20100507Compliance Filing.pdf

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May 7, 2010
VI OVERNIGHT DELIVERY
Idao Public Utilties Commission
472 West Washington
Boise,ID 83702-5983
Attention:Ms. Jean D. Jewell
Commission Secreta
Re: Idaho Docket No. P AC-E-05-08 Compliance Filing
To the Idaho Public Utilties Commssion:
PacifiCorp submits the attchments in compliance with the Commission'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 final reports regardig 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 attched report
related to PacifiCorp.
Very try your,~w~
Bruce Willams
Vice President and Treasurer
Enclosure
Primary Credit Analyst:
Anne Selting, San Francisco (11415-371-5009; anne_selting(gstandardandpoors.com
Secondary Credit Analyst:
Todd A Shipman, CFA, New York (1) 212.438.7676; todd_shipman(gstandardandpoors.com
Table Of Contents
Major Rating Factors
Rationale
Outlook
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PacifiCorp
Major Rating Factors
Strengts:
. Market and regulatory diversity afforded by PacifiCorp's electric utilty
business, which serves portions of six western U.S. states;
. Retail electric rates compare favorably with those of other electric suppliers
operating in the states PacifiCorp serves, suggesting that the company may
be able to maintain its competitive advantage despite its ongoing need for
rate relief to support a large capital program;
. The company has made progess in putting into place fuel and purchased
power adjusters in the six states it serves (an adjuster was put into effect in
Idaho in 2009, and one is pending in PacifiCorp's largest market, Utah);
. The completion of 1,068 megawatts of new natural gas plants, along with
wind farm investment, is reducing the company's reliance on purchased
power; and
. A tentative resolution in the contentious Klamath hydro relicensing case has
the potential to adequately address the company's financial exposure if the
project is decommssioned, as is now envisioned.
Corporate Credit Rating
A-Stble/A-2
Weakesses:
. Despite recent rate relief in nearly all states PacifiCorp serves, regulatory lag continues to allow only modest
improvement in the company's financial profile: Its return on equity remains under authorized levels and
although leverage has improved since MidAerican Energ Holdings Co. (MEHC) acquired it in 2006, cash flow
metics remain weak;
. Regulators wil need to consistently support retail rate increases to recover PacifiCorp's planed capital
investments, although the recessionary environment has caused some scaling-back of capital plans;
. Growt in the percentage of generation provided by natural gas costs mitigates some of the company's potential
exposure to carbon regulation, but introduces greater potential for cost volatilty.
Rationale
The 'A-' corporate credit rating (CCR) on PacifiCorp reflects its "excellent" business risk profie, evidenced by a
diverse and growing service territory, and "aggressive" financial risk profile that reflects a large capital program and
the need to shore up its cash flow metics. While the ring-fenced utilty's credit metrics are more consistent on a
stand-alone basis with a 'BBB' category rating, Standard & Poor's Ratings Services expes that management wil
achieve cash flow metrics more consistent with an 'A' category rating over the next several years. PacifiCorp is
owned by MidAerica Energy Holdings Co. (MEHC; BBB+/Stable/--). In tu, MEHC is privately held and
majority owned by Berkshire Hathaway (AA+/StablelA-1+), which at year-end 2009 had an 89.5% interest in
MEHC on an undiluted basis. (MEHC's remaining common equity is owned by Walter Scott (9.7%) and President
and Chief Executive Offcer Greg Abel (0.8%)). MEHC has demonstrated a wilingness to deploy equity to support
the utility's large capital program, providing the utility with $865 milion in equity contributions since it purchased
Standard & Poor's I RatingsDire on the Global Credit Portl I April 30. 2010 2
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PacifiCorp
the company in March 2006.
MEHC's credit profile is supported by Berkshire, which has in place through Februar 2011 a $3.5 bilion equity
commitment agreement between itself and MEHC in which MEHC can unilaterally call upon Berkshire to support
either its debt repayment or the capital needs of its regulated subsidiaries, including PacifiCorp. In March 2010, the
agreement was amended to extend though February 2014 at a lower level of $2 billon. We view this agreement
between PacifiCorp's parent and a 'AA+' rated entity as reducing the likelihood of a PacifiCorp default.
Nevertheless, we expe PacifiCorp to grow into a stand-alone credit profile consistent with the 'A-' rating on the
company. We take this view because the utility has no right to cause MEHC to make an equity contribution, either
from MEHC or via Berkshire through an MEHC board request. While MEHC would tyically have strong
incentives to support the utilty by tapping the Berkshire contingent equity, we would note that in a catastrophic
utility event, MEHC would be expected to do so only if doing so were in the economic best interests of the parent.
Such a scenario is remote and would require an unprecedented event such as what occurred during the western
energy crisis, when regulators refused to allow utilities to recover power procurement costs.
PacifiCorp serves 1.7 millon customers in portions of six western states: Utah, Oregon, Wyoming, Washington,
Idaho, and California. The company operates as Pacific Power in Oregon, Washigton, and California, and as
Rocky Mountain Power in Utah, Wyoming, and Idaho. The company's two largest markets, Utah and Oregon,
accounted for about 67% of the company's retail electric sales in 2009, with Wyoming and Washington at 25%,
and the balance being sold to customers in Idaho and California. As of Dec. 31, 2009, the utilty's long-term debt
was $6.4 bilion. Consolidated long-term debt at MEHe (which includes PacifiCorp's debt) was nearly $20 billon
as of the same date.
Supportive rate case outcomes remain key to maintaining and improving upon the company's financial performance.
When MEHC purchased PacifiCorp in 2006 from ScottishPower, the utility had consistently been unable to earn its
authorizd ret on equity (ROE), which varies by jurisdicton but ranges from 10% to 10.6%. Management has
focused on improving its return, with some success. In 2009, our calculations suggest that the consolidated ROE
for PacifiCorp was 8.5%. Regulatory lag remains an issue for the company, although the company is permitted
under state regulation to use forward test years for rate cases in Utah, Oregon, Wyoming, and California. (Idaho
and Washington require historical test years.)
In 2009, several pares, interveners, and the company reached a settlement to implement fuel and purchased power
adjustments, which the IPUC approved. The Utah Public Service Commission (UPSC) is considering the design of a
new fuel adjuster, and the company in February 2010 fied to seek approval to defer the difference between the net
power costs allowed in the company's 2009 rate case and actal costs incurred. That request is pending before the
commission.
Recent general rate case activity includes the company's setement agreement with the UPSC on Feb. 18,2010, for a
retail rate increase of $32 milion, an average price increase of 2 %, as compared with the original $67 millon
sought. In Wyoming, the company has fied a general rate case with the Wyoming Public Service Commission for an
increase of as much as $71 millon. Early this year, the commission in Oregon approved a stipulation agreement that
includes an annual increase to $42 milion, as well as thee tariff riders for the collecton of an additional $8 million
that is associated with various cost initiatives over the course of the next three years. In Washington, the commission
and PacifiCorp reached a settlement agreement for an annual increase of $14 millon, or an average price increase of
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PacifiCorp
5%. Pro forma rate adjustments in Californa were made in January 2009 to address energy cost adjustments and
attrition adjustments. The company has filed a general rate case with the California Public Utilties Commission for
an anual increase of $8 milion that remains pending.
PacifiCorp completed $2.3 bilion in capital expenditues in 2009, up from $1.8 bilion in 2008. The company is
projected to spend $4.6 bilion in 2010-2012, excluding non-cash allowance for fuds used during constrction. The
largest component of PacifiCorp's capital program is the constructon of the Gateway transmission project, an
estimated $4.6 bilion, 2,000-mile transmission line connecg portions of Wyoming, Utah, Idaho, Oregon, and the
southwestern U.S. The project is being completed in phases, with initial portions of new lines being placed in service
as early as 2010 and a completion date scheduled for 2018. About 34% of the company's total capital budget over
the next three year (2010-2012) is devoted to transmission investment, of which Gateway is a component. In 2008,
the Federal Energy Regulatory Commssion awarded the company incentive rate treatment of 200 basis points for
seven of the eight projec segments.
Lower fuel prices, decreased volume of wholesale electricity purchases, and favorable rate approvals on retail
electicity sales and sales of renewable energy credits affected PacifiCorp's 2009 results. Although revenues declined
slightly, by almost 1 %, gross margins per megawatt-hour sold increased by almost 6%, as did the company's
earnings before interest and taxes. Operating income increased about 11 % due in large par to retail revenues
increases provided by reglatory rate relief. For 2009, cash flows from operations rose by $508 millon to $1.5
bilion, but the majority of this was attibutable to the deferred income taxes. In 2009, retail sales declined by 3%,
while wholesale sales were approximately flat. About 30%-32% of PacifiCorp's total electic sales are to industrial
customers. As a result, we had expected sales contracton to be a drag on 2009 performance, as industrial sales are
more sensitive to the business cycle than is residential elecic consumption. Industrial sales declined 7% in 2009.
Year-end leverage for the company was 53%, virtally unchanged year over year. Borrowing in 2009 was partially
offset by $125 millon of equity contribution from MEHC. These equity investments wil be key to maintaining a
balanced capital structre throughout the company's capital program. Debt to total capitalization reflects several
adjustments we make, the largest of which include adding $395 millon for power purchase obligations and $370
milion for post-retirement obligations. We expect that PacifiCorp wil not be in a position to make distributions to
its parent while it is executing its capital program and that MEHC will manage PacifiCorp's debt leverage
downward to the 50% area in the next several years.
Short-ter credt factors
The company's liquidity position is strong. The PacifiCorp 'A-2' short-term rating reflect that although the
contingent equity agreement between MEHC and Berkshire supports MEHC and its subsidiaries, the agreement is
not a source of instantaneous liquidity. The agreement allows Berkshire up to 180 days to fud a request by MEHC.
Given the recent turmoil in both the liquidity and capital markets, we have taken a firmer view on the need to lin
the PacifiCorp short-term ratings to its stand-alone credit quality, which supports an 'A-2' short-term rating.
However, we note that although Berkshire contractally 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 $117 milion as of Dec. 31, 2009. In addition, the company has
$1.395 bilion in unsecured revolving credit structred in two separate agreements: an $800 million line expiring
July 2013 and a $700 milion line extending through October 2012. The company had letters of credit in place for
$258 milion, leaving $1.137 bilion available under its revolving facilties.
Standard & Poor's I RatingsDire on the Global Credit Porl I April 30. 2010 4
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PacifiCorp
Outlook
The stable outlook on the PacifiCorp ratings incorporates our expectation that MEHC wil continue to support the
utility by contributing equity sufficient to ensure that our fully adjusted debt to total capitalization is managed over
the next few years to an adjusted level of closer to 50% and that FFO to total debt and FFO interest coverage wil
be 20% or better and in the range of 4.0x-4.5x, respectively. Given that PacifiCorp's financial risk profie is weak
for the current ratings, we do not expect near-term upward ratings momentum for the utility. PacifiCorp's
regulatory and structural insulation shields the utilty from some MEHC credit deterioration, to an extent.
Specifically, our criteria provide that the PacifiCorp CCR can be no more than thee notches above the MEHC
consolidated credit rating. The company is comfortably within this range, so we do not see significant prospect for
the utilty rating to fall as a result of advers rating changes on MEHC, which also enjoys a stable outlook.
Tablet
PacifiCorp -- Peer Comparison*
Rating as of April 28, 2010
PacifiCorp Portland General Electic Co. Pacific Gas & Electrc Co.
A./Stable/A.2 BBB/Stable/A-2 BBB+/Stable/A-2
--Average of past three fiscal years-
IMil.$)Revenues 4,40.3
Net income from cont. oper. 479.7
Funds from operations (FFO) 1.342.3
Capital expenditures 1,850.2Oebt 6,641.7Equity 5,926.2
Adjusted raos
Oper. income (bef. O&A)/revenues (%) 35.8
EBIT interest coverage (x) 2.8
EBITOA interest coverage (x) 4.0
Return on capital (%) 8.0
FFO/debt (%) 20.2
Oebt/EBITOA (x) 4.2
"Fully adjusted (including postretirement obligations).
1,64.0 13.218.9
109.0 1,157.7
326.5 3,030.0
511.4 3,437.7
1,875.2 12.662.8
1,404.3 10,032.3
25.9 29.3
2.2 2.9
3.8 4.4
7.6 10.2
17.4 23.9
4.1 3.3
TableZ.
PacifiCorp -- Financial Summary*
--Fiscal year ended Mar. 31--
Zl 20 ZO 20 20
Rating history A./Stable/ A-2 A-/Stable/ A-1 A-/Stable/ A-1 A-/Stable/ A-1 A-/Stable/ A-1
(MiL. $)
Revenues 4,457.0 4,49.0 4,258.0 4.154.1 3,896.7
Net income from continuing operations 542.0 458.0 439.0 307.9 360.7
Funds from operations (FFO)1,60.1 1,272.1 994.8 927.6 86.5
Capital expenditures 2.297.1 1.57.0 1,496.4 1,375.0 1,03.5
cash and short-term investments 117.0 59.0 228.0 59.0 119.6
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lable2.
PacifiCorp -- Financial Summary* (COiit.)
Debt 7,415.8 6.635.9 5,873.5 5,473.6 5.185.3
Preferred stock 20.5 41.0 41.0 41.3 41.3
Equity 6,711.5 5.987.0 5.080.0 4,426.8 3,750.7
Debt and equity 14,127.3 12,622.9 10,953.5 9.900.4 8,936.0
Adjused ratios
EBIT interest coverage (x)2.2.8 2.8 2.5 3.0
FFO int. cov. (x)4.9 4.2 3.5 3.8 3.8
FFO/debt (%)23.7 19.2 16.9 16.9 16.7
Discretionary cash flow/debt (%)(10.2)(10.7)(10.5)(10.7)(5.6)
Net cash flow/capex (%)76.6 723 66.3 66.1 66.7
DeWdebt and equity (%)52.5 52.6 53.6 55.3 58.0
Return on common equity (%)7.0 6.8 7.8 6.2 8.9
Common dividend payout ratio (unadj.) (%)7.0 0.0 0.0 5.2 49.1
*Fully adjusted (including posttirement obligations).
lable3.
Reconciliation Of PacifiCorp Reported Amounts With Standard & Poor's Adjusted Amounts (MiL. S)*
--Fiscal year ended Dec. 31. 20
PacifiCorp reportd amount
Operang Operang Operaing
income income income Cash flow Cashftow
Shareholders'(before (before (after Interest frm from Divdends CapitlDebtequityDl)Dl)DU)expense operations operaons paid expenditres
Reported 6,416.0 6,732.0 1,609.0 1,609.0 1,06.0 359.0 1,500.0 1,500.0 2.0 2,328.0
Stndard & Poor's adjustent
Operating 36.5 5.0 2.3 2.3 2.3 2.7 2.7 4.1leases
Intermediate 20.5 (20.5)1.0 (1.0)(1.0)(1.0)hybrids
reported as
equity
Postretirement 369.9 20.0 20.0 20.0 5.0 33.8 33.8
benefit
obligations
Accrued 111.0
interest not
included in
reprted debt
Capitalized 35.0 (35.0)(35.0)(35.0)interest
Power purchase 395.7 63.3 63.3 25.8 25.8 37.5 37.5agreements
Asset 66.3 9.0 9.0 9.0 9.0 5.2 5.2retirement
obligations
Reclassification 83.0
of nonoperating
income
(expnses)
Standard & Poor's I RatingsDiret on the Global Credit Porl I April 30, 2010 6
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PacifiCor
Table 3.
Reconciliation Of PacifiCorp Reported Amounts With Standard & Poor's Adjusted Amounts (MiL. S)* (cont.)
Reclassification
of
working-capital
cash flow
changes
Total 999.8
adjustments
Stndard & Poor's adjust amounts
217.0
(ZO.5)97.3 94.6 140.2 78.2 43.1 260.1 (1.0)(30.9)
Operating
incom Càshflow Fund
(before Interes frm from Dividends Càpital
Debt Equity D&)EBITDA EBIT expense operations operations paid expeits
Adjusted 7,415.8 6,711.5 1,06.3 1,03.6 1,ZOO.2 437.2 1,543.1 1,760.1 1.0 Z.Z97.1
'PacifiCorp reported amounts shown are taken from the company's finanial statements but might include adjustments made by data providers or reclassifications mae by
Standard & Poor's analyss. Please note that two rert amounts (operating income before D&A and cash flow from operationsl are use to derve 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 secion
in some tables may feature duplicate descriptons and amounts.
Ratings Detail lAs Of April 30, 20101'
PacifiCorp
Corporate Credit Rating
Commercial Paper
Local Currency
Preferred Stock (1 Issue)
Senior Secured (70 Issues)
Senior Unsecured (1 Issue)
Senior Unsecured (3 Issues)
Senior Unsecured (Z Issues)
Corporate Credit Ratings Histry
Z7-Mar.2009
18-Sep-ZOOS
22-Mar-2006
06.Mar-Z006
25-May-Z005
Business Ri Proile
Financial Risk Proile
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Ratings Detail iAs Of ,"pí1130 20 O)"(cont.)
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A-1M
A-/Stable
A-/Stablel A-2
A-2
BB8+
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A-A.2
BB8+/Stable/--
BBB-
BB8+
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A-1M
A-/Stable/--
A-
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BB8+/Stablel A-2
A-
NStable/-
A
BBB-/Stable
AANegative
A./Stable/A.2
A-
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BB8+/Stable/.-
BBB+/Stablel A-2
BB8+
'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. Stanard
Standard & Poor's I RatingsDiret on the Global Credit Portl I April 30. 2010 8
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PacifiCorp
Ratings Detail lAs Of April 30 2o~ 0)' (cont.)
& Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
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7961251300030966