COC 2011-03-09_IDACORP_Opinion.pdf

Credit Opinion: IDACORP, Inc.
Global Credit Research - 09 Mar 2011
Boise, Idaho, United States
Ratings
Category Moody's Rating
Outlook Stable
Issuer Rating Baa2
Sr Unsec Bank Credit Facility 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
Sr Unsec Bank Credit Facility Baa1
Senior Unsecured Shelf (P)Baa1
Commercial Paper P-2
Contacts
Analyst Phone
Kevin G. Rose/New York 212.553.0389
William L. Hess/New York 212.553.3837
Key Indicators
[1]IDACORP, Inc.
2010 2009 2008 2007
(CFO Pre-W/C + Interest) / Interest Expense 4.3 4.5 2.9 2.2
(CFO Pre-W/C) / Debt 17%19%10%6%
(CFO Pre-W/C - Dividends) / Debt 14%16%7%3%
Debt / Book Capitalization 47%46%47%45%
[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
Recent regulatory support through base rate increases and improvements to cost recovery mechanisms
Potential metric pressures in light of significant utility capital expenditures
Good 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. 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. IPC's service
territory encompasses southern Idaho 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.
operations.
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 single largest 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 over the past two years and the financial
pressures of executing a large capital program. Continued support from regulators in future general rate cases will be necessary to sustain the
company's improved credit metrics, which rebounded in 2009 to levels more appropriate for the Baa1 rating category, driven by regulatory
support and temporary tax related inflows. Continued conservative financing strategies will also remain an important rating driver, as will
adequate hydro conditions, since low cost hydro generation contributes over 50% of IDA's owned generation.
DETAILED RATING CONSIDERATIONS
VAST MAJORITY OF HOLDINGS RESIDE IN RATE REGULATED UTILITY OPERATIONS
IDA divested most of its prior investments in riskier non-regulated businesses during a three-year period covering 2005 - 2007, and has since
made IPC its principal focus. For the year ended 2010, more than 98% of IDACORP's revenue, assets and cash flow were contributed from
utility operations at Idaho Power. The remaining, relatively immaterial, non-regulated investments include independent power production at Ida-
West Energy and affordable housing and other real estate investments at IDACORP Financial Services.
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. Since IPC provides an essential service in two relatively supportive regulatory
environments, the company has a high degree of assurance to its revenue and cash flow, which is why Moody's ascribes a low business risk to
IPC's business operations. IPC operates as a vertically integrated electric utility company, providing electric service to over 492,000 customers
in southern Idaho and eastern Oregon as of December 31, 2010. IPC is also the parent of Idaho Energy Resources Co. (also regulated), a joint
venture partner in Bridger Coal Company, which supplies coal to the Jim Bridger generating plant owned in part by IPC.
SUPPORTIVE REGULATORY ENVIRONMENT UNDERPINS IMPROVED CREDIT QUALITY
Favorable regulatory practices in Idaho (IPC's principal jurisdiction), include: 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, 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.
IMPROVEMENTS TO COST RECOVERY MECHANISMS SHOULD STABILIZE CREDIT METRICS
The significant rebound of credit metrics in 2009 and 2010 was aided by several favorable rate orders from both the Idaho and Oregon
commissions. In addition to the increase to general base rates which contributed to IDA's improved financial results for the last two years, the
IPUC also took action to solidify the cost recovery mechanics of various intra-year trackers.
The most significant of the May 2009 rate order was the power cost adjustment (PCA) rate decision. For the first time, IPC was able to use its
most recent operating plan as the basis from which to forecast power supply expenses, rather than the previous method based on forecast
Brownlee Reservoir inflow and a regression formula. This change became effective in February 2009 after the IPUC agreed with IPC that the
utility's plan was a better indicator of anticipated expenses and should create a better matching between actual costs incurred and the amounts
in customers' rates. This practice will continue with future PCA filings; accordingly, future PCA balances should be considerably less and
thereby reduce cash lag. Moreover, the IPUC revised the sharing formula under the PCA mechanism to 95%/5% (customers/shareholders)
from 90%/10% previously, thereby reducing risk to investors.
The Idaho legislature enacted a significant assurance to cost recovery for IDA'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, a 300-330 megawatt combined cycle generating facility, 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 revised PCA calculation and SB 1123's forward looking benefits, IPC is currently working with the commission
to solidify its decoupling mechanism and load growth adjustment rate (LGAR). Though the decoupling mechanism (Fixed Cost Adjustment, or
FCA) has been continued through 2011, the IPUC is reluctant to make the FCA permanent, citing the desire for additional data and further
evaluation. Similarly, although the LGAR (intended to adjust IPC's net power supply costs that are included in the annual PCA filings for
differences between actual load and the load used in calculating existing base rates) has been in place for years and was approved by the IPUC
in the May 2010 PCA order, the commission stated that it expects the IPUC staff, IPC and other interested parties to revise the current
methodology of how LGAR is calculated. In January 2011, IPC had submitted comments for a revised methodology and further determinations
are pending. Moody's views 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 both the FCA and LGAR to be supportive to the financial profile of IPC.
CAPEX PLANS REMAIN SIGNIFICANT EVEN AS TRANSMISSION PROJECTS UNFOLD SLOWLY
IDA's capital expenditures are expected to range from $775 - $805 million over the next three years, the primary outlay being the construction of
the 300-330 megawatt natural gas plant at Langley Gulch. The total estimated expense for that project alone, including AFUDC, is $427 million,
which could be in service as early as June 2012.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 projects included in IDA's capex figures include: $92 million of initial phase costs for the Boardman-Hemingway Line and $40 million of
initial phase outlays for the Gateway West transmission projects plus expenses related to 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. By the time of estimated completion in mid-2016, total costs for the Boardman-Hemingway line are expected to be about $820 million
(increased from previous estimates of $600 million), with IDA's share to be between 30 and 50 percent. The Gateway West project is a joint
venture with PacifiCorp (Baa1 issuer rating, stable outlook) 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 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 once the settlement period under its current rate
agreement expires December 31, 2011.
SUSTAINABILITY OF CASH FLOW LEVELS COMPLICATED BY TEMPORARY TAX BENEFITS
While a variety of baseline factors contributed to the substantial strengthening of IDA's key credit metrics in 2009 and 2010, including general
rate relief and cash recovery of regulatory assets, there were also favorable tax accounting impacts that are not viewed as an ongoing source
of sizeable cash flow for the company. For example, IDA realized cash benefits due to 2009 capitalized repairs and uniform capitalization
method changes of $33 million and $42 million, respectively. The majority of this cash benefit has been realized through reductions to cash
payments that would have otherwise been owed to taxing authorities for the 2009 tax year and a federal refund of $24 million received in the
fourth quarter of 2010. The company has added about $74 million to its uncertain tax positions in 2010, relating to the capitalized repairs and
uniform capitalization. The one-time nature of a cumulative tax adjustment available from a tax method change, or tax savings related to bonus
depreciation enacted to stimulate economic growth, will not be an ongoing source of cash for the company, in Moody's opinion. Consequently,
this has the potential to significantly reduce key credit metrics in the future, which could pressure IDA's credit rating.
Despite some uncertainty regarding the sustainable run-rate of cash flow levels, Langley Gulch should be online and contributing to cash flow
by mid-2012. In addition, IDA maintains a significant amount of general tax credits to use for the benefit of future cash flow. Federal tax credits of
$17 million, previously recognized, were restored due to the reduction of 2009 taxable income by the capitalized repairs and uniform
capitalization method changes. The restored credits were a reduction to cash received in 2010, but will be available to deliver cash benefits in
future periods. In addition, Idaho Power's 2010 rate settlement allows for the accelerated amortization of accumulated deferred investment tax
credits (ADITC) if the company's actual rate of return on year-end equity in the Idaho jurisdiction is below 9.5% for any calendar year of the
settlement period. IPC has the maximum of $25 million available of additional ADITC amortization for use in 2011.
Beyond the ability to mitigate a portion of one-time items that have benefited 2009 and 2010 metrics, Moody's is incorporating the view that
management will continue to operate the company in a conservative and fiscally responsible manner, which should generate credit metrics
approaching 4.0x CFO pre-WC to interest coverage and the mid to high teens CFO pre-WC to debt. For example, the company used the
significant improvements in the 2009 cash flow to contribute $60 million to fund its underfunded pension liability, an amount that greatly
exceeded the required minimum funding amounts. Since Moody's considers unfunded pension liabilities as part of total adjusted debt, this was
viewed as a credit positive action taken by management, though, due to discount rate movements in 2010, resulted in only a $20 million
decrease in the obligation from 2009. Similarly, Moody's anticipates that as the company evaluates the use of bonus depreciation, any acquired
near-term boost to CFO would be used to offset future capital needs and supplement a portion of IPC's expected negative free cash flow
position in the period following the bonus depreciation election.
Liquidity
Moody's observes that IDA appears to have sufficient liquidity over the next twelve months. IDA's internal liquidity sources include cash on hand
of about $229 million as of December 31, 2010, and annual dividends provided by IPC and its other operating subsidiaries in the range of $60
million. Moody's estimates cash from operations on a consolidated basis to be north of $200 million (approximately 20% of 2010 Revenues,
given that IPC has a rate moratorium until 2012).
For external sources, IDA has ample unused capacity under committed bank facilities at the parent level and at IPC ($33 million of HoldCo
availability and $276 million available to IPC as of December 31, 2010). IDA maintains access to short-term funding and alternative liquidity for
commercial paper outstanding through a $100 million credit facility, which terminates on April 25, 2012. At December 31, 2010, there were no
borrowings under IDA's facility but approximately $70 million of commercial paper was outstanding. The IPC facility is currently a $300 million
revolving credit agreement that terminates on April 25, 2012. At December 31, 2010, no loans were outstanding under IPC's facility nor was
there any commercial paper outstanding. However, $24 million has been earmarked for variable rate bonds that are puttable to IPC. The only
financial covenant in each facility limits the debt to total capitalization ratio as defined to 65%. At December 31, 2010, the leverage ratios for both
IDA and IPC were 52% and 53%, respectively.
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 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 no plans to issue holding company
long-term debt in the foreseeable future.
IDA's consolidated maturity profile appears very manageable, as IPC's March 2, 2011 maturity of $120 million had been prefunded with a portion
of the company's $200 million First Mortgage Bond issuance in August of 2010. The next material maturity for IPC is when $100 million comes
due in November 2012.
Looking forward, construction of the Langley Gulch plant primarily drives the capital needs in 2011 and 2012 and we assume conservative
financing strategies will continue to guide future funding of the expected $185 million of negative free cash flow for 2011 and any other shortfall
thereafter.
Rating Outlook
IDA's stable rating outlook mirrors the stable outlook for IPC, its principal subsidiary. IPC's stable rating outlook reflects recent supportive
regulation, especially in Idaho, which should help avoid past volatility in key metrics and keep them closer in line with similarly rated peers. The
execution risks associated with ongoing capital spending projects and external financing needs, coupled with questions regarding the
appropriate run-rate for cash flow that has benefitted from one-time tax items are tempered by assurances of future rate treatment for the
Langley Gulch plant, anticipated conservative funding strategies and future tax credit availability. IPC's outlook and ratings substantially drives
those of its parent.
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. Although a rating
upgrade is unlikely in the near term, IDA's outlook could turn to positive if the benefits from recent rate relief for IPC carry through and there are
no material changes in the degree of regulatory supportiveness in IPC's future rate filings. In terms of key metrics, the outlook could turn to
positive if CFO Pre-W/C to debt and CFO Pre-WC plus interest to interest, on a three-year average basis, can be sustained near its current
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, below 3.5x and 15%, respectively, for an extended period of time. This degradation in metrics could occur if the improved regulatory
support for IPC wanes; if cash from operations materially decreases absent one-time tax benefits; 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. Also, any unexpected shift by IDA to increase
investments in its non-utility businesses or a negative action from the IRS, regarding historical tax policies taken by the company, could also
lead to a negative rating action.
Rating Factors
IDACORP, Inc.

Regulated Electric and Gas Utilities Industry [1][2]Current
LTM
12/31//2010
Moody's 12-18
month Forward
View* As of March
2, 2011

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%) A A
b) CFO pre-WC + Interest/ Interest (3 Year Avg) (7.5%)3.9x Baa 3.5 - 4.0x Baa
c) CFO pre-WC / Debt (3 Year Avg) (7.5%)15%Baa 15 - 20%Baa
d) CFO pre-WC - Dividends / Debt (3 Year Avg) (7.5%)12%Baa 10 - 15%Baa
e) Debt/Capitalization (3 Year Avg) (7.5%)47%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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