20210325Avista to Staff 75 Attachment A10.pdf

INFRASTRUCTURE AND PROJECT FINANCE
CREDIT OPINION
19 December 2019
Update
RATINGS
Avista Corp.
Domicile Spokane, Washington,
United States
Long Term Rating Baa2
Type LT Issuer Rating
Outlook Stable
Please see the ratings section at the end of this report
for more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Edna R Marinelarena +1.212.553.1383
Analyst
[e-mail]
Ryan Wobbrock +1.212.553.7104
VP-Sr Credit Officer
[e-mail]
Michael G. Haggarty +1.212.553.7172
Associate Managing Director
[e-mail]
Jim Hempstead +1.212.553.4318
MD-Utilities
[e-mail]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Avista Corp.
Update to credit analysis
Summary
Avista Corporation's (Avista) credit profile reflects its primary business as a low-risk vertically
integrated electric and gas utility with supportive cost recovery mechanisms, such as electric
and gas decoupling. The credit further incorporates the company's adequate track record
with its primary regulator, the Washington Utilities and Transportation Commission (WUTC),
which includes contentious regulatory proceedings in recent years. We expect proceedings to
become more predictable over time given the May 2019 passage of a new clean energy bill
in Washington. The bill is credit positive for Avista because it clarifies the WUTC's authority
to consider and implement various constructive regulatory mechanisms including multi-year
rate plans and performance and incentive-based regulation.
Avista's credit is constrained by cash flow loss associated with tax reform, given the
historically high contribution of deferred income taxes to operating cash flow. We expect key
metrics including CFO pre-W/C to debt will range in the mid teens for the next three years.
Avista has some unregulated exposure in addition to its ownership of regulated utility Alaska
Electric Light and Power (AEL&P, Baa3 Stable) that provides marginal operational and cash
flow diversity, but remain neutral in terms of our view of Avista's credit.
Exhibit 1
Historical CFO Pre-WC, Total Debt and CFO Pre-WC to Debt
$ in millions
$380 $386 $404 $358 $345
$1,838
$1,991 $2,051
$2,297 $2,336
20.7%
19.4%19.7%
15.6%14.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
$-
$500
$1,000
$1,500
$2,000
$2,500
Dec-15 Dec-16 Dec-17 Dec-18 LTM Sept-19
CFO Pre-W/C Total Debt CFO Pre-W/C / Debt
Source: Moody's Financial Metrics
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Credit Strengths
» Low-risk, $3.3 billion rate base utility with supportive cost recovery mechanisms
» New clean energy bill provides for additional credit positive regulatory tools
» Track record of stable cash flow generation
Credit Challenges
» Cash flow loss due to tax reform
» Inconsistent track record of regulatory outcomes relating to cost recovery mechanisms
» Exposure to environmental risk with carbon regulation, social risk with responsible production, and governance risk with financial
policies and risk management
Rating Outlook
The stable outlook incorporates our view that Avista's financial profile will maintain CFO pre-W/C to debt in the mid-teens range. In
addition, the stable outlook assumes Avista will receive adequate cost recovery authorizations within its regulatory jurisdictions and
that unregulated operations will remain below 15% of consolidated earnings and cash flow.
Factors that Could Lead to an Upgrade
» Demonstrated improvement in regulatory environments and relationships
» CFO pre-WC to debt above 19% on a sustainable basis
» CFO pre-WC less dividends above 13% on a sustained basis
Factors that Could Lead to a Downgrade
» Sustained degradation of regulatory relationships resulting in inadequate regulatory relief
» CFO pre-WC to debt below 14% on a consistent basis
Key Indicators
Avista Corp. [1]
Dec-15 Dec-16 Dec-17 Dec-18 LTM Sept-19
CFO Pre-W/C + Interest / Interest 5.7x 5.4x 5.2x 4.5x 4.2x
CFO Pre-W/C / Debt 20.7%19.4%19.7%15.6%14.8%
CFO Pre-W/C – Dividends / Debt 16.2%15.0%15.2%11.3%10.4%
Debt / Capitalization 44.8%44.5%48.4%50.5%49.4%
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Financial Metrics™
Source: Moody's Financial Metrics
Profile
Avista is primarily an electric and natural gas utility whose Avista Utilities operating division provides electric transmission and
distribution, and natural gas distribution services in parts of eastern Washington and northern Idaho. Avista Utilities also provides
natural gas distribution service in parts of northeastern and southwestern Oregon. The utility has electric generating facilities in
Washington, Idaho, Oregon and Montana and also supplies electricity to a small number of customers in Montana. For the nine
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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months ended 30 September 2019, Avista Utilities averaged over 388,000 electric and over 356,000 gas customers. Avista also owns
Alaska Energy and Resources Company (AERC; not rated), parent of Alaska Electric Light and Power Company (AEL&P; Baa3 Stable)
which serves around 17,000 electric customers in Juneau, Alaska.
Avista's utility operations are regulated by the Washington Utilities and Transportation Commission (WUTC), the Idaho Public Utilities
Commission (IPUC), the Oregon Public Utility Commission (OPUC) and the Montana Public Service Commission (MPSC). AEL&P is
under the purview of the Regulatory Commission of Alaska (RCA).
Exhibit 3
Nine months ended 30 September 2019 Earnings Contribution
Exhibit 4
Estimated Rate Base by Jurisdiction
Avista Utilities
94%
AELP6%
Excludes Other SegmentSource: Avista Corporation
Idaho30%
Washington62%
Oregon8%
As of 30 September 2019
Excludes AEL&PSource: Company Documents & Moody's Investors Service
Detailed Credit Considerations
Weakened financial position expected to sustain at current adequate levels
As of 30 September 2019 (LTM), Avista's key financial metrics weakened to levels in line with expectations following tax reform. CFO
pre-W/C to debt declined to 14.8% and is expected to remain in the mid teens over the next three years. Deferred income taxes
historically constituted a significant portion of Avista's operating cash flow, over half of operating cash flow in 2013, a third in 2016,
and averaging about 30% over the 2014 to 2017 period. Going forward, we expect stable financial performance.
Exhibit 5
Avista Corp. Historical Deferred Income Taxes Contribution to Operating Cash Flow (CFO)
($ in millions)
$52
$125
$70
$9 $8
$376
$358
$410
$362
$337
13.8%
34.8%
17.0%
2.4%2.4%
0%
5%
10%
15%
20%
25%
30%
35%
40%
-
50
100
150
200
250
300
350
400
450
12/31/15 12/31/16 12/31/17 12/31/18 LTM (09/19)
Deferred Income Taxes CFO Deferred Income Taxes % of CFO
Source: Moody's Financial Metrics™
3 19 December 2019 Avista Corp.: Update to credit analysis
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Credit supportive regulatory jurisdictions with adequate track record for cost recovery
We view Avista's regulatory jurisdictions to be generally credit supportive. The Washington Utilities and Transportation Commission
(WUTC), which regulates roughly 60% of the company's rate base and revenue, has electric and gas decoupling mechanisms which
allow for timely recovery of fixed costs for the utility and drive stable and predictable gross margin and cash flow in the face of
declining use. Even so, the use of historic test years result in the need for Avista to file general rate cases frequently to recover and earn
on investments.
Avista filed its most recent electric and natural gas general rate cases on 30 April 2019 with the WUTC. The original filing was for a
two-year rate plan that included a $45.8 million increase in annual electric revenue and a $12.9 million increase in annual natural gas
revenue effective April 2020 and a $18.9 million increase for annual electric revenue and a $6.5 million increase for annual natural
gas revenues effective April 2021. The request was based on a 9.9% ROE and 50% equity layer. The company entered into a partial
multiparty settlement on 6 November 2019 that is pending final approval by WUTC. The agreement allows for one year rate plan
increasing electric revenues by $28.5 million and natural gas revenues by $8 million effective 1 April 2020. The agreement is based on
an ROE of 9.4% and equity layer of 48.5%, which are slightly below industry averages. Additionally, the settlement includes provisions
for cost recovery associated with Colstrip units 3 and 4 decommissioning and remediation (D&R) expenses estimated at about $33
million as of 31 March 2020 and ability to accelerate depreciation to 2025 in recognition of the state's new energy bill requirements.
The commission is expected to issue final ruling March 2020.
While we consider the last two Washington rate case outcomes as neutral from a credit perspective, the company has had a somewhat
contentious regulatory relationship in recent years particularly related to credit supportive mechanisms that would allow for faster cost
recovery. In an ongoing review of Avista's 2015 rate case, the rate base attrition adjustments, which we considered credit supportive,
were ruled by the Washington Court of Appeals in August 2018 as against the state’s used and useful law. Subsequently, both the Court
of Appeals and Superior Court have terminated and remanded the case back to the WUTC to recalculate Avista's rates without the
attrition adjustment used in the final order. We expect Avista's regulatory environment to strengthen as a result of passage of a new
clean energy legislation discussed in the next section.
In Idaho, Avista reached an all parties settlement on 11 October 2019 for its electric general rate case filed 10 June 2019. The
settlement, which was approved on 1 December 2019 by IPUC, included a revenue reduction of $7.18 million effective 1 December
2019. The approved revenue decrease was based on a 9.5% ROE and a 50% equity ratio, which were in line with prior approved levels.
Avista requested a revenue increase of about $5.3 million that included costs associated with their wind generation PPAs in base rates
instead of continuation of the Power Cost Adjustment (PCA) mechanism. The settlement approved continuation of the PCA instead of
inclusion in base rates. Avista was authorized electric and gas decoupling mechanisms, known as Fix Cost Adjustment (FCA) in Idaho, in
December 2015 for a three year period beginning 1 January 2016. The company filed a request for continuation, and the IPUC approved
the request on 17 December 2019.
In Oregon, on 9 October 2019, the OPUC approved an all-party natural gas rate settlement filed in August 2019 taking effect 15
January 2020. The approved settlement increases natural gas revenues by $3.6 million and maintains the 9.4% ROE and a 50%
equity layer. As part of its March 2016 rate case order in Oregon, Avista is allowed to implement a revenue per customer decoupling
mechanism.
In Alaska, AELP lowered customer rates by 6.7% or $2.4 million annually effective 1 August 2018 to reflect the lower tax rate
associated with the Tax Cuts and Jobs Act (TCJA). The RCA also approved AELP's proposal to refund to customers a one-time credit
equal to the 6.7% rate reduction for 1 January through 31 July 2018. The utility completed the refund during the third quarter of 2018.
The impact of the TCJA on AELP’s deferred income taxes will be addressed in its next general rate case to be filed by August 30, 2021.
AELP's allowed ROE of 11.95% and equity layer of 58.18% is above the average of authorized returns for the industry, a credit positive.
However, we note that Alaska has a statutory period of 450 days or approximately 15 months to decide on rate cases, the longest in
the nation and has not authorized cash flow stabilizing mechanisms such as revenue decoupling.
Washington's clean energy bill enhances regulatory framework
On 7 May 2019, Washington State Governor Jay Inslee signed a package of clean energy legislation including the 100% clean energy
and regulatory reform bill (SB 5116). The bill requires electric utilities to eliminate coal-fired generation by 2025, transition the state's
electricity supply to 80% renewables and 100% carbon neutral power by 2030 and be 100% carbon free by 2045. We view the law as
4 19 December 2019 Avista Corp.: Update to credit analysis
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
credit positive because it includes the potential for enhanced cost recovery mechanisms that can improve utility financial performance
and provides a legal and regulatory framework to reduce carbon exposure risks.
Compliance with the law will require significant investment and an overhaul of existing state electric infrastructure. However, the law
acknowledges the WUTC's authority to implement performance and incentive based regulation, multiyear rate plans and other “flexible
regulatory mechanisms” to achieve the state's public interest objectives. Importantly, the law also recognizes that the policy must
include safeguards that do not impair the reliability of the electricity system nor impose unreasonable costs on utility customers.
Some of the key components of SB 5116 include: four year clean energy implementation plans to be filed and approved beginning in
2022; successive four year compliance periods to implement WUTC approved clean energy plans for interim goals beginning in 2022;
penalty payments for failure to comply with emissions goals; alternative compliance options (including payments, use of renewable
energy certificates, investment in “energy transformation projects”); and 2% revenue increase caps on compliance costs. It also
promotes energy transformation projects, including support of the electrification of transportation, smart grid investments, distributed
generation and grid resilience, among others. SB 5116 also requires the WUTC to accelerate depreciation schedules for coal generation
resources, including transmission lines, to December 31, 2025, or to allow investor-owned utilities to recover costs in rates for earlier
closure of those facilities.
Environmental, social and governance considerations
From an environmental perspective, Avista has moderate carbon transition risk within the regulated electric and gas utility sector. The
company's electric generation resource mix consists of 34% fossil fuels and 9% coal. The Washington and Idaho commissions agreed
to set aside $11.7 million and $6.4 million, respectively, of TCJA related electric tax benefits to offset costs associated with accelerating
depreciation of Avista's only coal facilities, Colstrip Units 3 and 4. The remaining useful life under the WUTC agreement is 31 December
2025 while the IPUC authorized to 31 December 2027. Colstrip Units 3 & 4 will cease service to Washington customers in 2025 in line
with state requirements.
From a social perspective, Avista customer relations and regulatory environment are important factors. Although contentious in the
past, we anticipate a more predictable regulatory environment as a result of recent legislative action. Additionally, the safety and
reliability of service are extremely important and are a key focus for Avista's utilities.
From a governance perspective, in general, we view Avista's corporate governance and policies as balanced with an end objective of
setting policies that mitigate financial, environmental and social risks.
Exhibit 6
Avista Utilities Electric Generation Resource Mix
As of 31 December 2018
Natural Gas
34%
Coal9%
Wind4%Biomass2%
Hydro
51%
Based on maximum capacity
Excludes AEL&P
Source: Company Presentation
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Liquidity Analysis
We expect Avista to maintain adequate liquidity over the next 12-18 months. Avista's external liquidity sources consist of a $400
million senior secured revolving credit facility, which expires in April 2021. At the end of September 2019, there was about $180 million
available under the line of credit. Since Avista currently has unsecured investment grade ratings from two nationally recognized rating
agencies, the company has the option to request the banks to relinquish the existing First Mortgage Bond collateral position. Avista
has not asked for the release, keeping the company as one of the few US regulated utilities to maintain a secured bank credit facility.
The secured nature of the credit facilities constrains Avista's liquidity flexibility, in our opinion, since the typical investment grade issuer
(having an unsecured facility) can use collateral as an option to improve bank credit access during periods of unforeseen liquidity stress.
Avista was in compliance with the facility’s sole covenant of less than 65% capitalization, with a ratio of 53.7% as of 30 September
2019. We note that the company has no material adverse change language beyond the close of the facility, a credit positive.
AEL&P has a $25 million line of credit which expires in 2024 and requires a consolidated debt to capitalization covenant of 67.5%. As of
30 September 2019, there were no borrowings or letters of credit outstanding under the facility and AEL&P was in compliance with its
covenant, with a ratio of 52.3%.
Avista's next material debt maturities occur in December 2019 and 2020, when $90 million and $52 million of senior debt is due,
respectively. In September 2019, Avista issued $180 million of First Mortgage bonds in November 2019. The proceeds were used to
repay the maturing $90 million senior debt and repay a portion of the outstanding balance under Avista's credit facility.
Exhibit 7
Avista Corp. Debt Maturities
($ in millions)
$90
$52
$250
$14
0
50
100
150
200
250
300
2019 2020 2021 2022 2023 2024 2025 2026 2027
* Excludes debt maturities of $15 million at Alaska Energy and Resources Company in 2019
Source: Avista Corporation
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Methodology and Scorecard
Exhibit 8
Rating Factors
Avista Corp.
Regulated Electric and Gas Utilities Industry Scorecard [1][2]
Factor 1 : Regulatory Framework (25%)Measure Score Measure Score
a) Legislative and Judicial Underpinnings of the Regulatory Framework A A A A
b) Consistency and Predictability of Regulation Baa Baa Baa Baa
Factor 2 : Ability to Recover Costs and Earn Returns (25%)
a) Timeliness of Recovery of Operating and Capital Costs Baa Baa Baa Baa
b) Sufficiency of Rates and Returns Baa Baa Baa Baa
Factor 3 : Diversification (10%)
a) Market Position A A A A
b) Generation and Fuel Diversity A A A A
Factor 4 : Financial Strength (40%)
a) CFO pre-WC + Interest / Interest (3 Year Avg)4.8x A 4x - 5x A
b) CFO pre-WC / Debt (3 Year Avg)17.4%Baa 15% - 17%Baa
c) CFO pre-WC – Dividends / Debt (3 Year Avg)13.0%Baa 10% - 12%Baa
d) Debt / Capitalization (3 Year Avg)47.6%Baa 46% - 48%Baa
Rating:
Scorecard-Indicated Rating Before Notching Adjustment Baa1 Baa1
HoldCo Structural Subordination Notching 0 0 0 0
a) Indicated Rating from Scorecard Baa1 Baa1
b) Actual Rating Assigned Baa2 (P)Baa2
Current
LTM 9/30/2019
Moody's 12-18 Month Forward
View
As of Date Published [3]
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 9/30/2019 (LTM)
[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody’s Financial Metrics™
Appendix
Exhibit 9
Peer Comparison Table [1]
FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM
(in US millions)Dec-17 Dec-18 Sept-19 Dec-17 Dec-18 Sept-19 Dec-17 Dec-18 Sept-19 Dec-17 Dec-18 Sept-19
Revenue 1,446 1,397 1,353 3,460 3,346 3,422 1,345 1,367 1,384 2,009 1,991 2,082
EBITDA 488 452 458 1,396 1,393 1,331 521 503 507 751 749 754
CFO Pre-W/C / Debt 19.7%15.6%14.8%24.0%20.3%18.5%17.3%17.5%17.9%21.8%22.2%21.4%
CFO Pre-W/C – Dividends / Debt 15.2%11.3%10.4%18.5%16.5%15.2%12.1%12.2%12.3%17.5%17.8%16.9%
Debt / EBITDA 4.2x 5.1x 5.1x 3.0x 3.3x 3.6x 4.2x 4.5x 4.5x 3.7x 3.8x 3.8x
Debt / Capitalization 48.4%50.5%49.4%48.5%49.9%50.3%44.3%43.9%43.5%49.9%49.6%49.6%
EBITDA / Interest Expense 5.0x 4.4x 4.3x 6.0x 5.7x 5.4x 5.0x 4.5x 4.5x 5.7x 5.5x 5.5x
(P)Baa2 Stable Baa1 Stable A3 Stable A3 Stable
Avista Corp.Puget Sound Energy, Inc.Idaho Power Company Portland General Electric Company
[1] All figures & ratios calculated using Moody's estimates & standard adjustments. FYE=Financial Year=End. LTM=Last Twelve Months.
Source: Moody's Financial Metrics
7 19 December 2019 Avista Corp.: Update to credit analysis
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Exhibit 10
Cash Flow and Credit Metrics [1]
($ in millions)
CF Metrics Dec-15 Dec-16 Dec-17 Dec-18 LTM Sept-19
As Adjusted
EBITDA 418 473 488 452 458
FFO 386 442 389 332 355
- Div 82 87 92 98 101
RCF 304 355 297 234 253
FFO 386 442 389 332 355
+/- ΔWC (4) (28) 8 4 (7)
+/- Other (6) (56) 15 26 (10)
CFO 376 358 412 362 338
- Div 82 87 92 98 101
- Capex 394 407 412 424 452
FCF (101) (136) (93) (160) (215)
Debt / EBITDA 4.4x 4.2x 4.2x 5.1x 5.1x
EBITDA / Interest 5.2x 5.4x 5.0x 4.4x 4.3x
FFO / Debt 21.0%22.2%19.0%14.5%15.2%
RCF / Debt 16.5%17.8%14.5%10.2%10.8%
Revenue 1,485 1,442 1,446 1,397 1,353
Cost of Good Sold 653 547 525 495 455
Interest Expense 80 88 97 102 107
Net Income 108 141 126 84 75
Total Assets 4,907 5,310 5,518 5,833 5,965
Total Liabilities 3,390 3,672 3,799 4,074 4,086
Total Equity 1,517 1,637 1,719 1,759 1,879
[1] All figures & ratios calculated using Moody’s estimates & standard adjustments. Periods are Financial Year-End unless indicated. LTM = Last Twelve Months.
Source: Moody’s Financial Metrics™
8 19 December 2019 Avista Corp.: Update to credit analysis
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Ratings
Exhibit 11
Category Moody's Rating
AVISTA CORP.
Outlook Stable
Issuer Rating Baa2
First Mortgage Bonds A3
Senior Secured A3
Senior Unsecured MTN (P)Baa2
ALASKA ELECTRIC LIGHT AND POWERCOMPANY(AELP)
Outlook Stable
Issuer Rating Baa3
AVISTA CORP. CAPITAL II
Outlook Stable
BACKED Pref. Stock Baa3
Source: Moody's Investors Service
9 19 December 2019 Avista Corp.: Update to credit analysis
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policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and
rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at
www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
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Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended
to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or
indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to
the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s
Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees
ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1202204
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
CLIENT SERVICES
Americas 1-212-553-1653
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Japan 81-3-5408-4100
EMEA 44-20-7772-5454
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