20071128Compliance filing.pdf

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Pac Por I
Rocky Mounn Por IPaCo Energ
825 NE Multnomah. Suite 1900 LeT
Portd. Orego 9n32
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2~û l1,tO, . K
November 28, 2007
nA OVERNIGHT MAL
Idaho Public Utilities Commission
472 West Washington
Boise,ID 83702-5983
Attention:Ms. Jean D. Jewell
Commission Secreta
Re: Idaho Docket No. PAC-E-05-08 Compliance Filing
To the Idaho Public Utilties Commssion:
PacifiCorp submits the attchments in compliance with the Commssion's Order in ths case
issued on Febru 13,2006 and amended on March 14,2006. The Order approved the
Stipulation supporting the acquisition ofPacifiCorp by MidAerican Energy Holdings
Company.
Commtment 120 of the Stipulation provides that, PacifiCorp will provide to the Commssion, on
an informational basis, credit rating agency news releases and fial reports regarding PacifiCorp
when such reports are known to PacifiCorp and are available to the public.
Therefore, in compliance with Commtment 120 of the Stipulation, please fid the atthed
reports related to PacifiCorp.
Very trly yours,~~
Bruce Willams
Vice President and Treasurer
Enclosures
BW:lb
PacifiCorp
Primary Credit Analyst:
Anne Selting, San Francisco (1) 415-371-5009; anne_selting(?standardandpoors.com
Table Of Contents
Major Rating Factors
Rationale
Outlook
Short-term Rating Factors
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PacifiCorp
Major Rating Factors
Strengths:
· Market and regulatory diversity afforded by PacifiCorp's electric utility
business, which serves portions of six western U.S. states;
· Low retail electric rates, which compare favorably to other electric suppliers
operating in the states PacifiCorp serves; this competitive advantage should
be maintained, despite the company's need for rate relief in the coming years
to support a large capital program;
· A stable regulatory environment, as evidenced by the 2006 settlement of
rate cases in all six states served by the company, which provided PacifiCorp
with incremental cash flow, albeit at lower levels than its original requests;
· The 2006 approval of a power cost adjuster in Wyoming, combined with
the use of a forward mechanism to set base fuel and power costs in Oregon,
has improved the company's exposure to fluctuations in natural gas and
purchased power costs.
Corporate Credit Rating
Weaknesses:
· An expected $16 bilion in capital projects are planned during the next ten years; in 2007, total capital
expenditures are expected to be $1.8 bilion;
· A heavy reliance on purchased power, due to legacy power sale agreements; PacifiCorp purchased about 22% of
the company's 2006 power supply, and about 21 % of its total energy sales were to wholesale customers;
· Stringent renewable portfolio standards in Washington wil require 25% of retail electric sales to be supplied with
renewable sources by 2025; incremental targets begin in 2011, PacifiCorp is investing in wind generation.
Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflects the consolidated credit profile of parent, MidAmerican
Energy Holdings Company (MEHC; 'A-/Stable'). The rating incorporates MEHC's strong business risk position,
aggressive financial profile, and both explicit and implicit support from Berkshire Hathaway ('AAAlStable/A-1+'),
which is the majority owner of MEHC. Explicit support from Berkshire Hathaway is in the form of a $3.5 bilion
equity commitment agreement, which, in our view, would be called on -- if necessary -- to support MEHC's rating
or that of its regulated subsidiaries, including PacifiCorp.
PacifiCorp serves 1.7 milion customers in portions of six western states: Utah, Oregon, Wyoming, Washington,
Idaho, and California. PacifiCorp operates as Pacific Power in Oregon, Washington and California; and as Rocky
Mountain Power in Utah, Wyoming and Idaho. The company's two largest markets, Utah and Oregon, comprise
about 70% of the company's retail electric operating revenues. As of June 30, 2007, the utilty's stand-alone debt,
including current maturities and preferred stock, was approximately $4.6 bilion. Consolidated debt at MEHC was
more than $19.2 bilion as of the same date.
MEHC completed its purchase of PacifiCorp from Scottish Power PIc. on March 21, 2006. MEHC owns PacifiCorp
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2
f¡:í30'ì
PacifiCorp
through PPW Holdings LLC, a special-purpose, non-rated entity -- with no debt outstanding -- that ring-fences
PacifiCorp from MEHC as required by state regulators. The ring-fencing includes: structural protections, covenants,
a pledge of stock, a non-consolidation opinion, and an independent director. PacifiCorp is limited in 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 a MEHC bankruptcy. Due to
the ring-fencing, PacifiCorp's CCR could potentially be as high as three notches above MEHC's rating, provided its
standalone credit quality supported such an elevation. However, on a standalone basis, PacifiCorp currently has
credit metrics that are in the 'BBB' category.
Both cash coverage of debt and leverage have improved modestly at the utility level since the acquisition. As of June
30, 2007, PacifiCorp's adjusted funds from operation (FFO) to total debt was 17.7%, and FFO interest coverage
was 3.7x. Adjusted debt to total capitalization stood at about 54%. (PacifiCorp's fiscal year was changed to
year-ending March 31 to Dec. 31 after the acquisition was completed.) Cash flow improvement can be attributed to
the increased rate relief PacifiCorp received from the 2006 settlement of rate cases in all six states it serves. Leverage
has benefited in 2007 from MEHC's equity infusions into PacifiCorp, which through June 30, 2007, were $150
milion, building on 2006 equity contributions that have helped offset the effects of PacifiCorp's borrowing for its
large capital program.
The financial analysis also focuses on MEHC's consolidated credit metrics that, although improving, are clearly
weak for the 'A-' rating, but benefit from both implicit and explicit support provided by its parent, Berkshire
Hathaway. For the 12 months ended June 30, 2007, MEHC's FFO coverage of interest and debt stood at 2.8x and
12.3%, respectively. Consolidated MEHC debt to total capitalization has shown an improvement to 65.7% at the
12 months ended June 30, 2007, from 68.6% as of Dec. 31, 2005, which principally reflects the $3.4 bilion in
equity infused into MEHC to fund the $5.1 bilion acquisition of PacifiCorp.
MEHC's business profie score is strong at '4' on a 10-point scale, where '1' represents the least risk. This score
incorporates the significant diversity of MEHC's businesses, limited exposure to unregulated ventures (less than
10% of operating income), and our expectation that MEHC's future acquisitions wil be in the regulated utility
segment and not in unregulated or commodity-exposed businesses. MEHC's strategy has been to acquire regulated
utilties 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's challenges during the next few years are largely
tied to achieving the goals it established for PacifiCorp, as the utilty is expected to comprise about 40% of
consolidated operating cash flows during the next several years.
PacifCorp's business profie is a satisfactory '5', reflecting a predominantly coal-fired generation base that produces
competitive, low-cost power in average markets, which by virtue of their disparate locations provide a degree of
economic and geographical diversity. It also reflects the potential for improved operating effciencies through
MEHC's ownership. Challenges that are reflected in PacifiCorp's business risk include: its exposure to wholesale
purchases and hydro variability (about 68% of PacifiCorp's 2006 energy requirements came from owned coal, 22%
from purchases, 6% from hydro, and 4% from natural gas); the absence of fuel and purchased power adjustment
mechanisms in Utah, Washington and Idaho; and the challenge the companies wil face in implementing a large
capital program, and the attendant regulatory rate relief that wil be required to support it.
Under ScottishPower ownership, PacifCorp was consistently unable to earn its authorized return on equity (ROE),
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PacifiCorp
which ranges from 10%-10.5%, depending on the state. Instead, at the time of acquisition, annual ROEs were in the
range of 7%. To do so, MEHC wil have to implement a constructive regulatory strategy, as it has done with
MidAmerican Energy Co., the Iowa-based utility it acquired in 1999. In 2006, the company settled major rate cases
in each of the six states, but it should be emphasized that all cases were initiated under ScottishPower ownership.
Although these settlements provided PacifiCorp with revenues lower than requested, sometimes substantially so (as
in Oregon), and generally prevent the company from going back for rate increases until 2008, the results were
largely in line with assumptions in our forecasts. This year's filed rate cases in Idaho and Wyoming represent the
first rate case activity in which MEHC has had full discretion in developing its requests.
Future rate cases wil largely be driven by new resource additions. In the summer of 2007, the company brought two
large generation investments online: Lake Side, a Utah 534 megawatt (MW) combined cycle gas plant, which wil
increase PacifiCorp's installed gas plant to about 18% of total owned plant capacity; and Marengo, a 140 MW
wind farm in southeastern Washington. More wind projects are planned for 2007 and 2008. PacifiCorp's current
owned generation capacity is 9,262 MW, including the 2007 additions. The company's integrated resource plan,
filed in May 2007, calls for an additional 3,171 MW of additional resources (including energy efficiency and load
control) by mid-2016. Regulatory review of the fiing is expected to be complete in 2008. Substantial transmission
investment is also planned.
As part of its 2006 rate cases, PacifiCorp requested power supply adjusters in a number of states and was successful
in Wyoming. The use of an adjuster was rejected in Utah and as part of its 2006 rate case settlement, the company
agreed to defer pursuit of one until its next general rate case. In Washington, the Washington Utilities and
Transportation Commission (WUTC) ruled that while PacifiCorp had proved its case for one, it did not adopt the
proposed design.
In Wyoming, an adjuster was approved. There, a general rate case establishes base power costs, which are then trued
up to actuals, as measured on a Dec. 1-Nov. 30 basis. The company then files on Feb. 1 of each year to collect or
refund the amounts tracked in the balance accounting beginning April 1, with the proviso that total company net
power costs must exceed rates by $40 millon before an adjustment is made.
In Oregon, no power supply adjuster exists but power costs are trued up on a regular basis, based on a forward
price curve. First used by the company in 2006, it fies its forecast net power costs on April 1 for the coming
calendar year. Parties file discovery and typically the process is fully adjudicated. Updates for new contracts, and to
reflect the revised forward curve, occur in November, with new power rates in place by Jan. 1. While the company
may not defer cost overruns, the timelier update of costs is expected to minimize the potential for the company to
incur power costs significantly in excess of rates. In California, the company receives dollar-for-dollar recovery of
costs in excess of rates, with some restrictions.
Outlook
The stable outlook reflects our expectation that MEHC wil deleverage PacifiCorp through equity infusions, as
needed, and reinvest cash flow into its extensive capital expenditure program, as well as and work to improve
regulatory relationships and operating effciency at PacifiCorp. It is also assumed that Berkshire Hathaway wil
provide credit support and future investment capital, as needed, to PacifiCorp. PacifiCorp's rating could fall to a
level commensurate with its standalone credit quality if MEHC's rating is lowered. PacifiCorp's rating has limited
near-term upside, as its credi't metrics on a stand-alone basis fall well short of the 'A' category.
Standard & Poor's RatingsDirect I November 8. 2007 4
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PacifiCorp
Short-term Rating Factors
PacifiCorp's 'A-l' short-term rating considers the equity commitment of MEHC's ultimate parent, Berkshire
Hathaway ('AAAlStable/A-1+'), to which it has strong ties. Without these ties, the short-term rating on the company
would be 'A-2'. 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 commercial paper (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 cash and cash equivalent totaled $56 milion as of June 20, 2007, in addition to an unsecured revolving
credit agreement for $800 milion through July 2011, and $760 milion for the subsequent year ending July 2012.
There were no borrowings under the revolver as of Sept. 30, 2006, but it supports $30 milion of CP outstanding as
of the same date, as well as various pollution control revenue bonds, with a letter of credit and standby bond
purchase agreement totaling $518 million at June 20, 2007.
The company has two significant numbers of maturities in September and May 2008, of $200 milion each, with
total maturities for the year at $419 milion, which includes capital lease obligations. PacifiCorp's large capital
expenditure program wil require substantial external funding, including equity contributions from, and zero
dividends to MEHC to maintain financial ratios.
Table 1
PacifiCorp: Peer Comparison*
Industry sector: Integrated
PacifiCorp Portland General Electric Co.Pacific Gas & Electric Co.
Rating as of Nov. 8, 2007 A-/Stable/ A-l'BBB+/Negative/A-2'BBB+/Stable/A-2'
Average of past three fiscal years
($Mil.)
Revenues 3,699.87 1,473.33 11,484.33
Net income from continuing operations 306.77 75.67 1,967.00
Funds from operations (FFO)893.22 291.04 1,797.99
Capital expenditures 1,087.38 278.78 2,051.58
Cash and investments 125.97 112.67 1,425.67
Debt 5,439.98 1,236.53 9,948.02
Preferred stock 41.30 0.00 270.00
Equity 3,766.07 1,182.03 7,462.82
Debt and equity 9,206.04 2,418.56 17,410.84
Adjusted ratios
EBIT interest coverage (x)2.63 2.16 3.32
FFO interest coverage (x)3.77 3.99 3.21
FFO/debt 1%)16.42 23.54 18.07
Discretionary cash flow/debt (%)(7.15)16.80)(3.79)
Net cash flow / capex (%1 70.16 83.11 70.99
Debttotal capital (%1 59.09 51.13 57.14
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PacifiCorp
Table 1
PacifiCorp: Peer Comparison"'(cont.)
Return on common equity (%) 7.37 4.96 25.31
Common dividend payout ratio (unadjusted) (%) 42.33 78.41 15.47
'Fully adjusted !including postretirement obligations). In 2006, PacifiCorp changes its fiscal year ending from March 31 to Dec. 31.
Table 2
PacifiCorp: Financial Summarv'"
Organization Type: Electric
Fiscal year ended Dec. 31,Fiscal year ended Mar. 31,
200 2006 2005 2004 2003
Rating history A-/Stable/ A-1 'A-/Stable/ A-l'A-/Stable/A-2'A-/Negative/A-2'A-/Negative/A-2'
($Mil.)
Revenues 4,154.10 3,896.70 3,048.80 3,194.50 3,593.40
Net income from continuing operations 307.90 360.70 251.0 249.00 140.10
Funds from operations (FFO)927.56 864.48 887.62 830.78 600.29
Capital expenditures 1,374.97 1,030.50 856.67 710.51 554.54
Cash and investments 59.00 119.60 199.30 58.80 152.50
Debt 5,473.55 5,185.32 5,661.05 5,035.67 5,043.03
Preferred stock 41.30 41.30 41.30 41.30 41.30
Equity 4,426.80 3,750.66 3,120.74 3,032.25 2,965.67
Debt and equity 9,900.35 8,935.98 8,781.9 8,067.92 8.008.70
Adjusted ratios
EBIT interest coverage (x)2.53 2.96 2.41 2.36 1.80
FFO interest coverage (x)3.77 3.81 3.72 3.77 3.04
FFO/debt (%)16.95 16.67 15.68 16.50 11.90
Discretionary cash flow/debt (%)(10.70)(5.56)(5.18)(0.61)2.40
Net cash flow / capex (%)66.11 66.70 80.80 93.69 106.93
DebVdebt and equity (%)55.29 58.03 64.46 62.42 62.97
Return on common equity (%)6.17 8.94 7.16 7.08 3.90
Common dividend payout ratio (unadjusted) (%)5.24 49.10 7763 66.31 2.92
'Fully adjusted (including postretirement obligations). In 2006, PacifiCorp changes its fiscal year ending from March 31 to Dec. 31.
Table 3
Reconciliation Of PacifiCorp Reported Amounts With Standard & Poor's Adjusted Amounts
Fiscal year ended Dec. 31, 200
($Mil.)
PacifiCorp
reported amounts
Reported
Standard & Poor's
adjustments
Operating
income
(before
D&A)
1,153.80
Operating
income
(before
D&A)
1,153.80
Operating
income
(aiterD&A)
686.20
Interest
expense
261.20
Cash flow
from
operations
752.10
Cash flow
from
operations
752.10
Capital
expenditures
1,383.60
Debt
4,528.50
Standard & Poor's RatingsDirect I November 8, 2007 6
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PacifiCorp
Table 3
Reconcilation Of PacifiCorp Reported Amounts With Standard & Poor's Adjusted Amounts(cont.)
Operating leases 40.71 14.90 2.46 2.46 2.46 12.44 12.44 14.47
Postretirement 435.24 63.10 63.10 63.10 8.40 66.63 66.63
benefit obligations
Capitalized interest 2310 (2310)(2310)123.10)
Power purchase 469.10 29.08 29.08 29.08 29.08
agreements
Reclassification of 38.60
nonoperating
income lexpenses)
Reclassification of 119.50
working-capital cash
flow changes
Total adjustments 945.05 107.08 94.65 133.25 63.05 55.96 175.46 (8.63)
Standard & Poor's
adjusted amounts
Operating
income Cash flow
(before Interest from Funds from Capital
Debt DM)EBITDA EBIT expense operations operations expenditures
Adjusted 5,473.55 1,260.88 1,248.45 819.45 324.25 808.06 927.56 1,374.97
'PacifiCorp reported amounts shown are taken from the company's financial statements but might include adjustments made by data providers or reclassifications made
by Standard & Poor's analysts. Please note that two reported amounts (operating income before D&A and cash flow from operationsl are used to derive more than one
Standard & Poor's-adjusted amount (operating income before D&A and EBITDA, and cash flow from operations and funds from operations, respectivelyl. Consequently,
the first section in some tables may feature duplicate descriptions and amounts. In 2006, PacifiCorp changes its fiscal year ending from March 31 to Dec. 31.
Ratill§ iieflr~,Il! Of ND.I1.ilir~, ~a:Oi)" .. .' .:: ,';'" "" ,Ii t ",* l' , ' "ii,' '&''1 II I i
A-/Stable/ A-1
Local Currency
Preferred Stock
Local Currency
Senior Secured
Local Currency
A-1
BBB
A-
BBB+
25-May-2005
A-/Stable/ A.1
A-
A-
Related Entities
C U.K. Funding Co.
Rating BBB-/Positive/A-3
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PacifiCorp
ßat¡iø~ Ðltail ¡~~ t:f l!!ì\l~ii~er 8, l$QQJ1lll;ønt.1
MidAmerican Energy Co.
Issuer Credit Rating
Commercial Paper
Local Currency
Preferred Stock
Local Currency
Senior Secured
Local Currency
Senior Unsecured
Local Currency
MidA y Holdings Co.
Issuer Credit Rating
Preferred Stock
A-/Stable/A-1
A-1
BBBt
A
A-
A-/Stable/--
BBB-
BBBt
BBB+
BBBt
Northern
Issuer Credit Rating
cured
BBBt/Positive/--
BBBt
Nortern Electric PLC
Issuer Credit Rating
North
BBB-/Positive/A-3
A/Stable/--
Local Currency
Yorkshire Electrcit Distribution PLC
Issuer Credit Rating
Senior Unsecured
Local Currency
ireE
redit
A
BBBt/Positive/A-2
BBBt
BBB-/Positive/--
BBB-/Positive/A-3
BBB-
'Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard
& Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
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Summary:
PacifiCorp
Primary Credit Analyst:
Anne Selting, San Francisco (1) 415-371-5009; anne_selting(?standardandpoors.com
Table Of Contents
Rationale
Outlook
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Summary:
PacifiCorp
Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflects the consolidated credit profie of parent, MidAmerican
Energy Holdings Company (MEHC; 'A-/Stable'). The rating incorporates MEHC's strong business risk position,
aggressive financial profie, and both explicit and implicit support from Berkshire Hathaway ('AAAStable/A-1+'),
which is the majority owner of MEHC. Explicit support from Berkshire Hathaway is in the form of a $3.5 bilion
equity commitment agreement, which, in our view, would be called on -- if necessary -- to support MEHC's rating
or that of its regulated subsidiaries, including PacifiCorp.
PacifiCorp serves 1. 7 milion customers in portions of six western states: Utah, Oregon, Wyoming, Washington,
Idaho, and California. PacifiCorp operates as Pacific Power in Oregon, Washington and California; and as Rocky
Mountain Power in Utah, Wyoming and Idaho. The company's two largest markets, Utah and Oregon, comprise
about 70% of the company's retail electric operating revenues. As of June 30, 2007, the utility's stand-alone debt,
including current maturities and preferred stock, was approximately $4.6 bilion. Consolidated debt at MEHC was
more than $19.2 bilion as of the same date.
MEHC completed its purchase of PacifiCorp from Scottish Power Pic. on March 21, 2006. MEHC owns PacifiCorp
through PPW Holdings LLC, a special-purpose, non-rated entity -- with no debt outstanding -- that ring-fences
PacifiCorp from MEHC as required by state regulators. The ring-fencing includes: structural protections, covenants,
a pledge of stock, a non-consolidation opinion, and an independent director. PacifiCorp is limited in 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 a MEHC bankruptcy. Due to
the ring-fencing, PacifiCorp's CCR could potentially be as high as three notches above MEHC's rating, provided its
standalone credit quality supported such an elevation. However, on a standalone basis, PacifiCorp currently has
credit metrics that are in the 'BBB' category.
Both cash coverage of debt and leverage have improved modestly at the utility level since the acquisition. As of June
30, 2007, PacifCorp's adjusted funds from operation (FFO) to total debt was 17.7%, and FFO interest coverage
was 3.7x. Adjusted debt to total capitalization stood at about 54%. (PacifiCorp's fiscal year was changed to
year-ending March 31 to Dec. 31 after the acquisition was completed.) Cash flow improvement can be attributed to
the increased rate relief PacifiCorp received from the 2006 settlement of rate cases in all six states it serves. Leverage
has benefited in 2007 from MEHC's equity infusions into PacifiCorp, which through June 30, 2007, were $150
milion, building on 2006 equity contributions that have helped offset the effects of PacifiCorp's borrowing for its
large capital program.
The financial analysis also focuses on MEHC's consolidated credit metrics that, although improving, are clearly
weak for the 'A-' rating, but benefit from both implicit and explicit support provided by its parent, Berkshire
Hathaway. For the 12 months ended June 30, 2007, MEHC's FFO coverage of interest and debt stood at 2.8x and
12.3%, respectively. Consolidated MEHC debt to total capitalization has shown an improvement to 65.7% at the
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Summary: PacifiCorp
12 months ended June 30, 2007, from 68.6% as of Dec. 31, 2005, which principally reflects the $3.4 bilion in
equity infused into MEHC to fund the $5.1 bilion acquisition of PacifiCorp.
MEHC's business profile score is strong at '4' on a 10-point scale, where '1' represents the least risk. This score
incorporates the significant diversity of MEHC's businesses, limited exposure to unregulated ventures (less than
10% of operating income), and our expectation that MEHC's future acquisitions wil be in the regulated utilty
segment and not in unregulated or commodity-exposed businesses. MEHC's 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's challenges during the next few years are largely
tied to achieving the goals it established for PacifiCorp, as the utilty is expected to comprise about 40% of
consolidated operating cash flows during the next several years.
PacifiCorp's business profile is a satisfactory '5', reflecting a predominantly coal-fired generation base that produces
competitive, low-cost power in average markets, which by virtue of their disparate locations provide a degree of
economic and geographical diversity. It also reflects the potential for improved operating effciencies through
MEHC's ownership. Challenges that are reflected in PacifiCorp's business risk include: its exposure to wholesale
purchases and hydro variability (about 68% of PacifiCorp's 2006 energy requirements came from owned coal, 22%
from purchases, 6% from hydro, and 4% from natural gas); the absence of fuel and purchased power adjustment
mechanisms in Utah, Washington and Idaho; and the challenge the companies wil face in implementing a large
capital program, and the attendant regulatory rate relief that wil be required to support it.
Under ScottishPower ownership, PacifiCorp was consistently unable to earn its authorized return on equity (ROE),
which ranges from 10%-10.5%, depending on the state. Instead, at the time of acquisition, annual ROEs were in the
range of 7%. To do so, MEHC wil have to implement a constructive regulatory strategy, as it has done with
MidAmerican Energy Co., the Iowa-based utility it acquired in 1999. In 2006, the company settled major rate cases
in each of the six states, but it should be emphasized that all cases were initiated under ScottishPower ownership.
Although these settlements provided PacifiCorp with revenues lower than requested, sometimes substantially so (as
in Oregon), and generally prevent the company from going back for rate increases until 2008, the results were
largely in line with assumptions in our forecasts. This year's filed rate cases in Idaho and Wyoming represent the
first rate case activity in which MEHC has had full discretion in developing its requests.
Future rate cases will largely be driven by new resource additions. In the summer of 2007, the company brought two
large generation investments online: Lake Side, a Utah 534 megawatt (MW) combined cycle gas plant, which wil
increase PacifiCorp's installed gas plant to about 18% of total owned plant capacity; and Marengo, a 140 MW
wind farm in southeastern Washington. More wind projects are planned for 2007 and 2008. PacifiCorp's current
owned generation capacity is 9,262 MW, including the 2007 additions. The company's integrated resource plan,
fied in May 2007, calls for an additional 3,171 MW of additional resources (including energy efficiency and load
control) by mid-2016. Regulatory review of the filing is expected to be complete in 2008. Substantial transmission
investment is also planned.
As part of its 2006 rate cases, PacifiCorp requested power supply adjusters in a number of states and was successful
in Wyoming. The use of an adjuster was rejected in Utah and as part of its 2006 rate case settlement, the company
agreed to defer pursuit of one until its next general rate case. In Washington, the Washington Utilities and
Transportation Commission (WUTC) ruled that while PacifiCorp had proved its case for one, it did not adopt the
www.standardandpoors.com/ratingsdirect 3
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Summary: PacifiCorp
proposed design.
In Wyoming, an adjuster was approved. There, a general rate case establishes base power costs, which are then trued
up to actuals, as measured on a Dec. 1-Nov. 30 basis. The company then files on Feb. 1 of each year to collect or
refund the amounts tracked in the balance accounting beginning April 1, with the proviso that total company net
power costs must exceed rates by $40 milion before an adjustment is made.
In Oregon, no power supply adjuster exists but power costs are trued up on a regular basis, based on a forward
price curve. First used by the company in 2006, it files its forecast net power costs on April 1 for the coming
calendar year. Parties fie discovery and typically the process is fully adjudicated. Updates for new contracts, and to
reflect the revised forward curve, occur in November, with new power rates in place by Jan. 1. While the company
may not defer cost overruns, the timelier update of costs is expected to minimize the potential for the company to
incur power costs significantly in excess of rates. In California, the company receives dollar-for-dollar recovery of
costs in excess of rates, with some restrictions.
Outlook
The stable outlook reflects our expectation that MEHC wil deleverage PacifiCorp through equity infusions, as
needed, and reinvest cash flow into its extensive capital expenditure program, as well as and work to improve
regulatory relationships and operating efficiency at PacifiCorp. It is also assumed that Berkshire Hathaway wil
provide credit support and future investment capital, as needed, to PacifiCorp. PacifiCorp's rating could fall to a
level commensurate with its standalone 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.
Standard & Poor's RatingsDirect I November 8. 2007 4
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Credit Opinion: PacifiCorp
PacifiCorp
Portland, Oregon, United States
Global Credit Research
Credit Opinion
26 NOV 2007
Category
Outlook
Issuer Rating
First Mortgage Bonds
Senior Secured
Senior Unsecured MTN
Subordinate Shelf
Preferred Stock
Commercial Paper
Ult Parent: Berkshire Hathaway Inc.
Outlook
Issuer Rating
ST Issuer Rating
Parent: MidAmerican Energy Holdings Co.
Outlook
Senior Unsecured
Preferred Shelf
Moody's Rating
Stable
Baal
A3
A3
Baal
(P)Baa2
Baa3
P-2
Stable
Aaa
P-L
Stable
Baal
(P)Baa3
Cocts..
Analyst
Laura SchumacherlNew York
Willam L. HesslNew York
..!....;.,...
(1)PacifiCorp
ACTUALS
(CFO Pre-W/C + Interest) i Interest Expense (3)
(CFO Pre-W/C) I Debt (3)
(CFO Pre-W/C - Dividends) I Debt (3)(4)
(CFO Pre-W/C - Dividends) I Capex (3)(4)
Debt I Book Capitalization
EBIT A Margin %
Phone
212.553.3853
212.553.3837
LTM 9/30/07 LTM 12131/06 (2)FY 2006 (2)FY2005
3.4x 4.1x 3.7x 3.8x
16.8%17.8%17.9%16.7%
16.8%17.5%14.3%12.9%
64.6%65.1%66.1%77.3%
44.9%45.9%47.1%51.5%
22.1%18.0%21.8%22.8%
(1) All ratios are calculated using Moody's Standard Adjustments. (2) Fiscal Year End March 31 (3) CFO pre-W/C,which is also referred to as FFO in the Global Regulated Electric Utilities Rating Methodology, is equal to net cash
flow from operations less net changes in working capital items. (4) CFO pre-W/C-Dividends, is also referred to as
retained cash flow ("RCF") in the Global Regulated Electric Utiities Rating Methodology.
Note: For definitions of Moody's most common ratio terms please see the accompanyingUser'sGYide.
N1110n
Company Profile
PacifiCorp (Baal senior unsecured, stable outlook) is a vertically integrated electric utility headquartered in
Portland, Oregon. As a regulated utilty, PacifiCorp serves more than 1.7 million customers in portions of the states
of Utah, Oregon. Wyoming, Washington, Idaho and California. The company is also engaged in wholesale
marketing of power and coal mining activities. In March 2006, PacifiCorp was acquired by MidAmerican Energy
Holdings Company (MEHC: Baa1 senior unsecured, stable outlook), which is a consolidated subsidiary of
Berkshire Hathaway Inc. (BRK: Aaa Issuer Rating, stable outlook).
Rating Rationale
PacifiCorp's Baa1 rating for its senior unsecured obligations is driven by the stabilty of its regulated cash flows, the
geographically diverse and relatively constructive regulatory environments in which it operates, the diversification
of its generation portfolio, financial credit metrics that are within the ranges demonstrated by U.S. integrated
electric utilties rated Baa, and its position as the largest subsidiary of MEHC. The rating considers PacifiCorp's
plans for significant capital investment in generation and transmission and for environmental compliance. The
stable outlook incorporates Moody's expectation that PacifiCorp wil continue to receive generally supportive
regulatory treatment for the recovery of its increased costs and that capital expenditures wil be financed in a
manner that is consistent with its current credit profie.
The most important drivers of PacifiCorp's rating and outlook are as follows:
RESONABLY SUPPORTIVE REGULATORY ENVIRONMENT
PacifiCorp's rating recognizes that the majority of its operations are regulated and acknowledges the relative
stabilty and predictabilty of cash flows associated with these operations. The rating also considers PacifiCorp's
specific regulatory relationships. In 2006, approximately 70% of PacifiCorp's retail revenues were subject to
regulatory oversight in Utah and Oregon which Moody's generally ranks as average among U.S. regulatory
jurisdictions in terms of framework development, consistency and predictabilty of decisions, and expectation of
timely recovery of costs and investments. In Oregon, California and Wyoming (45% of 2006 revenues) regulators
have authorized adjustment mechanisms to recover changes in the costs of fuel and purchased power. Such
provisions add predictability to utilty returns and reduce implementation lag.
In Utah (41 % of 2006 revenues) PacifiCorp does not enjoy an automatic recovery mechanism for fuel and
purchased power, however traditional rate cases may be filed on the basis of a forward test year and the
commission must act on rate increase requests within 240 days of the initial fiing. In December 2006, PacifiCorp
received approval for a $115 million revenue increase (approximately 10%) based on a 10.25% ROE, or
approximately 60% of the $197 millon PacifiCorp originally requested in March 2006. PacifiCorp will file its next
general rate case in December 2007, with rates anticipated to be effective in August 2008.
In Oregon (30% of 2006 revenues) forward test years are allowed for rate making and PacifiCorp benefits from a
fuel and power purchase cost adjustment mechanism based on forecasted net power costs, as well as automatic
recovery of costs to implement Oregon's new Renewable Portfolio Standard. However the company received
somewhat less favorable regulatory treatment in its last general rate case. In September 2006, PacifiCorp was
authorized to increase revenues by $43 million, $33 milion in base rates and $10 million for increased power
costs, which was less than half of the approximately $112 million increase originally requested in 2005. A
significant portion of PacifiCorp's 2005 request was denied as a result of Senate Bill 408 (SB 408), which was
adopted in Oregon in September 2005. SB 408 addressed the differences between taxes collected in retail rates
and actual taxes paid by the utilities, and requires the company to flow through consolidated tax savings with
ratepayers. The law also authorizes the Oregon Public Utilty Commission (OPUC) to implement, upon request, an
automatic rate adjustment clause to flow back any differences in utilties' taxes. In October 2007, PacifiCorp
submitted to OPUC its first consolidated tax report under SB 408, which indicated that PacifiCorp had actually paid
$33 million more in federal state and local taxes than it had collected in rates and it has therefore fied for a
surcharge. The filng is currently being reviewed by the PUC; the review period is 180 days with rates potentially
effective June 2008.
PacifiCorp currently has general electric rate cases pending in Wyoming (13% of 2006 revenues) and Idaho (6 %
of 2006 revenues). In Wyoming, PacifiCorp requested an annual revenue increase of approximately $36.1 milion,
or 8% based on a 10.75% ROE. PacifiCorp expects new rates would be effective by May 2008. In Idaho,
PacifiCorp requested an annual revenue increase of approximately $18.5 milion, or 10.3% based on a 10.75%
ROE. Parties to the Idaho case have reached a settlement agreement providing for an increase of $11.5 milion, or
6.4% based on an ROE of 10.25%. PacifiCorp expects final decision in Idaho by year-end, with rates to be
effective in January 2008.
WELL DIVERSIFIED GENERATION PORTFOLIO
PacifiCorp benefits from a well-diversified generation portolio. Its 8.6 GW generation fleet is comprised primarily of
low-cost base load coal and hydro assets, supporting its position as a low cost energy supplier. In 2006,
PacifiCorp's owned generation supplied approximately 78% of its energy requirements. PacifiCorp actual peak
load for summer 2007 was 9,775 MW. To date in 2007, approximately 674 MW of new wholly-owned natural gas-
fired and wind driven generation facilties have come on line, with an additional approximate 370 MWs anticipated
by year-end 2008. These additional resources wil reduce PacifiCorp's exposure to volatile purchased power costs.
PacifiCorp manages its exposure to natural gas price volatiliy through hedging. Currently, approximately 100% of
its financial exposure is hedged through 2008.PacifiCorp also controls 242 million tons of recoverable coal
reserves located adjacent to PacifiCorp's coal-fired plants in Utah, Wyoming and Colorado. These mines provide
low cost fuel for roughly 30% of PacifiCorp's annual coal needs.
EXISTENCE OF RING-FENCING PROVISIONS
PacifiCorp is ring-fenced via a special purpose entity structure, which preserves its credit profie as an independent
operating company, separate from its ultimate parent company. The structure includes typical ring-fencing
provisions such as an independent director, separate books and records, restrictions on affiliate transactions
(arm's length), prohibitions on collateralizing or guaranteeing affliate debt, and restrictions on dividenddistributions. PacifiCorp's dividend distributions are subject to compliance with certain financial tests, including a
minimum coverage ratio of 2.5 times and minimum equity ratio in the range of 44-48.25%. Despite sufficient
headroom in the current ratios, Moody's does not expect substantial dividend distributions over the next few years,
while PacifiCorp embarks on a significant capital spending program.
FINANCIAL METRICS
The cash flow metrics for PacifiCorp are toward the middle of the ranges identified for integrated electric utilty
companies in the U.S. rated in the Baa range, and slightly weaker than those of integrated electric companies
rated Baa1. For example, over the last three years, the ratio of cash from operations before changes in working
capital (CFO pre-W/C) to Debt, adjusted in accordance with Moody's standard analytical adjustments, has been in
the range of 16-18% for PacifiCorp versus a median range of 19-21 % for other Baa1 rated U.S integrated electric
utilties. The interest coverage ratio measured by (CFO pre-W/C + interest) to interest has been in the range of 3.5-
4.0 times for PacifiCorp, while the median for the peer group has been in the range of 4.5-5.0 times. These metrics
are expected to be pressured over the near-to-medium term as PacifiCorp continues with its significant capital
expenditure program; however, we anticipate the company wil be pro-active in seeking additional rate recovery of
increased costs, and we understand dividend policy will continue to be established in a manner that is supportive
of the company's current credit profie. Over the next few years, Moody's anticipates PacifiCorp's ratio of (CFO pre-
W/C) to Debt wil remain in the range of 17-19% and that its interest coverage ratio wil be in a range of 4.0-5.0
times.
The Baa1 rating recognizes the predominately regulated nature of PacifiCorp's activities, its diversity in both
regulatory environments and sources.of fuel, and management's commitment to maintain a healthy financial
profile.
Liquidity
PacifiCorp's Prime-2 short term rating for commercial paper reflects relatively stable and predictable cash flows
provided by its operations as a vertically integrated electric utility. In the twelve months ended September 30,
2007, cash flow from operations of $730 milion covered approximately 52% of PacifiCorp's outlays including $1.4
billon of capital expenditures. The cash shortall was funded via a combination of internal and external sources of
cash, including $270 milion of capital contributions from the parent and approximately $370 milion of net debt
proceeds. In 2007, capital expenditures are projected to be approximately $1.6 billion. The significant increase in
capital expenditures from the $1.0 billion spent in fiscal year 2006 (ended March 2006) is primarily due to
construction and development costs related to new wind-generated power capacity, of which approximately 370
MW is expected to be online in 2008, associated transmission lines and clean air initiatives. Over the next few
years, PacifiCorp's annual outlays for capital expenditures are projected to exceed cash flow from operations by
approximately $200 - 400 million. In 2008, Moody's expects cash shortfalls to be funded from a combination of
internal and external sources of cash including capital contributions from the parent and debt financing. Under the
terms of an equity commitment agreement, expiring February 28, 2011, BRK has a commitment to provide up to
$3.5 billion to MEHC, PacifiCorp's parent. Equity may be requested to fund MEHC's debt obligations coming due
or other capital requirements of MEHC's regulated subsidiaries. Beyond 2008, we anticipate that cash shortalls
wil be funded primarily with external debt financing.
PacifiCorp's short-tem; borrowings are supported by a revolving credit facility of $700 milion available through
2012, and by a revolving credit agreement of $800 million available through July 2011 (and $760 millon for the
subsequent year ending July 2012). PacifiCorp relies on these revolving credit facilities to backstop its commercial
paper program of $1.5 bilion. As of September 30, 2007, PacifiCorp had $206 million of commercial paper
outstanding and no other borrowings under the revolver. The facilities do not contain rating triggers that would
cause acceleration or make the facilities unavailable and also don't require MAC representation for borrowings.
However, the facilties do contain a rating sensitive pricing grid and a financial covenant that limits debt to 65% of
total capitalization. As of September 30, 2007, PacifiCorp's debt to capitalization ratio as defined in the agreement
was 49%.
PacifiCorp's financing arrangements also include $518 millon of standby letters of credit and standby bond
purchase agreements that provide credit support for PacifiCorp's variable-rate pollution-control revenue bonds, and
$21.0 millon of standby letters of credit that provide credit support for certain transactions as requested by third
parties. These financing agreements expire periodically through the period ending February 2011 and were fully
available as of September 30,2007.
PacifiCorp's near-term maturities include approximately $200 million of first mortgage bonds due in May 2008 and
additional $200 millon due in September 2008. Overall, PacifiCorp's liquidity position is felt to be adequate to meet
the company's capital needs over the next four quarters.
Rating Outlook
The stable outlook incorporates Moody's expectation that PacifiCorp wil continue to receive reasonable regulatory
treatment for the recovery of its higher capital expenditures, and that the funding requirements wil be financed in a
manner consistent with its current credit profile
What Could Change the Rating - Up
While the size of the company's capital expenditures limits the prospects for a rating upgrade in the near-term, the
rating could be upgraded if reasonable regulatory support and a conservatively financed capital expenditure
program results in a sustained improvement in credit metrics. This would include, for example, PacifiCorp's CFO
pre-WC to debt, calculated in accordance with Moody's standard analytical adjustments. being in excess of 20%
on a sustainable basis.
What Could Change the Rating - Down
The ratings could be adjusted downward if PacifiCorp's planned capital expenditures are funded in a manner
inconsistent with its current financial profie, or if there were to be adverse regulatory rulings on current and future
distribution rate cases such that we would anticipate a sustained deterioration in financial metrics as demonstrated,
for example, by a ratio of CFO pre-WC to debt falling below 17%, andlor its interest expense coverage being less
than 4.0x over an extended period.
PacifiCorp
590000
Select Key Ratios for Global Regulated Electric
Utilities
CFO pre-W/C to Interest (x) (1 J ::6 ::5 3.5-6.0 3.0-2.7-5.0 2-4.0 ~2.5 ~2
5.7
CFO pre-W/C to Debt (%) (1 J ::30 ::22 22-30 12-22 13-25 5-13 ~13 ~5
CFO pre-W/C - Dividends to Debt (%) (1J ::25 ::20 13-25 9-20 8-20 3-10 ~10 ~3
Total Debt to Book Capitalization (%)~40 ~50 40-60 50-75 50-70 60-75 ::60 ::70
(1) CFO pre-W/C, which is also referred to as FFO in the Global Regulated Electric Utilties Rating Methodology, is
equal to net cash flow from operations less net changes in working capital items
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