Avista (AVA) Q1 2023: 35% of Utility Earnings Front-Loaded, Guidance Hinges on Rate Relief

May 3, 2023 | By EarningsIQ Research

Avista’s Q1 earnings distribution shifted sharply, with 35% of annual utility profits recognized in the first quarter due to tax allocation timing and regulatory adjustments. The company’s full-year outlook remains intact, but the path to allowed returns relies on effective execution of multi-year rate cases and cost recovery mechanisms. Investors should focus on regulatory cadence, power cost dynamics, and the evolving leadership structure as critical levers for future performance.

Summary

• Regulatory Timing Drives Earnings Concentration: Tax allocation and rolling customer credits front-loaded utility profits into Q1.
• Clean Energy Commitments Advance: Wind and renewable gas agreements move Avista toward 70% non-emitting peak capacity by 2026.
• Leadership Transition Spotlights Regulatory Strategy: Incoming CFO brings deep commission relationships to support rate case execution.

Business Overview

Avista Corporation (AVA) is a regulated utility serving electric and natural gas customers in the Pacific Northwest. The company’s core revenue streams are derived from Avista Utilities, which operates electric generation, transmission, and distribution, as well as natural gas distribution. Major geographic segments include Washington, Idaho, and Oregon, with Washington representing roughly 60% of the utility business. Avista also owns Alaska Electric Light & Power (AEL&P), and maintains small investments in other businesses, including a minority biotech stake. The company’s business model relies on cost recovery through regulatory rate cases and investment in utility infrastructure.

Performance Analysis

Avista’s first quarter results reflect a pronounced shift in earnings seasonality, with 35% of Avista Utilities’ annual profits recognized in Q1, a departure from historical patterns. This front-loading is driven by the timing of tax credits and customer credits, which are set to roll off in Q3, and will shift a larger share of annual income to Q4. While utility margin improved from recent rate cases and customer growth, these positives were offset by persistently high net power supply costs—an anticipated challenge given winter commodity price trends.

The Energy Recovery Mechanism (ERM) in Washington imposed a notable headwind, with a $7.6 million pretax expense in Q1, compared to $1.9 million last year. However, management expects this to reverse over the remainder of the year, forecasting a net positive ERM impact for 2023. Non-utility businesses, including AEL&P and the biotech investment, contributed in line with expectations but remain small relative to the consolidated business. The company maintained its annual EPS guidance, contingent on timely regulatory relief and normal operations.

• Earnings Seasonality Recast: Tax allocation and customer credit roll-off will push half of annual utility profits into Q4, with only 5% and 10% expected in Q2 and Q3, respectively.
• High Power Costs Offset Margin Gains: Elevated net power supply costs compressed Q1 results, though relief is expected as commodity prices normalize.
• Capital Commitments Remain Robust: $475 million in utility infrastructure spend is planned for 2023, funded by recent bond issuance and expanded credit facilities.

Liquidity remains solid, with $264 million in available credit and a plan to increase facility capacity to $500 million in Q2. Equity issuance of $120 million is also anticipated, with $30 million already completed in Q1.

Executive Commentary

Strategic Positioning

1. Regulatory Rate Case Cadence

Avista’s path to normalized returns hinges on timely and effective rate case execution across its core jurisdictions. Multi-year plans are underway in Idaho and Oregon, with Washington—the largest segment—awaiting its next filing to address inflation-driven cost increases. The company’s strategy is to minimize regulatory lag, a key driver of underperformance in 2022.

2. Clean Energy Resource Transition

Recent agreements for 100 MW of wind and renewable natural gas (RNG) contracts position Avista to achieve over 70% non-emitting peak capacity by 2026. These moves, combined with hydro and extended gas generation contracts, support both regulatory compliance and long-term cost stability.

3. Capital Allocation and Liquidity Management

Avista continues to prioritize utility infrastructure investment, with $475 million in planned capex for 2023 and proactive steps to secure liquidity through bond offerings and expanded credit lines. The company’s ability to issue equity as needed further supports its capital-intensive business model.

4. Leadership and Organizational Realignment

The transition to a new CFO with deep regulatory and finance experience formalizes the alignment between regulatory affairs, finance, and accounting. This structure is designed to strengthen rate case execution and stakeholder engagement, both critical for achieving allowed returns.

Key Considerations

This quarter’s results underscore the importance of regulatory execution, cost recovery, and operational discipline in a rising cost environment. Investors should monitor the following:

• Regulatory Relief as a Profit Lever: The pace and outcome of pending and future rate cases in all jurisdictions will determine Avista’s ability to recover costs and approach allowed returns.
• ERM and Power Cost Volatility: The timing and magnitude of ERM reversals are sensitive to hydro conditions and commodity markets, which could swing results intra-year.
• Leadership Continuity Risk: The CFO transition is well-planned, but execution risk remains as regulatory and financial teams adjust to new leadership and increased external scrutiny.
• Clean Energy Execution: Delivering on wind, RNG, and hydro agreements is central to meeting both regulatory mandates and customer expectations for decarbonization.

Risks

Avista’s near-term risk profile is dominated by regulatory lag, particularly in Washington, where inflation has outpaced the last rate case settlement. Execution risk around hydro conditions, commodity price swings, and the timing of ERM recoveries could produce earnings volatility. Leadership transition, while managed, introduces uncertainty around stakeholder engagement and continuity. Failure to secure timely rate relief or delays in clean energy project delivery could materially impact returns and long-term positioning.

Forward Outlook

For Q2 and beyond, Avista guided to:

• 5% of annual utility earnings in Q2, 10% in Q3, and 50% in Q4, excluding ERM impacts
• Full-year consolidated EPS guidance of $2.27 to $2.47, reaffirmed

For full-year 2023, management maintained guidance:

• Avista Utilities expected to contribute $2.15 to $2.31 per share, with ERM projected to be a $0.03 positive for the year

Management emphasized that guidance assumes timely and appropriate rate relief, normal operating conditions, and no major non-recurring events.

• Pending Idaho and Oregon rate cases to take effect later in 2023 and early 2024
• Washington rate case filing strategy under development for 2025 effective rates

Takeaways

Avista’s Q1 results highlight the outsized importance of regulatory cadence, cost management, and resource planning as drivers of both short-term earnings and long-term value.

• Front-Loaded Earnings Distort Seasonality: Investors must recalibrate expectations for quarterly results as tax and credit allocations shift profit recognition toward Q1 and Q4.
• Regulatory Relief and Cost Recovery Are Central: The ability to execute on pending and future rate cases will determine Avista’s path back to allowed returns, especially as inflationary pressures persist.
• Clean Energy Execution and Leadership Transition Are Key Watchpoints: Delivering on resource agreements and maintaining regulatory relationships through leadership change will shape Avista’s risk and opportunity set in 2023 and beyond.

Conclusion

Avista’s first quarter marks a transition period, with front-loaded profits, regulatory-driven volatility, and a sharpened focus on rate case execution and clean energy delivery. The company’s full-year outlook is stable, but investors should watch the timing of regulatory relief, ERM dynamics, and the impact of leadership changes on execution quality.

Industry Read-Through

Avista’s results reinforce the sector-wide theme that regulatory agility and cost recovery are paramount for utilities facing inflation and energy transition mandates. The pronounced earnings seasonality and reliance on multi-year rate cases are likely to be echoed across other regulated utilities, especially those with significant exposure to commodity costs and decarbonization targets. For peers, the ability to align regulatory, finance, and operational teams—and to communicate evolving earnings patterns—will be critical as investor focus shifts to rate lag, capital discipline, and clean energy execution. The leadership transition at Avista also highlights the importance of deep regulatory relationships in navigating this environment.

AVA Utilities Electric Regulation Clean Energy Rate Cases Capital Allocation Leadership