20060815Quarterly Debt Report.pdf

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POWER
A OMSION OF PACIFICORP
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201 South Main, Suite 2300
Salt Lake City. Utah 84111
August 14, 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 June 30, 2006 as well as recent write-ups from
major bond rating agencies.
I Long-Term Debt Activity:
Amount outstanding at March 31 , 2006 909 424 000
None (I)Issuances
Maturities None
Amount outstanding at June 30 2006 $3.909.424.000
Long-Term Debt Authorization:
Amount authorized May 17, 2005 by Order No. 29787 000 000 000
Issuances (1)
June 13 , 2005 issuance of 5.25% FMBs due June 2035 (300 000 000)
Remaining authorization at June 30, 2006 $700.000.000
(1) On August 10 2006, PacifiCorp issued $350.0 million of its 6.10% Series of First Mortgage
Bonds due August 1 , 2036.
If you have any questions regarding this summary, please call me at [phone].
Sincerely,
1JZJf :J
Matt Fechner
Treasury Analyst
Enclosures
(08-Aug-2006) Research Update: PacifiCorp s $350 Million First Mortgage Bond Assign...Page 1 of 3
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RESEARCH
Research Update: PacifiCorp s $350 Million First
Mortgage Bond Assigned '' Rating
08-Aug-2006
Swami Venkataraman, CFA, San Francisco (1) 415-371-5071;
swami - venkataraman~standarda ndpoors .com
Publication date:
Primary Credit Analyst:
Credit Rating:/Stable/A-
Rationale
On Aug. 8, 2006, Standard & Poor s Ratings Services assigned its '
rating to the $350 million first mortgage bond offering at electric
utility PacifiCorp. The proceeds will be used to retire CP ($305 million
outstanding as of June 30, 2006) and for general corporate purposes. The
' rating on the first mortgage bonds is the same as the corporate
credit rating on PacifiCorp, and reflects Standard & Poor s conclusion in
its ultimate recovery analysis of the company s utility operations that
there is insufficient overcollateralization to notch the debt above the
corporate credit rating.
The ' A-' corporate credit rating on Portland, Ore. -based PacifiCorp
reflects the consolidated credit profile of parent MidAmerican Energy
Holdings Co. (MEHC; A-/Stablel--). The rating incorporates MEHC's strong
business risk position, fairly aggressive financial profile, and both
explicit and implicit support from Berkshire Hathaway. Explicit support is
in the form of a $3.5 billion equity commitment agreement, which in our
view would be called on, if necessary, to support the rating on MEHC. In
fact, MEHC is expected to fund a portion of PacifiCorp s large upcoming
capi tal program through equity.
MEHC's business profile score is 'strong ' (utility business profiles
are ranked from ' l' (excellent) to '10' (vulnerable)). This score
incorporates the significant di versi ty of MEHC' s businesses, limited
exposure to unregulated ventures (less than 10% of operating income in the
future), and our expectation that MEHC I s future acquisitions will be in
the regulated utility segment and not in unregulated or commodity-exposed
businesses. MEHC' s strategy has been to acquire regulated utili ties that
can benefit from MEHC' s established record of enhancing operational and
financial performance through a mixture of improved regulatory
relationships, cost reductions, and the funding of investment with the use
of equity sufficient to maintain roughly a 50-50 capital structure.
PacifiCorp serves 1.6 million customers in six western states and had
about $4.3 billion in outstanding debt and preferred stock as of June 30,
2006. On March 21, 2006, MEHC completed its purchase of PacifiCorp from
Scot tish Power PLC.
MEHC owns PacifiCorp through PPW Holdings LLC, a special-purpose
entity that ring-fences PacifiCorp from MEHC as required by various state
regulators. The ring-fencing includes structural protections, covenants,
and an independent director. PacifiCorp also agreed to refrain from making
dividends to MEHC unless it maintains a common equity ratio of 48.25%
through 2008, after which the ratio will decrease annually to 44% by 2012.
(As of June 30, 2006, PacifiCorp was in compliance with the test.) These
factors serve to protect PPW Holdings LLC and PacifiCorp from an MEHC
bankruptcy. Due to the ring-fencing, pacifiCorp s corporate credit rating
could potentially be as much as three notches above MEHC' s rating,
provided its stand-alone credit quality supported such an elevation.
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(08-Aug-2006) Research Update: PacifiCorp s $350 Million First Mortgage Bond Assign...
Currently, the utility s stand-alone credit quality does not warrant a
rating above that on MEHC; its stand-alone credit measures are in the
BBB' category.PacifiCorp S business profile is a satisfactory ' 5', reflecting
strengths that include:
. A predominantly coal-fired generation base that produces competitive,
low-cost power;
. Average markets that, by virtue of their disparate locations, provide
a degree of economic and geographical diversity; and
. The potential for improved operating efficiencies through MEHC'
ownership.
Challenges that are reflected in PacifiCorp
' s business risk include:
. The sometimes-difficult regulatory environments in which the company
operates.
. 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); and
. An absence of fuel and purchased-power adjustment mechanisms in Utah,
Washington, and Idaho, and the presence of only a partial mechanism
in Oregon.
The company has been consistently unable to earn
its authorized ROE,
which ranges from 10% to 10.5%, depending on the state. Regulatory
relationships will be tested this year, and the utility will conclude rate
cases in all six states. While recent settlements in
Utah, Oregon,
wyoming, Idaho, and California are in line with expectations, the case in
Washington state, where the commission rejected PacifiCorp
s rate increase
application chiefly on cost allocation issues, has proved
challenging. In
addition, the potential application of Senate Bill 408 in Oregon is a
concern.
Standard & Poor s expects that MEHC will fund a significant portion
of PacifiCorp ' s substantial $ 6.4 billion capital program over the next
five years with equity, and that PacifiCorp will achieve stronger returns
on the newly invested capital than the company has been able to achieve in
recent years under the ownership of Scottish Power
PLC, resulting in an
overall improvement in PacifiCorp ' s credit measures.
Under the consolidated rating methodology, Standard & Poor s focuses
primarily on MEHC' s consolidated financial profile. While MEHC' s credit
measures are improving, ratios are clearly weak for the
' A-' rating, which
benefi ts from Berkshire Hathaway ' s support. In recent years, MEHC'
consolidated credit measures have improved due to the acquisitions of two
large pipeline assets. For the 12 months ended March
31, 2006, funds from
operations coverage of interest and debt stood at
2. 5x and 8.8%,
respectively. Debt to total capital stood at 70.
9%, which is a substantial
improvement from the 77.4% as of Dec. 31, 2005, reflecting the equity
infusion for the acquisition of PacifiCorp. The results of PacifiCorp
operations are included in MEHC's results beginning March, 21, 2006. Credit
measures should continue to improve over the next few years as MEHC
deleverages pacifiCorp through equity infusions and reinvestment ofoperating cash flow.
Short-term credit factors
The 'l' short-term rating on PacifiCorp 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 cannot 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.
PacifiCorp had $42.5 million in cash as of June 30, 2006, and an
$800 million revolving credit agreement that terminates in July 2011.
Page 2 of 3
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(08-Aug-2006) Research Update: PacifiCorp s $350 Million First Mortgage Bond Assign...Page 3 of 3
As of June 30, 2006, the facility supported $305 million of CPo
Long-term debt maturities over the next 12 months stand at $354.
million, and capital expenditures for 2006 are expected to total
about $953 million. PacifiCorp will depend on MEHC to finance capital
expenditures.
Outlook
The stable outlook on PacifiCorp reflects Standard & Poor s expectation
that MEHC will deleverage PacifiCorp through the reinvestment of cash flow
into its extens i ve capital expenditures program, as well as work to build
constructive regulatory relationships in the states PacifiCorp serves. It
is also assumed that Berkshire Hathaway will provide credit support and
future investment capital as needed to PacifiCorp. The rating on
PacifiCorp could fall to a level commensurate with its stand-alone credit
quality if the rating on MEHC is lowered. The rating on PacifiCorp has
limited near-term upside, as its stand-alone credit measures fall well
short of the ' A' category.
Ratings List
Rating Assigned
PacifiCorp
$350 mil 1st mtg bnd
Complete ratings information is available to subscribers of
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ratings, research, and risk analysis, at www.ratingsdirect.com. All
ratings affected by this rating action can be found on Standard & Poor
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left navigation bar, select Find a Rating, then Credit Ratings Search.
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are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make
any other investment decisions. Accordingly, any user of the information contained herein should not rely on any credit rating or
other opinion contained herein in making any investment decision. Ratings are based on information received by Ratings
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F i tch!lw~~~~gs
FITCH RATES P ACIFICORP'S $350MM ISSUANCE OF FMB'
Fitch Ratings-Chicago-07 August 2006: Fitch has assigned a rating of '' to PacifiCorp s (PPW)
anticipated issuance of$350 million 6.10% first mortgage bonds (FMB), due 2036. Proceeds from
the issuance will be used to repay short-term debt and for general corporate purposes. The Rating
Outlook is Stable.
The ratings for PPW reflect the company s solid operating cash flow and financial position
competitive resource base, and relatively low business risk profile. The ratings assume reasonable
outcomes in pending and future rate proceedings. Fitch's analysis also takes into account PPW'
projected above-industry-average service territory growth, primarily in its Eastern service territory,
significant planned investment in new plant and infrastructure to meet its load requirements, and its
growing exposure to gasMfired generating capacity. PPW is expected to invest approximate
billion annually, on average, in new plant and equipment over the next five years. The primary
credit concern is the potential for unsupportive regulatory actions, especially in light of the
company s large construction budget and historically low earned returns. Additionally, PPW faces
growing reliance on gas-CITed generation and the exposure to high commodity costs in the event of a
prolonged, unscheduled base-load plant outage during a period of high demand. Recent unfavorable
regulatory developments in Washington and uncertainty regarding utility tax policy in Oregon are
sources of concern for investors.
PPW has had a full regulatory agenda to date with rate proceedings in progress in Utah, Oregon,
Wyoming and Washington in 2006. Favorably, the company recently reached settlement
agreements in Utah and Oregon, which, if approved by regulators, will result in $115 million and
$43 million of base rate increases, respectively. Earlier in the year, PPW received approval from the
Wyoming Public Service Commission for a total annual increase of $25 million, as well as a power
cost adjustment mechanism and an agreement to utilize a forward test year in its next general rate
case. The Washington Utilities and Transportation Commission s rejection of PPW's $30 million
rate increase request is a setback for the inter-jurisdictional cost allocation method under the revised
protocol and is a hurdle to improved earned returns.
While Fitch views the recent Utah and Wyoming general rate case settlements favorably, regulators
and policy makers in Oregon continue to send mixed signals to investors. The recent settlement of
PPW's 2006 Oregon general rate case is a constructive development, in Fitch's view. However, the
Oregon Public Utility Commission s anticipated September 2006 final order establishing permanent
rules implementing Senate Bill 408 could have an adverse impact on PPW.
A wholly-owned subsidiary of MidAmerican Energy Holdings Company, PPW provides integrated
electric service to approximately 1.6 million retail customers in parts of Utah, Oregon, Wyoming,
Washington, Idaho and California.
Contact: Philip W. Smyth, CFA, [phone], New York or Karen Anderson
[phone] , Chicago.
Media Relations: Brian Bertsch, New York, Tel: [phone].
Fitch's rating defmitions 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 fITewall
compliance and other relevant policies and procedures are also available from the 'Code of Conduct'
section of this site.