20210325Avista to Staff 75 Attachment A4.PDF

Rating Action: Moody's downgrades Avista Corp. to Baa2, outlook stable
20 Dec 2018
Approximately $1.1 billion of securities affected
New York, December 20, 2018 -- Moody's Investors Service ("Moody's") today downgraded Avista Corp.'s
(Avista) issuer rating to Baa2 from Baa1, its senior secured and first mortgage bond ratings to A3 from A2 and
the trust preferred securities rating at Avista Corp. Capital II to Baa3 from Baa2. The outlook for Avista is
stable.
"Avista's cash flow is lower primarily due to tax reform, resulting in financial metrics in the mid-teens range"
stated Nana Hamilton, Analyst. "In addition, Moody's sees less predictability with the regulatory outcomes in
Washington and room for the company to better manage its relationship with the commission."
Downgrades:
..Issuer: Avista Corp.
.... Issuer Rating, Downgraded to Baa2 from Baa1
....Senior Secured First Mortgage Bonds, Downgraded to A3 from A2
....Underlying Senior Secured First Mortgage Bonds, Downgraded to A3 from A2
....Senior Secured Medium-Term Note Program, Downgraded to (P)A3 from (P)A2
....Senior Secured Regular Bond/Debenture, Downgraded to A3 from A2
....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1
..Issuer: Avista Corp. Capital II
....Pref. Stock, Downgraded to Baa3 from Baa2
Outlook Actions:
..Issuer: Avista Corp.
....Outlook, Changed To Stable From Negative
..Issuer: Avista Corp. Capital II
....Outlook, Changed To Stable From Negative
RATINGS RATIONALE
Pre-tax reform, deferred income taxes constituted a significant portion of Avista's operating cash flow. For
example, in 2016, over a third of operating cash flow was associated with deferred taxes. Between 2013 to
2017, deferred taxes averaged about 26% of cash flow. With the lower tax rate and loss of bonus depreciation
from tax reform, Avista's ratio of cash flow to debt over the next two years should be around 16%.
The Baa2 rating also looks at Avista's less predictable regulatory outcomes in Washington, where the
company generates about 60% of its revenue. Although the state has some credit supportive mechanisms,
such as revenue decoupling, the use of historic test years results in the need file general rate cases more
frequently. In August 2018, rate base attrition adjustments, which are considered to be credit supportive, were
ruled by the Washington Court of Appeals as against the state's used and useful law. This legal decision was
part of an ongoing review of Avista's 2015 Washington rate case.
Separately, in April 26, 2018, the Washington Utilities and Transportation Commission (WUTC) issued a final
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order in Avista's most recent electric and natural gas general rate cases filed on May 26, 2017. Although Avista
had requested three-year electric and gas rate plans in its original filing, the WUTC's order provided for new
rates effective May 1, 2018 for one year. In its order, the WUTC approved a net electric revenue increase of
$10.8 million and a net natural gas revenue decrease of $2.1 million, both including the impacts from the tax
cuts and jobs act (TCJA). Both electric and natural gas rate orders were based on a slightly below industry
average ROEs of 9.5% and equity layers of 48.5%. In addition, the WUTC agreed to withhold $10.4 million of
the electric excess deferred federal income taxes that resulted from TCJA for the purpose of accelerating the
depreciation schedule for Colstrip Units 3 and 4 to reflect a remaining useful life of those units through
December 31, 2027.
Although Moody's considers the outcome of the rate case as neutral from a credit perspective, the company's
relationship with the Washington commission has been more contentious than other peers'. For example,
Avista's February 2016 rate filing was rejected by the WUTC in December 2016, and the company's request for
reconsideration of the decision was rejected by the commission in February 2017.
On 5 December 2018, the WUTC rejected Hydro One Limited's (HOL) proposed acquisition of Avista,
concluding that the proposed merger agreement is not in the best interest of Avista or its customers from a
political and financial risk perspective. Avista and HOL have filed a petition for reconsideration of Washington's
decision and decisions from Idaho and Oregon on the acquisition are still pending.
Outlook
The stable outlook incorporates a view that Avista's financial profile will maintain a ratio of cash flow from
operations pre-working capital (CFO pre-WC) to debt in the mid-teens range and assumes that the utility will
receive adequate cost recovery within its regulatory jurisdictions. The stable outlook also incorporates a view
that the proposed acquisition by HOL is unlikely to be completed and that unregulated operations will remain
below 15% of consolidated earnings and cash flow.
What could change the rating -- Up
A rating upgrade could be considered with a demonstrated improvement in regulatory relationships or with
CFO pre-WC to debt above 19% on a sustainable basis and CFO pre-WC less dividends to debt above 13%
on a sustained basis.
What could change the rating -- Down
A downgrade could be considered if there was a sustained depredation of regulatory relationships or if CFO
pre-WC to debt deteriorated to below 14% on a consistent basis. A rating downgrade could also be considered
if, in the event of a successful completion of the HOL acquisition, Avista is required to provide direct financial
support of HOL's acquisition debt.
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June
2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain
regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or
category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this
announcement provides certain regulatory disclosures in relation to the credit rating action on the support
provider and in relation to each particular credit rating action for securities that derive their credit ratings from
the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be
assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a manner that would have affected the
rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on
www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this
credit rating action, and whose ratings may change as a result of this credit rating action, the associated
regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following
disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated
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entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related
rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal
entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures
for each credit rating.
Nana Hamilton
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Michael G. Haggarty
Associate Managing Director
Insfrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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