Company Overview: Avista Corporation (NYSE: AVA) operates as a utility company providing electricity and natural gas distribution to residential, industrial, and commercial customers in Pacific Northwest and Alaska region. AVA conducts operations through its primary subsidiaries, Avista Utilities and Alaska Electric Light and Power Company (AEL&P).  AVA drives revenue from the mix of energy sources such as it owns hydroelectric and thermal capacity, while solar and wind power generation has been contracted from third-party through long-term power purchase agreements (PPAs). The company had overall nameplate capacity of 1,050.9 MW of hydroelectric power and 839.2 MW of thermal as of December 2019.

AVA Details

Clean Energy Focus: Avista intends to serve its customers with carbon-free electricity (100% clean energy) by 2045 and carbon-neutral electricity by 2027-end. The company stands committed to renewable energy with about 57% of its generation portfolio has renewables energy assets as of December 2019. It had completed two solar and one wind energy projects in last three years. Avista claims that it is one of the low-cost electric utility company in the state.

Figure 1. In-Pursuit of Clean Energy Commitment

Source: Company Reports

Avista Utilities caters to customers in the Eastern Washington and Northern Idaho for electricity distribution. The company had nameplate capacity of 944.3 MW in hydroelectric energy and 839.2 MW in thermal energy as of December 2019. Further, Avista Utilities provides natural gas distribution to customers in Eastern Washington, Northern Idaho and North-Eastern and South-Western Oregon.

AEL&P serves customers in Juneau, Alaska through five hydroelectric generation facilities with nameplate capacity of 106.6 MW as of December 2019. Besides, AEL&P also had 121.5 MW of diesel generation capacity to provide back-up services to its customers.

In the recent press release, Avista Corp. begin commercial operation of its 20-year PPA with Clearway for 160 MW Rattlesnake Flat Wind Farm located in central Adams County, Washington. The wind farm facility provides low-cost energy to Avista’s customers with enough electricity to power 38,000 homes each year. For solar, Avista had PPA with Lind Solar Farm that expires in 2038 with nameplate capacity of 28 MW. Avista Utilities estimated its annual hydroelectric generation for 2020 to reach 5.2 million MWhs, up from 4.5 million MWhs in 2019.

Figure 2. Renewable Energy Generation YoY Trend

Source: Data from Company Reports

Avista believes it has sufficient capacity to meet energy requirements. Based on PPAs and customer load schedule, Avista’s energy requirements stood at 1,161 aMW for 2021 which are likely to be serviced predominantly through hydroelectricity and thermal capacity.

Figure 3. Avista had Peak Load of 1,081 aMW in 2019

Source: Company Reports

Historical Financial Trend: Avista’s revenues were affected by continued revision of base rates. Usually, Avista file general rate cases with regulators to mitigate the incremental cost burden without rising tariffs to end-customers. At times, its rates were revised downwards impacting both electricity and gas distribution revenues. Revenues were also influenced by frequent power outages and subsequently mitigated through decoupling accounting mechanism.

Figure 4. Five-Year Historical Financials

Source: Company Reports

Decrease in sales volume following warmer than usual weather and lower decoupling rates affected FY19 electricity revenues. Its natural gas revenues improved on the back of increase in offtake from retail customers partly offsetting lower drop-in retail rates. The company maintained stable EBITDA margin of 32.4% in FY19 due to lower utility resources costs offsetting increase in power purchase prices and thermal fuel costs. During the period, Avista received $103 million towards termination of the proposed acquisition of Hydro One due to certain regulatory issues. This had lifted overall net profit to $196.8 million in FY19, up from $136.6 reported in pcp. It also incurred a marginal loss on sale of its interest in METALfx.

Figure 5. FY17-FY19 Key Financial Highlights

Source: Company Reports

Q3 FY20 Updates: Avista experienced decline in utility revenues by 3.1% in YTD September 2020 over last year led by lower offtake by commercial and industrial customers resulting from lockdown restrictions.  There was also a decline in electric decoupling revenues (implying rebates to customers) in contrast to surcharge in last year comparable period. Natural gas retail revenues dropped across all customer categories coupled with lower customer growth. Lower gas prices pulled down wholesale natural gas revenues for nine months ending September 2020 over pcp. On margin front, Avista reported uptick in utility margin which had increased by $17.8 million driven by increase in general electric rates in Washington (partial settlements for cases filed in April 2019). EBITDA margin for quarter ending September 2020 improved to 30.3% as compared to 28.3% reported last year pcp.

Figure 6. Movement in Net Income for YTD September 2020

Source: Company Reports

Avista has adequate liquidity with financing flexibility. It has $400 million committed line of credit that expires in April 2022. As of September 2020, the company had $324.4 million available under this facility. During the quarter period, Avista raised $165.0 million through issue of bonds that matures in 2050. For the full-year 2020, the company expects to issue about $70.0 million of equity. On debt maturity, Avista has $250 million upcoming payment in 2022. The company closed the quarter with a healthy cash balance of $84.7 million.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 51.24%. BlackRock Institutional Trust Company, N.A. and The Vanguard Group, Inc. holds the maximum interest in the company at 16.07% and 10.77%, respectively.

Figure 7. Top 10 Shareholders

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: AVA reported uptick in EBITDA margin to 30.3% in quarter ending September 2020 as against 28.3% reported in pcp benefitting from higher utility margin resulting from lower electric resources costs. It had reported low cash cycle with 22.2 days as of September 2020 as compared to Industry Median of 32.7 days. The company operated with low debt-equity against Industry with 1.17x as of September 2020 (vs. Industry Median of 1.26x).

Figure 8. Key Financial Metrics

Key Metrics (Source: Refinitiv, Thomson Reuters)

Outlook: Avista Corp. plans to enter Western Energy Imbalance Market by 2022. Western Energy Imbalance Market is a real-time energy market that automatically find low-costs energy to serve real-time consumer demand across geographies. The company is expecting to benefit around $6 million every year from participating in this market.

As mentioned in the Q3 FY20 presentation, the company confirmed its 2020 guidance for diluted per share in the range of $1.75 to $1.95. Avista is expecting it to be near the midpoint in the projected range. Due to the pandemic, bad debt expenses are expected to increase $11.5 million for the full-year 2020. The company deferred costs related to COVID for Idaho in Q3 FY20 and is anticipating deferring costs in Washington and Oregon in the fourth quarter.

Figure 9. Management Guidance for Full-Year FY20

Source: Company Reports

Key Risks: Avista Corp. has filed several general rate cases with regulator appropriate to jurisdiction to mitigate the impact of incremental costs. But the company experienced lag with regulators and as a result it had realized only partial settlements. The company continues to expect regulatory lag until 2023. This may impact realization and margin going forward. The company’s electricity prices are highly regulated and are influenced by volatility in the wholesale energy exchange as the company procures some quantum of energy from the exchange platform. Avista is exposed to market risk relating to natural gas commodity prices which are determined by global supply and demand. Some of its short-term and long-term natural gas contracts are committed in Canadian currency and the company’s unhedged derivatives may expose to foreign currency risk.

Figure 10. Key Valuation Metrics

Key Valuation Metrics (Source: Company Reports)

Valuation Methodology: Enterprise Value to Sales Multiple Based Relative Valuation (Illustrative)

Enterprise Value to Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: AVA has provided 1-month and 3-month returns of +3.85% and +12.13%, respectively. The stock is currently trading lower than the average of 52-week high price of $53.00 and 52-week low price of $32.09. On the technical analysis front, the stock has a support level of ~US$37.33 and a resistance level of ~US$40.43. The company has consistent dividend payment track history. It has annualized dividend yield of 4.10%. We have valued the stock using EV to Sales multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. For the purpose, we have taken peers like Ameren Corp. (NYSE: AEE), CMS Energy Corp. (NYSE: CMS), CenterPoint Energy Inc. (NYSE: CNP). Considering the sizeable clean energy portfolio, upward trending margins, consistent dividend payment history, and positive outlook we give a “Buy” recommendation on the stock at the current market price of US$38.82, down 1.65% versus previous close as on January 05, 2021.

AVA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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