20230502PR_139 Attachment B.pdf

INFRASTRUCTURE AND PROJECT FINANCE
CREDIT OPINION
30 August 2022
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 shown
reflect information as of the publication date.
Contacts
Edna R Marinelarena +1.212.553.1383
AVP-Analyst
[e-mail]
Ryan Wobbrock +1.212.553.7104
VP-Sr Credit Officer
[e-mail]
Cole Egan 212.553.0300
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 revenue decoupling. These supportive mechanisms have resulted in steady
revenue and cash flow and sustained stable credit metrics including a ratio of cash flow from
operation before changes in working capital (CFO pre-WC) to debt at about 15%.
In 2021, the CFO pre-WC to debt ratio declined to about 12% as a result of a delayed general
rate case filing in 2020 as well as an established customer tax credit. Management chose
this path due to customer sensitivities around the coronavirus pandemic, but the net effect
reduced Avista's cash collections.
The utility filed its latest general rate case in January 2022 and expects the Washington
Utilities and Transportation Commission (WUTC) to rule on a settlement agreement in
December 2022. If the settlement agreement is approved, we estimate that Avista's financial
metrics will improve, including a ratio of CFO pre-WC to debt returning to the mid-teens.
The credit further incorporates the company's track record with its primary regulator, 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 (Senate Bill 5295) 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. We view the recent settlement agreement
as a sign that the bill is helping regulatory proceedings and a step towards more consistent
regulatory outcomes.
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
358 355 381 308 304
2,297 2,372 2,492
2,651 2,67115.6%
15.0%15.3%
11.6%11.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
0
500
1,000
1,500
2,000
2,500
3,000
2018 2019 2020 2021 LTM Jun-22
CFO Pre-W/C Total Debt CFO Pre-W/C / Debt
Source: Moody's Financial Metrics
Credit Strengths
» Vertically integrated utility with track record of consistent cash flow generation
» Washington legislation provides for additional credit-positive regulatory tools
Credit Challenges
» Weak credit metrics providing little cushion within the Baa2 rating category
» Delayed cost recovery due to coronavirus pandemic and historic test year requirement
» Uncertainty over the implementation of new, potentially positive legislative provisions
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 a trend of
consistent rate case outcomes and authorization of trackers and riders that would result in faster cost recovery, reducing regulatory lag.
Factors that Could Lead to a Downgrade
A rating downgrade could result should there be a degradation in the utility's regulatory environment resulting in inadequate cost
recovery or if 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 issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.
2 30 August 2022 Avista Corp.: Update to credit analysis
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Key Indicators
Avista Corp. [1]
Dec-18 Dec-19 Dec-20 Dec-21 LTM Jun-22
CFO Pre-W/C + Interest / Interest 4.5x 4.3x 4.6x 3.9x 3.7x
CFO Pre-W/C / Debt 15.6%15.0%15.3%11.6%11.4%
11.3%10.6%10.9%7.2%6.8%
Debt / Capitalization 50.5%49.2%48.7%48.7%48.0%
[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
Rating Outlook
The stable outlook incorporates our view that Avista's financial profile will improve in 2023 (e.g., CFO pre-WC to debt of at least 14%),
following the conclusion of its current rate case and new rates take effect in December 2022. We forecast this ratio staying in the
mid-teens over the next several years. In addition, the stable outlook incorporates a view 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.
Profile
Avista is primarily an electric and natural gas utility which 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. At the end of 2021, Avista Utilities had over 407,000 electric and
over 374,000 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
2021 earnings contribution breakdown
Exhibit 4
Rate base by jurisdiction
Avista Utilities95%
AELP5%
Excludes other segments
Source: Avista Corp. Filings
Idaho30%
Washington62%
Oregon8%
As of 30 June 2022, excludes AEL&PSource: Company Documents & Moody's Investors Service
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Detailed Credit Considerations
Weak financial metrics with improvement reliant on rate case outcome
Because of Washington's historic test year requirements for rate making, Avista experiences a lag between the time that investments
are made and the time at which it is allowed to begin recovery of those investments via new rates. Management had intended to
improve this lag by filing rate cases more frequently, but the coronavirus-driven economic downturn delayed this process until October
2020. Additionally, as a way to help mitigate the customer bill impact, the company offset its revenue increase with the creation of a
Tax Customer Credit, which reduced revenue and cash flow in 2021 and 2022. As a result, the company's financial profile is weak, but
we expect an improvement associated with the outcome of the pending settlement agreement.
CFO pre-WC to debt stabilized in the mid-teens over the last three years after declining from about 20%, following the negative cash
flow effects associated with 2017 tax reform. As highlighted in Exhibit 4, CFO pre-WC to debt in 2023 is forecast to improve to about
15% and remain in the mid-teens going forward.
Exhibit 5Weak financial metrics could improve if settlement agreement is approved
Historical and forecast CFO pre-WC to debt ratio
19%20%
16%15%15%
12%11%
15%
12%11%12%
15%
17%
10%
12%
14%
16%
18%
20%
22%
24%
2016 2017 2018 2019 2020 2021 LTM Q2 2022 2022E 2023E 2026E
CFO Pre-WC to debt Forecast Upgrade/Downgrade Treshold Range
*The ranges indicated are one of several factors that could lead to an upgrade or downgrade of the ratings if the CFO pre-WC to debt ratio is above or below the level for a sustained
period.
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 60% of the company's rate base and revenue, allows electric and gas decoupling mechanisms which
provide for timely recovery of fixed utility costs and stable gross margin 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 rising costs and earn on investments.
Avista filed its latest electric and natural gas general rate case on 21 January 2022 with the WUTC. The filing was a two year multiyear
rate plan that requested a $52.9 million (9.6%) electric increase in the first year effective December 2022 and a $17.1 million (2.8%)
increase in the second year effective December 2023. For natural gas, Avista requested $10.9 million (9.5%) increase in the first year
and $2.2 million (1.7%) increase in the second year. The filing included a 10.25% ROE, higher than the currently authorized 9.4%, and
48.5% equity layer, as currently authorized. Additionally, the filing 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 first used as an offset in the
2020 rate case.
On 28 June 2022, Avista filed a multiparty settlement agreement on a two year rate plan. The agreement includes an electric revenue
increase of $38 million (6.9%) effective December 2022 and a $12.5 million (2.1%) revenue increase effective December 2023. For
natural gas, the settlement includes a $7.5 million (6.5%) increase in December 2022 and a $1.5 million (1.2%) increase in December
2023. The parties agreed to a 7.03% rate of return with all other aspects not made public. A company concession included the
disallowance of costs associated with dry ash disposal requirements at Colstrip, which Avista owns 15% share of the plant's operating
4 30 August 2022 Avista Corp.: Update to credit analysis
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capacity. Management took a write off in the second quarter 2022 on such costs. We view the settlement agreement as a positive step
towards a constructive rate case outcome and if approved will be credit supportive.
While we view Avista settling its last two general rate cases and entering into a settlement agreement on the first multiyear rate plan
following the passage of SB 5295 as examples of an improved stakeholder relationship with WUTC, the lag in cash flow recovery and
tempered revenue increases have pressured Avista's credit metrics particularly during a time when the sector faces material headwinds
from higher natural gas prices and overall cost pressures. The approval of the settlement agreement is a key credit consideration for
Avista's credit profile.
Idaho
In Idaho, Avista filed its 2021 general rate case with the Idaho Public Utilities Commission (IPUC) in January 2021 and the IPUC
approved an all-party settlement in June 2021. The settlement authorized a two-year multiyear rate plan that included a $10.6 million
(4.3%) electric revenue increase effective 1 September 2021 and an annual base electric revenue increase of $8 million (3.1%) effective
1 September 2022. For natural gas the rate plan decreased revenue by $1.6 million (3.7%) in 2021 and increase revenue by $0.9 million
(2.2%) in 2022. The settlement further authorized a 9.4% ROE (prior authorized was 9.5%) and 50% capital structure (in line with prior
authorization). The company plans to file its next general rate case in early 2023. Avista's original request included an electric revenue
increase of $24.8 million (10.1%) in 2021 and an $8.7 million (3.2%) increase in 2022. Similar to the Washington filing, Avista proposed
to offset the increase by the creation of the Tax Customer Credit for the two years, which was authorized under the settlement.
Oregon
The company's most recent natural gas rate case was filed on 22 October 2021 where it requested a $3.8 million (3.1%) revenue
increase. The commission approved a settlement where rates became effective 23 August 2022. The settlement included a revenue
increase of $1.6 million, and a 9.4% ROE and 50% capital structure (both as previously authorized).
Alaska
AELP filed its latest general rate case on 18 July 2022 requesting a $3.2 million (9%) electric base rate increase. The request includes a
13.45% ROE and 60.7% capital structure. The utility is currently allowed an ROE of 11.95% and equity layer of 58.18%, which are well
above the average of authorized returns for the industry, a credit positive. 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.
In the utility's last rate case, 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 commission 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 current 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.
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.
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We discuss more details on SB 5295 in “Washington approves clean energy bill, a credit positive for investor-owned utilities” (16 May
2019).
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.
SB 5295 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.
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).
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ESG considerations
Avista's ESG Credit Impact Score is Moderately Negative CIS-3
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
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 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
compliance and reporting, management creditability and track record as well as financial policy and risk management, which is driven
by the historical ratio of retained cash flow to debt.
ESG Issuer Profile Scores and Credit Impact Scores for Avista are available on Moodys.com. In order to view the latest scores, please
click here to go to the landing page for the entity/transaction on MDC and view the ESG Scores section.
7 30 August 2022 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 June 2022, there was about $198.7 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 54% as of 30 June 2022. 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 30 June 2022, 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 2022, Avista issued $400 million in first mortgage
bonds and issued $60.8 million of the planned $135 million of equity in the year. Proceeds were used to repay short term debt
outstanding under the line of credit and $250 million in maturities due in April 2022. Avista's maturity schedule is manageable with a
$13.5 million secured note due in 2023 and $25 million secured note due in 2028.
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Methodology and Scorecard
Exhibit 8
Rating Factors
Avista Corporation
Regulated Electric and Gas Utilities Industry [1][2]
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
b) Generation and Fuel Diversity A A A A
Factor 4 : Financial Strength (40%)
a) CFO pre-WC + Interest / Interest (3 Year Avg)4.1x Baa 3x-5x Baa
b) CFO pre-WC / Debt (3 Year Avg)13.0%Ba 11%-15%Ba
c) CFO pre-WC – Dividends / Debt (3 Year Avg)8.6%Ba 8%-11%Ba
d) Debt / Capitalization (3 Year Avg)49.0%Baa 48%-50%Baa
Rating:
Scorecard-Indicated Outcome Before Notching Adjustment Baa2 Baa2
HoldCo Structural Subordination Notching 0 0
a) Scorecard-Indicated Outcome Baa2 Baa2
b) Actual Rating Assigned (P)Baa2 (P)Baa2
Current
LTM 6/30/2022
Moody's 12-18 Month Forward
View
As of 8/22/2022 [3]
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.
[2] As of 6/30/2022 (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 9
Peer Comparison Table [1]
FYE FYE LTM FYE FYE LTM FYE FYE LTM FYE FYE LTM
(In US millions)Dec-20 Dec-21 Jun-22 Dec-20 Dec-21 Jun-22 Dec-20 Dec-21 Mar-22 Dec-21 Dec-21 Jun-22
Revenue 1,322 1,439 1,568 3,326 3,806 3,912 1,347 1,455 1,484 2,145 2,396 2,467
EBITDA 466 493 482 1,299 1,339 1,301 536 552 556 759 822 832
Total Debt 2,492 2,651 2,671 4,957 5,268 5,175 2,601 2,496 2,546 3,711 3,707 3,616
CFO Pre-W/C / Debt 15.3%11.6%11.4%18.1%17.1%16.7%12.2%12.8%12.8%14.5%14.4%16.2%
10.9%7.2%6.8%15.1%12.7%13.9%6.9%7.0%6.9%10.8%10.3%11.9%
Debt / Capitalization 48.7%48.7%48.0%49.0%49.3%47.5%45.0%43.1%43.5%55.5%54.4%53.3%
Debt / EBITDA 5.3x 5.4x 5.5x 3.8x 3.9x 4.0x 4.9x 4.5x 4.6x 4.9x 4.5x 4.3x
EBITDA / Interest Expense 4.4x 4.6x 4.3x 5.1x 5.2x 5.1x 4.8x 5.0x 5.0x 5.0x 5.6x 5.3x
Avista Corp.Puget Sound Energy, Inc.Idaho Power Company Portland General Electric Company
(P)Baa2 (Stable)Baa1 (Stable)Baa1 (Stable)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 10
Cash Flow and Credit Metrics [1]
($ in millions)
CF Metrics Dec-18 Dec-19 Dec-20 Dec-21 LTM Jun-22
As Adjusted
FFO 332 365 368 302 275
+/- Other 26 -10 13 7 29
CFO Pre-WC 358 355 381 308 304
4 47 -49 -22 -2
CFO 362 402 333 286 302
- Div 98 103 110 118 124
- Capex 424 447 409 445 442
FCF -160 -147 -186 -277 -263
(CFO Pre-W/C) / Debt 15.6%15.0%15.3%11.6%11.4%
(CFO Pre-W/C - Dividends) / Debt 11.3%10.6%10.9%7.2%6.8%
FFO / Debt 14.5%15.4%14.8%11.4%10.3%
RCF / Debt 10.2%11.1%10.3%6.9%5.7%
Revenue 1,397 1,346 1,322 1,439 1,568
Interest Expense 102 107 107 107 111
Net Income 84 128 127 141 139
Total Assets 5,833 6,082 6,402 6,854 6,938
Total Liabilities 4,074 4,158 4,372 4,699 4,700
Total Equity 1,759 1,925 2,030 2,155 2,237
[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 11
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 1336981
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