Approximately $9.5 billion of parent level debt affected
New York, August 01, 2019 -- Moody's Investors Service affirmed the ratings of Berkshire Hathaway
Energy Company (BHE) including its senior unsecured ratings at A3,
and its short-term rating for commercial paper at P-2.
The outlook for BHE is stable.
RATINGS RATIONALE
BHE's A3 rating is driven by the company's ownership of one
of the largest and most diversified portfolios of regulated assets among
US utility holding companies. The rating considers the supportive
regulatory relationships across BHE's subsidiary jurisdictions and
their geographic diversification. The rating recognizes BHE's
moderate carbon transition risk within the regulated utility sector and
its ongoing efforts to reduce the amount of its energy generated by fossil
fuels.
BHE's A3 rating and stable outlook incorporate Moody's expectation
that BHE will continue to manage its capital structure in a manner that
will enable the company to produce a ratio of cash from operations excluding
changes in working capital (CFO pre-WC) to debt in the mid-teens
range. BHE does not upstream any dividends to its ultimate parent
holding company, Berkshire Hathaway Inc. (BRK: Aa2
stable), so its ratio of CFO pre-WC less dividends to debt
is also expected to remain in the mid-teens range, which
is high when compared to its peers.
BHE's regulatory and business diversification helps insulate the
company from isolated instances of unfavorable regulatory rulings and
earnings volatility associated with local weather changes and economic
conditions. BHE operates a globally diverse portfolio of regulated
utility businesses located in eleven US states, the UK, Canada,
and the Philippines, with no single regulatory jurisdiction accounting
for more than 20% of revenue. We view the national regulation
of utilities in the UK, Canada, and for BHE's pipeline
and transmission businesses in the US, as being most supportive
of credit quality. Combined these operations accounted for approximately
28% of BHE's 2018 adjusted net income.
BHE has also achieved constructive regulatory outcomes in its primary
US state jurisdictions while taking action to reduce its carbon footprint.
In Iowa, where the majority of subsidiary MidAmerican Energy Company's
(A1 stable) (22% of 2018 adjusted net income) operations are located,
the company has installed over 5,000 MW of wind generation with
authorized returns on equity (ROEs) in the 11% range. Currently,
the company has enough wind capacity to supply over half of its Iowa retail
energy. The utility continues to invest in wind, and by 2020
expects to be able to provide close to 100% of its retail load.
BHE's PacifiCorp (A3 stable) subsidiary (24% of 2018 adjusted
net income), which operates in Utah, Oregon, Wyoming,
Washington, Idaho and California, has been investing in transmission
and wind generation through its ongoing Gateway and Energy Vision 2020
projects. These investments are being made in conjunction with
state policy goals aimed at reducing carbon and promoting clean energy.
The company has the ability to file rate cases using a forward test year
in its largest jurisdictions, and has been earning returns that
are at or above its authorized levels, which are in the mid-to-high
9% range.
In Nevada, where BHE subsidiaries comprising approximately 10%
of 2018 adjusted net income operate, a ballot initiative to institute
retail choice was defeated at the end of 2018, removing the potential
risk of stranded assets and providing a clearer path for future investment.
The state recently passed legislation requiring utilities to acquire 50%
of their electricity from renewable resources by 2030. The Nevada
legislature also recently enacted laws that give Nevada regulators the
ability to establish alternative rate making plans, such as revenue
sharing, performance based rates, formula rates, de-coupling
or multi-year rate plans. The legislation paves the way
for additional regulatory support as the company looks to invest in the
renewable resources its customers are requesting. BHE remains focused
on cost containment and ways to retain large customers who by law have
the ability to choose an alternative supplier.
BHE's A3 rating recognizes the company has minor exposure to California,
a state that has been besieged by devastating and costly wildfires,
through its operations at PacifiCorp and through a renewables businesse
that sells power to California utilities. However, Moody's
does not expect any material impact to BHE's credit profile.
The rating also acknowledges Moody's expectation that in the UK,
rates established for electric distribution networks in the next price
control period (beginning in 2023 for BHE's subsidiaries) will likely
be set to achieve lower return levels. In the meantime, cash
flows should remain stable while the companies continue to dialogue with
the regulator. If necessary, the company should have adequate
time to adjust its financial policies in order to maintain its existing
credit profile. BHE's UK operations made up approximately
8% of 2018 adjusted net income, and its subsidiaries are
not expected to send any material dividends to BHE over the next few years.
From a corporate governance perspective, BHE's A3 rating and
stable outlook consider the unique advantages that result from its private
ownership by BRK (90.9%). BRK pays no dividends to
its shareholders and unlike the vast majority of regulated utility holding
companies, has never required a dividend from BHE. As such,
BHE has been able to accrete more equity value than its utility peers,
which tend to produce negative free cash flow and need constant infusions
of capital. The ownership structure also affords BHE financing
options that are unique when evaluated against regulated utility peers.
For the twelve months ending March 2019, BHE's ratio of CFO
pre-WC to debt, and its ratio of CFO pre-WC less dividends
to debt were both 15.7%. Although CFO pre-WC
to debt in the 15-16% range is comparable to peer companies
with slightly weaker credit profiles such as Duke Energy Corporation (Baa1
stable) and American Electric Power Company, Inc. (Baa1 stable),
the ratio of retained cash flow to debt ratio is typically stronger than
peers.
Outlook
BHE's outlook is stable, reflecting the company's steady cash flow,
the overall low business risk of its diverse regulated operations,
and the financial strategy under BRK's ownership. The stable outlook
reflects Moody's expectation that the company will generally be
able to sustain its ratios of CFO pre-WC to debt and CFO pre-WC
less dividends to debt in the 15% to 17% range and to maintain
parent debt as a percentage of consolidated debt in the 20% to
30% range (about 25% as of December 2018).
Factors that could lead to an upgrade
BHE's large ongoing capital programs and resulting relatively moderate
cash flow to debt metrics temper the potential for an upgrade.
However, a ratio of CFO pre-WC to debt sustained above 20%
could put upward pressure on the rating.
Factors that could lead to a downgrade
BHE's ratings could be downgraded if its financial profile is hurt by
a rise in regulatory contentiousness or adverse policy developments in
multiple jurisdictions; if major investments are financed with excessive
leverage; or if there is an increase in business risk. If
credit metrics sustain a decline, for example, if CFO pre-WC
to debt, and CFO pre-WC less dividends to debt, fall
below 15% for a prolonged period or BHE holding company debt increases
to over 30% of consolidated debt, there could be downward
pressure on the ratings.
Affirmations:
..Issuer: Berkshire Hathaway Energy Company
....Senior Unsecured Bank Credit Facility,
Affirmed A3
....Senior Unsecured Commercial Paper,
Affirmed P-2
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
Outlook Actions:
..Issuer: Berkshire Hathaway Energy Company
....Outlook, Remains Stable
Headquartered in Des Moines, Iowa, BHE is a consolidated utility/energy
investment subsidiary of Berkshire Hathaway Inc. with about $94.5
billion of total assets. BHE's globally diverse portfolio
of regulated businesses operates in eleven US states, the UK,
Canada, and the Philippines. BHE also owns some non-utility
businesses including BHE Renewables, which holds renewable and other
contracted independent power projects; and HomeServices, a
real estate brokerage firm.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Laura Schumacher
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
