20180108Compliance Filing.pdf

RECTIVED
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January 8,2018
It.\".rli PJELIC
I ;'i I i'i:i i Es cch,tM lssl0N
VA OWRNIGHT DELIWRY
Idaho Public Utilities Commission
472West Washinglon
Boise,ID 83702-5983
Attention: Ms. Diane Hanian
Commission Secretary
Re: Idaho Docket No. PAC-E-05-08 Compliance Filing
To the Idaho Public Utilities Commission:
PacifiCorp hereby submits the S&P Global Ratings Direct report, dated December 21,2017,in
compliance with Commission Order 29973 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 hled in Case No. PAC-E-05-08.
Merger Commitment I20 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 Merger Commitment I20 of the Stipulation, please find the attached
credit rating agency report related to PacifiCorp.
Very truly yours,
Pacific Power !
Rocky Mountain Power
825 NE Multnomah, Suite 2000
Portland, Oregon 97232
eems
Assistant Treasurer
Enclosure
I On April 30,2014, MidAmerican Energy Holdings Company changed its name to Berkshire Hathaway Energy
Company.
S&P Globat
Ratings
RatingsDirect"
Summary:
PacifiCorp
Primary Credit Analyst:
Safina Ali, CFA, New York (1) 212-438-1877; [e-mail]
Secondary Contacts:
Gerrit W Jepsen, CFA, New York(l) 212-438-2529; [e-mail]
Amrita Lol&ande, Mumbai; [e-mail]
Table Of Contents
Rationale
Outlook
Our Base-Case Scenario
Company Description
Business Risk
Financial Risk
Liquidity
Group Influence
Ratings Score Snapshot
Issue Ratings
Related Criteria
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DECEMBER 21,2077 7
Summary:
PacifiCorp
Rationale
Buslaess Risk BXCBI.LBTT
r----{lr
Vulnerable Excellent a-
CORPORATE CREDIT RATING
A/Stable/A-1Fhanclal Risk SIcItIFIcAItT
--{r---Highlyleveraged Minimal
Anchor Modifiers Group/Gov't
Business Risk: Excellent Financial Risk: Significant
o Vertically integrated electric operations under
generally constructive regulatory frameworks.
. Large and diversified customer base covering over
six states.
o Stable operating cash flow from the regulated utility
operations that supports the credit profile.
o Prudent management of coal-fired generating units
for environmental compliance.
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o We evaluate financial performance using moderate
financial benchmarks compared to the typical
corporate issuer because of the company's low-risk
utility operations and effective management of
regulatory risk
o Elevated capital expenditures leads to negative
discretionary cash flow over the next several years.
DECEMBER 27,2077 2
.a-
Outlook: Stable
Summary: PacifiCorp
The stable outlook on PacifiCorp reflects S&P Global Ratings'outlook on parent company Berkshire Hathaway
Energy Co. (BHE).
The stable outlook on BHE reflects S&P Global Ratings' expectation that management will continue to focus on its
core utility operations and reach constructive regtdatory outcomes supporting the existing business risk profile.
Although BHE has used significant debt leverage for acquisitions and capital invesunents, we expect credit
measures to strengthen, supporting the current rating. Under ourbase-case forecast, we expect adjusted FFO to
debt to average about 14%-160/o over the next few years.
Downside scenario
We could lower ratings if core financial measures continuously underperform our base-case forecast and remain
consistently at Iess credit-supportive levels, including adjusted FFO to debt of less than 13%. This could occur if
regulatory outcomes are consistently weaker than expected and regulatory lag increases, or if capital expenditure
increases are primarily debt financed. An acquisition could present a risk and lead to a rating change depending on
the nature of the target entity, the financial risk profile at the time of the acquisition announcement, and the
transaction financing.
Upside scenario
We could raise the ratings if the company's business risk profile strengthens, including if regulated utility
operations materially increase as a percentage of total operations or if BHE continues to perform consistently
within the base case with low probability of event risk. We could also raise the rating if the company continues to
maintain its focus on its core regulated utility operations, while financial measures strengthen and consistently
exceed our base-case forecast, including adjusted FFO to total debt that is consistently above 20o/o, the high end of
the significant financial risk profile category. Stronger financial meEuiures could occur for various reasons, including
higher operating cash flow due to economic growth in the utilities' service territories, deleveraging with free
operating cash flow a decline in capital expenditures, or greater equity funding of investments.
Our Base-Case Scenario
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Summary: PacifiCorp
Assumptions Key Metrics
o Low-single-digit EBITDA growth resulting from
retail sales growth and incremental cost recovery
through various rate mechanisms, including
base-rate increases and rate surcharges.
o Capital spending of about $850 million in 2017 that
thereafter elevates to $1 billion to $2.2 billion with a
focus on wind repowering and wind development
projects.
o We assume refinancing of a]l debt maturities.
2016A 20178 20188
FFO/total debt (%)20.2 79-21 t8-20
Debt/EBImA (x)3.6 3-3.5 3-3.5
FFO cash interest coverage (x) 5.5 5-5.5 5-5.5
A-Actual. E-Estimate. FFO*Funds from operations.
Company Description
PacifiCorp is a regulated electric utility company serving 1.8 million retail electric customers in portions of Utah,
Oregon, Wyoming, Washington, Idaho, and California. Pacificorp is an indirectly wholly owned subsidiary of Berkshire
Hathaway Energy Inc. (BHE).
Our assessment of PacifiCorp's business risk profile incorporates the company's low-risk and regulated, vertically
integrated electric operations under generally stable and transparent regulatory frameworks. The utility
demonstrates geographical and regulatory diversity with its operations in six states, serving a large customer base.
Over 65% of customers are from its two primary markets, Utah and Oregon. The predominance of residential and
commercial customers limits susceptibility to economic cyclicality and provides stable cash flows.
The company has a well-diversified energy supply portfolio that consists of coal (about 55%), gas (about 15%),
purchased power (20%), and renewables (about 10%). Our assessment also incorporates its environmental
compliant coal plant fleet that provides safe and reliable operations. The company is currently retiring coal plants
and investing in renewables generation to decarbonize its generation portfolio. Recently, PacifiCorp announced a
plan to invest in approximately 850 MW of new wind generation and about 900 MW of wind repowering in next
few years. The plan is subject to the state commissions'approval.
From a regulatory standpoint, PacifiCorp operates under generally constructive regulatory environments that offer
opportunities to recover capital and operating cost with minimal regulatory lag. The constructive mechanisms
provided by regulators vary by state, and include decoupling, fuel cost recovery mechanisms, and renewable
adjustment clauses. These mechanisms support the company's operating cash flows and allow it to achieve returns
close to its authorized levels.
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Business Risk: Excellent
DECEMBER 21,,201.7 4
Summary: PacifiCorp
We assess PacifiCorp's financial risk profile as significant based on moderate financial benchmarks compared to
the typical corporate issuer, reflecting the company's vertically integrated electric operations under constructive
regulatory framework and its ability to effectively manage its regulatory risk.
Under our base-case scenario, we expect PacifiCorp will generate FFO to total debt of about 78o/e2lo/o, above the
midpoint of the significant financial profile range. We expect discretionary cash flow to turn negative from 20 18 as
the company accelerates its capital spending on renewable generation. Our base-case assumptions include modest
sales volume growth, elevated capital spending and associated regulatory cost recovery, bonus depreciation as a
result of new wind generation.
Liquidity: Adequate
We assess PacifiCorp's liquidity as adequate to cover its needs over the next 12 months. We expect that the company's
liquidity soruces will exceed its uses by 1.1x, the minimum threshold for this designation under our criteria, and that
the company will meet our other such conditions.
Moreovet the company's generally prudent risk management, well-established and solid relationships with banks, and
its satisfactory standing in the credit markets further support our liquidity assessment.
Financial Risk: Significant
Principal Liquidity Sources Principal Liquidity Uses
o Cash balance of about $150 million;
r Revolving credit facility of $l billion; and
o Cash FFO of about $1.6 billion.
o Debt maturities, including short-term debt of about
$590 million;
. Capital spending of about $950 million; and
o Common stock dMdends of about $600 million.
Group Influence
We consider PacifiCorp to be a core subsidiary of BHE, reflecting our view that the utility is unlikely to be sold, has
strong long-term commitment from senior management, is successful at what it does, and contributes meaningfully to
the group. PacifiCorp meets the provisions and conditions in our group rating methodology to be considered an
insulated subsidiary except for the requirement that PacifiCorp's stand-alone credit profile (SACP) exceed BHE's group
credit profile. Insulation measures in place that inhibit the utility from fully supporting the parent and justiff up to a
one-notch rating differential between PacifiCorp and BHE include:
o PacifiCorp is prohibited from acquiring obligations or securities of BHE or affiliates;
o To pay dividends, PacifiCorp must maintain investment-grade credit ratings;
. Separate books and records must be maintained;
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Surnmary: PacifiCorp
o Affiliate transactions must be at arm's length;
o PacifiCorp has a regulatory commitment not to pay dividends if its cornmon equity ratio drops below a certain level;
o To pay dividends, interest coverage should be at least 2.5x and debt leverage cannot exceed 65%; and
. Any amendment to these provisions requires independent director consent and rating agency confirmation of no
downgrade.
Although PacifiCorp is an insulated subsidiary with structural and regulatory restrictions, we assign an'A' issuer credit
rating based on parent BHE's'a' group credit profile. This is one notch higher than the utility's 'a-' SACP
Ratings Score Snapshot
Corporate Credit Rating
A/Stable/A-1
Business risk: Excellent
o Country risk: Very low
o Industry risk Very low
o Competitive position: Strong
Financial risk Significant
o Cash flow/Leverage: Significant
Anchor: a-
Modifiers
o Diversffication/Portfolio effect: Neutral (no impact)
o Capital structure: Neutral (no impact)
o Financial policy: Neutral (no impact)
o tiquidtty: Adequate (no impact)
o Management and governance: Satisfactory (no impact)
o Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile : a-
o Group credit profile: a
o Entity status within group: Core (+1 notch from SACP)
Issue Ratings
The short-term rating of PacifiCorp is 'A-1' based on the issuer credit rating on the company.
PacifiCorp's first-mortgage bonds benefit from a first-priority lien on substantially all of the utility's real property owned
or subsequently acquired. Collateral coverage ofover 1.5x supports a recovery rating of'1+' and an issue rating one
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Summary: PacifiCorp
notch above the issuer credit rating.
Subordination risk analysis
Capital structure
PacifiCorp's capital structure consists of about $7 billion of debt out of which senior unsecured debt is about $400
million and the balance is first-mortgage bonds.
Analytical conclusions
We rate senior unsecured debt of PacifiCorp at the same level as the issuer credit rating, because it is unsecured debt
of a qualiffing investment-grade regulated utility.
Related Criteria
. Criteria - Corporates - General: Reflecting Subordination Risk In Corporate Issue Ratings, Sept. 21, 2017
. General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, Apnl7,2017
o Criteria - Corporates - Generat Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,
Dec. 16,2014
o Criteria - Corporates - Generat Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
o Criteria - Corporates - General Corporate Methodology, Nov. 19, 2013
o Criteria - Corporates - Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013
r General Criteria; Methodology: Industry Risk, Nov. 19, 2013
r General Criteria: Group Rating Methodology, Nov. 19, 2013
o General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
o Criteria - Corporates - Utilities: 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
o General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Financial Risk ProfiIe
Business Risk Profile Highly leveraged
Strong
Satisfactory
Weak
Vulnerable bb-
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Fair
bb
b+
b/b-
bbb-,/bb+
b
b-b
SignificantMinimalModestIntermediate Aggressive
Excellent a-aaa/aa+aa a+/a bbb
aa/aa-at/a a-lbbb+bbb bb+
a/a-bbb+bbb/bbb-bbb-/bb+bb
bbb/bbb-bbb-bb+bb bb-
bb+bb+bb bb-b+
Business And Financial Risk Matrix
bb-bb-/b+b+
DECEMBER 21,2017 7
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