20180126Avista to Staff_DR_017 Attachment B.pdf

Research Update:
Avista Corp. Outlook Revised To
Positive From Stable On Planned
Acquisition By Hydro One Ltd.
Primary Credit Analyst:
Safina Ali, CFA, New York (1) 212-438-1877; [e-mail]
Secondary Contact:
Gerrit W Jepsen, CFA, New York (1) 212-438-2529; [e-mail]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Recovery Analysis/Issue Ratings
Ratings Score Snapshot
Related Criteria
Ratings List
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Staff_DR_017(AVA) Attachment B Page 1 of 6
Research Update:
Avista Corp. Outlook Revised To Positive From
Stable On Planned Acquisition By Hydro One Ltd.
Overview
·Toronto, Ontario-based utility Hydro One Ltd. (HOL) has entered into an
agreement to acquire U.S.-based Avista Corp. (Avista) for C$6.7 billion
in an all-cash transaction.
·We are affirming our ratings on Avista, including the 'BBB' issuer credit
rating, and revising the outlook to positive from stable.
·The positive outlook reflects the potential for higher ratings on Avista
if the acquisition is completed as proposed.
Rating Action
On July 19, 2017, S&P Global Ratings affirmed its ratings, including the 'BBB'
issuer credit rating, on Avista Corp. and revised the outlook to positive from
stable.
Rationale
The outlook revision on Avista reflects the potential for higher ratings upon
the completion of the acquisition by Hydro One Ltd. (HOL). Post-acquisition,
we will view Avista as a highly strategic subsidiary of HOL. Our assessment is
based on our view that Avista will be an important member of the HOL group,
highly unlikely to be sold, and integral to overall group strategy and
operations. Avista will be a significant cash flow contributor to the group,
making up about 22% of consolidated EBITDA. We would also see a strong,
long-term commitment of support from HOL senior management in almost all
circumstances.
Avista's highly strategic group status would result in an issuer credit rating
one notch below the rating on HOL.
Our assessment of Avista's business risk reflects the strength and
contribution of its regulated electric and gas utility operations. Avista
conducts vertically integrated electric and natural gas distribution utility
operations in Washington and Idaho, electric operations in Alaska, and gas
distribution in Oregon. The company serves a total of about 700,000 customers.
Our financial risk profile assessment on Avista is based on financial ratio
benchmarks that are more relaxed compared with those used for typical
corporate issuers. This reflects the mostly steady cash flow from its
regulated utility operations. Our base-case scenario projects adjusted funds
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Staff_DR_017(AVA) Attachment B Page 2 of 6
from operations (FFO) to debt of roughly 16%-18% over the next two years.
Liquidity
We assess Avista's liquidity as adequate because in our view its sources are
likely to cover uses by more than 1.1x over the next 12 months and to meet
cash outflows, even in the event of a 10% decline in EBITDA. The assessment
also reflects the company's generally prudent risk management, sound
relationships with banks, and a generally satisfactory standing in credit
markets.
Principal liquidity sources:
·Cash FFO of about $355 million; and
·Revolving credit facility availability of $400 million.
Principal liquidity uses:
·Debt maturities, including outstanding commercial paper, of about $110
million;
·Capital spending of about $410 million; and
·Dividends of about $95 million.
Outlook
The positive outlook reflects the potential for higher ratings on Avista if
HOL completes its acquisition as proposed. Upon close of the transaction, we
will consider Avista as a highly strategic subsidiary of HOL, resulting in an
issuer credit rating on Avista that is one notch below our rating on HOL.
Downside scenario
We do not envision a lower rating on Avista, but we would revise the outlook
to stable if the transaction fails to close or is completed in a manner that
results in more than a one-notch downgrade of HOL.
Prior to the completion of the acquisition, we could lower the rating on
Avista if its business risk weakens materially or credit measures diminish
such that FFO to debt is consistently below 15%. This could occur due to
increased use of leverage to cover funding shortfalls or adverse regulatory
decisions leading to increased regulatory lag or a large deferral of costs.
Upside scenario
We could raise our ratings on Avista by one notch following the acquisition if
our issuer credit rating on HOL is 'A-'. Once HOL owns Avista, we will base
our issuer credit rating on Avista on the group's credit profile, which would
typically be one notch lower.
We do not contemplate an upgrade on Avista before the acquisition is completed
given the company's current business mix, regulatory risk, and financial
measures in our base-case scenario.
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Staff_DR_017(AVA) Attachment B Page 3 of 6
Recovery Analysis/Issue Ratings
·Avista's first-mortgage bonds benefit from a first-priority lien on
substantially all of the utility's real property owned or subsequently
acquired. Collateral coverage of more than 1.5x supports a recovery
rating of '1+' and an issue rating two notches above the issuer credit
rating.
·We rate the preferred stock issued by Avista Capital II two notches below
the issuer credit rating on Avista Corp. to reflect the discretionary
nature of the dividend and the deeply subordinated claim if a bankruptcy
occurs.
·The short-term rating on Avista Corp. is 'A-2' based on our 'BBB' issuer
credit rating on the company.
Ratings Score Snapshot
Corporate Credit Rating: BBB/Positive/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
·Group credit profile: bbb
Related Criteria
·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 - General: Corporate Methodology: Ratios And
Adjustments, Nov. 19, 2013
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Research Update: Avista Corp. Outlook Revised To Positive From Stable On Planned Acquisition By Hydro One
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Staff_DR_017(AVA) Attachment B Page 4 of 6
·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
·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 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
·Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each
Issue, April 15, 2008
Ratings List
Ratings Affirmed; Outlook Action
To From
Avista Corp.
Corporate Credit Rating BBB/Positive/A-2 BBB/Stable/A-2
Ratings Affirmed
Avista Corp.
Senior Secured A-
Recovery Rating 1+
Avista Capital II
Preferred Stock BB+
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 information is available to subscribers of
RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All
ratings affected by this rating action can be found on the S&P Global Ratings'
public website at www.standardandpoors.com. Use the Ratings search box located
in the left column.
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