20150324Compliance Filing.pdf

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Idaho Public Utilities Commission
472West Washington
Boise,ID 83702-5983
Attention: Ms. Jean D. Jewell
Commission Secretary
Re: Idaho Docket No. PAC-E-05-08 Compliance X'iling
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
Companyl.
Commitmentl2} 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 Commifinentl20 of the Stipulation, please find the attached report
related to PacifiCorp.
Very truly yours,
Bruce Williams
Vice President and Treasurer
Enclosure
I On April 30,2014, MidAmerican Energy Holdings Company changed its name to Berkshire Hathaway Energy
Company.
STANDARD & POOR'S
RATINGS SERVICES
McCRAW HItL FINATCIAL
RatingsDirect'
Summary:
PacifiCorp
Primaty Credit Analyst:
Gerrit W Jepsen, CFA, New York (1) 212-438-2529; [e-mail]
Secondary Contact:
Matthew L O'Neill, New York (l) 212-438-4295; [e-mail]
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Other Credit Considerations
Group Influence
Ratings Score Snapshot
Recovery Analysis
Related Criteria And Research
W'W'W. STAI{DARDAI| DPOORS. CODI /RATITCSDINECT
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Summary:
PacifiCorp
Business Risk: EXCELLENT
&wffi8ffi-{-
Vulnbrable
Financial Risk SIGMFICANT
@Er{-
Highly leveraged Minimal
a-A-&o:{----{
Modifiers Group/Gov't
CORPORATE CREDITMTING
A-lStable/A-2
l___
Rationale
Stable operating cash flow from the regulated utility
operations that supports the credit profile
Lack of competition in regulated service territories
About 70% ofretail revenue derived from residential
and commercial customers, which provides cash
flow diversity and at least a base level ofusage
Prudent management of coal-fired generating units
to comply with environmental requirements
Cost recovery through base rates and rate
surcharges for orpenses such as fuel and capital
investrnents
W'WW. STAXDANDAIf DPOORS. CODI/NATIIfGSDINECT
THIS WAS PNEPANED BXCLUSTVBLY FOR USER JOHT{ L8E.
TOT TOB NEDISTnIBTrIIOII T'NIJSS OTIIBRWISB PBNMITTED.
Discretionary cash flow to remain negative during
heavy capital spending period
EBITDA growth consisting of revenue increases and
customer growth to remain approximately the same
as that in recent years
Ability to consistently access capital markets to fund
capital investments
Sizable parent-level debt
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a
a
Summary: PacifiCorp
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 (FFO) to adjusted debt
and adjusted operating cash flow to adjusted debt both averaging between 18% and 23%. These measures are
consistent with our expectations for the rating.
Downside scenario
We could lower the rating if PacifiCorp's business risk increases materially through ongoing under-recovery of
operating costs or capital improvements, or if financial measures consistently underperform our base-case forecast
and remain at less credit-supportive levels, including adjusted FFO 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 FFO to total debt greater
than 23o/o.
Standard & Poor's Base-Case Scenario
Low-single-digit EBITDA growth from retail sales
growth and incremental cost recovery through
various rate mechanisms, including base-rate
increases and rate surcharges
Capital spending of about $1.1 billion in 2015, $900
million in 2016, and $775 million in2017
Annual owner distributions of roughly $500 million
in 2015, 2016, and2017
Capital spending and dividend payouts that result in
discretionary cash flow that is positive once capital
spending declines, indicating limited, if any, external
funding needs
WU'W. STATDANDAI{DPOONS.COM/RATNGSDINECT
THIS WAS PUPARED EXCLUSTVBLY FOR USBR JOHI{ LEB.
T{OT FOR RADISTRIBUTIOIT T'NI^8SS OII|BRIIIISE PENMITTBD.
201.1* 2015E 2016E
FFO/total debt (%)21.4 t8-20 t9-21
Debt/EBITDA (x)3.6 3.2-3.7 3-3.5
CFO/debt (%)21.6 t9-2t 20-22
Note: Standard & Poor's a{usted figures. *Last 12
months ended Sept. 30, 2014. E-Estimate. CFO-Cash
flow from operations.
IIIABCH 12,2015 3
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Summary: PacifiCorp
Business Risk Excellent
We base our assessment of PacifiCorp's business risk profile as "excellent," as defined in our criteria, on the company's
"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 strengths 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 ofusage. PacifrCorp also has a high level of cash flow
diversity since it serves a total of about 1.7 million retail customers, in Utah, Wyoming, and Idaho through its Roclry
Mountain Power operating unit; and in Oregon, Washington, and California through its Pacifrc Power unit.
Utah and Oregon are the most important markets for the company, providing about 45% andZSYo 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, especial$ in Utah. Salt Lake County accounts for slightly more than 20% of PacifiCorp's customer base.
The utility has a well-diversified power supply portfolio that consists of coal (approximately 60%), gas (about 10%),
purchased power (20%), and other sources (about 10%). We expect PacifiCorp's coal fleet to comply urith existing
environmental rules. However, regarding the proposed Clean Power Plan, we will monitor the utility's progress to
comply with the rule, once final.
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 dMdend 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 Sept. 30,2014, FFO to debt and operating cash flow to debt were both aboutZlo/o. For the
same period, debt to EBITDA was about 3.6x. Our baseline forecast includes frnancial measures about the same as to
slightly better than existing levels for FFO to debt and operating cash flow to debt and slightly stronger forecast debt
to EBITDA than current levels.
Liquidity: Adequate
PacifiCorp has "adequate" liquidiry as our criteria define the term. We believe the company's liquidity sources are
likely to cover its uses by more than 1.lx over the next 12 months and to meet cash outflows even with a 10% decline
W'WW. STAIf DARI'AIf DPOORS.COM/NATIITGSDIRECT
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Summary: PacifiCorp
in EBITDA.
Other Credit Considerations
Other modifiers have no impact on the rating outcome.
Group Influence
Under our group rating methodology, we designate PacifiCorp as a core entity to BHE since it is unlikely to be sold in
the near term; it operates in lines of business or functions integral to the overall group strategy; it has strong, long-term
commitments of support from senior group management in good times and under stressful conditions; it constitutes a
significant proportion of BHE's longstanding utility operations; it is closely linked to BHE's reputation because of its
regulated nature; it has been operating many years; and it is likely to receive support from the group should it falI into
financial difficulty. In addition, PacifiCorp's business is similar to those of BHE's principal utility operations, which will
continue to be a large portion of the consolidated group.
In addition, BHE meets the provisions and conditions in our group rating methodology to be considered an insulated
subsidiary, including the requirement that PacifiCorp's SACP exceed BHE's group credit profile (GCP). Insulation
measures in place that inhibit the utility from fully supporting the parent and justiff a one-notch rating differential
between PacifiCorp and BHE include:
o PacifiCorp is prohibited from acquiring obligations or securities of BHE or affiliates,
. To pay dividends, PacifrCorp must maintain investment grade credit ratings,
. Separate books and records must be maintained,
o Affiliate transactions must be at arm's length,
o PacifiCorp has a regulatory commitment not to pay dividends if its common equity ratio drops below 46.25%, and
o To pay dividends, interest coverage should be at least 2.5x and debt leverage cannot exceed 65%.
Ratings Score Snapshot
o We estimate FFO of about $1.6 billion
o Credit facility availability of approximately $1.2
billion
Corporate Credit Rating
A-lStable/A-2
Business risk Excellent
o Country risk: Very low
o Industry risk: Very low
W.wW. STATDARI'AIf DPOORS. CODI./ NATIIf GSDIRECT
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. Capital spending of roughly $1.1 billion
r Debt maturities of about $120 million
o DMdends of approximately $500 million
DIAnCH 12,2015 5
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Summary: PacifiCorp
o Competitive position: Strong
Financial risk: Significant
o Cash flow/Leverage: Significant
Anchor: a-
Modifiers
o Diversification/Portfolio effect: Neutral (no impact)
o Capital structure: Neutral (no impact)
o Financial policy: Neutral (no impact)
o Liquidity: Adequate (no impact)
o Management and governance: Satisfactory (no impact)
. Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile : a-
o Group credit profile: bbb+
o Entity status within group: Insulated (+ I notch above group credit profile)
Recovery Analysis
We assign recovery ratings to first mortgage bonds (FMBs) 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 ofthe collateral coverage.
The FMBs issued by U.S. utilities are a form of "secured utilify 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%o 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, Eyo notches in the'BBB'category, and three notches in speculative-grade categories depending on the
calculated ratio.
PacifrCorp'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 '1+' and an issue rating one
notch above the ICR.
WW'W. STAIIDANDAITDPOORS.CODI / RATIXGSDlnE CT
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Summary: PacifiCorp
Related Criteria And Research
Related Criteria
o Criteria - Corporates - General Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,
Dec. 16,2014
o Criteria - Corporates - General Corporate Methodology, Nov. 19, 2013
o Criteria - Corporates - General Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
o General Criteria: Group Rating Methodology, Nov. 19, 2013
. General Criteria: Methodology: Industry Risk, Nov. 19, 2013
r GeneralCriteria:CountryRiskAssessmentMethodologyAndAssumptions,Nov. 19,2013
. Criteria - Corporates - Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013r General Criteria: Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And
Sovereign Issuers, May 7,2013
o Collateral Coverage and Issue Notching Rules for'1+' and '1' Recovery Ratings on Senior Bonds Secured by Utility
Real Property, Feb. 14,2013
o General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,
Nov. 13,2012
. General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
o Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Financial Risk Profile
Butiness Risk Profile Highly leveraged
bbb-/bb+
Strong
Satisfactory
Vulnerable
WITW. STAI{DANDAI| DPOORS. COiI/RATIIIGSDIRECT
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