2013-02-08_Idaho Power Opinion.pdf

Credit Opinion: Idaho Power Company
Global Credit Research - 08 Feb 2013
Boise, Idaho, United States
Ratings
Category Moody's Rating
Outlook Stable
Issuer Rating Baa1
First Mortgage Bonds A2
Senior Secured A2
Senior Unsecured Shelf (P)Baa1
Commercial Paper P-2
Parent: IDACORP, Inc.
Outlook Stable
Issuer Rating Baa2
Senior Unsecured Shelf (P)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 3Q12 2011 2010 2009
(CFO Pre-W/C + Interest) / Interest Expense 3.9 4.0 4.6 4.3
(CFO Pre-W/C) / Debt 15%16%19%18%
(CFO Pre-W/C - Dividends) / Debt 11%12%16%15%
Debt / Book Capitalization 41%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
Strong regulatory support and cost recovery provisions
Weak financial metrics
Considerable capital expenditures continue over intermediate-term
Adequate liquidity
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 (which constitutes approximately 96% of rate
base) 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 cost recovery
mechanisms. These trackers 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 the high level of capital expenditures which pose a challenge over the
intermediate-term as the company manages negative free cash flow. Weak financial metrics are the primary risk
to IPC's stable outlook and rating.
DETAILED RATING CONSIDERATIONS
REGULATORY FRAMEWORK IS SUPPORTIVE TO CREDIT QUALITY
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 to 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.
STRONG COST RECOVERY PROVISIONS
Since IPC provides an essential service in a relatively supportive regulatory environment, this allows the company
to generate a high degree of revenue and cash flow assurance. As such, Moody's ascribes a low business risk to
IPC's business profile and 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, 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).
Additionally, in a proposal submitted to the IPUC in 2012, IPC is trying to gain approval for an annual recovery
mechanism for its investment in energy efficiency programs for large commercial and industrial customers as well
as the opportunity to earn a return on investment in these programs, similar to its investments in supply sources.
Typically, recovery for spending on energy efficiency programs has been included as part of its general rate cases
which occur every 18-36 months. The energy efficiency investments amounted to over $8 million in 2011. We
would view such an annual recovery mechanism as supportive because it would reduce the lag associated with
the filing of general rate cases. We view the ongoing nature of these cost recovery mechanisms as evidence of
the supportive working relationship between IPC and its regulators.
WEAK FINANCIAL PROFILE, AS CASH FLOW IS BOOSTED BY BONUS DEPRECIATION AND TAX REFUNDS
Despite regulatory support through rate increases, a relatively high ROE and an impressive suite of cost recovery
provisions, IPC has weak financial metrics for its rating category. For LTM 9/30/12 the company's cash flow before
working capital (CFO pre-WC) interest coverage was 3.9x and its CFO pre-WC/debt was 15.0%. This marks a
slight decline from the 2011 metrics of 4.0x and 15.6% and is considerably lower than the average of these metrics
for Baa1-rated utilities (averaging 5.2x and 22.4%, respectively).
Furthermore, the cash flow generation of the company has been impacted by significant short term tax benefits. In
2010 and 2011, tax benefits from a combination of IRS settlements for repairs and uniform capitalization, along
with accelerated bonus depreciation, provided a significant boost to cash flow. Benefits of at least $20 million per
annum related to repairs and uniform capitalization should continue to provide ongoing cash flow support; however,
the underlying financial metrics would be even lower if we strip away the effects from the one-time change in tax
methodologies and bonus depreciation. For example, excluding the cash impact of bonus depreciation, the 2011
interest coverage ratio would drop to 3.6x and CFO pre-WC/debt would be 13.6%, which are more in line with
metrics of a Baa3 integrated utility. Similar impacts are attributable to cash flow and financial performance
throughout the 2010-2012 time period, and may persist into 2013 since 50% bonus depreciation has been
extended. If current levels of core, ongoing cash flow were to continue over the intermediate term, downward
pressure on the rating could result.
It is worthwhile noting that the 2012 cash flow metrics might be slightly higher than the LTM 9/30/12, not only due to
fourth quarter performance, but also because of the end of year adjustment Moody's makes for pension
contributions. Our adjustments for pension contributions that exceed annualized service cost are added back to
CFO, as the cash flow deduction is shifted to financing cash flows (i.e., treated as a repayment of debt due to the
imputation of underfunded pension as debt). In 2012, IPC made $44.3 million in pension contributions, versus an
estimated service cost of approximately $26 million (annualized from the first three quarters of 2012); therefore,
this would result in a lift of approximately $18 million in CFO.
CONSIDERABLE CAPITAL EXPENDITURES CONTINUE OVER INTERMEDIATE TERM
The completion of the Langley Gulch plant in 2012 marks the conclusion of a construction cycle that started in
2009 with total project costs of $396 million including AFUDC. The company 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. The IPUC had already approved a certificate of public
convenience and necessity (CPCN) for this plant in September 2009 which, thanks to Senate Bill 1123, pre-
approved the inclusion of this amount into rate base concurrent with the commercial operation date of the plant.
Investments in Langley Gulch drove much of the capital expenditures in 2010 and 2011, which were approximately
$340 million, higher than the average of $250 million in prior years. The company is forecasting around $500 million
in capex for 2013-2014. There are no new generation projects that have been announced, but this might change
once the company'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 that involve partnerships with
other utilities. 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. The total costs and dates of service of
these projects is highly subject to change as the development process continues. 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
(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 Profile
IPC has reasonable liquidity supported by internally generated cash flow 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 2017. This facility is principally used to backstop its commercial paper
program.
As of September 30, 2012, IPC had about $14 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 to 65%. As of September 30, 2012, IPC's
leverage ratio was 49%, leaving ample cushion against the covenant.
During LTM 9/30/12, IPC produced negative free cash flow, with CFO of $242 million, capital expenditures at $259
million and dividends to IDACORP of $65 million. It is expected to continue along this level in 2013. We incorporate
a view that the company will continue to fund cash shortfalls with a balanced mix of debt and equity.
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 IPC's liquidity profile, there is some question as to whether this policy will further exacerbate
the company's weak credit metrics.
IPC's maturity profile appears very manageable, with $70 million maturing in October 2013.
Rating Outlook
IPC's stable rating outlook reflects a very supportive regulatory environment which offers timely cost recovery and
constructive rate case outcomes. The outlook also incorporates a view that the company will fund capex
conservatively and manage its dividend growth strategy with an eye toward improving cash flow coverage metrics
for debt and interest.
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
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 cash flow (excluding the effects of bonus depreciation) metrics were
to persist below, 3.5x CFO Pre-WC interest coverage and 15% CFO Pre-WC to debt, or if IPC were to experience
a decline in the level of regulatory support for future rate filings.
Rating Factors
Idaho Power Company

Regulated Electric and Gas Utilities Industry [1][2]Current
LTM
12/31/2011
Moody's
12-18
month

12/31/2011 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%)17.5%Baa 13 - 18%Baa
d) CFO pre-WC - Dividends / Debt (3 Year Avg) (7.5%)14.2%Baa 9 - 14%Baa
e) Debt/Capitalization (3 Year Avg) (7.5%)45.3%Baa 40 - 45%A
Rating:
a) Indicated Rating from Grid Baa1 Baa1
b) Actual Rating Assigned Baa1 Baa1

* 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 12/31/2011; Source: Moody's Financial
Metrics

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