20081212Compliance Filing.pdf

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Portland. Oregon 9722
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December 12, 2008
Idao 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 Filng
To the Idao Public Utilties Commssion:
PacifiCorp submits the attchment 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 inormationa basis, credit rating agency news releases and final reports regardi 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 attched report
related to PacifiCorp.
CTj;~/1/1(Bruce Wiliams
Vice President and Treasurer
Enclosure
RESEARCH
Summary:
PacifiCorp
Publication date:
Primary Credit Analyst:
24-Nov-2008
Anne Selting, San Francisco (1) 415-371-5009;
anne_seltlng (gstandardand poars .com
Credit Rating: A-/Watch Neg/A-1
Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflect its 'excellent' business profile, evidenced by a diverse and
growing service territory, and an 'aggressive' financial profile that reflect a large capital program and the need to shore up
its cash flow metrics. While the ring-fenced utilty's credit metncs are more consistent on a stndalone basis with a 'BBB'
category rating, the ratings benefit from the implicit and explicit support available to MEHC (the direct owner of PaclfiCorp)
from its parent, Berkshire Hathaway (AAAStable/A-1+). Berkshire has a $3.5 bilion equity commitment agreement with
MEHC through 2011 that MEHC can unilaterally call upon to support the ratings of MEHC or it regulated subsidiaries,
including PaclfiCorp. We view this agreement from a 'AM' rated entity to greatly reduce the likelihood of a default at the
utility or its parent. As a result, the ratings assigned to PacifiCorp are higher than would be warranted without this
agrement.
The CreditWatch listing reflect MEHC's announcement in September that it seeks to acquire Constellation Energy Group
(BBB/Watch Dev) for $4.7 billon. The transaction requires shareholder and regulatory approvals, which are not expected
before January and late spring or early summer 2009, respectively. Standard & Poor's Ratings Services views the acquisition
as imposing substantially greater business risks on MEHC. Heretofore, the company has built its operations through
acquisitions, but these have been solidly investment-grade companies in the regulated energy and electric sector. While the
Constellation sale includes utility Baltimore Gas & Electric, this business is dwarfed by a large merchant and trading
business that define the company. Constellation earned about earned 85% of its net income in 2007 from unregulated
activities in 2007. In recent months Constellation's liquidity position and a general crisis of confidence amongst
counterpartles jeopardized Constellation's existence and led to it enter into the merger agreement with MEHC.
While Constellation has announced effort to exit businesses and de-risk its trading operations, as it currently stands, the
acquisition creates downward pressure on MEHC's ratings due to heightened risks to the business and financial profile. While
PacifiCorp has in place structural protections that Insulate it from MEHC, the credit quality of the parent is not completely
divorced from that of the subsidiaries. Moreover, with the potential increase in MEHC's scale wit the acquisition, the
contingent equity commitment may no longer be adequate in size, tenor, and terms to accommodate the needs of regulated
subsidiaries such as PacifiCorp. As result, the MEHC acquisition could have rating impact on its subsidiaries, even those
that are properly ring-fenced.
PaclfiCorp serves 1.7 million customers in portions of six western states: Utah, Oregon, Wyoming, Washington, Idaho, and
California. The company operates as Pacific Power in Oregon, Washington, and California, and as Rocky Mountain Power in
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(24-~ov-2008J Sumar: PacifiCorp
Page 2 of4
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 Sept. 30,2008, the utilty's stand-alone debt, including current maturities and
preferred stock, was approximately $5.2 billon. Consolidated long-term debt at MEHC (which includes PaciflCorp's debt)
was more than $20 billon as of the same date.
Supportive rate case outcomes continue to be key to maintaining and improving upon the company's financial performance.
When MEHC purchased PacifiCorp in 2006 from ScottishPower, the utilty had consistently been unable to earn its
authorized ROE, which varies by jurisdiction but ranges from 10.0%-10.6%.
Management has focused on improving its returns, with some success. ROEs are higher but are stil below authorized, as
regulatory lag remains an issue for the company, particularly given the absence of adjusters in some of its largest markets
and its large capital program, with expenditures year to date about $1.1 billon. The company currently has active rate
cases in Wyoming (a $34 milion request, or a 7% rate increase), Utah (a revised $115 milion reuest, which wil be
adjusted based on commission direction in a filing expected in December), and Idaho (a $6 milion request, or a 6%
request).
In September the company purchased for $308 milion the Chehalis plant, a 520 MW combined-cycle plant that wil now
have to be authorized for recovery in current or future rate cases in all but California. The investment wil be part of the
Washington and Oregon 2009 general rate cases and is part of pending cases in Wyoming and Utah, which has pre-
approved the purchase.
While fallng commodity costs should provide a small measure of relief in managing power cost in states without adjusters,
this issue and the expectation for persisting reguiatory lag continue to be significant credit concerns. The company has been
able to 1) institute a power cost adjuster in Wyoming (which will revert to a process that relies on a forward power cost
forecast in 2011 under a settlement reached in January 2008; 2) implement a forward price forecast methodology in Oregon
(referred to as the transition adjustment mechanism) in which new rates for fuel and purchased power go into effec every
January based on forecast power prices (however, shortalls in revenue to cover these costs are not eligible for deferral)¡
and 3) apply for approval to establish an adjuster in Idaho. But prospect for attaining adjusters in Washington and Utah
appear dim in the near term. In Washington, PacifiCorp's last rate case settlement prevents it from seeking one unti its
next rate case, and in Utah the company expects to request an adjuster in its next rate case but has been rebuffed in its
prior requests.
The challenge to mitigate lag appears to be particularly acute for PacifiCorp's largest market, Utah, in which the company
earlier this year received a rate case outcome awarding It just $36 million of its original $100 million request. (The request
was originally for $161 millon, but the Utah Public Service Commission, or UPSC, directed the company to change its test
period, which reduced the company's request.)
As a result of a petition for reconsideration, the UPSC in October increased its original award $3 milion to $39 milion, after
the company announced it would consider service cuts based on the US PC's ruling. A new case Is pending, and was filed for
$161 milion last July (notably while the original case was still pending before the commission). The request in this newest
case was revised in August to $115 million and the UPSC in October ordered the company to re-file its request, using a 12-
month test year ending December 2009, rather than a test year ending June 2009. While moving the test year out should
favorably increase the number of projects that can be included in the rate base, the company's abilty to receive approval to
recover both sizable upticks in commodity costs and spending for capital investment in this state is uncertain.
Hydro relicensing effort for a portion of the company's 1,158 MW of hydro generation began in 2004 and are for the most
part behind the company. We expect that the cost wil be recovered in retail electric rates. Through negotiations and
settlements PacifiCorp has been largely successful in extending its licenses, which is beneficial for credit given the low cost
and flexibility of hydro resources. The most contentious license is associated with the 169 MW Klamath Falls facilties, which
is the subject of a non-binding agreement in principle that sets a framework for a path toward removal of the dams no
earlier than 2020. The agreement is expected to be finalized in mid-2009 and would institute a maximum 2% surcharge on
PacifiCorp's California and Oregon customers to generate over time up to $200 milion for dam removal, with an additional
$250 millon raised by the state of California through a bond issuance. PacifiCorp would also not have liabilty for the actual
removal, an obligation that wil be assumed by a third part. The agreement requires federal and state legislation to
implement.
Senate Bil (SB) 408 Is not expected to have any adverse impact on PacifiCorp in 2008 or 2009. (SB 408 requires electric
and gas utilities in Oregon to file a report annually with the Oregon Public Utilties Commission, or OPUC, that compares
income taxes actually paid to income taxes collected in rates. It requires a rebate for over-collections and a surcharge for
shortalls, potentially introducing large cash flow swings in company results.) Based on estimated federal, state, and local
taxes paid in 2006 (which are reported to the OPUC in October 2007 and trued up in rates in 2008), the OPUC authorized
PacifiCorp to begin collecting from ratepayers in June 2008 some $27 milion In taxes paid but uncollected In retail electric
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(24-Nov-2008) Sumar: PacifiCorp. .Page 30f4
rates. The charge wil end in June 2009. Furthermore, the company's October 2008 filing refleced a modest overpayment of
$4 millon, which is not expeced to have a significant impact on 2009 results.
More material for the company is its prospect for improving its financial profile. Leverage remains high for its rating
category at 54%. The company issued $800 milion In long-term debt in July 2008, which resulted in total borrowing
increasing by $586 million (net of maturities but including short-tenn debt increases). However, leverage did beneft from a
$200 milion equity contribution of MEHC in May. These equity investments wil be key to maintaining a credit-friendly
capital profile if the company realizes its proposed capital program. We expect that PacifiCorp wil not be in a position to
make distributions to its parent while it Is executing its capital program.
Cash flow metrics as of Sept. 30, 2008, continue to be weak for the rating. And year end numbers are not expected to
meaningfully improve, relative to 2007. Operating revenue was up about 6% year to date to $3.4 bilion, due largely to $68
million in rate increases approved by regulators. Revenues were up despite sales dropping modestly, mostly because of a
mild winter. Notably, customer growth continues in the utility's service territory, but is slowing. Despite stronger operating
revenue, net income was flat. Primary drivers are higher fuel costs (up 20% relative to 2007, with gross margin unchanged
from last year) and larger Interest expense caused by increased borrowing.
While cash flows for the nine months ending Sept. 30, 2008, were stronger relative to 2007, this is solely attributable to the
accelerated depreciation the company is benefiing from under the economic stimulus package approved by Congress earlier
this year. As a result, the company was able to reflect a $228 millon add back to cash flows. Absent this, funds from
operations ($892 millon including the deferred tax add back) would have been lower than the same period in 2007 ($681
millon for the nine months ended Sept. 30, 2008, versus $694 milion for 2007).
The company appears to be on track to spend the $2 bilion in 2008 that it has forecast. For the nine months ended Sept.
30, the company invested $1.1 bilion in infrastructre ($1.4 bilion including the Chehalis acquisition). As with all utilties,
PacifiCorp may need to reexamine some of its near-term capital spending in light of the credit crisis, which has significantly
re-prlced the cost of debt in recent months.
Short-term credit factors
The company's liquidity position Is very strong. PacifiCorp'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'. Berkshire Hathaway's extremely strong liquidity position is assume to be available to PacifiCorp
via MEHC in the unlikely event that PacifiCorp could not repay its commercial paper (CP) or other short-term obligations.
Explicit support exists in the form of a $3.5 billon 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.
However, because Berkshire has up to 180 days to provide contingent equity at the request of MEHe's board, strong
internal liquidity is also required to support the short-term rating.
PacifiCorp cash and cash equivalents totaled $69 millon as of sept. 30, 2008. In addition, the company has $1.395 bilion in
unsecured revolving credit structured in two separate agreements: an $800 millon line expiring July 2013 and a $700
million line extending through the end of October 2012. While these facilties total $1.5 billon, in September 2008 the
bankruptcy of Lehman Brothers Bank FSB reduced capacity on the two agreements to a total of $105 milion. Liquidity
remains ample, however, and the single largest exposure to any banks as a percentage of total commitments is 15%, which
is manageable. Net of $155 milion in short-term borrowing, CP issuance, and letters of credit, the utilty had $1.24 bilion
available to it under credit agreements as of Sept. 30. Regulators limit PaciflCorp to having no more than $1.5 billion in debt
outstanding.
In September 2008, due to the significant reduction in its market liquidity, PaciflCorp acquired $216 million of Its insured
variable-rate pollution control bonds. These bonds are a small component of the company's overall debt profile, and
PacifiCorp can utilze its ample liquidity facilty to hold the obligations until market conditions support the company placing
the debt back with investors.
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(24-~oV-2008J Summary: PacifiCorp Page 4 of4
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12/l/2008