20070322Compliance filing, Commitment 120.pdf

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Pacific Power I
Rocky Mountain Power I
PacifiCorp Energy
825 NE Multnomah, Suite 1900 LCT
Portland. Oregon 97232
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March 22, 2007
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Idaho Public Utilities Commission
472 West Washington
Boise, ill 83702-5983
Attention:Ms. Jean D. Jewell
Commission Secretary
Re:Idaho Docket No. PAC-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 the acquisition ofPacifiCorp by MidAmerican Energy Holdings
Company.
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
Vice President and Treasurer
Enclosures
BW:lb
(14-Mar-2007) Research Update: PacifiCorp $600 Million Bonds Rated 'Page I of 3
RESEARCH
Research Update:
PacifiCorp s $600 Million Bonds Rated '
Publication date:
Primary Credit Analyst:
14-Mar-2007
Swami Venkataraman, CFA, San Francisco (1) 415-371-5071;
swami- venkataraman~standardandpoors.com
Rationale
On March 14 , 2007 , Standard & Poor's Ratings Services assigned its
to PacifiCorp'$600 million first mortgage bonds due 2037. At the
Standard & Poor's affirmed its '' corporate credit rating on the
The outlook is stable. The proceeds from the offering will be
repay short term debt and for general corporate purposes.PacifiCorp serves 1.7 million customers in six western states and had
about $5.8 billion in outstanding debt and preferred stock as of Dec. 31,
2006. On March 21 , 2006, MidAmerican Energy Holdings Co. (MEHC; A-/Stable/--
completed its purchase of PacifiCorp from Scottish Power pIc.
The ' A-' corporate credit rating on PacifiCorp reflects MEHC'
consolidated credit profile. The rating incorporates MEHC' s strong business
risk position , fairly aggressive financial profile, and both explicit and
implicit support from Berkshire Hathaway. Explicit support from Berkshire
Hathaway 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.
Neither MEHC nor PacifiCorp displays '' credit metrics on a stand-alone
basis. MEHC is expected to fund a significant portion of PacifiCorp' s large
upcoming capital program through equity. MEHC has contributed $215 million in
equity to date since acquiring PacifiCorp in March 2006.
MEHC's business prof ile score is strong at '. (Business profiles are
categorized from '1' (excellent) to '10' (vulnerable)). This score
incorporates the significant diversity of MEHC's businesses , limited exposure
to unregulated ventures (less than 10% of operating income in future), and our
expectation that MEHC's future acquisitions will be in the regulated utility
segment and not in unregulated or commodity-exposed businesses. MEHC'
strategy has been to acquire regulated utilities that can benefit from its
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.
MEHC owns PacifiCorp through PPW Holdings LLC, a special-purpose entity
that ring-fences PacifiCorp from MEHC as required by the Oregon Public
Utilities Commission. The ring-fencing includes structural protections,
covenants , a pledge of stock, 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, decreasing annually to 44% by 2012. 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 high as three notches above MEHC' s rating, provided
its stand-alone credit quality supported such an elevation. Currently, theutilitys stand-alone credit metrics are in the ' BBB' category and do not
warrant a rating above MEHC'
PacifiCorp's business profile is a satisfactory ' 5', reflecting apredominantly 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 di versi ty; 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
'A-' rating
same time,
company.used to
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(14-Mar-2007) Research Update: PacifiCorp s $600 Million Bonds Rated 'Page 2 of 3
from owned coal , 21% from purchases , 5% from hydro , and 4% from natural gas),
limited fuel and purchased power adjustment mechanisms, and the
sometimes-difficult regulatory environments where the company operates.
The company has been consistently unable to earn its authorized return on
equity, which ranges from 10%-10., depending on the state. In 2006,
PacifiCorp settled rate cases, originally filed under the ownership of
Scottish Power , in all its jurisdictions but for Washington. Although
settlements provide PacifiCorp with revenues lower than requested , sometimes
substantially so as in Oregon, and generally prevent the company from going
back for rate increases for at least another year , these are largely in linewi th assumptions in our forecasts. MEHC, through Pacif iCorp and MidAmerican
Energy Co., has 10 state regulators, which presents unique logistical and
performance challenges.
Finally, Senate Bill 408 in Oregon will continue to remain a moderate
risk for PacifiCorp. Although the tax apportionment rule based on property,
sales and payroll appears fairly neutral to PacifiCorp, there is potentialthat, in a bad year , PacifiCorp' s stand-alone tax bill would be lower than
what it collects from customers and that may require a refund under the second
of the three rules of SB408. The third rule , namely the prospect that
Berkshire Hathaway as a whole would pay less in taxes than PacifiCorp alone
collects from its ratepayers , is extremely unlikely to occur.
We expect that MEHC will contribute substantial equity to fund
PacifiCorp's $6.4 billion capital program over the next five years and that a
combination of cost reductions and improved regulatory relationships will
eventually enable PacifiCorp to improve its financial performance to achieve
returns closer to its authorized ROE. This is something PacifiCorp wasn't able
to do in recent years under Scottish Power's ownership. These factors should
result in an overall improvement in PacifiCorp' s credit metrics.
Under the consolidated rating methodology, we focus primarily on MEHC' s
consolidated financial profile. While MEHC' s credit metrics are improving,
ratios are clearly weak for the ' A-' rating, which benefits from Berkshire
Hathaway's support. During 2006, funds from operations coverage (FFO) of
interest and debt stood at 3. 4x and 11., respectively. Debt to total capital
had shown a substantial improvement from 77.8% as of Dec. 31 , 2005 to
approximately 69% as of Dec. 31 , 2006, mainly reflecting the equity infusion
for the acquisition of PacifiCorp. Credit metrics should continue to improve
over the next few years as MEHC deleverages PacifiCorp through substantial
equity infusions and reinvestment of operating cash flow.
Short-term credit factorsPacifiCorp's 'A-short-term rating benefits from the explicit and implicit
support that MEHC receives from Berkshire Hathaway. We assume that Berkshire
Hathaway's extremely strong liquidity would 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 on to
support the liquidity requirements of MEHC's regulated subsidiaries, includingPacifiCorp.
PacifiCorp had cash of $59 million as of Dec. 31 , 2006 and an $800
million revolving credit agreement that expires in July 2011. There were no
borrowings under the revolver but it supports $79.7 million of commercial
paper and various pollution control revenue bonds. Current maturities of
long-term debt are manageable at $325.5 million. PacifiCorp's large capital
expenditure program will require substantial external funding, including
equity contributions from and zero dividends to MEHC to maintain financialratios.
Outlook
The stable outlook reflects our expectation that MEHC will deleverage
PacifiCorp through equity infusions and reinvestment of cash flow into its
extensi ve capital expendi ture program and work to improve Pacif iCorp' s
regulatory relationships and operating efficiency. We also assume that
Berkshire Hathaway will provide credit support and future investment capital
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(14-Mar-2007) Research Update: PacifiCorp s $600 Million Bonds Rated 'Page 3 of 3
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
New Rating
PacifiCorp
$600 mil 1st mortg bonds due 2037
Rating Affirmed
Corporate credit rating A- /Stable/A-
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Fitch Press.Release Page 1 of
FitchRatin
KIUlW YOUR RI$I\
Fitch: ,InfoCenter: Press Releases
Fitch Rates PacifiCorp s$600MM Issuance of FMBs Ra.tiM
12 Mar20Q79:08AM (EDT)
Fitch Ra,tings-New York.t2March2007: Fitch Ratings has assigned a ratirigof ~A-to PacifiCorp s (PPW)
anticipatedissuance,df $600 million 5.75% first mortgage bonds (FMBs), due April 1, 2037. Proceedsfrorn the
issuance will be used to repay shorHerm debtand forgeneralcorpbrate purposes. The Rating Outlook for PPW
is Stable.
The ratings fotPPWreflect the company s solid finanqiaLposition, competitive resource base, and relatively low
busIness risk profile. The ratings assumereasonableputcomesin pending and future r,';lte proqeeQings to,
recovetanticipqted, significant capit(1linvestment. PPWa,ppears to be making solid progrE:iSs on the regulatory
front, achieving commission approval of settlement agreernentsduring 2006 related to general rate case
proceedings in utah ,Oregon, Wyoming, Idaho and California. In addition" PPW recently received a staff
recommendation in its pending Washington general rate case of$12 rnillion-$16rniUibn in which the company
requested a$.23million (10'%;) rate Jrmrease. The rate case was filed inOctober2008andafil1al brder expected later this year.
Fitch'S analysis also takes ihtoaccount PPW's projected above-industry-average Mrvice t~rritorygrowth,
primarily in its Eastern service territory,signifil';antplannedinvestmentin new plantincJuding renewablesand
infrastructure to meet its load requirements, andit~ grQwingexposure to gc:ts-fired generating capacity~ PPW's
capitClI investment is expected to increClseto$1.bUlionin2007from$1 billion in 2006 and spending on new
planLand equipment over the next 10 years is estimClted to approximate $16 billion.
The potential for unsuppbttive regulatory actions, especially in light of thecornpany s large construction budget
isa primary source6f concern for inVestors. Additionally, PPWfacesgrowing reliance on gas~firedgeneration
and exposure to highcomrnodityc6stsintheeVent of a prolonged, unsCheduledhase-loadplant outage during
a period of high demand. Changes in utility tax policy mandated by OrEigonSehClteBill408are also an ongoing
source of uncertainty forPPW investors.
PPW,a wholly owned subsidiClry of MidAmerican Energy Holdings Company, provides integrated electric
service to approximately 1.7 million retail customers in parts of Utah, Oregon, Wyoming,Washington, Idaho and
California.
Cbntact.PhilipW. Smyth, CFA +1-212~908-0531, New York; or Karen Anderson +l-c312~368-3165, Chicago,
Media Relations: Brian Bertsch , New York, Tel: [phone].
Fitch's rating definitions and the termSbf use of SllCh ratings are available on the agency s public site
www.fitChratings.corn'. Published ratings, criter'iaandmethodologiesareavailablefromthissite, at all tirries.
Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewaU,corripliahceand other relevant
policies and procedures are also available fr(jrnthe 'CodeofConduct'sectionoUhis site.
CQPyright ~2007 by FItch, Inc" Fitch Ratings Ltd. and its subsidiaries.
http:/ Ifitchratings .comlcreditdesk/press releases/detail.cfm?p ri nt== 1 &pr _id=34687 4 3/13/2007