20080501Compliance re Credit Rating.pdf

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Idaho Public Utilities commisH'dÀ\.XnES
472 West Washington
Boise,ID 83702-5983
Paifc Por I
Rocky Mountn Power I
PaifCorp Energ
825 NE Multnomah, Suite 1900 LeT
Portland, Oregon 9n32
Attention:Ms. Jean D. Jewell
Commission Secreta
Re: Idaho Docket No. PAC-E-05-08 Compliance Filng
To the Idaho Public Utilities Commission:
PacifiCorp submits the attachment in compliance with the Commission's Order in ths case
issued on Februar 13,2006 and amended on March 14,2006. The Order approved the
Stipulation supporting the acquisition ofPacifiCorp by MidAerican Energy Holdings
Company.
Commitment 120 of the Stipulation provides that, PacifiCorp wil 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 report
related to PacifiCorp.
Very trly yours,
~~ "':\\,,- )t'-
Bruce Wiliams
Vice President and Treasurer
Enclosure
(22-Apr-2008) Sumar: PacifiCorp Page 1 of3
RESEARCH
Summary:
PacifiCorp
Publication date:
Primary Credit Analvst:
22-Apr-2008
Anne Seltlng, San FrancisCo (1) 415-371-5009;
an ne.5elting ':gsta nda rda nd poors. com
Credit Rating:A-fStablefA-1
Rationale
The 'A-' corporate credit rating (CCR) on PaclfiCorp reflects the consolidated credit profile of parent, MidAmerican Energy
Holdings Company (MEHC; 'A-fStable'). The rating Incorporates MEHC's 'excellent' business risk position, an 'aggressive'
financial profile, and the explicit and implicit support from Berkshire Hathaway ('AAAfStablefA-1+'), which is the majority
owner of MEHC. Explicit support from Berkshire Hathaway is in the form of a $3.5 billon equity commitment agreement,
which, in Standard & Poor's Ratings Services' view, wouJd be called on -- if necessary-- to support MEHC's rating or that of
Its regulated subsidiaries, Including PacifiCorp, Consolidated MEHC debt, including current maturities and short-term debt,
totaled $19.8 billion as of Dec. 31, 2007.
PacifiCorp serves 1.7 million customers in portions of the six western states of Utah, Oregon, Wyoming, Washington, Idaho,
and california, operating as Pacific Power (Oregon, Washington, and California) and Rocky Mountain Power (Utah, Wyoming,
and Idaho). ihe company's two largest markets, Utah and Oregon, comprise about 70% of the company's retail electric
operating revenues. As of Dec. 31, 2007, the utilty's standalone debt, including current maturities and preferred stock, was
approximately $5.2 billion.
MEHC purchased PacifiCorp from Scottish Power Pic. in March 2006 and owns the utility via PPW Holdings LLC, a special-
purpose, nonrated entity with no debt outstanding. Through ring-fencing, PaclfiCorp'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, PaciftCorp currently has credit metrlcs that are In the 'BBB' category.
Funds from operations (FFO) rose modestly in 2007 to $995 millon from $928 million in 2006. As of Dec. 31, 2007,
PacifiCorp's adjusted FFO to total debt was 16.7%, and FFO interest coverage was 3.7x. Adjusted debt to total capitalization
stood at about 54%, which includes adjustments to reflect debt-like obligations, the largest of which is the inclusion of $450
million in power purchase payments. As part of the acquisition, PaciflCorp is limited in making dividends to MEHC unless It
maintains a common equity ratio of 48.25% through 20,08, decreasing annually to 44% by 2012. (These requirements
exclude current maturities and short-term debt in the calculation of leverage.)
Key drivers of performance for the year included the 2006 settlement of rate cases in all six states It serves, which provided
about $270 milion In rate relief (of which $187 million flowed to the company in 2007); a 3% increase In energy sales
driven by weather; customer growth of 2%; and improved plant availabilty. Revenues from wholesale sales were siightly
down for the year at about $1 bilion.
4/28/2008
(22-Apr-2008) Summary: PacifiCorp Page 2 of3
Major challenges facing the utility include managing six separate regulatory environments to ensure timely recovery of
costs, controllng fuel costs given the absence of power supply adjusters (PSAs) in Utah, Washington and Idaho, and
executing on its large capital program.
In 2007, the company Invested $1.5 billion in capital projects that was funded with approximately $1.0 bilion of debt (total
issuance in 2007, net of $165 millon in maturing debt and preferred stock), $200 milion in MEHC equity Infusions, and the
balance with operating cash flow. The company is embarking on a 10-year, $20 bilion capital program, of which an
estimated $14 bilion will be incurred in the next five years. The largest component of investment is an estimated $4.1
bilion to build Energy Gateway, a 1,200-mile multistate transmission project that will be energized in phases from 2010 to
2014.
Other projects include investment in renewable generation to meet renewable portfolio standards. In 2007, the company
piaced into service the 140 MW Marengo wind project. Another seven projects, totaling 520 MW, are planned. As part of the
company's integrated resource plan (IRP) flied in May 2007, the company has identified 3,870 MW needed by summer
2016. Utah has acknowledged the IRP, and Oregon, Idaho, and Washington regulators are expected to respond in 2008.
The company's IRP does not contemplate any new coal-.fired resOurces. Capital investment also Includes environmental
work; the company pledged $812 million for emission reductions as part of MEHC's acquisition. About 64% of the company's
power supply in 2007 was coal fired.
The company last week announced It has reached an agreement to buy a 500 MW plant. Details of the acquiSition have not
been disclosed. Its 2007 IRP identified a need for two approximately 500 MW gas plants in the 2012 timeframe. As a result,
the transaction would require the company to close the purchase an estimated four years in advance of requiring the
capacity. The company is currently seeking regulatory approval needed in Utah and Oregon to bypass the request for
proposals process, which would allow it to purchase the plant without a formal bid solicitation process. In Utah state statute
also permits preapproval of the acquisition.
The capital program underscores the need for what is expected to be sizable rate relief in the coming years. To date,
PaclflCorp's new owners have been only modestly tested in their abilty to manage rate case outcomes, as most of the rate
cases resolved in 2007 were all initiated by Scottish Power. Utah wil be an important state to monitor. By this summer, the
company is expected to file Its third rate case In less than three years. Cumulative rate increases over this period could be
17% or more. (A 10% retail rate Increase was approved in late 2006, and the company's revised current request Is for a 7%
increase. It has not made public the amount it will seek in a proposed June 2008 filing.)
The case currently pending before the Utah Public Service Commission (UPSC) was originally filed in December 2007, and
was based on a forecast, 12-month test year ending June 30, 2009. The company sought a $161 million general request, or
about an 11% rate increase. But In February 2008, the UPSC ruled that the test period should end on Dec. 31, 2008, which
lowered the company's request to about $100 milion (a 7% increase). The revenue requirement portion of the case should
be completed in early June with initial rates, if approved, going into effect August 2008. This month, PaciflCorp notified the
UPSC that it expects to file another rate request around June 6, 2008. This implies that two cases may be pending before
the UPSC at the same time.
In other states, PacifiCorp also has an active $35 milion rate case (a 15% increase) in Washington. Filed in February 2008,
rates are expected to be In place no later than January 2009. The company was last granted a 6% Increase in June 2007 as
part of a fall 2006 filing.
In Wyoming, a final order is pending that codifies an oral ruling last month by the Wyoming Public Service Commission
approving a $23 millon settlement. The settlement represents a 5% increase, relative to the original $36 milion PacifiCorp
sought. New rates are expected to go into effect in May 2008. The last rate Increase In the state was for 7%, granted to
PacifiCorp in March 2006. PacifiCorp has no other active cases in the three other states it serves. (In Oregon, the company
last had a rate increase of 5% in September 2006. In Idaho, a $6 millon rate increase, or 8%, authorized in late 2007
began on Jan. 1, 2008. In California, a $5 millon increase, or 7%, was approved in association with increases in energy and
power costs and went into effect January 2008.)
Through an absence of PSAs in Utah, Washington, and Idaho (about 56% of its retail electric revenues in 2007), the
company has below-average regulatory protection from fuel and purchased power cost escalatIon. In 2008, Wyoming
regulators approved a PSA through April 2011, and in California the company benefits from P$A.like mechanisms that up
costs ex-post to adjust for changes in operating costs. In Oregon there is also no true PSA, but the company does benefit
from an annual proceeding that updates fuel and purchased power costs based on forecast costs, which mitigates the
potential for sizable mismatch between actual fuel and purchased power costs and costs authorized in retail rates. In
California, the company receives dollar-for-dollar recovery of costs in excess of rates, with some restrictions. The absence of
PSAs is somewhat mitigated by the company's heavy reliance on coal, which exhibits reasonabie cost stability, but the
company's dependence on gas is expected to grow. .
4/28/2008
(22-Apr-2008) Sumary: PacifiCorp Page 3 of3
Short-term credit factors
PaclfiCorp's 'A-l short-term rating considers the equity commitment of MEHC's ultimate parent, Berkshire Hathaway, to
which it has strong ties. Without these ties, the short-term rating on the company would be 'A-2'. Berkhire 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 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 PaciflCorp.
PacifiCorp cash and cash equivalents totaled $228 milion as of De(. 31, 2007, in addition to an unsecured revolving credit
agreement for $800 million through July 2011, reduced to $760 milion In ending July 2012. The company also has a second
credit agreement for $700 million that is through October 2012. Both support the company's CP program and were undrawn
at Dec. 31, 2007. CP balances were zero as of the same date. PacifiCorp is limited by regulators to having no more than
$1.5 billion in short-term debt.
The company also has $518 million of standby letters of credit and standby bond purchase agreements available to support
variable-rate pollution control bonds that were fully available at year-end 2007.
The company has two significant maturities in May and September 2008 of $200 millon each, with total maturities for the
year at $414 million, which includes capital lease obligations. PacifiCorp's large capital expenditure program wil require
substantial external funding, including equity contributions from MEHC. We expect that PacifiCorp wil not be in a position to
make distributions to its parent while it is executing its capital program.
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 expendlture'program, as well as maintain regulatory relationships sufficient to
support needed rate increases. It is also assumed that via MEHC Berkshire Hathaway will provide credit support and future
investment capital, as needed, to PacifiCorp. PaciflCorp's rating could fall to a level commensurate with its standalone Credit
quality If MEHC's rating is lowered. PaclfiCorp's rating has limited near-term upside, as its credit metrics on a standalone
basis fall well short of the 'A' category,
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4/28/2008