.7 mil., difference between $21,7 mil. request and $13.6 mil. received reflects agreement ro exclude $8.1 mil. in power cost charges, ~~Of rhe
$45 mil, difference. between request and actual award, $20 mil. associated with rate of return issues, ~~Of the $11,5 mil. difference, about $5 mil. due to rare
of return, the other pension, payroll and misc, "'Ofthe $16 mil. difference, all attributable to PacifiCorp s agreement to not seek this amOJnt in net power
ir-.:rease but instead to have an adjuster, n~Ooes not address $91 mil, in deferred power costs later rejected. $11 mil. difference mostly disallowed power
contracts,
About 70% ofPacifiCorp's energy requirements come from owned coal, 21% from purchases, 5% from
hydro, and 4% from natural gas. As a result, another important issue for PacifiCorp is whether it will be
permitted to establish fuel and purchased power adjusters. Wyoming, which disallowed $91 million of
PacifiCorp s deferred power costs incurred during the energy crisis, was paradoxically the fuststate to approve
an adjuster. Adjuster requests are pending in nearly all other states, and for Utah and Oregon will likely be
considered as part of the general rate eases filed. However, the prospects for adoption in these states are
uncertain.
One certain challenge to MEHC will be whether it will be able to achieve the benefits of its
diversified portfolio in the face of the inevitable logistical and coordination challenges presented by managing
10 separate regulatory commissions (11, ifMEHC's FERC-regulated pipelines are considered). In addition, the
financial challenges at PacifiCorp are greater than MEHC faced with MEC, which was only slightly under-
earning at the time MEHC acquired it. In contrast, PacifiCorp's under-earning is almost structural in character.
While these challenges are significant, at the same time Scottish Power has made progress in
achieving a nwnber of regulatory goals that should significantly benefit MEHc. These accomplishments
include: Current retail rates, while still lagging, are nearer to actual costs, due largely to PaciflCorp s relentless
filing and settlement of eases in recent years; the adoption of forward test years in four states (Oregon, Utah
Wyoming and California) should avoid the potential for future rates to be based on a stale test year; the
company s anticipated rulings for fuel and purchaSed power adjusters in five jurisdictions may provide
significant protection from volatile cOmmodity costs; the conclusion of a multi-state agreement for the
allocation of costs in four states (pending in Washington and California) should avoid interstate battles over the
proper attribution of costs to each service area; and, lastly, the passage of recent legislation in Utah that prc-
approves power plants or purchases greater than 100 MW provides protection from future regulatory
disallowances, which is critical because much ofPacifiCorp s growth is occurring in this state.
Q: What steps daes Standard pqar s exp~t MEHC to. take to. maintain PacifiCarp 's credit quality?
Standard&Poar I CREDITFAQ
Mid-American 's Acquisition Of PacifiCorp-Implications For PacifiCorP 's Bondholders
A: Standard & Poor s expects that MEHC will deleverage PacifiCorp through the reinvestment of cash flow
into its extensive capital expenditure program. MEHC has represented that it views a properly capitalized utility
as having roughly a 50-50 equity-to-debt structilre, and it has achieved this at MEC. The dividend restrictions
in place as a part of regulatory approval should also provide incentives to deleverage PacifiCorp.
PacifiCorp s rating could fall to a level commensurate with its standalone credit quality ifMEHC'
ting is lowered. This could result from MEHC's financial perfonnance being weaker than forecast, or if '
Standard & Poor s view of parent support from Berkshire Hathaway changes. MEHC's rating has limited
upside, as improving financial metrics and a successful integration ofPacifiCorp have been assumed.
Importantly, Berkshire Hathaway has indicated that it may purchase other utilities. MEHC'
consolidated business risk profile score reflects Standard & Poor s expectation that MEHC's future acquisitions
will be in the regulated utility segment and not in unregulated or commodity-exposed businesses. If acquisitions
were to result in a change in consolidated credit quality, this could affect PacifiCorp s rating.
www.standardandpoors.com
..
Mid-American 's Acquisition OfPacifiCorp-Implications For PacifiCorp 's Bondholders
PacifiCorp service Area
Source; PaeifiCOIp.
Standard Poor I CREDITFAQ
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