Fitch Affirms IDACORP and Idaho Power’s IDRs at ‘BBB/F2

Fitch has affirmed the Issuer Default Rating (IDR) and individual security ratings of IDACORP, Inc. (NYSE:IDA) and its primary electric utility operating subsidiary Idaho Power Company (IPC). Fitch has also revised the Rating Outlook for IDA and IPC to Negative from Stable. Approximately $1.2 billion of debt is affected by the rating action, as follows:

IDA:

–IDR ‘BBB’;

–Short-term IDR ‘F2′;

–Commercial paper (CP) ‘F2′.

IPC:

–IDR ‘BBB’;

–Short-term IDR ‘F2′;

–Senior secured ‘A-’;

–Senior unsecured ‘BBB+’;

–CP ‘F2′.

The Outlook revision primarily reflects the company’s weakening underlying credit metrics due to its inability under its power cost adjustment mechanism (PCA) to fully recover higher thermal generation production and purchase power costs in rates. Water conditions have been below-normal in 6 of the last 7 years and it appears that 2008 could extend that trend. This dynamic in concert with a relatively large capital investment program and timing differences between when those costs are incurred and reflected in rates appear likely to result in earnings, cash flow and credit metrics more consistent with low ‘BBB’ creditworthiness in Fitch’s estimation.

IPC’s PCA mechanism allows the utility to defer and pass through to customers 90% of its net power supply costs. The PCA has offset the lion’s share of the potential adverse financial impact of higher operating costs due to drought conditions in recent years. Nonetheless, absorption of the remaining 10% of costs not recovered in rates has led to a gradual erosion of IPC’s financial strength.

Fitch notes that capital expenditures are projected to average approximately $300 million per annum on a consolidated basis primarily to meet the growth and reliability requirements of IPC. Consolidated IDA capex totaled $286 million in 2007 compared to $80 million of operating cash flow. External funding was provided by a balanced mix of new debt and equity issuance in 2007. Future cash flow levels will be largely dependent upon water conditions and hydro production, among other factors.

On Feb. 28, 2008, the Idaho Public Utilities Commission issued a final order approving IPC’s settlement agreement. The settlement agreement calls for an approximate $32 million (5.2%) rate increase effective March 1, 2008. The settlement is silent on return on equity. Favorably, the agreement includes provisions for future discussions to implement forward-looking test years in future rate case filings to reduce regulatory lag and associated earnings and cash flow attrition. IPC filed the GRC in June 2007 requesting a $63.9 million (10.35%) rate increase.

The agreement stipulates that the parties to the settlement make a good faith effort to adjust or replace IPC’s load growth adjustment rate (LGAR). The LGAR adjusts the power supply costs IPC is allowed to include in its annual PCA for differences in actual and the estimated load used to calculate base rates.

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