20210325Avista to Staff 75 Attachment A1.PDF

INFRASTRUCTURE AND PROJECT FINANCE
CREDIT OPINION
22 March 2017
Update
RATINGS
Avista Corp.
Domicile Spokane, Washington,United States
Long Term Rating Baa1
Type LT Issuer Rating
Outlook Stable
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shown
reflect information as of the publication date.
Contacts
Ryan Wobbrock 212-553-7104
Vice President
[e-mail]
Jillian Cardona [phone]
Associate Analyst
[e-mail]
Jim Hempstead 212-553-4318
MD-Utilities
[e-mail]
AVISTA CORP.
A Vertically Integrated Electric and Gas Utility
Summary Rating Rationale
Avista Coporation's (Avista, Baa1 Stable) Baa1 issuer rating reflects its primary business
as a low-risk vertically integrated electric and gas utility with supportive cost recovery
mechanisms, such as electric and gas revenue decoupling. Recent events in Washington,
Avista's primary regulatory jurisdiction, create some uncertainty for the company going
forward, but Avista's financial profile can provide cushion to offset any negative effects over
the next 12-18 months.
Avista has some unregulated exposure in addition to its ownership of regulated utility Alaska
Electric Light and Power (AEL&P, Baa3 Stable), which provide marginal operational and cash
flow diversity, but remain neutral in terms of affecting the ratings of Avista.
Exhibit 1
Historical CFO Pre-WC, Total Debt and CFO Pre-WC to Debt
Source: Moody's Investors Service
Credit Strengths
» Low-risk utility with supportive cost recovery mechanisms
» Stable cash flow production
Credit Challenges
» Significant miscommunication, recently, between AVA and its key regulator
» Clean Air Rule in Washington could be costly
Rating Outlook
The stable outlook incorporates our view that despite a recent rate filing snafu in
Washington, Avista's financial profile will maintain cash flow from operations pre-working
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
capital (CFO pre-WC) CFO pre-WC to debt in the high-teens range and that it will continue to receive adequate cost recovery
within its regulatory jurisdictions. The stable outlook also incorporates a view that unregulated operations will remain below 15% of
consolidated earnings and cash flow.
Factors that Could Lead to an Upgrade
The ratings for Avista could be upgraded if the company were able to produce CFO pre-WC to debt above 21% on a sustained basis,
without the benefits from one-time adjustments or temporary tax benefits.
Factors that Could Lead to a Downgrade
Avista's ratings could considered for downgrade with less supportive regulatory relationships over a sustained period of time and if CFO
pre-WC to debt were to fall to 17% on a consistent basis. Also, if the contribution of Avista's unregulated business were to increase
disproportionately to those of its regulated operations, it could be downgraded.
Key Indicators
Exhibit 2
[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™
Detailed Rating Considerations
SIGNIFICANT MISCOMMUNICATION WITH WASHINGTON REGULATORS
In Washington, there appears to be some form of miscommunication between Avista and the Washington Utilities and Transportation
Commission (WUTC). This is evident given Avista's most recent rate filing being rejected by the WUTC in December 2016, which was
followed by a WUTC denial for reconsideration of the December decision, in February 2017. This was a surprising outcome considering
our view that the core competency of utility management is managing regulatory relationships and an outright denial by the regulator
is unexpected.
Since the WUTC is Avista's most important regulator, overseeing roughly 60% of the company's revenue generation, we anticipate that
the company will have a declining financial profile over the next 12-18 months while Avista engages the commission in preparation for
another filing (expected during 2Q17). While this is a credit negative development, Avista currently has a strong enough financial profile
to absorb this rate case delay without any ratings impact (see financial section, below). Moreover, we view this snafu as temporary, and
expect that the company will continue to receive adequate and timely cost recovery of prudently incurred costs.
In the meantime, Avista's last general rate case order remain intact, including the electric and gas decoupling mechanisms, which we
view as a significant credit positive. Decoupling enhances the timely recovery of fixed costs for the utility and provides for stable and
predictable gross margin and cash flow in the face of declining use, in addition to attrition adjustments for ongoing rates. This has been
beneficial to Avista since residential and commercial customer electric and gas use has declined over the past two years.
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 22 March 2017 AVISTA CORP.: A Vertically Integrated Electric and Gas Utility
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
FINANCIAL PROFILE PROVIDES SOME CUSHION FOR RATE CASE DELAY
Avista's key financial metrics, such as cash flow from operations before the changes in working capital (CFO pre-WC) to debt, continue
to be very stable at around 19%. This level is in-line with other Baa1 vertically integrated peers and should provide a degree of financial
flexibility for the company to withstand the financial decline expected over the next 12-18 months.
For example, Avista estimates that the delay in obtaining a rate order will reduce its earnings per diluted share between $0.20 to $0.30
for 2017. We estimate that this would equate to between $13 million and $20 million of net income. This reduction of net income
could reduce cash flow to debt metrics by up to 100 basis points, or around 18%, assuming no increase in debt. We would expect this
trend to correct itself once an acceptable general rate case is filed with the WUTC and becomes approved. However, should cash flow
to debt remains in the mid-teen's percent range (e.g., 16% or 17%) there could be negative ratings pressure for Avista.
We see a more significant risk with Avista's level of deferred taxes generated in 2016. The company benefitted from around $125
million of deferred tax increases that represented roughly 35% of CFO in 2016. We expect this level to decline significantly going
forward, which could place additional pressure on financial metrics. For example, if deferred taxes reduced to around $75 million (the
average level from 2012-2016) 2016 CFO pre-WC to debt would be 17%.
WASHINGTON'S CLEAN AIR RULE PROVIDES AN ASPECT OF UNCERTAINTY
In September 2016, the Washington State Department of Ecology adopted the Clean Air Rule (CAR) which establishes emission
standards for green house gas (GHG) emissions from certain sources in the state, including power plants and natural gas distributors.
The plan calls for a reduction of GHG emissions over time, at a pace of 1.7% annually until 2035; however, the base level has not been
set by the Department of Ecology.
Exactly how, and at what cost, the rule might affect Avista's power plant generation and natural gas distribution is currently unclear.
Under the rule, Avista can comply by simply reducing emissions or providing Emission Reduction Units (ERUs) - a cap and trade type
mechanism within Washington state borders, which has yet to be administered.
We view the ability to reduce emissions from owned generation as more feasible than from natural gas deliveries - which are primarily
based on customer needs and generally outside the control of the company - since the company only acts as a conduit for natural gas
deliveries. Therefore, if Avista is held financially accountable for the emissions of roughly 117 Bcf of gas deliveries per year, rates and
customer bills could rise with no added benefit of service - a credit negative.
The first compliance period ranges from 2017 to 2020, giving Avista time to incorporate a compliance strategy. We note that several
parties, including Avista, filed a joint action in the US District Court for the Eastern District of Washington challenging the CAR; thus, a
prolonged litigation period will likely ensue.
Liquidity Analysis
We expect Avista to maintain adequate liquidity in the next 12-18 months.
Avista's external liquidity source consists of a $400 million senior secured revolving credit facility, which expires in April 2021. As of
31 December 2016, there were $154 million of cash borrowings, leaving $246 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 the existing First Mortgage Bond collateral position, but it has chosen not to do so for economic
reasons. Despite the collateral staying in place at Avista's discretion, the secured nature of the credit facilities somewhat constrains
Avista's liquidity flexibility, in our opinion, since the typical investment grade issuer (having an unsecured facility) can use collateral as
an option to improve bank credit access during periods of unforeseen liquidity stress.
Avista was in compliance with the facility’s sole covenant of less than 65% capitalization, with a ratio of 52.9% as of 31 December
2016.
AEL&P has a $25 million line of credit which expires in November 2019 and requires a consolidated debt to capitalization covenant
of 67.5%. As of 31 December 2016, there were no borrowings or letters of credit outstanding under the facility and AEL&P was in
compliance with its covenant, with a ratio of 55.6%.
3 22 March 2017 AVISTA CORP.: A Vertically Integrated Electric and Gas Utility
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Avista's next material debt maturities occur in May and June 2018, when $7 million and an aggregate $255.5 million of senior debt are
due, respectively.
Profile
Avista Corporation (Avista, Baa1 Stable) is primarily a regulated electric and gas utility servicing around 375,000 electric and 335,000
gas customers in Washington, Idaho and Oregon. Avista also owns Alaska Energy and Resources Company (AERC; not rated), parent of
Alaska Electric Light and Power Company (AEL&P; Baa3) which serves around 17,000 electric customers in Juneau, Alaska.
Avista's utility operations are primarily regulated by the Washington Utilities and Transportation Commission (WUTC), Idaho Public
Utilities Commission (IPUC) and the Oregon Public Utility Commission (OPUC). AEL&P is under the purview of the Regulatory
Commission of Alaska (RCA).
Rating Methodology and Scorecard Factors
Exhibit 3
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 12/31/2016.
[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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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
Ratings
Exhibit 4
Category Moody's Rating
AVISTA CORP.
Outlook Stable
Issuer Rating Baa1
First Mortgage Bonds A2
Senior Secured A2
Senior Unsecured MTN (P)Baa1
ALASKA ELECTRIC LIGHT AND POWER
COMPANY(AELP)
Outlook Stable
Issuer Rating Baa3
AVISTA CORP. CAPITAL II
Outlook Stable
BACKED Pref. Stock Baa2
Source: Moody's Investors Service
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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE
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