Executive Summary / Key Takeaways

• Utility Segment Delivers Despite Headwinds: Avista Utilities generated $1.63 per diluted share year-to-date through September 2025, a 15% increase over 2024, driven by constructive rate case outcomes across Washington, Oregon, and Idaho that lifted returns and enabled customer growth.

• Non-Utility Drag Masks Core Strength: The "Other Businesses" segment produced a $13 million net loss year-to-date, a 333% deterioration from 2024's $3 million loss, as clean technology venture investments marked down sharply due to federal policy shifts, pushing consolidated guidance to the low end of the $2.52-$2.72 range.

• Massive Growth Catalysts Materializing: The company is evaluating over 80 bids totaling nearly 14 gigawatts for its 425-megawatt all-source RFP, while simultaneously managing a pipeline of large load customer requests exceeding 3,000 megawatts—representing potential capital investments of $500 million through 2029 that could drive earnings growth above the 4-6% long-term target.

• Regulatory Protection Balanced by Structural Earnings Drag: New wildfire legislation in Idaho and Washington provides liability protection for utilities implementing approved mitigation plans, but the Washington Energy Recovery Mechanism continues to impose a $0.14 per share earnings penalty in 2025 after regulators denied Avista's requested modifications.

• Dividend Sustainability Questions Amid Growth Investments: While Avista extended its dividend growth streak to 23 consecutive years with a 5.1% yield, the 82.4% payout ratio significantly exceeds the 65-75% target range, raising concerns about financial flexibility as the company plans $525 million in base utility capex for 2025 plus potential incremental growth spending.

Setting the Scene: A 135-Year-Old Utility at an Inflection Point

Avista Corporation, founded in 1889 as Washington Water Power and headquartered in Spokane, Washington, has evolved from a regional hydroelectric operator into a diversified energy company serving approximately 406,000 electric and 372,000 natural gas customers across the Pacific Northwest and Alaska. The company generates revenue through two primary regulated utilities: Avista Utilities, operating in eastern Washington, northern Idaho, and parts of Oregon and Montana; and Alaska Electric Light and Power Company (AEL&P), serving Juneau.

The utility industry structure in which Avista operates is undergoing fundamental transformation. Electrification trends, driven by data center expansion and manufacturing reshoring, are creating load growth opportunities not seen in decades. Simultaneously, the clean energy transition imposes new compliance requirements while wildfire risks elevate operational costs and liability concerns. Avista's position in this landscape reflects a classic mid-tier regulated utility profile—smaller than regional giants like Portland General Electric (POR)'s 950,000 customers or NorthWestern Corporation (NWE)'s 1.5 million, but distinguished by an integrated electric-gas model and significant hydroelectric assets that provide lower-cost, lower-carbon generation.

Competitively, Avista overlaps with IDACORP (IDA) in northern Idaho's electric market, where both provide distribution services, but Avista's natural gas offering creates bundled service opportunities that IDACORP's electric-only model cannot match. In Oregon, Avista's gas operations complement Portland General Electric's electric focus, enabling integrated heating and power solutions that enhance customer retention. Against NorthWestern and Black Hills (BKH), Avista's hydro-heavy generation mix provides a carbon advantage as states implement clean energy mandates, though its smaller scale limits absolute market share capture.

Technology, Strategy, and Regulatory Differentiation

Avista's strategic positioning rests on three pillars: regulatory relationship management, clean energy transition navigation, and growth infrastructure deployment. The company's recent success in securing multi-year rate settlements across all three jurisdictions—Washington (9.8% ROE approved December 2024), Oregon (May 2025 settlement), and Idaho (August 2025 settlement)—provides earnings visibility and capital recovery certainty that many utilities struggle to achieve. This regulatory resilience underpins the company's ability to fund a record $510 million in 2024 utility capital expenditures while maintaining dividend growth.

The clean energy transition presents both opportunity and cost pressure. Avista's planned January 1, 2026 divestiture of its 15% ownership in Colstrip Units 3 and 4 to NorthWestern Energy eliminates coal exposure at a time when Washington's Clean Energy Transformation Act requires 100% clean electricity by 2045. The company's 2025 Clean Energy Implementation Plan proposes increasing clean energy delivery from 66% in 2026 to 76.5% by 2029, positioning Avista ahead of compliance curves. This proactive stance reduces future stranded asset risk while qualifying for federal tax credits that improve project economics.

Wildfire risk management has become a critical operational and financial imperative. Idaho's Wildfire Standard of Care Act and Washington's House Bill 1522, both enacted in April 2025, establish liability protection for utilities implementing approved mitigation plans. Avista is deploying AI-enabled cameras across high-risk areas with coverage expected by end of 2026, installing weather stations on every circuit by 2029, and piloting strategic undergrounding of power lines. These measures transform wildfire exposure from a potentially catastrophic tail risk into a manageable operational cost, with insurance proceeds covering the $21 million Babb Road Fire settlement.

The most significant strategic development is Avista's growth investment pipeline. The May 2025 all-source RFP for 425 megawatts attracted over 80 bids totaling nearly 14 gigawatts of capacity, with shortlisted projects including wind, solar, storage, thermal, and demand response options. Construction must begin by July 2026 to capture federal tax credits, with projects online by 2029-2030. Simultaneously, management is engaged with potential large load customers representing over 3,000 megawatts of demand—equivalent to 150% of Avista's current peak native load of under 2,000 megawatts. This pipeline could drive $500 million in incremental capital investment from 2026-2029, potentially pushing earnings growth toward the high end of the 4-6% long-term target or beyond.

Financial Performance: Utility Strength Meets Non-Utility Volatility

Avista's financial results through September 2025 reveal a tale of two businesses. Avista Utilities generated $131 million in net income for the nine-month period, with operating revenues rising 2.0% to $1.398 billion. Electric utility margin expanded by $86 million year-over-year, while natural gas margin grew $19 million, reflecting general rate case increases and customer growth partially offset by lower wholesale revenues. This performance translated to $1.63 per diluted share, a 15% increase over 2024's $1.44, demonstrating the earnings power of the core utility franchise.

The Alaska Electric Light and Power segment contributed $4 million in net income, down from $5 million in 2024 due to milder weather and operational factors, but remains a stable, modest contributor expected to deliver $0.09-$0.11 per share annually. This Alaskan diversification provides geographic risk mitigation that pure Pacific Northwest utilities lack.

The "Other Businesses" segment, however, generated a $13 million net loss year-to-date versus a $3 million loss in 2024—a 333% deterioration that masks the utility's strength. Approximately 75% of these losses stem from mark-to-market valuation declines in clean technology venture funds, negatively impacted by federal policy shifts prioritizing natural gas and fossil fuel generation over clean energy. An additional 25% relates to ownership dilution from new share issuances. Management now expects zero contribution from this segment in 2025, acknowledging that periodic volatility will continue until venture fund exits materialize. Consequently, what historically averaged near-zero earnings impact has become a material drag on consolidated results, explaining why full-year guidance sits at the low end of the $2.52-$2.72 range despite utility outperformance.

The Energy Recovery Mechanism in Washington represents a structural earnings headwind. Avista incurred $13 million in ERM expenses year-to-date, a $0.12 per share impact, with full-year guidance assuming $0.14 in the 90% customer/10% company sharing band. The Washington Commission's denial of Avista's requested mechanism modification means this drag will persist into 2026, creating a $0.14-$0.16 annual earnings penalty that competitors in other jurisdictions do not face. As a result, Avista's earned ROE falls below authorized levels, compressing returns despite otherwise constructive regulatory relationships.

Outlook, Guidance, and Execution Risk

Management's 2025 guidance framework reflects clear-eyed assessment of these cross-currents. Avista Utilities is expected to contribute toward the upper end of its $2.43-$2.61 range, while consolidated results will land at the low end of $2.52-$2.72 due to non-utility losses. This bifurcation signals that the market may be mispricing AVA by applying a single multiple to a dual-natured earnings stream, potentially undervaluing the utility franchise while over-penalizing non-core volatility.

Long-term earnings growth of 4-6% from the 2025 base year assumes constructive regulatory outcomes, continued capital deployment, and potential incremental opportunities from the RFP and large load pipeline. Kevin Christie, CFO, noted that additional capital investment would help push growth toward the high end of the range but likely not exceed it, pending large load execution. This frames the 4-6% target as achievable through base business alone, with any large load wins representing potential upside.

Operating expense trends support this trajectory. The 2025 guidance assumes $470 million in O&M expense, up 15% from 2024, but approximately 40% of this increase reflects amortizations and base wildfire mitigation costs with corresponding revenue offsets that produce no earnings impact. Going forward, management expects annual O&M increases closer to 4%, aligning with inflation and customer growth. This demonstrates disciplined cost control, with current-year increases being largely revenue-recoverable rather than structural margin pressures.

The company's capital plan calls for $525 million in base Avista Utilities capex for 2025, scaling to $705 million by 2030, representing a 6% annual growth rate. Incremental growth opportunities could add $500 million from 2026-2029, financed roughly 50-50 between debt and equity. This financing mix maintains the current 1.21 debt-to-equity ratio while funding growth, though it necessitates continued equity issuance that dilutes existing shareholders.

Risks and Asymmetries

The investment thesis faces several material, thesis-specific risks. First, the Washington ERM mechanism's structural deficiency creates persistent earnings leakage that management has been unable to reform. With the commission denying modification requests and no probable scenario for 2025 turnaround, this $0.14 per share annual drag will continue until a future rate case resets power supply costs. It represents a permanent 5-6% earnings haircut that competitors do not face, requiring Avista to outperform operationally just to achieve parity.

Second, the non-utility segment's clean technology investments face policy-driven valuation volatility that management cannot control. While these markdowns are non-cash, they reflect real economic losses as federal policy shifts away from clean energy support. The $13 million year-to-date loss already exceeds the segment's typical zero-contribution baseline, and further policy deterioration could deepen losses. Such volatility consumes management attention and capital that could otherwise be deployed to the utility business, creating opportunity cost.

Third, the large load customer pipeline, while promising, remains speculative. The 3,000 megawatts of requests represent early-stage discussions, not contracted commitments. If data center development slows or competitors capture these loads, Avista's growth trajectory could stall at the low end of the 4-6% range. The market may be pricing in some probability of large load wins, creating downside risk if the pipeline fails to materialize.

Fourth, geographic concentration in the Pacific Northwest exposes Avista to regional risks. Hydroelectric generation variability from drought conditions can increase power supply costs, while wildfire risks, though mitigated by new legislation, remain a tail event that could exceed insurance coverage. A single catastrophic event could overwhelm the regulatory protection and create multi-year earnings pressure.

Finally, the dividend payout ratio at 82.4% leaves limited room for error. While management explicitly stated dividend growth will be less than earnings growth until reaching the 65-75% target range, any utility earnings shortfall or non-utility deterioration could force a difficult choice between dividend sustainability and growth investment. Avista's dividend track record is a key investor attraction, and any threat to it would likely trigger multiple compression.

Valuation Context

Trading at $38.56 per share, Avista's valuation reflects a market attempting to price a complex utility with both defensive characteristics and growth optionality. The price-to-earnings ratio of 16.3x sits modestly below the peer average of 17-18x for regional utilities, while the price-to-operating cash flow ratio of 6.5x appears attractive relative to peers trading at 7-11x. This modest discount may reflect the ERM headwind and non-utility losses that cloud earnings clarity.

The enterprise value-to-EBITDA multiple of 10.0x aligns closely with Portland General Electric's 9.7x but trails NorthWestern's 12.1x, suggesting the market assigns a lower multiple to Avista's mixed earnings quality. The dividend yield of 5.08% stands out as materially higher than IDACORP's 2.78% and Portland General's 4.31%, compensating investors for the non-utility volatility but also signaling potential market skepticism about payout sustainability.

Balance sheet metrics show a debt-to-equity ratio of 1.21x, consistent with the 1.14-1.36x range of peers, indicating no excessive leverage. However, the return on equity of 7.31% trails IDACORP's 9.41% and NorthWestern's 7.62%, reflecting the ERM drag and non-utility losses that compress returns. The 82.4% payout ratio significantly exceeds the peer range of 59-75%, representing the highest risk factor in the capital structure.

Conclusion

Avista Corporation stands at an inflection point where its core utility business is firing on all cylinders while non-core assets create substantial earnings noise. The utility segment's 15% earnings growth, constructive regulatory settlements, and massive growth pipeline of RFP and large load opportunities position it for sustained outperformance. However, the Washington ERM mechanism's $0.14 per share structural drag and the non-utility segment's $13 million year-to-date clean tech losses mask this strength, pushing consolidated results to the low end of guidance.

The investment thesis hinges on two critical variables: whether management can successfully reform the ERM mechanism in the 2026 Washington rate case to eliminate the persistent earnings leakage, and whether the 3,000-megawatt large load pipeline converts into contracted demand that drives capital deployment above the base plan. Success on both fronts would unlock the high end of the 4-6% earnings growth range and potentially justify a valuation re-rating toward peer multiples.

Conversely, failure to address the ERM headwind or material non-utility losses could compress returns and strain the elevated dividend payout ratio, threatening the 23-year dividend growth streak that attracts many investors. The market's current pricing appears to assign little value to the growth optionality while penalizing the earnings volatility, creating potential upside asymmetry for investors willing to tolerate near-term noise for exposure to a utility with above-average growth prospects and below-average valuation multiples.