COC S-P-Credit Profile-IPC-Nov-24-2010.pdf

Summary:
Idaho Power Co.
Primary Credit Analyst:
Tony Bettinelli, San Francisco (1) 415-371-5067; [e-mail]
Secondary Contact:
Anne Selting, San Francisco (1) 415-371-5009; [e-mail]
Table Of Contents
Rationale
Outlook
November 24, 2010
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Summary:
Idaho Power Co.
Credit Rating:BBB/Stable/A-2
Rationale
The 'BBB' corporate credit rating on IDACORP Inc. (IDA) and Idaho Power Co. (IPC) is based on the company's
consolidated credit profile, which consists primarily of integrated regulated electric utility operations at IPC; and
reflects an "excellent" business risk profile and "aggressive" consolidated financial risk profile under Standard &
Poor's Ratings Services corporate risk profile matrix. IPC normally provides more than 90% of IDA's earnings and
most of its consolidated cash from operations. IPC serves retail electric customers in Idaho and Oregon, which
account for about 95% and 5% of regulated assets, respectively.
IDA and IPC's "excellent" business risk profile incorporates both a low-cost hydroelectric generation base and a
credit-supportive regulatory environment in Idaho. Hydro generation provides about half of total generation needs
under normal water conditions, but the proportion could lessen when new non-hydro generating resources are
added. Significant hydroelectric generation results in some of the lowest average retail customer rates in the U.S, but
also exposes the company to substantial replacement power price risk in the event of low water flows that lead to
reduced generation. Idaho regulators have authorized a robust cost recovery mechanism to assist in collecting these
costs and limiting financial exposure in Idaho, the company's chief service area.
IPC's revised annual power cost adjustment (PCA) mechanism in Idaho, implemented in 2009, supports credit
quality and reduces the undercollection of power costs. The most significant credit-supportive components of the
annually filed PCA mechanism include a sharing provision that reduces the company's power cost exposure to 5%
of undercollected costs, and a forecast cost methodology that reduces deferrals and collection lag. In exceptionally
low water years, deferrals can materially weaken cash flows and credit metrics, but Standard & Poor's generally
views such collection delays as temporary because we expect 95% of costs above base rates will be collected with a
carrying charge over 12 months. The previous PCA mechanism, which was less robust, had a long history of support
and no record of significant disallowances.
The economic resilience of IPC's main service markets also supports the credit profile. Unemployment has been
lower than regional and national averages, with low energy rates attracting businesses and jobs from other western
states. Load growth and customer growth are expected to continue, albeit at slower rates.
The "aggressive" financial risk profile of IDA and IPC is marked by periodically low cash-flow-based credit metrics
and average adjusted debt leverage, based on our indicative financial ratios. Average credit metrics have deteriorated
and then rebounded since the company took steps to stabilize returns and cash flow with updated base rates and a
modified power cost mechanism. Consolidated credit ratios improved in 2009, supported by base rate increases and
PCA updates, but are partially offset by lower consumption due to the economy and mild weather. We do not
consider load loss stemming from the company's significant energy efficiency spending a significant risk at this time,
due to a fixed-cost adjustment (FCA) mechanism in Idaho that decouples certain costs from energy usage by
residential and commercial customers. However, the recent Idaho commission decision to keep the FCA temporarily
highlights the uncertainties in determining the credit impact of energy efficiency spending.
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For the 12 months ended Sept. 30, 2010, IDA's consolidated adjusted funds from operations (FFO) to total debt
was 15.1%, a slight decrease from a year earlier due to the overcollection of power costs in 2009. (We adjust credit
metrics to include the debt equivalent of leases, purchased power obligations, and postretirement benefit
obligations.) Cash-flow-based coverage ratios have improved significantly from an adjusted FFO to debt of less than
10% in mid-2008. We expect the company to maintain average adjusted FFO to debt of 13%-15% to ensure
stability of the current ratings. The company's consolidated adjusted debt to total capitalization was 56.6% as of
Sept. 30, 2010. Adjusted debt leverage remains aggressive, while reported debt leverage trended down to about
50%. Management appears to be targeting a balanced unadjusted capital structure, and has taken steps to maintain
it.
Capital expenditures were about $250 million in 2009, and have risen in 2010 as a result of the proposed Langley
Gulch power plant, which the Idaho Commission preapproved after legislation enacted in 2009 granted
pre-approval authority. Capital expenditures for the 12 months ended Sept. 30, 2010, were $350 million. The size
of IPC's planned capital expenditures and expected internal cash funding ability should allow the company to
manage a balanced capital structure with occasional external capital. The need for external equity, assuming the
capital structure is maintained, would increase if transmission proposals in the Northwest move forward.
Short-term credit factors
The 'A-2' short-term rating on IDA and IPC is supported by adequate liquidity and the ability to meet financial
commitments. Consolidated liquidity is "adequate" under our corporate liquidity methodology, which categorizes
liquidity under five descriptors. Under our analysis, projected sources of liquidity (mainly operating cash flow and
available bank lines) exceed projected uses (mainly necessary capital expenditures, debt maturities, and common
dividends), absent access to capital markets, with coverage of more than 1.2x for the upcoming 12 months. Cash
flow volatility is highly dependent on hydrological conditions, and ample capacity must remain available for
higher-than-expected power costs. The company has been able to fund about 71% of capital expenditures from net
cash flows in the 12 months ended Sept. 30, 2010.
Liquidity is provided by a $100 million, five-year credit agreement at IDA and a $300 million, five-year credit
facility at IPC, primarily used for deferred power costs. At Sept. 30, no commercial paper (CP) backed by the IPC
facility or other draws were outstanding on IPC's credit facility, and $4 million of CP backed by IDA's credit facility
was outstanding. Both facilities terminate on April 25, 2012. Each credit agreement contains a covenant requiring a
leverage ratio of consolidated indebtedness to consolidated total capitalization of no more than 65% at the end of
each fiscal quarter. At Sept. 30, the leverage ratios for IDA and IPC were 52% and 54%, respectively.
Recovery analysis
We rate IPC's first mortgage bonds 'A-' (two notches higher than the corporate credit rating on the company), with
a recovery rating of '1+', reflecting our highest expectation (100%) for full recovery in a default scenario. Under
Standard & Poor's criteria, first mortgage bonds with a '1+' recovery rating issued by companies in the 'BBB' rating
category are rated two notches above the corporate credit rating.
Outlook
The stable outlook reflects our expectation of sufficient operating cash flows to support financial metrics that are
adequate for the ratings, the ability to internally fund a significant portion of capital expenditures, and adequate
management of regulatory relationships. We could lower the ratings if the company does not carefully manage costs
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Summary: Idaho Power Co.
and investments to ensure full recovery and the maintenance of credit metrics, especially in light of a weakening
economy. We could raise the ratings if the company is able to consistently achieve significantly stronger financial
metrics, in addition to solidly managing regulatory relationships, but higher ratings are unlikely in the near term.
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Summary: Idaho Power Co.
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