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HomeMy WebLinkAbout20081024Compliance Filing.pdf~~~J£9!! October 24, 2008 RECE\VED iune Gei 24 ~M 9~ 33 PaIC Por I Rocky Moutan Por IPaCo Enrg 825 NE Mulmomah, Suit 1900 LeT Portland, Oregon 9n32 VI OVERNIGHT DELIVERY 'i ~ ~l r 5 (~ \D"HO PUÖ'.t.IX '''\\l'_"'CO\. ~~,q\."S¡v¡. UT\L\T\t:~) ,,,,,, .. Idaho Public Utilties Commission 472 West Washigton Boise, ID 83702-5983 Attention:Ms. Jean D. Jewell Commission Secreta Re: Idaho Docket No. PAC-E-05-08 Compliance Filg To the Idao Public Utilties Commission: PacifiCorp submits the attchment in compliance with the Commssion'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 will provide to the Commssion, on an informational basis, credit rating agency news releases and final report regardig 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 try your, R · '() .0ilLurl\ lIb'1 ~~e Wi1liams ì Vice President and Treasurer Enclosure ............. Credit Opinion: PacifiCorp PacifiCorp Porand, Oregon, United States Ratngs Category Outlook Issuer Rating First Mortgage Bonds Senior Secured Sr Unsec Bank Credit Facility Senior Unsecured MTN Preferred Stok Commercial Paper Ult Parent: Berkshire Hathaway Inc. Outlook Issuer Rating ST Issuer Rating Parent: MidAmerican Energy Holdings Co. Outlook Sr Unsec Bank Credit Facilty Senior Unsecured Preferred Shelf Contacts Analyst Laura Schumacher/New York Wiliam L. Hess/New York Key Indicators (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 Bok Capitalization EBIT A Margin % Global Credit Research Credit Opinion 17 OCT 2008 RECEIVED 2008 OCT 2l+AH 9: 33 IDAHO PUBLIC UTILITIES COMMISSION Moody's Rating Stable Baa1 A3 A3 Baa1 Baa1 Baa3 P-2 Stable Aaa P-1 Stable Baa1 Baa1 (P)Baa3 Phone 212.553.3853 212.553.3837 LTM 6130/08 2007 L TM 12131/06 (2)FY 2006 4.3x 3.9x 4.1x 3.7x 20.7%17.9%17.8%17.9% 20.6%17.9%17.5%14.3% 73.7%64.7%65.1%66.1% 42.0%44.7%45.9%47.1% 23.1%23.0%18.0%21.8% (1) All ratios are calculated using Moody's Standard Adjustments. (2) Fiscl 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 Electic Utilities Rating Methodology. Note: For definitions of Moody's most common ratio terms please see the accmpanying ljseIsGlJide. Opinion Corporate Profle PacifiCorp (Baa1 senior unsecured, stable outlook) is a vertically integrated electric utilty headquartred in Portland, Oregon. As a regulated utilty, PacifCorp serves more than 1.7 millon 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 col 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). Recent Events In September 2008, PacifiCorp's parent MEHC announce that it had reached a tentative agreement to acquire all of the outstanding share of Constellation Energy Group, Inc. (Constellation: Baa2 senior unsecured, under review for posible downgrade) for cash consideration of $26.50 per share, or approximately $4.7 billon. The agrement was finalized upon the close of business i;riday September 19, 2008. The companies anticipate the transaction could close within nine months and is subject to shareholder and regulatory approvals. The proposed acquisition will be funded via a capital contribution from BRK and is not anticipated to have any impact on the ratings or outlook of MEHC or PacifiCorp. In August 2008, the Utah Public Service Commission (UPSC) authorized PacifiCorp an approximate $36 milion (2.6%) rate increase premised on a 10.25% ROE, a 50.4% equity ratio and a test year ended December 2008. PacifiCorp's original request, filed in December 2007 was for a $161 millon (11%) rate increase base on a 10.75% ROE, an equity ratio of approximately 52% using a test year ended June 2009. Through subsequent testimony and adjustments, PacifiCorp's request was adjusted downward to approximately $75 milion, based on a 10.75% ROE, an equity ratio of 50.4% and a test year ended Decmber 2008. In July 2008, PacifiCorp filed a separate general rate case with the UPSC, requesting an increase of $161 millon (11%) over ordere rates from the December 2007 rate case. In September 2008, PacifiCorp filed supplemental testimony establishing the rate request at $115 milion. PacifiCorp anticipates rates resulting frm the 2008 case would be implemented in May 2009. On September 2, 2008, PacifiCorp filed for reconsideration of the August 2008 UPSC order asking for reconsideration of its order related to several items including the end-date for the forward test year, and various power cost recovery adjustments. Accrding to Utah statute, if the UPSC does not grant a rehearing within 20 days of the request, the request is deemed denied. On September 22, the UPSC agreed to review the request. In August, 2008, PacifiCorp reached a settlement agreement with the Washington Utilities and Transport Commissions (WUTC) staff, Public Counsel of the Attorney General's offce and other intervenors for an approximately $20 milion (9%) rate increase comprised of an approximate $18 millon base increase and a $2 millon annual surcharge for approximately three years designed to recover higher energy procurement costs incurred in 2005 due to por hydroelectric conditions. The settlement specified an 8.06% overall return on rate base and PacifiCorp agreed not to file a rate case prior to January 31,2009. The utilty also agreed not to request a generation co adjustment clause until after its next general rate case. PacifiCorp's original request was filed in February 2008 and was for a $35 milion (15%) rate increase predicated on a 10.75% ROE and 50.1% equity ratio (8.47% return on rate base). The WUTC approved the settlement on October 8,2008. New rates are to become effecive October 15, 2008. In April 2008, the Wyoming Public Servce Commission (WPSC) approved a settement betwn PaciCorp, the Ofce of Consumer Advocate and other intervenors for an approximate $23 milion (5%) elecric rate increase premise on a 10.25% ROE and 50.8% equit ratio. PacifiCorp filed its rate increase request in June 2007 asking for a $36.1 millon (8%) rate increase premised on a 10.75% ROE and 50.8% equity ratio and measuring a test year ending August 31,2008. As part of the settlement, the parties agreed to modif, by April 2011, the current power cost mechanism to use forecasted power costs. In July 2008, PacifiCorp filed a new base rate increase reuest with the WPSC for a $33.5 milion (7%) increase based on upon a 10.75% ROE and 51.9% equity ratio. A WPSC decision is expected mid-2009. On April 11, 2008, the Oregon Public Utility Commission (OPSC) ruled PacifiCorp could recver $34.5 millon from customers to make up the difference between income taxes paid and collected from customers in 2006. The decision reflected the implementation of Oregon Senate Bil 408 (SB 408). On Decmber 28, 2007, the Idaho Public Utilties Commisson (IPUC) approved an $11.5 millon (6.4%) electric rate increase settlement between PacifiCorp, staff and other intervenors premised on a 10.25% ROE and 50.4% equity ratio. PacifCorp filed in June 2007 for a $18.6 millon (10.4%) rate increase premised on a 10.75% ROEand 50.4% equity ratio using a December 31,2006 test year. On September 19, 2008, PacifiCorp filed for an approximate $5.9 milion (4%) base rate increase, based upon a 10.75% ROE and 50.4% equity ratio. An IPUC decsion could ocr by mid-2009. Rating Rationale PacifCorp's Baa1 rating for its senior unsecured obligations is driven by the stabilty of its reulated cash flows, the geographically diverse and relatively constructive regulatory environments in which it operates, the diversification of its generation portolio, financial credit metrics that are within the ranges demonstrated by U.S. integrated electric utilities rated Baa, and its position as the largest subsidiary of MEHC. The rating also considers PacifiCorp's plans for significant capital investment in generation and trnsmission and for environmental compliance. The stable outlook incorporates Moody's expection that PacifiCorp will continue to receive generally supportive regulatory treatment to recver its increased costs and that capital expenditures wil be financed in a manner that is consistent with its current credit profile. Key drivers of PacifiCorp's rating and outlook are as follows: Reasonably Supportive Regulatory Environment PacifiCorp's rating recnizes that the regulate nature of its businesses and acknowledges the relative stabilty and predictabilty of cash flows associated with these operations. The rating also considers PacifiCorp's specifc regulatory relationships. In 2007, approximately 72% of PacifCorp'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 predictbilty of decisions, and expecttion of timely recovery of costs and investments. In Oregon, California and Wyoming (44% of 2007 revenues) regulators have authorized adjustment mechanisms to recover changes in the costs of fuel and purchased power. Such provisions add predictabilty to utilty returns and reduce implementation lag. In an attempt to minimize regulatory lag and earn it allowed ROEs, PacifCorp is filing more frequent rate cases in all its jurisdictions. In Utah (43% of 2007 revenues) PacifiCorp does not enjoy an automatic recvery mechanism for fuel and purchased power; however, traitional rate cases may be filed on the basis of a forwrd test year and the commission must act on rate increase requests within 240 days of the initial filing. PacifiCorp is also allowed to file for temporary rate increases to recover purchased power costs not currently part of rates. In Oregon (29% of 2007 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 revery of costs to implement Oregon's Renewable Portlio Standard. The company received somewhat less favorable regulatory treatment in its last general rate case. In September 2006, PacifiCorp was authorized to incrase revenues by $43 milion, $33 milion in base rates and $10 millon for increased power costs, which was less than half of the approximately $112 millon increase originally requested in February 2006. However, a significant portion of the disallowance related to the recovery of taxes, which was the focus of Oregon SB 408. In 2008, the OPSC authorized the recovery (with interest) of approximately $35 millon of PacifiCorp taxes paid in 2006 but not colleced. Oregon SB 408 was enacted in 2005 and authories the OPUC to separately evaluate the difference between utilties' income taxes paid and collected by customers and requires the company to flow through consolidated tax savings to ratepayers. The law also authories the OPUC to implement, upon request, an automatic rate adjustment clause to flow back any differences in utilties' taes after a 180 day review period. In Wyoming (13% of revenues in 2007), the WPSC uses a historic test year in its rate cases and is required to act within a ten month period of the original filing date. PacifiCorp currntly has a power cost adjustment clause which adjusts rates based on prior period over or under-recoveries. Based on its most recent rate ca settlement, the current adjustment mechanism wil be replaced with a forward power cost mechanism by April 2011. Well Diversifed Generation Portolio PacifCorp benefits from a well-diversified generation portlio. Its 9,286 MW (year-e 2007) generation flet is comprised primarily of low-cost base load coal and hydro assets, supportng its position as a low cost energy supplier. In 2007, PacifiCorp's owned generation supplied approximately 81% of its energy requirements. In 2008, PacifiCorp added approximately 520 MW of additional gas generating capacity, 164 MW of wind capacity and plans on adding an additional 356 MW of wind capacity by the end of the year. Additional modest wind capacity is pl~nned to be added in 2009 and 2010. These additional resourcs wil reduce PacifiCorp's exposure to volatile purchased power costs. PacifiCorp manages its exposure to natural gas price volatilty through hedging. Currently, approximately all of its financial expoure is hedged through 2008 with approximately 84% hedged for 2009. PacifiCorp also controls 232 millon tons of recoverable col 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 nees. Existence of Ring-Fencing Provisions PacifiCorp is ring-fenced via a special purpose entity structure, which preserves its credit profile as an independent operating company, separate from its ultimate parent company. The structure includes typical ring-fencing provisions such as an independent director, separate boks and records, restrctions on affliate transactions (arm's length), prohibitions on collateralizing or guaranteeing affliate debt, and restrctions on dividend distributions. PacifiCorp's dividend distributions are subject to compliance with certain financial tests, including a minimum interest coverage ratio of 2.5 times and minimum equity ratio in the range of 44-48.25%. Despite suffcient 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 proram. 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 comparable to those of integrated electric utilties rated Baa1. For example, over the last three years, PacifiCorp's ratio of cash from operations before changes in working capital (CFO pre-W/C) to Debt, adjusted in accrdance with Moody's standard analytical adjustments, has been in the range of 16-18% which is similar to the median range for Baa 1 electric utilties. PacifiCorp's interest coverage ratio, as measured by CFO pre-W/C interest coverage has been in the range of 3.5-4.5 times which is also similar to the median range of 3.5 -5.0 times for Baa1 rated electric utilties. PacifCorp's cash flow metrics are expected to remain fairly stable over the near-to-medium term as the company continues with its significant capital expenditure program. Moody's anticipates the company wil proactvely seek additional rate recovery for increased costs and investments, and that dividend policy wil continue to be established in a manner that is supportive of the company's current credit profie. Over the next few years, Mooy'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. Liquidity Profile PacifCorp's Prime-2 short term rating for commercial paper reflect the relatively stable and predictable cash flows provided by its operations as a regulated vertically integrated electric utilty. In 2007, cash flow from operations of $824 millon covered approximately 54% of PacifiCorp's outlays including $1.5 bilion of capital expenditures. The cash shortall was funded via a combination of internal and external sources of cash, including $270 millon of capital contributions from the parent and approximately $1.2 billon of first mortgage bond issuance. In 2008, capital expenditures are projected to be approximately $2.1 bilion. Approximately half of the spending is for normal maintenance expenditures and to meet customer growth, including the acquisition of a 520 MW natural gas fired plant in Chehalis, Washington. Approximately $787 millon is fo generation projects including 519 MW of new wind capacity and the remaining spending is environmental and transmission expenditures. In 2008, Moody's expects cash shortalls to be funded from a combination of internal and external sources of cash including capital contrbutions frm the parent and debt financing. In July 2008, PacifiCorp issued $800 millon of first mortgage bonds and it received $200 millon of parent contributions in May 2008. Over the next few years, PacifiCorp's annual outlays for capital expenditure are projected to exce cash flow frm operations by approximately $1 - 2 billon per year. Mooy's anticipates this shortall wil continue to be funded via a combination of internal and external sources including debt and equity cotributions from its parent. Under the terms of an equity commitment agreement, expiring February 28, 2011, BRK has a commitment to provide up to $3.5 billon 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. PacifiCorp's liquidity position is supported by a $700 milion revolving credit facility available through 2012, and by a second $800 milion revolving credit agreement available through July 2011 after which availability is reduced to $760 milion for the year ending July 2012 and to $670 millon for the year ending July 2013. A subsidiary of Lehman Brothers is a lender under these facilties so the size of the facilties may be modestly reduced by Lehman's approximate $65 millon and $40 milion commitments under the two facilities. PacifiCorp relies on these revolving credit facilities to backstop its commercial paper proram of $1.5 billon. As of June 30, 2008, PacifiCorp had $35 milion of commercial paper outstanding and $38 milion reserved as a backstop for its variable-rate pollution control bonds, with no other borrowings under the revolver. The facilities do not contain rating triggers thatwould cause accleration or make the facilities unavailable and also don't require MAC representation for borrwings. However, the facilities do contain a rating sensitive pricing grid and a financial covenant that limit debt to 65% of total capitalization. As of June 30, 2008, PacifiCorp's debt to capitalization ratio as defined in the agreement was 48%. PacifiCorp's financing arrngements also include $518 millon of stndby letters of creit and related standby bond purchase agreements that provide credit support for PacifiCorp's variable-rate pollution-control revenue bonds, and $18 milion of standby letters of creit that provide credit support for certain transactions as requested by third parties. These financing agreements expire periodically through the period ending May 2012. PacifCorp's near-term maturities include approximately $125 milion of senior secured notes due July 15, 2009 and $13 milion of first mortgage bonds due Octobet 1, 2009. Overall, PacifiCorp's liquidity position is felt to be suffcient to meet the company's capital nes 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 recvery of its higher capital expenditures, and that the funding requirements will be financed in a manner consistent with management's commitment to maintain a healthy financial 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 finance capital expenditure program results in a sustained improvement in credit metrics. This would include, for example, PacifiCorp's CFO pre-W/C to Debt, calculated in accrdance with Mooy's standard analyical 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 capitl expenditure are funded in a manner inconsistent with its current financial profile, or if there were to be adverse regulatory rulings on currnt and future distrbution rate cases such that we would anticipate a sustained deterioration in financial metrics as demonstrated, for example, by a ratio of CFO pre-W/C to Debt fallng below 17%, and/or it interest expense coverage being less than 4.0x over an extended period. Rating Factors PacifCorp 590000 Selec Key Ratios for Global Regulated Electric Utilties Ratng Aa Aa A A Baa Baa Ba Ba Level of Business Risk Medium Low Medium Low Medium Low Medium Low CFO pre-W/C to Interest (x) (1):-6 :-5 3.5-6.0 3.0-2.7-5.0 2-4.0 oe2.5 oe2 5.7 CFO pre-W/C to Debt (%) (1):-30 :-22 22-30 12-22 13-25 5-13 oe13 oe5 CFO pre-W/C - Dividends to Debt (%) (1):-25 :-20 13-25 9-20 8-20 3-10 oe10 oe3 Total Debt to Book Capitalization (%)oe0 oe50 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 frm operations less net changes in working capital items (Ç Copyright 2008, Mooy's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved. 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