20060822Complance filing re credit rating.pdf

~!~ !!:t~~~f'RECEIVED
200& AUG 22 AM 9: 43
Pacific Power I
Rocky Mountain Power I
PacifiCorp Energy
825 NE Multnomah, Suite 1900 LCT
Portland, Oregon 97232
August 21 , 2006
IDAHO PU8L1C
UTILITIES COMM\SSIOj~
Idaho Public Utilities Commission
472 West Washington
Boise, ID 83702-5983
Attention:Ms. Jean D. Jewell
Commission Secretary
Re:Idaho Docket No. P AC-OS-O8 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 MERe'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
LJ~
Bruce Williams
Treasurer
Fitch Ratings
KNOW YOUR RISK
FITCH RATES PACIFICORP'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 mi11ion 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 gas-fired generating capacity. PPW is expected to invest approximate $1
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-fired 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: +l 212-908-0549.
Fitch's rating definitions 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 firewall
compliance and other relevant policies and procedures are also available from the 'Code of Conduct'
section of this site.
(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~standardandpoors .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-/Stable/-). The rating incorporates MERC'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 MERC. In
fact, MERC is expected to fund a portion of PacifiCorp T s large upcoming
capi tal program through equity.
MERC's business profile score is 'strong ' (utility business profiles
are ranked from '1' (excellent) to '10' (vulnerable)). This score
incorporates the significant diversity of MERC' s businesses, limited
exposure to unregulated ventures (less than 10% of operating income in the
future), and our expectation that MERC's future acquisitions will be in
the regulated utility segment and not in unregulated or commodity-exposed
businesses. MERC' s strategy has been to acquire regulated utilities that
can benefit from MERC' 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
Scottish 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 MERC 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 MERC
bankruptcy. Due to the ring-fencing, PacifiCorp s corporate credit rating
could potentially be as much as three notches above MERC' s rating,
provided its stand-alone credit quality supported such an elevation.
https://www.ratingsdirect.cornl Apps/RD/controller/ Article?id=525 317 &type=&outputType...8/8/2006
(O8-Aug-2006) Research Update: PacifiCorp s $350 Million First Mortgage Bond Assign...Page 2 of 3
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 ~ubstantial
improvement from the 77.4% as of Dec. 31, 2005, reflecting the equity
infusion for the acquisition of PacifiCorp. The results of PacifiCorp ' s
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 of
operating cash flow.
Short-term credit factors
The ' A-I' 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.
Berkshi re 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
liquidi ty 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.
https://www.ratingsdirect.com/ Apps/RD/controller/ Artic1e?id=5253 I 7 &type=&outputType...8/8/2006
(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
expendi tures.
Outlook
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, 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 I category.
Ratings List
Rating Assigned
Paci fiCorp
$350 mil 1st mtg bnd
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