COC 2011-03-09_Idaho Power_Opinion.pdf

Credit Opinion: Idaho Power Company
Global Credit Research - 09 Mar 2011
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
Senior Unsecured Shelf (P)Baa2
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]Idaho Power Company
2010 2009 2008 2007
(CFO Pre-W/C + Interest) / Interest Expense 4.6 4.3 3.0 2.4
(CFO Pre-W/C) / Debt 19%18%10%7%
(CFO Pre-W/C - Dividends) / Debt 16%15%7%3%
Debt / Book Capitalization 47%46%48%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
Relatively low risk, regulated electric utility business model
Capital expenditure program creates negative free cash flow over the intermediate-term
Recent implementation of improved cost recovery mechanisms
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. The
recent improvement in IPC's credit metrics is largely due to improved 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, allowing the company to receive a
more frequent true-up of costs than would otherwise be available through general rate cases. IPC's rating is benefitted by 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, earning it a 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). IER is a wholly-owned subsidiary, also subject to regulation, and 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
about 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 Langley Gulch comes online in 2012), given the pass-through
nature of these costs, which effectively go straight to customer bills. While IPC has a high dependency (over 50% of IPC's generation is from
hydro facilities) on hydro resources making it vulnerable to drought conditions, that reliance also positions IPC relatively well in regard to
emissions costs, when compared to most utilities across the nation.
Furthermore, IPC is not burdened by having to support any material debt load at the IDACORP level since IDACORP 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.
The remaining non-regulated investments, include independent power production at Ida-West Energy and affordable housing and other real
estate investments at IDACORP Financial Services. Given the size of IDACORP's unregulated operations, they 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 $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 (though it is contracted to be in service by November 1, 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 credit positive because it reduces the regulatory and financial risk that could
otherwise be associated with this 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 IPC'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, with IPC'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, 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.
SUITE OF COST RECOVERY MECHANISMS SHOULD MITIGATE METRIC VOLATILITY
Favorable regulatory actions, taken recently in Idaho, have been given positive qualitative considerations to the credit profile of IPC and should
help mitigate some of the financial pressure assumed with IPC's current capex plans. A host of newly adjusted cost recovery practices, as of
IPC's 2009 rate case settlement, should stabilize metrics at Baa1-appropriate levels going forward (about 4x CFO pre-WC interest coverage
and 20% CFO pre-WC to debt).
Beyond the aforementioned SB 1123, which gives forward looking construction cost approval for Langley Gulch, the IPUC has allowed IPC to
maintain its decoupling mechanism (Fixed Cost Adjustment, or FCA) through 2011. The FCA is intended to aid in the predictability and
assurance of future cost recovery, as it attempts to assure a fixed cost reimbursement from customers, independent of the volume of energy
used and variable costs. Any forward looking approvals or trackers are viewed to be beneficial to a company's credit profile, from Moody's
perspective, since they should lead to greater predictability of revenue levels and cash flow recovery.
The most significant change in process of the 2009 rate orders was the power cost adjustment (PCA) rate decision. Specifically, IPC was able
to use its most recent operating plan to forecast power supply expenses rather than the previous method based on forecasted 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 in 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 somewhat reducing risk to investors.
The load growth adjustment rate (LGAR), currently determined formulaically based on total production expenses included in current base rates,
is intended to reduce regulatory risk as it adjusts 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. Part of the May 2010 IPUC order included an expectation that the IPUC
Staff, IPC and interested parties would meet to address changes to the mechanism. IPC submitted comments for a revised methodology on
January 14, 2011 and is currently awaiting determination from the IPUC. Moody's maintains a view that the ultimate result of the LGAR approval
will continue to achieve the intended result of matching actual net power supply costs incurred and load growth experienced with levels
assumed in setting existing rates; a credit positive.
SUSTAINABILITY OF CASH FLOW LEVELS COMPLICATED BY TEMPORARY TAX BENEFITS
Moody's is of the opinion that the suite of cost recovery mechanisms, which are currently available to IPC, should help stabilize the company's
credit metrics at more robust levels than what occurred during the 2005-2008 timeframe (3.1x CFO pre-WC / Interest and 11.5% CFO pre-WC
/ Debt, on average); however, there are various one-time benefit items that complicate the discernment of the effectiveness of these
mechanisms while also temporarily bolstering current cash flow levels.
While a variety of baseline factors contributed to the substantial strengthening of IPC'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, IPC 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 it uncertain tax positions in 2010, relating to 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. This has the
potential to significantly reduce key credit metrics in the future and pressure IPC's credit rating.
Despite some uncertainty regarding the run-rate of cash flow levels, Langley Gulch should be online and contributing to cash flow by mid-2012.
In addition, IPC still 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 will maintain credit metrics above
the level exhibited during the 2005-2008 period. 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. As
Moody's considers pension liabilities as part of total adjusted debt, this results in a credit positive action taken by management, though, due to
discount rate movements, only decreased the obligation by $20 million from last year. 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 negative free cash flow position.
Liquidity Profile
IPC has reasonable liquidity supported by internally generated cash flows and its own committed bank credit facilities. The company maintains
a $300 million committed revolving bank credit facility which expires in April 2012 and is principally used to backstop its commercial paper
program. As of December 31, 2010, IPC had about $224 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 December 31,
2010, IPC's leverage ratio was 53%, leaving ample cushion against the covenant.
Moody's anticipates that IPC will be in a negative free cash flow position for the next several years, even with Langley Gulch capex ramping
down in 2012. For 2011, Moody's estimates that IPC will generate slightly above $200 million of cash flow (our estimate of 20% of 2010
Revenue, as there is a rate moratorium until 2012) while spending around $325 million in capex and upstreaming dividends to IDACORP
nearing $60 million, resulting in negative free cash flow of approximately $185 million. Expectations are that the company will continue to fund
cash shortfalls with a balanced mix of debt and equity.
IPC's maturity profile appears very manageable, as the company's March 2, 2011 maturity of $120 million has 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.
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 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 metrics
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. Also, if there
were any negative action from the IRS, regarding historical tax policies taken by the company, the rating could be downgraded.
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 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%)4.0x Baa 3.5 - 4.0x Baa
c) CFO pre-WC / Debt (3 Year Avg) (7.5%)16%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 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 12/31/2010; Source: Moody's Financial Metrics
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