20230502PR_139 Attachment A.pdf

INFRASTRUCTURE AND PROJECT FINANCE
CREDIT OPINION
10 August 2021
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
AVP-Analyst
[e-mail]
Sahiba Sikand +1.212.553.5819
Associate Analyst
[e-mail]
Michael G. Haggarty +1.212.553.7172
Associate Managing Director
[e-mail]
Jim Hempstead +1.212.553.4318
MD - Global Infrastructure & Cyber Risk
[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. These supportive mechanisms have resulted in steady revenue and cash
flow and sustained stable credit metrics over the last three years including the ratio of cash
flow from operation before changes in working capital (CFO pre-WC) to debt at about 15%.
Given a lag in rate case filings due to the coronavirus pandemic, we see the ratio weakening
over the next 12 to 18 months to below 13%, which is below our indicated financial metric
threshold for a possible downgrade. We expect Avista's financial metrics to rebound once
new rates take effect at the conclusion of its currently pending general rate case.
The credit further incorporates the company's adequate track record with its primary
regulator, the Washington Utilities and Transportation Commission (WUTC), which regulates
roughly 60% of the company's rate base and revenue. 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 the past particularly related to credit
supportive mechanisms that would allow for faster cost recovery.
The company stands to benefit from a clearer regulatory structure after the enactment of
legislation that aims to reform the regulatory framework and pave the way for multiyear
rate plans and performance based ratemaking. The bill could enhance the consistency
and predictability of utility regulation and provide credit positive opportunities for Avista.
However, improved regulatory and financial outcomes for these utilities remain subject to
the bill's implementation by the WUTC.
Avista has some unregulated exposure and owns 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.
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Exhibit 1
Historical CFO pre-WC, Total Debt and CFO pre-WC to Debt
$ in millions
404 358 355 381 361
2,051
2,297 2,372 2,492 2,577
19.7%
15.6%15.0%15.3%
14.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
500
1,000
1,500
2,000
2,500
3,000
2017 2018 2019 2020 LTM Jun-21
CFO Pre-W/C Total Debt CFO Pre-W/C / Debt
Source: Moody's Financial Metrics
Credit Strengths
» Low-risk, $3.5 billion rate base utility with supportive cost recovery mechanisms
» Track record of strong cash flow generation
» Washington legislation provides for additional credit positive regulatory tools
Credit Challenges
» Narrow financial buffer expected over the next 12 to 18 months
» Delayed cost recovery due to coronavirus and historic test year requirement
» Uncertainty over the implementation of new, potentially positive legislative provisions
Rating Outlook
The stable outlook incorporates our view that Avista's financial profile will remain adequate for the current rating despite weaker
metrics over the next 12 to 18 months. We expect the company's CFO pre-W/C to debt to return to the mid-teens after the conclusion
of its current rate case and new rates take effect in 2022. In addition, the stable outlook assumes that Avista will continue to 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
An upgrade could occur if financial metrics improve such that CFO pre-WC to debt is above 19% and CFO pre-WC less dividend is
above 13% on a consistent basis. Additionally, a demonstrated improvement in the regulatory environment, including implementation
of credit positive legislative provisions, could lead to a higher rating.
Factors that Could Lead to a Downgrade
A rating downgrade could result should there be a degradation in the company's regulatory environment resulting in inadequate cost
recovery or CFO pre-WC to debt remains below 14% for a sustained period.
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.
2 10 August 2021 Avista Corp.: Update to credit analysis
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Key Indicators
Exhibit 2
Avista Corp. [1]
Dec-17 Dec-18 Dec-19 Dec-20 LTM Jun-21
CFO Pre-W/C + Interest / Interest 5.2x 4.5x 4.3x 4.6x 4.4x
CFO Pre-W/C / Debt 19.7%15.6%15.0%15.3%14.0%
15.2%11.3%10.6%10.9%9.6%
Debt / Capitalization 48.4%50.5%49.2%48.7%48.9%
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
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 three
months ended 31 March 2021, Avista Utilities had over 397,000 electric and over 363,000 gas customers.
Avista 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
2020 earnings contribution breakdown
Exhibit 4
Rate base by jurisdiction
Avista Utilities94%
AELP6%
Excludes other segments
Source: Avista Corp. Filings
Idaho30%
Washington62%
Oregon8%
As of 31 March 2021, excludes AEL&P
Source: Company Documents & Moody's Investors Service
Detailed Credit Considerations
Strong historical cash flow production, but little to no cushion in near term financial metrics
Avista has a history of strong cash flow production that has averaged about $373 million from 2015 to 2020. CFO pre-WC to debt
stabilized in the mid-teens over the last three years after declining from about 20% in 2017 following the loss of deferred taxes post tax
reform.
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As highlighted in Exhibit 5, CFO pre-WC to debt in 2021 is forecast to drop below 13% over the next 12 to 18 months driven by a delay
in the company's rate case filing due to the coronavirus pandemic. Avista filed general rate cases in Washington and Idaho in late 2020,
which are the drivers behind our expectations of an improved CFO pre-W/C to debt ratio in 2023.
Because of historic test year requirements, Avista experiences cash flow lag. Management had intended to improve this lag by filing
rate cases more frequently, but the coronavirus driven economic downturn delayed plans to file until late 2020. Any outcome of these
rate cases will not be effective until late 2021. The company's financial buffer will be limited over the next several years, with any
improvement largely dependent of the outcome of the pending rate cases.
Exhibit 5
Financial metrics will weakened but rebound following new rates
Historical and forecast CFO pre-WC to debt
19%20%
16%15%15%15%15%15%
13%12%
16%
10%
12%
14%
16%
18%
20%
22%
24%
2016 2017 2018 2019 2020 LTM Q121 2021E 2022E 2023E
CFO Pre-WC to debt Forecast Upgrade/Downgrade Treshold Range
Source: Moody's Investors Service
Credit supportive regulatory jurisdictions with adequate track record of cost recovery
Washington
We view Avista's regulatory jurisdictions to be generally credit supportive. The Washington Utilities and Transportation Commission
(WUTC), which regulates roughly 62% 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 results in the need for Avista to file general rate cases frequently to recover and
earn on investments.
Avista filed an electric and natural gas general rate case on 30 October 2020 with WUTC requesting an increase in base electric
revenue of $44.2 million (or 8.3%) and an increase in natural gas revenue of $12.8 million (or 12.2%). The company proposed that the
revenue increases be offset by the creation of a Tax Customer Credit, which would come from a change in its accounting for federal
income tax expense. The revenue increases are premised on a 9.9% ROE and a 50% equity layer; higher than the currently approved
9.4% and 48.5%. The company expects the rate case to be completed and new rates to become effective on 1 October 2021.
The company's prior electric and natural gas general rate cases filed on 30 April 2019 resulted in a partial settlement and the WUTC
approved the settlement agreement in March 2020. The partial settlement allowed for a one year rate plan increasing electric revenue
by $28.5 million and natural gas revenue by $8 million effective 1 April 2020. The agreement approved an ROE of 9.4% and equity
layer of 48.5%, which are slightly below industry averages. Additionally, the settlement included 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 the ability to accelerate depreciation to 2025 in recognition of the state's new energy bill requirements. The order disallowed
Avista recovery of costs associated with a 2018 Colstrip plant outage, ruling that Avista failed to prove the costs were prudently
incurred, a credit negative. The total costs were about $3 million.
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 revenue effective April 2021. The request was based on a 9.9% ROE and 50% equity layer.
4 10 August 2021 Avista Corp.: Update to credit analysis
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Idaho
In Idaho, Avista filed its 2021 general rate case with the Idaho Public Utilities Commission (IPUC) on 29 January 2021. The request
is for a two year rate plan with new rates effective 1 September 2021 and 1 September 2022. In June 2021, the company reached an
all parties settlement, which has been submitted to the IPUC for approval. The electric and natural gas rate plan is based on a 9.9%
ROE, an increase from current 9.5%, and a 50% equity ratio, in line with currently approved equity ratio and requests an electric base
revenue increase of $24.8 million (10.1%) in 2021 and an $8.7 million (3.2%) increase in 2022. Similarly to the Washington filing, Avista
has requested that the revenue increase be offset by the creation of the Tax Customer Credit for the two years.
Avista reached an all parties settlement on 11 October 2019 for its last electric general rate case filed on 10 June 2019. The settlement,
which was approved by the IPUC on 1 December 2019, 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 its wind generation PPAs in base rates instead
of a continuation of the Power Cost Adjustment (PCA) mechanism. The settlement approved continuation of the PCA instead of
their inclusion in base rates. Avista was authorized electric and gas decoupling mechanisms, known as Fixed 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.
Oregon
The company's most recent natural gas rate case filed on 16 March 2020 resulted in a settlement that included a $3.9 million base rate
revenue increase, down from the requested $6.8 million, with rates effective on 16 January 2021. The settlement maintained the 9.4%
ROE and the 50% equity layer. The company intends to file a new general rate case in the second half of 2021. As part of a March 2016
rate case order in Oregon, Avista is allowed to implement a revenue per customer decoupling mechanism.
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 tax
reform. 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 filing. AELP planned to file a general rate case in August 2021, however, the
company requested a delay in filing to avoid using 2020 as a test year given coronavirus pandemic and the resources it would take to
normalize 2020 for the filing. AELP is under regulatory order by the commission to file by 2022 with a 2021 test year.
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 legislative action has the potential to enhance regulatory framework
The Washington regulatory framework has the potential to be enhanced with the enactment of two key Senate bills (SB), SB 5116 and
SB 5295 in 2019 and 2021,respectively. SB 5116, a clean energy bill with aggressive carbon transition targets, was enacted in 2019 and
offered utilities the potential for important regulatory tools to recover associated costs. 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 viewed the law as 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.
We discuss more details on SB 5295 in “Washington approves clean energy bill, a credit positive for investor-owned utilities” (16 May
2019).
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The recently passed SB 5295 (enacted on 3 May 2021) followed the clean energy bill and aims at reforming the regulatory framework
for utilities in the state by paving the way for multiyear rate plans (MYRP) and performance based ratemaking (PBR). We view the bill
as credit positive as it could enhance the consistency and predictability of utility regulation. Specifically, we view the PBR construct as
a credit supportive rate making mechanism because MYRPs with performance targets and the potential to earn performance incentives
will work to reduce regulatory lag. It could also aid Avista's renewable transition, improve operational efficiency and enhance cash
flow and profitability, all while considering customer cost and service. Nevertheless, the extent to which the new law will enhance the
Washington regulatory framework and improve utility financial performance is subject to WUTC decisions, which have been historically
inconsistent.
The bill requires the WUTC to develop, in collaboration with utilities and other interested stakeholders, a policy statement on
alternatives to traditional costs of service rate making, including performance measures, incentives and penalty mechanisms. The
WUTC must provide an update to the relevant legislative committees by 1 January 2022. Importantly, beginning 1 January 2022,
utilities are required to include a proposal for a MYRP between two and four years in length in every general rate case filing. We discuss
more details on SB 5295 in “Legislation supporting multiyear rate plans has credit positive implications for Washington's investor
owned utilities” (10 May 2021).
ESG considerations
Avista's ESG Credit Impact Score is CIS-3 (Moderately Negative).
Exhibit 6
ESG Credit Impact Score
Source: Moody's Investors Service
Avista’s ESG Credit Impact Score is moderately negative (CIS-3), where its ESG attributes are overall considered as having a limited
impact on the current rating, with greater potential for future negative impact over time. Avista’s CIS-3 reflects its moderate exposure
to environmental risks and social risks, and low exposure to governance risks.
Exhibit 7
ESG Issuer Profile Scores
Source: Moody's Investors Service
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Environmental
Specifically, Avista’s exposure to environmental risks is moderate (E-3 issuer profile score) driven by its moderately negative physical
climate risks, primarily in the form of extreme weather patterns including an increase in wildfires across Washington. These risks are
offset by a neutral to low exposure to carbon transition, water management, waste and pollution and natural capital.
Social
Exposure to social risks is moderately negative (S-3 issuer profile score) reflecting the higher risk to demographics and societal
trends that increase public concern over environmental, social or affordability issues, which could lead to adverse regulatory political
intervention. These risks are balanced by neutral to low risks to health and safety, human capital, customer relationships and
responsible production.
Governance
Governance is broadly in line with other utilities and does not pose a particular risk (G-2 issuer profile). For Avista, board structure
primarily stands out as moderately negative, however it is offset by other aspects of governance strength that are derived in part
by government ownership, compliance and reporting, management credibility and track record as well as financial policy and risk
management, which is driven by the historical ratio of retained cash flow to debt.
7 10 August 2021 Avista Corp.: Update to credit analysis
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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 June 2026. As of 30 April 2021, there was about $182 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 their 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. Avista was
in compliance with the facility’s sole covenant of less than 65% capitalization, with a ratio of 53.5% as of 30 June 2021. We note that
the company has no material adverse change language beyond the close of the facility, a credit positive.
AELP has a $25 million line of credit which expires in 2024 and requires a consolidated debt to capitalization covenant of 67.5%. As
of 31 March 2021, there were no borrowings or letters of credit outstanding under the facility and AELP was in compliance with its
covenant, with a ratio of 52%.
The company typically funds capex with a mix of long-term debt and equity. In 2021, Avista expects to issues about $140 million in
long-term debt and $90 million in equity. The company's maturity schedule is manageable with the next maturity in 2022, as shown
in Exhibit 8. Avista entered into $100 million 364-day term loan in April 2020 to support liquidity; as of April 2021 the agreement had
been repaid.
Exhibit 8
Avista Corp. Debt Maturities
($ in millions)
$250
$14 $25 0
50
100
150
200
250
300
2021 2022 2023 2024 2025 2026 2027 2028
Excludes $15 million term loan at Alaska Energy and Resources Company maturing in 2024Source: Avista Corporation
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Methodology and Scorecard
Exhibit 9
Methodology Scorecard Factors
Avista Corporation
Regulated Electric and Gas Utilities Industry [1][2]Current
LTM 6/30/2021
Moody's 12-18 Month
Forward View
As of Date Published [3]
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
Factor 4 : Financial Strength (40%)
a) CFO pre-WC + Interest / Interest (3 Year Avg)4.4x Baa 4x - 4.5x Baa
b) CFO pre-WC / Debt (3 Year Avg)14.6%Baa 13% - 14%Baa
c) CFO pre-WC – Dividends / Debt (3 Year Avg)10.3%Baa 9% - 10%Baa
d) Debt / Capitalization (3 Year Avg)49.4%A 48% - 51%A
Rating:
Scorecard-Indicated Outcome Before Notching Adjustment Baa1 Baa1
HoldCo Structural Subordination Notching 0 0 0
a) Scorecard-Indicated Outcome Baa1 Baa1
b) Actual Rating Assigned (P)Baa2 (P)Baa2
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 6/30/2021 (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™
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Appendix
Exhibit 10
Peer Comparison Table [1]
FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM
(In US millions)Dec-19 Dec-20 Jun-21 Dec-19 Dec-20 Mar-21 Dec-19 Dec-20 Mar-21 Dec-20 Dec-20 Mar-21
Revenue 1,346 1,322 1,364 3,401 3,326 3,440 1,343 1,347 1,372 2,123 2,145 2,181
EBITDA 463 466 490 1,329 1,299 1,443 527 536 544 787 757 759
Total Debt 2,372 2,492 2,577 4,828 4,957 4,774 2,349 2,601 2,601 2,988 3,617 3,527
CFO Pre-W/C / Debt 15.0%15.3%14.0%15.1%18.1%20.6%15.3%12.2%13.5%20.0%14.9%14.4%
10.6%10.9%9.6%11.7%15.1%17.5%9.8%6.9%8.1%15.5%11.0%10.4%
Debt / Capitalization 49.2%48.7%48.9%49.3%49.0%47.1%43.6%45.0%44.9%50.3%54.8%53.6%
Debt / EBITDA 5.1x 5.3x 5.3x 3.6x 3.8x 3.3x 4.5x 4.9x 4.8x 3.8x 4.8x 4.6x
EBITDA / Interest Expense 4.3x 4.4x 4.6x 5.2x 5.1x 5.6x 4.8x 4.8x 4.8x 5.8x 5.0x 5.0x
Avista Corp.Puget Sound Energy, Inc.Idaho Power Company Portland General Electric Company
(P)Baa2 (Stable)Baa1 (Stable)A3 (Negative)A3 (Stable)
[1] All figures & ratios calculated using Moody's estimates & standard adjustments. FYE=Financial Year=End. LTM=Last Twelve Months.
Source: Moody's Financial Metrics
Exhibit 11
Cash Flow and Credit Metrics [1]
($ in millions)
CF Metrics Dec-17 Dec-18 Dec-19 Dec-20 LTM Jun-21
As Adjusted
EBITDA 488 452 463 466 490
FFO 389 332 365 368 345
- Div 92 98 103 110 114
RCF 297 234 262 258 231
FFO 389 332 365 368 345
8 4 47 -49 -38
+/- Other 15 26 -10 13 16
CFO 412 362 402 333 323
- Div 92 98 103 110 114
- Capex 412 424 447 409 433
FCF -93 -160 -147 -186 -225
Debt / EBITDA 4.2x 5.1x 5.1x 5.3x 5.3x
EBITDA / Interest 5.0x 4.4x 4.3x 4.4x 4.6x
FFO / Debt 19.0%14.5%15.4%14.8%13.4%
RCF / Debt 14.5%10.2%11.1%10.3%9.0%
Revenue 1,446 1,397 1,346 1,322 1,364
Interest Expense 97 102 107 107 107
Net Income 126 84 128 127 142
Total Assets 5,518 5,833 6,082 6,402 6,646
Total Liabilities 3,799 4,074 4,158 4,372 4,576
Total Equity 1,719 1,759 1,925 2,030 2,070
[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™
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Ratings
Exhibit 12
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 POWER
COMPANY(AELP)
Outlook Stable
Issuer Rating Baa3
AVISTA CORP. CAPITAL II
Outlook Stable
BACKED Pref. Stock Baa3
Source: Moody's Investors Service
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REPORT NUMBER 1293445
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