20210325Avista to Staff 75 Attachment A11.pdf

Avista Corp.
Primary Credit Analyst:
Obioma Ugboaja, New York + 1 [phone]; [e-mail]
Secondary Contact:
Kevin M Sheridan, New York + 1 [phone]; [e-mail]
Table Of Contents
Credit Highlights
Outlook
Our Base-Case Scenario
Company Description
Business Risk
Financial Risk
Liquidity
Environmental, Social, And Governance
Reconciliation
Issue Ratings - Recovery Analysis
Ratings Score Snapshot
Related Criteria
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Avista Corp.
Business Risk:STRONG
Vulnerable Excellent
Financial Risk:SIGNIFICANT
Highly leveraged Minimal
bbb bbb bbb
Anchor Modifiers Group/Gov't
Issuer Credit Rating
BBB/Stable/A-2
Credit Highlights
Overview
Key strengths Key risks
Mostly lower risk regulated utiity, with nonregulated operations
comprising less than 5% of the company's consolidated EBITDA;
Minimal cushion at the current rating level, and we expect regulatory
lag to persist until 2023;
Modest regulatory, operating, and geographic diversity eventhough
Washington and Idaho account for most of Avista's regulated footprint;
and
Heavy dependence on hydroelectric generation introduces some fuel
replacement risk; and
Regulatory mechanisms provide cash flow stability through decoupling
and interim adjustments for purchased power and gas costs.
Negative discretionary cash flow over the next few years indicates a
reliance on external funding for capital expenditures and dividends.
The COVID-19 pandemic will likely lead to additional regulatory lag for Avista Corp.Avista recently delayed its
planned Washington and Idaho rate case filings until the fourth quarter of 2020. In addition, per the terms of a March
2020 order from its Washington State regulators, Avista will refund $40 million in energy recovery mechanism (ERM)
balancing account over a two-year amortization period. This effectively offsets approved electric and gas rate
increases of $28.5 million, and $8 million, both of which became effective in April 2020. Overall, while we expect the
company will work with its regulators to mitigate the effects of higher expenses related to the pandemic, it will likely
result in additional regulatory lag primarily due to delays in its planned rate case filings, and the uncertain timing for
recovering any incremental expenses tied to the outbreak. Partially offsetting, is the availability of decoupling in
Washington, Idaho, and Oregon, which provides some downside protection from reduced sales volumes.
There is potential improvement to Avista's business risk, despite a history of regulatory lag.Although Avista is
currently experiencing a period of regulatory lag, we expect the 2019 passage of a law in Washington State to be
favorable for its credit quality. The law allows for the authority for the Washington Utilities and Transportation
Commission (WUTC) to approve multiyear rate plans and allow recovery for some utility investments deemed useful
up to 48 months after the rate approval. In addition, other factors such as use of its purchased power and gas
cost-adjustment mechanisms, and decoupling, support our assessment of the company's current business risk profile.
We expect forecast credit metrics to remain in the lower end of the significant financial risk category.We expect that
Avista's funds from operations (FFO) to debt will average in the 14%-16% range over the forecast period, assessed
under our medial volatility financial benchmark table. As such, there is minimal cushion in Avista's financial measures
compared to our current ratings downside trigger.
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Outlook: Stable
The stable outlook reflects our expectation that the potential improvement to Avista Corp.'s regulatory risk
management strengthens its business risk profile, mitigating its modestly weaker financial measures. We also
expect Avista to maintain FFO to debt of 14%-16% throughout our forecast period.
Downside scenario
We could lower our ratings on Avista during the next two years if adverse regulatory decisions weaken FFO to
debt consistently below 14%, without sufficient countermeasures. We could also lower the ratings if Avista shifts its
strategic focus to other business activities that weaken its credit quality.
Upside scenario
We could raise our rating on Avista if it materially improves its financial measures such that FFO to debt is
consistently above 20%.
Our Base-Case Scenario
Assumptions Key Metrics
• Continued use of existing regulatory mechanisms;
• Periodic and timely rate case filings;
• No material weakening in the company's capital
structure;
• Capital spending averaging about $415 million
annually;
• Dividends in line with historical payout ratio;
• Equity issuance of $70 million in 2020;
• Refinancing of all debt maturities; and
• Negative discretionary cash flow over the forecast
period.
2019a 2020e 2021f
FFO/debt (%)12.3 14 14.6
Debt/EBITDA (x)5.7 5.5 5.3
FFO/cash interest coverage (x)3.9 4.4 4.5
a--Actual. e--Estimated. f--Forecast. FFO--Funds from
operations.
Company Description
Spokane, Wash.-based Avista is a vertically integrated regulated electric and natural gas utility company. It operates
through two segments, Avista Utilities and Alaska Electric Light & Power Co. (AEL&P). Avista Utilities provides
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electric distribution and transmission, natural gas distribution services in parts of eastern Washington and northern
Idaho, and natural gas distribution services in parts of northeastern and southwestern Oregon. Avista Utilities also
generates electricity in Washington, Idaho, Oregon, and Montana. AEL&P offers electric services to approximately
17,000 customers in the city and borough of Juneau, Alaska. Overall, Avista has about 393,000 electricity customers
and approximately 361,000 natural gas customers.
Business Risk: Strong
Avista's business risk profile reflects its low-risk regulated electric and gas utility operations, which contribute more
than 95% to the consolidated EBITDA. Our assessment also reflects the company's geographic diversity, with
regulated operations across five states, even though Washington and Idaho account for over 90% of its rate base. The
company has material exposure to hydroelectric power (roughly 50% of its fuel supply mix), followed by gas-fired
generation, both of which help to keep electricity prices competitive compared with the national average. Dependence
on hydropower, however, introduces fuel-replacement risk in low water years.
The company regulatory compact includes an ERM in Washington. The ERM is a regulatory accounting mechanism
used to track certain differences between Avista's net power supply costs, compared to the amount that is included in
base retail rates, and hence, is trued up periodically. Similarly, the company has a power cost adjustment (PCA)
mechanism in Idaho, which allows for deferral of 90% of its energy cost differences for future recovery. And for its
regulated gas operations, a purchased gas adjustment (PGA) mechanism, available in all its jurisdictions, helps to
mitigate gas price risk. Furthermore, Avista benefits from decoupling mechanisms in the majority of its jurisdictions,
which provide some downside protection from reduced sales volumes.
Avista regulatory risk management also include it activities in other jurisdictions. In October 2019, Avista received a
commission order on its electric rate case in Idaho and gas rate case in Oregon. The Idaho Public Utility Commission
(IPUC) approved a $7.2 million rate decrease and Oregon Public Utility Commission (OPUC) approved a $3.6 million
increase to rates. Overall, we view these outcomes as indicative of the company's regulatory risk management, which
is mostly in line with its peers. Other factors we consider in our assessment includes the company's size and track
record of safety and service reliability.
Peer comparison
Table 1
Avista Corp. -- Peer Comparison
Industry Sector: Combo
Avista Corp.Puget Energy Inc.IDACORP Inc.
Northwest Natural Gas
Co.
Ratings as of May 27, 2020 BBB/Stable/A-2 BBB-/Negative/--BBB/Stable/A-2 A+/Stable/A-1
--Fiscal year ended Dec.
31, 2019--
--Fiscal year ended Dec. 31,
2019--
--Fiscal year ended Dec.
31, 2019--
--Fiscal year ended Dec.
31, 2019--
(Mil. $)
Revenue 1,345.6 3,401.1 1,346.4 739.9
EBITDA 447.0 1,332.6 535.4 244.5
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Table 1
Avista Corp. -- Peer Comparison (cont.)
Industry Sector: Combo
Avista Corp.Puget Energy Inc.IDACORP Inc.
Northwest Natural Gas
Co.
Funds from operations
(FFO)
314.3 964.2 403.9 202.0
Interest expense 109.1 376.8 117.2 41.4
Cash interest paid 107.0 357.8 117.4 40.0
Cash flow from operations 408.7 549.7 366.0 190.7
Capital expenditure 448.8 967.9 280.6 240.2
Free operating cash flow
(FOCF)
(40.1)(418.2)85.4 (49.5)
Discretionary cash flow
(DCF)
(142.9)(482.5)(48.5)(102.9)
Cash and short-term
investments
9.9 45.3 217.3 5.9
Debt 2,560.9 7,123.8 2,327.4 1,066.3
Equity 1,939.3 4,000.3 2,470.6 822.2
Adjusted ratios
EBITDA margin (%)33.2 39.2 39.8 33.0
Return on capital (%)5.5 5.3 8.0 8.3
EBITDA interest coverage
(x)
4.1 3.5 4.6 5.9
FFO cash interest coverage
(x)
3.9 3.7 4.4 6.0
Debt/EBITDA (x)5.7 5.3 4.3 4.4
FFO/debt (%)12.3 13.5 17.4 18.9
Cash flow from
operations/debt (%)
16.0 7.7 15.7 17.9
FOCF/debt (%)(1.6)(5.9)3.7 (4.6)
DCF/debt (%)(5.6)(6.8)(2.1)(9.6)
Sources: S&P Global Ratings, company reports.
Financial Risk: Significant
We assess Avista's financial risk profile as significant using our medial volatility financial ratio benchmarks given the
company's mostly low-risk cash flow sources, and our view of its overall management of regulatory risk. Our base case
indicates that capital spending, along with dividend payments, will lead to negative discretionary cash flow over the
next few years, necessitating a reliance on external funding for capital expenditures and dividends. Specifically for
2020, we assume about $415 million in capital spending, $110 million in dividends, $70 million in equity issuance, and
periodic net electric and gas rate increases.
We expect modestly improving financial measures due to recent rate cases outcomes and our assumptions of
favorable tax positions in our forecast, partially offset by continued regulatory lag, including delays in its 2020 rate
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case filings. However, we expect regulatory lag to gradually dissipate as the company continues to effectively manage
its regulatory activities across all of its service territories, including in Washington State, which accounts for over 60%
of Avista's regulated rate base. Our base case indicates that Avista's financial measures will remain at the lower end of
the range for a financial risk assessment of significant.
Financial summary
Table 2
Avista Corp. -- Financial Summary
Industry Sector: Combo
--Fiscal year ended Dec. 31--
2019 2018 2017 2016 2015
(Mil. $)
Revenue 1,345.6 1,396.9 1,445.9 1,442.5 1,484.8
EBITDA 447.0 474.5 500.4 500.7 439.8
Funds from operations (FFO)314.3 350.2 435.9 417.6 359.0
Interest expense 109.1 109.9 104.2 99.5 89.4
Cash interest paid 107.0 109.5 106.0 96.5 90.7
Cash flow from operations 408.7 369.7 418.4 368.2 385.2
Capital expenditure 448.8 431.0 419.6 415.6 402.1
Free operating cash flow (FOCF)(40.1)(61.3)(1.1)(47.4)(16.8)
Discretionary cash flow (DCF)(142.9)(159.3)(93.6)(134.6)(102.4)
Cash and short-term investments 9.9 14.7 16.2 8.5 10.5
Gross available cash 9.9 14.7 16.2 8.5 10.5
Debt 2,560.9 2,463.1 2,177.1 2,110.6 1,945.3
Equity 1,939.3 1,774.0 1,730.5 1,648.5 1,554.1
Adjusted ratios
EBITDA margin (%)33.2 34.0 34.6 34.7 29.6
Return on capital (%)5.5 6.7 8.2 9.0 8.4
EBITDA interest coverage (x)4.1 4.3 4.8 5.0 4.9
FFO cash interest coverage (x)3.9 4.2 5.1 5.3 5.0
Debt/EBITDA (x)5.7 5.2 4.4 4.2 4.4
FFO/debt (%)12.3 14.2 20.0 19.8 18.5
Cash flow from operations/debt (%)16.0 15.0 19.2 17.4 19.8
FOCF/debt (%)(1.6)(2.5)(0.1)(2.2)(0.9)
DCF/debt (%)(5.6)(6.5)(4.3)(6.4)(5.3)
Sources: S&P Global Ratings, company reports.
Liquidity: Adequate
As of May 2020, we assess Avista's liquidity as adequate. We expect Avista can cover its needs for the next 12 months
even if EBITDA declines by 10%. We expect the company's liquidity sources will exceed uses by more than 1.1x over
the next 12 months. Under our stress scenario, we do not expect Avista would require access to the capital markets
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during that period to meet liquidity needs. Our assessment also reflects the company's generally prudent risk
management, sound relationships with banks, and generally satisfactory standing in the credit markets.
Principal Liquidity Sources Principal Liquidity Uses
• Cash balance of $18.9 million;
• Cash FFO of about $370 million;
• Undrawn credit facilities totaling about $210 million;
and
• Cash proceeds of $100 million from a term loan
issued in April 2020.
• Current debt maturities of $152 million;
• Maintenance capital spending of about $300 million;
and
• Dividend payments of about $110 million.
Debt maturities
• 2020: $52 million
• 2022: $250 million
• 2023: $13.5 million
• 2024: $15 million
Environmental, Social, And Governance
Avista's credit quality is positively influenced by environmental factors compared to peers given its large hydro
portfolio. With a total generation fleet capacity of over 2,000 MW, close to 50% of its generation portfolio is from
hydro generation. In addition, in 2019, the company announced a goal to serve its customers with 100 percent
clean electricity by 2045 and to have a carbon- neutral supply of electricity by the end of 2027. We view social
factors as mostly in line with industry peers. This in large part reflects the company's track record of providing safe
and reliable electric and gas services for its customers, even though rate affordability is something that we continue
to monitor broadly across the sector. Governance factors are also neutral. Avista has independent board of
directors, who in our opinion are capably engaged in risk oversight on behalf of its stakeholders.
Reconciliation
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Table 3
Avista Corp.--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts
--Fiscal year ended Dec. 31, 2019--
Avista Corp. reported amounts (mil. $)
Debt EBITDA
Operating
income
Interest
expense
S&P Global
Ratings' adjusted
EBITDA
Cash flow
from
operations
Capital
expenditure
2,133.12 416.38 210.39 100.18 446.99 398.21 442.51
S&P Global Ratings' adjustments
Cash taxes paid --------(25.79)----
Cash interest paid --------(99.06)----
Reported lease liabilities 124.24 ------------
Operating leases --4.43 0.26 0.26 (0.26)4.16 --
Postretirement benefit
obligations/deferred
compensation
169.66 ----0.15 ------
Accessible cash and liquid
investments
(9.90)------------
Capitalized interest ------4.17 (4.17)(4.17)(4.17)
Share-based compensation
expense
--11.35 ----------
Power purchase agreements 90.50 13.96 3.46 3.46 (3.46)10.50 10.50
Asset-retirement obligations 16.07 0.88 0.88 0.88 ------
Nonoperating income
(expense)
----23.83 --------
Debt: Other 37.24 ------------
Total adjustments 427.82 30.61 28.42 8.92 (132.74)10.49 6.33
S&P Global Ratings' adjusted amounts
Debt EBITDA EBIT
Interest
expense
Funds from
operations
Cash flow
from
operations
Capital
expenditure
2,560.93 446.99 238.81 109.10 314.25 408.70 448.84
Sources: S&P Global Ratings, company reports.
Capital structure
Avista's capital structure consists of about $1.9 billion of long-term debt, most of which is secured.
Analytical conclusions
We rate the preferred stock issued by Avista Capital II two notches below the issuer credit rating to reflect the
deferability of the dividends, and because it is deeply subordinated to other instruments in the capital structure,
consistent with our criteria. The short-term rating on Avista Corp. is 'A-2' based on its issuer credit rating.
Issue Ratings - Recovery Analysis
Avista's first-mortgage bonds benefit from a first-priority lien on substantially all of the utility's owned or subsequently
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acquired real property. Collateral coverage of more than 1.5x supports a recovery rating of '1+' and an 'A-' issue level
rating, two notches above the issuer credit rating.
Ratings Score Snapshot
Issuer Credit Rating
BBB/Stable/A-2
Business risk: Strong
·Country risk:Very low
·Industry risk:Very low
·Competitive position:Satisfactory
Financial risk: Significant
·Cash flow/leverage:Significant
Anchor: bbb
Modifiers
·Diversification/portfolio effect:Neutral (no impact)
·Capital structure:Neutral (no impact)
·Financial policy:Neutral (no impact)
·Liquidity:Adequate (no impact)
·Management and governance:Satisfactory (no impact)
·Comparable rating analysis:Neutral (no impact)
Stand-alone credit profile : bbb
Related Criteria
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Dec. 16, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• Criteria | Corporates | Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
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• Criteria | Corporates | Utilities: Collateral Coverage And Issue Notching Rules For '1+' And '1' Recovery Ratings
On Senior Bonds Secured By Utility Real Property, Feb. 14, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers,
Nov. 13, 2012
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria | Insurance | General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
Business And Financial Risk Matrix
Business Risk Profile
Financial Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly leveraged
Excellent aaa/aa+aa a+/a a-bbb bbb-/bb+
Strong aa/aa-a+/a a-/bbb+bbb bb+bb
Satisfactory a/a-bbb+bbb/bbb-bbb-/bb+bb b+
Fair bbb/bbb-bbb-bb+bb bb-b
Weak bb+bb+bb bb-b+b/b-
Vulnerable bb-bb-bb-/b+b+b b-
Ratings Detail (As Of May 29, 2020)*
Avista Corp.
Issuer Credit Rating BBB/Stable/A-2
Senior Secured A-
Issuer Credit Ratings History
10-Dec-2018 BBB/Stable/A-2
15-Jun-2018 BBB/Watch Pos/A-2
19-Jul-2017 BBB/Positive/A-2
*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable
across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
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