2012-02-14_Idaho Power Opinion.pdf

Credit Opinion: Idaho Power Company
Global Credit Research - 14 Feb 2012
Boise, Idaho, United States
Ratings
Category Moody's Rating
Outlook Stable
Issuer Rating Baa1
First Mortgage Bonds A2
Senior Secured A2
Sr Unsec Bank Credit Facility Baa1
Senior Unsecured Shelf (P)Baa1
Commercial Paper P-2
Parent: IDACORP, Inc.
Outlook Stable
Issuer Rating Baa2
Sr Unsec Bank Credit Facility Baa2
Commercial Paper P-2
Contacts
Analyst Phone
Ryan Wobbrock/New York City 212.553.7104
William L. Hess/New York City 212.553.3837
Key Indicators
[1]Idaho Power Company
LTM 3Q11 2010 2009 2008
(CFO Pre-W/C + Interest) / Interest Expense 4.0 4.6 4.3 3.0
(CFO Pre-W/C) / Debt 16%19%18%10%
(CFO Pre-W/C - Dividends) / Debt 13%16%15%7%
Debt / Book Capitalization 42%47%46%48%
[1] All ratios calculated in accordance with the Regulated Electric and Gas Utilities Rating Methodology
using Moody's standard adjustments
Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.
Opinion
Rating Drivers
Relatively low risk, regulated electric utility business model
Strong regulatory support and cost recovery provisions
Sizeable capital expenditure program over the intermediate-term
Sustainability of current credit metric levels will be key over intermediate-term
Corporate Profile
Idaho Power Company (IPC) is a vertically integrated electric utility and principal wholly-owned subsidiary
of IDACORP, Inc. (IDA), a holding company which also serves as parent for other modest-sized non-utility
businesses. IPC's service territory encompasses southern Idaho and eastern Oregon and its rates are
regulated by the Idaho Public Utilities Commission (IPUC) and the Oregon Public Utility Commission
(OPUC), while the Federal Energy Regulatory Commission (FERC) regulates its transmission operations.
SUMMARY RATING RATIONALE
The primary driver behind IPC's Baa1 senior unsecured rating is the regulatory support that it receives for
its low risk utility operations. IPC also benefits from cost recovery measures granted by the IPUC (Idaho
being IPC's dominant service territory), including the supportive treatment afforded to IPC via single-issue
rate cases. These recovery mechanisms allow the company to receive a more frequent true-up of costs
than would otherwise be available through general rate cases, a credit benefit. IPC's rating reflects its
significant reliance on low cost hydro generation to supply electricity and its lower than average exposure
to increasingly stringent environmental mandates. The rating also takes into account that the current
construction of new generation and transmission assets will pose a challenge over the intermediate-term
as the company manages construction risk, increasing costs to customers and negative free cash flow.
DETAILED RATING CONSIDERATIONS
RELATIVELY LOW BUSINESS RISK PROFILE
The degree of regulatory support that IPC receives from the Idaho legislature and IPUC is the most
important factor to IPC's credit profile. IPC operates as a rate regulated, vertically integrated electric
utility company, providing electric service to over 492,000 customers in southern Idaho and eastern
Oregon. Since IPC provides an essential service in a relatively supportive regulatory environment that
allows it to generate a high degree of revenue and cash flow assurance, Moody's ascribes a low
business risk to IPC's business profile. IPC is also parent to Idaho Energy Resources Company (IER) a
wholly-owned subsidiary also subject to regulation, which is a one-third owner of Bridger Coal Company,
which mines and supplies coal to IPC's Jim Bridger plant.
Aside from regulatory risk, some other key risks include the availability of hydro resources, commodity
cost volatility and increasingly stringent environmental mandates. IPC is somewhat insulated from
commodity risk (about 45% of IPC's generation is from coal generation, which burns close to 4 million
tons of coal each year, based upon IPC's pro rata ownership share; only a small percentage of
generation is from natural gas fired facilities, but IPC's exposure to natural gas will increase once the 300-
330 MW Langley Gulch combined cycle generation facility comes online in mid-2012), given the pass-
through nature of these costs, which effectively go straight to customer bills. IPC has a high dependency
on hydro resources (over 50% of IPC's generation) which makes it vulnerable to drought conditions;
however, this significant reliance also positions IPC relatively well in regard to potential emissions costs
when compared to most utilities across the nation.
In addition, IPC is not burdened by having to support any material debt load at the IDACORP, as the
parent's non-regulated investments (i.e. independent power production at Ida-West Energy and affordable
housing and other real estate investments at IDACORP Financial Services) are rather minor and do not
have a material influence over the credit profile of the company.
SIGNIFICANT INTERMEDIATE-TERM CAPITAL PROGRAM IS PRIMARY CHALLENGE
IPC's capital expenditures are expected to range from $450 - $470 million over the next three years. The
conclusion of a major capex milestone is expected to occur when the Langley Gulch facility comes online
in June 2012. This will mark the conclusion of total project costs, including AFUDC, of around $427 million.
The IPUC approved a certificate of public convenience and necessity (CPCN) for this plant in September
2009. In granting the CPCN, the IPUC relied upon Senate Bill 1123 (SB 1123) to pre-approve inclusion of
approximately $400 million of construction costs in IPC's rate base concurrent with the commercial
operation date for the Langley Gulch plant. We view this pre-approval as a credit positive because it
reduces the regulatory and financial risk that could otherwise be associated with this sizable investment.
Importantly, any investment in excess of the pre-approved amount would not necessarily be disallowed,
but recovery of and return on the excess would be subject to a separate rate proceeding. Langley Gulch
construction is currently on-time and within budget.
Other significant projects that IPC is pursuing include: a 21.21% ownership of the Boardman-Hemingway
500kV transmission line ($820 million of total project cost, expected to be in service in 2016); a joint
proposal between IPC and PacifiCorp (Baa1 issuer rating, stable outlook) for the Gateway West
transmission project (IPC's portion is expected to be in the range of $300 - $500 million); and installation
of Advanced Meter / Smart Grid technology. The Boardman-Hemingway Line is a proposed 299-mile,
500-kV transmission line between Boardman, OR and IPC's Hemingway station near Boise, ID and
includes the Bonneville Power Administration (BPA, Aa1 issuer rating, stable) as 24.24% owner and
PacifiCorp as 54.55% owner. The Gateway West project is expected to connect the Hemingway station
with the Windstar station, located near Douglas, WY.
A mix of debt issuance and equity infusions from the parent are expected to be used to meet IPC's
external funding requirements, while targeting a capital structure close to the current percentages of debt
and equity. Also, given the absolute level of planned capex at the utility level, we expect that IPC will likely
need to file for additional general rate increases to take effect in Idaho.
STRONG REGULATORY SUPPORT SHOULD PROVIDE FOR FINANCIAL STABILITY
Supportive regulatory actions in Idaho should help mitigate some of the financial pressure assumed with
IPC's current capex plans. We anticipate the maintenance of current financial metrics in the midst of IPC's
current capital plan, based upon the historically supportive regulatory framework in Idaho, including: 1) a
relatively swift 7-month statutory period governing rate cases; 2) frequent decisions based on settlements
instead of litigated proceedings; 3) reasonable allowed returns on equity; 4) reliance on various cost
tracking and adjustment mechanisms including periodic utilization of single-issue rate cases and partially
forecast test years to avoid undue rate lag; and 5) pre-approval of future rate treatment for certain capital
investments allowed under Idaho state law.
An example of one of IPC's most significant cost recovery provisions is the power cost adjustment (PCA)
rate mechanism. The PCA reconciles actual purchase power costs incurred to the amounts included in
customers' rates (derived from IPC forecast assumptions). The PCA mechanism includes a 95%/5%
(customers/shareholders) sharing of the mismatch between forecasted and actual rates, thereby reducing
risk to investors on any under-collected amounts.
Another important recovery mechanism includes assurance to cost recovery for IPC's largest construction
project via Senate Bill 1123 (SB 1123), which became effective in July 2009. Under SB 1123, the IPUC
may grant pre-approval of rate treatment for certain utility capital expenditures, such as those associated
with Langley Gulch, currently under construction. We generally view pre-approval of rate treatment for a
utility's future capital programs as a credit positive given the degree of assurance it provides for cost
recovery and the ability to earn a rate of return.
In addition to the benefits of the aforementioned recovery mechanisms, IPC is currently working with the
commission to solidify its decoupling mechanism (Fixed-Cost Adjustment or FCA) . In the past, the IPUC
has expressed reluctance to make the FCA permanent, citing the desire for additional data and further
evaluation. The December 2011 general rate case settlement has allowed for further discussion
surrounding the FCA until a final order is issued no later than March 30, 2012.
We view the ongoing nature of these cost recovery mechanisms as evidence of the supportive and
iterative working relationship between IPC and its regulators, and we deem the FCA to be further
supportive to the financial profile of IPC (see Moody's report `Decoupling and 21st Century Rate
Making').
FINANCIAL METRICS WILL BENEFIT FROM RECENT IPUC ORDERS
On December 27, 2011, the IPUC authorized a modified extension of IPC's amortization of accumulated
deferral investment tax credits (ADITC) through 2014. The modified order includes the previous order's
stipulations of using the tax credits (up to $25 million in any one year) to achieve an actual earned ROE of
9.5%; the maximum level of ADITC allowed over the 2012-2014 period will be $45 million plus the ability
to carryforward any unused ADITC amounts from previous years. Another modification of the December
2011 order includes an adjustment to the sharing level and manner of refund to customers, should IPC
earn above their authorized ROE. As the earnings sharing currently stands, IPC would share earnings
between a 10.0% and 10.5% ROE with customers on a 50/50 basis; whereas earnings that exceed
10.5% would be shared with customers on a 75% customers / 25% IPC basis. A final modification is that
the company is allowed to file general rate cases, which will have a potential impact to the earned ROE
threshold for customer sharing. Moody's views this order as continued evidence of the beneficial support
that IPC receives from IPUC regulation. In particular, the likelihood of an earned ROE of 9.5% (given the
maximum ADITC dollar thresholds) is a significant credit positive to the stability and strength of IPC's
expected financial performance.
On December 30, 2011, the IPUC issued approval of a rate settlement between IPC and intervening
parties, which allows for a $34 million (4.07%) rate increase which took effect on January 1, 2012.
Although the settlement was silent as per the allowed ROE, IPC is allowed a 7.86% rate of return on its
$2.4 billion rate base. Furthermore, the settlement parties agreed to use IPC's proposed cost-of-service
methodology to determine the energy related revenue requirement for its load cost adjustment rate
(LCAR, fka LGAR or load growth adjustment rate). The LCAR methodology resolves the outstanding
question of how the company would calculate the value of differences between actual load and the load
assumed in rates. The IPUC decision is a credit benefit, as it allows for improved revenue and cash flow
in future periods, as well as providing a greater degree of predictability in cost recoveries provided by the
LCAR.
Recent improvements in IPC's credit metrics reflects this type of support from the IPUC, but increased
cash flow is also due, in part, to one-time tax policies. Since 2009, significant amounts of cash from
operations were generated from tax methodology changes related to capitalized repairs and uniform
capitalization, as well as tax savings related to bonus depreciation. We do not view these types of one-
time methodologies or economic stimulus options to be an ongoing source of cash for the company. The
absence of these benefits have the potential to significantly reduce the ongoing levels of key credit
metrics, which could pressure IPC's credit rating. However, declines from one-time tax benefits should be
offset by the ongoing availability of ADITCs, if needed, and future rate increases; for example, Langley
Gulch should be online and contributing to cash flow by mid-2012.
Moody's is incorporating the view that management will continue to operate the company in a
conservative and fiscally responsible manner to mitigate a portion of the above one-time items that have
benefited metrics since 2009. Our expectation is that IPC should generate credit metrics approaching
4.0x CFO pre-WC interest coverage and mid to high teens CFO pre-WC to debt. During LTM 3Q11, IPC
produced CFO pre-WC interest coverage of 4.0x and CFO pre-WC to debt near 17%.
Liquidity Profile
IPC has reasonable liquidity supported by internally generated cash flows and its own committed bank
credit facilities. The company recently amended and restated its standalone credit facility, so that the
$300 million committed revolver now expires in October 2016. This facility is principally used to backstop
its commercial paper program.
As of September 30, 2011, IPC had about $25 million of unrestricted cash on hand and there were no
direct borrowings under the facility and no commercial paper outstanding. There is, however,
approximately $24 million of revolver capacity unavailable as it is earmarked for American Falls and Port
of Morrow variable rate bonds, maturing in 2025 and 2027, respectively, that holders may put to Idaho
Power. IPC has one financial covenant that applies to the revolver, which limits the debt to total
capitalization ratio as defined to 65%. As of September 30, 2011, IPC's leverage ratio was 50%, leaving
ample cushion against the covenant.
We anticipate that IPC will be close to free cash flow neutral, to slightly negative, for 2012, with Langley
Gulch capex concluding at midyear. We estimate that IPC will generate close to $300 million of cash flow
while spending around $250 million in capex and upstreaming dividends to IDACORP nearing $60 million.
We incorporate a view that the company will continue to fund cash shortfalls with a balanced mix of debt
and equity.
IPC's maturity profile appears very manageable, with $100 million coming due in November 2012.
Rating Outlook
IPC's stable rating outlook reflects more timely cost recovery, especially in Idaho, which should help avoid
the past suppression of key metrics and sustain metric levels comparable to similarly rated peers. The
lingering execution risks associated with ongoing capital spending projects and related external financing
needs are tempered by assurances of future rate treatment for the Langley Gulch plant and anticipated
conservative funding strategies.
What Could Change the Rating - Up
A rating upgrade is unlikely in the near-to-medium term; however, IPC's rating outlook could turn to
positive if there are no material declines to the current degree of regulatory supportiveness in future rate
filings and benefits from rate relief materialize to produce metrics of 4.5x CFO pre-W/C interest coverage
and 22% CFO pre-W/C to debt, on a sustainable basis.
What Could Change the Rating - Down
The rating would likely be revised downward if regulatory support wanes, if the various cost tracking
mechanisms do not support the current level of credit metrics or if the absence of temporary cash flow
contributions (such as bonus depreciation or tax benefits) were to drop metric levels to, or below, 3.5x
CFO Pre-W/C plus interest to interest and 15% CFO Pre-W/C to debt, for an extended period of time.
Rating Factors
Idaho Power Company

Regulated Electric and Gas Utilities Industry [1][2]Current
LTM
12/31//2010
Moody's
12-18
month
Forward
View* As

of Date
Published
Factor 1: Regulatory Framework (25%)Measure Score Measure Score
a) Regulatory Framework Baa Baa
Factor 2: Ability To Recover Costs And Earn
Returns (25%)

a) Ability To Recover Costs And Earn Returns Baa Baa
Factor 3: Diversification (10%)
a) Market Position (5%) Baa Baa
b) Generation and Fuel Diversity (5%)49%A 48 - 55%A
Factor 4: Financial Strength, Liquidity And Key
Financial Metrics (40%)

a) Liquidity (10%) Baa Baa
b) CFO pre-WC + Interest/ Interest (3 Year Avg)
(7.5%)
4.0x Baa 3.5 - 4.0x Baa
c) CFO pre-WC / Debt (3 Year Avg) (7.5%)15.8%Baa 15 - 20%Baa
d) CFO pre-WC - Dividends / Debt (3 Year Avg) (7.5%)12.4%Baa 10 - 15%Baa
e) Debt/Capitalization (3 Year Avg) (7.5%)46.8%Baa 45 - 50%Baa
Rating:
a) Indicated Rating from Grid Baa2 Baa2
b) Actual Rating Assigned Baa2 Baa2

* THIS REPRESENTS MOODY'S FORWARD VIEW;
NOT THE VIEW OF THE ISSUER; AND UNLESS
NOTED IN THE TEXT DOES NOT INCORPORATE
SIGNIFICANT ACQUISITIONS OR DIVESTITURES

[1] All ratios are calculated using Moody's Standard Adjustments. [2] As of 12/31/2010; Source: Moody's
Financial Metrics
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