20160526Thies Direct.pdf

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-16-03
OF AVISTA CORPORATION FOR THE )
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC SERVICE ) DIRECT TESTIMONY
TO ELECTRIC CUSTOMERS IN THE ) OF
STATE OF IDAHO ) MARK T. THIES
)

FOR AVISTA CORPORATION

(ELECTRIC)

Thies, Di 1
Avista Corporation
I. INTRODUCTION 1
Q. Please state your name, business address, and present 2
position with Avista Corporation. 3
A. My name is Mark T. Thies. My business address is
1411 East Mission Avenue, Spokane, Washington. I am employed
by Avista Corporation as Senior Vice President, Chief Financial
Officer and Treasurer.
Q. Would you please describe your education and business 8
experience? 9
A. I received a Bachelor of Arts degree in 1986 with
majors in Accounting and Business Administration from Saint
Ambrose College in Davenport, Iowa, and became a Certified
Public Accountant in 1987. I have extensive experience in
finance, risk management, accounting and administration within
the utility sector.
I joined Avista in September of 2008 as Senior Vice
President and Chief Financial Officer (CFO). Prior to joining
Avista, I was Executive Vice President and CFO for Black Hills
Corporation, a diversified energy company, providing regulated
electric and natural gas service to areas of South Dakota,
Wyoming and Montana. I joined Black Hills Corporation in 1997
upon leaving InterCoast Energy Company in Des Moines, Iowa,
where I was the manager of accounting. Previous to that I was
a senior auditor for Arthur Anderson & Co. in Chicago, Illinois.

Thies, Di 2
Avista Corporation
Q. What is the scope of your testimony in this 1
proceeding? 2
A. I will provide a financial overview of Avista
Corporation as well as explain the proposed capital structure,
overall rate of return, and our credit ratings. Additionally,
I will summarize our capital expenditures program. Mr. Adrien
McKenzie, on behalf of Avista, will provide additional
testimony related to the appropriate return on equity for
Avista, based on our specific circumstances, together with the
current state of the financial markets.
In brief, I will provide information that shows:
 Avista’s plans call for a continuation of utility
capital investments in generation, transmission and
distribution systems to preserve and enhance service
reliability for our customers. Capital expenditures
of approximately $1.2 billion are planned for the
three-year period ending December 31, 2018. Avista
needs adequate cash flow from operations to fund these
requirements and for repayment of maturing debt,
together with access to capital from external sources
under reasonable terms, on a sustainable basis.
 We are proposing an overall rate of return of 7.78
percent, which includes a 50.0 percent common equity
ratio, a 9.9 percent return on equity, and a cost of
debt of 5.67 percent. We believe our proposed overall
rate of return of 7.78 percent and proposed capital
structure provide a reasonable balance between safety
and economy.
 Avista’s corporate credit rating from Standard & Poor’s 29
is currently BBB and Baa1 from Moody’s Investors 30
Service. Avista must operate at a level that will
support a solid investment grade corporate credit
rating in order to access capital markets at reasonable
rates. A supportive regulatory environment is an

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Avista Corporation
important consideration by the rating agencies when
reviewing Avista. Maintaining solid credit metrics and
credit ratings will also help support a stock price
necessary to issue equity under reasonable terms to
fund capital requirements.
A table of contents for my testimony is as follows:
Description Page
I. Introduction 1
II. Financial Overview 4
III. Capital Expenditures 5
IV. Maturing Debt 18
V. Capital Structure 20
VI. Proposed Rate of Return 25
VII. Credit Ratings 31
15
Q. Are you sponsoring any exhibits with your direct 16
testimony? 17
A. Yes. I am sponsoring Exhibit No. 2, Schedules 1
through 3. Schedule 1, page 1, includes Avista’s credit ratings 19
by S&P and Moody’s. Avista’s actual capital structure at
December 31, 2015, and proposed capital structure at December
31, 2016, are included on page 2, with supporting information
on pages 3 and 4. Confidential Exhibit No. 2, Schedule 2C
includes the Company’s planned capital expenditures and long-
term debt issuances by year. Confidential Exhibit No. 2,
Schedule 3C includes our Interest Rate Risk Management Plan.

Thies, Di 4
Avista Corporation
II. FINANCIAL OVERVIEW 1
Q. Please provide an overview of Avista's financial 2
situation. 3
A. We are operating the business efficiently for our
customers, ensuring that our energy service is reliable and
customers are satisfied while at the same time keeping costs as
low as reasonably possible. An efficient, well-run business is
not only important to our customers but also important to
investors. We plan and execute on a capital financing plan
that provides a prudent capital structure and liquidity
necessary for our operations. We honor prior financial
commitments and we continue to rely on external capital for
sustained utility operations. We initiate regulatory processes
to seek timely recovery of our costs with the goal of achieving
earned returns close to those allowed by regulators in each of
the states we serve. These elements – cost management, capital
and revenues that support operations – are key determinants to
the rating agencies whose credit ratings are critical measures
of our financial situation.
Q. What steps is the Company taking to maintain and 20
improve its financial health? 21
A. We are working to assure there are adequate funds for
operations, capital expenditures and debt maturities. We
obtain a portion of these funds through the issuance of long-

Thies, Di 5
Avista Corporation
term debt and common equity. We actively manage risks related
to the issuance of long-term debt through our interest rate
risk mitigation plan and we maintain a proper balance of debt
and common equity through regular issuances and other
transactions. We actively manage energy resource risks and
other financial uncertainties inherent in supplying reliable
energy services to our customers. We create financial plans
and forecasts to model our income, expenses and investments,
providing a basis for prudent financial planning. We seek
timely recovery of our costs through general rate cases and
other ratemaking mechanisms.
The Company currently has a sound financial profile. It
is very important for Avista to maintain and enhance its
financial position in order to access debt and equity financing
as Avista funds significant future capital investments and
refinances maturing debt.

III. CAPITAL EXPENDITURES 18
Q. Would you please explain how Avista plans and 19
prioritizes its incremental capital investments? 20
A. Yes. We are continuing to make significant capital
investments related to electric generation, transmission and
distribution facilities, natural gas distribution plant, new
customer connections, environmental and regulatory

Thies, Di 6
Avista Corporation
requirements, information technology, and other supporting
functions such as fleet services and facilities. The objective
in all of these investments is to enable the Company to continue
to provide safe, reliable service to our customers, maintain a
high level of customer satisfaction, and meet the current and
future needs and expectations of our customers and other
stakeholders, while at the same time being sensitive to the
rate impacts to customers resulting from the investments.
In order to meet these objectives, there are a number of
factors that must be balanced as we determine the appropriate
level of investment each year including, but not limited to:
1) the level of investment needed to meet safety, service and
reliability objectives and to further optimize our facilities;
2) the degree of overall rate pressure faced by our customers;
3) the variability of investments required for major projects;
4) unanticipated capital requirements, such as an unplanned
outage on a large generating unit or significant storm affecting
transmission and distribution facilities; and 5) the cost and
availability of funding, which includes internally generated
funds, terms for debt financing, and the opportunity to issue
equity on reasonable terms.
Q. What have been Avista’s recent capital expenditure 22
levels, and what do you expect them to be for the next several 23
years? 24

Thies, Di 7
Avista Corporation
* The relatively higher level of capital expenditure in 2015 was driven by approximately $23
million related to storm costs for the November storm, and approximately $8 million related
to a renegotiation of the Coyote Springs Long Term Service Agreement, which occurred late
in the year.
A. Illustration No. 1 below summarizes the capital
expenditure levels for recent years, as well as planned
expenditures through 2020.
Illustration No. 1 4
5
6
7
8
9
10
11

After the Company’s expected $375 million capital
investments in 2016, the capital expenditure level is expected
to increase to $405 million annually from 2017 through 2020.
Q. Why has the Company increased the level of its capital 18
expenditures? 19
A. The increase in the level of capital investment in
recent years is driven primarily by the business need to fund

Thies, Di 8
Avista Corporation
a greater portion of the departmental requests for new capital
investments that, in the past, were unfunded.
While there are numerous factors driving the need for
increased investment, they generally fall into six broad
categories. These categories are: (1) Asset Management, (2)
Compliance, (3) Improvements and Efficiencies, (4) Reliability
Maintenance, (5) Resource Supply, and (6) Safety and Security.
There are overlaps and interdependencies among these
categories, and they are not necessarily all-encompassing.
A brief description of each of these categories is provided
below. As other Avista witnesses present and explain the
specific capital projects and capital-related programs included
in this general rate case filing, they will provide additional
details on the specific purpose and objectives of the capital
investments.
Asset Management: In many instances we have asset
management plans, which are designed to determine the
efficient life cycle of the assets. These asset management
plans assess the useful life of the particular assets and
the appropriate time to replace the assets, balanced
against the operations and maintenance costs associated
with maintaining assets that are toward the end of their
useful life. These asset management plans allow the
Company to systematically replace the assets over time in
a manner that optimizes the value of the assets, while
still maintaining reliable service to customers. There
are a number of programs within electric distribution,
substation, and transmission operations that require
programmatic annual proactive maintenance investment in
order to maximize the lifetime value of the associated
assets. Specific asset management programs and projects
include wood pole management, Aldyl-A pipe replacement,

Thies, Di 9
Avista Corporation
transmission line rebuilds, and substation equipment
replacements and rebuilds.

Compliance: The compliance category is related to
mandates from state and federal governments and
regulators, including, but not limited to FERC
requirements; NERC requirements; PHMSA requirements;
requirements under franchise and right-of-way agreements,
cities, and counties; and environmental regulations; among
others. Additionally, this category includes the
Company’s compliance with contractual agreements.
12
Improvements and Efficiencies: This category is related
to keeping pace with technological innovation, the
identification of process improvements or efficiency
gains, and other opportunities to improve the Company’s 16
operating assets. For example, as technology has evolved,
our customers have grown to expect new functionality from
our customer-facing technology assets (e.g., increased
website functionality and mobile-friendly interaction).

Reliability Maintenance: This category represents the
backbone of Avista’s ability to meet its obligation to
serve all customers with safe, reliable service. As
discussed by Company witness Scott Morris, we believe the
current reliability of our system is satisfactory and is
meeting the needs and expectations of our customers and
other stakeholders. However, in order to maintain this
level of reliability, continued capital investment is
necessary, given that both new and existing assets
deteriorate over time and require replacement. Without
responsibly working to maintain our plant in service over
time, we cannot continue to maintain our reliability
levels.

Resource Supply: Avista’s ability to serve its customers 36
is only as effective as its ability to generate and procure
energy resources. As discussed by Company witness Scott
Kinney, Avista’s 2015 Electric Integrated Resource Plan
shows forecasted annual energy deficits and sustained
annual capacity deficits beginning in the next 10 years.
In light of this fact, it is critical that the Company
continue to invest in maintaining its current generating
assets, along with planning to meet future resource needs
with both supply-side and demand-side resources.

Thies, Di 10
Avista Corporation
Safety and Security: This category of investment includes
security considerations driven by threats to Avista’s 2
operations, both cyber and physical. As cybersecurity
risks grow,1 continued investment is required to respond
to these risks. Additionally, as evidenced by the Metcalf
sniper attack on a PG&E substation, physical security
risks also exist, requiring investment to improve physical
security. Aside from security considerations, safety
considerations are also important factors in investment
decisions and must be continually evaluated to ensure that
customers, the public at large, as well as Avista’s 11
employees remain safe.

Q. How do these categories ultimately translate into 14
plant investment? 15
A. As Mr. Morris briefly explained in his testimony,
each year the departments across the Company assess the near-
term needs to maintain and upgrade the utility infrastructure
and technology necessary to continue to provide safe, reliable
service to customers, as well as maintain a high level of
customer satisfaction. The departments develop business cases
for specific projects and programs that explain and support the
need for the capital investment. These business cases are
submitted to a Capital Planning Group that meets on a regular
basis to review and prioritize all proposed utility capital
investment projects.2

1 As recently as December 2015, a substantial portion of Ukraine’s energy
grid was blacked out by what is believed to be a hacking attack.
2 The business cases supporting capital projects included in this case for
2016 and 2017 are provided as Exhibit No. 10, Schedule 4 (Company witness
Ms. Schuh).

Thies, Di 11
Avista Corporation
After taking into consideration a number of factors,
senior management of Avista establishes a proposed capital plan
amount for each year of the next five years, which is presented
to the Finance Committee of the Board of Directors3. These
factors include, but are not limited to, the total capital
investment requests of the departments submitted to the Capital
Planning Group, the urgency of the projects, the opportunities
and risks associated with delaying the projects to a later date,
and the overall bill impact to customers associated with the
annual capital planned spend ultimately approved. These five-
year capital spend amounts are revisited each year to ensure
that capital dollars are dedicated to the highest priority
projects.
In recent years Avista has chosen to not fund all of the
capital investment projects proposed by the various departments
in the Company, driven, in part, by the Company’s desire to 16
mitigate the retail rate impacts to customers. The decision
to delay funding certain projects is made only in cases where
the Company believes the amount of risk associated with the
delay is reasonable and prudent.
As a result of this constrained capital spend level,
capital projects must be prioritized so that the dollars flow

3 The Finance Committee is presented with a five-year plan, but approves the
plan for only the next operating year.

Thies, Di 12
Avista Corporation
where they are most needed. As unexpected, high-priority
capital projects arise, the capital projects for the year must
be reprioritized to limit the total spend to the amount
established by the Company and approved by the Finance Committee
of the Board. This can cause some projects to be delayed so
that higher-priority projects can be completed.4
In addition, some scheduled capital projects will
encounter unexpected delays due to such things as permitting
issues, delays in receipt of materials and equipment, etc. A
delay in one project may allow another project to be accelerated
in time as part of managing the availability of our workforce
and to continue to make progress on projects next in the “queue” 12
that need to be done. This reprioritization occurs within the
Capital Planning Group, which is charged with ensuring that the
total capital spend for the year stays within the limit approved
by the Finance Committee of the Board.5

4 The CPG is a group of Avista employee directors that represent all capital
intensive areas of the Company. The CPG meets to review the submitted
Business Cases and prioritize funding to limit the capital spend to the
level set by senior management. After approval from senior management, the
annual capital planned spend is sent to the Finance Committee of the Board
of Directors to approve the capital spend amount. The CPG meets monthly to
review the status of the capital projects and programs, and approves or
declines new business cases as well as monitors the overall capital spend.
5 If circumstances indicate the capital spend for a year will exceed the
level previously approved by the Finance Committee of the Board, the
additional capital spend is presented to the Finance Committee for approval.

Thies, Di 13
Avista Corporation
The following illustration provides a graphical
representation of how the Company develops and prioritizes its
capital investments.
Illustration No. 2:

6
7
8
9
10
11
12
13
Q. How has the historical level of annual capital 14
spending for Avista compared with the planned level? 15
A. The actual and planned capital spending for the
utility for the years 2006 through 2015 are shown in Table No.
1 below. The table shows that actual capital spending has been
very close to the planned spending on a consistent basis. The
ten-year average of actual additions is 102% of the planned
spending. This table also shows that while Avista has been

Thies, Di 14
Avista Corporation
Planned
Expenditures
Actual
Expenditures
($ millions) ($ millions)
2006 $160.00 $158.30 99%
2007 183.10 198.40 108%
2008 190.00 205.40 108%
2009 220.00 199.70 91%
2010 235.00 206.80 88%
2011 260.00 247.00 95%
2012 255.00 262.00 103%
2013 275.00 296.00 108%
2014 336.00 352.00 105%
2015 376.30 415.30 110%
Ten Year Average $249.04 $254.09 102%
Percentage of
Planned
TABLE NO. 1
Planned vs. Actual Expenditures
increasing its capital spending it is generally remaining on
target with its planned spend. 2
Table No. 1:6 3

Q. Does the Company believe the current level of planned 12
expenditures are necessary prudent investments? 13
A. Yes. The Company has the obligation to responsibly
manage the replacement of assets over time to maintain
reliability and balance a number of competing factors such as
the bill impacts to customers. Although we could choose to put
off for tomorrow what does not absolutely need to be done today,
it would be imprudent to allow the system to deteriorate and

6 The relatively higher level of capital expenditure in 2015 was driven by
approximately $23 million related to storm costs for the November storm,
and approximately $8 million related to a renegotiation of the Coyote
Springs Long Term Service Agreement, which occurred late in the year.

Thies, Di 15
Avista Corporation
begin to jeopardize reliability, as well as potentially create
a “bow-wave” of investment that needs to be made in a relatively 2
short period of time.
As indicated earlier, the objectives in our investments
are to enable the Company to continue to provide safe, reliable
service to our customers, maintain a high level of customer
satisfaction, and meet the current and future needs and
expectations of our customers and other stakeholders, while at
the same time being sensitive to the rate impacts to customers
resulting from the investments.
In this filing, the Company has provided detailed
information, explanation and supporting documentation to
support the level of new capital investment proposed to be
included in retail rates for the 2017 rate period.
Q. Please identify the witnesses providing this detailed 15
information. 16
A. The following witnesses provide detailed information,
explanation and supporting documentation related to new capital
investment from 2016 through December 2017.
Scott Kinney’s testimony addresses the drivers of the
Company’s generation investment, totaling $241.2
million from 2016 through December 2017, mainly
related to the Company’s 100 year old hydroelectric
facilities along the Spokane River (i.e., Nine Mile,
Post Falls and Little Falls generating facilities),
as well as our larger Clark Fork River hydroelectric
facility at Cabinet Gorge. Additional capital
investments, such as those related to our Colstrip

Thies, Di 16
Avista Corporation
thermal generating facility and other projects are
also discussed.

Bryan Cox’s testimony addresses the Company’s need to
invest in its electric transmission plant, totaling
$120.9 million from 2016 through December 2017, to
maintain reliable customer service and meet mandatory
reliability standards (e.g., by the North American
Electric Reliability Corporation (NERC)), including
projects such as the Noxon Switchyard Rebuild
project, as well as many other transmission,
substation, and environmental projects to meet
reliability improvements, compliance and
replacement, as well as contractual agreements.

Heather Rosentrater’s testimony addresses the
Company’s investment in electric distribution plant,
totaling $102.3 million from 2016 through December
2017, explaining that the Company’s investment is 19
primarily driven by a combination of the following
factors: (1) new customer connections and changing
customer usage, (2) maintaining system reliability
and safety, (3) realizing operational and electrical
efficiencies, and (4) minimizing life cycle costs of
assets. Ms. Rosentrater also discusses Avista’s 25
Asset Management approach, which strives to
prioritize and plan work that results in maximizing
the value of Avista’s physical assets by integrating
information about repairing, maintaining,
inspecting, monitoring, and replacing those physical
assets through a comprehensive analysis. Examples of
Avista’s Asset Management programs (and related
capital investment projects) include its Wood Pole
Management, grid modernization, transformer change-
out, and improving worst feeders, to name a few.
Examples of additional capital projects discussed by
Ms. Rosentrater, include the reconductor and feeder
tie programs, new distribution substation projects,
storm damage repair, and street light management, to
name a few.

Jim Kensok’s testimony addresses the Company’s 42
investment in information systems and information
technology plant, totaling $119.5 million from 2016
through December 2017. Mr. Kensok discusses in
further detail that the utility industry is
undergoing a period of renewal, calling for

Thies, Di 17
Avista Corporation
technology in all areas of our business. Specific
drivers that prompt capital projects during the 2016
and 2017 time periods include: (1) a transition from
legacy custom-coded applications to commercial off-
the-shelf solutions to increase security and
reliability (i.e., outage management system), allow
flexibility and scalability, and forecast system
lifecycle planning, (2) continuous upgrades of
Operating System and Database software to maintain
vendor maintenance and support, (3) technology
infrastructure investment, such as communication
equipment on mountain tops and radios in fleet
vehicles to increase worker safety during unplanned
outages or emergency events, and (4) network
infrastructure efforts to respond to an ever
increasing demand for secure data transfer, sensor
technology, reliability and redundancy.

Karen Schuh’s testimony addresses the Company’s 19
investment in general plant, totaling $36.2 million
from 2016 through December 2017, which is mainly due
to the Central Office Long Term Campus restructuring
plans, phases 1 and 2. Ms. Schuh also discusses in
further detail the capital planning and review
process, including the oversight provided by the
Capital Planning Group.

In the supporting documentation provided by Avista in this
general rate case filing, the Company has attempted to strike
a reasonable balance of supplying robust supporting explanation
and documentation for its planned capital investments, while at
the same time not placing an undue burden on the record through
the submittal of voluminous documentation.
To the extent any party to the case requires additional
information or documentation associated with any of the
Company’s planned capital projects or programs, Avista is 36
prepared to provide additional information through responses to

Thies, Di 18
Avista Corporation
Maturity Year Principal Amount Coupon Rate Date Issued Maturity Date
2016 $90,000,000 0.84%8/14/2013 8/14/2016
2017 ----
2018
$7,000,000
$250,000,000
$15,500,000
7.39%
5.95%
7.45%
5/11/1993
4/3/2008
6/9/1993
5/11/2018
6/1/2018
6/11/2018
2019 $90,000,000 5.45%11/18/2004 12/1/2019
2020 $52,000,000 3.89%12/20/2010 12/20/2020
Total $504,500,000
Avista Corp
Long-Term Debt Maturities, 2016-2020
discovery, by conference call, through site visits by the
parties and other means. Avista’s practice has been to be 2
transparent and responsive to requests for information in
these, as well as other, regulatory proceedings, and the same
is true for this case.

IV. MATURING DEBT 7
Q. How is Avista affected by maturing debt obligations 8
in the next five years?
A. In the next five years the Company is obligated to
repay maturing long-term debt totaling $504.5 million. The
table in Illustration No. 3 below shows the Company’s maturing
long-term debt from 2016 through 2020. Within this five-year
period, a large concentration – $272.5 million – matures within
the second quarter of 2018.
Illustration No. 3 16
17
18
19
20
21
22
23

Thies, Di 19
Avista Corporation
These debt obligations originated as early as 1993 and
their original terms were three, ten, fifteen and twenty-five
years. These maturing obligations represent over a third (36%)
of the Company’s long-term debt outstanding at the end of 2015,
which is a significant portion of our capital structure. The
Company typically replaces maturing long-term debt with new
issuances of debt. It will be necessary for Avista to be in a
favorable financial position to complete the expected debt
refunding, while also obtaining debt and equity to fund capital
expenditures each year.
Q. What are the Company’s expected long-term debt 11
issuances in the next several years? 12
A. To provide adequate funding for the significant
capital expenditures noted in Section III above and to repay
maturing long-term debt, we are forecasting the issuance of
long-term debt every year for the next several years, as shown
in Exhibit No. 2, Confidential Schedule 2C. 17
Q. Are there other debt obligations that the Company 18
must consider? 19
A. Yes. In addition to long-term debt, the Company’s 20
$400 million revolving credit facility expires in April 2021.
The Company relies on this credit facility to provide, among
other things, funding to cover month-to-month variations in
cash flows, interim funding for capital expenditures, and

Thies, Di 20
Avista Corporation
credit support in the form of cash and letters of credit that
are required for energy resources commitments and other
contractual obligations. Our credit facility was amended in
April 2014, which stretched the expiration date to April 2019,
five years past the amendment date, and reduced interest rates
and fees.
In April 2016 the Company requested an extension of the
expiration date, requesting an additional two years to April
2021. This extension was approved in May 2016. Any outstanding
balances borrowed under the revolving credit facility become
due and payable when the facility expires.

V. CAPITAL STRUCTURE 13
Q. What capital structure and rate of return does the 14
Company request in this proceeding?
A. Our requested capital structure is 50.0 percent total
debt and 50.0 percent equity with a requested overall rate of
return in this proceeding of 7.78 percent, as shown in
Illustration No. 4 below. The requested capital structure is
consistent with that currently authorized (per Case No. AVU-
15-05), and similar to that expected prior to rates going into
effect at December 31, 2016 of 49.2 percent debt and 50.8
percent equity.

Thies, Di 21
Avista Corporation
Proposed Cost of Capital
Component
Cost Cost
Total Long-Term Debt 50.0%5.67%2.83%
Common Equity 50.0%9.90%4.95%
Total 100.00%7.78%
Avista Corporation
Percent of
Total Capital
Illustration No. 4 1
2
3
4
5
6
7
8
Q. Is the capital structure reflected in Illustration 9
No. 4 above calculated in a manner similar to the capital 10
structure calculated in Avista's recent rate proceedings? 11
A. Yes. This methodology considers debt and equity
outstanding for Avista Corp., including the impact of costs
related to the issuance of that debt and equity.
Debt and equity for AERC7, which was acquired in mid-2014,
are excluded from this calculation and do not impact the capital
structure calculation for this rate proceeding.
Q. How does the Company determine the amount of long-18
term debt and common equity to be included in its capital 19
structure? 20

7On July 1, 2014, the Company acquired Alaska Energy and Resources Company
(AERC). AERC’s primary subsidiary is Alaska Electric Light and Power
Company (AEL&P), a wholly-owned corporation of AERC and a vertically
integrated electric utility providing electric service to the City and
Borough of Juneau. AERC and AEL&P are separate legal entities and their
debt is backed by the assets and equity of AERC and AEL&P.

Thies, Di 22
Avista Corporation
A. As a regulated utility, Avista has an obligation to
provide safe and reliable service to customers while balancing
fiscal safety and economy, in both the short term and long term.
Through our planning process we determine the amount of new
financing needed to support our capital expenditure programs
while maintaining an optimal capital structure that balances
and supports our current credit ratings and provides
flexibility for anticipated future capital requirements.
Q. Why is the Company proposing a 50.0 percent equity 9
ratio? 10
A. On December 31, 2015, Avista’s common equity 11
percentage for the Idaho jurisdiction was 49.3 percent. The
Company continues to evaluate the extent and timing of equity
issuances for 2016-2018, taking into account our capital
expenditures and other financial requirements. These steps to
manage our equity level are expected to result in a common
equity level of 50.8 percent at December 31, 2016.
Maintaining a 50.0 percent common equity ratio has several
benefits for customers. We are dependent on raising funds in
capital markets throughout all business cycles. These cycles
include times of contraction and expansion. A solid financial
profile will assist us in accessing debt capital markets on
reasonable terms in both favorable financial markets and when
there are disruptions in the financial markets.

Thies, Di 23
Avista Corporation
Additionally, a 50.0 percent common equity ratio
solidifies our current credit ratings and moves us closer to
our long-term goal of having a corporate credit rating of BBB+.
A rating of BBB+ would be consistent with the natural gas and
electric industry average, which I will further explain later
in my testimony. We rely on credit ratings in order to access
capital markets on reasonable terms. Moving further away from
non-investment grade (BB+) provides more stability for the
Company, which is also beneficial for customers. We believe
our requested 50.0 percent equity appropriately balances safety
and economy for customers.
Q. In attracting capital under reasonable terms, is it 12
necessary to attract capital from both debt and equity 13
investors? 14
A. Yes, it is absolutely essential. As a publicly traded
company we have two primary sources of external capital: debt
and equity investors. As of December 31, 2015, we had
approximately $2.95 billion of debt and equity. Approximately
half of our capital structure is funded by debt holders and the
other half is funded by equity investors and retained earnings.
Rating agencies and potential debt investors tend to place
significant emphasis on maintaining strong financial metrics
and credit ratings that support access to debt capital markets
under reasonable terms. Leverage – or the extent that a company

Thies, Di 24
Avista Corporation
uses debt in lieu of equity in its capital structure – is a key
credit metric and, therefore, access to equity capital markets
is critically important to long-term debt investors. This
emphasis on financial metrics and credit ratings is shared by
equity investors who also focus on cash flows, capital structure
and liquidity, much like debt investors.
The level of common equity in our capital structure can
have a direct impact on investors’ decisions. A balanced
capital structure allows us access to both debt and equity
markets under reasonable terms on a sustainable basis. Being
able to choose specific financing methods at any given time
also allows the Company to take advantage of better choices
that may prevail as the relative advantages of debt or equity
markets can ebb and flow at different times.
Q. Are the debt and equity markets competitive markets?
A. Yes. Our ability to attract new capital, especially
equity capital, under reasonable terms is dependent on our
ability to offer a risk/reward opportunity that is equal to or
better than investors’ other alternatives. We are competing
with not only other utilities but also with businesses in other
sectors of the economy. Demand for our stock supports our stock
price, which provides us the opportunity to issue additional
shares under reasonable terms to fund capital investment
requirements.

Thies, Di 25
Avista Corporation
Q. What is Avista doing to attract equity investment? 1
A. We are requesting a capital structure that provides
us the opportunity to have financial metrics that offer a
risk/reward proposition that is competitive and attractive for
equity holders. We target a dividend payout ratio that is
comparable with other utilities in the industry. This is an
essential element, along with potential growth, in providing a
competitive risk/reward opportunity for equity investors.
Tracking mechanisms, such as the Fixed Cost Adjustment,
the Power Cost Adjustment and the Purchased Gas Adjustment
approved by the IPUC, and similar mechanisms approved by
Avista’s other regulatory commissions, help balance the risk of
owning and operating the business in a manner that places us in
a position to offer a risk/reward opportunity that is
competitive with not only other utilities, but with businesses
in other sectors of the economy.

VI. PROPOSED RATE OF RETURN 18
Q. Has Avista prepared an exhibit that includes the 19
components of Avista's requested rate of return of 7.78 percent? 20
A. Yes. Exhibit No. 2, Schedule 1, page 2 shows the
components of Avista’s requested rate of return of 7.78 percent.

Thies, Di 26
Avista Corporation
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
2008 2009 2010*2011*2012 2013*2014*2015 2016
proposed
Authorized Cost of Debt
Avista-Idaho
*Actual cost of debt,a specified capital structure or cost of debt was not authorized for this year.
Q. What is the Company’s overall cost of debt and how 1
does the Company’s current overall cost of debt compare to its 2
historic cost? 3
A. Our requested overall cost of debt is 5.67 percent.
The cost of debt has trended downward for Avista in recent years
with an increase in 2016, as shown in Illustration No. 5 below.
Illustration No. 5
8
9
10
11
12
13
14
15
16
17
Q. Please explain why Avista’s cost of long-term debt 18
has decreased.
A. There has been a general decline in interest rates
for several years while Avista has issued new debt, causing the

Thies, Di 27
Avista Corporation
Company’s overall cost of debt to decrease. There is an
increase in the proposed cost of debt for 2016, as compared to
2015, due to the maturation of $90 million of debt with a coupon
of 0.84 percent and an effective yield of -0.04 percent during
2016. In August 2013 we issued $90 million of debt with a 3-
year term. Avista executed interest rate hedges for $85 million
related to this debt, and at the time the debt was issued
received a benefit of $2.9 million related to the hedges. This
benefit is amortized over the life of the debt, which results
in an effective yield of -0.04 percent. We expect the effective
yield on our 2016 debt issuance to be higher than the effective
yield on the maturing 2016 debt and, therefore, the average
cost of debt will increase in 2016.
We have been prudently managing our interest rate risk in
anticipation of debt issuances, which has involved fixed rate
long-term debt with varying maturities, and executing on our
interest rate risk mitigation program for our forecasted debt
issuances.
From 2011 through 2015 we issued $415 million in long-term
debt. The weighted average coupon rate of these issuances is
3.55 percent. These issuances have varying maturities ranging
from 3 years to 35 years, and a weighted average maturity of
23.6 years.

Thies, Di 28
Avista Corporation
Our most recent issuance (in 2015) was $100 million of
first mortgage bonds with a thirty year maturity at a rate of
4.37%. This new debt has an effective cost of 5.015% after
taking into account issuance costs and the settlement of
interest rate hedges.
The prior year (in 2014) we issued $60 million of first
mortgage bonds with a thirty year maturity at a rate of 4.11%.
This debt, which matures in 2044, was the lowest priced debt
with a term beyond twenty years that the Company has issued
since the 1950s. The effective cost of this debt is even lower
at 3.65%, which includes cost of issuance and the impact of
interest rate hedges. The $5.4 million positive value of the
interest rate hedges (hedges were settled when the coupon rate
was set) improved the effective yield on this debt by 0.52%. I
will discuss the interest rate hedging program later in my
testimony.
We have continued to issue debt with varying maturities to
balance the cost of debt and the weighted average maturity.
This practice has provided us with the ability to take advantage
of historically low rates on both the short end and long end of
the yield curve.
The Company’s credit ratings have supported reasonable 22
demand for Avista debt by potential investors. We have further

Thies, Di 29
Avista Corporation
enhanced credit quality and reduced interest cost by issuing
debt that is secured by first mortgage bonds.
We plan to continue issuing long-term debt with various
maturities for the foreseeable future in order to fund our
capital expenditure program and long-term debt maturities.
Q. What is the Company doing to mitigate interest rate 6
risk related to future long-term debt issuances? 7
A. As mentioned earlier, we are forecasting $1.2 billion
in capital expenditures over the next three years.
Additionally, we have $362.5 million of debt maturing during
the same period. This results in a significant need for the
issuance of long-term debt to fund these capital expenditures
and maturing debt while maintaining an appropriate capital
structure.
We usually rely on short-term debt as interim financing
for capital expenditures, with issuances of long-term debt in
larger transactions approximately once a year. As a result, we
access long-term debt capital markets on limited occasions, so
our exposure to prevailing long-term interest rates can occur
all at once rather than across market cycles. To mitigate
interest rate risks, we hedge the rates for a portion of
forecasted debt issuances over several years leading up to the
date we anticipate each issuance.

Thies, Di 30
Avista Corporation
We also manage interest rate risk exposure by limiting the
extent of outstanding debt that is subject to variable interest
rates rather than fixed rates. In addition, we issue fixed
rate long-term debt with varying maturities to manage the amount
of debt that is required to be refinanced in any period (looking
ahead to its future maturity), and to obtain rates across a
broader spectrum of prevailing terms which tend to be priced at
different interest rates.
Q. Does the Company have guidelines regarding its 9
interest rate risk management? 10
A. Yes. The Company’s Interest Rate Risk Management 11
Plan, attached as Exhibit No. 2, Confidential Schedule 3C, is
designed to reduce uncertainty of the effective interest cost
of future debt issuances. The plan provides guidelines for
hedging a portion of interest rate risk with financial
derivative instruments. We settle these hedge transactions for
cash simultaneously when a related new fixed-rate debt issuance
is priced in the market. The settlement proceeds (which may be
positive or negative) are amortized over the life of the new
debt issuance.
The interest rate risk management plan provides that hedge
transactions are executed solely to reduce interest rate
uncertainty on future debt that is included in the Company’s 23

Thies, Di 31
Avista Corporation
five-year forecast8. The hedge transactions do not involve
speculation about the movement of future interest rates.
Q. The Company is requesting a 9.9% return on equity. 3
Please explain why the Company believes this is reasonable. 4
A. We agree with the analyses presented by Mr. McKenzie
which demonstrate that the proposed 9.9 percent ROE, together
with the proposed equity layer of 50.0%, would properly balance
safety and economy for customers, provide Avista with an
opportunity to earn a fair and reasonable return, and provide
access to capital markets under reasonable terms and on a
sustainable basis.

VII. CREDIT RATINGS
Q. How important are credit ratings for Avista? 14
A. Utilities require ready access to capital markets in
all types of economic environments. The capital intensive
nature of our business with energy supply and delivery dependent
on costly long-term projects to fulfill our obligation to serve
customers necessitates the ability to obtain funding from the
financial markets under reasonable terms at regular intervals.
In order to have this ability, investors need to understand the
risks related to any of their investments. Financial

8 The interest rate risk management plan also provides for the Company to
hedge interest rate risk beyond the five-year horizon in some situations.

Thies, Di 32
Avista Corporation
commitments by our investors generally stretch for many years
– even decades – and the potential for volatility in costs
(arising from energy commodities, natural disasters and other
causes) is a key concern to them. To help investors assess the
creditworthiness of a company, nationally recognized
statistical rating organizations (rating agencies) developed
their own standardized ratings scales, otherwise known as
credit ratings. These credit ratings indicate the
creditworthiness of a company and assist investors in
determining if they want to invest in a company and its
comparative level of risk compared to other investment choices.
Q. Please summarize the credit ratings for Avista. 12
A. Avista’ credit ratings, assigned by Standard & Poor’s
(S&P) and Moody’s Investor Service (Moody’s) are as follows:

Additional information on our credit ratings has been
provided on page 1 of Exhibit No. 2, Schedule 1.
Q. Please explain the implications of the credit ratings 20
in terms of the Company’s ability to access capital markets. 21
A. Credit ratings impact investor demand and expected
returns. More specifically, when we issue debt, the credit
rating can affect the determination of the interest rate at
S&P Moody’s
Senior Secured Debt A- A2
Corporate Credit Rating BBB Baa1
Outlook Stable Stable
1

Thies, Di 33
Avista Corporation
which the debt will be issued. The credit rating can also
affect the type of investor who will be interested in purchasing
the debt. For each type of investment a potential investor
could make, the investor looks at the quality of that investment
in terms of the risk they are taking and the priority they would
have for payment of principal and interest in the event that
the organization experiences severe financial stress.
Investment risks include, but are not limited to, liquidity
risk, market risk, operational risk, regulatory risk, and
credit risk. These risks are considered by S&P, Moody’s and 10
investors in assessing our creditworthiness.
In challenging credit markets, where investors are less
likely to buy corporate bonds (as opposed to U.S. Government
bonds), a stronger credit rating will attract more investors,
and a weaker credit rating could reduce or eliminate the number
of potential investors. Thus, weaker credit ratings may result
in a company having more difficulty accessing capital markets
and/or incurring significantly higher costs when accessing
capital.
Q. What credit rating does Avista believe is 20
appropriate? 21
A. Avista’s current S&P corporate credit rating is BBB. 22
We believe operating at a corporate credit rating level (senior
unsecured) of BBB+ is comparable with other US utilities

Thies, Di 34
Avista Corporation
providing both electricity and natural gas. As shown in
Illustration No. 6, the average credit rating for U.S. Regulated
Combined Gas and Electric Utilities is BBB+ and the most common
rating is A-. The average and most common ratings are one and
two notches higher, respectively, than Avista’s rating.
Illustration No. 6
7
8
9
10
11
12
13
14
15
16

We expect that a continued focus on the regulated utility,
conservative financing strategies and a supportive regulatory
environment will contribute toward an upgrade to a BBB+
corporate credit rating for Avista. Operating with a BBB+
credit rating would likely attract additional investors, lower
our debt pricing for future financings, and make us more
competitive with other utilities. In addition, financially

Thies, Di 35
Avista Corporation
healthy utilities are better able to invest in the required
infrastructure over time to serve their customers, and to
withstand the challenges facing the industry and disruptions in
the financial market.
Q. How important is the regulatory environment in which 5
the Company operates? 6
A. Both Moody’s and S&P cite the regulatory environment
in which a regulated utility operates as the dominant
qualitative factor to determine a company’s creditworthiness.
Moody's rating methodology is based on four primary factors.
Two of those factors – a utility’s “regulatory framework” and
its “ability to recover costs and earn returns” – make up 50
percent of Moody’s rating methodology9.
S&P states the following10:
Regulation is the most critical aspect that underlies
regulated integrated utilities’ creditworthiness.
Regulatory decisions can profoundly affect financial
performance. Our assessment of the regulatory
environments in which a utility operates is guided by
certain principles, most prominently consistency and
predictability, as well as efficiency and timeliness.
For a regulatory process to be considered supportive
of credit quality, it must limit uncertainty in the
recovery of a utility’s investment. They must also
eliminate, or at least greatly reduce, the issue of
rate-case lag, especially when a utility engages in
a sizable capital expenditure program.

9Moody’s Investors Service, Rating Methodology: Regulated Electric and Gas
Utilities, December 23, 2013.
10Standard and Poor’s, Key Credit Factors: Business and Financial Risks in
the Investor-owned Utility Industry, March 2010.

Thies, Di 36
Avista Corporation
Because of the major capital expenditures planned by
Avista and future maturities of long-term debt, a supportive
regulatory environment is essential in maintaining our current
credit rating.
Q. Does this conclude your pre-filed direct testimony? 5
A. Yes.