20100223Compliance Filing.pdf

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Pac Por I
Rocky Mountan Por IPa Ene
82S NE Multorn. Suit 190 LeT
Portland. Oreon 9n322010 FEB 23 M" 10: i 9
Febru 23, 2010
VI OVERNIGHT DELIVERY
Idaho Public Utilties Commission
472 West Washington
Boise, ID 83702-5983
Attention:Ms. Jean D. Jewell
Commssion Secreta
Re: Idaho Docket No. P AC-E-oS-08 Compliance Filng
To the Idao Public Utilties Commission:
PacifiCorp submits the attachments 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 of PacifiCorp by MidAerican Energy Holdings
Company.
Commitment 120 of the Stipulation provides that PacifiCorp will provide to the Commssion, on
an inormational basis, credit rating agency news releass 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 find the atthed report
related to PacifiCorp.
Very try your,~W~
Bruce Wiliams
Vice President and Treasurer
Enclosure
PacifiC:orp
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
Creit Rang: A-lStable/A-2
Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflects its "excellent" business risk profie, which is based on
a diverse and growing service territory, and a "significant" financial risk profile that reflects a large capital program
and the need to shore up cash flow metrcs. PacifiCorp is owned by MidAerican Energy Holdings Co. (MEHC;
BBB+/Stablel--). In tun, MEHC is privately held and majority owned by Berkshire Hathaway Inc.
(AA+/StablelA-1+). As of Sept. 30, 2009, Berkshire owned 89.5% of the voting common stock in MEHC, with the
balance owned by an MEHC board member and the company's president and CEO, who also sits on the board.
MEHC had approximately $19.5 bilion of debt, and the utility had $6.4 bilion long-term debt. Consolidated
long-term debt at MEHC (which includes PacifiCorp's debt) was nearly $19.5 bilion as of the same date.
MEHC's credit profile is supported by Berkshire, which has in place through February 2011 a $3.5 bilion equity
commtment agreement with MEHC by which MEHC can unilaterally call upon Berkshire to support either its debt
repayment or the capital needs of its regulated subsidiaries, including PacifiCorp. Berkshire's liquidity position and
financial flexibility remain very strong, in our view, despite its Feb. 4 one-notch downgrade to 'AA+' from 'AA'.
We view this agreement beteen PacifiCorp's parent and a 'AA+' rated entity as reducing the likelihood of a
PacifiCorp default. Nevertheless, we expect the utilty to have a stand-alone credit profile consistent with our 'A-'
rating. We take this view because the utility cannot cause MEHC to make an equity contribution, either from
MEHC or via Berkshire through an MEHC board request. Although MEHC would typically have strong incentives
to support the utilty by tapping the Berkshire contingent equity, we note that in a catastrophic utility event, we
would expec MEHC to call on Berkshire for equity support only if doing so were in MEHC's economic interests.
PacifiCorp serves 1.7 millon customers in portions of six Western states: Oregon, Washington, and California,
where it operates as Pacific Power; and Utah, Wyoming, and Idaho, where it operates as Rocky Mountain Power.
The company's two largest markets, Utah and Oregon, accounted for about 68% of the company's retil electic
sales in 2008, with Wyoming and Washington at 24%, and Idaho and California the balance. Although the
ring-fenced utilty's credit metrics are more consistent on a stand-alone basis with the 'BBB' rating category,
Standard & Poor's Ratings Services expects that management wil achieve cash flow metrics more consistent with
the 'A' rating category over the next several years. Supportive rate case outcomes remain key to maintaining and
improving financial performance. When MEHC purchased PacifiCorp in 2006 from ScottishPower, the utility had
consistently been unable to earn its authorized return on equity (ROE), which varies by jurisdiction but ranges from
10% to 10.6%. Management has focused on improving its returns, with some success. In 2008, our calculations
suggest that the consolidated ROE for PacifiCorp was 8.3%. Regulatory lag remains an issue for the company,
although state regulation permts the company to use forward test years for rate cases in Utah, Oregon, Wyoming,
and California. (Idaho and Washington require historical test years.)
PacifiCorp has power and fuel cost adjusters in Idaho, Wyoming, and California that allow for the deferral of these
costs for later collection. In Oregon, fuel and purchased power costs are updted in rates every January based on
Standard & Poor's I RatingsDirect on th Global Credit Porl I February 17, 201 0 2
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Summary: PacifiCorp
forecast power prices, but there is no true-up to reconcile these projected costs with actuals. In March 2009,
PacifiCorp fied for an energy cost adjustment mechanism in Utah. The Utah commssion ruled that the clause is in
the public interest, and the structure of the mechanism is curently under consideration.
The company expects to spend $6.1 bilion in 2009-2011, excluding non-eash allowance for funds used during
construction, and capital expenditues for the first nine months of 2009 totaled $1.8 bilion. The largest component
of PacifiCorp's capital program is the constructon of the Gateway transmission project, an estimated $6.1 bilion,
2,OOO-mile transmission line connectng portons of Wyoming, Utah, Idaho, Oregon, and the southwestern U.S. The
project is being completed in phases, with initial portions of new lines going into service as early as 2010 and
~ompletion scheduled for 2018. About 23% of the company's total capital budget over the next three years is
devoted to transmission investment, of which Gateway is a component. In 2008, the Federal Energy Regulatory
Commission awarded the company incentive rate treatment of 200 basis points for seven of the eight project
segments.
Operating income has improved relative to 2008 due in large part to lower fuel costs and regulatory rate relief,
which also resulted in higher gross margins per megawatt-hour sold for the 12 months ended Sept. 30,2009. In that
period, cash flow from operations received a boost from increased net income and the changes in regulatory assets
and liabilties, as compared with year-end 2008. Approximately 30%-32% of PacifiCorp's total electric sales are to
industrial customers. The company experienced an approximate 4% decline in retail sales for the first nine months
of 2009.
Leverage as of Sept. 30, 2009, was 53.5%, up from 52.6% as of year-end 2008 and reflected approximately $863
milion of new long-term borrowing in the first nine months of 2009, net of maturities. Equity investments from
MEHC wil remain key to maintaining balanced structure throughout the company's capital program. Debt to total
capitalization reflects several adjustments we make, the largest of which include addig $424 milion for power
purchase obligations and $379 millon for post-retirement obligations. We exp that PacifiCorp wil not be in a
position to make distributions to its parent while it executes its capital program, and that PacifiCorp's debt leverage
will approach the 50% area in the nex several years.
Cash flow metrIcs remain weak for the rating but are improving modestly. For the 12 months ended Sept. 30,2009,
fuds from operations (FFO) to total debt was nearly 19% and FFO interest coverage was 4.3x, which are
consistent with 2008 ratios. We would expect PacifiCorp to produce FFO interest coverage in the range of
4.0x-4.5x and FFO to total debt in the 20% area.
Short-ter credit factors
The company's liquidity is strong. The 'A-2' short-term rating reflect our view that although a $3.5 billon
contingent equity agreement between MEHC and Berkshire support MEHC and its subsidiaries, the agreement is
not a source of instantaneous liquidity. The agreement allows Berkshire up to 180 days to fund MEHC's request.
Given the recent tuoil in both liquidity and the capital markets, we have taken a firmer view on the need to link
the short-term ratings on PacifiCorp to its stand-alone credit quality, which supports an 'A-2' short-term rating.
However, we note that although Berkshire contractually has up to six months to respond to an MEHC call for
liquidity, it has strong economic incentives to do so.
PacifiCorp's cash and cash equivalents totaled $149 milion as of Sept. 30,2009. In addition, the company has $1.4
bilion in unsecured revolving credit structred in two separate agreements: a $760 millon line expiring July 2013
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Summary: PacifiCorp
and a $635 milion line extending though October 2012. As of Sept. 30, 2009, the company had no balances under
the credit facilties and had letters of credit in place for $258 millon, leaving $1.14 bilion available under its
revolving credit facilities. PacifiCorp's single largest exposure to any banks under its revolving facilty as a
percentage of total commitments is 15%, which is manageable. Regulators limit PacifiCorp to $1.5 bilion in debt.
Outlook
The stable outlook for PacifiCorp incorporates our expeation that MEHC wil continue to support the utilty by
contributing sufficient equity to ensure that the utilty keeps fully adjusted debt to total capitalization over the next
few years close to an adjusted 50%, and that FFO to total debt and FFO interest coverage wil be 20% or better and
in the range of 4.0x-4.5x, respectively. Given that PacifiCorp's financial risk profile is weak for the current ratings,
we do not expect near-term upward ratings momentum. PacifiCorp's ring-fenced structre insulates it from some
MEHC credit deterioration. Specifically, our criteria provide that the PacifiCorp CCR can be no more than thee
notches above the MEHC CCR. The company is comfortably within this range, so we see no significant prospects
for the utility rating to fall as a result of adverse rating chages at MEHC, which also has a stable outlook. Upward
ratings momentu is unlikely, given the need to improve credit ratios, which may be diffcult to achieve due to the
size of the company's capital program.
Standard & Poor's I RatingsDirect on the Global Credit Portl I February 17. 2010 4
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