20121030Compliance Filing.pdf

Pacific Power IPACIFICORP Rocky Mouintain Power I .: PaciflCorp Energy
825 NE Multnomah, Suite 1900 LCT
7111? OCT 30 AM 10: 1)6 Portland, Oregon 97232
tr October er v, 2012 UTILITIES Cc"-
VIA OVERNIGHT DELIVERY
Idaho Public Utilities Commission
472 West Washington
Boise, ID 83702-5983
Attention: Ms. Jean D. Jewell
Commission Secretary
Re: Idaho Docket No. PAC-E-05-08 Compliance Filing
To the Idaho Public Utilities Commission:
PacifiCorp submits the attachments in compliance with the Commission's Order in this case
issued on February 13, 2006 and amended on March 14, 2006. The Order approved the
Stipulation supporting the acquisition of PacifiCorp by MidAmerican Energy Holdings
Company.
Commitment 120 of the Stipulation provides that PacifiCorp will 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 truly yours,
Bruce Williams
Vice President and Treasurer
Enclosure
STANDARD
&POOR'S
RATINGS SERVICES
RatingsDirect 0
Summary:
PacifiCorp
Primary Credit Analyst:
Gerrit Jepsen, CFA, New York (1) 212-438-2529; [e-mail]
Secondary Contact:
Dimitri Nikas, New York (1) 212-438-7807; [e-mail]
Table Of Contents
Rationale
Outlook
Related Cnteria And Research
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Summary:
PacifiCorp
Credit
Rating A-/Stable/A-2
Rationale
Standard & Poor's Ratings Services' 'A-' corporate credit rating on PacifiCorp reflects an "excellent" business risk
profile and a 'significant' financial risk profile under our criteria. Our assessment of the business risk profile takes into
account PacifiCorp's position as a vertically integrated electric utility with geographical, market, and regulatory
diversity over its six-state service territory: PacifiCorp provides power to its 1.7 million retail customers in Utah,
Wyoming and Idaho as Rocky Mountain Power and in Oregon Washington, and California as Pacific Power. Utah and
Oregon are the most important markets for the company, providing about 45% and 25% of annual retail sales,
respectively. The utility's significant financial profile is supported through steady operating cash flow and restrained
leverage to finance new capital spending.
PacifiCorp is indirectly owned by MidAmencan Energy Holdings Co (MEHC BBB+/Stable/A-2) and has msulatory
provisions that allow us to rate PacifiCorp above the 'BBB+' corporate credit rating on MEHC if PaciflCorp's
stand-alone credit measures and business risk profile support the higher rating. In turn, MEHC is privately held and
majority owned by Berkshire Hathaway (AA+/Negative/A-1+). Our criteria provide that our corporate credit rating on
PacifiCorp can be no more than three notches above the MEHC consolidated credit rating. Ratings on MEHC and
PacifiCorp are one notch apart.
Since MEHC's acquisition in 2006, PacifiCorp has made modest strides in improving key business and regulatory
aspects. Despite the sluggish economic recovery in the company's Pacific Northwest territory, its western states,
especially Utah, continue to exhibit some growth. PacifiCorp has been able to eke out rate increases that are in line
with our expectations, and the utility was granted a fuel and purchased power adjuster in Utah last year. Fuel
adjustment mechanisms exist for all states but Washington. A key ongoing challenge for PacifiCorp is whether it will
be able to achieve rate relief at levels necessary to sustain the company's capital investment program. The program
has been at high levels and will remain so in the next few years, despite the sluggish economic recovery. MEHC has
been consistent in its investment strategy for PacifiCorp, with ongoing capital spending that will continue to result in
the need for regular revenue increases, requiring prudent regulatory risk management.
Our assessment of PacifiCorp's financial risk profile as significant is based on its consolidated financial measures
which include adjusted financial measures that are mostly in line with the rating. For the 12 months ended June 30,
2012, adjusted funds from operations (FF0) to total debt was a robust 21%. Debt leverage was adequate as
demonstrated by adjusted total debt to total capital of 51% but adjusted debt to EBITDA of 4.3x. Adjusted net cash
flow (FF0 less dividends) to capital spending was healthy at more than 100% and, after reducing cash flow from
operations with capital spending and dividends adjusted discretionary cash flow was negative $46 million The
measures indicate a modest need for external financing for capital spending and owner distributions. Adjusted FF0
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Summary: PacifiCorp
interest coverage was adequate at 4.9x, and the company's adjusted dividend payout ratio was much lower than the
industry average, providing additional financing cushion for capital spending. Although our forecast credit measures
are adequate for PacifiCorp's significant financial profile, our base-case forecast indicates adjusted financial measures
that include a decrease in adjusted FF0 to total debt to about 18% due to the waning benefits of deferred taxes and
maintenance of adjusted debt to capital of about 51%. We forecast a drop in adjusted debt to EBITDA to about 4x over
the next several years.
Liquidity
Our short-term rating on PacifiCorp is 'A-2'. The utility's stand-alone liquidity position is considered "adequate" under
Standard & Poor's liquidity methodology. We base our liquidity assessment on the following factors and assumptions:
• We expect PaciflCorp's liquidity sources over the next 12 months, including cash, FF0, and credit facility
availability, to exceed uses by 1.2x. Uses include necessary capital spending, working capital, debt maturities, and
shareholder distributions.
• Debt maturities are manageable over the next 12 months.
• We believe liquidity sources would exceed uses even if EBITDA decreased 15%.
• In our assessment, PacffiCorp has good relationships with its banks and has a good standing in the credit markets,
having successfully issued debt during the recent credit crisis.
In our analysis of liquidity over the next 12 months, we assume roughly $2.4 billion of liquidity sources, consisting of
FF0, cash, and credit facility availability. We estimate liquidity uses of approximately $1.8 billion for maintenance
capital spending, maturing debt, working capital, and shareholder distributions. We believe PacifiCorp will continue to
maintain sources over uses at greater than 1.2x to support the adequate stand-alone liquidity position.
PacifiCorp maintains $720 million and $600 million unsecured credit facilities that mature July 2013 and June 2017,
respectively. PaciflCorp's borrowing capacity is reduced after allocating credit facility capacity as support for
variable-rate tax-exempt bonds. Regulatory restrictions limit PacifiCorp's short-term debt to $1.5 billion. PacifiCorp has
modest debt maturities over the next several years with $283 million in 2013, $275 million in 2014, $147 million in
2015, and $72 million in 2016.
Recovery analysis
We rate PacifiCorp's first mortgage bonds (FMB) 'A', a notch higher than the 'A-' issuer credit rating, and have assigned
them a recovery rating of 1 V. We assign recovery ratings to FMBs issued by investment-grade US. utilities and this
can result in issue ratings that are higher than the corporate credit rating (CCR) on a utility depending on the CCR
category and the extent of the collateral coverage. We base our investment-grade FMB recovery methodology on the
ample historical record of nearly 100% recovery for secured-bond holders in utility bankruptcies and on our view that
the factors that supported those recoveries (the limited size of the creditor class and the durable value of utility
rate-based assets during and after a reorganization, given the essential service provided and the high replacement cost)
will persist. Under our notching criteria, we consider the limitations of FMB issuance under the utility's indenture
relative to the value of the collateral pledged to bondholders, management's stated intentions on future FMB issuance,
and the regulatory limitations on bond issuance. FMB ratings can exceed a CCR on a utility by as many as one notch
in the 'A' category, two notches in the 'BBB' category, and three notches in speculative-grade categories.
PaciflCorp's FMBs benefit from a first-priority lien on substantially all of the utility's real property owned or
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Summary: PacifiCorp
subsequently acquired. Collateral coverage of 1.5x supports a recovery rating of '1+' and an issue rating one notch
above the CCR.
Outlook
The stable outlook on PacifiCorp reflects our expectation that management will continue to focus on its core utility
operations and reach construction regulatory outcomes to avoid any meaningful business risk rise. The outlook also
includes our projection that cash flow measures will decrease as construction projects move forward and bonus
depreciation benefits decrease. Our base forecast includes adjusted FF0 to total debt of about 18%, adjusted debt to
EBITDA of roughly 4x, and adjusted debt to total capital hovering at 50%. These measures are consistent with our
expectations for the rating. We could lower ratings if financial measures consistently underperform our base forecast
and remain at less credit-supportive levels, including adjusted FF0 to total debt of less than 17%, adjusted debt to
EBITDA that exceeds 5x, and adjusted debt to total capitalization of more than 54%. We do not contemplate positive
rating actions because of near-term capital needs, but we could raise ratings if financial measures strengthen and
consistently exceed our base forecast, including FF0 to total debt greater than 22%, debt to EBITDA less than 4x, and
debt to total capital of no more than 47%.
Related Criteria And Research
• Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
• Business Risk/Financial Risk Matrix Expanded, May 27, 2009
• Analytical Methodology, April 15, 2008
• Ratios And Adjustments, April 15, 2008
• Changes To Collateral Coverage Requirements For '1+' Recovery Ratings On US. Utility First Mortgage Bonds,
Sept 6 2007
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