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HomeMy WebLinkAbout20150515Compliance Filing.pdfYPECIFICORP May 15,2015 VA OWRNIGHT DELIWRY Idaho Public Utilities Commission 472West Washington Boise, lD 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 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. Commitmentl20 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 Commitmentl2} of the Stipulation, please find the attached report related to PacifiCorp. Very truly yours, Wa^nl* Bruce Williams Vice President and Treasurer Enclosure I On April 30,z}l4,MidAmerican Energy Holdings Company changed its name to Berkshire Hathaway Energy Company. 825 NE Multnomah, Suite 2000 Portland, Oregon97232 Mooov's INVESTORS SERVICE Credit Opinion: PacifiCorp Global Credit Research - 07 lt/hy 2015 Portland, Oregon, United Sfafes Ratings Caegery Outlook lssuer Rating First Mortgage Bonds Senior Secured Sr Unsec Bank Credit Facility Senior Unsecured MTN Pref. Stock CommercialPaper Ult Parent Berkshire lffiraury lnc. Outlook lssuer Rating Senior Unsecured ST lssuer Rating Parent Berkshirc Fffiraray Eneryy Company Outlook Sr Unsec Bank Credit Facility Senior Unsecured CommercialPaper Contacts Analyst Mihoko Manabe/New York City William L. Hess/New York City Key lndicators [1]PacifiCorp CFO pre-WC + lnterest / lnterest CFO pre-WC / Debt CFO pre-WC - Dividends / Debt Debt / Capitalization Moody's Rating Stable A3 A1 A1 A3 (P)A3 Baa2 P-2 Stable Aa2 Aa2 P-1 Stable A3 A3 P-2 Phone 212.553.1942 212.553.3837 nB1tm14 5.0x 21.V/o 11.?/o 37.*/o nB1tm13 5.ft ZL*/o 15.6P/o 36.7/o 1A31tm12 4$( 21.1% 18.4% 38.3% 12t31t2011 4&( 21.tr/o 13.*/o 39.8Plo fl31tm10 5.3x E.T/o E.T/o 38.8Plo [1]All ratios are based on'Adjusted'financialdata and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms p/ease see the accompanying User's Gurde. Opinion Rating Drivers Reasonably supportive regulatory environment Well-diversified assets enhanced by entry into the energy imbalance market Solid credit metrics Benefits from Berkshire Hathaway affiliation Corporate Profile PacifiCorp (A3 senior unsecured, stable) is a vertically integrated electric utility company serving 1.8 million retail electric customers in six states: Utah (44% of PacifiCorp's 2014 retail electricity volumes), Oregon (24%), Wyoming (17o/o), Washington (8%), ldaho (6%), and California (1%). PacifiCorp also sells power in the wholesale market (16Yo of 2014 total electricity volumes). PacifiCorp is the largest subsidiary of Berkshire Hathaway Energy Company (BHE, formerly known as MidAmerican Energy Holdings Co., A3 senior unsecured, stable), comprising 31o/o of BHE's 2014 EBITDA, pro forma for BHE's Altalink acquisition. BHE, in turn, is a consolidated subsidiary of Berkshire Hathaway lnc. (BRK, Aa2 lssuer Rating, stable). SUMMARY RATING RATIONALE PacifiCorp's ratings are supported by the stability of the utility's regulated cash flows, the geographically diverse and reasonably supportive regulatory environments in which it operates, the diversification of its generation portfolio, and stable credit metrics. The company will have the capacity to generate free cash flow over the next few years as it reduces capital spending. The rating also takes into account PacifiCorp's position as a subsidiary of BHE, a holding company whose subsidiaries are primarily engaged in regulated activities, and the benefits from its affiliation with BRK. DETAILED RATING CONSIDERATIONS REASONAB LY SU PPO RTIVE REG U LATORY ENVI RON MENT PacifiCorp's rating recognizes the rate-regulated nature of its electric utility operations which generate stable and predictable cash flows. PacifiCorp operates in regulatory jurisdictions that are reasonably supportive in terms of rate decisions and cost recovery. The ability to use a forward test year in its rate requests helps to limit regulatory lag in Utah, Oregon, Wyoming, and Califomia. The company has been successful in getting approvals for capital projects, such as its Energy Gateway electric transmission program and the Lake Side 2 gas plant. Most of its jurisdictions do not grant pre-approvals on capital projects; therefore, to avoid disallowances, PacifiCorp has sought special riders or limited-issue proceedings such as in Utah, to recover those costs more quickly without a full rate case. The company has energy cost adjustment mechanisms in all its jurisdictions, except in Washington currently, although some lag remains in recovering portions of its energy costs. PacifiCorp continues to undergo rounds of rate cases across its jurisdictions, and rate relief is improving returns towards its allowed levels. lts reported ROE has increased from about 8% five years ago to 9.0% in2014, slightly below recent decisions of 9.5%-9.8o/o. ln addition to a rate case currently underway in Wyoming, the company will likely file rate cases before rate plans end in ldaho (December 2015) and Utah (September 2016). The company's most challenging jurisdiction is Washington, where its returns are the lowest, and where it is appealing its 2013 rate decision, while contesting its most recent March 2015 decision. Distributed generation (DG) customers, who generate some of their power usually through rooftop solar, account for only 0.5% of PacifiCorp customers, but their numbers are growing. PacifiCorp is proactively seeking rate design changes to ensure its returns against a potential erosion in sales to DG customers. ln the March 2015 decision, the Washington commission denied the company's request to raise the fixed basic charge. ln PacifiCorp's two largest jurisdictions, dockets are open to study the net metering tariff (Utah) and the value that solar brings to the system (Oregon). WELL-DIVERSIFIED ASSETS ENHANCED BY ENTRY INTO THE ENERGY IMBALANCE MARKET PacifiCorp credit profile benefits from being well-diversified in terms of its generation assets and markets. lts generation portfolio consists of coal (55% net owned capacity), gas (25%), hydro (10%), and wind and other sources (10o/o).lts sizable coal assets subject PacifiCorp to numerous environmental rules, but the company has made a significant amount of investments already and expects to be in compliance by their deadlines. PacifiCorp's annual environmental budget is wellwithin its means, at about $100 million. The market and customer diversity of PacifiCorp's six-state service territory is favorable, because it mitigates the economic and regulatory impacts in any one jurisdiction. ln November 2Ol4,PacifiCorp launched an energy imbalance market (ElM) in partnership with the California lndependent System Operator Corporation (CAISO). EIM is an automated system that matches least-cost electricity supply with demand every five minutes. This real-time dispatching system replaced a less efficient hourly, manual process and integrated PacifiCorp's large, disperse Rocky Mountain and Pacific Power networks with the California grid. EIM benefits PacifiCorp by: expanding the market for its generation (including the second- largest utility owned wind fleet in the US) and transmission assets; enhancing reliability; reducing the need to invest in reserves and more generation; and improving the integration of renewables and helping the company to meet the renewable portfolio standards in its service territories. PacifiCorp and CAISO project that EIM will yield a range of $21-$129 million a year of customer savings. SOLID CREDIT METRICS Expecting flat load growth, and seeking to temper rate increases, the company has cut its capital budget to average $842 million over the 2015-2017 period, which is less than 40o/o of its 2009 expenditures. Capex coming down closer to depreciation expense will result in rate base being maintained near current levels. The extension of bonus depreciation for another year will result in a temporary rise in cash flow from operations in 2015, before returning to a run-rate of $'1.5 billion. PacifiCorp posts solid credit metrics. lts 2014 ratios have changed little over the last three years. The ratio of cash from operations before changes in working capital (CFO pr+.WC/Debt was 21o/o, CFO pre'WC plus lnteresUlnterest was 5.0x, DebVBook Capitalization was 38%. lts CFO pre-WC - Dividends/Debt (11% in2014 vs.260/o in the 2009-10 period when it paid no dividends) will go down and become more variable, as PacifiCorp will have more free cash flow to pay out. We expect the company to size debt issuances and dividends to maintain its current capital structure. BENEFITS FROM BERKSHIRE HATHAWAY AFFILIATION PacifiCorp benefits from its affiliation with BRK, which requires no regular dividends from PacifiCorp or BHE. From a credit perspective, the company's ability to retain its earnings as an entity that is privately held, particularly by a deep-pocketed sponsor like BRK, is an advantage over most other investor owned utilities that are typically held to a regular dividend to their shareholders. As an example, PacifiCorp did not pay dividends for the first five years after being acquired by BHE in 2006, and during that time received equity contributions totaling $1.1 billion from BHE to help PacifiCorp finance its capital expenditures. lts balance sheet has strengthened from this financial policy, and PacifiCorp now pays dividends that are sized to manage PacifiCorp's equity ratio (as measured by unadjusted equity to equity plus debt) to about 50%. Liquidity Profile PacifiCorp has good near-term liquidity, with $12 million in cash and two $600 million revolvers expiring in June 2017 and March 2018, of which about $784 million was available as of 31 March 2015. The company generates CFO pre-WC at a run-rate of roughly $1.5 billion which will more than cover the $964 million of capital expenditures it estimates for 2015. PacifiCorp has approximately $570 million of variable rate tax-exempt bonds that it remarkets periodically. Material issues coming due over the next 12 months are $115 million of variable rate tax-exempt bonds due on I July 2015 and $45 million due on 1 January 2016. The company plans to issue $200- $300 million of debt this year. PacifiCorp uses its credit facilities to backstop its commercial paper program and to support its variable rate tax- exempt bonds. These credit agreements do not require a MAC representation for borrowings, which we view positively. The sole financial covenant is a limitation on debt to 65% of total capitalization. As of 31 March 2015, PacifiCorp had ample headroom under that covenant with that ratio at 49o/o as defined in the agreement. Rating Outlook The stable outlook incorporates our expectation that PacifiCorp will continue to receive reasonable requlatory treatment for the recovery of its capital expenditures, and that ine funding requirements will be finance-O in " ' manner consistent with management's commitment to maintain a healthy financial profile. We anticipate that PacifiCorp's credit metrics will be sustained at about current levels, for example, CFO pre-WC/Debt in the low 20o/o runge. What Could Change the Rating - Up Although its flat financial outlook limits the prospects for a rating upgrade in the foreseeable future, the rating could be upgraded longer term if a more favorable regulatory environment and a conservatively financed capital expenditure program result in a sustained improvement in credit metrics. This would include, for example, PacifiCorp's ratios of CFO pre-WC/Debt sustained in the mid 20% range. t/Vhat Could Change the Rating - Down The ratings could be downgraded if PacifiCorp's capital expenditures are funded in a manner inconsistent with its current financial profile, or if adverse regulatory rulings lower its credit metrics, as demonstrated for example, by a ratio of CFO pre-WC/Debt sustained below 20%. Rating Factors PacifiCorp Regulated Electic and Gas utilities lndusfry Grid t11t2l Cunent FY 12/31t20',t4 Factor 1 : Regulatory Framarork (2Slo) n) Legislative and Judicial Underpinnings of :he Regulatory Framework r) Consistency and Predictability of Reoulation Measure A A Scorc A A ladlor 2: Ability to Recover Costs and Eam Retums (25%) r) Timeliness of Recovery of Operating and SapitalCosts r) Sufficiencv of Rates and Returns A Baa A Baa Factor 3 : Dversifi cation (10%) r) Market Position r) Generation and Fuel Diversity A Baa A Baa tad,ror 4: Financial Stsength (40%) a) CFO pre-WC + lnterest / lnterest (3 Year \vg) r) CFO pre-WC / Debt (3 Year Avg) :) CFO pre-WC - Dividends / Debt (3 Year \vg) i) Debt / Caoitalization (3 Year Avo) 5.0x 21.60/0 15.1% 37.5o/o A Baa Baa A 3rid-lndicated Rating Before Notching \djustment loldCo Structural Subordination Notching r) lndicated Rating from Grid r) Actual Ratino Assiqned ng:Rati A3 A3 [3]Mood/s 12-18 Month Forward ViewAs ot fl2015 Measure A A Score A A A Baa A Baa A Baa A Baa 4.9x - 5x 21%-22% 10%- 15% 37o/o - 38o/o A A Baa A 0 A3 0 A3 A3 [1]All ratios are based on'Adjusted'financialdata and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. 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