S-P-Mar-2013.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) 212-438-1000; [e-mail]
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Recovery Analysis
Related Criteria And Research
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Summary:
Idaho Power Co.
Corporate Credit Rating BBB/Stable/A-2
Profile Assessments
BUSINESS RISK EXCELLENT
Vulnerable Excellent
FINANCIAL RISK AGGRESSIVE
Highly leveraged Minimal
Rationale
Business Risk: Excellent Financial Risk: Aggressive
·Relatively slow economic growth in its service
territory, which has resulted in a decreased need for
new generation
·A credit supportive regulatory body in Idaho, which
has provided the utility with appropriate recovery
mechanisms and has historically prevented
regulatory lag
·Substantial dependence on hydroelectric power,
and, consequently, risk of relying on purchased
power in "low-water" years
·Significant capital spending during the next few
years, stemming from investments in transmission
and new generation
·A historically conservative financial policy that has
emphasized the use of excess cash to pay down
debt, though this may change in coming years
·The ability to consistently access capital markets in
order to fund large capital expenditures
·A "strong" liquidity profile, which is quite beneficial
given the utility's substantial dependence on
hydroelectric power
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Outlook: Stable
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 spending, and adequate
management of regulatory relationships. In our base case we expect FFO to debt of 15% and debt to EBITDA of
4.6x in 2013, as well as debt to capital of about 52%
Downside scenario
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 14%. This could result if a
series of poor regulatory outcomes occur, or if hydro conditions weaken for several consecutive years.
Upside scenario
We could raise the ratings if the company is able to consistently achieve significantly stronger financial measures,
including adjusted FFO to debt of 18% or more and adjusted debt to capital of 50% or less, in addition to solidly
managing regulatory relationships. However, higher ratings are unlikely in the near term, but we expect some
credit improvement.
Standard & Poor's Base-Case Scenario
Assumptions Key Metrics
·The company will have capital spending of about
$250 million during 2013, increasing $290 million
beyond that
·The company will see sales growth of slightly higher
than 1% over the next three years
·The company will continue to experience favorable
regulatory outcomes, and current provisions will
remain in place during the forecast period
·The company's dividend policy will become more
aggressive, with annual payout reaching $81 million
by 2014
2012A 2013E 2014E
FFO to debt 12.4%15.6%15%
Debt to capital 54%52.1%51.3%
Debt to EBITDA 5.1x 4.6x 4.8x
A--Actual. E—Estimate.
Business Risk: Excellent
Idaho Power Co.'s (IPC) electric utility normally provides more than 99% of IDACORP Inc.'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. Our assessment of IDACORP's and IPC's business risk profile reflects
their fully regulated monopoly utility operations, featuring both a low-cost hydroelectric generation base and a
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Summary: Idaho Power Co.
credit-supportive regulatory climate in Idaho. Low-cost hydro generation provides about one-half of total generation
needs under normal water conditions. This exposes the company to substantial replacement power price risk when
low water flows lead to reduced generation, though the risk has partially abated with the 2012 completion of the
Langley Gulch natural gas plant, which was added to rate base.
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
measures, and create cash flow volatility, but Standard & Poor's generally views such collection delays as temporary.
Financial Risk: Aggressive
The "aggressive" financial risk profile of IDACORP and IPC reflects our view of low cash-flow-based credit measures
and above-average adjusted debt leverage, based on our indicative corporate financial ratios. Credit measures
bottomed out in 2007, but have rebounded 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
mechanism. This mechanism is also referred to as a fixed cost adjustment.
For the 12 months ended Dec. 31, 2012, IDACORP's consolidated adjusted funds from operations (FFO) to total debt
was 12.4%, slightly lower than the previous year, as a result of worse weather conditions. We believe that the company
should maintain average adjusted FFO to debt of at least 14% to sustain the ratings. The company's consolidated
adjusted debt to total capitalization was 54% as of Dec. 31, 2012. Adjusted debt leverage remains aggressive and
appropriate for the financial risk profile. The company appears to be targeting a balanced capital structure and has
taken steps to maintain it, even while executing an ambitious capital investment program.
Capital spending for the 12 months ended Dec. 31, 2012, totaled $230 million, down from $327 million in the year
ended Dec. 31, 2011. If slow growth rates continue over the next few years, the size of IPC's planned capital spending
and expected internal cash funding ability should incrementally 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 at least 2014.
Liquidity: Strong
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 more than 1.5x for the upcoming 12 months. Even when measured over the next 24
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Summary: Idaho Power Co.
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.
On Feb. 25, 2013, IDACORP had no amounts outstanding under its credit facility and $69.7 million of commercial
paper outstanding, and IPC had no amounts outstanding under its credit facility and no 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 Dec. 31, 2012, IDACORP and IPC were
compliant with all facility covenants.
Principal Liquidity Sources Principal Liquidity Uses
·Credit line availability of $355 million during the
next 12 months
·Funds from operations of $318 million during the
next 12 months
·Debt amortization of $71 million during the next 12
months
·Capital spending of $250 million during the next 12
months
·Dividends of $76 million during the next 12 months
Recovery Analysis
We assign recovery ratings to first mortgage bonds (FMBs) issued by U.S. utilities, which can result in issue ratings
being notched above a utility's corporate credit rating (CCR) depending on the rating category and the extent of the
collateral coverage. The FMBs issued by U.S. utilities are a form of "secured utility bond" (SUB) that qualify for a
recovery rating as defined in our criteria (see "Collateral Coverage and Issue Notching Rules for ‘1+’ and ‘1’ Recovery
Ratings on Senior Bonds Secured by Utility Real Property", published Feb. 14, 2013)
The recovery methodology is supported by the ample historical record of 100% recovery for secured bondholders in
utility bankruptcies in the U.S. and our view that the factors that enhanced those recoveries (limited 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 in the future.
Under our SUB criteria, we calculate a ratio of our estimate of the value of the collateral pledged to bondholders
relative to the amount of FMBs outstanding. FMB ratings can exceed a utility's CCR by up to one notch in the 'A'
category, two notches in the 'BBB' category, and three notches in speculative-grade categories depending on the
calculated ratio.
Idaho Power Co.'s FMBs benefit from a first-priority lien on substantially all of the utility's real property owned or
subsequently acquired. Collateral coverage of more than 1.5x supports a recovery rating of '1+' and an issue rating two
notches above the CCR at 'A-'.
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Summary: Idaho Power Co.
Related Criteria And Research
·Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
·Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
·2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Business And Financial Risk Matrix
Business Risk
Financial Risk
Minimal Modest Intermediate Significant Aggressive Highly
Leveraged
Excellent AAA/AA+AA A A-BBB --
Strong AA A A-BBB BB BB-
Satisfactory A-BBB+BBB BB+BB-B+
Fair --BBB-BB+BB BB-B
Weak ----BB BB-B+B-
Vulnerable ------B+B B- or below
Note:These rating outcomes are shown for guidance purposes only. The ratings indicated in each cell of the matrix are the midpoints of the likely
rating possibilities. There can be small positives and negatives that would lead to an outcome of one notch higher or lower than the typical matrix
outcome. Moreover, there will be exceptions that go beyond a one-notch divergence. For example, the matrix does not address the lowest rungs of
the credit spectrum (i.e., the 'CCC' category and lower). Other rating outcomes that are more than one notch off the matrix may occur for
companies that have liquidity that we judge as "less than adequate" or "weak" under our criteria, or companies with "satisfactory" or better business
risk profiles that have extreme debt burdens due to leveraged buyouts or other reasons. For government-related entities (GREs), the indicated
rating would apply to the standalone credit profile, before giving any credit for potential government support.
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Summary: Idaho Power Co.
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