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HomeMy WebLinkAbout2013-02-08_IDACORP Opinion.pdfCredit Opinion: IDACORP, Inc. Global Credit Research - 08 Feb 2013 Boise, Idaho, United States Ratings Category Moody's Rating Outlook Stable Issuer Rating Baa2 Senior Unsecured Shelf (P)Baa2 Commercial Paper P-2 Idaho Power Company Outlook Stable Issuer Rating Baa1 First Mortgage Bonds A2 Senior Secured A2 Senior Unsecured Shelf (P)Baa1 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]IDACORP, Inc. LTM 3Q12 2011 2010 2009 (CFO Pre-W/C + Interest) / Interest Expense 3.7 4.1 4.3 4.5 (CFO Pre-W/C) / Debt 14%16%17%19% (CFO Pre-W/C - Dividends) / Debt 11%13%14%16% Debt / Book Capitalization 42%43%47%46% [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 Primary subsidiary operations consist of a low risk vertically integrated utility Strong regulatory support through base rate increases and cost recovery mechanisms Weak credit metrics Adequate liquidity profile Corporate Profile IDACORP, Inc. (IDA) is a holding company whose principal operating subsidiary is Idaho Power Company (IPC), a fully integrated regulated electric utility. On a stand-alone basis, IPC represents nearly all of IDA's consolidated operations. IPC's service territory encompasses southern Idaho (this jurisdiction constitutes approximately 96% of IPC rate base) and eastern Oregon and its retail 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. IDACORP's other, rather immaterial, operating subsidiaries are discussed below. SUMMARY RATING RATIONALE IDA's Baa2 senior unsecured debt rating primarily reflects our assessment of key factors affecting the credit quality of IPC (Baa1 senior unsecured debt rating), which is its primary subsidiary. The rating also takes into account the structural subordination of IDA's obligations in right of payment to those of IPC and its other subsidiaries. IPC's Baa1 senior unsecured rating reflects its relatively low business risk profile, the improved cost recovery treatment it has been receiving from state regulators in both jurisdictions and the financial pressures of executing a large capital program. Continued conservative financing strategies will also remain an important rating driver, as will adequate hydro conditions, since low cost hydro generation contributes nearly 50% of IDA's owned generation. Weak financial metrics are the primary risk to IDA's stable outlook and rating. DETAILED RATING CONSIDERATIONS VAST MAJORITY OF HOLDINGS RESIDE IN RATE REGULATED UTILITY OPERATIONS On an annual basis, close to 100% of IDACORP's revenue, assets and cash flow are contributed from utility operations at Idaho Power. The low business risk profile of IDA's primary subsidiary, IPC, as determined by the degree of legislative and regulatory support that IPC receives, is the most important factor to IDA's credit profile. IDA's other operating subsidiaries include: IDACORP Financial Services, an investor in affordable housing projects and other real estate investments; and Ida-West Energy, an operator of nine small hydro-electric generation projects that satisfy the requirements of the Public Utility Regulatory Policies Act of 1978. SUPPORTIVE REGULATORY ENVIRONMENT IPC received significant rate relief in 2012, implementing $97 million of base rate increases, $36 million through general rate cases in Idaho and Oregon, and $61 million for construction costs related to completion of the Langley Gulch combined-cycle natural gas fired power plant. 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. On February 23, 2012, the OPUC authorized a base rate increase of $1.8 million (4.5%) with new rates taking effect on March 1, 2012. The partial settlement was based on a 9.9% ROE with a 49.9%/50.1% equity/debt split with a 7.76% total return. The Idaho settlement covered the period through 2014, and given the typical 7-month decision timeline for the IPUC, we would expect the next rate filing to occur in mid-2014, with the Oregon case to follow. The Idaho settlement does permit IPC to file earlier than 2014 if it deems necessary. IPC also has IPUC authorization to utilize up to $25 million in amortization of accumulated deferral investment tax credits (ADITC), in any one year, should its ROE fall below 9.5% through 2014. IPC did not need to use any additional ADITC in 2011 or 2012. The December 2011 order also revised an earnings sharing mechanism, such that IPC would share earnings between a 10.0% and 10.5% ROE with customers on a 50/50 basis, in the form of direct refunds to customers; whereas earnings that exceed 10.5% would be shared with customers on a 75% customers / 25% IPC basis, in the form of a reduction its pension regulatory asset. IPC is likely to have earned an ROE of over 10.5% in 2012, partly a result of the recent rate increases implemented last year. Although we do not consider ROE as a separate metric in determining ratings, it can provide an indication of regulatory supportiveness and ultimately translates into cash flow generation capability. COST RECOVERY MECHANISMS PROVIDE SIGNIFICANT CREDIT SUPPORT We view Idaho's cost recovery provisions as strong due to: 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 mechanisms (e.g., the power cost adjustment, or PCA, returns on equity; 4) reliance on various cost tracking mechanisms (e.g., the power cost adjustment, or PCA, which reconciles forecasted purchased power costs in rates to the actual amount spent on a 95%/5% customer/shareholder basis) and partially forecast test years to reduce regulatory lag; 5) pre-approval of future rate treatment for certain capital investments allowed under Idaho state law (i.e., Senate Bill 1123 which grants the IPUC pre-approval of rate treatment for certain capex); and a decoupling mechanism via the fixed cost adjustment (FCA; which allows IPC to recover up to 3% of base revenues in the current year, with any excess recovered in subsequent years). We view the ongoing nature of these cost recovery mechanisms as evidence of the supportive working relationship between IPC and its regulators. Based on Moody's 2009 Regulated Electric and Gas Utilities methodology, IDA and IPC have Baa ratings for Subfactor 2: Ability to Recover Costs and Earn Returns. However, IDA is ranked slightly lower than IPC in the Baa range, due to its position as a holding company, its subordination to IPC, and its minor unregulated operations which partially accounts for IDA's lower indicated rating. CASH FLOW SUPPORTED BY SHORT TERM EFFECTS OF BONUS DEPRECIATION AND TAX REFUNDS IDA's cash flow credit metrics declined over LTM 9/30/12, versus 2011, when cash flow before working capital (CFO pre-WC) interest coverage was 3.7x (versus 4.1x in 2011) and CFO pre-WC to debt was 14.4% (versus 16.3% in 2011). This decrease coincides with a similar decline at IPC, despite regulatory support through rate increases, a relatively high ROE and an impressive suite of cost recovery provisions. In recent years, metrics have been supported by bonus depreciation and tax refunds. In 2010, $65 million tax benefits, from a combination of IRS settlements for repairs and uniform capitalization, provided a significant one- time boost to cash flow. Although ongoing benefits of the changes in tax methodologies should produce at least $20 million per annum of cash flow, the underlying historical financial metrics would have been materially lower absent the one-time items, including the effects of bonus depreciation. For example, excluding the $36 million in bonus depreciation in 2011 from cash flows, interest coverage would drop to 3.7x from 4.1x and CFO pre-WC to debt would fall to roughly 14.3% from 16.3%. If current levels of core, ongoing cash flow were to continue over the intermediate term, downward rating pressure will continue to build. CAPEX PLANS REMAIN SIGNIFICANT IDA's capital expenditures are expected to be around $500 million for the 2013-2014 period. The completion of the Langley Gulch plant in 2012 marks the conclusion of a construction cycle that started in 2009 and total project costs of $396 million including AFUDC, which was completed on time and on budget. IPC was granted recovery of its investment through a base rate increase of $58.1 million (7%) authorized in May of last year with rates taking effect July 2012 following the June opening of the plant. As a result of Senate Bill 1123, the IPUC had pre-approved the inclusion of this amount into rate base concurrent with the commercial operation date of the plant. There are no new generation projects that have been announced, but that might change once IPC's Integrated Resource Plan (IRP) is submitted to the IPUC, which we expect to occur in June of this year. There are two large, long term transmission projects in the development pipeline. These are both currently in the permitting process and the only commitments to date have been around its share of permitting costs, which are estimated at $35 million. Costs of these projects are not included in the company's current capital expenditures estimates for 2013- 2014. One of these transmission projects is a 21% ownership in the Boardman-Hemingway 500kV transmission line, a proposed 300 mile line that runs between Boardman, OR and IPC's Heming way station near Boise, ID and includes the Bonneville Power Administration (BPA, Aa1 issuer rating, stable) as 24.24% owner and PacifiCorp (Baa1 issuer rating, stable) as 54.55% owner. The total project cost is currently estimated at between $890-$940 million and it is expected to come online no earlier than 2018. The other large scale transmission project is Gateway West which is proposed to connect the Hemingway station with the Windstar station, located near Douglas, WY. This is a joint proposal with PacifiCorp and IPC's expected share of the investment is $150-$300 million. 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. Liquidity We observe that IDA appears to have sufficient liquidity over the next four quarters. IDA's internal liquidity sources include cash on hand of about $20 million as of September 30, 2012, and annual dividends provided by IPC and its other operating subsidiaries were in the range of $65 million. Cash from operations on a consolidated basis during this period was around $250 million. IDA has a $125 million holdco credit facility and a $300 million facility for IPC. Both facilities were extended in 2012 to expire in October 2017. They both have only one financial covenant, which limits the debt to total capitalization ratio as defined to 65%. IDA maintains access to short-term funding and alternative liquidity for commercial paper issuance which had about $51 million outstanding as of September 30, 2012. IPC's facility is also used as a back- up to commercial paper which had no borrowings outstanding as of September 30, 2012, although $24 million is earmarked for variable rate bonds that are puttable to IPC. IDA has attempted to minimize its reliance on short-term debt, especially in support of capital expenditures at IPC, through the periodic issuance of common equity. We expect that this strategy will continue, including the issuance of common stock under a continuous equity program and from its dividend reinvestment program (DRIP). IDA has no standalone long-term debt outstanding and there are no plans to issue holding company long-term debt in the foreseeable future. The next material maturity for IPC is when $70 million comes due in October 2013. Over the past several years, IDA has been pursuing a policy to increase its dividend payout ratio, with a target of around 50-60%, compared to a ratio of 36% in 2011. While the amounts in question would not cause any significant change in IDA's liquidity profile, there is some question as to whether this policy will further exacerbate the company's weak credit metrics. Rating Outlook IDA's outlook and ratings are substantially driven by those of IPC and its outlook mirrors that of IPC. IPC's stable rating outlook reflects supportive regulation with timely cost recovery and constructive rate case outcomes. The outlook incorporates a view that the company will fund capex conservatively and manage its dividend growth strategy with an eye toward improving its cash flow coverage metrics for debt and interest. What Could Change the Rating - Up Since IPC represents the predominance of IDA's holdings, IDA's rating is primarily a function of IPC's rating and outlook. A rating upgrade is unlikely in the near-to-medium term. However, IDA's outlook could turn to positive if CFO pre-WC to debt and CFO pre-WC plus interest to interest can prove sustainable (absent bonus depreciation) near the high teens level and around 4.0x, respectively. What Could Change the Rating - Down The rating could be revised down if IDA's key credit metrics were pressured resulting in CFO pre-WC interest coverage and CFO pre-WC to debt, persist below 3.5x and 15%, respectively. This degradation in metrics could occur if the improved regulatory support for IPC wanes; if cash flow generation does not improve; or if recovery mechanisms do not work as anticipated. A rating downgrade could also occur if the company manages its significant utility capex program, and negative free cash flow position, in a manner that uses debt more aggressively than current capitalization ratios suggest. Rating Factors IDACORP, Inc. Regulated Electric and Gas Utilities Industry [1][2]Current LTM 12/31//2011 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%) A A Factor 4: Financial Strength, Liquidity And Key Financial Metrics (40%) a) Liquidity (10%) A A b) CFO pre-WC + Interest/ Interest (3 Year Avg) (7.5%)4.3x Baa 3.5 - 4.0x Baa c) CFO pre-WC / Debt (3 Year Avg) (7.5%)17.4%Baa 13 - 18%Baa d) CFO pre-WC - Dividends / Debt (3 Year Avg) (7.5%)14.1%Baa 9 - 14%Baa e) Debt/Capitalization (3 Year Avg) (7.5%)45.5%Baa 40 - 45%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. 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