IPC-S-P-Sept-21-2012.pdf

Summary:
Idaho Power Co.
Primary Credit Analyst:
Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670;
[e-mail]
Secondary Contact:
Gerrit W Jepsen, CFA, New York (1) 212-438-2529; [e-mail]
Table Of Contents
Rationale
Outlook
Related Criteria And Research
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Summary:
Idaho Power Co.
Credit
Rating:BBB/Stable/A-2
Rationale
Standard & Poor's Ratings Services bases its 'BBB' corporate credit rating on Idaho Power Co. (IPC) and its parent
IDACORP Inc. on our view of the company's consolidated credit profile. This profile consists primarily of integrated
regulated electric utility operations at IPC, and reflects an "excellent" business risk profile and "aggressive"
consolidated financial risk profile under our corporate risk profile matrix.
IPC's electric utility normally provides more than 99% of IDACORP's earnings and most of its consolidated cash from
operations. IPC serves retail electric customers in Idaho and Oregon, which account for about 95% and 5% of
regulated assets, respectively. We base our assessment of IDACORP's and IPC's business risk profile on their fully
regulated monopoly utility operations, featuring both a low-cost hydroelectric generation base and a credit-supportive
regulatory climate in Idaho. Hydro generation provides about one-half of total generation needs under normal water
conditions, but we expect that the proportion will lessen as loads grow and as non-hydro-generating resources are
added. The utility has some of the lowest average retail customer rates in the U.S. as a result of its abundant
hydroelectric generation. This exposes the company to substantial replacement power price risk when low water flows
lead to reduced generation, though the risk will partially abate with the 2012 completion of the Langley Gulch natural
gas plant. Idaho regulators have authorized a robust power cost recovery mechanism to assist in absorbing variations
and limiting financial exposure, and have granted the company a $60 million rate hike to pay for the Langley Gulch
plant.
IPC's revised annual power cost adjustment (PCA) mechanism in Idaho supports credit quality and reduces the
undercollection of power costs. The most significant credit-supportive components of the annually filed Idaho PCA are
a sharing provision that reduces the company's exposure to 5% of undercollected Non-Public Utilities Regulatory
Policies Act (PURPA) power costs and 0% of undercollected PURPA costs, and a forecast cost methodology designed
to reduce deferrals and collection lag. In exceptionally low water years, deferrals can weaken cash flows and credit
metrics, but Standard & Poor's generally views such collection delays as temporary because we anticipate that the
company will collect more than 95% of costs above base rates over 12 months, with a carrying charge. The PCA has a
long history of support and no instances of material disallowances.
The aggressive financial risk profile of IDACORP and IPC reflects our view of low cash-flow-based credit metrics and
above-average adjusted debt leverage, based on our indicative corporate financial ratios. Credit measures bottomed
out in 2007, but have rebounded somewhat over the past few years because the company has taken steps to stabilize
returns and bolster cash flows with updated base rates and a modified power cost mechanism. Slower expense growth,
robust hydro output in the past few years, and tax benefits have also helped cash flows. We do not consider load loss
stemming from the company's significant energy efficiency spending a significant risk due to a the revenue decoupling
Standard & Poor’s | Research | September 20, 2012 2
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mechanism that the IPUC approved in March 2012. This mechanism is also referred to as a fixed cost adjustment.
For the 12 months ended June 30, 2012, IDACORP's consolidated adjusted funds from operations (FFO) to total debt
was 13.0%, slightly lower than the previous year, as a result of decreased deferred taxes (We adjust credit metrics to
include the debt equivalent of leases, purchased power obligations, and postretirement benefit obligations.) We believe
that the company should maintain average adjusted FFO to debt of at least 12% to sustain the ratings but the ratio is
likely to trend higher as pending rate cases take effect. The company's consolidated adjusted debt to total
capitalization was 54.5% as of June 30, 2012. Adjusted debt leverage remains aggressive, while reported debt leverage
declined to 48%. The company appears to be targeting a balanced unadjusted capital structure and has taken steps to
maintain it, even while executing an ambitious capital investment program. We expect capital expenditures to
decrease after the completion of Langley Gulch in 2012.
Capital spending for the 12 months ended June 30, 2012, totaled $262 million, down from $357 million in the year
preceeding June 30, 2011. If slow growth rates continue over the next few years, the size of IPC's planned capital
expenditures and expected internal cash funding ability should increase cash flows, limiting the need for external
capital. If major transmission proposals in the Northwest move forward, IDACORP may need more external equity to
support the credit rating. Such investments are uncertain and are unlikely to occur until after 2013.
Liquidity
The short-term rating on IDACORP and IPC is 'A-2'. Liquidity is strong, based on an analysis of sources and uses,
absent access to capital markets. Companies with strong liquidity should be able to withstand substantially adverse
market circumstances over the next 24 months while still having sufficient liquidity to meet their obligations. Our
analysis results in coverage that is above 1.5x for the upcoming 12 months. Even when measured over the next 24
months, it remains above 1x.
On Oct. 26, 2011, IDACORP and IPC individually entered into a second amended and restated credit agreement. The
credit agreements mature on Oct. 26, 2016, and provide as much as $125 million at IDACORP and $300 million at IPC.
At June 30, 2012, IDACORP had no amounts outstanding under its credit facility and $53.7 million of commercial
paper outstanding, and IPC had no amounts outstanding under its credit facility and $10 million of commercial paper
outstanding. Each credit agreement contains a covenant requiring a leverage ratio of consolidated debt to consolidated
total capitalization of no more than 65% at the end of each fiscal quarter. At June 30, 2012, IDACORP and IPC were
compliant with all facility covenants.
Recovery analysis
We rate IPC's first mortgage bonds (FMB) 'A-', two notches higher than the issuer credit rating, with a recovery rating
of '1+'. We assign recovery ratings to FMBs issued by U.S. utilities, and this can result in issue ratings being notched
above the corporate credit rating on a utility, depending on the category and the extent of the collateral coverage. We
base the investment-grade FMB recovery methodology the ample historical record of nearly 100% recovery for
secured-bond holders in utility bankruptcies and our view that the factors that supported those recoveries (small size of
the creditor class and the durable value of utility rate-based assets during and after a reorganization, given the essential
service provided and the high replacement cost) will persist. Under our notching criteria, we consider the limitations of
FMB issuance under the utility's indenture relative to the value of the collateral pledged to bondholders, management's
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Summary: Idaho Power Co.
stated intentions on future FMB issuance, and the regulatory limitations on bond issuance when assigning issue ratings
to utility FMBs. FMB ratings can exceed a corporate credit rating on a utility by as much as one notch in the 'A'
category, two notches in the 'BBB' category, and three notches in speculative-grade categories. IPC's collateral
coverage of more than 1.5x supports a recovery rating of '1+' and an issue rating of 'A-', two notches above the
corporate credit rating.
Outlook
The stable outlook reflects our expectation of sufficient operating cash flows to support financial measures that are
adequate for the ratings, the ability to internally fund a significant portion of capital expenditures, and adequate
management of regulatory relationships. In our base case we expect FFO to debt of 16% and debt to EBITDA of 4.7x
in 2013, declining to 4.5x in 2014. We could lower the ratings if the company does not carefully manage costs and
investments to ensure full recovery and the maintenance of credit measures, including FFO to debt of at least 12%. We
could raise the ratings if the company is able to consistently achieve significantly stronger results, including adjusted
FFO to debt of 20% or more and adjusted debt to capital of 50% or less, in addition to effectively managing regulatory
relationships. However, we consider higher ratings to be unlikely in the near term, though we expect some credit
improvement.
Related Criteria And Research
·Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
·Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
·Analytical Methodology, April 15, 2008
Standard & Poor’s | Research | September 20, 2012 4
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Summary: Idaho Power Co.
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