NEW YORK, N.Y., May 16, 2002 — Drought and changes in business strategy have prompted Fitch Ratings to lower IDACORP’s implied senior unsecured debt rating to ‘BBB+’ from ‘A-‘ and the commercial paper rating to ‘F2’ from ‘F1’.
The rating of IDA’s trust preferred shelf registration has been lowered to ‘BBB’ from ‘BBB+’. Idaho Power Company’s (IPC) ratings have been lowered as follows: first mortgage bonds to ‘A’ from ‘A+’, senior unsecured debt to ‘A-‘ from ‘A’; and, preferred stock (all series) to ‘BBB+’ from ‘A’. Fitch has also initiated a short-term rating for IPC of ‘F1’. The Rating Outlook for both IDA and IPC’s securities is Stable.
The lowered ratings better reflect the earnings and cash flow volatility experienced by IPC during the recent drought, the higher business risk associated with IDA’s unregulated business strategy, especially the expansion of IDACORP Energy beyond its current western U.S. focus, and expected financial measures for each company that are consistent with the new rating.
The ratings reflect the May 13, 2002 PCA order allowing timely recovery of the vast majority of the company’s deferred energy supply costs. The PCA mechanism was implemented in 1992, and is designed to pass 90% of Idaho jurisdictional power supply costs/benefits through to ratepayers.
On a system-wide basis, about 80% of IPC’s energy costs are covered by a power cost adjustment (PCA) mechanism and IPC absorbs roughly 20% of any changes in excess energy costs. Energy cost exposure, combined with extremely high power procurement costs, reduced hydroelectric generation capacity (due to drought conditions), and an $11 million PCA disallowance severely impacted 2001 operating margins and cash flow.
On May 13, 2002, the IPUC authorized recovery of $244 million of accrued power costs over a one-year period, and denied IPC’s request to issue $172 million of securitization bonds. The commission also deferred roughly $12 million of power costs to the 2003-2004 PCA. The order authorizes recovery of approximately 95% of the company’s 2002-2003 PCA request, and combined with improved water conditions, should result in a rapid rebound in the utility’s financial position from depressed 2001 levels. Operating cash flow is expected to turn strongly positive in 2002, and debt-to-total capitalization is expected to decline to 50% by the end of 2002 from 56% at the end of 2001.
IDA’s non-utility businesses are active in power marketing, affordable housing, independent power production, fuel-cell technology, and telecom and internet services. IE is the most significant of these businesses. While IE’s 2001 contribution to operating earnings fully offset the decline in utility operating earnings, the unit did little to counter the sharp erosion of consolidated operating cash flow, which fell to a deficit of $60 million. This year, moderating volatility and a decline of credit-worthy counter-parties is likely to result in significantly lower operating income at IE, compared to $177 million in 2001 and $95 million in 2000. IE’s operating earnings in 1999 were $22 million. Management’s stated goal for IDA’s non-utility businesses is a contribution of roughly 40% of consolidated operating earnings within the next several years, and would include a significant expansion at IE, from its heretofore western U.S.-focused strategy. The success of this strategy in a highly competitive, cyclical market place is far from assured.
Drought conditions in the Pacific Northwest, combined with a shortage of generation capacity and frozen retail rates in California, were among the major factors contributing to a sustained period of unusually high wholesale energy prices in western U.S. markets during 2000 and 2001. Given IPC’s significant reliance on hydroelectric generation, poor water conditions and strong demand means greater reliance on more expensive thermal and purchased power resources. The energy crisis exacted a significant financial toll on IPC, despite the Idaho PCA mechanism.
This reflects: 1) less than full recovery of energy costs (combined Idaho and Oregon jurisdictional recovery is approximately 80% of total system-wide energy costs); 2) disallowed PCA recovery of $11 million; and, 3) financing costs associated with deferred balances.
IPC’s operating earnings plunged 47% to $90 million in 2001 from $169 million in 2000, while operating cash flow declined to a $60 million deficit from $161 million. Deferred regulatory assets related to unrecovered energy costs totaled $290 million at the end of 2001, representing roughly 10% of total assets and 15% of total capitalization. The utility’s short-term debt tripled to $309 million in 2001, from $90 million in 2000.