20140415Compliance Filing.pdf

V Pc ‘F’CoR p Pacific Power I
I I Rocky Mountain Power I
A MIDAMERICAN ENERGY HOLDINGSCOMPANY PacifiCorp Energy
-i.q 825 NE Multnomah,Suite 1900 LCT
Portland,Oregon 97232
April 15,2014
UTi C
VIA OVERNIGHTDELIVERY
Idaho Public Utilities Commission
472 West Washington
Boise,ID 23702-5983
Attention:Ms.Jean D.Jewel!
Commission Secretary
Re:Idaho Docket No.PAC-E-05-08 Compliance Filing
To the Idaho Public Utilities Commission:
PacifiCorp submits the attachment 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,
t3J2(2
Bruce Williams
Vice President and Treasurer
Enclosure
—3 STANDARD &POOR’S
‘RATINGS SERVICES
McGRAW HILL FINANCIAL
RatingsDirect®
Summary:
PaciftCorp
Primary Credit Analyst:
Gerñt W Jepsen,CFA,New York (1)212-438-2529;gernt.jepsenstandardandpoors.com
Secondary Contact:
Dimitri Nikas,New York (1)2 12-438-7807;[e-mail]
Table Of Contents
Initial Analytical Outcome (“Anchor”)And Rating Result
Rationale
Outlook
Standard &Poor’s Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Other Modifiers
Group Influence
Ratings Score Snapshot
Recovery Analysis
Related Criteria And Research
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Summary:
PaciftCorp
Corporate Credit Rating A-/Stable/A-2 I
Profile Assessments
BUSINESS RISK EXCELLENT I Vulnerable Excellent
FINANCIAL RISK —
./Highly leveraged
Initial Analytical Outcome (“Anchor”)And Rating Result
Standard &Poor’s Ratings Services ‘A-’issuer credit rating (ICR)on PacifiCorp is derived from:
•Our anchor of ‘a-,based on our ‘excellent”business risk and “significant”financial risk profile assessments for the
company;
•Modifiers have no impact on the rating outcome;and
•The stand-alone credit profile (SAC?)of ‘a-’on PacifiCorp,which is one notch higher than our bbb+’group credit
profile on parent holding company MidAmerican Energy Holdings Co.(MEHC),reflecting our assessment of
PacifiCorp’s business risk and financial risk profiles.Under our group rating methodology,we consider PacifiCorp to
be a core subsidiary of the MEHC group.PacifiCorp’s issuer credit rating is one notch higher than the ‘bbb+’GCP on
the parent because the utility’s SAC?is stronger and there is sufficient regulatory and structural insulation.
Rationale
Business Risk:Excellent Financial Risk:Significant
•Stable operating cash flow from the regulated utility
operations that supports the credit profile
•Lack of competition in regulated service territories
•About 70%of retail revenue derived from
residential and commercial customers,which
provides cash flow diversity and at least a base level
of usage
•Prudent management of coal-fired generating units
to comply with environmental requirements
•Cost recovery through base rates and rate
surcharges for expenses such as fuel and capital
investments
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•Discretionary cash flow to remain negative
•EBITDA growth consisting of revenue increases and
customer growth to remain approximately the same
as that in recent years
•Sizable parent-level debt
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I SIGNIFICANT Minimal
Summary:PacifiCorp
Outlook:Stable
The stable rating outlook reflects our expectation that management will continue to focus on utility operations and
reach constructive regulatory outcomes to avoid any meaningful increase in business risk.The outlook also
reflects our projection that cash flow measures will decrease as construction projects move forward and bonus
depreciation benefits drop.Our base-case forecast calls for adjusted funds from operations (FF0)to adjusted debt,
and adjusted operating cash flow to adjusted debt both averaging between 18%and 19%.These measures are
consistent with our expectations for the rating.
Downside scenario
We could lower the rating if PaciflCorp’s business risk increases materially through ongoing under-recovery of
operating costs or capital improvements,or if financial measures consistently underpeiform our base-case forecast
and remain at less credit-supportive levels,including adjusted FF0 to total debt dropping below 13%.
Upside scenario
Although we do not expect an upgrade because of near-term capital needs,we could raise the ratings if we raised
the ratings on parent MEHC and if PacifiCorp’s credit quality strengthened through both reduced business risk and
stronger financial measures that consistently exceeded our base-case forecast,including FF0 to total debt greater
than 23%.
Standard &Poor’s Base-Case Scenario
Assumptions Key Metrics*
•Low-single-digit EBITDA growth from retail sales 2014E 2015E 2016Egrowthandincrementalcostrecoverythrough
FF0/total debt (%)18-20 17-19 17-19variousratemechanisms,including base-rate
Debt/EBITDA (x)3.2-4.2 3.2-4.2 3.2-4.2increasesandratesurcharges
Cashflowftomoper./debt(%)18-20 17-19 17-19•Capital spending of about $1.2 billion in both 2014
_______________________________________
and 2015,and $1.5 billion in 2016 *Standard &Poor’s adjusted figures.E--Estimate.
•Annual owner distributions comparable to the 2013 FFO--fl.rnds from operations.
level of roughly $500 million in 2014,2015,and
2016
•Capital spending and dividend payouts that result in
discretionary cash flow that is negative,indicating
the need for external funding
Business Risk:Excellent
We base our assessment of PacifiCorp’s business risk profile as “excellent,”as defined in our criteria,on the company’s
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Summary:PaciliCor?
‘strong”competitive profile,“very low”industry risk derived from the regulated utility industry,and the “very low”
country risk of the U.S.,where the utility operates.
PacifiCorp’s competitive position reflects the stable regulatory framework of the low-risk regulated utility We consider
the utility’s geographical,market,and regulatory diversity over its six-state service territory a strength because these
factors provide extensive market diversity.About 70%of retail revenue is derived from residential and commercial
customers,providing cash flow diversity and at least a base level of usage.PacifiCorp serves a total of 1.7 million retail
customers,in Utah,Wyoming,and Idaho through its Rocky Mountain Power operating unit;and in Oregon,
Washington,and California through its Pacific Power unit,which provides a high level of cash flow diversity
Utah and Oregon are the most important markets for the company,providing about 45%and 25%of annual retail
sales,respectively.As the two largest markets for PacifiCorp,constructive regulatory dialogue is required to maintain
timely recovery of fuel costs and capital investments,along with other costs.Rocky Mountain Power has had good
sales growth,especially in Utah.Salt Lake County accounts for slightly over 20%of PacifiCorp’s customer base.
The utility has a well-diversified power supply portfolio that consists of coal (about 60%),gas (about 10%),purchased
power (20%),and other sources (about 10%).PacifiCorp’s coal fleet is on track to be compliant with existing
environmental rules.
Financial Risk:Significant
Based on the medial volatility financial ratio benchmarks,our assessment of PacifiCorp’s financial risk profile is
“significant,’reflecting the repetitive cash flows of a utility providing regulated electric service.Our assessment also
takes into consideration the company’s ongoing capital spending and mostly steady recovery of costs through various
rate mechanisms.Capital spending and dividend payments will lead to a drop in discretionary cash flow over the
forecast period,indicating the need for external funding and vigilant cost recovery to maintain cash flow measures.
Although we expect equity to grow,we also expect the utility to continue using debt financing.
For the 12 months ended Dec.31,2013,FF0 to debt was roughly 18%,and operating cash flow to debt was about
21%.Debt to EBITDA was about 4x as of year-end 2013.Our baseline forecast includes financial measures about the
same as existing levels for FF0 to debt;slightly weaker cash flow from operations to debt than current levels;and
slightly stronger forecasted debt to EBITDA than current levels.
Liquidity:Adequate
PacifiCorp’s liquidity reflects that of parent MEHC,which we consider “adequate,”as our criteria define the term.The
company’s sources of liquidity are likely to cover its uses by more than lix in the next 12 months.We expect MEHC
to meet cash outflows even with a 10%decline in EBITDA.
PacifiCorp has sizable debt maturities over the next three years,but we expect the company to refinance these,given
its satisfactory standing in the credit markets.
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Summary:PacifiCorp
Principal Liquidity Sources Principal Liquidity Uses
•Expected FF0 of $5.6 billion •Capital spending of $5.2 billion
•Credit facility availability of $2.8 billion •Debt maturities of $1 billion
Working capital increases of $300 million
Other Modifiers
Modifiers have no impact on the rating outcome.
Group Influence
The SACP of a-’for PacifiCorp is one notch stronger than the current GCP of ‘bbb+’on parent MEHC,reflecting our
assessment of PacifiCorp’s business risk and financial risk profiles.Under our group rating methodology,we consider
PacifiCorp to be a core subsidiary of the MEHC group because we believe the utility is integral to MEHC’s long-term
strategy.PacifiCorp’s issuer credit rating is one notch higher than MEHCs GCP because the utility’s SACP is stronger,
and existing structural arid regulatory protections are sufficient to provide insulation to the utility.PacifiCorp has a
regulatory commitment not to pay dividends if its common equity ratio drops below 46.25%.Structurally,the board of
the intermediate holding company that owns PacffiCorp has an independent director to consider only the interests of
this holding company and any of its creditors when acting or voting on board matters.
Ratings Score Snapshot
Corporate Credit Rating:A-/Stable/A-2
Business risk:Excellent
•Industry risk:Very low
•Country risk:Very low
•Competitive position:Strong
Financial risk:Significant
•Cash flow/leverage:Significant
Anchor:‘a-’
Modifiers
•Diversification/Portfolio effect:Neutral (no impact)
•Capital structure:Neutral (no impact)
•Liquidity:Adequate (no impact)
•Financial policy:Neutral (no impact)
•Management and governance:Satisfactory (no impact)
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Summary:PacifiCorp
•Comparable rating analysis:Neutral (no impact)
Stand-alone credit profile:‘a-’
•Group credit profile:bbb+
•Entity status within group:Core
Recovery Analysis
We assign recovery ratings to first mortgage bonds fFMBs)issued by U.S.utilities,which can result in issue ratings
being notched above an ICR on a utility depending on the rating category and the extent of the collateral coverage.
The FMBs issued by U.S.utilities are a form of “secured utility bond”(SUB)that qualifies for a recovery rating as
defined in our criteria.
The recovery methodology is supported by the ample historical record of 100%recovery for secured bondholders in
utility bankruptcies in the U.S.and our view that the factors that enhanced those recoveries will persist in the future
(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).
Under our SUB criteria,we calculate a ratio of our estimate of the value of the collateral pledged to bondholders
relative to the amount of FMBs outstanding.FMB ratings can exceed an ICR on a utility by up to one notch in the ‘A’
category,two notches in the ‘333’category,and three notches in speculative-grade categories depending on the
calculated ratio.
PacifiCorp’s FMBs benefit from a first-priority lien on substantially all of the utility’s real property owned or
subsequently acquired.Collateral coverage of more than 1.5x supports a recovery rating of’l+’and an issue rating one
notch above the ICR.
Related Criteria And Research
Related Criteria
•Methodology And Assumptions:Liquidity Descriptors For Global Corporate Issuers,Jan.2,2014
•Key Credit Factors For The Midstream Energy Industry,Dec.19,2013
•Key Credit Factors For The Regulated Utilities Industry,Nov.19,2013
•General Criteria:Group Rating Methodology,Nov.19,2013
•General Criteria:Methodology:Industry Risk,Nov.19,2013
•Corporate Methodology,Nov.19,2013
•Corporate Methodology:Ratios And Adjustments,Nov.19,2013
•General Criteria:Methodology For Linking Short-Term And Long-Term Ratings For Corporate,Insurance,And
Sovereign Issuers,May 7,2013
•Collateral Coverage And Issue Notching Rules For ‘1+’And ‘1’Recovery Ratings On Senior Bonds Secured By
Utility Real Property,Feb.14,2013
•Methodology:Management And Governance Credit Factors For Corporate Entities And Insurers,Nov.13,2012
•Stand-Alone Credit Profiles:One Component Of A Rating,Oct.1,2010
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Summary:PacifiCorp
•Notching Of U.S.Investment-Grade Investor-Owned Utility Unsecured Debt Now Better Reflects Anticipated
Absolute Recovery,Nov.10,2008
•2008 Corporate Criteria:Rating Each Issue,April 15,2008
•2008 Corporate Criteria:Commercial Paper,April 15,2008
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