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AVISTA CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Resultsof Operations

  • May 4, 2022
  • 106 views
Source: 
Edgar Glimpses
   Management's Discussion and Analysis of Financial Condition and Results of Operations has been prepared in accordance with the SEC's Regulation S-K for interim financial information and with the instructions to Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations does not contain the full detail or analysis, or the full discussion of trends and uncertainties, that would accompany financial statements for a full fiscal year; therefore, it should be read in conjunction with the Company's 2021 Form 10-K.  Business Segments 

Our business segments have not changed during the three months ended March 31, 2022. See the 2021 Form 10-K as well as "Note 16 of the Notes to Condensed Consolidated Financial Statements" for further information regarding our business segments.

    The following table presents net income for each of our business segments (and the other businesses) for the three months ended March 31 (dollars in thousands):                       2022         2021 Avista Utilities   $ 67,278     $ 64,058 AEL&P                 3,293        3,476 Other                   994          483 Net income         $ 71,565     $ 68,017     Executive Overview  Overall Results  Net income for the three months ended March 31, 2022 increased compared to the three months ended March 31, 2021 due to increased net income at Avista Utilities. The increase at Avista Utilities was primarily due to benefits from our completed general rate cases in Idaho and Washington, effective September 1, 2021 and October 1, 2021, respectively. While there were base rate increases approved in each case, these base rate increases were offset by tax customer credits which resulted in no increase in customer billing rates. Instead, the general rate case outcomes resulted in lower income tax expense, which represents our benefit from these cases. See "Note 7 of the Notes to Condensed Consolidated Financial Statements" for further discussion of the lower income tax expense. Avista Utilities also had customer growth which contributed additional retail revenue.  In March we joined the EIM, which provided net benefits to mitigate net power supply costs. We should continue to have net benefits from the EIM going forward. The net revenues and resource costs associated with EIM are included in the ERM and PCA mechanisms.  

These increases were partially offset by higher net power supply costs, higher depreciation and higher operating and maintenance costs.

More detailed explanations of the fluctuations in revenues and expenses are provided in the results of operations and business segment discussions (Avista Utilities, AEL&P, and the other businesses) that follow this summary.

Supply Chain Delays

    We continue to experience supply chain delays due to, among other things, the combined effects of the lingering COVID-19 pandemic, staffing shortages across multiple industries and the Ukraine/Russia conflict. These various issues have impacted the delivery times of some of our materials and equipment and have made some materials and equipment difficult to acquire in the needed quantities. So far, the delays are being proactively mitigated with minimal impact, as we have modified project plans to extend lead time for our materials; and in some cases we have been able to locate new suppliers in other parts of the country or internationally. However, any problems that could result from future delays could affect the ability of suppliers or contractors to perform, which could increase our operating costs and delay and/or increase the costs of our capital projects.                                         35

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    Table of Contents  AVISTA CORPORATION   Inflation  We are experiencing inflationary pressures in multiple areas of our business. Most notably, higher power and natural gas costs have impacted utility margin and higher gasoline and diesel costs have increased the cost to operate our vehicle fleet. We cannot estimate how long these ultimately will continue to increase or remain at elevated levels. However, we are mitigating these pressures as much as possible by monitoring the power and natural gas markets and following our various hedging and risk mitigation plans. We also have our Jackson Prairie natural gas storage facility which we use to optimize our system and limit our exposure to high natural gas prices. While we have various regulatory recovery mechanisms for our power and natural gas costs and we expect to ultimately recover these costs (subject to Company/customer sharing bands within the ERM, PCA and Oregon PGA), there will be a delay between the initial purchase of the commodities and recovery of these costs. To mitigate this timing delay, in April 2022, we filed out-of-cycle PGA commodity rate updates in Washington and Idaho with proposed effective dates of July 1, 2022. In addition, we expect to reset authorized power supply costs in Washington as part of our 2022 electric general rate case that would be effective in late 2022.  In addition to the above, our cost of debt has increased due to higher interest rates than those approved in our most recently completed general rate cases. This deficit is anticipated to be short-term as we expect to include changes in costs in our pending 2022 Washington general rate cases and future general rate case filings.  

Our forecast for 2022 assumed inflation of just over 5 percent and we still believe we can manage our costs to this level.

Regulatory Lag

    We continue to experience regulatory lag and expect this to continue through the end of 2022 due to our continued investment in utility infrastructure. Going forward, we will continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2023. See "Regulatory Matters" for additional discussion of the general rate cases.  

Climate Change

    There is a trend of increasing average temperatures that has had, and may continue to have, various significant direct and indirect impacts on our business. Direct impacts include, without limitation, variations in the amount and timing of energy demand throughout the year, variations in the level and timing of precipitation throughout the year and reduced availability of hydroelectric resources at times of peak demand. Indirect impacts include, without limitation, federal, state and local legislation or regulation (in effect and proposed) that limits (or eliminates) the use of fossil-fuel for electric generation, as well as the use of natural gas for heating in residential and commercial buildings. In April 2022, the Washington State Building Code approved a revised energy code that requires most new commercial buildings and large multifamily buildings to install all-electric space heating effective in July 2023. However, an amendment to the code does allow for natural gas to supplement electric heat pumps.  For additional information regarding climate change, recent effects of climate change on our operations and results of operations and legislation and regulation designed to mitigate climate change, see the 2021 Form 10-K. See also the discussion of wildfires below.  

Wildfires and Wildfire Resiliency Plan

There have been a number of wildfires in our service territory most of which have involved, individually or in combination, high draught conditions, unusually high temperatures and/or unusually high winds.

    We are implementing additional measures to enhance our ability to mitigate the potential for, and impact of, wildfires within our service territories. Our 10-year Wildfire Resiliency Plan includes improved defense strategies and operating practices for a more resilient and safe system. We expect to spend approximately $330 million implementing the plan components over the life of the 10-year plan. The IPUC and WUTC have approved deferral of certain costs of the wildfire resiliency plan and we plan to seek recovery in future rate filings.  

See "Note 15 of the Notes to Consolidated Financial Statements" for further discussion on wildfires and see the 2021 Form 10-K for further discussion of our Wildfire Resiliency Plan.

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    Table of Contents  AVISTA CORPORATION   Regulatory Matters  General Rate Cases 

We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We expect to continue to file for rate adjustments to:

seek recovery of operating costs and capital investments, and

seek the opportunity to earn reasonable returns as allowed by regulators.

    With regards to the timing and plans for future filings, the assessment of our need for rate relief and the development of rate case plans takes into consideration short-term and long-term needs, as well as specific factors that can affect the timing of rate filings. Such factors include, but are not limited to, in-service dates of major capital investments and the timing of changes in major revenue and expense items.  

Avista Utilities

Washington General Rate Cases

2020 General Rate Cases

    In September 2021, we received an order from the WUTC that approved a partial multi-party settlement agreement and resolved all other remaining issues. The approved rates were designed to increase annual base electric revenues by $13.6 million, or 2.6 percent of base revenues, and annual natural gas base revenues by $8.1 million, or 7.7 percent of base revenues, effective October 1, 2021. The revenue increases were based on a 9.4 percent ROE with a common equity ratio of 48.5 percent and a ROR of 7.12 percent.  

While base rates increased, there was no increase in billed rates because of the use of offsetting tax benefits.

    The WUTC's order approved recovery of capital additions including investments in advanced metering infrastructure, wildfire resiliency, joining the Western Energy Imbalance Market, and other projects. The WUTC disallowed $2.5 million of costs associated with Colstrip SmartBurn technology.  

The WUTC order also approved the Company's request to defer incremental wildfire expenses incurred during 2021, as well as the Company's use of a wildfire balancing account to track the level of expense associated with wildfire resiliency going forward.

2022 General Rate Cases

    In January 2022, we filed multi-year electric and natural gas general rate cases with the WUTC. The proposed rates are designed to increase annual base electric revenues by $52.9 million (or 9.6 percent of base revenues), effective in December 2022, and $17.1 million (or 2.8 percent of base revenues), effective in December 2023. For natural gas, the proposed rates are designed to increase annual base natural gas revenues by $10.9 million (or 9.5 percent of base revenues), effective in December 2022, and $2.2 million (or 1.7 percent of base revenues), effective in December 2023.  We are proposing to offset part of the base rate request with a residual tax customer credit that arose out of the Company's Washington electric and natural gas general rate cases that went into effect on October 1, 2021. The order for those general rate cases stipulated that the residual tax customer credit was to be flowed through to customers over a 10-year period beginning in 2023; however, we are now proposing that this credit be incrementally flowed through to customers over a two-year period. The estimated benefits to customers of this credit would be $25.5 million for electric customers and $12.5 million for natural gas customers over a two-year period from December 2022 to December 2024.  The proposed electric and natural gas revenue increase requests are based on a 10.25 percent ROE with a common equity ratio of 48.5 percent and a ROR of 7.3 percent. Increasing fixed expenses and ongoing capital investments (including replacement of wood poles and natural gas distribution pipe, continued investment in the wildfire resiliency plan, and technology) were the main drivers of                                         37

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    Table of Contents  AVISTA CORPORATION   proposed increases. As a part of the multi-year rate plan, if approved, we would not file a new general rate case for a new rate plan to be effective prior to December 2024. The WUTC has up to eleven months to review the general rate case filings and issue a decision.  

Washington Engrossed Substitute Senate Bill 5295

    This bill, which was signed into law and became effective in July 2021, is designed to promote multi-year rate plans and performance-based rate making for electric and natural gas utilities. The bill includes a number of provisions such as required multi-year rate plans from 2-4 years in length, methodologies the WUTC may use to minimize regulatory lag and/or adjust for under earning and starts an investigation into Performance Based Ratemaking Metrics, an initial move that may help to modify the historical test-year ratemaking construct. In October 2021, the WUTC issued a notice of opportunity to comment on a proposed work plan to be conducted in various phases between 2021 and 2025, initially focusing on Performance Based Ratemaking and identifying performance metrics. The first workshop on this matter was held on April 19, 2022. Thereafter, the WUTC will address revenue adjustment mechanisms and performance incentives in the context of multi-year rate plans. The new law leaves much to the discretion of the WUTC, and we cannot predict the extent to which the WUTC will embrace the options now permitted.  Idaho General Rate Cases  2021 General Rate Cases  In September 2021, the IPUC approved the all-party settlement agreement designed to increase annual base electric revenues by $10.6 million, or 4.3 percent of base revenues, effective September 1, 2021, and $8.0 million, or 3.1 percent of base revenues, effective September 1, 2022. For natural gas, the proposed rates under the settlement agreement were designed to decrease annual base natural gas revenues by $1.6 million, or 3.7 percent of base revenues, effective September 1, 2021, and increase annual base revenues by $0.9 million, or 2.2 percent of base revenues, effective September 1, 2022. The parties have agreed to use the tax customer credits, related to flow through of certain tax items, included in our original filing to offset overall proposed changes to electric and natural gas rates over the two-year plan.  

The settlement was based on a 9.4 percent ROE with a common equity ratio of 50 percent and a ROR of 7.05 percent.

2023 General Rate Cases

We expect to file electric and natural gas general rate cases with IPUC in the first half of 2023.

    Oregon General Rate Cases  2021 General Rate Case  In October 2021, we filed a natural gas general rate case with the OPUC. The proposal was designed to increase overall natural gas base revenue by $3.8 million (or 5.0 percent of base revenues) and was based on a proposed ROR of 7.35 percent with a common equity ratio of 50 percent and a 9.9 percent ROE. We proposed that the increase be fully offset for a two-year period with tax customer credits (related to the flow through of certain tax items) of the same amount.  In January 2022, a partial settlement stipulation was filed with the OPUC that addressed cost of capital issues. The parties agreed to an overall ROR of 7.05 percent based on a 50 percent common equity ratio and ROE of 9.4 percent.  In March 2022, a second settlement stipulation was filed with the OPUC that addressed, and resolved, all other remaining issues. The parties support an overall revenue increase of $1.6 million, effective August 22, 2022. The agreement is a "black box", with the only component of the revenue requirement explicitly stated being the previously-agreed upon cost of capital. The parties also agreed that certain tax customer credits and state income tax credits of approximately $3.0 million would be passed through to customers to mitigate the base revenue increase.                                         38

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    Table of Contents  AVISTA CORPORATION   AEL&P  Alaska General Rate Case 

AEL&P is required to file its next general rate case by August 30, 2022.

Avista Utilities

Purchased Gas Adjustments

    PGAs are designed to pass through changes in natural gas costs to customers with no change in utility margin (operating revenues less resource costs) or net income. In Oregon, we absorb (cost or benefit) 10 percent of the difference between actual and projected natural gas costs included in retail rates for supply that is not hedged. Total net deferred natural gas costs among all jurisdictions were assets of $26.8 million and $21.0 million as of March 31, 2022 and December 31, 2021, respectively. In April 2022, we filed out-of-cycle Washington and Idaho PGA adjustments to update the commodity rates to current natural gas market prices. If approved, the new rates will be effective on July 1, 2022.  

Power Cost Deferrals and Recovery Mechanisms

    The ERM is an accounting method used to track certain differences between actual power supply costs, net of wholesale sales and sales of fuel, and the amount included in base retail rates for our Washington customers. Under the ERM, we make an annual filing on or before April 1 of each year to provide the opportunity for the WUTC staff and other interested parties to review the prudence of and audit the ERM deferred power cost transactions for the prior calendar year. See the 2021 Form 10-K for a full discussion of the mechanics of the ERM and the various customer/Company sharing bands. Total net deferred power costs under the ERM were liabilities of $7.0 million and $11.9 million as of March 31, 2022 and December 31, 2021, respectively. These deferred power cost balances represent amounts due to customers. Pursuant to WUTC requirements, should the cumulative deferral balance exceed $30 million in the rebate or surcharge direction, we must make a filing with the WUTC to adjust customer rates to either return the balance to customers or recover the balance from customers.  We have a PCA mechanism in Idaho that allows us to modify electric rates on October 1 of each year with IPUC approval. Under the PCA mechanism, we defer 90 percent of the difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho customers. The October 1 rate adjustments recover or rebate power supply costs deferred during the preceding July-June twelve-month period. Total net power supply costs deferred under the PCA mechanism were assets of $8.1 million and $10.8 million as of March 31, 2022 and December 31, 2021, respectively. These deferred power cost balances represent amounts due from customers.  

Decoupling Mechanisms

    Decoupling (also known as an FCA in Idaho) is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each of our jurisdictions, electric and natural gas revenues are adjusted so as to be based on the number of customers in certain customer rate classes and assumed "normal" kilowatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. The difference between revenues based on the number of customers and "normal" sales and revenues based on actual usage is deferred and either surcharged or rebated to customers beginning in the following year. Only residential and certain commercial customer classes are included in our decoupling mechanisms. See the 2021 Form 10-K for a discussion of the mechanisms in each jurisdiction.  

Total net cumulative decoupling deferrals among all jurisdictions were regulatory liabilities of $1.5 million as of March 31, 2022 and regulatory assets of $15.2 million as of December 31, 2021. Decoupling assets represent amounts due from customers and liabilities represent amounts due to customers.

See "Results of Operations - Avista Utilities" for further discussion of the amounts recorded to operating revenues in 2022 and 2021 related to the decoupling mechanisms.

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    Table of Contents  AVISTA CORPORATION  

Results of Operations - Overall

    The following provides an overview of changes in our Condensed Consolidated Statements of Income. More detailed explanations are provided, particularly for operating revenues and operating expenses, in the business segment discussions (Avista Utilities, AEL&P, and the other businesses) that follow this section.  

The balances included below for utility operations reconcile to the Condensed Consolidated Statements of Income.

Three months ended March 31, 2022 compared to the three months ended March 31, 2021

    The following graph shows the total change in net income for the first quarter of 2022 compared to the first quarter of 2021, as well as the various factors that caused such change (dollars in millions):                       [[Image Removed: img149212032_0.jpg]] Utility revenues increased at Avista Utilities when compared to the first quarter of 2021. This was primarily due to higher natural gas PGA rates, higher electric customer usage due to weather that was colder than the prior year, and customer growth for both electric and natural gas. In addition, electric and natural gas wholesale sales increased due to an increase in prices and volumes.  Utility resource costs increased at Avista Utilities due to increased fuel for generation and natural gas purchased (mainly due to higher natural gas market prices).  Utility operating expenses increased when compared to the first quarter of 2021, primarily due to higher inflation which caused increased employee wages and benefits and outside service expenses. We also had higher wildfire resiliency costs and insurance costs. See the "Executive Overview" for further discussion around inflation.  

Utility depreciation and amortization increased primarily due to additions to utility plant.

    Income tax expense decreased primarily due to the recognition of income taxes related to our completed Idaho and Washington general rate cases in late 2021 which allowed for flow through treatment for certain tax items. For the full year 2022, we expect our effective tax rate to be negative 17.8 percent. See "Note 7 of the Notes to Condensed Consolidated Financial Statements" for further details and a reconciliation of our effective tax rate for the first quarter of 2022.  The increase in other was primarily related to an increase in taxes other than income taxes and higher interest costs, partially offset by an increase in net investment gains during the first quarter of 2022 as compared to the first quarter of 2021.                                         40

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    Table of Contents  AVISTA CORPORATION   Non-GAAP Financial Measures  The following discussion for Avista Utilities includes two financial measures that are considered "non-GAAP financial measures": electric utility margin and natural gas utility margin. In the AEL&P section, we include a discussion of utility margin, which is also a non-GAAP financial measure.  Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. Electric utility margin is electric operating revenues less electric resource costs, while natural gas utility margin is natural gas operating revenues less natural gas resource costs. The most directly comparable GAAP financial measure to electric and natural gas utility margin is utility operating revenues as presented in "Note 16 of the Notes to Condensed Consolidated Financial Statements."  The presentation of electric utility margin and natural gas utility margin is intended to enhance the understanding of operating performance. We use these measures internally and believe they provide useful information to investors in their analysis of how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our results of operations. Changes in loads, as well as power and natural gas supply costs, are generally deferred and recovered from customers through regulatory accounting mechanisms. Accordingly, the analysis of utility margin generally excludes most of the change in revenue resulting from these regulatory mechanisms. We present electric and natural gas utility margin separately below for Avista Utilities since each business has different cost sources, cost recovery mechanisms and jurisdictions, so we believe that separate analysis is beneficial. These measures are not intended to replace utility operating revenues as determined in accordance with GAAP as an indicator of operating performance. Reconciliations of operating revenues to utility margin are set forth below.  

Results of Operations - Avista Utilities

Three months ended March 31, 2022 compared to the three months ended March 31, 2021

    Utility Operating Revenues  The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the three months ended March 31, 2022 and 2021 (dollars in millions and MWhs in thousands):                       [[Image Removed: img149212032_1.jpg]]

(1)

This balance includes public street and highway lighting, which is considered part of retail electric revenues.

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    Table of Contents  AVISTA CORPORATION   Total electric operating revenues in the graph above include intracompany sales of $0.3 million and $6.0 million for the three months ended March 31, 2022 and 2021, respectively.                       [[Image Removed: img149212032_2.jpg]]  The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility electric operating revenues for the three months ended March 31 (dollars in thousands):                                                             Electric 

Decoupling Revenues

                                                                2022           

2021

   Current year decoupling deferrals (a)                   $        (8,804 )     $       4,326 Amortization of prior year decoupling deferrals (b)              (2,823 )            (3,545 ) Total electric decoupling revenue                       $       (11,627 )   

$ 781

(a)

   Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.  

(b)

   Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.  Total electric revenues increased $10.3 million for the first quarter of 2022 as compared to the first quarter of 2021. The primary fluctuations that occurred during the period were as follows:  

a $15.3 million increase in retail electric revenue due to an increase in MWhs sold (increased revenues by $11.7 million) and an increase in retail rates (increased revenues by $3.6 million).

    o The increase in total retail MWhs sold was primarily the result of an increase in use by residential and commercial customers due to weather that was colder than the prior year, as well as customer growth. Compared to the first quarter of 2021, residential electric use per customer increased 6 percent and commercial use per customer increased 3 percent. Heating degree days in Spokane were 1 percent above the prior year but 2 percent below normal.  o Retail rates increased primarily from rate changes which do not have an impact on utility margin, such as the low income rate assistance program and the ERM and PCA amortization rates.                                         42

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    Table of Contents  AVISTA CORPORATION   • a $10.0 million increase in wholesale electric revenues due to an increase in sales volumes (increased revenues $7.5 million) and an increase in sales prices (increased revenues $2.5 million). The fluctuation of volumes was due to increased hydroelectric generation compared to the prior year which allowed us additional opportunity to optimize our generation assets. In addition, we joined the EIM during March 2022 which led to a slight increase in wholesale sales.  

a $3.3 million decrease in sales of fuel as part of thermal generation resource optimization activities.

a $12.4 million decrease in electric decoupling revenue. The rebates in 2022 resulted from higher than normal usage from residential customers.

    The following graphs present Avista Utilities' natural gas operating revenues and therms delivered for the three months ended March 31, 2022 and 2021 (dollars in millions and therms in thousands):                       [[Image Removed: img149212032_3.jpg]]

(1)

This balance includes interruptible and industrial revenues, which are considered part of retail natural gas revenues.

    Total natural gas operating revenues in the graph above include intracompany sales of $9.3 million and $12.5 million for the three months ended March 31, 2022 and 2021, respectively.                                         43

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    Table of Contents  AVISTA CORPORATION  
                       [[Image Removed: img149212032_4.jpg]]

The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility natural gas operating revenues for the three months ended March 31 (dollars in thousands):

                                                               Natural Gas Decoupling Revenues                                                              2022           

2021

   Current year decoupling deferrals (a)                   $        (4,670 )     $        (1,543 ) Amortization of prior year decoupling deferrals (b)                (480 )               1,261 Total natural gas decoupling revenue                    $        (5,150 )   

$ (282 )

(a)

   Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.  

(b)

   Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.  Total natural gas revenues increased $29.7 million for the first quarter of 2022 as compared to the first quarter of 2021. The primary fluctuations that occurred during the period were as follows:  

   a $27.3 million increase in natural gas retail revenues (including industrial, which is included in other) due to higher retail rates (increased revenues $24.6 million), and higher sales volumes (increased revenues $2.7 million).  o 

Retail rates increased mainly due to purchased gas adjustment rate increases in all jurisdictions (which do not impact utility margin).

    o Retail natural gas sales increased primarily due to higher residential and commercial usage, due to colder weather, as well as residential and commercial customer growth. Compared to the first quarter of 2021, residential use per customer was consistent, but total therms delivered increased due to customer growth. Commercial use per customer increased 3 percent for the first quarter of 2022. Heating degree days in Spokane were 1 percent above the prior year but 2 percent below normal. Heating degree days in Medford were 2 percent below both the prior year and normal.                                         44

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    Table of Contents  AVISTA CORPORATION   • a $8.6 million increase in wholesale natural gas revenues due to an increase in prices (increased revenues $13.0 million), partially offset by a decrease in volumes of excess gas sold in the wholesale market (decreased revenues $4.4 million). Differences between revenues and costs from sales of resources in excess of retail load requirements and from resource optimization are accounted for through the PGA mechanisms.  

   a $4.8 million decrease in natural gas decoupling revenue primarily due to higher rebates to residential customers in the first quarter of 2022 resulting from higher than normal usage. In addition, we were able to recognize decoupling amounts related to 2021 that we were unable to recognize during the prior year due to our inability to collect them within 24 months from year-end.  The following table presents Avista Utilities' average number of electric and natural gas retail customers for the three months ended March 31, 2022 and 2021:                                         Electric Customers          Natural Gas Customers                                        2022          2021            2022           2021 Residential                            360,201       354,191          335,575       330,124 Commercial                              44,400        43,968           36,688        36,483 Interruptible                                -             -               44            37 Industrial                               1,197         1,210              189           192 Public street and highway lighting         666           649                -             - Total retail customers                 406,464       400,018          372,497       366,836   Utility Resource Costs 

The following graphs present Avista Utilities' resource costs for the three months ended March 31, 2022 and 2021 (dollars in millions):

                       [[Image Removed: img149212032_5.jpg]]  Total electric resource costs in the graph above include intracompany resource costs of $9.3 million and $12.5 million for the three months ended March 31, 2022 and 2021, respectively.  Total electric resource costs increased $17.2 million for the first quarter of 2022 as compared to the first quarter of 2021. The primary fluctuations that occurred during the period were as follows:  

a $0.6 million increase in power purchased due to an increase in wholesale prices (increased costs $0.3 million), and an increase in the volume of power purchases (increased costs $0.3 million). The fluctuation in volumes was primarily the

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    Table of Contents  AVISTA CORPORATION  

result of changes in the availability of opportunities to optimize our generation assets as compared to the prior year as well as fluctuations in customer loads.

a $14.4 million increase in fuel for generation primarily related to higher natural gas fuel prices in the first quarter of 2022 as compared to 2021. Also, there was an increase in customer usage which required additional generation.

   a $2.8 million decrease in other fuel costs. This represents fuel and the related derivative instruments that were purchased for generation but were later sold when conditions indicated that it was more economical to sell the fuel as part of the resource optimization process. When the fuel is sold either physically or through a derivative instrument, that revenue is included in sales of fuel.  

a $4.9 million increase in other electric resource costs, primarily related to an increase in the amortization of previously deferred power supply costs.

                       [[Image Removed: img149212032_6.jpg]]

Total natural gas resource costs in the graph above include intracompany resource costs of $0.3 million and $6.0 million for the three months ended March 31, 2022 and 2021, respectively.

Total natural gas resource costs increased $26.5 million for the first quarter of 2022 as compared to the first quarter of 2021 primarily due to the following:

a $29.3 million increase in natural gas purchased due to an increase in the price of natural gas (increased costs $32.7 million), partially offset by a decrease in volumes (decreased costs $3.4 million).

a $2.9 million decrease from net amortizations and deferrals of natural gas costs.

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    Table of Contents  AVISTA CORPORATION   Utility Margin 

The following table reconciles Avista Utilities' operating revenues, as presented in "Note 16 of the Notes to Condensed Consolidated Financial Statements" to the Non-GAAP financial measure utility margin for the three months ended March 31, 2022 and 2021 (dollars in thousands):

                                Electric                   Natural Gas                 Intracompany                   Total                        2022          2021          2022           2021          2022         2021          2022          2021 Operating revenues   $ 267,925     $ 257,580     $ 190,512     $  160,796   

$ (9,565 ) $ (18,516 ) $ 448,872 $ 399,860 Resource costs 95,039 77,867 100,950 74,489

(9,565 ) (18,516 ) 186,424 133,840 Utility margin $ 172,886 $ 179,713 $ 89,562 $ 86,307

$ - $ - $ 262,448 $ 266,020

Electric utility margin decreased $6.8 million and natural gas utility margin increased $3.3 million.

    Electric utility margin decreased primarily due to increased net power supply costs as compared to the prior year. For the first quarter of 2022, we had a $1.9 million pre-tax benefit under the ERM in Washington, compared to a $4.3 million pre-tax benefit for the first quarter of 2021. The increase in net power supply costs was primarily due to an increase in power and natural gas prices during 2022. While we are in a benefit position within the ERM for the first quarter of 2022, we expect an expense position by the end of 2022 in the 90 percent customers/10 percent Company sharing band.  Natural gas utility margin increased primarily due to customer growth and the recognition of $1.0 million in decoupling amounts from 2021 that we were unable to recognize in the prior year.  Intracompany revenues and resource costs represent purchases and sales of natural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation of total results for Avista Utilities and in the condensed consolidated financial statements but are included in the separate results for electric and natural gas presented above.  

Results of Operations - Alaska Electric Light and Power Company

Three months ended March 31, 2022 compared to the three months ended March 31, 2021

Net income for AEL&P was $3.3 million for the three months ended March 31, 2022 and $3.5 million for the three months ended March 31, 2021.

    The following table presents AEL&P's operating revenues, resource costs and resulting utility margin for the three months ended March 31, 2022 and 2021 (dollars in thousands):                         2022         2021 Operating revenues   $ 13,054     $ 12,821 Resource costs            444          739 Utility margin       $ 12,610     $ 12,082  

Utility margin increased slightly from 2021, primarily due to higher sales volumes to residential customers for 2022 compared to 2021. The increase in utility margin was offset by a slight increase in operating expenses.

Results of Operations - Other Businesses

    Our other businesses had net income of $1.0 million for the three months ended March 31, 2022 compared to net income of $0.5 million for the three months ended March 31, 2021.  

The increase in net income primarily relates to an increase in net investment gains during the first quarter of 2022 as compared to the first quarter of 2021.

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Critical Accounting Policies and Estimates

    The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on our consolidated financial statements and thus, actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2021 Form 10-K and have not changed materially.  

Liquidity and Capital Resources

Overall Liquidity

    Our sources of overall liquidity and the requirements for liquidity have not materially changed in the three months ended March 31, 2022. See the 2021 Form 10-K for further discussion.  In March 2022, we issued $400.0 million of first mortgage bonds with the proceeds being used to repay the outstanding balance under our committed line of credit. In April 2022, the remainder of the proceeds, as well as borrowings on the committed line of credit were used to repay $250.0 million of maturing long-term debt.  As of March 31, 2022, we had $370.7 million of available liquidity under the Avista Corp. committed line of credit and $25.0 million under the AEL&P committed line of credit. With our $400.0 million credit facility that expires in June 2026 and AEL&P's $25.0 million credit facility that expires in November 2024, we believe that we have adequate liquidity to meet our needs for the next 12 months.  

Review of Cash Flow Statement

Operating Activities

    Net cash provided by operating activities was $161.9 million for the three months ended March 31, 2022, compared to $145.1 million for the three months ended March 31, 2021. The increase is primarily due to the receipt of collateral previously posted for derivative instruments, which increased cash flows by $38.6 million in 2022, compared to an increase of $1.5 million in 2021. Cash collateral was returned in 2022 related to energy derivative instruments as the fair value increased compared to year-end due to increases in market prices compared to the prices included in our derivatives. Additionally, during the first quarter of 2022, we paid $17.0 million for the settlement of interest rate swaps related to our $400.0 million bond issuance.  

Investing Activities

    Net cash used in investing activities was $95.7 million for the three months ended March 31, 2022, compared to $96.5 million for the three months ended March 31, 2021. During the three months ended March 31, 2022, we paid $96.0 million for utility capital expenditures compared to $97.2 million for the three months ended March 31, 2021.  Financing Activities  Net cash provided by financing activities was $115.3 million for the three months ended March 31, 2022, compared to net cash used of $41.2 million for the three months ended March 31, 2021. In the three months ended March 31, 2022, we issued $400.0 million of bonds and we used the proceeds to pay off the outstanding balance of our committed line of credit and repay $250.0 million of maturing long-term debt in April 2022. In addition, we issued $37.9 million of common stock in 2022, compared to less than $0.1 million in 2021.                                         48

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    Table of Contents  AVISTA CORPORATION   Capital Resources  Our consolidated capital structure, including the current portion of long-term debt and short-term borrowings consisted of the following as of March 31, 2022 and December 31, 2021 (dollars in thousands):                                                        March 31, 2022               December 31, 2021                                                                  Percent                        Percent                                                   Amount         of total        Amount         of total Current portion of long-term debt and leases    $   257,433            5.2 %   $   257,386            5.4 % Short-term borrowings                                     -            0.0 %       284,000            6.0 % Long-term debt to affiliated trusts                  51,547            1.0 %        51,547            1.1 % Long-term debt and leases                         2,405,743           48.7 %     2,010,168           42.2 % Total debt                                        2,714,723           54.9 %     2,603,101           54.7 % Total Avista Corporation shareholders' equity     2,233,300           45.1 %     2,154,744           45.3 % Total                                           $ 4,948,023          100.0 %   $ 4,757,845          100.0 %   Our shareholders' equity increased $78.6 million during the first quarter of 2022 primarily due to net income and the issuance of common stock, which was partially offset by dividends.  

We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our indebtedness, both short-term and long-term, reduce the amount of cash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividends and other requirements.

Committed Lines of Credit

    Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million and an expiration date of June 2026, with the option to extend for an additional one year period (subject to customary conditions). The committed line of credit is secured by non-transferable first mortgage bonds we issued to the agent bank that would only become due and payable in the event, and then only to the extent, that we default on our obligations under the committed line of credit.  

The Avista Corp. credit facility contains customary covenants, including a covenant which does not permit our ratio of "consolidated total debt" to "consolidated total capitalization" to be greater than 65 percent at the end of any fiscal quarter, and customary events of default, including a Change in Control (as defined in the agreement). As of March 31, 2022, we were in compliance with this covenant with a ratio of 54.9 percent.

AEL&P has a $25.0 million committed line of credit that expires in November 2024. As of March 31, 2022, there were no borrowings or letters of credit outstanding under this committed line of credit.

    The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of "consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P" (including the impact of the Snettisham obligation) to be greater than 67.5 percent at any time. As of March 31, 2022, AEL&P was in compliance with this covenant with a ratio of 51.0 percent.  

Balances outstanding and interest rates of borrowings under Avista Corp.'s committed line of credit were as follows as of and for the three months ended March 31 (dollars in thousands):

                                                              2022          

2021

   Borrowings outstanding at end of period                 $       -     $  

93,000

   Letters of credit outstanding at end of period          $  29,288     $  16,618 Maximum borrowings outstanding during the period        $ 292,000     $ 106,000 Average borrowings outstanding during the period        $ 223,972     $  83,956 Average interest rate on borrowings during the period        1.14 %        1.19 % Average interest rate on borrowings at end of period            -          

1.17 %

     As of March 31, 2022, Avista Corp. and its subsidiaries were in compliance with all of the covenants of their financing agreements, and none of Avista Corp.'s subsidiaries constituted a "significant subsidiary" as defined in Avista Corp.'s committed line of credit.                                         49

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    Table of Contents  AVISTA CORPORATION   Liquidity Expectations  During the first quarter of 2022, we issued $400 million of long-term debt and we do not expect any further issuances during the year. We expect to issue $120 million of common stock (including $37.9 million of common stock issued during the first quarter of 2022). The debt and equity issuances for 2022 are to repay $250 million of maturing long-term debt in April 2022 and fund capital expenditures.  

After considering the expected issuances of long-term debt and common stock during 2022, we expect net cash flows from operations, together with cash available under our committed lines of credit to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments.

Capital Expenditures

    We are making capital investments to enhance service and system reliability for our customers and replace aging infrastructure. Our estimates for 2022 through 2024 have not materially changed during the three months ended March 31, 2022. See the 2021 Form 10-K for further information on our expected capital expenditures.  

Off-Balance Sheet Arrangements

As of March 31, 2022, we had $29.3 million in letters of credit outstanding under our $400.0 million committed line of credit, compared to $34.0 million as of December 31, 2021.

    Pension Plan  Avista Utilities  In the three months ended March 31, 2022 we contributed $14.0 million to the pension plan, and we expect to contribute $42.0 million for the full year of 2022. We expect to contribute a total of $82.0 million to the pension plan in the period 2022 through 2026, with an annual contribution of $42.0 million for 2022 and $10.0 million from 2023 to 2026.  The final determination of pension plan contributions for future periods is subject to multiple variables, most of which are beyond our control, including changes to the fair value of pension plan assets, changes in actuarial assumptions (in particular the discount rate used in determining the benefit obligation), or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed above.  

See "Note 6 of the Notes to Condensed Consolidated Financial Statements" for additional information regarding the pension plan.

Contractual Obligations

    Our future contractual obligations have not materially changed during the three months ended March 31, 2022, except that in March 2022, we issued $400.0 million of first mortgage bonds which are due in 2052. See "Note 9 of the Notes to Condensed Consolidated Financial Statements" for further discussion.  

See the 2021 Form 10-K for our contractual obligations.

Environmental Issues and Contingencies

Our environmental issues and contingencies disclosures have not materially changed during the three months ended March 31, 2022 except as follows:

Oregon Climate Protection Plan

    In March 2020, Oregon Governor Kate Brown issued Executive Order No. 20-04, "Directing State Agencies to Take Actions to Reduce and Regulate Greenhouse Gas Emissions." The Executive Order launched rulemaking proceedings for every Oregon agency with jurisdiction over greenhouse gas-related matters, with the aim of reducing Oregon's overall GHG emissions to 80 percent below                                         50

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1990 levels by 2050. This Executive Order led to the Oregon Department of Environmental Quality developing cap and reduce rules known as the Climate Protection Program (CPP).

    On March 18, 2022, we, along with the utilities NW Natural and Cascade Natural Gas, filed a lawsuit requesting judicial review of the CPP. This action was subsequently consolidated with a lawsuit filed by several other parties, and remains pending.  

See the 2021 Form 10-K for further discussion of our environmental issues and contingencies.

    Enterprise Risk Management  The material risks to our businesses, and our mitigation process and procedures to address these risks, were discussed in our 2021 Form 10-K and have not materially changed during the three months ended March 31, 2022. See the 2021 Form 10-K.  Financial Risk  Our financial risks have not materially changed during the three months ended March 31, 2022. Refer to the 2021 Form 10-K. The financial risks included below are required interim disclosures, even if they have not materially changed from December 31, 2021.  Interest Rate Risk  We use a variety of techniques to manage our interest rate risks. We have an interest rate risk policy and have established a policy to limit our variable rate exposures to a percentage of total capitalization. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance of long-term debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. See "Note 5 of the Notes to Condensed Consolidated Financial Statements" for a summary of our interest rate swap derivatives outstanding as of March 31, 2022 and December 31, 2021 and the amount of additional collateral we would have to post in certain circumstances.  

Credit Risk

    Under the terms of interest rate swap derivatives that we enter into periodically, we may be required to post cash or letters of credit as collateral depending on fluctuations in the fair value of the instrument. A downgrade in our credit ratings could further impact the amount of collateral required. See "Credit Ratings" in the 2021 Form 10-K for further information. As of March 31, 2022, we had interest rate swap derivatives outstanding with a notional amount totaling $30.0 million and we had no cash deposited as collateral and no letters of credit outstanding for these interest rate swap derivatives. If our credit ratings were lowered to below "investment grade" based on our interest rate swap derivatives outstanding at March 31, 2022, we would not be required to post additional collateral because all of our outstanding interest rate swap were in asset positions at that time.  As of March 31, 2022, we had cash deposited as collateral of $4.6 million and letters of credit of $25.0 million outstanding related to our energy contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount of collateral required. See "Credit Ratings" in the 2021 Form 10-K for further information. For example, in addition to limiting our ability to conduct transactions, if our credit ratings were lowered to below "investment grade" based on our positions outstanding at March 31, 2022 (including contracts that are considered derivatives and those that are considered non-derivatives), we would potentially be required to post the following additional collateral (in thousands):                                                                      March 31, 2022 Additional collateral taking into account contractual thresholds   $        

6,736

   Additional collateral without contractual thresholds                          9,296                                            51

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    Table of Contents  AVISTA CORPORATION   Energy Commodity Risk  Our energy commodity risks have not materially changed during the three months ended March 31, 2022. See the 2020 Form 10-K. The following table presents energy commodity derivative fair values as a net asset or (liability) as of March 31, 2022 that are expected to settle in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2025.                                                      Purchases                                                                        Sales                            Electric Derivatives                       Gas Derivatives                     Electric Derivatives                      Gas Derivatives Year               Physical (1)           Financial (1)      Physical (1)  

Financial (1) Physical (1) Financial (1) Physical (1) Financial (1) Remainder 2022 $ (229 ) $

               -     $       1,661     $        24,466     $          397       $       (7,840 )   $       (1,029 )   $        (6,306 ) 2023                           -                       -               789              19,789                  -                 (372 )           (2,176 )            (3,521 ) 2024                           -                       -               113               2,007                  -                    -             (1,713 )              (191 ) 2025                           -                       -                (8 )                 -                  -                    -             (1,265 )                 -   The following table presents energy commodity derivative fair values as a net asset or (liability) as of December 31, 2021 that are expected to be delivered in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2025.                                                     Purchases                                                                          Sales                           Electric Derivatives                       Gas Derivatives                       Electric Derivatives                      Gas Derivatives Year              Physical (1)           Financial (1)       Physical (1)       Financial (1)       Physical (1)         Financial (1)       Physical (1)       Financial (1) 2022              $        (269 )       $             -     $         (260 )   $         6,198     $          650       $         1,572     $       (3,479 )   $       (16,859 ) 2023                          -                       -                (54 )             1,964                  -                     -             (1,612 )              (757 ) 2024                          -                       -                (34 )               296                  -                     -             (1,603 )                 5 2025                          -                       -                  -                   -                  -                     -             (1,146 )                 - 2026                          -                       -                  -                   -                  -                     -                  -                   -   (1) Physical transactions represent commodity transactions in which we will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of the benefit or cost but with no physical delivery of the commodity, such as futures, swap derivatives, options, or forward contracts.  The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they are delivered and will be included in the various deferral and recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually be collected through retail rates from customers. 
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