20210325Avista to Staff 75 Attachment A13.pdf

Research Update:
Avista Corp. 'BBB' Rating Affirmed On New
Legislation In Washington State; Outlook Stable
May 20, 2019
Rating Action Overview
- We expect passage of legislation in Washington state, which includes authority for the
Washington Utilities and Transportation Commission (WUTC) to approve multiyear rate plans
and allow recovery for certain utility investments deemed useful up to 48 months after rates
have been approved, will be favorable for Avista Corp.'s business risk profile.
- At the same time, we expect Avista's financial measures to remain weak during our forecast
period, reflecting funds from operations (FFO) to debt of 14%-16% throughout our forecast
period.
- Taken together, we view the potential improvement in Avista's business risk as mitigating its
otherwise modestly weaker financial measures. This supports revising our ratings downgrade
threshold of FFO to debt to 14% from 15%.
- We are affirming all our ratings on Avista. The outlook is stable.
- The stable outlook reflects our expectation that the potential improvement to Avista's
regulatory risk management strengthens its business risk profile, mitigating the company's
modestly weaker financial measures, and for FFO to debt of 14%-16% throughout our forecast
period.
Rating Action Rationale
Our rating action follows the recent passage of legislation in Washington state that we expect will
improve Avista's regulatory risk management. This includes authority for the WUTC to approve
multiyear rate plans and allow recovery for certain utility investments deemed useful up to 48
months after rates are approved.
Avista recently filed for a general rate increase under this construct. If approved, we expect this to
reduce Avista's historical regulatory lag, strengthening our view of its business risk. As such, we
revised our ratings downside threshold of FFO to debt to 14% from 15%. While we acknowledge
the company's weaker financial measures for 2018 and 2019, our view of potential improvement in
Avista's business risk mitigates its modestly weaker financial measures. Our base case assumes
FFO to debt of 14%-16% over our forecast period.
Research Update:
Avista Corp. 'BBB' Rating Affirmed On New
Legislation In Washington State; Outlook Stable
May 20, 2019
PRIMARY CREDIT ANALYST
Obioma Ugboaja
New York
+ 1 [phone]
obioma.ugboaja
@spglobal.com
SECONDARY CONTACTS
Sloan Millman
New York
+ 1 [phone]
sloan.millman
@spglobal.com
Kevin M Sheridan
New York
+ 1 [phone]
kevin.sheridan
@spglobal.com
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Our assessment of Avista's business risk profile primarily reflects its regulatory risk management,
since about 95% of the company's overall EBITDA is derived from low-risk regulated utility
operations. The company is generally authorized to use various cost recovery mechanisms to help
alleviate regulatory lag but is somewhat exposed to potential excess power costs, typically tied to
an earnings sharing mechanism in Washington.
We also incorporate our view of its regulatory diversity and generation mix. Avista primarily
operates in Washington and Idaho; Oregon and Alaska jointly contribute less than 10% of its
consolidated revenues. Moreover, its dependence on hydroelectric generation introduces fuel
replacement risk during periods of unfavorable hydro conditions.
We assess Avista's financial risk profile under our medial volatility financial benchmark table,
reflecting its business risk derived from its low-risk regulated utility operations and regulatory risk
management. Under our base-case scenario--including capital spending averaging about $400
million, dividends of about $100 million, and a new multiyear rate case in Washington, and a
merger termination payment to Avista from Hydro One, we expect FFO to debt of 14%-16%
throughout our forecast period.
Outlook
The stable outlook reflects our expectation that the potential improvement to Avista's regulatory
risk management strengthens its business risk profile, mitigating the company's modestly weaker
financial measures, and that we expect FFO to debt of 14%-16% throughout our forecast period.
Downside scenario
We could lower our ratings on Avista during the next two years if adverse regulatory decisions
weaken FFO to debt consistently below 14%, without sufficient countermeasures. We could also
lower the ratings if Avista shifts its strategic focus to other business activities that weaken its
credit quality.
Upside scenario
We could raise our rating on Avista if it materially improves its financial measures such that FFO to
debt is consistently above 20%.
Company Description
Spokane, Wash.-based Avista is a vertically integrated regulated electric and natural gas utility
company. It operates through two segments, Avista Utilities and Alaska Electric Light & Power Co.
(AEL&P). Avista Utilities provides electric distribution and transmission, natural gas distribution
services in parts of eastern Washington and northern Idaho, and natural gas distribution services
in parts of northeastern and southwestern Oregon. AEL&P offers electric services to
approximately 17,000 customers in the city and borough of Juneau, Alaska. Overall, Avista has
about 382,000 electricity customers and approximately 347,000 natural gas customers.
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Research Update: Avista Corp. 'BBB' Rating Affirmed On New Legislation In Washington State; Outlook Stable
Staff_PR_075 Attachment A13 Page 2 of 6
Liquidity
We assess Avista's liquidity as adequate. We expect sources to cover uses by more than 1.1x over
the next 12 months even in the event of a 10% decline in EBITDA. 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:
- Revolving credit facility of $400 million;
- $400 million cash FFO; and
- Minimal cash assumed.
Principal liquidity uses:
- Long-term debt maturities of about $105 million in 2019;
- Assumed maintenance capital spending of $245 million; and
- Dividends of approximately $100 million.
Issue Ratings - Subordination Risk Analysis
Capital structure
Avista's consolidated capital structure comprises about $1.8 billion of long-term debt, most of
which is secured, and about $50 million of preferred stock, issued through Avista Capital II.
Analytical conclusions
We rate the preferred stock two notches below the issuer credit rating to reflect the deferability of
the dividends, and because it is deeply subordinated to other instruments in the capital structure,
consistent with our criteria. The short-term rating on Avista is 'A-2', based on our long-term 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
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Research Update: Avista Corp. 'BBB' Rating Affirmed On New Legislation In Washington State; Outlook Stable
Staff_PR_075 Attachment A13 Page 3 of 6
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
- 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
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- 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
- 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
Ratings List
Ratings Affirmed
Avista Corp.
Issuer Credit Rating BBB/Stable/A-2
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Research Update: Avista Corp. 'BBB' Rating Affirmed On New Legislation In Washington State; Outlook Stable
Staff_PR_075 Attachment A13 Page 4 of 6
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.capitaliq.com. All ratings affected by this rating
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. 'BBB' Rating Affirmed On New Legislation In Washington State; Outlook Stable
Staff_PR_075 Attachment A13 Page 5 of 6
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Research Update: Avista Corp. 'BBB' Rating Affirmed On New Legislation In Washington State; Outlook Stable
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