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Home My WebLink About20160512Compliance Filing.pdfMay 12,2016 VIA OWRNIGHT DELIWRY Idatro 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 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.l 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. T{[CTIVED ?01tr illY l2 fiH 9: 32 :" '.- li';.iil,iC',, .i1,i.:; i:Ci'41'tiSSl0N Pacific Power ! Rocky Mountain Power 825 NE Multnomah, Suite 2000 Portland, Oregon 97232 Very truly yours, if^t, tiytlttt4/'s f C'tb Biile Williams Vice President and Treasurer Enclosure t On April 30,2014, MidAmerican Energy Holdings Company changed its name to Berkshire Hathaway Energy Company. CREDIT OPIN!ON 5 May 2016 Update PacifiCorp Largest Subsidiary of Berkshire Hathaway Energy Summary Rating Rationale PacifiCorp's ratings are supported by the stabitity of the utility's regutated cash flows, the geographically diverse and reasonabty supportive regulatory environments in which it operates, the diversification of its generation portfollo, and stabte credit metrics. The company wi[[ 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 hotding company whose subsidiaries are primari[y engaged in regulated activities, and the benefits from its affitiation with BRK. Exhibitl r@hwrc rd* -@FE/H RATINGS PacifiCorp Domicite Long Term Rating TyPe Outlook Portland, Oregon, United States A3 LT lssuer Rating Stabte Please see the ntings section at the end of this report lor more information.The ratings and outlook shown reflect infomation as ofthe publication date. Contacts Mihoko Manabe Senior Vice President 212-553-'.tg42 mihoko.manabe6moodys.com William t. Hess 212-553-3837 MD-Utilities wittiam.hess6lmoodys.com Credit Strengths > Regulated rates that sustain stabte credit metrics > Benefits from Berkshire Hathaway affiliation Credit Chaltenges > F[at sales growth > Exposure to coa[ generation Rating Outlook The stable outlook incorporates our expectation that PacifiCorp wit[ continue to receive reasonable regutatory treatment, and that the funding requirements wiI be financed in a manner consistent with management's commitment to maintain a healthy financial profi[e. We anticipate that PacifiCorp's credit metrics wi[[ be sustained at about current levels, for exampte, CFO pre-WC/Debt in the low 20% range. Factors that Could Lead to an Upgrade Atthough its flat financial outtook [imits 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 woutd include, for exampte, PacifiCorp's ratios of CFO pre-WC/Debt sustained in the mid 20% range. Factors that Could Lead to a Downgrade The ratings coutd be downgraded if PacifiCorp's capita[ expenditures are funded in a manner inconsistent with its current financial profite, or if adverse regulatory rulings lower its credit metrics, as demonstrated for example, by a ratio of CFO pre-WC/Debt sustained below 20%. Key lndicators Exhibit 2 KEY TNOTC TORS Fl PadfiCorp 1u3112011 1a31nOE 1u3112013 128112014 EBln$s CFO pre-WC + lnterEst / lntenst 5.1x5.1x CFO prc-WC / Debt 21.1Yo CFO Dre-WC - Dividends / Debt 13.6%18.s%15.7%11.495 9.0% Debt /39.7%38.2%36.696 37.3%37.9% [1] Att ratios are based on'Adjusted'financial data and incorporate Moody's Ctobal Standard Adjustments for Non-Financial Corporations. Source: MooQ's f inancial Metricsil Detailed Rating Considerations CEOCRAPHICALLY DIVERSE UTILITY ASSETS The geographic diversity of PacifiCorp's six-state service territory is favorabte, because it mitlgates the economic and regulatory impacts in any one jurisdiction. The company expects Pacific Power's retail sa[es to decline stightty due to a reduction in per-customer usage that offsets an increase in the number of customers. Rocky Mountain Power's retailsales are on an upward trajectory, driven by the economic expansion in Utah, atthough the trend was interrupted in 2015 from the downturn in the commodities extraction industries. This pubt:cation do€s not announce a credit rating action- For any credit ratings referenced in this publication, ptease se the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. 2 5Nay2O16 Pacificorp; LarSest Subsidiary of Berkshire HathawEy Energy EXPOSURE TO COAL CENERATION PacifiCorp's generation portfotio consists of coat (55% net owned capacity), gas (25o/o), hydro (10%d, and wind and other sources (10%). The company relies on coal for about 60% of its energy suppty, which exposes it to stringent and costly environmental regulations. The company, however, has already completed many of its environmental projects over the last severalyears, so that the majority of its coal units are now equipped with necessary pollution controls. Consequentty, it forecasts environmental capex fa[[ing to an average of S40 mittion a year during 2016-18. The company retired 172 megawatt (l,tW) of coat-generation at its Carbon facility in December 2015 and proposes to retire or convert to natural gas 280MW more at Naughton during 2018. PacifiCorp has also reduced its exposure to coal-related activities in 2015 by closing a coal mine and disposing related assets in Utah in 2015. INTECRATINC THE WESTERN ENERCY MARKET: MORE RENEWABLES AND RELIABILITY, LOWER COSTS AND CAPEX ln November 2014, PacifiCorp launched an enerry imbalance market (ElM) in partnership with the California lndependent System Operator Corporation (CAISO). EIM is an automated system that matches least-cost electricity suppty with demand every five minutes. This real-time dispatching system replaced a less efficient hourty, 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 (inctuding the second-[argest utitity owned wind fleet in the US) and transmission assets; enhancing re[iabitity; reducing the need to invest in reserves and more generation; and improving the integration of renewables and hetping the company to meet the renewabte portfotio standards in its service territories. From EIM's inception through December 2015, CAISO estimated that the overall system and customer benefits (inctuding Lower supply costs and cost of environmental compliance) reatized by PacifiCorp customers totated S31 mittion. ln the first quarter of 2016, the estimated benefit for PacifiCorp was atmost 511 mi[[ion. Coing a step beyond ElM, PacifiCorp and C,AISO are exploring the creation of a regional lSO. lf this happens, subject to numerous regutatory approvats (expected to take at least a couple of years), PacifiCorp wi[[ be able to participate more in CAISO's energy markets. The regional ISO would take over the planning and operation of PacifiCorp's transmission grid. For much of this decade, PacifiCorp Transmission has been developing a S6 bittion suite of transmission projects called the Energy Cateway. To date, it has spent roughty SZ bittion for lines already or soon to be in service. lmproved transmission access in the region through the participation of other utilities in EIM coutd obviate the need to build some of the remaining projects. The company expects transmission capex to fatlfrom 5200-S300 mitlion a year in 2010-1,l to about S100 mittion a year in 2015-18. REASONABLY SU PPO RTIVE RECULATORY ENVI RON MENT PacifiCorp's rating recognizes the rate-regutated nature of its electric utility operations which generate stable and predictable cash flows. PacifiCorp operates in regulatory jurisdictions that are reasonabty supportive in terms of rate decisions and cost recovery. The abitity to use a foruuard test year in its rate requests helps to limit regulatory lag in Utah, Oregon, Wyoming, and California. During this decade, PacifiCorp had regu[arty spent in excess of S1 bittion a year for generation, environmental, and transmission projects. With many of these capita[ projects and rounds of rate cases completed, PacifiCorp is shifting to a strategy, being adopted across BHE, to stay out of rate cases whenever possibte. ln its rate cases, PacifiCorp has sought not only rate increases for its capital investments, but also changes in rate design. For example, in its ongoing rate case in Washington, expected to conclude in Juty 2016, PacifiCorp has requested accelerated depreciation of its coal assets and decoupling. The acce[erated depreciation wil[ avoid stranded costs in retiring coal ptants as required by regiona[ environmental legislation. Decoupling wi[[ make its margins less sensitive to the decline in per-customer sales. The company now has enerry cost adjustment mechanisms in ail its jurisdictions. Washington, its most chatlenging jurisdiction, became the last state to grant a power cost adjustment mechanism in the 2015 rate case. ln most of its jurisdictions, however, some lag remains in recovering portions of its energy costs. PacifiCorp's atlowed ROEs (mostty in the mid to high 97o range) have tended to be lower than the industry average, but rate relief has steadity improved its reported ROE to be ctoser to its allowed [eve[s. ln 2010, its reported ROE was 7.7o/o;in 2015, it was 9.1%. 3 5 May 2016 Pacificorpr Largest subsidiary of Bertshire Hathaway Energy STABLE CREDIT METRICS Expecting flat load growth and seeking to temper rate increases, the company has cut its capital budget to roughty S0.8 biltion a year during 2016-2018, down from about S1 bittion a year during 2013-15. This decrease witt bring capex in [ine with depreciation exPense, thereby maintaining its rate base and reducing the need for rate cases. PacifiCorp's credit metrics are very stable. We expect little change in the ratios that have varied little over the last five years, with cash from operations before changes in working capitat (CFO pre-WC)/Debt at about 22o/o and Debt/Book Capitatization at about 38%. lts CFO pre-WC- Dividends/Debt, however, has declined (9%in2015vs.260/o in the 2009-10 period when it paid no dividends) and wil[ become more variable, as PacifiCorp witl have free cash flow to pay out. We expect the company to size debt issuances and dividends to maintain its current capita[ 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 abitity to retain its earnings as an entity that is privatety held, particularty by a deep-pocketed sponsor [ike BRK, is an advantage over most other investor owned utilities that are typicatty hetd to a regular dividend to their sharehotders. 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 tota[ing S1.1 bittion from BHE to hetp 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 ptus debt) around its attowed levels of about 50% (regulations restrict dividends if this ratio falts below 44o/o).Furthermore, BHE has placed PacifiCorp in a ringfencing structure that restricts dividends if PacifiCorp's ratings fa[[ to non-investment grade. Liquidity Anatysis PacifiCorp has good near-term tiquidity, with the capacitlr to generate free cash flow and amp[e bank [ines. Last three years' reported cash ftow from operations averaged at S'1.6 bittion. After the roughty S0.8 bittion of capital expenditures estimated for 2016-18, the company would have free cash flow of about S0.7 bittion annually before financing activities. As of 3'l December 2015, the company had 512 miltion in cash and 51.02 bittion was available under two 5600 mittlon revolvers expiring in June 2017 and March 2018. We assume that the company wi[[ renew its credit facilities before they become current. PacifiCorp uses its credit facilities to backstop its commercial paper program and to support its variab[e rate tax-exempt bonds. These credit agreements do not require a MAC representation for borrowings, which we view positivety. The sote financial covenant is a [imitation on debt to 650/o of total capitalization. As of 31 December 2015, PacifiCorp had ampte headroom under that covenant with that ratio al 49% as defined in the agreement. PacifiCorp has approximatety S401 million of variabte rate tax-exempt bonds that it remarkets periodicatly. Material issues coming due over the next l2 months are three issues of tax-exempt bonds totaling 562 mittion maturing on 1 October and I December 20'16 and on 1 January 2017. The company can repay these maturities using its free cash flow and has no foreseeable need to issue long-term debt this year. lt witt tikety dividend its remaining cash flow to BHE. Profile PacifiCorp (A3 stabte) is a vertically integrated e[ectric utitity company serving 1.8 mittion retail electric customers in six western states. PacifiCorp conducts business through two utility divisions: Rocky Mountain Power (Utah,44o/o of PacifiCorp's 20'15 retaiI electrlcity sales; Wyoming, 17% of sales; ldaho, 6%) and Pacific Power (Oregon, 24o/o of retaiI sates; Washington, 87o; Catifornia, 1%). The company atso selts power in the wholesale market (14% of 2015 total electricity sa[es). PacifiCorp is the largest subsidiary of Berkshire Hathaway Energy Company (BHE, 43 stabte), comprising 30o/o of BHE's 2015 EBITDA. BHE, in turn, is a consotidated subsidiary of Berkshire Hathaway lnc. (BRK, AaZ stabte). 5 May 2016 PacifiCorp: Largest Subsidiary of Berkshire Hathaway Energy Rating Methodology and Scorecard Factors Exhibit 3 ReSuhted Elcctric and Gas tltilities lndustry Gdd FtlZBlnOI.s Mo@s t2-18 Month ForuardViu As of 5/5/2O16 l?l Factor 1 :Framewo*Measure Score Measure Score Legislthre and Judidal Underpinnings of the Regulatory Framarvo*A A and to Recover Costs and Eam Retums Timeliness of Recorrerv of Ooeratim and of Rates and Retums Factor 3 : Dlvcrsificatlon Ma*et Position Baa Baa A A A A Genentlon and Baa Bea Baa Baa Factoll: Flnancial cFo + lnterest / lnter€st [3 Year cFo / Debt (3 Year c) cFo - DMdends / Debt / 5.2x 22.O% 12.O% 37.3% A A 5.lx - 5.4x Baa Baa 22%-23% 9%-13%Baa 3r%-3A% R.tlng: Grid-lndicated Before HoldCo Structural lndicated from Grid Actual [1] Alt ratios are based on 'Adjusted'financiat data and incorporate Moody's Clobal Standard Adjustments for Non-Financiat Corporations. lzl As of 1213'tl2o15; [3] This represents Moody's forward view; not the view ofthe issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. Sowce: Moody's Financial Metricsn A3 0trtr 5 May 2015 PacifiCorpr Largest Subsidiary of Berkshire Hathaway Energy Sr Unsec Bank Credit Commercial Paper P-2 UtT PARENT: BERKSHIRE HATHAWAY !NC. stabte Aaz ST lssuer Rating P-l PARENT: BERKSHIRE HATHAWAY ENERGY COMPANY Senior Unsecured 5 May 2016 Paciflcorp: Lartest subsidiary of B.rkshire Hathawey Encrty CREDIT RATINGS I55UED BY MOODY'5 INVESTORS SERVICE, INC. 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('MSFJ") is a whotty-owned credit rating agency subsidiary of MJKK. MSF.J is not a Nationatty Recognized Statisticat Rating Organization ('NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an with the Japan Financia[ Seruices Ageng/ and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. ranging from JPY200,000 to approximatety JPY350,000,000. MJKK and MSFJ atso maintain poticies and procedures to address Japanese regutatory requirements. REPORT NUMBER 1025124 Mooov's INVESTORS SERVICE 5 May 2016 Pacificorp: Largest subsidiary of Berkshire Hathaway Energy