SANDP-IPC-4-27-2012.pdf

Idaho Power Co.
Major Credit Factors
Strengths:
• Strong power cost-adjustment mechanism that allows the company to
recover most purchased power costs from ratepayers;
• Low-cost, hydro- and coal-based generating plants;
• Generally supportive state regulatory regime; and
• Absence of material unregulated businesses.
Corporate Credit Rating
BBB/Stable/ A-2
Weaknesses:
• High exposure to hydroelectric generation volatility on the Snake River, resulting in unpredictable power supplies
and costs;
• Higher cash flow volatility that periodically reduces credit metrics; and
• Significant capital expenditures related to generation and transmission needs, coupled with uncertain future
growth and recovery.
Rationale
Standard & Poor's Ratings Services bases its 'BBB' corporate credit rating (CCR) on Idaho Power Co. (IPC) and its
parent IDACORP Inc. on our view of the company's consolidated credit profile. The profile consists primarily of
integrated regulated electric utility operations at IPC, and reflects an II excellent II business risk profile and
II aggressive II 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. IDACORP's and IPC's excellent business risk profile reflects our view of fully
regulated monopoly utility operations, featuring both a low-cost hydroelectric generation base and a
credit-supportive regulatory climate in Idaho. Hydrogeneration 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
nonhydro-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, although the risk will partially abate in 2012 as the
Langley Gulch facility begins to supply IPC. Idaho regulators have authorized a robust power cost recovery
mechanism to assist in absorbing variations and limiting financial exposure.
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 PCA are a
sharing provision that reduces the company's exposure to 5% of undercollected power costs, and a forecast cost
methodology designed to reduce deferrals and collection lag. In exceptionally low water years, deferrals can
materially 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 95% of costs above base rate over 12 months, with a
carrying charge. The PCA has a long history of support and no instances of material disallowances. Furthermore, in
Standard & Poor's I Research I April 27, 2012
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Idaho Power Co.
March 2012, IPC was permanently permitted a revenue decoupling mechanism, governing weather-normalization
on residential customers and other small customers.
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 metrics
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
fixed cost adjustment (FCA) mechanism in Idaho that decouples certain costs from energy usage by residential and
commercial customers. However, the Idaho commission decision to continue to allow IPC to use the FCA--but not
permanently--highlights our uncertainty about how energy efficiency spending affects credit.
For the 12 months ended Dec. 31, 2011, IDACORP's consolidated adjusted funds from operations (FFO) to total
debt was 15.1 %, slightly higher than the previous year, supported by higher base rates and increased 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 metric is likely to trend higher as pending rate cases take effect. The company's
consolidated adjusted debt to total capitalization was 54.3% as of Dec. 31, 2011. Adjusted debt leverage remains
aggressive, while reported debt leverage trended down 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 when company completes the Langley Gulch plant this year.
Capital spending for the 12 months ended Dec. 31, 2011, totaled $327 million, down from $340 million in 2010.
The Idaho commission preapproved this investment after new legislation in 2009 granted preapproval authority. 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 lx.
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 Feb 17, 2012, IDACORP had no amounts outstanding under its credit facility and $51.5 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, 2011,
IDACORP and IPC were compliant with all facility covenants.
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Idaho Power Co.
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 CCR on a utility, depending on the CCR 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-bondholders 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 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 utility CCR 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 l.5x supports a recovery rating of '1+' and an issue rating of 'A-', two notches
above the CCR.
Outlook
The stable outlook reflects our expectation of sufficient operating cash flows to support financial metrics 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 metrics, including FFO to debt of at least
12 % . We could raise the ratings if the company can consistently achieve significantly stronger financial metrics,
including adjusted FFO to debt of 20% 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, although we expect some
credit improvement.
Related Criteria And Research
• Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
• Business Risk/Financial Risk Matrix Expanded, May 27, 2009
• Analytical Methodology, April 15, 2008
• Changes To Collateral Coverage Requirements For '1+' Recovery Ratings On U.S. Utility First Mortgage Bonds,
Sept. 6, 2007
Table 1
IDACORP Inc. -- Peer Comparison
Industry Sector: Electric
Rating as of April 13. 2012
IDACORP Inc.
BBB/Stable/ A-2
Portland General Electric Co. NorthWestern Corp.
BBB/Stable/ A-2 BBB/Stable/ A-2
Avista Corp.
BBB/Stable/ A-2
Puget Sound Energy
Inc.
BBB/Stable/A-2
(Mil.$)
--Average of past three fiscal years--
Revenues 1,037.5 1,800.0 1, 115.7 1,552.6 3,256.B
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Table 1
IDACORP Inc. -- Peer Comparison (cont.)
Idaho Power Co.
EBITDA 337.6 522.3 252.4 349.3 840.2
Net income from cont. 144.6 121.0 81.1 93.2 129.8 aper.
Funds from operations 301.6 403.5 216.2 269.4 733.7 (FFO)
Capital expenditures 305.5 493.6 199.6 231.9 979.6
Free operating cash flow (8.7) (60.4) 3.1 36.0 (210.9)
Discretionary cash flow (66.8) (136.7) (46.5) (19.1) (412.4)
Cash and short-term 103.2 13.7 5.5 99.9 48.6
investments
Debt 1,946.8 2,198.0 1,151.9 1,418.2 3,915.3
Equity 1,533.1 1,602.7 822.2 1,179.2 3,218.4
Adiusted ratios
EBITDA margin(%) 32.5 29.0 22.6 22.5 25.8
EBITDA interest coverage 3.5 3.8 3.3 4.6 3.5 (x)
EBIT interest coverage (x) 2.4 2.2 2.2 3.1 1.7
Return on capital(%) 5.9 7.2 7.8 7.7 5.2
FFO/debt (%) 15.5 18.4 18.8 19.0 18.7
Free operating cash (0.4) (2.7) 0.3 2.5 (5.4)
flow/debt(%)
Debt/EBITDA (x) 5.8 4.2 4.6 4.1 4.7
Total debt/debt plus equity 55.9 57.8 58.4 54.6 54.9 (%)
Table 2
IDACORP Inc. -- Financial Summary
Industry Sector: Electric
--Fiscal year ended Dec. 31--
2011 2010 2009 2008 2007
Rating history BBB/Stable/ A-2 BBB/Stable/ A-2 BBB/Stable/ A-2 BBB/Stable/ A-2 BBB+/Negative/ A-2
(Mil.$)
Revenues 1,026.8 1,036.0 1,049.8 960.4 879.4
EBITDA 314.7 348.0 350.2 306.7 264.6
Net income from continuing operations 166.7 142.8 124.4 98.4 82.3
Funds from operations (FFO) 298.1 301.9 304.9 180.0 119.2
Capital expenditures 327.1 340.3 249.2 249.3 283.5
Dividends paid 59.7 57.9 56.8 54.2 53.0
Debt 1,968.8 2,041.2 1,830.5 1,748.0 1,545.8
Preferred stock 0.0 0.0 0.0 0.0 0.0
Equity 1,661.7 1,536.0 1,401.5 1,302.4 1,207.3
Debt and equity 3,630.5 3,577.2 3,232.0 3,050.4 2,753.1
Adiusted ratios
EBITDA margin(%) 30.6 33.6 33.4 31.9 30.1
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Table 2
IDACORP Inc. -- Financial Summary (cont.)
Idaho Power Co.
EBIT interest coverage (x) 2.2 2.4 2.6 2.2 2.1
FFO int. cov. (x) 4.1 3.8 4.0 2.9 2.4
FFO/debt (%) 15.1 14.8 16.7 10.3 7.7
Discretionary cash flow/debt(%) (4.5) (3.7) (2.1) (8.9) (14.9)
Net cash flow/capex (%) 72.9 71.7 99.5 50.5 23.3
Debt/debt and equity(%) 54.2 57.1 56.6 57.3 56.1
Return on capital(%) 4.9 6.1 6.8 5.8 5.3
Return on common equity(%) 8.0 7.8 8.8 7.0 5.9
Common dividend payout ratio (un-adj.) (%) 35.8 40.7 45.7 55.1 64.4
Table 3
Reconciliation Of IDACORP Inc. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil.$)
--Fiscal year ended Dec. 31, 2011--
IDACORP Inc. reported amounts
Shareholders' Operating Interest Cash flow from Debt equity Revenues EBITDA income expense operations
Reported 1,542.8 1,661.7 1,026.8 284.0 164.2 71.5 310.2
Standard & Poor's adjustments
Operating leases 18.0 1.0 1.0 1.0 1.7
Postretirement benefit 237.4 14.8 14.8 1.9 (2.0)
obligations
Capitalized interest 13.0 (13.0)
Share-based compensation 4.2 expense
Power purchase agreements 134.9 9.7 7.4 7.4 2.3
Asset retirement obligations 13.9 0.9 0.9 0.9 (0.3)
Reclassification of 22.0
nonoperating income (expenses)
Reclassification of
working-capital cash flow
changes
Debt - Accrued interest not 21.8
included in reported debt
Total adjustments 426.0 0.0 0.0 30.7 46.2 24.2 (11.3)
Standard & Poor's adjusted amounts
Interest Cash flow from
Debt Equity Revenues EBITDA EBIT expense operations
Adjusted 1,968.8 1,661.7 1,026.8 314.7 210.4 95.8 298.9
Ratings Detail (As Of April 27, 2012)
Idaho Power Co.
Corporate Credit Rating
Commercial Paper
Local Currency
Senior Secured
Standard & Poor's I Research I April 27, 2012
BBB/Stable/ A-2
A-2
A-
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Idaho Power Co.
Ratings Detail (As Of April 27, 2012) (cont.)
Senior Unsecured
Corporate Credit Ratings History
31-Jan-2008
27-Mar-2006
29-Nov-2004
Business Risk Profile
Financial Risk Profile
Related Entities
IDACORP Inc.
Issuer Credit Rating
Commercial Paper
Local Currency
BBB/A-2
BBB/Stable/ A-2
BBB+/Negative/ A-2
BBB+/Stable/ A-2
Excellent
Aggressive
BBB/Stable/ A-2
A-2
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Pcor's credit ratings on the global scale are comparable across countries. Standard
& Peer's credit ratings on a national scale are relative to obligors or obligations within that specific country.
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The McGrow·Hi/1 Companies I-