Avista: Population And Electric Consumption Growth Driving The Story

seekingalpha08-17

Avista Corporation is a regulated electric utility serving the Pacific Northwest with a low carbon footprint and strong growth potential.The stock price has risen by 19.16% since the last article we ...

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02:19 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715254-avista-population-and-electric-consumption-growth-driving-the-story><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Avista Corporation is a regulated electric utility serving the Pacific Northwest with a low carbon footprint and strong growth potential.The stock price has risen by 19.16% since the last article we ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715254-avista-population-and-electric-consumption-growth-driving-the-story\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU1894683348.USD","symbol_name":"AMUNDI FUNDS US EQUITY RESEARCH VALUE \"A2\" (USD) 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Leaders A Acc USD","IDU":"iShares U.S. Utilities ETF"},"translate_title":"Avista：人口和电力消耗增长推动故事","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AES":1,"NWE":1,"IDU":1,"ETR":1,"DTE":1,"AEP":1,"AVA":1},"content_text":"Avista Corporation is a regulated electric utility serving the Pacific Northwest with a low carbon footprint and strong growth potential.The stock price has risen by 19.16% since the last article we published, underperforming the S&P 500 Index.The company plans to invest $1.6 billion in rate base expansion to grow earnings per share and deliver a 9% to 11% total return annually.Electric consumption in the company's service territory has been growing at a very rapid pace, and it will likely accelerate going forward due to AI and data center needs.The company boasts a strong balance sheet and a fair valuation.   James O'Neil Avista Corporation (NYSE:AVA) is a regulated electric utility that serves customers in the Pacific Northwest states of Washington, Oregon, and Idaho. The company also has a subsidiary that operates in Alaska:   Avista Corporation Interestingly, though, we can see that the company’s service territory does not include many of the largest and most well-known cities in the area, such as Seattle and Olympia in Washington, Portland in Oregon, or Boise in Idaho. This is not necessarily a problem, however, as the company does still exhibit the general stability and slow growth that we typically associate with utility companies. Avista Corporation also has one of the lowest carbon footprints in the sector and produces much of its electricity using hydropower and other “green” sources, which may be attractive to some market participants. As regular readers might remember, we previously discussed Avista Corporation in late October of last year. This was at the tail end of a very disappointing performance run for the utility sector, as the U.S. Utility Index (IDU) had declined by 9.30% from July 1, 2023, until October 31, 2023:   Seeking Alpha This disappointing performance was mostly due to the market frequently treating companies like this as bond proxies. Utilities, in general, tend to have fairly low growth rates and high dividend yields, so they tend to be purchased by the same type of investor who might otherwise consider buying bonds. This causes them to be very sensitive to interest rate movements, and interest rates rose quite a lot over the summer of 2023. However, they started to fall in early November and the market began a massive bull run, which had the effect of taking utility companies along for the ride. Thus, the previous article was actually published pretty close to Avista’s low point. We can therefore expect that the company’s stock price has delivered a fairly strong performance since the previous article was published. This is indeed the case, as shares of Avista have risen by 19.16% since my previous article on the company was published:   Seeking Alpha We can, unfortunately, see that the stock price has substantially underperformed the S&P 500 Index (SP500). While that may be disappointing to some, it is also not unexpected, since utilities in general do not outperform the broader market. After all, these companies lack the growth prospects of most technology or healthcare names. However, boring can still be profitable, and a 19.16% gain over less than a year is certainly nothing to scoff at. Avista Corporation does not deliver its investment return solely through capital gains, however. The company also pays a fairly attractive 5.01% dividend yield right now, which provides its shareholders with a return that is in addition to the share price movement. When we factor this in, it results in the stock having delivered a 23.98% total return since my previous article was published:   Seeking Alpha This is still not as good as the S&P 500 Index (SP500), but when we consider that the market on average returns 10% per year, it is still a very attractive performance. It is pretty unreasonable to assume that Avista Corporation will be able to deliver performance this attractive regularly. However, the company should still be able to provide an annual share price appreciation of around 5% and a 5.01% dividend yield going forward. While that is not as exciting as some other companies possess, it is a very reasonable return given the historic annual performance of the market. About Avista Corporation And Growth Projections Update As mentioned in the introduction, Avista Corporation is a regulated electric and natural gas utility that primarily operates in the Pacific Northwest states of Washington, Oregon, and Idaho. The company’s website provides the following description: Avista Corporation is an energy company involved in the production, transmission and distribution of energy as well as other energy-related businesses. Avista Utilities is the operating division, providing electricity to 418,000 customers and natural gas to about 382,000 customers across 30,000 square miles and four northwestern states. Alaska Energy and Resources Company, an Avista subsidiary, provides retail electric service in the city and borough of Juneau through its subsidiary Alaska Electric Light and Power Company. The image that was provided in the introduction stated that Avista Corporation’s service territory had a population of 1.7 million. However, the description provided on the website states that Avista Corporation has approximately 418,000 electric customers. These numbers might be difficult to reconcile with the fact that electric service is generally a requirement for a property to comply with habitability laws until we realize that a single customer can be multiple people. After all, most people do not live alone, so if we assume that an average household contains four people, 1.7 million calculates to 425,000 customers. If we consider that some of the company’s customers will be businesses and that some households may have more than four people, we can see how a 1.7 million population will likely work out to around 400,000 to 450,000 customers. In the case of natural gas, some buildings use other sources of energy for heating and so do not have natural gas service. Thus, the numbers seem to work out. The demographics of the company’s service territory also seem favorable, as the populations of both Idaho and Washington are growing. In fact, Idaho is one of the fastest-growing states in the country:   State Annual Population Growth   Idaho 1.31%   Washington 0.36%   Oregon -0.14%   Click to enlarge (Data from World Population Review.) This is generally a positive sign for Avista Corporation, for reasons which I explained in a previous article: The reason that this is important is that population growth is one of the only ways that a utility can grow, and it is completely out of the utility’s control. This is because a utility is a monopoly that is restricted to operating in a specific region by law and it cannot expand by convincing customers outside of its service territory to switch providers. Thus, a growing population in Avista’s service territory will result in more customers due to its monopoly status and the fact that it is providing a necessary product that everybody in its service territory has to purchase. The reverse is also true, and a declining population in its service territory would reduce the company’s customer count. The more customers that the company has, the more people pay bills to it, and the more revenue Avista should generate, all else being equal. With that said, state-level data alone does not guarantee that the company will experience customer growth inside its service territory. After all, we have already seen that major Pacific Northwest cities like Seattle and Olympia, Washington, and Portland and Salem, Oregon are not located within the company’s service territory. The largest city within the company’s service territory is Spokane, Washington, and not all of its suburbs are served by the company. Spokane is experiencing a slight 0.03% population growth rate, however. The eastern suburbs of Spokane (specifically the area between Spokane and Coeur d’Alene, Idaho) are growing at a much higher rate, and that is within Avista’s service territory, so the company should be benefiting from that somewhat. Many of the fastest-growing cities in Idaho – Moscow, Lewiston, Sandpoint, and Coeur d'Alene – are serviced by Avista Corporation’s utility business. Thus, we can clearly see that Avista appears to be benefiting from some of the same population growth trends that have been benefiting Entergy (ETR) down in Texas, which we discussed a few weeks ago (link provided earlier). This positive demographic development has been showing up in the company’s customer base. As we saw in a previous article, at the end of 2022, Avista Corporation had 411,000 electric and 377,000 natural gas customers throughout its Pacific Northwest service territory. Today, that customer figure is larger:     Year-End 2023 Year-End 2022 % Change   Electric Customers 418,000 411,000 +1.70%   Natural Gas Customers 382,000 377,000 +1.32%   Click to enlarge This is roughly in line with the growth rates in the Spokane Valley, Washington and eastern Spokane suburbs area, which is one of the more populated areas in Avista Corporation’s service territory. Thus, we can clearly see that the company is benefiting from the pandemic-era trend of people moving away from major cities and towards more rural and less population-dense regions. Naturally, though, few investors will be satisfied with a sub-2% growth rate, even though that is a fairly rapid growth rate for the population as a whole. There are other ways for Avista Corporation to stimulate its growth, however, such as increasing the size of its rate base. As I explained in my August 2023 article on Avista Corporation (linked earlier): The primary method through which Avista Corporation will generate growth is by increasing the size of its rate base. The rate base is the value of the company’s assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase to the rate base allows Avista to positively adjust the prices that it charges its customers in order to earn that regulatory-allowed rate of return. The usual way through which a utility grows its rate base is by investing money into upgrading, modernizing, or possibly even expanding its utility-grade infrastructure. Earlier this year, Avista announced that it intends to invest approximately $1.6 billion over the 2024 to 2026 period into rate base expansion:   Avista Corporation This is actually a significant increase over the $1.425 billion spending program that the company outlined last year and represents an increase in both 2024 and 2025:     2024 2025 2026   Original Planned CapEx Spending $475 $475 N/A   New Planned CapEx Spending $500 $525 $575   Click to enlarge This is in direct response to electricity demand growing more rapidly than Avista Corporation originally expected. One reason for this comes from the technology sector, which is consuming massive amounts of electricity for both cloud computing and generative artificial intelligence. I explained the artificial intelligence thesis in a recent article (quote originally from Scientific American): Researchers have been raising general alarms about AI’s hefty energy requirements over the past few months. But a peer-reviewed analysis published this week in Joule is one of the first to quantify the demand that is quickly materializing. A continuation of the current trends in AI capacity and adoption is set to lead to NVIDIA shipping 1.5 million server units per year by 2027. These 1.5 million servers, running at full capacity, would consume at least 85.4 terawatt-hours of electricity annually – more than what many small countries use in a year, according to the new assessment. Artificial intelligence is just one driver of rapidly rising electricity use, as many major technology companies already use enormous amounts of electricity to power their data centers. A few days ago, Visual Capitalist showed that Microsoft (MSFT) and Alphabet (GOOG) (GOOGL) each consumed approximately 24 terawatt-hours of electricity in 2023. That is more than the entire country of Iceland (19 terawatt-hours). Meta Platforms (META) and Apple (AAPL) consume far less, but we can expect Meta in particular to rapidly increase its energy consumption as it continues to commit resources to building up its artificial intelligence offering. As of right now, Microsoft, Alphabet, Meta Platforms, and Apple together consume as much electricity as the entire populations of Ireland and Serbia combined. The total of all four technology companies was 62 terawatt-hours of electricity in 2023. For the full-year 2022 period (the most recent period for which data is available), Ireland and Serbia each consumed a total of 31 terawatt-hours. Thus, we can clearly see that the technology sector consumes a vast amount of electricity already. It is likely that it will become an even more vapid consumer of electricity as artificial intelligence and other services dependent on vast amounts of data become more commonplace. This is likely to be a revenue driver for electric utilities that have data centers in their service territories over the coming years. Microsoft, Alphabet, and Meta Platforms are all very secretive about where their data centers are located. However, Microsoft has stated that it has a data center in Quincy, Grant County, Washington, and Meta Platforms has disclosed a data center near Boise, Idaho. Admittedly, it does not appear that either of these locations is within Avista’s service territory, but that does not mean that these firms (or other major users of big data) do not have data centers powered by Avista’s electricity. If there are not currently any data centers within the company’s service territory, it is conceivable that someone may establish one in the future. Thus, this could still be a contributing factor to a bull thesis for Avista Corporation, even if it is not one today. As the chart above shows, Avista Corporation’s new capital spending plan should grow the company’s rate base at a 5% compound annual growth rate. Accounting for the need for capital financing, that should allow Avista to grow its earnings per share at a 4% to 6% rate. When combined with the 5.01% current dividend yield, the stock should deliver a 9% to 11% total return on average annually through the end of 2026. Thus, it appears as though our original thesis that included slow and steady growth for this company remains intact. It may, however, be a slightly stronger thesis given the data center trend driver. Financial Considerations As I stated in my previous article on Avista Corporation: It is always important that we investigate the way that a company is financing its operations before making an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. That is usually accomplished by issuing new debt and using the proceeds to repay the existing debt. After all, very few companies have sufficient cash on hand to repay their debt as it matures. This process can cause a company’s interest expenses to go up following the rollover, depending on the conditions in the market. One trend that we have been noticing lately in the utility sector is that interest expenses have been rising significantly. This is unsurprising considering that the effective federal funds rate is currently at the highest level that we have seen in more than 20 years:   Federal Reserve Bank of St. Louis The peak that was seen before the 2008 financial crisis was 5.25% (the Federal Reserve did not set a target range at that time). The effective federal funds rate today is 5.33%, which was last seen in March 2001. While the federal funds rate is only an overnight rate and not a long-term borrowing rate, long-term rates tend to follow the federal funds rate. Thus, we can conclude that any new debt that Avista Corporation has to issue today will carry a higher interest than its older or maturing debt. This causes the company’s interest expenses to increase following each rollover or new debt issuance. As we can see here, Avista Corporation’s net interest expense rose from $22.8 million in the final quarter of 2021 to $35.4 million in the most recent quarter:   Seeking Alpha (All figures in millions of U.S. dollars.) This represents an increase of 55.26% over the course of eleven quarters, which is obviously large enough to result in a drag on the company’s earnings. Despite this, though, Avista Corporation has generally managed to grow its earnings over time:   Seeking Alpha (All figures in millions of U.S. dollars.) This is a good sign, as it clearly indicates that the company’s capital expenditures have been on things that generate a sufficiently high return to cover their financing costs even at today’s higher-than-normal levels. This is an excellent sign, and it tells us that the company is generally spending money wisely, rather than spending it on pie-in-the-sky fantasy projects that have no real hope of generating immediate profits. Investors who are conservative and risk-averse will likely appreciate this. As we saw in various previous articles, Avista Corporation has typically been less reliant on debt to finance itself than many of its peers. We can see this by looking at the company’s net debt-to-equity ratio. As of June 30, 2024, Avista Corporation had a net debt of $3.0209 billion compared to a shareholders’ equity of $2.5272 billion. This gives the company a net debt-to-equity ratio of 1.20 today, which represents a very slight improvement over the 1.21 ratio that the company had the last time that we discussed it. Here is how Avista Corporation compares to its peers in this respect:   Company Name Net Debt-to-Equity Ratio   Avista Corporation 1.20   DTE Energy Company (DTE) 1.99   NorthWestern Energy Group (NWE) 1.03   The AES Corporation (AES) 3.44   American Electric Power Company, Inc. (AEP) 1.68   Click to enlarge As we can see here, Avista Corporation is conservatively financed compared to most of its peers. This is a sign that investors should not have to worry too much about the company's debt, since it is not using an unreasonable amount for a utility company. Valuation According to Zacks Investment Research, Avista Corporation currently has a forward price-to-earnings ratio of 15.67. Here is how that compares to the company’s peers:   Company Name Forward P/E Ratio   Avista Corporation 15.67   DTE Energy Company 18.21   NorthWestern Energy Group 15.04   The AES Corporation 9.03   American Electric Power Company, Inc. 17.27   Click to enlarge This does not suggest that Avista Corporation is undervalued. In fact, quite the opposite appears to be true. The company’s current valuation is the median of its peer group, which suggests that Avista is at best fairly valued. Conclusion In conclusion, Avista Corporation has been benefiting from population growth in its service territory. In particular, the Spokane Valley region of Washington and most of Idaho have been growing at a fairly rapid pace over the past few years. This is the continuation of the pandemic-era trend toward remote work that has enabled people to move away from the big cities and live in more rural locations. There is little reason to believe that this trend will reverse itself anytime soon, so it seems likely that the company will continue to benefit going forward. Electricity consumption has been rising at an exceptionally rapid pace, and this also seems likely to benefit the company over time.  Our thesis in this company is perhaps a little stronger than it was last year, but it still appears that investors should expect a 9% to 11% total average annual return over the coming years.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460228506"}