20210129Thies 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-21-01 OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-21-01 AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY AND NATURAL GAS CUSTOMERS IN THE ) OF STATE OF IDAHO ) MARK T. THIES )

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

Thies, Di 1
Avista Corporation

I. INTRODUCTION 1
Q. Please state your name, business address, and present position with Avista 2
Corporation. 3
A. My name is Mark T. Thies. My business address is 1411 East Mission Avenue, 4
Spokane, Washington. I am employed by Avista Corporation as Executive Vice President, 5
Chief Financial Officer and Treasurer. 6
Q. Would you please describe your education and business experience? 7
A. I received a Bachelor of Arts degree in 1986 with majors in Accounting and 8
Business Administration from Saint Ambrose College in Davenport, Iowa, and became a 9
Certified Public Accountant in 1987. I have extensive experience in finance, risk 10
management, accounting and administration within the utility sector. 11
I joined Avista in September of 2008 as Senior Vice President and Chief Financial 12
Officer (CFO). Prior to joining Avista, I was Executive Vice President and CFO for Black 13
Hills Corporation, a diversified energy company, providing regulated electric and natural gas 14
service to areas of South Dakota, Wyoming and Montana. I joined Black Hills Corporation 15
in 1997 upon leaving InterCoast Energy Company in Des Moines, Iowa, where I was the 16
manager of accounting. Previous to that I was a senior auditor for Arthur Andersen & Co. in 17
Chicago, Illinois. 18
Q. What is the scope of your testimony in this proceeding? 19
A. I will provide a financial overview of Avista Corporation as well as explain 20
our credit ratings and the Company’s capital structure and overall rate of return proposed over 21
the Two-Year Rate Plan in this case. Company witness Mr. McKenzie will provide additional 22
testimony related to the appropriate return on equity for Avista, based on the Company’s 23

Thies, Di 2
Avista Corporation

specific circumstances, together with the current state of the financial markets. I will provide 1
an overview of our capital expenditures program, and other witnesses will provide details on 2
what capital expenditures we are making, and why they are necessary in the time frame in 3
which they are planned. 4
In brief, I will provide information that shows: 5
1. Avista’s plans call for a continuation of utility capital investments in generation, 6
transmission, electric and natural gas distribution systems and technology to 7 preserve and enhance service reliability for our customers, including the continued 8 replacement of aging infrastructure. Capital expenditures of $405 million per year 9 (system) are planned for the five-year period ending December 31, 2024. Avista 10
needs adequate cash flow from operations to fund these requirements, together 11
with access to capital from external sources under reasonable terms, on a 12 sustainable basis. 13 14 2. We are proposing an overall rate of return of 7.30 percent, which includes a 50 15
percent common equity ratio, a 9.9 percent return on equity, and a cost of debt of 16
4.70 percent. We believe our proposed overall rate of return of 7.30 percent and 17 the proposed capital structure provide a reasonable balance between safety and 18 economy. 19 20 3. Avista’s corporate credit rating from Standard & Poor’s (S&P) is currently BBB 21
and Baa2 from Moody’s Investors Service. Avista must operate at a level that will 22 support a solid investment grade corporate credit rating in order to access capital 23 markets at reasonable rates. A supportive regulatory environment is an important 24 consideration by the rating agencies when reviewing Avista. Maintaining solid 25 credit metrics and credit ratings will also help support a stock price necessary to 26
issue equity under reasonable terms to fund capital requirements. 27 28 A table of contents for my testimony is as follows: 29
Description Page 30
I. Introduction 1 31
II. Financial Overview 5 32
III. Capital Expenditures 6 33
IV. Maturing Debt 16 34
V. Proposed Capital Structure and Cost of Capital 18 35
VI. Credit Ratings 29 36

Thies, Di 3
Avista Corporation

Q. Would you please provide a summary of the Company’s request in this 1
matter? 2
A. Yes. The Company is requesting a Two-Year Rate Plan with a Rate Year 1 3
electric base rate relief of $24.8 million, or 10.1%, effective September 1, 2021. This is before 4
the effect of the Tax Customer Credit Tariff Schedule 76 (electric) discussed later in my 5
testimony. The Company is also requesting a Rate Year 2 electric base rate relief of $8.7 6
million or 3.2%, effective September 1, 2022. For natural gas, the Company is requesting a 7
Two-Year Rate Plan with a Rate Year 1 natural gas base rate relief of $0.1 million, or 0.1%, 8
effective September 1, 2021. This is before the effect of the Tax Customer Credit Tariff 9
Schedule 176 (natural gas). Finally, the Company is requesting a Rate Year 2 natural gas base 10
rate relief of $1.0 million or 2.2%, effective September 1, 2022. This is before the effect of 11
the Deferred Depreciation Tariff Schedule 177, discussed by Company witness Ms. Andrews. 12
Q. Why is the Company proposing a Two-Year Rate Plan? 13
A. The Company is proposing a Two-Year Rate Plan to, once again, avoid annual 14
rate cases in its Idaho jurisdiction, providing benefits to all stakeholders. A Two-Year Rate 15
Plan, with increases in 2021 and 2022, would provide benefits to its customers by providing 16
some level of rate certainty over this two-year period; relief to all stakeholders – customers, 17
the Commission and its Staff, intervenors, and the Company - from the administrative burdens 18
and costs of litigation of annual general rate cases; and to Avista by providing a two-year 19
window to manage its business in order to achieve a fair rate of return within known price 20
changes.1 Finally, the Company filed for a Two-Year Rate Plan in its 2017 general rate case, 21

1 The Two-Year Rate Plan would not preclude tariff filings authorized by or contemplated by the terms of the
Power Cost Adjustment (PCA), Purchased Gas Adjustment (PGA), Public Purpose Rider Adjustment (DSM) or similar adjustments. The Company is proposing that the Two-Year Rate Plan also not preclude the Company

Thies, Di 4
Avista Corporation

and found that the results were very reasonable, especially because the parties agreed, in 1
settlement, to a reasonable first year revenue requirement. 2
Q. Please elaborate on the benefits of a reasonable first year revenue 3
requirement. 4
A. In any multiyear rate plan, the first-year revenue requirement approved by a 5
commission will persist for each year of the rate plan and is the basis for additional revenue 6
adjustments in year 2, 3 and beyond. If the revenue requirement is sufficient for the first year 7
of the plan, and the next year is built off of that revenue requirement, the utility would have a 8
reasonable opportunity to earn its allowed rate of return. But if the first-year revenue 9
requirement is insufficient, that insufficiency will persist. 10
Q. Are you sponsoring any exhibits with your direct testimony? 11
A. Yes. I am sponsoring Exhibit No. 2, Schedules 1 through 5, which were 12
prepared under my direction. Schedule 1 provides Avista’s credit ratings by S&P and 13
Moody’s which are summarized on page 1. Avista’s proposed capital structure and cost of 14
capital are included on page 2, with supporting information on pages 3 through 6. Confidential 15
Schedule 2 is our Interest Rate Risk Management Plan. Schedule 3 is the Company’s 2020 16
Infrastructure Investment Plan. Confidential Schedule 4 shows the Company’s planned 17
capital expenditures and long-term debt issuances by year for 2021-2024. Lastly, Schedule 5 18
is a copy of the independent “Interest Rate Hedging Plan Evaluation Report” completed in 19
December 2020 by Concentric Energy Advisors in compliance with Avista’s 2019 Oregon 20
natural gas general rate case, validating our approach to interest rate hedging. 21

from filing for rate relief or accounting treatment for major changes in costs not reflected in this filing, such as
the potential for increasing corporate tax rates as espoused by the Biden administration, or new safety or reliability requirements imposed by regulatory agencies.

Thies, Di 5
Avista Corporation

II. FINANCIAL OVERVIEW 1
Q. Please provide an overview of Avista's financial situation. 2
A. Avista has and will continue to operate the business efficiently to keep costs as 3
low as practicable for our customers, while at the same time ensuring that our energy service 4
is reliable, and our customers are satisfied. An efficient, well-run business is not only 5
important to our customers but also important to investors. Our capital financing plan, and 6
our execution of that plan, provides a prudent capital structure and liquidity necessary for 7
utility operations. We initiate regulatory processes to recover our costs in a timely manner 8
with the goal of achieving earned returns close to those allowed by regulators in each of the 9
states we serve. These elements – cost management, and ready access to capital and revenues 10
that support operations – are key determinants to the rating agencies when they are reviewing 11
our overall credit ratings. 12
Q. What steps does the Company take to maintain and improve its financial 13
health? 14
A. We work to assure there are adequate funds for operations, capital expenditures 15
and debt maturities. We obtain a portion of these funds through the issuance of long-term 16
debt and common equity. We actively manage risks related to the issuance of long-term debt 17
through our interest rate risk mitigation plan and we maintain a proper balance of debt and 18
common equity through regular issuances and other transactions. We actively manage energy 19
resource risks and other financial uncertainties inherent in supplying reliable energy services 20
to our customers. We create financial plans and forecasts to model our income, expenses and 21
investments, providing a basis for prudent financial planning. We seek timely recovery of our 22
costs through general rate cases and other ratemaking mechanisms. 23

Thies, Di 6
Avista Corporation

The Company currently has a sound financial profile and it is very important for Avista 1
to maintain and enhance its financial position in order to access debt and equity financing 2
under reasonable terms as Avista funds significant future capital investments and refinances 3
maturing debt. 4
5
III. CAPITAL EXPENDITURES 6
Q. What is the Company’s recent history related to capital investments? 7
A. Avista is making significant capital investments in our natural gas distribution 8
system, electric generation, transmission and distribution facilities, and new technology to 9
better serve the needs of our customers. These investments are focused on, among other things, 10
the preservation and enhancement of safety, service reliability and the replacement of aging 11
infrastructure. While there are variations among the functional areas targeted for investment 12
each year, the predominant areas have included electric generation, transmission and 13
distribution facilities, natural gas distribution plant, new customer hookups, environmental and 14
regulatory requirements, information technology and other supporting functions, such as fleet 15
services and facilities. 16
Q. Please explain how Avista identifies and prioritizes capital investments, 17
and why the investments are made in the time frame they are completed. 18
A. I will summarize why Avista is making capital investments in the time frame 19
they are being completed, and the process we use for identifying and prioritizing those 20
investments. Company witnesses Mr. Thackston, Ms. Rosentrater, and Mr. Kensok provide 21
details of the majority of our completed capital projects. While other specific projects, such 22
as the Company’s investments in the Western Energy Imbalance Market (EIM), Wildfire 23

Thies, Di 7
Avista Corporation

Resiliency Plan (Wildfire Plan), and Customer Facing Technology are discussed by Company 1
witnesses Mr. Kinney, Mr. Howell and Mr. Magalsky, respectively. Those witnesses address 2
why they need to be done in the planned time frame, and what the risks and consequences are 3
of not completing the projects in that time frame. Company witnesses Ms. Schultz and Ms. 4
Andrews discuss the pro forma capital adjustments and overall net rate base pro formed in 5
this general rate case. 6
As discussed in greater detail in Exhibit No. 2, Schedule 3, Avista’s 2020 7
“Infrastructure Investment Plan”, our process to identify and prioritize capital investment is 8
designed to meet the overall need for investment, in the appropriate time frame, in a manner 9
that best meets the future needs and expectations of our customers, in both the short-term and 10
long-term. The Company’s practice has been to constrain the level of capital investment each 11
year, such that not all of the prioritized projects and programs2 will be funded in a given year 12
at the level requested. Avista believes that holding capital spending below the level requested 13
accomplishes several important objectives, including: 14
• Promotes Innovation – Encourages ways to satisfy the identified investment needs in 15 a manner that may identify potential cost savings, defer implementation, or other 16
creative options or solutions. 17 18
• Balances Cost and Risk – Captures the customer benefits of deferring needed 19 investments by prudently managing the cost consequences and risks associated with 20
such deferrals. 21
22
• Efficiently Allocates Capital – Ensures that the highest-priority needs are adequately 23 funded in the most efficient and effective way. 24
25
• Reduces Variability – Moderates the magnitude of year-to-year variability to avoid 26 excessive rate impacts, and more efficiently optimizes the number and cost of 27 personnel necessary to carry out the capital projects. 28

2 “Project” refers to an individual investment for a specific period of time. “Programs” represent investments that address systemic needs that are ongoing with no recognized endpoint, such as the wood pole management or Aldyl-A Pipe Replacement programs. For ease of reference, the term “capital project” will be used to represent both capital projects and capital programs.

Thies, Di 8
Avista Corporation

1
Avista currently has chosen to stabilize the level of annual capital spending at what 2
can be described as a constrained level of $405 million (system), in an effort to accomplish 3
the objectives described above. 4
Q. How does the Company’s current level of capital spend compare with 5
other similarly sized utilities? 6
A. It is important to first note that the driver of capital expenditures is driven by 7
the needs of the business so that we can continue to provide safe and reliable natural gas and 8
electric service for our customers. With that said, the Company recently completed some 9
high-level analysis to see if our level of capital spend was in line with other similarly sized 10
utilities. What the analysis showed was that Avista, at a system level, was pretty much right 11
in the median as compared to other similarly sized utilities. Illustration No. 1 below provides 12
just one look – a comparison of total capital expenditures as a percentage of total operating 13
revenue. In the end, Avista is spending approximately 32 percent of operating revenue on 14
capital investment, which is just above the trendline for all utilities who have operating 15
revenues below $4 billion. 16

Thies, Di 9
Avista Corporation

0%
5%
10%
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2018 Operating Revenue (000's, Median = 2,277)
CapX Ratio, 2019 (Gas-Electric and Eletric Only)
Illustration No. 1 - Comparison of total capital expenditures as a percentage of total 1 operating revenue 2 3
4
5
6
7
8
9
10
11
12
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16
Q. As Avista removes old equipment and replaces it with new, does the 17
depreciation component currently included in retail rates cover the cost to replace 18
facilities? 19
A. No. The depreciation component currently included in retail rates generally 20
covers a very small amount of the new facilities and equipment placed into service, especially 21
for the long-lived assets. Avista’s retail rates are cost-based, which means the prices 22
customers are paying today for natural gas pipe, gate stations, transformers, distribution poles, 23
substations, and transmission lines, among other facilities, are based on the cost to install those 24

Thies, Di 10
Avista Corporation

facilities, in some cases, 40, 50, and even 60 years ago. The costs of the same equipment and 1
facilities today are many times more expensive. The depreciation component built into retail 2
rates today is based on the much lower cost to install those facilities many years ago. 3
Therefore, the depreciation component in retail rates covers only a small fraction of the annual 4
costs associated with the new investment in facilities. 5
Q. How does Avista identify and prioritize its capital investments? 6
A. Avista’s capital investments originate from the following six major 7
“investment drivers”: 8
1. Respond to customer requests for new service or service enhancements; 9
2. Meet regulatory and other mandatory obligations; 10
3. Replace equipment that is damaged or fails, and support field operations; 11
4. Replace infrastructure at the end of its useful life based on asset condition; 12
5. Meet our customers’ expectations for quality and reliability of service; and 13
6. Address system performance and capacity issues. 14
An explanation of each of these drivers, as well as examples of specific capital projects under 15
these drivers, is provided in the Infrastructure Investment Plan, attached as Exhibit No. 2, 16
Schedule 1. In addition, Mr. Thackston, Ms. Rosentrater, and Mr. Kensok provide details on 17
the specific capital projects planned and in progress, why the projects need to be done in the 18
time frame they will be completed, as well as what the risks and consequences are of not 19
completing the projects.3 A breakdown of planned investments for each driver for 2020-2024 20
is shown in Illustration No. 2 below. 21

3 Mr. Kinney, Mr. Howell and Mr. Magalsky discuss the Company’s investments in EIM, Wildfire, and Customer Facing Technology, respectively.

Thies, Di 11
Avista Corporation

Business Unit
Needs FundedNot Funded
(Deferred)
Capital Planning Group
Overall Infrastructure Priority and Capital
Allocation
Capital Requests/
Business Cases
Prioritization
Senior Management
Board Finance Committee
0
20
40
60
80
100
120
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CustomerRequested Mandatory &Compliance Failed Plant &Operations CustomerService Quality& Reliability
Performance &Capacity Asset Condition
Mi
l
l
i
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n
s
Five Year Infrastructure Plan by Investment Summary
2020
2021
2022
2023
2024
Illustration No. 2 – Planned Investments by Capital Investment Driver (2020-2024) 1
2
3
4
5
6
7
8
The process under which Avista’s planned capital expenditures are identified and 9
prioritized is illustrated in Illustration No. 3 below. 10
Illustration No. 3 - Identification and Prioritization Process 11
12
13
14
15
16
17
18
19

Thies, Di 12
Avista Corporation

The capital projects are identified in the lower-left portion of the diagram labeled 1
“Business Unit Needs,” and are then prioritized within each department. This prioritization 2
occurs with the knowledge of the continuing constraint on the capital spend level for the 3
Company, while at the same time the leadership of each department informs Senior 4
Management of both the near-term and longer-term needs that are being delayed. For the 5
prioritized projects, Business Cases4 are developed for each of the Capital Requests that go 6
to the Capital Planning Group (CPG) (as illustrated in the diagram). The CPG prioritizes the 7
Capital Requests across departments, such that the overall planned capital spend stays within 8
the constrained spend level established by Senior Management. The highest priority Capital 9
Requests are “Funded”, and a portion of the Capital Requests are “Not Funded” (Deferred), 10
as shown on the diagram. Each year, the Board Finance Committee reviews and approves the 11
first year of the rolling five-year capital investment plan. Under this Identification and 12
Prioritization Process, the capital projects are screened and prioritized twice; once within the 13
departments, and then a second time across departments within the CPG. This Identification 14
and Prioritization Process is explained in more detail in the Infrastructure Investment Plan in 15
Exhibit No. 2, Schedule 1. 16
Q. What does Avista consider in setting the overall level of capital investment 17
each year? 18
A. A range of factors influences the level of capital investment made each year, 19
including: 1) the level of investment needed to meet safety, service and reliability objectives 20

4 A Business Case is a summary document that defines the business problem addressed by a project or program,
along with a proposal and recommended solution. The Business Case explains why the work is necessary, and the risks associated with not making the investment, as well as the alternatives considered, the selected alternative and the timeline associated with the project. The Business Cases applicable in this rate case are included in the Capital witnesses exhibits.

Thies, Di 13
Avista Corporation

and to further optimize our facilities; 2) the degree of overall rate pressure faced by our 1
customers; 3) the variability of investments required for major projects; 4) unanticipated 2
capital requirements, such as an unplanned outage on a large generating unit; 5) the cost of 3
debt; and 6) the opportunity to issue equity on reasonable terms. 4
Q. Why did the Company increase the level of its capital expenditures 5
beginning in 2015? 6
A. The primary drivers that have affected Avista’s level of capital investment 7
includes the business need to fund a greater portion of the departmental requests for new 8
capital investment that, in the past, have not been funded, and the need to capture investment 9
opportunities and benefits identified by our asset management programs. It is important to 10
note that the Company has held, and is projected to hold, the capital budget to an approximate 11
$405 million level. What the Company is actively experiencing, as shown below, is increased 12
funding stress. In additions to new required investment, using a flat level of capital, not 13
adjusted for inflation, has also been problematic. For example, $405 million in 2017 is worth 14
$432 million in 2020, and potentially close to $440 million in 2021. Not adjusting our level 15
of capital additions for inflation has, in essence, actually limited our growth in capital 16
additions. 17
Q. If a project is delayed for whatever reason, can the Company simply lower 18
the capital budget for that year rather than find another project to fund? 19
A. The continuing progress on projects in the queue is very important to avoid the 20
creation of a large “bow-wave” of investment that needs to be done in a relatively short period 21
of time. Generally, if a project is delayed, moving the next priority project up helps to 22
alleviate that bow-wave. This reprioritization occurs within the CPG, which is charged with 23

Thies, Di 14
Avista Corporation

ensuring that the total capital spend for the year stays within the constrained spending limit 1
established by the Company. The dollar amount of capital projects requested by departments 2
with the amounts approved by the Company is provided in Table No. 1 below. The dollar 3
amounts for projects that were delayed (not approved) are also shown: 4
Table No. 1: Capital Project Requests/Approvals ($ in millions) 5
6
7
8
9
10
11
As demonstrated in Table No. 1 above, the Company has a significant capital 12
investment need, as determined by Company subject matter experts. If Avista were simply 13
just trying to grow rate base for purposes of increasing earnings, we would not constrain 14
ourselves to the $405 million capital budget level. Put another way, Avista could fully justify 15
increasing its capital budget to $500 million over the next several years and reduce the obvious 16
backlog of requested projects, but it is choosing not to in order to balance investment need 17
with customer rate impact. 18
Q. What are the major components of the increased plant investment 19
included in the Company’s request? 20
A. As discussed in more detail by Ms. Andrews, the increase in overall costs to 21
serve customers is driven primarily by the continuing need to replace and upgrade the facilities 22
and technology we use every day to serve our customers, while revenue growth remains low. 23

Thies, Di 15
Avista Corporation

Looking at the changes to “gross” plant in service for Rate Year 1 (RY1), Idaho “gross” plant 1
increases by approximately $133.9 million for electric, and approximately $65.1 million for 2
natural gas, as compared to what is currently embedded in base retail rates. For Rate Year 2 3
(RY2), “gross” plant increases by approximately $79.8 million for electric, and approximately 4
$9.4 million for natural gas, as compared to RY1. A breakdown of the incremental electric 5
and natural gas gross plant additions for each year shown in Table No. 2 is as follows: 6
Table No. 2 – Gross Plant Additions (Idaho $) 7
8
9
10
11
12
13
14
15
16
The specific 2020 through August 2023 pro forma capital expenditures undertaken by 17
the Company to expand and replace its generation, transmission, distribution and general 18
facilities are discussed further by Company witnesses Mr. Thackston regarding production 19
investment (including the Company’s investment in Colstrip Units 3 and 4), Ms. Rosentrater 20
regarding transmission, distribution and general investment, Mr. Kensok regarding the costs 21
associated with Avista’s IS/IT projects, Mr. Howell regarding Wildfire Plan investments, Mr. 22
Magalsky regarding customer technology projects, and Mr. Kinney regarding EIM 23
Investment RY1 RY2
Generation/Transmission 66,651$ 47,009$ 113,660$
Distribution 57,053$ 27,577$ 84,630$
General & Intangible 10,233$ 5,216$ 15,449$
Total Electric Gross Additions 133,937$ 79,802$ 213,739$
Investment RY1 RY2
Distribution 56,961$ 7,848$ 64,809$
General & underground Storage 8,146$ 1,545$ 9,691$
Total Natural Gas Gross Additions 65,107$ 9,393$ 74,500$
Electric
Natural Gas
Total Over
2-YR Plan
Gross Plant Additions (000s)
Total Over
2-YR Plan

Thies, Di 16
Avista Corporation

Maturity Year Principal Amount Coupon Rate Date Issued Maturity Date
2021 ----
2022 250,000,000$ 5.125%9/22/2009 4/1/2020
5,500,000$ 7.530%5/6/1993 5/5/2023
1,000,000$ 7.540%5/7/1993 5/5/2023
7,000,000$ 7.180%8/12/1993 8/11/2023
2024 -$ ---
Total 263,500,000$
Avista Corp
Long-Term Debt Maturities, 2021-2024
2023
investments. Ms. Schultz sponsors the restating and pro forma capital adjustments which 1
incorporate the effects of these capital investments in the determination of the Company’s 2
proposed revenue requirements. 3
4
IV. MATURING DEBT 5
Q. How is Avista affected by maturing debt obligations in the next five years? 6
A. In the next four years, the Company is obligated to repay maturing long-term 7
debt totaling $263.5 million as shown in Table No. 3 below. Within this forward-looking 8
five-year period, a large concentration – $250 million – matures within the second quarter of 9
2022. 10
Table No. 3 – Long-Term Maturities 2021-2024 11
12
13
14
15
16
17
These debt obligations originated as early as 1993 and their original terms were 30 18
years. These maturing obligations represent 13 percent of the Company’s long-term debt 19
outstanding at the end of 2020, which is a significant portion of our capital structure. It will 20
be necessary for Avista to be in a favorable financial position to complete the expected debt 21
refunding under reasonable terms, while also obtaining debt and equity to fund capital 22
expenditures each year. 23

Thies, Di 17
Avista Corporation

Q. What are the Company’s expected long-term debt issuances through 1
2024? 2
A. To provide adequate funding for the significant capital expenditures noted in 3
Section III above and to repay maturing long-term debt, we are forecasting the issuance of 4
long-term debt in each year through 2024. We issued $165 million in 2020. Issuances planned 5
for 2021 through 2024 are provided in Exhibit No. 2, Confidential Schedule 4. 6
Q. Has Avista considered recalling of debt to take advantage of current low 7
long-term interest rates? 8
A. Yes. However, the recall provisions of debt issued require penalties (make-9
whole provisions) that exceed the value gained from current market interest rates. As 10
discussed later in my testimony, Avista has an Interest Rate Risk Management Plan (Exhibit 11
No. 2, Confidential Schedule 2) for issuance of long-term debt that includes hedging a portion 12
of future issuance through interest rate swaps.5 13
Q. Are there other debt obligations that the Company must consider? 14
A. Yes. In addition to long-term debt, the Company’s $400 million revolving 15
credit facility expires in April 2022. The Company had planned to renew and replace the 16
facility in the spring of 2020 for a 5-year term, but due to the impacts of COVID-19 on the 17
financial markets, the market conditions and pricing was such that it was not fiscally prudent 18
to commit to a long-term, 5-year credit facility. Instead, the Company amended and extended 19
the current facility for a term of 1-year, with an option to extend for one additional year. The 20
Company relies on this credit facility to provide, among other things, funding to cover daily 21

5 As discussed later in my testimony, Concentric Energy Advisors completed a review of the Company’s Interest
Rate Risk Management Plan as part of an Oregon general rate case requirement. That report has been provided as Exhibit No. 2, Schedule 5.

Thies, Di 18
Avista Corporation

and month-to-month variations in cash flows, interim funding for capital expenditures, and 1
credit support in the form of cash and letters of credit that are required for energy resources 2
commitments and other contractual obligations. 3
The Company expects to initiate the renewal or replacement of the credit facility 4
before the existing arrangement expires. Any outstanding balances borrowed under the 5
revolving credit facility become due and payable when the facility expires. A strong financial 6
position will be necessary to gain access to a new or renewed revolving credit facility, under 7
reasonable terms, prior to expiration of the existing facility. 8
Additionally, the Company entered into a 364-day $100 million short-term credit 9
agreement in April 2020, to provide additional liquidity as a result of COVID-19. The 10
Company has borrowed the entire $100 million available under this credit agreement. 11
12
V. PROPOSED CAPITAL STRUCTURE AND COST OF CAPITAL 13
Q. What capital structure and rate of return does the Company request in 14
this proceeding? 15
A. Our proposed capital structure is 50 percent debt and 50 percent equity, with a 16
proposed cost of debt of 4.70 percent, a proposed 9.9 percent return on equity (ROE), and a 17
requested overall rate of return (ROR) in this proceeding of 7.30 percent, as shown in Table 18
No. 4 below.6 The proposed capital structure for the Two-Year Rate Plan is calculated 19
excluding short-term debt. 20

6 The calculations of the proposed capital structure (excluding short-term debt), cost of debt and overall cost of capital are provided with Exhibit No. 2, Schedule 1.

Thies, Di 19
Avista Corporation

Table No. 4 – Proposed Cost of Capital 1
2
3
4
5
6
Q. Why is the Company planning to maintain an equity ratio at this level? 7
A. Maintaining a 50 percent common equity ratio, excluding short-term debt, has 8
several benefits for customers. We are dependent on raising funds in capital markets 9
throughout all business cycles. These cycles include times of contraction and expansion. A 10
solid financial profile will assist us in accessing debt capital markets on reasonable terms in 11
both favorable financial markets and when there are disruptions in the financial markets. 12
Additionally, this common equity ratio solidifies our current credit ratings and our 13
long-term goal is to move our Standard & Poor’s corporate credit rating from BBB to BBB+. 14
A rating of BBB+ would be consistent with the natural gas and electric industry average, 15
which I will further explain later in my testimony. We rely on credit ratings in order to access 16
capital markets on reasonable terms. Moving further away from non-investment grade (BB+) 17
provides more stability for the Company, which is also beneficial for customers. We believe 18
the proposed 50 percent equity appropriately balances safety and economy for customers and 19
is consistent with that currently authorized for our Idaho jurisdiction. 20
Q. How does the Company’s weighted average cost of equity compare to 21
other utilities in the United States? 22
A. As shown in Illustration No. 4, Avista proposed weighted average cost of 23
7.30%
AVISTA CORPORATION
Proposed Cost of Capital
December 31, 2020

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Avista Corporation

Commission-Authorized Weighted Average Cost of Equity
RRA Regulatory Focus, Major Rate Case Decisions, January 2019-August 2020
equity is in-line with other utilities authorized weighted average cost of equity, and that our 1
present weighted average cost of equity is at the low end of actual, commission-authorized 2
values: 3
Illustration No. 4 – Commission-Authorized Weighted Average Cost of Equity 4
5
6
7
8
9
10
11
12
13
14
If the Commission simply carries over our existing ROE of 9.5 percent and 50.0 15
percent equity component, the weighted cost of equity would only be 4.75 percent, well below 16
even the midpoint of Illustration No. 4 above. In fact, Avista’s proposed weighted cost of 17
equity puts very close to, but not beyond, the midpoint of actual authorized Commission 18
weighted average returns. 19
Q. In attracting capital under reasonable terms, is it necessary to attract 20
capital from both debt and equity investors? 21
A. Yes, it is absolutely essential. As a publicly traded company we have two 22
primary sources of external capital: debt and equity investors. We have approximately $4.0 23

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Avista Corporation

billion of long-term debt and equity. Approximately half of our capital structure is funded by 1
debt holders, and the other half is funded by equity investors and retained earnings. Rating 2
agencies and potential debt investors place significant emphasis on maintaining credit metrics 3
and credit ratings that support access to debt capital markets under reasonable terms. Leverage 4
– or the extent that a company uses debt in lieu of equity in its capital structure – is a key 5
credit metric and, therefore, access to equity capital markets is critically important to long-6
term debt investors. This emphasis on financial metrics and credit ratings is shared by equity 7
investors who also focus on cash flows, capital structure and liquidity, much like debt 8
investors. 9
The level of common equity in our capital structure can have a direct impact on 10
investors’ decisions. A balanced capital structure allows us access to both debt and equity 11
markets under reasonable terms, on a sustainable basis. Being able to choose among a variety 12
of financing methods at any given time also allows the Company to take advantage of better 13
choices that may prevail as the relative advantages of debt or equity markets can ebb and flow 14
at different times. 15
Q. Are the debt and equity markets competitive markets? 16
A. Yes. Our ability to attract new capital, especially equity capital, under 17
reasonable terms is dependent on our ability to offer a risk/reward opportunity that is equal to 18
or better than investors’ other alternatives. We are competing with not only other utilities but 19
also with businesses in other sectors of the economy. Demand for our stock supports our stock 20
price, which provides us the opportunity to issue additional shares under reasonable terms to 21
fund necessary capital investments. 22
Q. What is Avista doing to attract equity investment? 23

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Avista Corporation

6.01%
5.34%
5.67%5.72%
5.20%
4.70%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
2013 2016 2017 2018 2019 2021 Proposed
Avista's Idaho Jurisdiction
Historically Approved Cost of Debt
A. We are requesting a capital structure that provides us the opportunity to have 1
financial metrics that offer a risk/reward proposition that is competitive and/or attractive for 2
equity holders. We have steadily increased our dividend for common shareholders over the 3
past several years, which is an essential element in providing a competitive risk/reward 4
opportunity for equity investors. 5
Tracking mechanisms, such as the Fixed Cost Adjustment Mechanisms, the Power 6
Cost Adjustment Mechanism and the Purchased Gas Adjustment Mechanism approved by 7
regulatory commissions, help balance the risk of owning and operating the business in a 8
manner that places us in a position to offer a risk/reward opportunity that is competitive with 9
not only other utilities, but with businesses in other sectors of the economy. 10
Q. What is the Company’s overall proposed cost of debt, and how does it 11
compare to its historically-approved cost? 12
A. Our requested overall cost of debt is 4.70%. The authorized cost of debt has 13
trended downward for Avista from 2010 to 2021, with an exception of an uptick in 2018 due 14
to low-cost debt that rolled off in 2016, as shown in Illustration No. 5 below. 15
Illustration No. 5: Historically-Approved Cost of Debt 16
17
18
19
20
21
22
23

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Avista Corporation

Q. Please explain why Avista’s cost of long-term debt is trending down. 1
A. There has been a general decline in interest rates over the past decade. At the 2
same time Avista has issued new debt to fund capital expenditures and to replace higher cost 3
debt maturing, which has caused the Company’s overall cost of debt to decrease. We have 4
been prudently managing our interest rate risk in anticipation of these periodic debt issuances, 5
which has involved fixed rate long-term debt with varying maturities and executing forward 6
starting interest rate swaps to mitigate interest rate risk on a portion of the future maturing 7
debt and our overall forecasted debt issuances. 8
There was a decrease in the cost of debt for 2021, as compared to 2019 authorized, 9
due in part to the maturation of $90 million of debt with an average coupon of 5.45% and an 10
effective yield of 6.462% during 2019 and a maturation of $52 million with an average coupon 11
of 3.89% and an effective yield of 5.578% during 2020. 12
From 2015 through 2020 the Company issued $1.085 billion in long-term debt. The 13
weighted average interest rate of these issuances is 3.78%. These issuances have varying 14
maturities ranging from 30 years to 35 years. Our most recent issuance was funded on 15
September 30, 2020. This issuance of $165 million of first mortgage bonds with a thirty-year 16
maturity was completed at a coupon rate of 3.07%. On the same day as the debt was priced, 17
$70 million of interest rate swaps were settled. These swaps were entered into in accordance 18
with the Company’s Interest Rate Risk Management Plan (discussed in more detail later in 19
my testimony), in order to reduce concentration risk associated with a single issuance date. 20
The effective cost of this debt is 4.323%, including the issuance costs and the cost of settled 21
interest rate hedges. 22
We have continued to take advantage of historically low rates. The Company’s credit 23

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Avista Corporation

ratings have supported reasonable demand for Avista debt by potential investors. We have 1
further enhanced credit quality and reduced interest cost by issuing debt that is secured by first 2
mortgage bonds. 3
Q. What is the Company doing to mitigate interest rate risk related to future 4
long-term debt issuances? 5
A. Our future borrowing requirements are primarily driven by our significant 6
capital expenditure program and maturing debt, which creates exposure to interest rate risk. 7
As mentioned earlier, we have approximately $2.0 billion in forecasted capital expenditures 8
over the next five years. Additionally, we have $263.5 million of debt maturing during the 9
same period. We are forecasting the issuance of approximately $620 million in long-term 10
debt from 2021 through 2024 to fund these capital expenditures and maturing debt while 11
maintaining an appropriate capital structure. 12
We usually rely on short-term debt as interim financing for capital expenditures, with 13
issuances of long-term debt in larger transactions approximately once a year. As a result, we 14
access long-term debt capital markets on limited occasions, so our exposure to prevailing 15
long-term interest rates can occur all at once rather than across market cycles. To mitigate 16
interest rate risks, we hedge interest rates for a portion of forecasted debt issuances over 17
several years leading up to the date we anticipate each issuance. 18
There are a number of factors that should be taken into consideration in choosing the 19
term of new debt issuances. For example, in the current interest rate environment where the 20
interest rate spread for 30-year and 10-year terms is relatively narrow (i.e. presently there is a 21
low premium for 30-year debt versus 10-year debt), supports increased reliance on longer-22
term debt. 23

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Avista Corporation

In addition, the average life of plant assets for Avista exceeds 30 years. A 30-year 1
term for debt is a closer match to the average life of the underlying assets that are being 2
financed. Decisions on the term of the debt are generally made closer to the time that new 3
debt is issued. Based on information available today, although the Company will consider 4
some amount of 10-year debt, the issuances will likely be heavily weighted toward a 30-year 5
term, due in large part to the matching of the financing to the life of the assets being financed, 6
and the narrow rate spread for 30-year vs 10-year terms. 7
Q. Does the Company have guidelines regarding its interest rate risk 8
management? 9
A. Yes. The Company’s “Interest Rate Risk Management Plan”, attached as 10
Exhibit No. 2, Confidential Schedule 2, is designed to provide a certain level of stability to 11
future cash flows and the associated retail rates related to future interest rate variability. The 12
Plan provides guidelines for hedging a portion of interest rate risk with financial derivative 13
instruments. We settle these hedge transactions for cash simultaneously when a related new 14
fixed-rate debt issuance is priced in the market. The settlement proceeds (which may be 15
positive or negative) are amortized over the life of the new debt issuance. 16
The Interest Rate Risk Management Plan provides that hedge transactions are executed 17
solely to reduce interest rate uncertainty on future debt that is included in the Company’s five-18
year forecast. The hedge transactions do not involve speculation about the movement of future 19
interest rates. 20
Q. Before discussing more recent changes to the Company’s Interest Rate 21
Risk Management Plan, were the hedges that are included in the Company’s cost of debt 22
in this filing consistent with the same hedging plan that the Company operated under in 23

Thies, Di 26
Avista Corporation

its last general rate case? 1
A. Yes. The hedges included in this filing were entered into a manner that is 2
consistent with the Company’s Interest Rate Risk Management Plan in effect in Case Nos. 3
AVU-E/G-17-01, as well as AVU-E-19-04. The Company has executed interest rate swaps, 4
for purposes of reducing interest rate risk for our customers as early as 2004 and has been 5
fully transparent in communicating its interest rate hedging activities. The settlement values, 6
either losses or gains, of the interest rate swaps have been clearly included as a component of 7
cost of debt in previous filings and this filing. 8
Q. Has the Company made any recent changes to the Interest Rate Risk 9
Management Plan? 10
A. Yes. On January 1, 2019, the Company added a Risk Responsive Hedging 11
component to its existing Interest Rate Risk Management Plan. The Risk Responsive Hedging 12
component employs Value at Risk (VaR) calculations to further monitor and respond to 13
dramatic interest rate volatility for unhedged forecasted debt issuances. Risk Responsive 14
Hedging is in effect for the two forward calendar year’s debt issuances. In conjunction with 15
implementing this new component, the Company reduced the Minimum Hedge Ratio for its 16
existing Dynamic Window Hedging component to 40%. The Company believes that Risk 17
Responsive Hedging is an additional protection for customers against extreme market swings 18
associated with the interest rate market. Since the implementation, there have been no hedges 19
executed under the Risk Responsive Hedging component. 20
Q. Did the Company communicate this plan change with Commission Staff? 21
A. Yes. In November 2018, Avista met with Commission Staff and provided an 22
overview of the changes made to the Interest Rate Risk Management Plan. 23

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Avista Corporation

Q. Has an independent, third party review of the Company’s Interest Rate 1
Risk Management Plan been conducted? 2
A. Yes, the Interest Rate Risk Management Plan (“Plan”) has been independently 3
reviewed. As a part of Avista’s 2019 Oregon natural gas general rate case (Docket No. UG-4
366), the Public Utility Commission of Oregon approved the First Partial Settlement 5
Stipulation (Order No. 19-331). As a part of that Stipulation, Avista agreed to the following 6
term: “The Parties have also agreed to an Independent Third-Party Review of Avista’s Interest 7
Rate Hedging practices”, and that such review would be completed and filed with the 8
Commission by December 31, 2020. The Evaluation was to examine the mechanics of the 9
Plan to understand whether the objectives of the Plan are being met and whether those 10
objectives are still appropriate in the current interest rate environment. The Evaluation would 11
evaluate how the Plan benefits customers, and whether any proposed changes and/or 12
modifications are recommended. 13
To comply with that stipulated term, Avista along with the Parties7 to our Oregon rate 14
case developed and issued a Request for Proposals. Ultimately the Parties agreed that Avista 15
should retain Concentric Energy Advisors (“Concentric”). A copy of Concentrics’s 16
Evaluation has been provided as Exhibit No. 2, Schedule 5. 17
Q. In summary, what were Concentrics’s findings? 18
A. Concentric, in their summary letter to Avista (pg. 2 of Exhibit No. 2, Schedule 19
5), states the following: 20
In summary, the results of the Evaluation show that the Plan is well structured, 21
executed and has the appropriate internal control structure to monitor its performance 22 and its continuation is therefore endorsed. While we have found opportunities for 23

7 Parties included Avista, the Staff of the Public Utility Commission of Oregon, Oregon Citizens’ Utility Board (CUB), and the Alliance of Western Energy Consumers (AWEC).

Thies, Di 28
Avista Corporation

improvement, we did not find areas with meaningful deficiencies. The 1
recommendations will therefore improve the efficiency of the Plan but will not 2 materially change its current form. In fact, we find most of the features of the Plan to 3 be at the best practice level and some of the features of its implementation actually 4 exceed such standards. (emphasis added) 5
6
Q. Concentrics’s summary mentions areas for improvement. Please 7
elaborate. 8
A. Concentric states, at page 1 of the Executive Summary, that “there are no 9
obvious flaws in the Plan and any recommendations for changes will not change its character, 10
but mostly improve in its efficiency.” They offered the following opinions, meant to improve 11
Avista’s hedging Plan: 12
• Opinion 1: The interest rate risk is significant and merits having Plan to contain 13
the risk 14
• Opinion 2: The Plan as it currently stands is well structured, executed and has the 15
appropriate internal control structure to monitor its performance 16
• Opinion 3: The objective of the Plan to reduce volatility of interest rates is 17
appropriate 18
• Opinion 4: The Plan provides reasonable protection for rate payers by controlling 19
for potential price increase at a reasonable cost 20
• Opinion 5: Recommend enabling the model used to implement the Plan so that it 21
runs an outlier test to avoid obvious errors in the price feed and inconsistencies in 22
price movements 23
• Opinion 6: Recommend changing the method used to calculate volatility to a 24
method that yields volatility estimates that are more reasonable for long-dated 25
volatility estimation 26
• Opinion 7: Once the new method to estimate volatility is implemented, ensure that 27
it is used throughout the model used to implement the Plan 28
• Opinion 8: The performance of the Plan should not be exclusively measured as a 29
comparison between the scenario of hedging or not hedging. It should be based 30
on the reasonableness of the interest rate to support the investment and a 31
comparison to the cost of debt of peer companies 32
• Opinion 9: The Plan is structured as a prudent effort to control the cost of debt on 33
behalf of customers 34
• Opinion 10: The Plan provides a reasonable, prudent strategy benefiting the 35

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Avista Corporation

customers and should be continued. 1
2
Q. Has the Company implemented the minor modifications proposed by 3
Concentric? 4
A. The Company received the final report on December 28, 2020, just a few 5
weeks before this general rate case filing. We are reviewing the proposed modifications, and 6
to the extent the recommendations are appropriate, we will adopt those modifications 7
prospectively. 8
Q. Turning now to return on equity (“ROE”), the Company is requesting a 9
9.9 percent ROE. Please explain why the Company believes this is reasonable. 10
A. We agree with the analyses presented by Mr. McKenzie which demonstrate 11
that the proposed 9.9 percent ROE,8 together with the proposed equity layer of 50 percent, 12
would properly balance safety and economy for customers, provide Avista with an 13
opportunity to earn a fair and reasonable return, and provide access to capital markets under 14
reasonable terms and on a sustainable basis. Please see the direct testimony of Mr. McKenzie 15
for his support of a 9.9 percent ROE. 16
17
VI. CREDIT RATINGS 18
Q. Please describe Avista's credit facility. 19
A. We have a credit facility in the amount of $400 million with a maturity date of 20
April 18, 2022. The credit facility involves participation by eight banks. This credit facility 21
was originally established in 2011, amended in April 2014, extended in May 2016 and then 22
8 As stated by Mr. McKenzie, a 9.9 percent ROE is a conservative estimate of investors’ required ROE for Avista.

Thies, Di 30
Avista Corporation

amended and extended in June 2020. Our credit facility provides the ability to take out or 1
repay short-term debt based on day-to-day liquidity needs and to have letters of credit issued 2
on the Company’s behalf. The Company pays fees under three price elements in the 3
agreement: 1) a facility fee to maintain the right to draw on the credit facility at any time, 2) 4
interest on amounts borrowed, and 3) fees for letters of credit. 5
The Company may request letters of credit (LCs) underwritten by the participating 6
banks and established for the benefit of counterparties to Avista. LCs are often used as 7
collateral when required for energy resources forward commitments, forward swap 8
transactions to hedge interest rate risk on future long-term debt, and other contractual or legal 9
requirements that involve the Company. The maximum amount available for LCs is $150 10
million. The amount available for cash borrowing out of the overall $400 million credit 11
facility is reduced by the amount of LCs outstanding. Table No. 5 below summarizes the rates 12
paid to maintain and use the credit facility. 13
Table No. 5 – Credit Facility Fees (2020 Third Amendment to the 2011 Avista 14 Corporation Credit Agreement) 15 16
17
18
19
20
21
The Pricing Level and associated rates that we are charged is based upon our 22
underlying credit ratings as well as the security supporting the borrowings. Our current rates 23
are based upon Pricing Level III, which became effective in December 2018 based on the 24

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Avista Corporation

Company’s downgraded credit rating by Moody’s. We achieve this Pricing Level by securing 1
the credit facility with First Mortgage Bonds. If we did not secure this credit facility with 2
First Mortgage Bonds, the costs would be based on Pricing Level IV, which would increase 3
costs to customers. There are also upfront costs paid for setting up the credit facility (i.e. legal 4
arrangement, bank commitments) that are amortized over the term of the credit facility. 5
Q. How important are credit ratings for Avista? 6
A. Utilities require ready access to capital markets in all types of economic 7
environments. The capital-intensive nature of our business, with energy supply and delivery 8
dependent on long-term projects to fulfill our obligation to serve customers, necessitates the 9
ability to obtain funding from the financial markets under reasonable terms at regular 10
intervals. In order to have this ability, investors need to understand the risks related to any of 11
their investments. Financial commitments by our investors generally stretch for many years 12
– even decades – and the potential for volatility in costs (arising from energy commodities, 13
natural disasters and other causes) is a key concern to them. To help investors assess the 14
creditworthiness of a company, nationally recognized statistical rating organizations (rating 15
agencies) developed their own standardized ratings scales, otherwise known as credit ratings. 16
These credit ratings indicate the creditworthiness of a company and assist investors in 17
determining if they want to invest in a company and its comparative level of risk compared to 18
other investment choices. 19
Q. Please summarize the credit ratings for Avista. 20
A. Avista’ credit ratings, assigned by Standard & Poor’s (S&P) and Moody’s 21
Investor Service (Moody’s) are shown in Table No. 6 below: 22
23

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Avista Corporation

S&P Moody's
Senior Secured Debt A-A3
Senior Unsecured Debt BBB Baa2
Outlook Stable Stable
Table No. 6 – Current Credit Ratings 1
2
3
4
Additional information on our credit ratings has been provided on page 1 of Exhibit 5
No. 2, Schedule 1. 6
Q. Please explain the implications of the credit ratings in terms of the 7
Company’s ability to access capital markets. 8
A. Credit ratings impact investor demand and expected returns. More 9
specifically, when we issue debt, the credit rating can affect the determination of the interest 10
rate at which the debt will be issued. The credit rating can also affect the type of investor who 11
will be interested in purchasing the debt. For each type of investment, a potential investor 12
could make, the investor looks at the quality of that investment in terms of the risk they are 13
taking and the priority they would have for payment of principal and interest in the event that 14
the organization experiences severe financial stress. Investment risks include, but are not 15
limited to, liquidity risk, market risk, operational risk, regulatory risk, and credit risk. These 16
risks are considered by S&P, Moody’s and investors in assessing our creditworthiness. 17
In challenging credit markets, where investors are less likely to buy corporate bonds 18
(as opposed to U.S. Government bonds), a stronger credit rating will attract more investors, 19
and a weaker credit rating could reduce or eliminate the number of potential investors. Thus, 20
weaker credit ratings may result in a company having more difficulty accessing capital 21
markets and/or incurring higher costs when accessing capital. 22
Q. What credit rating does Avista believe is appropriate? 23

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Avista Corporation

A. Avista’s current S&P corporate credit rating is BBB. We believe operating at 1
a corporate credit rating level (senior unsecured) of BBB gives us the ability to continue to 2
attract investors and to achieve competitive debt pricing. Although a corporate credit rating 3
of BBB is a strong investment-grade credit rating, we continue to target a credit rating of 4
BBB+ which is comparable with other US utilities providing both electricity and natural gas. 5
As shown in Illustration No. 6, credit ratings for U.S. Regulated Combined Gas and Electric 6
Utilities are highly concentrated at A- or BBB+. 7
Illustration No. 6 – Distribution of Corporate Credit Ratings 8
9
10
11
12
13
14
15
16
17
We expect that a continued focus on the regulated utility, conservative financing 18
strategies and a supportive regulatory environment will contribute toward an upgrade to a 19
BBB+ corporate credit rating for Avista. Operating with a BBB+ credit rating would likely 20
attract additional investors, lower our debt pricing for future financings, and make us more 21
competitive with other utilities. In addition, financially healthy utilities are better able to 22
invest in the required infrastructure over time to serve their customers, and to withstand the 23

Thies, Di 34
Avista Corporation

challenges facing the industry and potential financial market disruptions. 1
Q. As discussed by Company witness Mr. Krasselt, the Company is 2
proposing to offset the Company’s base electric and natural gas rate relief requests with 3
a “Tax Customer Credit.”9 Why is the Company proposing such a credit? 4
A. The Company felt it was important to find ways to offset base rate increases 5
for our customers during the COVID-19 pandemic. We realize that the Company’s request 6
to recover its costs in this case related to providing safe and reliable energy service would 7
have an impact on our customers. As Mr. Vermillion discusses in his testimony, we 8
understand that our customers have been impacted, and that we have sought to assist in a 9
number of ways. This holds true for this case as well. We desired to find a way to mitigate 10
our request – in effect deferring for a period of time the effects of this rate case on our 11
customer’s bills. 12
Q. Would you please provide more details on what the Company is proposing 13
in this regard? 14
A. Yes. Concurrent with the Rate Year 1 effective date of this GRC, the Company 15
proposes to return to customers the Tax Accumulated Deferred Income Tax benefit (if 16

9 As discussed by Mr. Krasselt, the Company filed with this Commission on October 30, 2020 its “Application for an Order Authorizing Approval to Change Its Accounting for Federal Income Tax Expense Certain Plant Basis Adjustments and Deferral of Associated Changes in Tax Expense” (Tax Accounting Application). Mr. Krasselt in his supporting testimony describes in more detail the Company’s Tax Accounting Application and explains the
Company’s request seeks authorization to change its accounting for federal income tax expense from the normalization method to a flow-through method for certain “non-protected” plant basis adjustments, including Industry Director Directive No. 5 (IDD #5) and meters. Approval of the Company’s Tax Accounting Application would provide benefits to customers, which the Company also through the Tax Accounting Application, is requesting approval to defer. However, approval in all three of Avista’s jurisdictions (Idaho, Washington and Oregon) to make this change is required, and any changes need to be adjusted concurrent with a GRC, as it has
significant impact on tax expense and rate base. Furthermore, the Company has requested in its Tax Accounting Application approval of the change in accounting, and the deferral of benefits, on or before May 1, 2021, to ensure approval from all three jurisdictions is received in time to apply this change and return the customer benefits in each state effective with each State’s next general rate case.

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Avista Corporation

approved), beginning September 1, 2021 through separate Tariff Schedules 76 (electric) and 1
176 (natural gas), titled “Tax Customer Credit” of $24.783 million for electric and $1.2 million 2
for natural gas. The Tax Customer Credit would offset the Company’s requested electric base 3
rate relief over approximately 15 months - resulting in no billed impact to electric customers. 4
For natural gas customers, given the slight proposed base rate increase for natural gas in Rate 5
Year 1 of $0.1 million, the Tax Customer Credit would result in a reduction to natural gas 6
billed rates by approximately 1.8%. The natural gas tax benefit amortization is proposed over 7
10-years. 8
Q. Will the proposed “Tax Customer Credit” have an effect on the 9
Company’s rating agency metrics? 10
A. Yes. The “Tax Customer Credit” will reduce the Company’s cash flow and 11
weaken the credit metrics tracked by the rating agencies. As noted earlier, S&P indicated that 12
a key risk is the minimal cushion in the credit metrics at the current rating level. Weaker 13
credit metrics will increase the risk of a ratings downgrade, which is why we are proposing to 14
return to customers these tax benefits through separate “Tax Customer Credit” Schedules 76 15
(electric) and 176 (natural gas), as described earlier. But, with the proposed amortization 16
periods, we believe that the Rating Agencies will take that into account when they review our 17
metrics - that we are proposing essentially a one-time credit, and that the metrics will improve 18
after amortization. 19
Q. Would it be wise for the Company or the Commission to amortize even 20
more funds to customers at this time? 21
A. In short, no. The Company’s proposal is balancing a fine line between 22
investment-grade metrics and customer offsets. Due to the potential impact on the Company’s 23

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Avista Corporation

cash flow metrics, the Company requests that, regardless of the electric and natural gas base 1
revenue increases approved in this case, the electric and natural gas tax benefit amortization 2
does not go beyond base rate increases approved on an annual basis, and does not go beyond 3
a two year amortization period for those increases. As noted above, currently the Company’s 4
credit rating is at BBB, two notches above “non-investment grade” rating levels. A 5
downgrade to our ratings to one-notch above or to non-investment grade, could be possible if 6
the Commission were to include a higher amortization balance than the approved rate 7
increases. That is true as well if the Commission went beyond the two-year amortization 8
period proposed in this filing (as we believe the Rating Agencies will want to see those metrics 9
revert to where they were in short order). 10
Any remaining balance after the two-year amortization of the rate period increases, 11
plus the on-going, incremental, annual deferred tax benefit recorded, would be included in 12
future rate proceedings, and amortized over a 10-year period going forward. For natural gas, 13
given Rate Year 1 results in a de minimis rate change of $0.1 million, the Company has 14
proposed to amortize the tax credit over a 10-year period beginning September 1, 2021. We 15
believe this proposal properly balances the rate impact to customers and the Company’s 16
financial health. Applying more of the Tax Customer Credit beyond that proposed by the 17
Company, will lower our credit metrics to a level that could cause a downgrade in our ratings. 18
This would be negative to customers and could result in the Company having more difficulty 19
accessing capital markets and/or incurring higher costs when accessing capital. 20
Q. How is the COVID-19 global pandemic currently affecting the business? 21
A. The COVID-19 global pandemic is currently impacting all aspects of our 22
business, as well as the global, national and local economies. It is likely that the continued 23

Thies, Di 37
Avista Corporation

spread of COVID-19 and efforts to contain the virus will continue to cause an economic 1
slowdown and possibly a recession, resulting in significant disruptions in various public, 2
commercial or industrial activities. These circumstances have affected and will likely continue 3
to adversely affect our operations, results of operations, financial condition and cash flows. 4
Additionally, Moody’s states: 5
We expect Avista and its subsidiaries to be resilient to recessionary pressures 6
related to the coronavirus because of its primary rate regulated, essential 7 service business model and cost recovery framework. Nevertheless, we are 8 watching for electric usage declines, utility bill payment delinquency and the 9 regulatory response to counter these effects on earnings and cash flow. 10
11
Mr. Vermillion in his testimony provides details on how the Company has responded to the 12
pandemic, on behalf of our customers. That includes the Tax Customer Credit which will 13
help offset the Company’s requested base rate relief. 14
Q. Does this conclude your pre-filed direct testimony? 15
A. Yes. 16