Avista (AVA) Q4 2022: $300M Liquidity Boost Counters Power Market Volatility

February 22, 2023 | By EarningsIQ Research

Avista’s year-end liquidity surge and regulatory progress countered a tough backdrop of power price volatility and inflation. The utility’s multi-jurisdiction rate case wins and a 4.5% dividend hike signal management’s focus on stability and long-term shareholder value, even as cost recovery and capital structure remain in flux. Investors should watch regulatory execution and cost pass-through as key levers for near-term performance and risk management.

Summary

• Liquidity Expansion: Short-term borrowing capacity increased by $300 million to buffer power market volatility.
• Regulatory Progress: Multi-year rate approvals and new filings position Avista for improved cost recovery.
• Shareholder Commitment: Dividend raised for the 21st consecutive year, reinforcing capital return focus.

Business Overview

Avista Corporation is a regulated utility providing electric and natural gas service across Washington, Idaho, and Oregon. The company’s core business, Avista Utilities, generates revenue through regulated tariffs on electricity and gas delivery, while a smaller segment, AEL&P, serves Alaska. Non-regulated investments, including legacy biofuel and biotechnology stakes, contribute opportunistically but are not core to the business model.

Performance Analysis

Avista’s 2022 results highlight the challenge of balancing utility stability with market-driven volatility. Core Avista Utilities earnings fell short of internal expectations, pressured by “extreme volatility in the power and natural gas markets” and the coldest winter in two decades. Deferred power costs exceeded $30 million, triggering a planned rate recovery filing in Washington. Higher interest expense and inflation added to margin compression, while the energy recovery mechanism (ERM) acted as a partial buffer but also led to earnings drag in the quarter.

Offsetting these headwinds, non-regulated investments delivered a significant $0.41 per share—up from $0.21 last year—driven by a marked increase in the fair value of a bioscience holding. Liquidity was a focal point: the company expanded its short-term borrowing capacity by $300 million to $700 million, with $183 million available at year-end. Management expects to reduce short-term debt in 2023 as regulatory cost recovery and margin deposits return to normal.

• Deferred Cost Recovery: Over $30 million in deferred power costs will be pursued for recovery starting July 2023.
• O&M Cost Discipline: Operations and maintenance (O&M) expense growth targeted at 2% for 2023, reflecting ongoing inflation management.
• Capital Allocation: $475 million annual capex through 2025 underscores continued investment in grid reliability and clean energy transition.

Dividend policy remains a cornerstone, with a 4.5% increase marking 21 consecutive years of raises, signaling Avista’s intent to preserve shareholder trust amid a turbulent operating environment.

Executive Commentary

Strategic Positioning

1. Regulatory Execution as Earnings Driver

Avista’s multi-year rate settlements in Washington and new rate filings in Idaho and Oregon are central to near-term earnings visibility. The company’s guidance assumes timely and constructive outcomes, with cost recovery for deferred power and gas expenses a key swing factor for 2023 results. Management’s ability to navigate regulatory lag and secure adequate returns will remain a critical differentiator.

2. Liquidity and Capital Structure Flexibility

Significant expansion of short-term borrowing lines and proactive capital markets activity (including $400 million in long-term debt and $138 million in equity issued in 2022) provide a buffer against commodity price shocks and margin calls. The plan to further increase the revolving credit facility to $500 million in 2023 demonstrates a conservative stance on liquidity risk management.

3. Clean Energy and Resource Transition

Avista’s clean energy implementation plan is advancing with new renewable natural gas (RNG) RFPs and contracts for hydro and wind resources. The company is leveraging federal incentives for grid hardening and renewables, though self-build projects remain under evaluation. Management continues to emphasize the transitional role of natural gas for reliability and affordability, especially for vulnerable customers.

4. ESG and Stakeholder Engagement

Updated corporate responsibility reporting and new aspirational targets for workplace and supplier diversity reinforce Avista’s long-term ESG positioning. Continued focus on key industry disclosures and metrics positions the company for evolving investor and regulatory expectations.

Key Considerations

This quarter’s results reflect a utility navigating both old and new risks: legacy volatility in energy markets, the inflationary environment, and the evolving regulatory landscape all shape Avista’s earnings power and capital allocation.

Key Considerations:

• Regulatory Lag Impact: Delays in cost recovery and structural unrecovered costs are expected to reduce return on equity by 150 basis points in 2023.
• Commodity Price Exposure: Continued power and gas price volatility can drive liquidity needs and deferred cost balances, with partial pass-through to customers.
• Dividend Stability: Long-term dividend growth remains a management priority, providing a defensive anchor for shareholders.
• Non-Regulated Earnings Volatility: Outsize gains from non-core investments are opportunistic and unlikely to repeat, reinforcing the need for core utility earnings improvement.

Risks

Regulatory outcomes remain the most material risk, as timely approval of rate relief and cost recovery will determine Avista’s ability to offset inflation and commodity volatility. Prolonged market dislocation, further interest rate hikes, or unexpected regulatory pushback could pressure cash flows and capital structure. Non-regulated investment gains are nonrecurring and should not be relied upon for future earnings stability.

Forward Outlook

For Q1 2023, Avista guided to:

• Earnings per share in the range of $2.27 to $2.47 for the full year.
• O&M cost growth capped at 2%.

For full-year 2023, management maintained guidance:

• Assuming normal precipitation and hydro generation, with no material nonrecurring items included.

Management highlighted several factors that will influence results:

• Timely regulatory approvals in Washington, Idaho, and Oregon.
• Ability to manage liquidity and reduce short-term borrowings as cost recovery is implemented.

Takeaways

Avista’s quarter underscores the primacy of regulatory execution and liquidity management in a volatile environment.

• Cost Recovery and Rate Relief: Deferred power costs and regulatory lag are the key swing factors for 2023 earnings, with management betting on constructive rate case outcomes.
• Capital Allocation Discipline: Dividend growth and infrastructure investment remain central, but capital structure flexibility is increasingly important given market volatility.
• Watch Regulatory and Market Signals: Investors should monitor the pace of cost pass-through, O&M discipline, and any new regulatory developments as primary drivers of near-term results.

Conclusion

Avista’s Q4 and FY22 results show a utility balancing tradition with transformation, leaning on regulatory relationships and liquidity levers to offset external shocks. Shareholder returns are prioritized, but ongoing volatility and regulatory lag require vigilance.

Industry Read-Through

Avista’s experience this quarter highlights sector-wide challenges for regulated utilities: market volatility, inflation, and regulatory lag are compressing returns and forcing more active liquidity management. Deferred cost recovery mechanisms and multi-year rate cases are becoming standard tools for utilities across the West, while capital allocation toward grid resilience and clean energy is accelerating. Dividend stability remains a differentiator, but sector investors should expect continued earnings volatility tied to external shocks and the pace of regulatory adaptation.

AVA Utilities Electric Utility Regulatory Dividend Liquidity Clean Energy Inflation