20210325Avista to Staff 75 Attachment A12.pdf

Research Update:
Avista Corp. Ratings Affirmed; Outlook Stable
September 22, 2020
Rating Action Overview
- Spokane, Wash.-based Avista Corp. announced its investigation determined the primary cause
of recent fires in its region was extreme wind. The weather event triggered wildfires and
affected electric utilities throughout the Pacific Northwest. Additional investigations by the
Department of Natural Resources (DNR) are ongoing.
- While the wildfires highlight potential operational risks, our base case assumes that the recent
fires do not adversely weaken Avista's credit quality.
- Some key factors supporting our opinion include the outcome of Avista's investigation of the
wildfires, the company's risk mitigation practices, and our assessment of the company's
financial measures, including an funds from operations (FFO)-to-debt ratio of 14%-16% that
we expect the company to maintain over the next two years.
- Furthermore, there is potential improvement in Avista's business risk, reflecting recent
passage of a law in Washington State that will likely improve Avista's regulatory construct in
this jurisdiction, which accounts for about 60% of its rate base.
- We are affirming our ratings on Avista, including our 'BBB' issuer credit rating, 'A-2' short-term
rating, and 'A-' rating on its senior secured debt.
- The stable outlook reflects gradual improvement to Avista's regulatory construct, our
expectation that the company's risk mitigation practices are sufficient to mitigate its wildfire
risk exposure, and that the company maintains an FFO-to-debt ratio of 14%-16% over the next
two years.
Rating Action Rationale
In our opinion, the recent wildfires in Avista's service territory should not hurt its credit quality.
Avista's investigation indicates that the primary cause of the recent fires in its region was
extreme winds, a weather event that triggered wildfires and affected electric utilities throughout
the Pacific Northwest. In addition, after considering other factors, including our assessment of the
company's financial measures, and risk mitigation practices, which include insurance coverage,
we think that Avista's credit quality should not materially suffer because of these incidents.
Research Update:
Avista Corp. Ratings Affirmed; Outlook Stable
September 22, 2020
PRIMARY CREDIT ANALYST
Obioma Ugboaja
New York
+ 1 [phone]
[e-mail]
SECONDARY CONTACT
Kevin M Sheridan
New York
+ 1 [phone]
kevin.sheridan
@spglobal.com
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The recent wildfires cast a spotlight on operating and event risks for Avista.Avista's 2020
wildfire resiliency plan aims to reduce fire risk with about $270 million of capital investment over
the next 10 years. Through strategic investment in grid hardening, vegetation management,
situational awareness, and operations and emergency response, Avista plans to reduce its risk
exposure by up to 90% by year-end 2029. Nevertheless, wildfires generally increase both
operating and event risk for utilities exposed to this type of risk, meaning such risk is likely to
persist for Avista as the company tries to reduce its wildfire risk exposure.
There is potential improvement to Avista's business risk, despite a history of regulatory lag.
Although Avista is experiencing regulatory lag, we expect the 2019 passage of a law in Washington
to be favorable for its credit quality. The law allows the Washington Utilities and Transportation
Commission (WUTC) to approve multiyear rate plans and allows 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, as well as decoupling,
support our assessment of the company's business risk profile.
We assess Avista's financial risk profile under our medial volatility financial benchmark tables.
This largely reflects that most of Avista's operating cash flow (over 95% of consolidated EBITDA)
comes from low-risk regulated electric and gas activities. Our use of this table also reflects our
view of the company's management of regulatory risk, and considers the operating risk associated
with the nature of the services provided. Our base case reflects about $415 million in capital
spending, $110 million in dividends, $70 million in equity issuance for 2020, and periodic net
electric and gas rate increases. We expect modestly improving financial measures in 2020
compared to 2019 due to recent rate case outcomes and our assumption of favorable tax positions
in our forecast. Continued regulatory lag, including delays in its 2020 rate case filings in
Washington and Idaho, partially offset these improvements. Overall, we expect a consolidated
FFO-to-debt ratio for Avista of 14%-16% over the next two years, which indicates a significant
financial risk profile assessment.
Outlook
The stable outlook reflects gradual improvement to Avista's regulatory construct, our expectation
that the company's risk mitigation practices are sufficient to mitigate its wildfire risk exposure,
and that the company maintains an FFO-to-debt ratio of 14%-16% during our forecast period.
Downside scenario
We could lower our rating on Avista over the next 12 months if the company's FFO to debt weakens
to below 14% and stays there. This could occur if Avista does not execute on its financial plan,
leading to weaker financial measures. This could also occur if persistent regulatory lag or
unforeseen liabilities related to potential wildfire outbreaks weaken the company's FFO to debt
without sufficient countermeasures to offset it. While unlikely, a material shift in strategic focus
into other higher-risk unregulated activities could also weaken Avista's business risk and result in
a downgrade.
Upside scenario
We could upgrade our rating on Avista over the next 12 months if the company materially improves
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Research Update: Avista Corp. Ratings Affirmed; Outlook Stable
Staff_PR_075 Attachment A12 Page 2 of 6
its financial measures, including FFO to debt that is consistently above 20%, without any
weakening of its business risk.
Company Description
Avista is a vertically integrated regulated electric and natural gas utility that operates in two
segments, Avista Utilities and Alaska Electric Light & Power Co. (AEL&P). Avista Utilities
generates, transmits, and distributes electricity. It serves electric customers in eastern
Washington and northern Idaho, as well as a small number of customers in Montana. The
company also provides natural gas distribution services to retail customers in parts of eastern
Washington, northern Idaho, and northeastern and southwestern Oregon. In total, Avista Utilities
supplies retail electric service to about 393,000 customers and retail natural gas service to about
361,000 customers. AEL&P generates, transmits, and distributes electricity in Juneau, Alaska, to
about 17,000 customers.
Liquidity
We assess Avista's liquidity as adequate. We expect Avista can cover its needs for the next 12
months even if EBITDA declines 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 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:
- Cash balance of about $116 million;
- Cash FFO of about $375 million; and
- Undrawn credit facilities of about $185 million.
Principal liquidity uses:
- Current debt maturities of $152 million;
- Maintenance capital spending of about $300 million; and
- Dividend payments of about $112 million.
Issue Ratings - Subordination Risk Analysis
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
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Research Update: Avista Corp. Ratings Affirmed; Outlook Stable
Staff_PR_075 Attachment A12 Page 3 of 6
in the capital structure. We base our 'A-2' short-term rating on Avista Corp. on our 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 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
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Hybrid Capital: Methodology And Assumptions, July 1, 2019
- 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
- Criteria | Corporates | Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19,
2013
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Research Update: Avista Corp. Ratings Affirmed; Outlook Stable
Staff_PR_075 Attachment A12 Page 4 of 6
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- 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, Nov. 13, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings Affirmed
Avista Corp.
Issuer Credit Rating BBB/Stable/A-2
Avista Capital II
Preferred Stock BB+
Ratings Affirmed; Recovery Rating Unchanged
Avista Corp.
Senior Secured A-
Recovery Rating 1+
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings
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action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search
box located in the left column.
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Research Update: Avista Corp. Ratings Affirmed; Outlook Stable
Staff_PR_075 Attachment A12 Page 5 of 6
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Research Update: Avista Corp. Ratings Affirmed; Outlook Stable
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