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HomeMy WebLinkAbout20100323Thies Di.pdfDAVID J. MEYER VICE PRESIDENT AN CHIEF COUNSEL OF REGULATORY & GOVERNTAL AFFAIRS AVISTA CORPORATION P.O. BOX 3727 1411 EAST MISSION AVEE SPOKA, WASHINGTON 99220-3727 TELEPHONE: (509) 495-4316 FACSIMILE: (509) 495-4361 Rr:(~ E 20 I Û N~ 1' 2 i f¡. "'1 ¡ 1".' v 'f' '0.3~ j ..... :i BEFORE TH XDAHO PUBLXC UTXLXTXES COHXSSXON AVU-E-10-01 AVU-G-10-01 IN THE MATTER OF THE APPLICATION ) CASE NO. OF AVISTA CORPORATION FOR THE ) CASE NO. AUTHORITY TO INCREASE ITS RATES ) AN CHAGES FOR ELECTRIC AN ) NATURA GAS SERVICE TO ELECTRIC AN ) NATURA GAS CUSTOMERS IN THE STATE )OF IDAHO ) ) FOR AVISTA CORPORATION DIRECT TESTIMONY OF MA THIES (ELECTRIC AN NATURA GAS) 1 2 X. XNTODUCTXON Q. Please state yor nae, business address, and 3 present position with Avista Corp. 4 5 A.My name is Mark Thies.My business address is 1411 East Mission Avenue, Spokane, Washington.i am 6 employed by Avista Corporation as Senior Vice President and 7 Chief Financial Officer. 8 Q.Would you please describe your education aD 9 business exerience? 10 A.I received a Bachelor of Arts degree with majors 11 in Accounting and Business Administration from Saint 12 Amrose College in Davenport, Iowa, and became a Certified 13 Public Accountant in 1987. I have extensive experience in 14 finance, risk management, accounting and administration 15 wi thin the utility sector, primarily in the Midwest. 16 I joined Avista in Septemer of 2008 as Senior Vice 17 President and Chief Financial Officer (CFO).Prior to 18 joining Avista, I was Executive Vice President and CFO for 19 Black Hills Corporation, a diversified energy company, 20 providing regulated electric and natural gas service to 21 areas of South Dakota, Wyoming and Montana. I joined Black 22 Hills Corporation in 1997 upon leaving InterCoast Energy 23 Company in Des Moines, Iowa, where I was the manager of 24 accounting.Previous to that I was a senior auditor for 25 Arthur Anderson & Co. in Chicago, Illinois. Thies, Di 1 Avista Corporation 1 Q.Wht is the scope of your testimony in this 2 proceeding? 3 A.i will provide a financial overview of the 4 Company and will explain the overall rate of return 5 proposed by the Company in this filing for its electric and 6 natural gas operations.The proposed rate of return is 7 derived from Avista's long-term cost of debt, and common 8 equi ty, weighted in proportion to the proposed capital 9 structure. 10 i will address the proposed capital structure, as well 11 as the proposed cost of debt and equity in this filing. 12 Dr. Avera,on behalf of the Company, will provide 13 additional testimony related to the appropriate return on 14 equity for Avista, based on the specific circumstances of 15 the Company, together with the current state of the 16 financial markets. 17 In brief, i will provide information that shows: 18 . Avista's plans call for significant capital 19 expenditure requirements for the utility over the20 next two years to assure reliability in serving 21 our customers .and meeting customer growth.22 Capi tal expendi tures of approximately $42023 million1 are planned for 2010-2011 for customer24 growth, investment in generation upgrades, l This does not include investment in "Smart Grid" projects. Avista was awarded matching grants from the U. S . Department of Energy for two "Smart Grid" projects. One project will upgrade portions of the utility's electric distribution system to smart grid standards in Spokane, Washington, and the other project is a demonstration project in Pullman, Washington that involves automation of many parts of the electric distribution system using advanced metering, enhanced utility communication and other elements of smart grid technologies. Thies, Di 2 Avista Corporation 1 transmission and distribution facilities for the 2 electric utility business as well as necessary 3 maintenance and replacements of our natural gas4 utility systems. Capital expenditures of 5 approximately $1. 2 billion are -planned for the 6 five year period ending Decemer 31, 2014. 7 Avista needs adequate cash flow from operations 8 to fund these requirements, together with access 9 to capi tal from external sources under reasonable10 terms. 11 12 . Avista's corporate credit rating from Standard &13 Poor's (S&P) is currently BBB- and Baa3 from14 Moody's Investors Service (Moody's). Avista must15 operate at a level that will support a strong16 investment grade corporate credit rating, meaning17 "BBB" or "BBB+" , in order to access capi tal18 markets at reasonable rates, which will decrease19 long-term borrowing costs to customers. Avista20 has been placed on "positive" outlook by both S&P 21 and Moody's, which may result in an upgrade as22 early as August 2010. The regulatory environment23 will be taken into consideration by the rating24 agencies when reviewing Avista for a possible25 upgrade. Maintaining solid credit metrics and26 credit ratings will also help support a stock 27 - price necessary to issue equity to fund capital 28 requirements. 29 30 . The Company has proposed an overall "rate of31 return of 8.55%, including a 50% equity ratio and32 a 10.9% return on equity. Our cost of debt is33 6.20%. We believe the 10.9% provides a34 reasonable balance of the competing obj ecti ves of35 continuing to improve our financial health, and36 the impacts that increased rates have on our.37 customers. 3839 The Company's initiatives to carefully manage its 40 operating costs and capital expenditures are an important 41 part of improving performance, but are not sufficient 42 without revenues from the general rate request for our 43 electric and natural gas businesses in these cases. 44 Certainty of cash flows from operations can only be Thies, Di 3 Avista Corporation 1 achieved with the continuing support of regulators in 2 allowing the timely recovery of costs and the ability to 3 earn a fair return on investment. 4 Q.Are you sponsoring any exibits with yor direct 5 testimony? 6 7 A.Yes. I am sponsoring Exhibit No.2, Schedules 1 and 2, which were prepared under my direction.Avista's 8 credit ratings by S&P and Moody's as sumarized on schedule 9 1, and Avista's actual capital structure at December 31, 10 2009 and pro forma capital structure at Decemer 31, 2010 11 are included on schedule 2, with supporting information on 12 pages 2 through 3. 13 14 A table of contents for my testimony is as follows: 15 16 17 18 19 20 21 22 23 24 25 26 Description I. Introduction II. Financial Overview III. Credit Ratings iv. Cash FlowV. Capi tal Structure VI. Cost of Debt VII. Cost of Common Equity page 1 4 11 25 34 35 36 XX. FXNAXAL OVRV:IEW Q.Please provide an overview of Avista' s finacial 27 situation. 28 A.The Company has made solid progress in improving 29 its financial health in recent years, ås demonstrated by Thies, Di 4 Avista Corporation 1 improved financial ratios. Avista has reduced investments 2 in unregulated subsidiaries and redeployed the majority of 3 the proceeds from the sales of the unregulated subsidiaries 4 to the Utility. The Company has been able to improve and 5 balance its debt and equity ratios by paying down debt, 6 issuing additional common stock, and through additional 7 retained earnings.Although we have made progress in 8 improving the Company's financial condition, we are still 9 not as strong as we need to be. 10 Avista's goal is to operate at a level that will 11 support a strong corporate credit rating of BBB I BBB+, and 12 move away from the bottom notch of the investment grade 13 rating scale.Operating at a higher rating will help 14 reduce long-term costs to customers. It will also reduce 15 collateral requirements and allow us to maintain access to 16 more counterparties for acquisition of natural gas and 17 18 electricity.We expect that a continued focus on the regulated utility,conservative financing strategies 19 (including the issuance of common equity) and a supportive 20 regulatory environment will contribute to an overall 21 improved financial situation, that will allow us to move up 22 from the current BBB- rating. 23 Avista was placed on "positive" outlook by both S&P 24 and Moody's in August 2009, which indicates that continued 25 financial improvement and prudent financial management Thies, Di 5 Avista corPoration 1 could lead to an upgrade.This may not be achieved, 2 however, if there are significant drought conditions or 3 negative impacts to 'the company's hydro generating 4 facilities, if the company does not obtain adequate and 5 timely support for recovery of costs from state regulators, 6 if there are significant changes in wholesale energy 7 prices, or if the company's financial metrics otherwise 8 deteriorate. 9 Q.What additional steps is the Comany taking to 10 improve its financial health? 11 A.We are working to assure we have adequate funds 12 for operations, capital expenditures and debt maturities. 13 We are maintaining a $320 million line of credit and a $75 14 million line of credit, which will both expire in April 15 2011, as well as an Accounts Receivable Sales program. We 16 plan to obtain a portion of our capital requirements 17 through equi ty issuance.We also maintain an ongoing 18 dialogue with the rating agencies regarding the measures 19 taken by the Company to improve our credit rating. 20 We have reduced our overall cost of debt from 21 approximately 6.9% in 2008 to 6.4% at Decemer 31, 2009, 22 primarily by issuing $250 million of secured debt at a 23 coupon of 5.125%. 24 We are operating the business efficiently to keep 25 costs as low as practicable for our customers, while at the Thies, Di 6 Avista Corporation 1 same time ensuring that our energy service is reliable, and 2 customers are satisfied.An efficient, well-run business 3 is not only important to our customers, but also to 4 investors.Additionally, the Company is working through 5 regulatory processes to recover our costs in a timely 6 manner so that earned returns are closer to those allowed 7 by regulators in each of the states we serve. This is one 8 of the key determinants from the rating agencies' 9 standpoint when they are reviewing our overall credit 10 ratings. 11 Q.Xn addition to having credit ratings that will 12 allow Avista to attract debt capital UDer reasonale 13 ter.s, is it also necessary to attract capital from equity 14 investors? 15 A.It is absolutely essential.Avista has two 16 primary sources of external capital - debt and equity 17 investors. Avista currently has approximately $2.3 billion 18 of debt and equity in place to serve its customers. 19 Approximately half of that investment is funded by debt 20 holders, and half is funded by equity investors.There 21 tends to be a lot of emphasis on maintaining credit metrics 22 and credit ratings that will provide access to debt capital 23 under reasonable terms, however, access to equity capital 24 is equally important. In fact, equity investors also focus Thies, Di 7 Avista Corporation 1 on cash flows, capital structure and liquidity, as do debt 2 inves tors. 3 Addi tional equity capital generally comes in two forms 4 - retained earnings and new equi ty issuances. Retained 5 earnings represent the annual earnings (return on equity) 6 of the Company that is not paid out to investors in 7 dividends.The retained earnings are reinvested by the 8 Company in utility plant, and other capital requirements, 9 to serve customers, which avoids the need to issue new 10 debt.Occasionally it is necessary to issue new common 11 stock to maintain a balanced debt and equity capital 12 structure, which allows Avista access to both debt and 13 equity markets under reasonable terms, on a sustainable 14 basis.Because of the large capital requirements at 15 Avista, it is imperative that Avista have ready-access to 16 both the debt and equity markets at reasonable costs. 17 Q.Are the debt and equity capit.al markets a 18 cometi ti ve market? 19 A.Yes.Our ability to attract new capital, 20 especially equity capital, under reasonable terms is 21 dependent on our ability to offer a risk/reward opportunity 22 that is better than the equity investors'other 23 alternatives.We are competing with not only other 24 utilities, but businesses in other sectors of the economy. 25 Demand for the stock supports the stock price, which Thies, Di 8 Avista Corporation 1 provides the opportunity to issue additional stock under 2 reasonable terms to fund capital investment requirements. 3 To the extent that the equity investor holds a 4 diversified portfolio of companies that includes utilities 5 and other energy companies, we would be competing with 6 those companies to attract those equity dollars. 7 In the debt markets, utili ties are the third largest 8 issuers, right behind governents and financial services. 9 Therefore, it is a very competi ti ve market and the Company 10 must be able to attract debt investors as well as equity 11 investors. 12 Q.What is Avista doing to attract equity 13 investment? 14 A.Avista is carrying a capital structure that 15 provides the opportunity to have financial metrics that 16 offer a risk/reward proposition that is competitive and/or 17 attractive for equity holders. 18 We have increased our dividend for common 19 shareholders, and have publicly stated that we intend to 20 work toward a dividend payout ratio that is comparable to 21 other utilities in the industry.This is an essential 22 element in providing a competitive risk/reward opportunity 23 for equity investors. 24 We are operating the business efficiently to keep 25 costs as low as practicable for our customers, while at the Thies, Di 9 Avista Corporation 1 same time ensuring that our energy service is reliable, and 2 customers are satisfied. 3 We are employing tracking mechanisms such as Power 4 Cost Adjustment (PCA) and Purchased Gas Adjustment (PGA) , 5 approved by the regulatory commissions, to balance the risk 6 of owning and operating the business in a manner that 7 places us in a position to offer a risk/reward opportunity 8 that is competitive with not only other utilities, but with 9 businesses in other sectors of the economy. 10 We are seeking rate relief to provide timely recovery 11 of costs and earned returns closer to those allowed by 12 regulators.If we are not able to achieve a reasonable 13 actual earned return on our equity investment, we will not 14 be able to attract equity dollars that are absolutely 15 necessary to support this business going forward. 16 Dr. Avera provides additional testimony related to the 17 appropriate return on equity for Avista, that would allow 18 the Company access to equity capital under reasonable 19 terms, and on a sustainable basis. 20 Q.Has regulatory lag reduced the actual return 21 earned by the Comany? 22 A.Yes.Although we have received additional rate 23 increases within the last year in all three states where we 24 do business, we are continuing to experience increases in 25 costs, and increased capital investment requirements.As 26 an example, in our most recent rate case in Idaho we did Thies, Di 10 Avista Corporation 1 not receive recovery of increased costs in 2010 associated 2 with items such as labor, vegetation management and 3 information services.What that means is, we are not 4 recovering these increased costs that we are already 5 experiencing, and will continue to experience, until the 6 conclusion of this rate case later this year. 7 8 9 10 11 XXX. CREDXT RATXNGS Q.How important are credit ratings for Avista? A.Utilities need ready access to capital markets in all types of economic environments.The nature of our 12 business with long-term capital projects, our obligation to 13 serve, and the potential for high volatility in fuel and 14 purchased power markets, necessitates the ability to go to 15 the financial markets under reasonable terms on a regular 16 basis. 17 Q.Please explain the credit ratings for Avista's 18 debt securities. 19 20 A.Rating agencies are independent agencies that assess risks for investors.Two of the mos t widely 21 recognized rating agencies are S&P and Moody's.These 22 rating agencies assign a credit rating to companies and 23 their securities so investors can more easily understand 24 the risks associated with investing in their debt and Thies, Di 11 Avista Corporation 1 preferred stock. Avista's credit ratings are sumarized on 2 page 1 of Exhibit No.2, Schedule 1. 3 As shown in Illustration No. 1 below, Avista is on the 4 lowest rung of the investment grade credit rating scale. 5 As I noted earlier, I believe it is important that we move 6 up the scale to at least a BBB or BBB+, so that we are not 7 on the edge of the investment grade cliff. 8 9 10 11 12 13 14 15 16 17 18 19 20 Xllustration No.1: S&P's Distribution of Credit Ratings U.S. Regulated Electric Utiltie auf Feb 3. 2010 70 60......50::...!40..0..30It.. E 20::z 10 0 AA- A+A A- 588+ 888 SBB- 58+ 88 BB- Additionally, as shown in Illustration No. 2 below, 21 Avista has the lowest corporate credit rating among its 22 Northwes t peers. 23 24 25 Thies, Di 12 Avista Corporation 1 Xllustration No.2: A vista Corporation Peer Comparison - S&P Corporate Issuer Ratig Pol1and General PugetSound Avita IDACORP Electrc Nortweste Energy Corporate Issuer Ratig BBB-BBB BBB BBB BBB 2 3 Q.Please exlain the implications of the credi t 4 ratings in terms of the Comany's ability to access 5 financial markets. 6 A.Credit ratings impact inves tor demand and 7 expected return. More specifically, when the Company issues 8 debt, the credit rating helps determine the interest rate 9 at which the debt will be issued. The credit rating also 10 determines the type of investor who will be interested in 11 purchasing the debt. For each type of investment a 12 potential investor could make, the investor looks at the 13 quality of that investment in terms of the risk they are 14 taking and the priority they would have in the event that 15 the organization experiences severe financial stress. 16 Investment risks include the likelihood that a company will 17 not meet all of its debt obligations in terms of timeliness 18 and amounts owed for principal and interest. Secured debt 19 receives the highest ratings and priority for repayment 20 and, hence, has the lowest relative risk.In challenging Thies, Di 13 Avista Corporation 1 credit markets, where investors are less likely to buy 2 corporate bonds (as opposed to U. S. Government bonds), a 3 higher credit rating will attract more investors, and a 4 lower credit rating could reduce or eliminate the numer of 5 potential investors. Thus, lower credit ratings may result 6 in a company having more difficulty accessing financial 7 markets and/or incur significantly higher financing costs. 8 Q.What credi t rating does Avista Corpration 9 believe is appropriate? 10 A.The move to investment grade for Avista was a 11 significant step in improving the Company's ability to 12 access capital at a reasonable cost.However, a credi t 13 rating at the bottom of investment grade is not appropriate 14 for Avista.In adverse conditions - whether unique to 15 Avista or by all market participants - a downgrade from 16 BBB- (investment grade) to BB+ (non-investment grade) is 17 significantly harder to overcome than a downgrade from BBB 18 to BBB-. As Avista experienced, it took approximately six 19 years for the Company to regain its investment grade rating 20 from S&P after it was downgraded during the energy crisis. 21 The difference between investment grade and non-investment 22 grade is not only a matter of debt pricing, it can be a 23 matter of not having the ability to access markets.To 24 avoid adverse circumstances, Avista should operate at a 25 level that will support a strong corporate investment grade Thies, Di 14 Avista Corporation 1 credi t rating, meaning a "BBB" or "BBB+," using S&P'S rating 2 scale. As shown in illustration 1 above, BBB+ /BBB is the 3 average rating of U. S. regulated electric utilities.The 4 Company's goal is to have a credit rating of at least 5 average (our current credit rating is below average) . 6 As noted in Dr. Avera's testimony, the Chairman of the 7 New York State Public Service Commission noted in his role 8 as spokesman for the National Association of Regulatory 9 Utility Commissioners the following: 10 While there is a large difference between11 A and BBB, there is an even brighter line 12 between Investment Grade (BBB-/Baa3 bond 13 ratings by S&P/Moody's, and higher) and 14 non-Investment Grade (Junk) (BB+/Ba1 and15 lower) . The cost of issuing non-- 16 investment grade debt, assuming the market17 is receptive to it, has in some cases been18 hundreds of basis points over the yield on19 investment grade securities. To me this20 suggests that you do not want to be rated 21 at the lower end of the BBB range because 22 an unexpected shock could move you outside23 the investment grade range. (P. 28, L. 's24 10-21) . 2526 A solid investment grade credit rating would also 27 allow the Company to post less collateral with 28 counterparties than would otherwise be required with a 29 lower credit rating. This results in lower costs. It also 30 increases financial flexibility since the credit line 31 capacity would not be reduced for outstanding letters of 32 credit. Thies, Di 15 Avista Corporation 1 2 Financially healthy utilities have lower financing costs which, in turn, benefit customers.In addition, 3 financially healthy utilities are better able to invest in 4 the needed infrastructure over time to serve their 5 customers, and to withstand the challenges and risks facing 6 the industry. 7 Q.What finacial metrics are used by the rating 8 agencies to establish credit ratings? 9 A.S&P's financial ratio benchmarks used to rate 10 companies such as Avista are set forth in Illustration No. 11 3 below. 12 Illustration No.3: 13 Standard & Poor's Financial Risk Indicative Ratios FFO/Debt (%)FFO/Interest (x)Debt/Capita (%) Minial Greater than 60 (a)Less than 25 Modest 45 - 60 (a)25 - 35 Interediate 30 - 45 (a)35 - 45 Signficat 20 - 30 (:) 45 - 60 Aggressive 12 - 20 50 - 60 Highy leveraged Less than 12 (a)Greater tha 60 12 Months Ended 12/31/09 Ratios: Avista Adjusted (b)13.9%3.71x 57.5% (a) Not available, however, S&P ha indicate tht it is a benchmk ratio use for the Utility industr. (b) Calculated as of 12/31109 based on last known S&P methodology 14 Thies, Di 16 Avista Corporation 1 2 The ratios above are utilized to determine the financial risk profile.Currently, Avista is in the 3 "Aggressive" category.The financial risk category along 4 with the business risk profile (Avista is in the Excellent 5 category) is then utilized in Illustration No. 4 below to 6 determine a company's rating.S&P currently has Avista's 7 corporate credit rating as a BBB-.Based upon an 8 aggressive financial risk profile and excellent business 9 risk profile, Avista should have a corporate credit rating 10 of BBB (as indicated in the following table).S&P has 11 placed Avista on ''positive'' outlook, which indicates that 12 continued financial improvement and prudent financial 13 management could lead to an upgrade.This may not be 17 negative impacts to the Company's hydro generating 18 facilities, there are significant changes in wholesale 19 energy prices, or the Company's financial metrics otherwise 20 deteriorate. 21 22 23 24 25 Thies, Di 17 Avista Corporation 1 2 Xllustration No.4: Standard & Poor's Business and Financial Risk Prorde Matrix Financial Risk Prorile Business Risk Highy Profie Minmal Modest Intermediate Signficant Aggessive Leveraged Excellent AA AA A A-BBB Strong AA A A-BBB BB BB- Satisfactory A-BBB+BBB BB+BB-B+ Fair BBB-BB+BB BB-B Wea BB BB-B+B- Vulnerable B+B CCC+ 3 4 Moody's uses a similar methodology to analyze and 5 determine utility credit ratings and has also placed Avista 6 Corporation on "positive" outlook. 7 Q.Xf Avista is not upgraded at its next review by 8 the credit rating agencies, how long may it take for Avista 9 to be upgraded? 10 A.S&P and Moody's are both scheduled to review 11 Avista's credit ratings in August 2010.If Avista is not 12 upgraded at that time, Avista could be placed on an outlook 13 of "stable".If Avista is placed on a stable outlook, it 14 may take an additional 3 years before Avista is upgraded 15 one notch. 16 Q.Please describe how S&:p's Financial Risk ratios 17 are calculated and what they mean? Thies, Di 18 Avista Corporation 1 A.The first ratio, "Funds from operations/total 2 debt (%)", calculates the amount of cash flow from 3 operations as a percent of total debt. The ratio indicates 4 the company's ability to fund debt obligations. The second 5 ratio, "Funds from. operations/interest coverage (x)", 6 calculates the amount of cash from operations that is 7 available to cover interest requirements.This ratio 8 indicates how well a company's earnings can cover interest 9 payments on its debt.The third ratio, "Total debt/total 10 capital (%)", is the amount of debt in our total capital 11 structure.The ratio is an indication of the extent to 12 which the company is using debt to finance its operations. 13 S&P looks at many other financial ratios ¡however, these 14 are the three most important ratios they use when analyzing 15 our financial profile. 16 Q.Do rating agencies mae adjustments to the 17 financial ratios that are calculated directly from the 18 financial statemnts of the Comany? 19 A.Yes. Rating agencies make adjustments to debt to 20 factor in off-balance sheet commitments (for example, the 21 accounts receivable program, purchased power agreements and 22 the unfunded status of pension and other post-retirement 23 benefits) that negatively impact the ratios. In 2008, S&P 24 made adjustments to Avista's debt totaling approximately Thies, Di 19 Avista Corporation 1 $247 million related to the accounts receivable program, 2 purchased power and post-retirement benefits. The adjusted 3 financial ratios for Avista are included in Illustration 4 No. 3 above. 5 Q.Where does Avista fall within those coverage 6 ratios? 7 A.Progress in increasing the cash flow ratios in 8 recent years has been slower than anticipated due to higher 9 capital expenditures that require cash up front before we 10 can recover the costs from customers and below normal 11 stream flows affecting hydro generation.Each has an 12 impact on the Company by reducing the amount of available 13 cash flow from operations, requiring external financing and 14 ultimately resulting in higher debt and lower. cash flow 15 ratios.In fact, S&P stated the following in an August 16 2009 credit review of Avista Corporation: 17 18 19 20 21 22 23 24 Progress could be derailed by a worsening recessionary environment, very adverse hydro conditions that lead to large deferral balances, or rate case activity that does not yield timely and sufficient regulatory relief in Idaho and Washington. 2 Additionally, Moody's stated the following in its 25 August 2009 credit review of Avista Corporation: 26 What could change the rating down: Failure to27 obtain adequate and timely support for recovery 28 of costs from any of the commissions having 2 Standard and Poor's, Global Credi t Portal Avista Corporation, August 2009 Thies, Di 20 Avista Corporation 1 jurisdiction in Avista's operating territories 2 could pressure ratings. Significant drought 3 conditions or negative impacts of any kind to the 4 company's hydro generating facilities would be a 5 significant credit negative. 3 6 7 In order to improve the cash flow ratios, Avista must 8 reduce its debt to total capitalization ratio and increase 9 its available cash funds from operations. 10 Q.Do the rating agencies look at an other factors 11 when evaluating a comany's credit quality? 12 A.Yes. In addition to financial ratios and metrics, 13 rating agencies also look at a numer of qualitative 14 factors which directly or indirectly may affect a company's 15 cash flow. 16 These factors include: 17 · Regulation 18 · Markets 19 · Operations 20 · Competitiveness, and 21 · Manage~ent 22 In evaluating these factors, the rating agencies look 23 for regulatory actions that are supportive of cost recovery 24 and that eliminate or minimize volatility of cash flows. 25 They also consider the strength and growth of the economy 26 in our service terri tory, operations' ability to control 3 Moody's Investor Services, Credit Opinion: Avista Corp. Global Credit Research, August 2009 Thies, Di 21 Avista Corporation 1 costs, whether our service is competitive, and the 2 effectiveness of management. 3 Therefore, while the ratios are utilized in their 4 quantitative evaluation of a company, they are not the only 5 factors that are taken into account. 6 Q.Wht risks are Avista and the utility sector 7 facing that may impact credit ratings? 8 A.Avista's credit ratings are impacted by risks 9 that could negatively affect the Company's cash flows. 10 These risks include, but are not limited to, the level and 11 volatility of wholesale electric market prices and natural 12 gas prices for fuel costs, liquidity in the wholesale 13 market (fewer counterparties and tighter credit 14 restrictions), recoverability of natural gas and power 15 costs, stream flow and weather conditions, changes in 16 legislati ve and governmental reguiations,rising 17 construction and raw material costs, customers' ability to 18 timely.pay their bills, and access to capital markets at a 19 reasonable cost. 20 Credit ratings for the utility sector are also 21 adversely impacted by large capital expenditures for 22 environmental compliance, and the need for new generation 23 and transmission and distribution facilities. The utility 24 sector is in a cycle of significant capital spending, which 25 will likely be funded by significant issuances of debt and Thies, Di 22 Avista Corporation 1 equity.This increases the competition for financial 2 capital at a time when the average utility credit rating is 3 just above investment grade (i.e. BBB / BBB+) and Avista is 4 lower at BBB-. 5 Given the downturn in the economy and the tightened 6 credit markets, the rating agencies are keeping closer tabs 7 on all companies in order to make sure there is sufficient 8 liquidity in case the credit markets are inaccessible. Not 9 having sufficient sources of cash for potential cash 10 requirements could prompt a credit rating downgrade.The 11 rating agencies are concerned about the significant amount 12 of bank credit facilities that will need to be refinanced 13 or addressed in 2010 through 2012.They expect that over 14 $110 billion of bank credit facilities will need to be 15 refinanced during this time.This is expected to create 16 significant competition for bank credit and will result in 17 increased fees as well as a reduction in the size of 18 facili ties. 19 The increased capital spending needs and resulting 20 increased debt and equity issuances make regulation 21 supporting the full and timely recovery of prudently 22 incurred costs even more critical to the utility sector 23 than in previous years. 24 Q.How imprtant is the regulatory environmnt in 25 which a Comany operates? Thies, Di 23 Avista Corporation 1 A.The regulatory environment in which a company 2 operates is a major qualitative factor in determining a 3 company's creditworthiness.Moody's stated the following 4 regarding Avista's regulatory environment in an August 2009 5 credit ratings report: 6 Given the highly regulated nature of Avista's 7 operations, the Company's primary credit ratings 8 driver is the degree of supportiveness that the 9 Company receives from its various regulatory10 authorities. 4 1112 S&P stated the following: 13 Regulation is the most critical aspect that14 underlies regulated integrated utilities'15 creditworthiness. Regulatory decisions can16 profoundly affect. financial performance. Our17 assessment of the regulatory environments in18 which a utility operates is guided by certain19 principles, most prominently consistency and20 predictability, as well as efficiency and21 timeliness. For a regulatory process to be22 considered supportive of credit quality, it must23 limit uncertainty in the recovery of a utility's24 investment. They must also eliminate, or at25 least greatly reduce, the issue of rate-case lag,26 especially when a utility engages in a sizable27 capi tal expendi ture program. 5 2829 S&P also stated. the following regarding Avista: 30 The company's chief risk is the electric 31 utility's exposure to replacement power costs,32 particularly in low water years, which its fuel 33 and purchased-power mechanisms in Idaho and 34 Washington partially mitigate. How the company35 manages its regulatory relationships in its three 4 Moody's Investor Service, Credit Opinion: Avista Corp. Global Credit Research, August 2009 S Standard and Poors, Key Credit Factors: Business and Financial Risks in the Investor-owned Utilities Industry, March 2010 Thies, Di 24 Avista Corporation 1 2 3 4 jurisdictions is an important component of credit quality and stability. Due to the maj or capi tal expendi tures planned by 5 Avista, a supportive regulatory environment will be 6 critical to Avista's financial health.Additionally, 7 although Avista has electric and natural gas tracking 8 mechanisms (PCA and PGA) to provide recovery of the 9 majority of the variability in commodity costs, these 10 changes in costs must be financed until the costs are 11 recovered from cus tomers .Investors and rating agencies 12 are concerned about regulatory lag and cost-recovery 13 related to these items. 14 XV. CAH FLOW 15 Q.Wht are the Comany's sources to fun capital 16 requirements? 17 A.The Company utilizes cash flow from operations, 18 long-term debt and common stock issuances to fund its 19 capi tal expendi tures .Additionally, on an interim basis, 20 the Company utilizes its credit facilities to fund working 21 capital needs and capital expenditures until longer-term 22 financing can be obtained. 23 Q.What are the comany's near-ter.capital 24 requiremnts? 6 Standard and Poors, Global Credi t Portal Avista Corporation, August 2009 Thies, Di 25 Avista Corporation 1 A.As a combination electric and natural gas 2 utility, over the next few years, capital will be required 3 for investment in generation upgrades, transmission and 4 distribution facilities for the electric utility business, 5 customer growth as well as necessary maintenance and 6 replacements of our natural gas systems. 7 The amount of capital expenditures planned for 2010- 8 2011 is approximately $420 million and approximately $1.2 9 billion for the five year period ending Decemer 31, 2014. 10 For 2010 alone, these costs equate to a total of $210 11 million.Total company ratebase at Decemer 31, 2009 was 12 $2.1 billion; therefore, these planed capital additions 13 represent substantial new investments given the relative 14 size of the Company. 15 A few of the major capital expenditure items on a 16 system basis for 2010 include $57 million for electric 17 transmission and distribution upgrades, $16 million for 18 natural gas system upgrades, $9 million for environmental 19 (associated with the Spokane River relicensing and the 2001 20 Clark Fork River license implementation issues), $35 21 million for generation upgrades and $29 million for 22 customer connects. 23 24 Maj or capi tal expendi tures are a normal part of utili ty operations.Customers are added to the service 25 area, roads are relocated and require existing facilities 26 to be moved, and facilities continue to wear out and need Thies, Di 26 Avista Corporation 1 replacement. These and other requirements create the need 2 for significant capital expenditures each year. Access to 3 capital at reasonable rates is dependent upon the Company 4 maintaining a strong capital structure, sufficient interest 5 coverage, and investment grade credit ratings. 6 Q.What are the comany's long-ter.capital 7 requiremnts related to new energy resources? 8 A.Avista's Integrated Resource Plan has identified 9 the potential need for the Company to finance significant 10 expendi tures for electric facilities.The preferred 11 strategy outlined in our 2009 Integrated Resource Plan 12 included total expenditures of $1~25 billion by 2020, 13 including investment in wind resources and combined-cycle 14 combustion turbines (to meet customer load) as well as 15 upgrades at hydroelectric stations. 16 Q.Wht are the Coman's near-ter. plans related to 17 its debt? 18 19 A.The Company issued $280 million of secured debt in 2008, and $250 million of secured debt in 2009.The 20 $250 million secured debt was issued at a coupon of 5.125% 21 in September 2009.The Company's original plan was to 22 issue long-term secured debt in Septemer 2008. Due to the 23 disruption in the financial markets, the Company elected to 24 defer the issuance until September 2009.The Company 25 instead sought out and was able to establish a second bank Thies, Di 27 Avista Corporation 1 line of credit to ensure continued adequate liquidity. The 2 Company was able to reduce interest costs by approximately 3 $80 million over a ten year period (approximately $8 4 million annually) by deferring the issuance of long-term 5 debt from 2008 to 2009. 6 7 The Company currently plans to issue up to $83.7 million of secured debt in 2010.The proceeds from the 8 issuance of the securities will be utilized to fund capital 9 expendi tures, repay maturing long-term debt and repay funds 10 borrowed under our credit facilities. The Company has $35 11 million long-term debt scheduled to mature in 2010. 12 Illustration No. 5 below shows the amount of debt 13 maturities for Avista each year: 14 15 16 17 18 19 20 21 22 23 24 25 26 Thies, Di 28 Avista Corporation 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1 Xllustration No.5: 2 Debt Maturity By Year Prforma December 31, 2010 25% 23% 21% 17% 12% -- 7% 6%6%- l 3% 2% 1%1%LI1%II U- 530 20 $240 15%511 3' ¡iæ g.e 11m 5120 5'l se O'so ~ m II 12 U M 15 ~ V U U ~ n n 25 ~ 25 ~ V U ~ ~ D n " ~ .~ § D . Lone-term debt outtlndlne Ii Propos 2010 Oebt Issuane Q.Wht is the status of the comany's lines of 18 credit secured by first mortgage bonds and its accounts 19 receivable program? 20 A.The Company has a $320 million line of credit, 21 and a $75 million line of credit that both expire in April 22 2011. Additionally, the Company has a $50 million accounts 23 receivable funding program that expires in March 2011. 24 This agreement has historically been renewed on a year-to- 25 year basis. Thies, Di 29 . Avista Corporation 1 The costs related to our $320 million line are 2 expected to increase (when it is refinanced) due to the 3 tightened credi t markets and competition for bank credit. 4 The increased costs are evident in our $75 million credit 5 agreement that was completed in Novemer 2009. 6 The facilities have been sized to allow the Company to 7 maintain adequate liquidity to cover working capital 8 requirements, manage counterparty collateral requirements, 9 and avoid issuing securities in unfavorable markets.We 10 believe our current agreements provide us adequate 11 liquidity and flexibility to face volatile financial 12 markets and volatile energy commodity prices. 13 Many purchases of natural gas, or contracts for 14 pipeline capacity to provide natural gas transportation, 15 require collateral, and/or prepayments, based upon the 16 Company's credit rating.Upgrades to Avista's credit 17 ratings during 2007 and 2008 have reduced the amount of 18 collateral required to be posted with counterparties. If 19 Avista is upgraded above its current credit ratings, the 20 Company should see an increase in the numer of 21 counterparties willing to do business with us and the 22 collateral requirements are expected to decrease even 23 further, resulting in reduced costs. 24 The lines of credit and accounts receivable program 25 are our primary sources of immediate cash for borrowing to Thies, Di 30 Avista Corporation 1 meet these needs and the lines of credit support the 2 issuance of letters of credit. These credit facilities are 3 required to manage daily cash flow since the timing of cash 4 receipts versus cash disbursements is never totally 5 balanced. 6 Q.Xs there pending legislation that may impact the 7 Company's collateral reqiremnts? 8 A.Yes.In Decemer 2009 the U. S. House of 9 Representatives passed the Wall Street Reform and Consumer 10 Protection Act of 2009 (the House Bill) which would 11 establish regulatory jurisdiction by the Commodity Futures 12 Trading Commission (CFTC) for certain swaps (which includes 13 a variety of derivative instruments) and the users of such 14 swaps.Under the House Bill, ''maj or swap participants" 15 would be required to register with the CFTC and, among other things,maintain minimum capi tal and margin16 17 requiremen ts ."Major swap participants" would include 18 entities with large swap positions, excluding swaps held 19 primarily for hedging commercial risk.Since we use 20 derivative instruments primarily for hedging commercial 21 risks, it is unlikely that we would be subject to t):e 22 proposed CFTC regulation. 23 The House Bill would also require a broad category of 24 swaps to be cleared and traded on registered exchanges or 25 special derivatives exchanges.Such clearing requirements Thies, Di 31 Avista Corporation 1 could impose a significant change from our current 2 practices of bilateral transactions and negotiated credit 3 4 terms.Clearing requirements could involve greater liquidity as collateral.However, there would be an 5 exemption, available on an individual basis, for an end 6 user that is not a major swap participant, and we believe 7 we would qualify for such an exemption. 8 Although the House Bill may not have a material direct 9 adverse effect on us,concern remains that our 10 counterparties who are not exempt would pass along 11 increased costs and margin requirements through higher 12 prices and reductions in unsecured credit limits. In 13 addition, there can be no assurance that any final 14 legislation affecting derivatives, if enacted, would retain 15 the exemptions contained in the House Bill. 16 Q.Wht are Avista's plans regarding comn equity 17 and why is this important? 18 A.Avista will continue to monitor the common equity 19 ratio of its capital structure, and assess the need to 20 issue additional common equity.Avista entered into an 21 amended and restated sales agency agreement in December 22 2009 to issue up to 1.25 million shares of our common stock 23 from time to time. Avista originally entered into a sales 24 agency agreement to issue up to 2 million shares of its 25 common stock in Decemer 2006. In 2008, we issued 750,000 Thies, Di 32 Avista Corporation 1 shares of common stock under this sales agency agreement. 2 We are planning to issue up to $45 million of common stock 3 in 2010 in order to finance a portion of our capital 4 expenditures and maturing long-term debt and to support our 5 common equity ratio. To the extent that we are not able to 6 access the equity market, there will be increased pressure 7 on our lines of credit, and an increased need to issue long 8 term debt, which is likely to unfavorably impact our cost 9 of debt and debt-to-equi ty-ratio.It is important to the 10 rating agencies for Avista to maintain a balanced 11 debt/equity ratio in order to minimize the risk of default 12 on, required debt interest payments. 13 As Dr. Avera explains in his testimony, the 50 percent 14 common equity ratio requested by Avista in this case is 15 consistent with the range of equity ratios maintained by 16 the firms in the Utility Proxy Group. 17 Dr. Avera notes that electric utilities are facing, 18 among other things, rising cost structures, the need to 19 finance significant capital investment plans,and 20 uncertainties over accommodating future environmental 21 mandates. A more conservative financial profile, in the 22 form of a higher common equity ratio, is consistent with 23 increasing uncertainties and the need to maintain the 24 continuous access to capital that is required to fund 25 operations and necessary system investment. 26 In his testimony Dr. Avera states that: Thies, Di 33 Avista Corporation 1 2 3 4 5 6 7 8 9 10 11 12 13 My conclusion is reinforced by the investment community's focus on the need for a greater layer to accommodate higher operating risks and the pressures of funding significant capital investments. This is reinforced by the need to consider the impact of uncertain capital market condi tions, as well as off-balance sheet commi tments such as purchased power agreements, which carry wi th them somelevel of imputed debt (P. 7, L. 's 6-14). This is especially the case for Avista, which faces 14 the dual challenge of financing significant. capital 15 expansion plans while at the same time endeavoring to 16 improve its credit standing.Avista is committed to 17 maintaining an appropriate level of equity to support a 18 strong credit rating. 19 Q.Wht are Avista's plans regarding preferred 20 equity and other financing structures (for exle, hybrid 21 instruents)? 22 A.Avista does not have any preferred equity or 23 other financing structures outstanding at December 31, 24 2009.Currently, Avista does not plan to issue preferred 25 equity or other financing structures, but will continue to 26 evaluate the appropriateness of these financing vehicles. 27 28 29 V. CAXTAL STRUCTU Q.Please explain the capital structure propsed by 30 Avista in this case. Thies, Di 34 Avista Corporation 1 A. Avista's current capital structure consists of a 2 blend of long-term debt and common equity necessary to 3 support the assets and operating capital of the Company. 4 The proportionate shares of Avista Corp..'s actual capital 5 structure on Decemer 31, 2009, are shown on page 1 of 6 Exhibit No.2, Schedule 2. A pro forma capital structure 7 is also shown on page 1, which reflects expected changes 8 for the period ending De~emer 31, 2010.Supporting 9 workpapers provide additional details related to these 10 adj us tments on pages 2 through 3. 11 The rate of return to be applied to rate base in this 12 proceeding is equal to the weighted average cost of 13 capital, taking into account the pro forma adjusting items. 14 As shown on page 1 of Exhibit No.2, Schedule 2, Avista 15 Utili ties is proposing art overall rate of return of 8.55%. 16 17 18 19 VX. COST OF DEBT Q.How have you deter.ned the cost of debt? A.Cost of debt in the Company's proposed capital 20 structure includes long-term debt. As shown on page 1 of 21 Exhibi t No.2, Schedule 2, the actual weighted averagè cost 22 of long-term debt outstanding on Decemer 31, 2009 was 23 6.37% .The size and mix of debt changes over time based 24 upon the actual financing completed. We have made certain 25 pro forma adjustments to update the debt cost through Thies, Di 35 Avista Corporation 1 December 31, 2010 to 6.20%, which is a reduction from the 2 6.6% currently allowed in rates. Pro forma adjustments to 3 long-term debt reflect expected maturities of outstanding 4 long-term debt and issuance of new debt to fund those. 5 6 7 VXX. COST OF COMMON EOUJTY Q.Wht rate of return on comn equity is the 8 Company proposing in this proceeding? 9 A.The Company is proposing a 10.9% return on common 10 equity (ROE), which falls at the lower end of Dr. Avera's 11 recommended range of required return on equity. Dr. Avera 12 testifies to analyses related to the cost of common equity 13 with an ROE range of 10.9% to 12.5% and 11. 1% to 12.7% 14 (after accounting for the impact of common equity flotation 15 costs). In his testimony Dr. Avera states that: 16 17 18 19 20 21 22 23 24 Because Avista's requested ROE of 10.9 percent falls at the very bottom of my "bare bones" cost of equity range, it represents a conservative estimate ofinves tors' required rate of return. (P . 5, L. 's 4-7). Q.Dr. Avera suggests an ROE range of 10.9% to 25 12.5%. Why is Avista requesting an ROE at the lower end of 26 the range? 27 A.As I have testified, Avista has made solid 28 progress towards improving its financial health. If Avista 29 can earn a 10.9% ROE, I believe our financial condition Thies, Di 36 Avista Corporation 1 would continue to improve and would further strengthen the 2 credit ratings ratios. 3 Furthermore,as the . Company has worked toward 4 improving its financial condition over the last several 5 years, it has done so with the customer in mind. Avista is 6 attempting to balance the ability to continue to improve 7 our financial health and access capital markets under 8 reasonable terms with the impacts that increased retail 9 rates have on its customers.In this case, although we 10 believe an ROE greater than 10.9% is supported and is 11 warranted, we also believe the 10.9% provides a reasonable 12 balance of the competing obj ecti ves . 13 Q.Please sumrize the propsed capital structure 14 and the cost comonents for debt and comn equity.. 15 A.As also shown on page 1 of Exhibit No.2, 16 Schedule 2, the following illustration shows the capital 17 structure and cost components proposed by the Company. 18 Thies, Di 37 Avista Corporation 1 Xllustration No.6: AVISTA CORPORATION Cost of Capital December 31 2010 Percent of Amount Total Capital Cost Component Long-Term Debt $1,160,800,000 50.00%6.20%3.10% Common Equity 1 ,151,660,792 50.00%10.90%5.45% Total $2,312,460,792 100.00%8.55% 2 3 Q.Does that conclude your pre-filed direct 4 testimony? 5 A.Yes. 6 Thies, Di 38 Avista Corporation DAVID J. MEYER VICE PRESIDENT AND CHIEF COUNSEL OF REGULATORY & GOVERNMENTAL AFFAIRS AVISTA CORPORATION P . 0 . BOX 3727 1411 EAST MISSION AVENUE SPOKANE, WASHINGTON 99220-3727 TELEPHONE: (509) 495-4316 FACSIMILE: (509) 495-8851 DAVI D . MEYER~AVI STACORP . COM BEFORE THE IDAHO PUBLIC UT:ILIT:IES COMMISS:ION IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-10-01 OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-10-01 AUTHORITY TO INCREASE ITS RATES ) AND CHARGES FOR ELECTRIC AND ) NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 2 AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO ) MARK T. THI.ES ) FOR AVISTA CORPORATION (ELECTRIC AND NATURAL GAS) \ \ I S I \ ( (J R I'OI~ \ i I (J \ Ilìl1:;-klll S..'iiiillli.. ( tLult 1\ Itl11.;.. Standard & Poor's Moody's Last Upgraded Februry 2008 December 2007 and the First Mortage Bonds and Secd Medium-tenn Notes wer fuer upgred to Baal from Baa in Augut 2009 Credit Outlook Positive Positive A+Al A A2 A-A3 BBB+ First Mortgage Bonds Securd Medium- Tenn Notes Baal First Mortgage Bonds Securd Medium- Tenn Notes BBB BaaZ BBB- A vista Corp.lCorporate rating BaaJ Avista Corp.lssuer rating INVSTMENT GRADE BB+Bal Tmst-Onginated Preferrd Securties BB Tmst-Originated Preferred Securities Ba2 BB-BaJ Exibit NO.2 Case Nos. AVU-E-1ll1 and AVU-G10-o1 M.Thies. Avita Scle 1 Page 1 ci 1 AVISTA CORPORATION Cust )f Ccl~) tal December 31 2010 Percent of Amount Total Capital Cost Component Long Term Debt $1,160,800,000 50.00%6.20%3.10% Common Equity 1,151,660,792 50.00%(1)10.90%(2)5.45% Total $2,312,460,792 100.00%8.55% AVISTA CORPORATION Ep'oedrwd Cost ot Cap'tal Dece'l1ber 31 2009 Percent of Amount Total Capital Cost Component Long Term Debt $1,129,100,000 51.42%6.37l'3.28% Common Equity 1,066,938,893 48.58%10.50%5.10% Total $2,196.038,893 100.00%8.38% (1) Common equity percentage of tota capital is 49.80% in the Dec6 forecast model (2) Proposed Retu on Common Equity - See Avera testimony Notes: Refer to supporting documentation for detailed calculations All costs are shown before ta Assumptions: A Staed with 12-31-2009 actu1s B Forecasted though 12-31-2010 C The forecasted debt and equity amounts come from the forecast Dec6 model D Equity is adjusted for Other Comprehensive Income and capital stock expense ($16,060,000 as of December 31, 2010 and $15,651,454 as of December 31,2009) E Forecasted issuance of $45 milion of additional equity durng 2010 Exhibit NO.2 Case Nos. AVU-E-10-Q1 and AVU-G-1Q-01 M.Thies, Avista Schedule 2 Page 1 of 3 AV I S T A C O R P O R A T I O N Pr i n c i p a l Li n e Co u p o n Ma t u r i t y Se t t l e m e n t Pr i n c i p a l Is s u a n c Lo s s I e a c q Ne t Yi e l d t o Ou t t a n d i n g Ef f e c t v e Li n e No , De s c r i p t i o n Ra t e Da t e Da t e Am o u n t Co s t s Ex p e n s e Pr o c e e d s Ma t u r i t y 12 - 3 1 - 2 0 1 0 Co s t No , (a ) (b ) ( c ) (d ) (e ) (f ) (g ) (h ) (i ) (j ) (k ) 1 SM T N S t r i e s A Se r i e s C o s t s 08 - 1 - 2 0 1 0 05 - 0 1 - 1 9 9 3 37 3 , 6 9 3 $ - $ - 1 2 SM T N . r i A 6. 6 7 % 07 - 1 2 - 2 0 1 0 07 - 1 2 - 1 9 9 3 5,0 0 0 , 0 0 0 35 , 0 8 1 69 0 , 4 6 4 4, 2 7 4 , 4 5 5 8. 2 7 5 % - - 2 3 SM T N S ' i e s A 7. 1 8 % 08 - 1 1 - 2 0 2 3 08 - 1 2 - 1 9 9 3 7,0 0 0 , 0 0 0 54 , 3 6 4 6, 9 4 5 , 6 3 6 7, 2 4 4 % 7, 0 0 , 0 0 50 7 , 0 6 4 3 4 SM T N S e r e s A 7, 3 7 % 05 - 1 0 - 2 0 1 2 05 - 1 0 - 1 9 9 3 7,0 0 0 , 0 0 0 49 , 1 1 4 1, 2 2 7 , 8 8 3 5, 7 2 3 , 0 0 3 9, 4 5 5 % 7, 0 0 , 0 0 66 1 , 8 7 7 4 5 SM T N S e e s A 7. 3 9 % 05 1 1 - 2 0 1 8 05 - 1 1 - 1 9 9 3 7, 0 0 , 0 0 54 , 3 6 4 1, 2 2 7 , 8 8 3 5, 7 1 7 , 7 5 3 9, 2 8 7 % 7, 0 0 , 0 0 65 0 , 1 1 4 5 6 SM T N S e r e s A 7, 5 3 % 05 - 0 5 - 2 0 2 3 05 - - 1 9 9 5, 5 0 , 0 0 0 42 , 7 1 2 96 3 , 0 1 1 4, 4 9 4 , 2 7 7 9. 3 5 9 % 5, 5 0 , 0 0 51 4 , 7 4 4 6 7 SM T N S e r i A 7, 4 5 % 06 - 1 1 - 2 0 1 8 06 - 0 - 1 9 9 3 15 , 5 0 , 0 0 17 0 , 5 9 7 2, 1 4 0 , 4 4 0 13 , 1 8 8 , 9 6 3 8. 9 5 3 % 15 , 5 0 , 0 0 1, 3 8 7 , 7 1 5 7 8 SM T N S e s A 7, 5 4 % 05 - 0 5 - 2 0 2 3 05 7 - 1 9 9 3 1, 0 0 0 , 0 0 0 7. 7 6 6 17 5 , 4 1 2 81 6 , 8 2 2 9, 3 7 5 % 1, 0 0 , 0 0 93 , 7 4 7 8 9 SM T N s e r i s B 6, 9 0 % 07 - 0 1 - 2 0 1 0 06 9 - 1 9 9 5. 0 0 , 0 0 37 , 9 4 4. 9 6 2 . 0 5 6 6. 9 8 2 % - - 9 10 5, 7 0 % F M B ' s 5, 7 0 % 07 - 0 1 - 2 0 3 7 12 - 1 5 - 2 0 0 15 0 , 0 0 , 0 0 8. 6 6 3 . 1 6 2 14 1 . 3 3 6 , 8 3 8 6, 1 2 0 % 15 0 , 0 0 0 . 0 0 0 9, 1 7 9 . 7 4 0 10 11 6,1 2 5 % F M B ' s 6. 1 3 % 09 1 - 2 0 1 3 09 2 0 3 45 . 0 0 . 0 0 0 1, 0 5 5 , 1 4 0 81 5 . 8 2 4 43 . 1 2 9 , 0 3 6 6, 7 0 3 % 45 . 0 0 , 0 0 0 3, 0 1 6 . 2 4 8 11 12 5. 4 5 % F M B ' s 5, 4 5 % 12 - 0 1 - 2 0 1 9 11 - 1 8 - 2 0 0 4 90 . 0 0 . 0 0 0 1, 4 3 2 , 0 8 1 88 . 5 6 7 , 9 1 9 5, 6 0 8 % 90 , 0 0 , 0 0 5, 0 4 7 . 0 0 1 12 13 6, 2 5 % F M B ' s 6, 2 5 % 12 - 0 1 - 2 0 3 5 11 - 1 7 - 2 0 0 5 15 0 , 0 0 . 0 0 0 -2 , 1 3 7 , 0 1 6 15 2 , 1 3 7 , 0 1 6 6, 1 4 5 % 15 0 , 0 0 , 0 0 9, 2 1 7 . 8 5 3 13 14 5. 1 2 5 % F M B ' s 5, 1 2 5 % 04 1 - 2 0 2 09 - 2 2 - 2 0 0 9 25 , 0 0 , 0 0 0 -7 , 7 0 1 , 2 2 25 7 , 7 0 1 . 2 2 4. 7 9 5 % 25 0 , 0 0 . 0 0 0 11 . 9 8 7 , 1 1 6 14 15 5. 9 5 % F M B ' s 5. 9 5 % 06 - 0 1 - 2 0 1 8 04 - 0 2 - 2 0 0 8 25 0 , 0 0 . 0 0 0 19 , 4 7 6 , 4 1 9 23 0 . 5 2 3 . 5 8 1 7,0 3 4 % 25 0 , 0 0 . 0 0 17 . 5 8 5 , 3 5 15 16 7, 2 5 % F M B ' s 7. 2 5 % 12 - 1 6 - 2 0 1 3 12 - 1 6 - 2 0 0 8 30 , 0 0 . 0 0 0 42 0 . 3 0 6 29 . 5 7 9 , 6 9 4 7,5 9 2 % 30 . 0 0 0 , 0 0 2. 2 7 7 . 5 9 0 16 17 PC B ' s K e t U F a l l s 6. 0 0 % 12 - 0 1 - 2 0 2 3 07 - 2 9 - 1 9 9 3 4,1 0 0 . 0 0 0 13 5 . 8 5 5 14 6 , 3 9 3 3, 8 1 7 , 7 5 2 6, 5 2 3 % 4, 1 0 0 , 0 0 26 7 . 4 4 1 17 18 MT ' s s e r i s C Se r e s C o t s 06 - 1 5 - 2 0 1 3 06 - 1 5 - 1 9 9 8 65 0 , 1 7 9 - 43 . 3 4 5 18 19 MT N ' s s e r i e s C 6, 3 7 % 06 - 1 9 - 2 0 2 8 06 - 1 9 - 1 9 9 8 25 . 0 0 0 , 0 0 15 8 , 3 0 4 18 8 , 6 4 9 24 , 6 5 3 . 0 4 7 6, 4 7 5 % 25 , 0 0 . 0 0 1.6 1 8 . 8 6 3 19 20 MT N ' s s e r i e s C 8. 0 2 % 10 - 2 6 - 2 0 1 0 10 - 2 6 - 1 9 9 9 25 . 0 0 0 , 0 0 16 1 , 2 8 7 70 7 . 5 2 7 24 . 1 3 1 , 1 8 6 8.5 1 3 % - - 20 21 PC B C o l s t r i p 1 7 M , 5, 3 6 % 03 - 1 - 2 0 3 4 09 - 1 5 - 2 0 1 0 17 . 0 0 . 0 0 4. 0 5 1 , 7 1 8 12 . 9 4 8 , 2 8 2 7. 5 4 1 % 17 . 0 0 , 0 0 1. 2 8 1 , 9 9 9 21 22 PC B C o l s t p 6 6 , 7 , 5, 3 6 % 06 - 0 1 - 2 0 3 2 09 1 5 - 2 0 1 0 66 . 7 0 0 , 0 0 2, 0 0 1 . 0 0 1, 3 2 9 , 5 2 63 , 3 6 9 , 4 7 8 5. 7 6 5 % 66 , 7 0 0 . 0 0 3, 8 4 5 , 4 8 8 22 23 6. 1 7 3 % 1. 1 2 0 , 8 0 0 , 0 0 69 . 1 8 3 . 3 0 0 23 24 24 25 Re p u r c h a 2 7.7 4 % 12 - 3 1 - 2 0 1 7 06 - 3 - 2 0 0 6 6. 8 7 5 , 0 0 0 48 3 . 5 8 2 6, 3 9 1 , 4 1 8 8, 7 2 1 % - 3 70 . 1 2 7 25 26 Re p u r c a s e 2 8,1 7 % 06 - 3 0 - 2 0 1 5 06 - 3 0 - 2 0 0 5 26 . 0 0 , 0 0 1. 7 3 5 . 7 9 6 24 . 2 6 , 2 0 4 9. 2 0 6 % - 3 27 2 , 9 2 5 26 27 Re p u r c h a s e 2 8,4 1 % 06 - 3 0 2 0 1 4 06 - 3 0 - 2 0 0 36 , 5 9 0 , 0 0 7, 3 5 8 . 6 8 0 29 , 2 3 1 . 3 2 0 11 , 9 0 3 % . 3 1. 2 9 7 , 2 0 1 27 28 Re p u r c e 2 8, 6 8 % 09 - 3 - 2 0 1 2 06 - 3 - 2 0 0 52 . 4 8 5 . 0 0 2, 8 1 9 . 8 6 49 , 6 6 5 , 1 4 0 9, 5 8 % . 3 48 1 , 1 8 6 28 29 Re p u r c a s e 2 8. 7 6 % 09 2 0 1 0 06 - 3 - 2 0 0 2 20 3 . 5 9 0 . 0 0 0 9, 9 5 8 . 7 8 2 19 3 , 6 3 1 . 2 1 8 9. 6 2 8 % - 3 - 29 30 1. 1 2 0 . 8 0 0 . 0 0 71 . 3 0 , 7 3 9 30 31 31 32 TO P r S 4 1,8 1 % 06 1 - 2 0 3 7 06 3 - 1 9 9 7 40 , 0 0 0 , 0 0 1. 2 9 6 . 0 8 6 -2 , 5 0 0 . 0 0 41 . 2 0 3 . 9 1 4 1, 7 0 3 % 40 . 0 0 . 0 0 68 1 . 2 8 3 32 33 33 34 TO T A L L O N G - T E R M D E B T 6, 2 0 1 % $ 1 , 1 6 0 , 8 0 0 . 0 0 0 $ 71 , 9 8 6 , 0 2 2 34 35 35 36 36 , F o r e t e d d e b t i s s u a 2 T h e c o p o n r a t e u s e d i s t h e c o o f d e b t a t t h t i m e o f t h e r e p u r c s e s 3 T h e a m o u n t a r c a l c u l a t e d u s i n g t h I R R f u n c o n 4 I n f o a t i o n c o f r m p a g e 3 o f S c h u l e 2 Ex h i b i t N O . 2 Ca s e N o s . A V U - E - 1 0 - o 1 a n d A V U - G - 1 0 - 0 1 M. T h i e s . A v i s t a Sc h e d u l e 2 P a g e 2 o f 3 /\ V I S T A C O R P O R A T I O N 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 T N S I P r r r De Ja . 1 0 Fe b 1 0 Me r . 1 0 "" . 1 0 Me y - 1 0 Ju n - 1 0 Ju l . 1 0 Au g - 1 0 Se p - 1 0 0c 1 0 No v 1 0 De 1 0 Av g o f (a ) (b ) (c ) (d ) (e ) (l (g ) (h ) (I ) OJ (k ) (I ) (m ) (n ) (0 ) Tn i s t P r e r $4 0 , 0 0 , 0 0 $4 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 0 $4 0 , 0 0 , 0 0 $4 , 0 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 0 , 0 0 $4 0 , 0 0 0 , 0 0 $4 0 , 0 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 40 , _ , 0 0 To l a l S h o T e n n D e $4 0 , 0 0 , 0 0 0 $4 , 0 0 0 , 0 0 $4 0 , 0 0 0 , 0 0 $4 0 , 0 0 , 0 0 0 $4 0 , 0 0 0 , 0 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 0 , 0 0 , 0 0 $4 , 0 0 , 0 0 0 Nu m b o f D a y s I n M o t h 31 28 31 30 31 30 31 31 30 31 30 31 36 Fo r t e R a t e T n i s t P r f e r r 1, 6 3 % 1.6 3 % 1. 6 3 % 1. 6 3 % 1,6 3 % 1,6 3 % 1. 5 % 1. 5 % 1. 5 % 2,1 3 % 2,1 3 % 2.1 3 % TN a l P r e r r I n t e l E i e 55 , 9 7 2 50 , 5 5 6 55 , 9 7 2 54 , 1 6 7 55 , 7 2 54 , 1 6 7 60 , 2 7 8 60 , 2 7 8 58 , 3 3 3 73 , 1 9 4 70 , 8 3 3 73 , 1 9 4 72 8 1 7 To t a I n l e r e E i e 55 , 8 7 2 50 , 5 5 55 , 9 7 2 54 , 1 6 7 55 , 9 7 2 54 , 1 6 7 60 , 2 7 8 60 , 2 7 8 58 , 3 3 3 73 , 1 9 4 70 , 8 3 3 73 , 1 9 4 72 2 , 8 1 7 Av e r a g e b o n g r a t e u s e i n t h c a c u t i o n o f t h e e f f v e c o t s b e l o 1,8 1 % Co u p o M a t u r i S e l t l P r i n c p a l I s u a n c L ø N e t Y I l d 1 0 O u t s l a n d l n g E l f De c r o n R a l e D e l D a l e A m u n l C o E x s e P r o M a t u r i 1 2 . 3 1 . 2 0 1 0 C o l (a ) ( b ) ( c ) ( d l ( e l ( f ) ( g l ( h ) ( I ) 0 1 ( k l 1. 1 % 0 6 1 . 2 0 7 0 6 3 - 1 9 9 7 4 0 , 0 0 0 , 0 0 1 , 2 9 6 , 0 8 . 2 , 5 0 , 0 0 4 1 , 2 , 9 1 4 1 . 7 0 3 % 4 0 , 0 0 , 0 0 0 6 8 1 , 2 8 3 Ex l b N ø , 2 ca N o s . A W - E . 1 Q . 1 a n A V l 1 Q . 1 M. T h A v l Sc l e 2 P a 3 o f 3