20060405Compliance re credit ratings.pdf

, '
, c :;
Pacific Power I Utah Power
Rocky Mountain Power
825 NE Multnomah, Suite 2000
Portland, Oregon 97232
~ ~~!;.Nt~O ~ P
. , ". ,..
,' 1,
- - ,
April 4, 2006
Idaho Public Utilities Commission
472 West Washington
Boise, ID 83702-5983
Attention:Ms. Jean D. Jewell
Commission Secretary
Re:Idaho Docket No. P AC-O5-08 Compliance Filing
To the Idaho Public Utilities Commission:
PacifiCorp submits the attachments in compliance with the Commission s Order in this case
issued on February 13 2006 and amended on March 14 2006. The Order approved the
Stipulation supporting MEHC's acquisition ofPacifiCorp from ScottishPower.
Commitment 120 of the Stipulation provides that, PacifiCorp will provide to the Commission, on
an informational basis, credit rating agency news releases and final reports regarding PacifiCorp
when such reports are known to PacifiCorp and are available to the public.
Therefore, in compliance with Commitment 120 of the Stipulation, please find the attached
reports related to PacifiCorp.
Very truly yours
Bruce Williams
Treasurer
Mid-American s Acquisition Of
PacifiCorp-Implications For
PacifiCorp s Bondholders
MidAmerican Energy Holdings Co. (MEHC; A-/Stable/-) today closed its acquisition ofPacifiCorp.
(A-/Stable/A-2). MEHC purchased all ofPacifiCorp s outstanding shares for about $5.1 billion in
cash trorn Scottish Power pic (A-/Stable/ A-2), which was ftmded trom an investment by its parent
Berkshire Hathaway Inc. (AAAlStable/ 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-term
debt and preferred stock, which stood at about $4.1 billion as of Dec. 31, 2005, remains outstanding.
On March 6, in anticipation of the transaction being completed, Standard & Poor s affirmed
the '' corporate credit rating (CCR) on PacifiCorp and removed its ratings trom CreditWatch with
negative implications. The outlook is stable. This article addresses in further detail the acquisition
trom the perspective ofPacifiCorp s bondholders and discusses the expected ramifications of the sale
on PacifiCorp s future credit quality.
Frequently Asked Questions
Q: How has PacifiCorp 's financial performance been in recent years?
A: PacifiCorp s credit quality has benefited trom the otherwise strong consolidated operations of
Scottish Power, which purchased the utility in 1999 for $10.7 billion. On a standalone basis, financial
performance has been weak but recovering. Scottish Power purchased PacifiCorp just 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 performance seen before the crisis. Funds from operations
(FFO) has only stabilized in the last two fiscal years to levels on par with fiscal 2000, when FFO was
Mid-American s Acquisition OfPacifiCorp-lmplications For PacifiCorp 's Bondholders
$728 million; for the 12 months ending Dec. 3 I, 2005, FFO improved to about $818 million. Eamed 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 %.
Adjusted 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 fin~ncial performance over the last five years, and
include the absence of fuel and purchase adjusters, except in Wyoming, where one was approved in February
2006; dry hydro conditions; increasing administrative and general costs, including escalating pension and health
care costs; a~d 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 intrastructure 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 ofMidArnerican Energy Co. (MEC; A-/Stable/A-I), an IowA-based utility that
serves I.3 million electric and gas customers; CE Electric u.K. Funding Co. (BBB-/Stable/A-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-IWatchNegl-)and Northern Natural Gas Co.
(A/Stable/-) 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 accounted for
27%). MEHC's largest unregulated subsidiary is a real estate brokerage firm , HomeServices (not rated), which
in 2005 provided about 13% of 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.
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 customers
in six western U.S. states. Its total assets were $12.8 billion at year-end 2005, and at the 12 months ending Dec.
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 $1.3 billion.
Going forward, about 35% ofMEHC's operating income is expected to come trom PacifiCorp.
PacifiCorp will push the proportion ofMEHC's operating income eamed 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 tenitories include parts of Utah, Oregon, Wyoming,
Washington, Idaho, and Califomia. As shown in Table I , while PacifiCorp s sales are concentrated in Utah and
Standard&Poor I CREDITFAQ
, 1
Mid-American 's Acquisition OfPacifiCorp-lmplications For PacifiCo,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
of 2005 Retail Revenues
Mid American Energy Co.PacifiCorp Standalone MEHC Consolidated
Iowa 83.91 42,
Illinois
South Dakota 5.78
Nebraska 0.38
Utah 41,20,
Oregon 28.71 14,
Wyoming 13.42
Washington
Idaho
California 2.36 1.16
Total 100,100,100.
Excludes FERC-regulated assets owned by Kern River Gas and Northern Natural
Q: Can MEHC improve PacifiCorp 's performance?
A: This is certainly management's intent. Ultimately, MEHC's success will be driven by whether it can
achieve greater operational efficiencies and enhance PacifiCorp s existing regulatory relationships.l,'hese goals
are not dissimilar trom 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 trom its Glasgow, Scotland headquarters.
MEHC has a reputation as a competent operator of utility assets, and it has improved the financial
performance of regulated businesses that it has acquired, most notably, MEC, which it purchased in 1999, and
Northem Natural Gas, which it purchased from Dynegy in 2002, shortly after Dynegy had purchased it trom
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 Iowajurisdictional electric
ROE falls below 10%. The Iowa Office of the Consumer, Advocate has agreed not to request or support any rate
decreases before Jan. 1 2012. In addition, earnings exceeding an ROE of 11.75% 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
www.standardandpoors.com
I, '
Mid-American 's Acquisition Of PacifiCorp-lmplications 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 affirmed PacifiCorp s CCR at the 'A- 'level?
A: Standard & Poor s does view MEHC ownership as having a potentially stabilizing effect on PacifiCorp
financial performance. However; the affirmation of PacifiCorp' s '' CCR was principally based on the
benefits PacifiCorp is afforded trom the consolidated credit strength ofMEHC, whose CCR was raised three
notches to '' on March 6 (see "Research Update: MidAmerican Upgraded To ', PacifiCorp Ratings
Affirmed; All Ratings Off Watch " RatingsDirect, March 6, 2005).
Q: What is the implication ofPacifiCorp s "ring-fencing for its credit rating?
A: As a cohdition of approving the sale, the Oregon Public Utilities Commission (OPUC) required PacifiCorp
to be ring-fenced trom MEHC. As part of this, MEHC has committed to retrain trom dividending cash flows
trom 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
s~ndalone credit metrics warrant the elevation. MEHC has ring fenced MEC, Kem River, Northern Natural;
and CE Electric u.K.; 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 trom
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 performance improves significantly, it could potentially support a ratings improvement, due to
the ring fencing. In addition, it will be somewhat protected trom credit deterioration below its own stand-alone
credit quality should MEHC's credit quality on a consolidated basis fall to a level below that ofPacifiCorp s.
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 willface?
A: Improvement i? PacifiCorp s financial performance and business risk is expected to be incremental. From
a bondholder perspective, PacifiCorp faces sometimes-difficult regulatory environments in each of the states it
serves. For example, in Oregon, PacifiCorp s second most important market, the senate overwhelmingly 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. SB 408 could provide a permanent cIawback 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 rules are not expected until this summer.) Utah is considering
similar legislation.
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 requests.
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 FAQ
Mid-American 's Acquisition Of PacifiCorp-lmplications For PacifiCorp 's Bondholders
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
some room for compromise.
Table 2
PacifiCorp Rate Cases ByState
., . .
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 Filed 11/20/2005
ruling)(TBD)
% rate inc,17,112 request 6:90 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
Di'lte 3/1/2005 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./$96 mil.~~$25,9 miL/$52,$9.3 mil.N/A $5,8 mil./$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./$125 mil.N/A $22,9 mil./$34A $15 mil./$25,7 mil.N/A N/A
mil.ss
Auth ROE 10,N/A 10.Not specified N/A N/A
(%)
2003
Date N/A 9/19/2003 4/1/2003 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 $R5 mil./$18 mil.~$R7 mil./$20 N/A N/A $7,6 mil.
mil.~~~
Auth ROE N/A 10,10.75 N/A N/A Not specified
(%)
2002-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 $402 mil.& $70 $64.4 mil./$103 $R9mil.N/A N/A N/A
miL/$142 mil.miLs
www.standardandpoors.com
Mid-American 's Acquisition OfPacifiCorp-lmplications For PacifiCorp s Bondholders
Table 2
PacifiCorp Rate Cases By State (cant. '
Utah
Auth ROE
(%)
2000
Date
% rate inc,
$ increase
Auth ROE
Year %
inc,
Oregon Wyoming Washington Idaho
10,75 Not specified N/A
California
11.00 N/A N/A
5/25/2000
$17 mil.
10/5/2000 6/21/2000 8/16/2000 N/A N/A
4.g 7 (over 2001-03)N/A N/A
$13.6 milJ$21 , 7 $10,6 miIJ$40,$13,1 miIJ$25,N/A N/A
miL"mil.mil.
10,11.25 Not specified N/A N/A
6.4 20.7 14,13.61R8
PacifiCorp reached settlment for $52,5 mil., but amount awarded reduced by about $26 mil. under application of 58408, PacifiCorp is appealing this reduction,
ROE reduced to 10% from 10.5%, set in 2001 ~Majorityof reduction related to net power costs and return on equity, ~PacifiCorpsought 11.75% ROE; awarded
a 10.15% 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 $116 mil. received reflects agreement to exclude $8. 1 mil. in power cost charges, nOf the
$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 rate
of return, the other pension, payroll and mise. "'Of the $16 mil. difference, all attributable to PacifiCorps agreement to not seek this amount in net power
increase but instead to have an adjuster, ~~~Does not address $91 mil. in deferred power costs later rejected, $11 mil. difference mostly disallowed power
contracts,
About 70% ofPacifiCorp s energy requirements come trom owned coal, 21 % trom purchases, 5% trom
hydro, and 4% trom 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 first state 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 cases 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 number 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 PacifiCorp s relentless
filing and settlement of cases 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 trom 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 pre-
approves power plants or purchases greater than 100 MW provides protection trom future regulatory
disallowances, which is critical because much ofPacifiCorp s growth is occuning in this state.
Q: What steps does Standard Poor s expect MEHC to take to maintain PacifiCorp 's credit quality?
Standard Poor I CREDIT F AQ
" '
Mid-American 's Acquisition Of PacifiCorp-lmplications 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 structure, 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'
rating is lowered. This could result from MEHC's financial performance being weaker than forecast, or if
Standard & Poor s view of parent support trom 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's
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 resu~t in a change in consolidated credit quality, this could affect PacifiCorp s rating.
www.standardandpoors.com
, 1
Mid-American 's Acquisition OfPacifiCorp-lmplications For PacifiCorp s Bondholders
Pac iftCorp SEnvic~ Area
$Qurt;e; p..~rtCOI'p,
Standard Poor I CREDIT F AQ
, I
Published by Standard & Poors, a Division of The McGraw-Hili Companies, Inc, Executive offices: 1221 Avenue of the Americas, New York, NY 10020,
Editorial offices: 55 Water Street, New York, NY 10041. Subscriber services: (1) 212-438-7280, Copyright 2006 by The McGraw-Hili Companies, Inc,
Reproduction in whole or in part prohibited except by permission, All rights reserved, Information has been obtained by Standard & Poor s from sources
believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor
does not guarantee the accuracy, adequacy, or completeness 01 any information and is not responsible for any errors or omissions or the result obtained
from the use of such information- Ratings are statements of opinion. not statements of fact or recommendations to buy. hold, or sell any securities,
Standard & Poor's uses billing and contact data collected from subscribers for billing and order fulfillment purposes, and occasionally to inform subscribers
about products or services from Standard & Poors, our parent. The McGraw-Hili Companies, and reputable third parties that may be of interest to them, All
subscriber billing and contact data collected is stored in a secure database in the US and access is limited to authorized persons, If you would prefer not to
have your information used as outlined in this notice, if you wish to review your information for accuracy, or for more information on our privacy practices.
please call us at (1) 21-2,438-7280 or write us at: privacy11!Jstandardandpoors,com. For more information about The McGraw-Hili Companies Privacy Policy
please visit www,mcgraw-hiILcom/privacy,htmL
Analytic services provided by Standard & Poor s Ratings Services ("Ratings Services ) are the result of separate activities designed to
preserve the independence and oQjectivity of ratings opinions, Credit ratings issued by Ratings Services 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 credit ratings issued by Ratings Services should not rely on any such ratings or other opinion issued by Ratings
Services in making any investment decision, Ratings are based on information received by Ratings Services, Other divisions of Standard
& Poor's may have information that is not available to Ratings Services, Standard & Poor s has established policies and procedures to
maintain the confidentiality of non-public information received during the ratings process,
Ratings Services receives compensation for its ratings, Such compensation is normally paid either by the issuers of such securities or by
the underwriters participating in the distribution thereof, The fees generally vary from US$2,000 to over US$1 ,500,000, While Standard
& Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications,
Permissions: To reprint. translate, or quote Standard & Poors publications, contact: Client Services, 55 Water Street, New York, NY
10041: (1) 212-438-9823; or bye-mail to: research request~standardandpoors,com,
i22"'Mi;r-~O(l6)'ResearchUpdute: PacifiCorps Short~ Tetn) RatifigRaisedTo 'A'" l'FonpwingS~e'To ML,Page lot
STi\NDARD RAT f;!'
&p(')OJrs.
RESEARCH
Reseqrch Update: PaclfiCorp s Short-Term Rating
Raised To 1' Following Sale To MidAmerican Energy
, Holdings
Publication date
Primary Credit Analyst:
22~Mar-2006 ,
AflneSejtingi S~nFrL'IncisCP(1) 415~371-5009;
an ne -'- seltti1gcmstandardandpoors,com
Credit Rating::/Stable/A-,1
Rationale
On l~arch 22, 201)6, Stq:riaaiq& P60't's ~atlngB' Se,rvice'S raised itsyho!Ct-t~rm 'rating tC:'l\,~l' from 'A'"'?' on Pa:-ci(iCofp'to ref 1 i!Jct ScOttishPowerplc 'ssale of the,companyonMarCh21.,2()'O6 to MidArrlet'lcati EnergyHolding:;; Company (MEHQiA-/Stable!-
;") .
Th~ ra:tiil1g actionr~fiects Sti:lndardIi. PC)o!: t sc0pcltlsip1'i tha~the\ltilitY'::;;~$l1Qr't~r:mratingbE)n~fits frbmtheexplicit and ~plicit5upportthat j-1E;Hqr;ec:::eiV~9:t::r~m its pa:ten:t,Berkshire H.;ithaway 1:hc .tAM/stableIA-l+ r .The 'A- 'corpC/rate 'cr~dit 1:::tlti:f1g .(CC~y tini'l$ci;EicQrp reflecfstnecQn~G1:i.dated credit proflie of MERC. MEHC'sratings ,reflect a fjtrongbusin"2s:;;ris,,!c Ptofi~,e5c:::'6re qf 4' (on, a lO,point ,scale, where 'I' iexcetJentanct' '10' is vulneL;;iple) , "!3:fAi.J::!lY ~ggre5sive fihtitiCialproLile,and the support. available t,oMEHC' from its parent Berk:shh:e Hath'aw~y. ,MEH(C' $b1,1siness Ii'iskpt6,fill!! ie'flects i't$6wtlerShip ofpdmarilY, regu latecienergycompanie.s, In' addJt;io!),to P~c::ifiCorp, ,MEHC,Owri~
t~idAm6dciari :Energy ce,. (MEt:; A-lStablelA-:L),an Iowa-'bagect ui:iJ,ity thatSetv,,":;; 1.3 million, ~lect.tic ,aridgascust!?fuers;CE Electric U.K. :E"undingCo. (BBB- /3table/A-3) thatserves~. 7 :lj\i.11ionelect~icGustQniE)d3 ("'lathe
distrib!itloricompaniesof Yorkshire Electricity am;! Northern Elect):':L.c);ctndn'JQ !J .S. pipelines, Kern RiyerGcts Transmission Co,. ' (A-/Credi tWatch
Ne'J !and Northern Natural Ga$c,Q. j~,JStaplel-'-), thllt are ,under the
jurisct:ict\o!'1 of the FeRC. I:n2005;t.hese re~!:ulated 'entitie~cQntr;i4utedabout 78% ofMEHC '::; earning,s,MEHG'$ largest, unregulated 8Ubs,idiary isreal est'te brokerage, firm HomeServ:Lc:e~(not ri!-;teq) , which ill 2()()5prov;,ded about 13% of itseariiings;Through varioll'S subsidiarie$ MEJ'jC cilsoowns addit,ional inp.ependentpo\qeI: generation' facilities, includinghydr:oelectdc and geothermal assets in t~~Philippin(i)5. Cb)clectively,
th~$e unrlOgulated energy c:ompaniescont,ributed about 9'% of 2DO5 ,earnings.Goingfo,rward,abol;lt 35% ,of MEH
q;'
()perati,n~J ,incQme isei:tpec:t'ed to comer:omPacifiCorp, and will increase thepr,oP9ftio110f MEfjC"'s opei:.;!.t'o:g.ix;come 8)"!"!led (rqm regulated (!;)u'sinesses to a;bout91% by 200:7,P9~ifLCO'rpserve$ 1. ,6:roilli9n ~ll$tqni~rs' in.si.xwe.st-erh stat~s, !tsbus.i1.e:.?ss p:t'Ofile is a satisfactory 'S " re:flecti:rW st;:rehgt!1S that inc.1ude:,,; pr~dQmini'J-nLly ,zoal-fired gener~tiori pasethiOlt produces competitive, lowco~n j;)6w~r; "'3e:ta,ge marketl,';,wh,iQhpy yi:rt:tu"," o'f their disparate locations
pl~CJvidea degree of e~Qm;;micai'ld geogr,aphical diversity; aridt'he poteritial
for Jmproved oPi;iiEitil1g effic,i:enciesthr6ughMEHC' s ownership . Challenges
,at"ln~ r:~nected in PacifiCb'rp,s businessrlskinclude itsexpbsiire to
'Hj"j,oie,'5ale, purchases and 'hydro variability (apout 70% of PacifiCoj,p' 52005
energyrequiremehts came from ch'iriectdoal;, 21% from purchases, 5% fromhydro ('imd H from natural gas) ;ana,bsE!nce of fuel andpiJrchasep poweradllJ~Jt€rs (although one was recently gr,anted in Wyoming and application.';fc,i iidjUstio'jcs' are pending irithe five other st'ates the utility serves);
and the $om-etime$' ciiffic'Jlt regulatory envi roninent 5 that the company
OJ);~I-.,b,,s wi thin. The company has been consistently unable to earn itscnittlcn:ized :eturn on equity, 'jrd,cil ranges from 10% to 10.5%, depending ontilt:' stcl tfJ. Regulatory anq custom~r relatio"!1ships are likelytb, be t€!sted
this year in Pacin,Corp s two most important markets , Ut,ah and Oregon,
hlip: 1/ ratingsdirect. Com! A ppsfRD/controller/Article ?id=49924 3&type=&outputType=prillt&fi'om=03/23/2006
f22"Mar-20Q61ResearcllUpdatq: PacifiG9rp s$llQrt-TermRatihgRaised To 'I' FollowirigSaleTo Mi..
whel"€!sizablerate case's were: :reCe:Vitly filed. The CQrnpany is seeking $197r:(ilUqrr (a,n IT. 4% inc.re,a.s~) in Utah and$'1i2Iidlli(';Jn (i'ln '11. 5% increase)in Ot,'0gori_
MERC, hi'lsabo.ut$16.i billion pfcorisplidated debt and $1.6' billion offrus:tmpretetred.s.ecuritle-soutstanding 8tthe holdingQOliipallY l~Vel. MEHC
4613 ,~;et4pa speciltl purpdseeritity, PPw Holdings LLC, todirer.::tiy ownPa-diCerf'p. Pacificorp'stotal debt outs:tandiiig a:t Dec. 3'1, 2005was$iL 1bUlion.Standard & J?oor's, applies its conso:Udatedri?tipg methodology toPacifiCoi"p, As a conditioh:6fapp-rovirig the, sale, the Oregon PublicUU Li ties Co.mmission (OPPC) required P$!c::ifiC9rpt~b!'! ririg"-fenC:€'d from
IYJEHc. The ring-fencing includes structural 'protec::tions, cC:W~f!.:ii\ts, ~pledge ofs1;'dC:k, and an in-dependent dir~tt6r. Such provisions serve top-t'otecc PPWHo1.dingsLLC and PClcHiCorp fro~ ariMEIIC; bankruptcy. Que tothe rirjg"-fo:inCii\g,Paci:t:iC6,' 5 C(';R could potentially be~shigh at; threenQtch~$ ahbye MEHG's rating, if its sbrnd-alonecredit quaIL tysupportedsuch an e1evatiO'n. Currently,th:e tItlE ty' s st'and:-aIOrie creq-itqualityopes hOt ~Iai:ra'rit a rating above MEHC'Si its stand"-alone c:red:i;tmet,ics arein the ' BBB'caj:;e,gqry.
As part ofacguiringthe needed regUlgtqIY a:pprovals to Complet,e theacql1isitiOrl0f paciiiCorp, MERe has agreed to refrain frQmdividendlngcast, news frQ!!" ,t!leilti,llt')i to.j'fEHC llhlessitmaintclins ac:ommon equityratiO' of 4H.25%throl1gh 100B, deq-reasing annually to 44 %!;iy-, 2QI2. Thisdividei:d restricti6Iisho\ild also. provide inCe111:i ves to delev~rage1"4ci ficocp. (E'i?cificprp' sq.(;ij wsted deb,
:':
t91;.oti!.lcapi ta'lizati-on was 56% at
':: .
31, :2 ODS, which reflects a q,ebt equivaJ.ent Qf$'537rn:illion, reS:t11tingpLimar.L1.y ferain the~1t.ilitY's5ubstantial purchased power obligations. BacifiCorpha~ f! ~'iz~ble cap,ital pr9gramthat Scottish J?;ow:er basestimated will be $6.' bil'lion ov€r the neXt:, five Ye4J':$.,At:1::(iirj,ing-b!i'2ttati'pnal effiqcieI1ciej5 tQ improve cash flows ,avai:lable to. re~nve-'9t illt11e\1ti1i t,y win be animpart?1it focus. Hi:J\ifever,eqriLty sUpport 'from thepai'ent mbyalso. be- required to support the utilit.y,in;ra;;1::t,jJctul:er~qtl-trE1,m~nt$..
Sh ort-te rmrating fa clots
P0kCifiCorp s ':A"'l' sho,r't~te rm- rorting reflects Sta'Iidard&,p6or ' sconclus.lon that the utility ' scP , rating henef'its from the expl-iGitand implicit support t'hat MERe receives from Berkshire Hathaway.
Berkshire Hathaway's extremely strong liquidity-positidn:!,s assumedt0. be-available to,PaeifiCorp via MEHC in the, qnl:l,,\(e:lyevent thatPaci'fiCoiPC01ild'rl6trepayit$ CP, bbligatLons.E;.:plic'it~upport- exi'St13intbe form pf a $3.5 (Jillion equityc0rnI!\itm,"ntagreement between Berkshire Hat:hawi'1yand ME1lCthat, c;o uldbe caEedupon to$upport the liquidity requirementsofMEHC' st'e9ula,tedsubsidiari~s, inc1U:liing PacifiCorp, In (:j:dijit ic,D , Standard &?(n" sbelieves that due to Berkshire Hathaway's incr~aS$qV:9tinginter,,$\; in MEHCari(j its stri'rtegic fbciJS Qn utility investments, ithas incentives to trE~q,t Paq;i.fiCqr;p",nd MEHC' s dthe:(: I'egulatedi nv6stn1orit::; as core to. consolidated Berkshire HathawClyoPE?rat,tohs.PticifiCorp pt'ovides for i tsdwn ,;jay-"to.-day liquidity needs. It-Cash zmd cash equiva1€mt p:c;;5itibn W.;lS $16,4 miliiorii;lsof Dec. 31,2()O:;, relatlvet6$T99 million as of ~-'ear-end fisGa12005 tMarch 31,the '~nd. of StoftishPower'sfiscalyear).Tnaddidon,it has an $800mil11onCP program, wIth $215 mil1~Onb\ltstancjingaB ofO!')c. ,31. The,p:rog,ram is backstopped bya revolving credit agreement tp.8
terminate,\; in August ,.20:LO. f';.s. of Dec. 31, th,eJac:ility was undrawn.ut-ure maturJ ties are in line witl1 historic obliga,ticns. At Dec. 31,2005, PatifiCbrp ' scapj-tal expenditures totaled $7i6 rnillia:n. coiT1pa"red t'o $540 mil1J_ori, atlJfjc. 31, 2004,
Outlook
The stabl" out,loOk on POicifi Co rp, reflects Standard /;; 'poor s expectationthaI. NEllC l~:LI.l. de.J.,everllge Paci'ficorp through thereirivestmeht Qf cash flow
Ln~:0it:,~ CJxtensive capital I';!xpendit~n::e5 program and work to buildCoIi$LJ::CJcti\rere,guld:Lo,).::"\!i:elationships in the statesPaci-fiCorp ,serves. It
is al';:;oilss'I1H\ed tha-t Berkshire Hathaway, which holds an8 6. 6!1i economicintGTci;,:t: on
;,)
diluted basis in I'JEHC,will provide credit support aridfuture ),nvestment: capital as needed to PacifiCorp.P.acifiCorp '5 ratingcc,,-,~.l.df;;;lll to a level comrnen-S\J'rate with its stand-alone crectit quality ifU1EHC'~; YO? L:i:ng INI8T'r"d. PacifiCorp s rating has lillti'ted nea termLrp:sid("
~;
ib, CJ:'I8dit metrics ana, stand-C11one basis fall well short of
http :/!rati ngsdirecLcoml Apps/RD/contro Her/A 11i 01 e?id =4 992 4 3 &type=&o utputT ype=pl'int&from=
Page2 ofT
03/23/2006
J22-MRt;.20Q(iIRes~~:rchUpd.ate; PacitiCorp s , Short-TeI'hl Rating Raised To"l' FoUowingS~Je I() Mi... Pqge\3 ellthe t lV C6't'egory.
Ratings List
Ratiti,Raised From
t'acifiCm:'
8hor:t---t:e hn corp credit d:g A-I
1\a tlTlgs Affirmeq
f'iadfiCorp
Lpng-tent1cotp credit rtg
Seniorsec1,1i:'ed debt
Senior. unsecu:red debt
Preferr"rl stoc
A- (Stable
BBB
BBB
MidPcine riciJ.Q 'Energy Holdings Co.(:orpPrq-1:ecredit iating A-IStable/--Senior llJ"lseCurecj debt BB~+Preferred stock BBB-
Colnpl,ete ri!-ting.sipformatioriis available to-, subscribe.rs Ratingsbirect.
, ,
SJ,Ildard& Poq,1;SWeb-b$sedpredit anal;ysis: s-yst~m, at"IWW, t'2ttTngsdi'cect .com. A1.1 Ei'ltlngs affecteq.hythis ra:tingac.tii:l'rl (;an befound, on$ta.ridEi'.1::c:i ,I' pdo ' ~public viet site -at www. standardanqpO'Ors .cpm;underCiedit!1.a.!:;irJ95;in'th~ :left navigati'Qn bar, select Find: :a: R-iating,then (;1;editRa tlngsSearch.
AriiilytiC seNicesprovidedby Standard & Poor's Ra~ngs ServlCeS (RatingsServices)arelhfa result of sepCir-ate;3clivities ,designed to preserve theindep~n!:!en~aJ'lcl\)bJ~(:tivity ofratii'\gsOpinipns; TM creditratlngs a lid observations contained hereinare::s'rilelysfatemerit$ofoplriirinaiu:inofslatements of fact or recomrnendatiopsto, pur~a$e,hold" or ~II any securiiiesor makeany other investment decisions, Accordingly, anyoserof the hiformationcontained hereinsbOuld not rely 00 any credit rating or
tither opfnroncpntailiedherein in m~kin:g.ariyinvestment decision; Ratings are based on il1formation received by Ratings 'Services:, bthefdJvisiGrlsofStandard&Poor's may have informatlontharisnofavailabie I()RafingsServices~ Siaridard'& Poor'shas:~stl3bl,shed POlic~sC!ndprocequres to mairitafnthe confidenti~!lity6f non-publlcirifOri'riation receivedduringlhe ratil'19sprOCeSs.
RatingsServicesre~iVescompensationfo(iIS ratings, Such compensation is notmally,paideJihli:!rbythe issuers of suchsecur'ities odtiii'dparties participating inrnarketing the ,securities. Whi1&$tandard& Poor's'res.ervesth&right todisseminafelhe'rating, it receives nIJ payment fordoing SO, E1xceptforsubscriplions t6 its publications, AdditiOnal information about our ratingsfees isavaiJableOlt wwwsiandardandpoors.comlusratingsfees.
Copyright I.!'J iB94-2006Standard & Poor's, a dl\lision ofThe McGraw-Hili Companies.AIIRJghts Reiierv'ed, PtivacyNoiice
bttp;! hatingsdireCLcom/Apps/RDlcontro Her/Article ?id='49924 3&type=&outputType=print&from=03/23/2006