20181212Hydro One Supplemental Report.pdf

t..'I_rartr.frni .,.-. i-, i- l I L- U
David J. Meyer
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
1411 E. Mission Ave., MSC-27
Spokane, WA 99220-3727
David. me y er @avistacorp. com
In the Matter of the Joint Application of
HYDRO ONE LIMITED (acting through
its indirect subsidiary Olympus Equity
LLC)
BEFORE THE
IDAHO PUBLIC UTILITIES COMMISSION
Elizabeth Thomas, Partner
Kari Vander Stoep, Partner
K&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
Liz.thomas@kl gates. com
kari.vanderstoep@klgates. com
CASE NOS. AVU-E-17-09
AVU-G-17-05
and
AVISTA CORPORATION
SUPPLEMENTAL REPORT ON
HYDRO ONE MANAGEMENT
CHANGES
For an Order Authorizing Proposed
Transaction
As required by the Idaho Public Utilities Commission's (the "Commission") July 20, 2018,
Order No. 34111 ("July 20th Order"), Hydro One Limited ("Hydro One") provides this
Supplemental Report on Hydro One Management Changes and the Proposed Transaction.
SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES - I
':t'. ? F!l C.?Q! t.rt J. LJ
I
2 On December 10, 2018, S&P Global Ratings ("S&P") issued two reports, one each on Hydro
One and Avista, in response to the Washington Utilities and Transportation Commission's
("WUTC") decision denying the companies' Joint Application for Transfer of Property.
The S&P report on Hydro One, titled "Hydro One Ltd. And Sub Ratings Affirmed As Regulator
Rejects M&A Deal With Avista, Off Watch; Outlook Negative," is attached as Attachment A.
The S&P report on Avista, titled "Avista Corp. Ratings Affirmed; Off Watch Positive; Outlook
Stable," is attached as Attachment B.
DATED: December I 1. 201 8
K&L GATES, LLP AVISTA CORPORATION
J
(L n r4A [* {,n,
BY:BY
J. Meyer, ISB No. 8317
3
I
Elizabeth Thomas, Partner (admitted pro hac vice)
Kari Vander Stoep, Partner (admitted pro hac vice)
K&L Gates LLP
On Behalf of Hydro One Limited
Olympus Equity LLC
925 Fourth Avenue, Suite 2900
Seattle, WA 98104-1158
Liz.thomas@kl gates. com
kari.vanderstoep@kl gates.com
Chief Counsel for Regulatory and
Governmental Affairs
Avista Corporation
14118. Mission Ave., MSC-27
Spokane, WA 99220-3727
David. meyer@avistacorp. com
SUPPLEMENTAL REPORT ON HYDRO ONE MANAGEMENT CHANGES - 2
Ir I *W
Attachment A
S&P Gtobal
Ratings
RatingsDirect'
Research Update:
Hydro One Ltd. And Sub Ratings
Affirmed As Regulator Rejects fUae
Deal With Avista, Off Watch; Outlook
Negative
Primar5r Credit Analyst:
Andrew Ng, Toronto + 1 [phone]; [e-mail]
Secondary Contact:
Obioma Ugboaja, New York + 1 [phone]; [e-mail]
Table Of Contents
Rating Action Overview
Rating Action Rationale
Outlook
Company Description
Our Base-Case Scenario
Liquidity
Environmental, Social, And Governance
Issue Ratings - Subordination Risk Analysis
Ratings Score Snapshot(Hydro One Ltd.)
Ratings Score Snapshot(Hydro One Inc.)
WWW,STANDABDANDPOOBS, COM/RATINGSDIRECT DECEMBER 10,2018 1
Irll: 9l c:lrll: (::lll
Related Criteria
Ratings List
WWW,STANDARDANDPOORS, COM/RATINGSDIBECT DECEMBER 10,2018 2
Research Update:
Hydro One Ltd. And Sub Ratings Affirmed As
Regulator Rejects M&A Deal With Avista, Off
Watch; Outlook Negative
Rating Action Overview
e The Washingt.on UEilities and TransportaEion Commission (WUTC) has denied
the merger petiEion between Hydro One LLd. (HOL) and Avista Corp.
o The WUTC's decision, in our view, significantly increases the likelihood
t.hat. the transaction will not close as expecEed, reducing the possibility
of an imminenu rat.ings downgrade on HOL.
. However, in our assessment, the WUTC's decision weakens HOLrs ability to
Erack, adjust, and conErol Ehe execuEion of iEs st.rat.egy, and raises
broader concerns regarding HOL's governance and strategic direction as it
seeks a permanenE CEO.
r On Dec. 10, 2018, ScP Global Ratings affirmed it.s 'A-r issuer credit
ratings on HOL and subsidiary Hydro One Inc. (HOI) and removed lhe
ratings from CreditWaEch, where they were placed wit.h negat.ive
implications on June 15, 2018. The outlook on both ent.it.ies is negative.
r We also affirmed our issue-leve] ratings on HoI, including the rA-t
rating on iEs senior unsecured debt, and the ta-2t globaf and 'A-1 (LOW)'
Canadian Nat.ional Scale ratings on its commercial paper program. We
removed Ehe raEings from CrediEWatch wit,h negative implicaE.ions.
o The negaEive outlooks reflect uncertainEy about. HOL's ability Eo convert
its straEegy into construcEive actions Ehat support. Ehe company's
financial performance. In addiEion, the negat,ive outlook i-ncorporates
broader concerns relat,ed to HOLrs governance, uncert.ainEy regarding Ehe
company's sErategic direcEion, and our revised base-case assumption Ehat
t.he Avist.a tsransaction is unlikely Eo close as expect.ed, t.he effecE of
which resulEs in weaker sLand-alone financial measures for HOL through
20t9.
Rating Action Rationale
The removal of our CreditWatch negative list.ing reflect.s Ehe decreased
likelihood for a one-notch downgrade, incorporating our revised assumption
thaE t.he pending EransacEion with Avista Corp. is unlikely Eo close as
expect.ed. As a result we forecasE HOL's funds from operaEions (FFO) tso debt,
wit.hout Avista, tso be about 12? during our 201,9-2020 outlook period. However,
the WIIIC,s decision weakens our view of HOL's abiliEy to Erack, adjusE, and
cont.rol t.he execution of iEs strategy, and raises broader concerns related t.o
WWW.STANDABDANDPOORS.COM/HATINGSDIBECT DECEMBER 10,2018 3
Researcb Update: Hydro One Ltd. And Sub Ratings Affirrned As Regulator Reiects MdA Deal With Auista, Off
Watch ; Outlook Negatiue
HOL's governance and sErategic direction, Moreover, our revised base-case
assumptions suggesE weaker stand-a1one financial measures for t.he company
through 2019, coflectively warranting a negat.ive outl-ook for HOL and HOI
Our assessmenE of HOL's business risk is unchanged and contj.nues t.o reflect
Ehe utilit.y's large electrlcity distributsion and transmission operations thaE
serve about 1.3 million efecEricity cusEomers covering approximaEely ?5? of
the province of OnEario. The company has hisEorically benefiEed from
supportive regulation in OnEario thaE enables utilit.ies Eo earn cl-ose Eo Eheir
authorized reEurn on equity. This is done through the use of a forward-looking
tesE year, multiyear rate-seEEing Ehat adjusts to keep costs and rates
aligned, decoupling, and variance accouncs that foster full cost recovery. Our
base-case assumes the regulatory framework in Ontario remains transparent,
st.able, and independenE from governmenE or political influence.
We assess HOLrs financial risk using our fow volatiliEy financial benchmark
Eab1e, reflecting t.he company's low-risk regulat.ed utility operaEions, and
management of regulat.ory risk. Under our revised base-case scenario, which
assumes merger terminaEion fees, redemption of the first, installment. of the
convertible debentures of abouE C$500 million and accrued inEerest, and
transacEion fees incurred thus far, we expect FFO t.o debt of abouE 11.5? in
20t9.
Hist.orically, Ehe rationale for the posiCive ratings analysis modlfier
reflects our view Ehat the consolidaLed credit. profile of HOL was
incrementally stsronger than other peers with similar business profiles, which
is no longer Ehe case. CurrenEly, our assessment of the positive ratsings
analysis modifier reflecEs our expectat,ion of robusE financial measures for
HOL aE its currenE financial risk profile caEegory. Any material deteriorat.ion
in HOL's financial performance from our base case scenario could warrant a
revision of Ehis modifier, posslbly resulting in a one-notch downgrade.
Outlook
The negative out.looks reflect uncertainty abouE HOL's abiliEy Eo convert it.s
strat.egy inEo consEructive actions EhaE support t.he company's financial-
performance. In addiEion, the negative ouElook incorporates broader concerns
related to HOIrs governance, uncertainty regarding the companyrs sErategic
direction, and our revised base-case assumption thaE Ehe Avista Eransact.ion is
unlikely Eo close as expected, the effecE of which, resulEs in weaker
sEand-alone financial measures for HOL Ehrough 20L9.
Downside scenario
We could take a negative raEing action on HOL over Ehe next. 12 months if the
WUTC reverses iEs decision on the HOL-Avista merger. We could also lower the
rating if t,he company's sErategic decisions result in weaker business or
financial risk assessmenEs, includi-ng FFO Eo debE that consisEenEly remains
befow 12?.
WWW.STANDARDANDPOOBS.COM/RATINGSDIRECT DECEMBER 10,2018 4
Researcb lJpdate: Hydro One Ltd. And Sub Ratings Affirmed As Regulator Rejects MdA Deal With Auista, Off'Watch ; Outlook Negatiue
Alt.ernatively, we could downgrade HOL if the ontario government i-ntervenes
furEher in HOL's business or operaEing decisions, resulting in additional
governance deficiencies LhaE we consider severe.
Upside scenario
We could revise Ehe outlook on HOL t.o stable if t.he company continues iEs
hi.storic focus on 1ow-risk regulaLed utility operat.ions and the company's
forward strategy does not weaken its business risk and financial measures,
maintaining FFO to debE above 12?, consistently.
Company Description
Hydro One, through its subsidiaries, operates as an electrical Eransmission
and dj.st.ribut.ion (T&D) company in Ont.ario. It operat.es through three segments:
transmission, distribution, and other business, The company owns and operates
approximatety 30,000 circuit kilomeEers of high-voltage transmission network,
123,000 circuit kilometers of 1ow-volt.age distribution network, and 308
transmission sEations. It serves approximat.ely 1.3 million residential and
business cusEomers across the province of OnEario, as well as large indust.rial
customers and local distribuEion companies.
Our Base-Case Scenario
. Assessment. of HOL on a stand-alone basis without Avista.
. Merger terminaEion fees per the terms of t.he merger agreement.
o RedempEion of Ehe first insEallment of the convertible debentures of
about C$500 mi1]ion, plus accrued interesE, issued in 201,7.
. No strucEural change Uo Ehe uEility regulatory framework in Ontario.
e The Ont.ario utiliEy regulator, the Ontario Energy Board (OEB) remains
independenE from governmenE int.erference.
. No adverse regulatory decisions from the OEB.
Liquidity
We assess HOLrs lj.quidity as adeguate. We expect. liquidit,y sources Eo exceed
uses by more t.han 1.1x over the next 12 months. In the event of a l-0? decline
in EBITDA, we also expect liquidity sources will cover uses. In our view, t.he
company has sound relationships with banks and a generally sat.isfact.ory
standing in Ehe credit markets. fn Ehe unlikely evenE of liguidit.y di-st.ress,
we expecE HOL to scale back its capital spending to preserve its liquidit.y
posit,ion.
Princi.pal liquiditsy sources:
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Researcb Update: Hydro One Ltd. And Sub Ratings Affirmed As Regulator Rejects M(yA Deal With Auista, Off
Watcb ; Outlook Negatiue
. AbouE C$615 million cash as of Sept. 30, 2018;
. Commit.ted crediE facilit.ies availabiliEy of about C$2.55 billion as of
Sept. 30, 2018; and
. Cash FFO of abouE C$1.6 billion over the nexE 12 monEhs.
Principal l-iquidity uses:. Debt. maEurit.ies of about C$1.9 billion over the next 12 monEhs, including
long-Eerm, shorL-Eerm, commercial paper, and redempEion of the
convertj-b1e debenEures ;
. Capital spending of about C$1.6 billion over the next 12 months;
o Dividend pa)rmenUs of about C$500 mi]lion over t.he next 12 months; and
o Abouts C$105 million for Ehe acquisitsion of Peterborough DisLribut.ion fnc.
Environmental, Social, And Governance
HOL's exposure Eo environmental risk is guite manageable compared with its
elecEric utili-E,y peer group, since T&D companies are more favorably positioned
t.han t.heir counEerparEs wj-th owned power generatlon asset.s.
From a social perspecEive, high power prices and consumer el-ectricity bills
are highly poliEicized in Ontario. We view this negatively in Eerms of
regulaEory advantage, since polit.ical inEerference is a potenEial negative
credit, factor. However, Ehe primary goal of Ehe company's critics is focused
on reducing power costs, not T&D rates. These objectives can reduce social"
risks in t,he short Eerm, buE excessive political interference could const.raint,
managementls effect.iveness over t.j-me and hinder long-Eerm credit guality.
From a management and governance sEandpoint., the Ontari.o government. recent.ly
passed an amendmenE Eo the Ontario Energy Board Act (OEBA) Eo exclude any
compensat.ion paid to HOL's CEO and other senior executives from consumer
rat.es. We vi-ew Ehis legislaEive acEion as a governance deficiency related to
HOL's ownership strucEure since the OnEario Province exercised its legislative
authorit.y Eo lower elecEricitsy rat.es, consistent wit.h the governmentrs
election campaign promises. In our view, the use of t.his legislative authority
Eo influence HOL's compensation structure for executives undermines the
effect.iveness of Ehe company's governance strucEure, and potentially promoE.es
the i-nterests and priorj-Eies of the OnEario governmenE above those of other
st.akeholders. We also note tshat these events fol-lowed the recent resignaEion
of Hydro Oners entire previous board of directors. AddiEional interferences in
HOL's business or operaEing decisions could resulE in a weaker assessment of
t.he company's governance, reflecting severe deficiencies.
With respect to HOL's sErategic posiEioning, the WUTC's rejecLion of its
merger petj-E.i-on wit.h AvisEa suggests that HOL may be unable Eo convert
st.rat.egic decisions into constructive acEions, which in our assessment weakens
t.he companyrs overall ability Eo Erack, adjust and cont.rol the executj,on of
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Research Update: Hydro One Ltd. And Sub Ratings Affirmed As Regulator Rejects MbA Deal With Auista, Off
Watch ; Outlook Ne gatiue
its strategy
Issue Ratings - Subordination Risk Analysis
Capital structure
HOL's capital structure consists of abouE $L0.5 billion of senior unsecured
long-t.erm debt, all of which is issued by HOI. There is no senior unsecured
debt aE the HOL fevel.
Analytical conclusions
We consider HOf as a gualifying invesE.ment.-grade regulat.ed utility under our
criLeria. As such, we raEe iEs senior unsecured debt the same as our i-ssuer
credit raEing on HOI.
Ratings Score Snapshot(Hydro One Ltd.)
Issuer Credit RaEing: A-/NegaEive/ --
Business risk: ExcellenE. Country risk: Very low
o Industry risk: Very low
. compeEitive position: Excel]enE
Financial risk: SignificanEr Cash flow/Leverage: Significant
Anchor: a-
Modifiers
o Diversificatsion/Port.folio effect: Neutral (no impact)
. CapiEal structure: NeuEral (no impact)
r Financial policy: Neutral (no impacE)
o LiguidiEy: AdeguaEe (no impacE)
. Management. and governance: Fair (-1 not.ch)
. Comparable raEing analysis: Posit.ive (+1 notch)
Stand-alone credits profile: a-
Group credit profile: a-
WTVW,STANDAHDANDPOOHS.COM/RATINGSDIRECT DECEMBER 10,2018 7
Research Update: Hydro One Ltd. And Sub Ratings Affirmed As Regulator Reiects MdyA Deal Witb Auista, Off
Watch ; Outlook Negatiue
StaEus wit.hin group: ParenE
Ratings Score Snapshot(Hydro One Inc.)
Issuer Credit. Rating: A-,/Negative/A-Z
Business risk: Excellent
o Country risk: Very low
. fndustry risk: Very Iow
o CompetiEive posiEion: Excellent
Financial risk: Significant
o Cash f low,/Leverage: Signif icant.
Anchor: a-
Modi f iers
o Diversification/PorEfolio effect: NeuEral (no impacE)
. CapiEal strucEure: Neutral (no impact)
o Financial policy: Neutsral (no impact)
r Liguidity: AdequaEe (no impact)
. ManagemenE and governance: Fair (-l- not.ch)
. Comparable rating analysis: Posit.ive (+1 notsch)
Stand-a1one credi-t, prof i-1e: a-
Group credit profile: a-
SEat.us within group: core (no impact.)
Related Criteria
o Criteria - Corporates - General: Reflecting Subordination Risk In
Corporat,e fssue Ratings, March 28, 201-8
. General CriEeria: MeEhodology For Linking Long-Term And short-Term Ratings
, April 7, 2017
o General CriEeria: Rating Government-Related EnEities: Methodology And
Assumptions, March 25, 201-5
o CriEeria - CorporaEes - General: Methodology And Assumpt.ions: Liquidit.yDescriptors For G1oba1 Corporate Issuers, Dec, 1G, 2Ol4
WWW,STANDABDANDPOOHS.COM/RATINGSDIBECT DECEMBER 10,2018 8
Research Update: Hydro One Ltd. And Sub Ratings Affirmed As Regulator Re'jects MdA Deal'V/ith Auista, Off
Watch ; Outlooh Negatiue
o General Critseria: MeEhodology: Indust,ry Risk, Nov. 19, 20]-3
. GeneraL CriEeria: Group RaEing Methodology, Nov. !9, 20t3
o Criteria - CorporaEes - UtsiliEies: Key Credit. FacEors For The Regulated
Utilit.ies IndusEry, Nov. a9, 20L3
o Crit,eria - CorporaEes - General: Corporate Methodology: RaLios And
Adjust.menEs, Nov. 19, 20]-3
r Criteria - CorporaEes - General: CorporaEe Methodology, Nov. L9, 20a3
. General Critseria: CounEry Risk AssessmenE Methodology And Assumptions,
Nov. 19, 2Ot3
. General Criteria: MeEhodology: Management, And Governance CrediE Fact.ors
For Corporatse Entities And Insurers, Nov. 1-3, 20L2
. General CriLeria: Use Of CreditWatch And Outlooks, Sept. !4, 2009
Ratings List
Ratings Affirmed; CreditwaEch/OuElook Action
To
Hydro One Limit.ed
Issuer Credit Rating A-/Negaeive/--
Hydro One Inc.
fssuer Credit Rating
From
A-lwatch Neg/--
A-lNegative/I.-2 A-lWatch Neg/A-2
Hydro One Inc.
Senior Unsecured
Commercial Paper
Commercial Paper
A-
A-r. (LOW)
A-2
A-lwat.ch Neg
A-1 (LOW) /Watch Neg
A-2,/Watch Neg
Cert.ain Uerms used in t.his report., particularly cerEain adjectives used Eo
express our view on rating reLevant factors, have specific meanings ascribed
to Ehem in our criteria, and should Eherefore be read in conjuncEion with such
crit.eria. Please see Ratings Cri-Eeria aE www,st.andardandpoors.com for further
informat.ion. CompleEe raEings i-nformat.ion is available to subscribers of
RatingsDirect aE www.capitalig.com. All- ratings affected by Chis rating action
can be found on S&P Globaf RaEings' public websiEe at
www.standardandpoors.com. Use the RaEings search box locat.ed in Ehe left
column.
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Copyright @ 2018 by Standard & Poor's Financial Services LLC. All rights reserved.
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Attachment B
S&P Gtobat
Ratings
Research
Research Update:
Avista Corp. Ratings Affirmed; Off
Watch Positive; Outlook Stable
Primary Credit Analyst:
Obioma Ugboaja, New York + 1 (212) 438 7 406; [e-mail]
Secondary Contacts:
Sloan Millman, New York + I (212). 438 2146; [e-mail]
Kevin M Sheridan, New York + I (212l. 438 3022; [e-mail]
Table Of Contents
Rating Action Overview
Rating Action Rationale
Outlook
Company Description
Liquidity
Environmental, Social, And Governance(ESG)
Issue Ratings - Subordination Risk Analysis
Issue Ratings - Recovery Analysis
Ratings Score Snapshot
Related Criteria
Ratings List
ururw. sTAlf DAnDAI| DPoons. coM
@ S&P Global Ratings. AJl rights reserved. No reprint or dissemination without S&P Global
Ratings' pemission. See Tems of Use,/Disclaimer on the last page.
DECEMBER 10,2018 I
2141978
Research Update:
Avista Corp. Ratings Affirmed; Off Watch Positive;
Outlook Stable
Rating Action Overview
o The Washington UEiliEies and Transport.aEion Commission (WUTC) has denied
t,he merger peeition beEween Avista Corp. and Hydro One Limit.ed (HOL) .
o The WUTC's decision, in our view, significant.ly increases the 1ike1i-hood
that the transacEion will not close, despite other regulatory approvals
achieved from oEher states.
. We are affirming our ratings on Avista, and removing our CreditwaEch
Posit.ive listing on the company.
r The stable outlook reflects our base-case expecEat.ion that Avist.a will
most likely continue to operate as a stand-alone regulated utility, and
that t.he company's funds from operations (FFO) to debt will stay at.
about L6t through 2020.
Rating Action Rationale
On Dec. 10, 2018, ScP Globa1 Ratings affirmed it.s ,BBB/A-2' long- and
short-term issuer credit raEings on Avj-sta Corp. and the IA- | issue rating on
its senior secured debt. At the same, we removed the raEings from CreditWatchwith positive implications, where they were placed on \Tune 15, 201-8 (see',Hydro
One Ltd. And Hydro One Inc. Placed On Wat.ch Negative, Avista Corp. On Watch
Positive Ahead Of Regulatory Approvals't). the outlook on Avista is stable.
The rating action follows the WUTC's rejection of Ehe merger petition beEween
Avist.a and HOL. Because Washington is Avista's largest. jurisdict.ion, the
WUTC's decision, in our view, significantly increases the likelihood that the
Eransact,ion may noE close as expecEed, despite other regulatory approvals
achieved from ot.her staEes. As such, we no longer incorporate in our base case
Ehe potential for ratings uplift on Avista as previously expected, given that
Hydro One Limit,ed is rated higher t.han Avista.
Our assessment of Avista's business risk profile primarily reflects its
managemenE of regulatory risk, since about 95? of the companyts overall EBITDAis derived from 1ow-risk regulated utility operatlons. The company is
generally authorized Lo use various cost recovery mechanisms to help alleviate
regulat.ory 1ag, buE is somewhat exposed to potent.ial excess power cosLs,typically tied to an earnings sharing mechanism in Washington. Our businessrisk assessment also incorporates our view of the company's regulatory
diversity and generation mix. Avista primarily operates in Washingt.on andIdaho; Oregon and Alaska jointly cont.ribuEe less than 10? of it.s consolidaEed
$ruyw.sTAttDARDArDpooRs.coM DECEMBER tO,2Ot$ 2
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last page.
Research Update: Auista Corp. Ratings Affirmed; Off Watch Positiue; Outlook Stable
revenues. Moreover, the company's dependence on hydro-electsric generation
introduces fuel replacemenE risk during periods of unfavorable hydro
conditions.
We assess Avist.a's financial risk profile under our medial volatilit.y
financial benchmark tab1e, reflecEing the company's business risk derived from
its low risk regulated utillty operations and average management. of regulaEory
risk. Under our base-case scenarj-o--including capital spending averaging about
$430 miI1ion, dividends of abouE $l-00 million, periodic raEe cases, and Lhe
effects of U.S. tax reform--we expect FFO to debt, to average about 15? through
2020. Our base case also assumes a merger termination fee payment to Avista
from Hydro One, as per Ehe merger agreement terms, reflect.ing Ehe lack of
regulat,ory approval in Washington.
Outlook
The stable outlook reflects our base-case expectat.ion that. Avista will mosE
like1y continue Eo operate as a sLand-a1one regulated uEilit.y, and that the
company's FFO tso debt will stay at around 16? through 2020.
Downside scenario
We could lower our raEings on Avist.a during the next two years if Ehe company
shift.s iEs strategic focus Eo other business act.ivit.ies thaE weaken its credj.t
guality, or if the company's management of regulatory risk weakens, relative
to our expectations. We could also lower our ratings if adverse regulatory
decisions weaken the company's FFO to debt consistently below 15?.
Upside scenario
We could raise the rating on Avista if the company materially improves its
financial measures, including FFO t.o debt that is consistently above 21?.
Company Description
Avi-sta is a vertically integrated regulated electric and natural gas uEility
company. It. operates through Lwo segments, Avista Ut.i1it.i-es and AEL&P. Avista
Utilities provides electric distribution and transmission, and natural gas
distribution services in parts of eastern Washington and northern Idaho; and
natural gas d!-sEribution services in parts of nort.heastern and southwestern
Oregon. AEL&P offers electric services Eo approximately 17,000 customers in
t.he city and borough of ,Juneau, Alaska. Overa11, AvisLa has about 382,000
electric customers and approximately 347,000 natural gas cusEomers.
Liquidity
We assess Avista's liquidity as adequate. we expecL Ehe company's sources to
cover uses by more than 1.1x over the next 12 months even in the event of a
10? decl-ine in EBITDA. Our assessment, also reflect.s the company's generally
prudent risk management, sound relaEionships with banks, and generally
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Research Update: Auista Corp. Ratings Affirmed; Off 'Watch Positiue; Outlook Stable
satisfacEory standing in the credit markets.
Principal LiquidiEy Sources
o Revolving credit facilit.y of $400 million;
. Cash FFO of $330 millioni and
o Minimal cash assumed.
Principal LiguidiEy Uses
. Long-Eerm debt maturities of about $272 million in 2019;
o Assumed mainEenance capital spending of $245 million; and
r Dividends of approximately $100 mi11ion.
Environmental, Social, And Governance(EsG)
With a Eotal generat.i-on fleet capaciEy of over 1,800 megawaEts, close to 45?
of which j-s based on fossil-fired generat.ion, Avj-st.a's environmental footprint
is a significanE risk factor, including from nat.ural gas (35t) and coal
(around 10?) . This reflects the potential for ongoing cosE of operat.lng fossil
units in the face of disruptive technol-ogy advances and t.he potential for
changing environmenEal regulations t.haE may reguire significant capital
investments. In addition, the company's dependence on hydro-electric
generation int.roduces fuel replacemenL risk during periods of unfavorable
hydro conditions. From a social perspective, Avista's safety and health
management sysEems processes enable it Eo effectively serve electrici-ty
customers across four states. Governance factors are neutral Eo our ESG
assessmenE. Avista has board of directors who, in our view, are capably
engaged in risk oversight, including on matters that affect the company's
financia] performance, regulatory relations, and environmental mandates.
Issue Ratings - Subordination Risk Analysis
Capital structure
Avistats consolidated capital structure comprises about $L.8 billion of
long-t.erm debt, most of which j-s secured, and abouE $50 million of preferred
sEock, issued through Avista Capital II.
Analytical conclusions
We raEe the preferred stock issued by Avista Capit.al- II two notches below tshe
issuer credit rating to reflecE the deferability of t.he dividends, and because
it is deeply subordinated Eo oEher j-nstrumenEs in the company's capital
sEructure, consistent wj-t.h our criteria. The short-term rating on Avista is
'A-2', based on our long-term issuer credit rating on Ehe company.
Issue Ratings - Recovery Analysis
Avist.a's first-mortgage bonds benefit. from a first-priority lien on
subst,antially all of the utilityts owned or subsequenEly acquired real
unilw.sTAI{DARDAttDpOOnS.COM DECEMBEB t0,20t8 4
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Research Update: Auista Corp. Ratings Affirmed; Off 'Watch Positiue; Outlook Stable
propert,y. Collateral coverage of more than L.5x supports a recovery rating of
'1+tand an rA-r issue raEing, two noEches above the issuer credit raEing.
Ratings Score Snapshot
Issuer Credit Rating: BBB/Stable/A-2
Bus j-ness risk: Stsrongr Country risk: Very 1ow
. Industry risk: Very 1ow
. Competitive position: Satisfact.ory
Financial rj-sk: Significant
r Cash flow/Leverage: Significant
Anchor: bbb
Modifiers
o Diversi-fication/Portfollo effect: NeutraL (no impact)
. CapitaL seructure: NeuEral (no impact.)
o Fi-nancial policy: NeuEral (no impact)
. Liguidity: AdequaEe (no impact)
. Management and governance: Sat,isfactory (no impact)
. Comparable ratsing analysis: Neutral (no impact.)
St.and-a1one credit profile: bbb
Related Criteria
o Criteria - CorporaEes - General: Reflect.ing Subordination Risk In
Corporate Issue Ratings, March 28, 2078
. GeneraL CriEeria: Methodology For Linking Long-Term And Short-Term Ratings
, April 7, 201-7
o Criteria I Corporates I General: Methodology And Assumptions: Liquidity
Descriptors For Globa1 Corporate Issuers, Dec. 16, 201,4
r Criteria - CorporaEes - Utilities: Key Credit Factors For The Regulated
Ut.ilities Industry, Nov. A9, 2013
. General Critseria: Country Risk Assessment Methodology And Assumptions,
Nov. 19, 2013
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Research Update: Auista Corp. Ratings Affirmed; Off 'Watch Positiue; Outlook Stable
. General Criteria: Methodology: Industry Risk, Nov. !9, 2073
o Crit.eria - CorporaEes - General: Corporate Methodology, Nov. 19, 20]-3
. GeneraL Criteria: Group RaEi-ng MeEhodology, Nov. !9, 2013
o Criteria I CorporaEes I General.: Corporat.e Methodology: Ratios And
Adjustments, Nov. L9, 20L3
o Crit.eria - Corporates - Utilities: Collateral Coverage And Issue Not.chi-ng
Rules For 11+ I And I 1 ' Recovery Rat.ings On Senior Bonds Secured By
UtiliEy Real ProperEy, Feb. 14, 2013
. General Criteria: Methodology: ManagemenL And Governance CrediE Factors
For Corporatse EnEities And Insurers, Nov. 13, 20L2
. General Crit.eria: Use Of CreditWat.ch And Outlooks, SepE. !4, 2009
o Crit,eria - Insurance - General: Hybrid Capit.al Handbook: September 2008
Edition, SepE. 15, 2008
Ratings List
Ratings Affirmed;
From
Avist.a Corp.
Issuer Credit RaEing BBB/SLable/A-2 BBB/WaEch pos/e-Z
Avista Corp.
Senior Secured
CreditwaEch/Out.1ook Act ion
To
A-
BB+
A-lwatch Pos
Avista Capit.al 1I
Preferred Stock BB+/WaEch Pos
Certain terms used in this reporE., particularly certain adjectives used to
express our view on rating rel-evant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunctJ-on with such
criteria, Please see Ratings Criteria at. www.standardandpoors.com for furtherj-nformation. Complete ratj.ngs information is available Lo subscrj-bers of
RatingsDirect at www.capiEaliq.com. A11 ratings affect.ed by this rat.ing action
can be found on S&P Globa1 Ratings' public website at
www.sEandardandpoors.com. Use the Ratings search box Located in Ehe ]eft
column.
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Standard 6( Poor's I Research I December 10,2018
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