20121011Theis DI.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-12-08
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-12-07
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC AND ) DIRECT TESTIMONY
NATURAL GAS CUSTOMERS IN THE STATE ) OF
OF IDAHO ) MARK THIES
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

Thies, Di 1
Avista Corporation
I. INTRODUCTION 1
Q. Please state your name, business address, and 2
present position with Avista Corp. 3
A. My name is Mark Thies. My business address is 4
1411 East Mission Avenue, Spokane, Washington. I am 5
employed by Avista Corporation as Senior Vice President 6
and Chief Financial Officer. 7
Q. Would you please describe your education and 8
business experience? 9
A. I received a Bachelor of Arts degree in 1986, 10
with majors in Accounting and Business Administration from 11
Saint Ambrose College in Davenport, Iowa, and became a 12
Certified Public Accountant in 1987. I have extensive 13
experience in finance, risk management, accounting and 14
administration within the utility sector. 15
I joined Avista in September of 2008 as Senior Vice 16
President and Chief Financial Officer (CFO). Prior to 17
joining Avista, I was Executive Vice President and CFO for 18
Black Hills Corporation, a diversified energy company, 19
providing regulated electric and natural gas service to 20
areas of South Dakota, Wyoming and Montana. I joined 21
Black Hills Corporation in 1997 upon leaving InterCoast 22
Energy Company in Des Moines, Iowa, where I was the 23

Thies, Di 2
Avista Corporation
manager of accounting. Previous to that I was a senior 1
auditor for Arthur Andersen & Co. in Chicago, Illinois. 2
Q. What is the scope of your testimony in this 3
proceeding? 4
A. I will provide a financial overview of the 5
Company and will explain the overall rate of return 6
proposed by the Company in this filing for its electric 7
and natural gas operations. The proposed rate of return 8
is derived from Avista’s total cost of long-term debt and 9
common equity, weighted in proportion to the proposed 10
capital structure. 11
I will address the proposed capital structure, as 12
well as the proposed cost of total debt and equity in this 13
filing. Dr. Avera, on behalf of the Company, will provide 14
additional testimony related to the appropriate return on 15
equity for Avista, based on the specific circumstances of 16
the Company, together with the current state of the 17
financial markets. 18
In brief, I will provide information that shows: 19
Avista’s plans call for significant capital 20
expenditure requirements for the utility over 21
the next two years to assure reliability in 22
serving our customers and meeting customer 23
growth. Capital expenditures of approximately 24
$500 million are planned for 2012 and 2013 to 25
fund customer growth, investment in generation 26
upgrades and transmission and distribution 27
facilities, as well as necessary maintenance and 28

Thies, Di 3
Avista Corporation
replacements of our natural gas utility systems. 1
Capital expenditures of approximately $1.2 2
billion are planned for the five-year period 3
ending December 31, 2016. Avista needs adequate 4
cash flow from operations to fund these 5
requirements, together with access to capital 6
from external sources under reasonable terms. 7
8
Avista’s corporate credit rating from Standard & 9
Poor’s (S&P) is currently BBB and from Moody’s 10
Investors Service (Moody’s) it is Baa2. Avista 11
must operate at a level that will support a 12
solid investment grade corporate credit rating 13
in order to access capital markets at reasonable 14
rates, which will result in lower long-term 15
borrowing costs to customers. A supportive 16
regulatory environment is an important 17
consideration by the rating agencies when 18
reviewing Avista. Maintaining solid credit 19
metrics and credit ratings will also help 20
support a stock price necessary to issue equity 21
under reasonable terms to fund capital 22
requirements. 23
24
The Company is proposing an overall rate of 25
return of 8.46%, including a 50.0% equity ratio 26
and a 10.90% return on equity. Our proforma 27
cost of debt is 6.02%. 28
29
The Company’s ongoing efforts to carefully manage its 30
operating costs and capital expenditures are an important 31
part of our performance, but are not sufficient without 32
revenues from the general rate request for our electric 33
and natural gas businesses in these cases. Sufficient 34
cash flows from operations can only be achieved with the 35
support of regulators in allowing the timely recovery of 36
costs and the ability to earn a reasonable return on 37
investment. 38

Thies, Di 4
Avista Corporation
A table of contents for my testimony is as follows: 1
Description Page 2
I. Introduction 1 3
II. Financial Overview 4 4
III. Credit Ratings 10 5
IV. Cash Flow 19 6
V. Capital Structure 24 7
VI. Cost of Debt 26 8
VII. Cost of Common Equity 27 9
10
Q. Are you sponsoring any exhibits with your direct 11
testimony? 12
A. Yes. I am sponsoring Exhibit 2, Schedule 1, 13
pages 1 through 5, and confidential Exhibit 2, Schedule 2, 14
which were prepared under my direction. Avista’s credit 15
ratings by S&P and Moody’s are summarized on page 1 of 16
Exhibit 2, Schedule 1, and Avista’s actual capital 17
structure at June 30, 2012, and pro forma capital 18
structure at December 31, 2013 are included in Exhibit 2, 19
Schedule 1, page 2. Supporting information is included on 20
pages 2, 3 and 4, of Exhibit 2, Schedule 1 and 21
confidential Exhibit 2, Schedule 2. 22
23
II. FINANCIAL OVERVIEW 24
Q. Please provide an overview of Avista's financial 25
situation. 26

Thies, Di 5
Avista Corporation
A. Avista’s goal is to operate at a level that will 1
support a solid corporate credit rating of at least the 2
current rating of BBB with a long-term goal of operating 3
at a Corporate Credit rating of BBB+. Operating at a BBB+ 4
rating level will result in lower long-term borrowing 5
costs to customers. We expect that a continued focus on 6
the regulated utility, conservative financing strategies 7
(including the issuance of common stock) and a supportive 8
regulatory environment will contribute toward an upgrade 9
to a BBB+ credit rating. 10
We are operating the business efficiently to keep 11
costs as low as practicable for our customers, while at 12
the same time ensuring that our energy service is 13
reliable, and customers are satisfied. An efficient, 14
well-run business is not only important to our customers, 15
but also to investors. Additionally, the Company is 16
working through regulatory processes to recover our costs 17
in a timely manner so that earned returns are closer to 18
those allowed by regulators in each of the states we 19
serve. This is one of the key determinants from the 20
rating agencies’ standpoint when they are reviewing our 21
overall credit ratings. 22
Q. What steps has the Company taken to improve its 23
financial health? 24

Thies, Di 6
Avista Corporation
A. We are working to assure there are adequate 1
funds for operations, capital expenditures and debt 2
maturities. We have extended the weighted average 3
maturity of long-term debt while maintaining the overall 4
cost of long-term debt. During 2010, 2011 and 2012, the 5
Company priced and issued long-term debt at historically 6
low rates. 7
We obtain a portion of our capital requirements 8
through issuing common equity. In 2011, we issued $26.5 9
million of equity and in 2010, we issued $46.2 million. 10
We are planning to issue up to $45 million of common stock 11
in 2012, in order to maintain our capital structure at an 12
appropriate level for our business. 13
We are anticipating the cost of debt to rise slightly 14
to 6.02% by December 31, 2013, from 5.94% as of June 30, 15
2012. This increase is primarily due to the forecasted 16
2013, thirty year issuance of $90 million secured bonds, 17
of which a portion of the proceeds will be used to 18
refinance the three year, 1.68%, $50 million secured bonds 19
maturing in 2013 (originally issued in 2010). 20
The Company entered into forward-starting interest 21
rate swaps for a total of $160 million as a hedge on a 22
portion of the interest payments on forecasted issuances 23
of long-term debt in 2013, 2014 and 2015. The Company 24

Thies, Di 7
Avista Corporation
continues to analyze the possibility of entering into 1
additional transactions in order to lock in the interest 2
rate on forecasted debt issuances to mitigate interest 3
rate risk. 4
Additionally, the Company filed a finance application 5
with the Commission to support the issuance of future debt 6
issuances. The Commission approved this application in 7
Order No. 32338. This order provides support for the $90 8
million debt securities forecasted to be issued in 2013. 9
Q. In addition to having credit ratings that will 10
allow Avista to attract debt capital under reasonable 11
terms, is it also necessary to attract capital from equity 12
investors? 13
A. It is absolutely essential. Avista has two 14
primary sources of external capital: debt and equity 15
investors. As of June 30, 2012, Avista had approximately 16
$2.4 billion of debt and equity. Approximately half of 17
that investment is funded by debt holders, and the other 18
half is funded by equity investors and retained earnings. 19
There tends to be significant emphasis on maintaining 20
credit metrics and credit ratings that will provide access 21
to debt capital under reasonable terms, however, access to 22
equity capital is equally important. In fact, equity 23
investors also focus on cash flows, capital structure and 24

Thies, Di 8
Avista Corporation
liquidity, as do debt investors. The level of common 1
equity in the Company’s capital structure can have a 2
direct impact on its credit rating. 3
Additional equity capital generally comes in two 4
forms: retained earnings and new stock 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 capital expenditures to serve customers 9
and other capital/investments, which avoids the need to 10
issue new debt or new stock. Occasionally, it’s necessary 11
to issue common equity in order to maintain a balanced 12
debt and equity capital structure. A balanced capital 13
structure allows Avista access to both debt and equity 14
markets under reasonable terms, on a sustainable basis. 15
As previously noted, our capital requirements for the next 16
five years are sizable at approximately $1.2 billion, 17
which will need to be funded with both debt and equity. 18
Q. Are the debt and equity capital markets a 19
competitive market? 20
A. Yes. Our ability to attract new capital, 21
especially equity capital, under reasonable terms is 22
dependent on our ability to offer a risk/reward 23
opportunity that is better than the equity investors’ 24

Thies, Di 9
Avista Corporation
other alternatives. We are competing with not only other 1
utilities, but businesses in other sectors of the economy. 2
Demand for the stock supports the stock price, which 3
provides the opportunity to issue additional stock under 4
reasonable terms to fund capital investment requirements. 5
To the extent that the equity investor holds a 6
diversified portfolio of companies that includes utilities 7
and other energy companies, we would be competing with 8
those companies to attract those equity dollars. 9
Q. What is Avista doing to attract equity 10
investment? 11
A. Avista is carrying a capital structure that 12
provides the opportunity to have financial metrics that 13
offer a risk/reward proposition that is competitive and/or 14
attractive for equity holders. 15
We have steadily increased our dividend for common 16
shareholders over the past several years, to work toward a 17
dividend payout ratio that is comparable to other 18
utilities in the industry. This is an essential element 19
in providing a competitive risk/reward opportunity for 20
equity investors. 21
We are employing tracking mechanisms such as the 22
Power Cost Adjustment (PCA) and Purchased Gas Adjustment 23
(PGA), approved by the Idaho Public Utilities Commission 24

Thies, Di 10
Avista Corporation
(the Commission), to balance the risk of owning and 1
operating the business in a manner that places us in a 2
position to offer a risk/reward opportunity that is 3
competitive with not only other utilities, but with 4
businesses in other sectors of the economy. 5
Dr. Avera provides additional testimony related to 6
the appropriate return on equity for Avista that would 7
allow the Company access to equity capital under 8
reasonable terms, and on a sustainable basis. 9
10
III. CREDIT RATINGS 11
Q. How important are credit ratings for Avista? 12
A. Utilities require ready access to capital 13
markets in all types of economic environments. The nature 14
of our business with long-term capital projects, our 15
obligation to serve, and the potential for significant 16
volatility in fuel and purchased power markets, 17
necessitates the need to have the ability to go to the 18
financial markets under reasonable terms on a regular 19
basis. In order to have this ability, investors need to 20
understand the risks related to any of their investments. 21
To help investors assess the creditworthiness of a 22
company, Nationally Recognized Statistical Rating 23
Organizations (rating agencies) developed their own 24

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Avista Corporation
standardized ratings scale, otherwise known as credit 1
ratings. These credit ratings indicate the 2
creditworthiness of a company and assist investors in 3
determining if they want to invest in a Company. 4
Q. Please summarize the credit ratings for Avista’s 5
debt securities. 6
A. Two of the most widely recognized rating 7
agencies are S&P and Moody’s. Avista has credit ratings 8
assigned by both S&P and Moody’s. Avista’s credit ratings 9
are summarized on page 1 of Exhibit 2, Schedule 1. 10
Q. Please explain the implications of the credit 11
ratings in terms of the Company’s ability to access 12
capital markets. 13
A. Credit ratings impact investor demand and 14
expected returns. More specifically, when the Company 15
issues debt, the credit rating can affect the 16
determination of the interest rate at which the debt will 17
be issued. The credit rating can affect the type of 18
investor who will be interested in purchasing the debt. 19
For each type of investment a potential investor could 20
make, the investor looks at the quality of that investment 21
in terms of the risk they are taking and the priority they 22
would have for payment of principal and interest in the 23
event that the organization experiences severe financial 24

Thies, Di 12
Avista Corporation
stress. Investment risks include, but are not limited to, 1
liquidity risk, market risk, operational risk, and credit 2
risk. These risks are considered by the rating agencies 3
and investors in assessing our creditworthiness. 4
In challenging credit markets, where investors are 5
less likely to buy corporate bonds (as opposed to U.S. 6
Government bonds), a higher credit rating will attract 7
more investors, and a lower credit rating could reduce or 8
eliminate the number of potential investors. Thus, lower 9
credit ratings may result in a company having more 10
difficulty accessing financial markets and/or incur 11
significantly higher costs when accessing capital. 12
Q. What credit rating does Avista Corporation 13
believe is appropriate? 14
A. The move to investment grade for Avista was a 15
significant step in improving the Company’s ability to 16
access capital at a reasonable cost. It took 17
approximately six years for the Company to regain its 18
investment grade rating from S&P and Moody’s after it was 19
downgraded during the Energy Crisis. The difference 20
between investment grade and non-investment grade is not 21
only a matter of debt pricing, but also the ability to 22
access markets. 23

Thies, Di 13
Avista Corporation
As shown in Illustration No. 1, Avista’s current S&P 1
corporate credit rating of BBB, is below the average 2
credit rating for U.S. Regulated Combined Gas and Electric 3
Utilities. The Company’s long-term goal is to operate at 4
a credit rating of at least the utility average (BBB+). 5
Operating at a BBB+ would likely attract additional 6
investors, lower the Company’s debt pricing, and makes us 7
more competitive with other utilities. 8
Illustration No. 1: 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

Thies, Di 14
Avista Corporation
Financially healthy utilities have lower financing costs 1
which, in turn, benefit customers. In addition, 2
financially healthy utilities are better able to invest in 3
the required infrastructure over time to serve their 4
customers, and to withstand the challenges facing the 5
industry. 6
Q. What are the key credit factors S&P uses to 7
establish credit ratings? 8
A. Credit factors utilized by S&P to establish 9
credit ratings typically include an assessment of a 10
company’s Business Risk and Financial Risk. The Business 11
Risk includes such items as country risk, industry risk, 12
competitive position, and profitability. The Business 13
Risk analysis is supported by statistics; however, it also 14
involves subjective judgment. S&P assigns a Business Risk 15
profile to each company that may range from the lowest of 16
“Vulnerable” to the highest of “Excellent”. Avista’s 17
Business risk profile is currently Excellent. 18
Financial risk is assessed primarily through 19
quantitative means. S&P’s financial ratio benchmarks used 20
to rate companies such as Avista are set forth in 21
Illustration No. 2 below. 22

Thies, Di 15
Avista Corporation
Illustration No. 2: 1
2
The ratios above are utilized to determine the 3
financial risk profile. Currently, Avista is in the 4
Aggressive category. The financial risk category along 5
with the business risk profile is then utilized in 6
Illustration No. 3 below to determine a company’s rating. 7
S&P currently has Avista’s corporate credit rating as BBB, 8
based upon an Aggressive financial risk profile and 9
Excellent business risk profile. 10

Thies, Di 16
Avista Corporation
Illustration No. 3: 1
2
3
Moody’s uses a similar methodology to analyze and 4
determine utility credit ratings. 5
Q. Please describe how S&P’s Financial Risk ratios 6
are calculated and what they mean? 7
A. The first ratio, Funds from operations/total 8
debt (%), calculates the amount of cash flow from 9
operations as a percent of total debt. The ratio 10
indicates the company’s ability to fund debt obligations. 11
The second ratio, Total debt/total capital (%), is the 12
amount of debt in our total capital structure. The ratio 13
is an indication of the extent to which the company is 14
using debt to finance its operations. S&P looks at many 15
other financial ratios; however, these are the two most 16

Thies, Di 17
Avista Corporation
important ratios they use when analyzing our financial 1
profile. 2
Q. Do rating agencies make adjustments to the 3
financial ratios that are calculated directly from the 4
financial statements of the Company? 5
A. Yes. Rating agencies make adjustments to debt 6
to factor in off-balance sheet commitments (e.g., 7
purchased power agreements and the unfunded status of 8
pension and other post-retirement benefits) that 9
negatively impact the ratios. For example, in 2011 S&P 10
made adjustments to Avista’s debt totaling approximately 11
$148 million primarily related to purchased power 12
contracts, post-retirement benefits, and non-recourse 13
debt. The adjusted financial ratios for Avista are 14
included in Illustration No. 2 above. 15
Q. What other risks are Avista and the utility 16
sector facing that may impact credit ratings? 17
A. Avista’s credit ratings are impacted by risks 18
that could negatively affect the Company’s cash flows. 19
These risks include, but are not limited to, weather 20
conditions, the effect of state and federal regulatory 21
decisions on the ability to recover costs and earn a 22
reasonable return, changes in wholesale energy prices, 23
local and global economic conditions, access to capital 24

Thies, Di 18
Avista Corporation
markets at a reasonable cost, potential effects of 1
legislation or administrative rulemaking, volatility and 2
illiquidity in the wholesale energy market, and delays or 3
changes in construction costs. 4
Credit ratings for the utility sector are also 5
adversely impacted by large capital expenditures for new 6
generation, transmission and distribution facilities, and 7
environmental compliance. The utility sector is in a 8
cycle of significant capital spending, which will likely 9
be funded by significant issuances of debt and equity. 10
This will likely affect the competition for financial 11
capital. 12
The increased capital spending needs and resulting 13
increased debt and equity issuances make regulatory 14
support for full and timely recovery of prudently incurred 15
costs critical to the utility sector. 16
Q. How important is the regulatory environment in 17
which a Company operates? 18
A. The regulatory environment in which a company 19
operates is a major qualitative factor in determining a 20
company’s creditworthiness. 21
22
S&P stated the following: 23
Regulation is the most critical aspect that 24
underlies regulated integrated utilities’ 25

Thies, Di 19
Avista Corporation
creditworthiness. Regulatory decisions can 1
profoundly affect financial performance. Our 2
assessment of the regulatory environments in 3
which a utility operates is guided by certain 4
principles, most prominently consistency and 5
predictability, as well as efficiency and 6
timeliness. For a regulatory process to be 7
considered supportive of credit quality, it must 8
limit uncertainty in the recovery of a utility’s 9
investment. They must also eliminate, or at 10
least greatly reduce, the issue of rate-case 11
lag, especially when a utility engages in a 12
sizable capital expenditure program.1 13
Due to the major capital expenditures planned by 14
Avista, a supportive regulatory environment is essential. 15
16
IV. CASH FLOW 17
Q. What are the Company’s sources to fund capital 18
requirements? 19
A. The Company utilizes cash flow from operations, 20
long-term debt and common stock issuances to fund its 21
capital expenditures. Additionally, on an interim basis, 22
the Company utilizes its credit facility to fund capital 23
needs until longer-term financing can be obtained. 24
Q. What are the Company’s near-term capital 25
requirements? 26
A. As a combined electric and natural gas utility, 27
capital will be required for investment in generation 28
1 Standard and Poor’s, Key Credit Factors: Business and Financial Risks in the
Investor-owned Utilities Industry, March 2010.

Thies, Di 20
Avista Corporation
upgrades, expansion and replacement of transmission and 1
distribution facilities, customer growth as well as 2
necessary upgrades and replacements of our natural gas 3
systems. 4
We have been making significant capital investments 5
in generation, transmission and distribution systems to 6
preserve and enhance service reliability for our customers 7
and replace aging infrastructure. Utility capital 8
expenditures were $247.0 million for 2011. 9
The amount of capital expenditures planned for 2012-10
2013 is approximately $500 million, and over a five year 11
period ending December 31, 2016 approximately $1.2 12
billion. Total average monthly rate base as of June 30, 13
2012, was $2.2 billion; therefore, these planned capital 14
additions represent substantial new investments given the 15
relative size of the Company. 16
Q. What are the Company’s near-term plans related 17
to its debt? 18
A. The Company finances its rate base assets with 19
long term debt and equity. As such, from time to time, we 20
need to access long-term capital markets in order to 21
finance these long-term assets as well as fund maturing 22
debt. 23

Thies, Di 21
Avista Corporation
In November 2012, the Company will issue $80.0 1
million of First Mortgage Bonds due in 2047. Additionally, 2
the Company is forecasting the issuance of $90 million of 3
First Mortgage bonds in June 2013. 4
The Company has $50.0 million of 1.68 percent First 5
Mortgage Bonds that mature in 2013. Illustration No. 4 6
below shows the amount of debt maturities by year 7
including the maturity date of the forecasted long-term 8
debt issuance: 9
Illustration No. 4: 10
11
12
Q. Is there pending legislation that may impact the 13
Company’s collateral requirements? 14

Thies, Di 22
Avista Corporation
A. Yes. The Dodd-Frank Wall Street Reform and 1
Consumer Protection Act (Dodd-Frank Act) was enacted into 2
law in July 2010. The Dodd-Frank Act establishes 3
regulatory jurisdiction by the Commodity Futures Trading 4
Commission (CFTC) and the Securities and Exchange 5
Commission (SEC) for certain swaps (which include a 6
variety of derivative instruments) and the users of such 7
swaps, that previously had been largely exempted from 8
regulation. The Dodd-Frank Act includes mandatory 9
clearing requirements for swaps, with certain 10
expectations. Avista uses derivative instruments to hedge 11
risks related to electric and natural gas commodities, 12
interest rates and foreign currency. 13
A variety of rules must be adopted by federal 14
agencies (including the CFTC, SEC and the FERC) to 15
implement the Dodd-Frank Act. These rules being developed 16
and implemented will clarify the impact of the Dodd-Frank 17
Act on the Company, which may be significant. 18
Under the Dodd-Frank Act, “Swap Dealers” and “Major 19
Swap Participants” generally will be required to collect 20
minimum initial and variation margin (cash collateral) 21
from their counterparties for non-cleared swaps, similar 22
to the margin required for swaps that are cleared on 23
exchanges. However, the requirement varies with the type 24

Thies, Di 23
Avista Corporation
of counterparty and the regulator of the “Major Swap 1
Participant” or “Swap Dealer.” The Company should be 2
categorized as a counterparty that is a non-financial end 3
user for the purposes of the Dodd-Frank Act, i.e., as a 4
non-financial entity that engages in derivatives to hedge 5
commercial risk. 6
On August 13, 2012, the CFTC and SEC issued final 7
rules regarding the definition of “swap” and various 8
exemptions from mandatory clearing. The final rules 9
indicate including how our use of derivatives to hedge 10
commercial risk could be exempt under the de minimis 11
threshold and/or the end-user criteria. These rules could 12
affect counterparties classified as Swap Dealers or Major 13
Swap Participants. Some of these parties have been active 14
in providing hedging instruments and may be forced out of 15
the market or elect to drop out because of the 16
restrictions on proprietary trading by financial 17
institutions. These final rules have effective dates 18
relevant to Avista starting in April 2013. 19
We will continue to monitor developments including 20
proposals to implementation of various aspects related to 21
the Act. We cannot predict the impact the Dodd-Frank Act 22
may ultimately have on our operations. 23

Thies, Di 24
Avista Corporation
V. CAPITAL STRUCTURE 1
Q. What are Avista’s plans regarding common equity 2
and why is this important? 3
A. Avista continuously monitors the common equity 4
ratio of its capital structure, and assesses the need to 5
issue additional common equity in order to maintain a 6
capital structure that is appropriate for our business. 7
In 2011, we issued $26.5 million, and in 2010, we issued 8
$46.2 million of common stock. In 2012, we plan to issue 9
up to $45 million of common stock. It is important to the 10
rating agencies and investors for Avista to maintain a 11
balanced debt/equity ratio in order to minimize the risk 12
of default on required debt interest payments. Dr. Avera 13
notes that: 14
Utilities are facing energy market 15
volatility, rising cost structures, the need 16
to finance significant capital investment 17
plans, uncertainties over accommodating 18
economic and financial market uncertainties, 19
and ongoing regulatory risks. Taken 20
together, these considerations warrant a 21
stronger balance sheet to deal with an 22
increasingly uncertain environment. A more 23
conservative financial profile, in the form 24
of a higher common equity ratio, is 25
consistent with increasing uncertainties and 26
the need to maintain the continuous access 27
to capital under reasonable terms that is 28
required to fund operations and necessary 29
system investment, including times of 30
adverse capital market conditions. (Avera 31
Testimony, P. 27, ll. 12-22. P. 28, ll. 1-32
2). 33

Thies, Di 25
Avista Corporation
1
In his testimony Dr. Avera concludes that the 50.0 2
percent common equity ratio is reasonable based on the 3
following: 4
Avista’s requested capitalization is 5
consistent with the Company’s need to maintain 6
its credit standing and financial flexibility 7
as it seeks to raise additional capital to 8
fund significant system investments and meet 9
the requirements of its service territory; 10
Avista’s proposed common equity ratio is 11
entirely consistent with the 49.0 percent and 12
50.1 percent average common equity ratios for 13
the proxy utilities, based on year-end 2011 14
data and near-term expectations, respectively; 15
and, 16
The requested capitalization reflects the 17
importance of an adequate equity layer to 18
accommodate Avista’s operating risks and the 19
pressures of funding significant capital 20
investments. This is reinforced by the need 21
to consider the impact of uncertain capital 22
market conditions, as well as off-balance 23
sheet commitments such as purchased power 24
agreements, which carry with them some level 25
of imputed debt. (Avera Testimony, P. 7, ll. 26
28 through P. 8, ll. 2). 27
28
Q. Please explain the capital structure proposed by 29
Avista in this case. 30
A. The proportionate shares of Avista Corp.’s pro 31
forma capital structure are 50.0 percent common equity, 32
and 50.0 percent long-term debt as shown on page 2 of 33
Exhibit 2, Schedule 1. Additional details related to 34

Thies, Di 26
Avista Corporation
adjustments are located in page 1 of confidential Exhibit 1
2, Schedule 2. 2
3
VI. COST OF DEBT 4
Q. How have you determined the cost of debt? 5
A. Cost of total long-term debt in the Company’s 6
proposed capital structure includes forecasted and actual 7
weighted average long-term debt. As shown in Exhibit 2, 8
Schedule 1 page 2, the actual weighted average cost of 9
long-term debt outstanding on June 30, 2012 was 5.94%. 10
The size and mix of debt changes over time based upon the 11
actual financing completed. We have made certain pro 12
forma adjustments to update the debt cost through December 13
31, 2013. Pro forma adjustments to total long-term debt 14
reflect the issuance of new debt for the pro forma period. 15
We are anticipating the cost of debt to rise to 6.02% 16
as of December 31, 2013, from 5.94% as of June 30, 2012. 17
This increase is primarily due to the forecasted 2013, 18
thirty-year issuance of $90 million secured bonds, of 19
which a portion of the proceeds will be used to refinance 20
the three-year, 1.68%, $50 million first mortgage bonds 21
maturing in 2013 (originally issued in 2010). 22

Thies, Di 27
Avista Corporation
VII. COST OF COMMON EQUITY 1
Q. What rate of return on common equity is the 2
Company proposing in this proceeding? 3
A. The Company is proposing a 10.90% return on 4
common equity (ROE), which falls essentially at the 5
midpoint of Dr. Avera’s recommended range of required 6
return on equity. Dr. Avera testifies to analyses related 7
to the cost of common equity with an ROE range of 10.0% to 8
11.4% and 10.2% to 11.4% (after incorporating an 9
adjustment to account for the impact of common equity 10
flotation costs). In his testimony Dr. Avera states that: 11
My conclusion that a 10.9 percent ROE for 12
Avista is a reasonable estimate of 13
investors’ required return is also 14
reinforced by the greater uncertainties 15
associated with Avista’s relatively small 16
size and the fact that current cost of 17
capital estimates are likely to understate 18
investors’ requirements at the time the 19
outcome of this proceeding becomes effective 20
and beyond. (Avera Testimony, at P.6, ll. 21
20-28) 22
23
If Avista can earn a 10.9% ROE, it would further 24
strengthen the Company’s credit ratings ratios. Stronger 25
credit ratings ratios could lead to the Company’s goal of 26
obtaining an upgrade to our corporate credit rating to 27
BBB+ from BBB. 28
Q. Please summarize the proposed capital structure 29
and the cost components for debt and common equity. 30

Thies, Di 28
Avista Corporation
A. Illustration No. 5 below shows the capital 1
structure and cost components proposed by the Company. 2
Illustration No. 5: 3
4
Q. Does that conclude your pre-filed direct 5
testimony? 6
A. Yes. 7
Percent of
Amount Total Capital Cost Component
Total Debt 1,333,000,000$ 50.00%6.02%3.01%
Total Equity 1,305,826,000 50.00%10.90%5.45%
Total 2,638,826,000$ 100.00%8.46%
AVISTA CORPORATION
Forecasted Cost of Capital
December 31, 2013

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-12-08
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-12-07
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. THIES
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

Standard & Poor's Moody's
Last Upgraded
Credit Outlook
A+A1
A A2
A-First Mortgage Bonds A3 First Mortgage Bonds
Secured Medium-Term Notes Secured Medium-Term Notes
BBB+Baa1
BBB Avista Corp./Corporate rating Baa2 Avista Corp./Issuer rating
BBB-Baa3
INVESTMENT GRADE
BB+Trust-Originated Preferred Securities Ba1 Trust-Originated Preferred Securities
BB Ba2
BB-Ba3
(1)The Company received an upgrade to its Corporate credit rating in March 2011 and to its First Mortgage Bonds in August 2011
AVISTA CORPORATION
Long-term Securities Credit Ratings
March/August 2011(1)March 2011
Stable Stable
Exhibit No. 2
Case Nos. AVU-E-12-08 AVU-G-12-07
M. Thies, Avista
Schedule 1, p. 1 of 5
Percent of
Amount Total Capital Cost Component
Total Debt 1,333,000,000$ 50.00%B 6.02%3.01%
Total Equity 1,305,826,000 50.00%B 10.90%5.45%
Total 2,638,826,000$ 100.00%8.46%
Percent of
Amount Total Capital Cost Component
Total Debt 1,213,000,000$ 50.77%5.94%3.01%
Total Equity 1,176,206,894 49.23%10.50%C 5.17%
TOTAL 2,389,206,894$ 100.00%8.18%
Assumptions:
A
B
C
Embedded Cost of Capital
AVISTA CORPORATION
Forecasted Cost of Capital A
December 31, 2013
AVISTA CORPORATION
June 30, 2012
The Company's cost of capital was forecasted through 12-31-2013, based on the Company's internal
forecast.
The Company's actual percentage of debt and equity is 50.5% and 49.5%, respectively. Consistent
with prior regulatory filings the Company is filing a capital structure of 50% equity and 50% total
debt.
The cost of equity used for the embedded cost of capital is based on the last known allowed return on
equity approved by the Commission.
Exhibit No. 2
Case Nos. AVU-E-12-08 AVU-G-12-07
M. Thies, Avista
Schedule 1, p. 2 of 5
Line Coupon Maturity Settlement Principal Issuance SWAP Discount Loss/Reacq Net Yield to Outstanding Effective Line
No.Description Rate Date Date Amount Costs Loss/(Gain)(Premium)Expenses Proceeds Maturity 12/31/2013 Cost No.
(a)(b)( c)(d)(e)(f)(g)(g)(h)(i)(j)(k)(l)
1 FMBS - SERIES A 7.530%5/5/2023 5/6/1993 5,500,000$ 42,712$ -$ -$ 963,011$ 4,494,277$ 9.359%5,500,000$ 514,744$ 1
2 FMBS - SERIES A 7.540%5/5/2023 5/7/1993 1,000,000$ 7,766$ -$ -$ 175,412$ 816,822$ 9.375%1,000,000 93,747 2
3 FMBS - SERIES A 7.390%5/11/2018 5/11/1993 7,000,000$ 54,364$ -$ -$ 1,227,883$ 5,717,753$ 9.287%7,000,000 650,114 3
4 FMBS - SERIES A 7.450%6/11/2018 6/9/1993 15,500,000$ 120,377$ -$ 50,220$ 2,140,440$ 13,188,963$ 8.953%15,500,000 1,387,715 4
5 FMBS - SERIES A 7.180%8/11/2023 8/12/1993 7,000,000$ 54,364$ -$ -$ -$ 6,945,636$ 7.244%7,000,000 507,064 5
6 Trust Preferred Securities 1.580%1 6/1/2037 6/3/1997 40,000,000$ 1,296,086$ -$ -$ (1,769,125)$ 40,473,039$ 1.540%40,000,000 616,011 6
7 FMBS - SERIES B 6.370%6/19/2028 6/19/1998 25,000,000$ 158,304$ -$ -$ 188,649$ 24,653,047$ 6.475%25,000,000 1,618,863 7
8 FMBS SERIES 5.45% 5.450%12/1/2019 11/18/2004 90,000,000$ 1,192,681$ -$ 239,400$ -$ 88,567,919$ 5.608%90,000,000 5,047,001 8
9 FMBS SERIES - 6.25% 6.250%12/1/2035 11/17/2005 150,000,000$ 1,812,935$ (4,445,000)$ 367,500$ -$ 152,264,565$ 6.139%150,000,000 9,208,605 9
10 FMBS SERIES - 5.70% 5.700%7/1/2037 12/15/2006 150,000,000$ 4,702,304$ 3,738,000$ 222,000$ -$ 141,337,696$ 6.120%150,000,000 9,179,674 10
11 FMBS SERIES - 5.95%5.950%6/1/2018 4/2/2008 250,000,000$ 2,246,419$ 16,395,000$ 835,000$ -$ 230,523,581$ 7.034%250,000,000 17,585,352 11
12 FMBS SERIES - 5.125%5.125%4/1/2022 9/22/2009 250,000,000$ 2,284,788$ (10,776,222)$ 575,000$ 2,875,817$ 255,040,618$ 4.907%250,000,000 12,268,615 12
13 FMBS SERIES - 3.89%3.890%12/20/2020 12/20/2010 52,000,000$ 383,338$ -$ -$ 6,273,664$ 45,342,997$ 5.578%52,000,000 2,900,325 13
14 FMBS SERIES - 5.55%5.550%12/20/2040 12/20/2010 35,000,000$ 258,834$ -$ -$ 5,263,822$ 29,477,345$ 6.788%35,000,000 2,375,887 14
15 FMBS SERIES - 4.45%4.450%12/14/2041 12/14/2011 85,000,000$ 692,722$ 10,557,000$ -$ -$ 73,750,278$ 5.340%85,000,000 4,538,863 15
16 FMBS SERIES - 4.23%4.230%11/29/2047 11/30/2012 80,000,000$ 600,000$ 2 18,546,870$ -$ 104,292$ 60,748,838$ 5.854%80,000,000 4,683,510 16
17 Forecasted FMBS Issuance 5.500%6/15/2043 6/15/2013 90,000,000$ 675,000$ 2 -$ -$ -$ 89,325,000$ 5.552%90,000,000 4,996,461 17
18 1,333,000,000 78,172,554 18
19 19
20 Repurchase 3 7.74%12/31/2017 6/30/2006 6,875,000$ 483,582$ 6,391,418$ 8.721%4 70,127 20
21 Repurchase 3 8.17%6/30/2015 6/30/2005 26,000,000$ 1,700,371$ 24,299,629$ 9.184%4 267,096 21
22 Repurchase 3 8.41%6/30/2014 6/30/2004 36,590,000$ 7,244,895$ 29,345,105$ 11.840%4 1,273,854 22
23 Repurchase 3 5.72%3/1/2034 12/30/2009 17,000,000$ 1,957,496$ 15,042,504$ 6.683%4 163,206 23
24 Repurchase 3 6.55%10/1/2032 12/31/2008 66,700,000$ 3,709,755$ 62,990,245$ 7.034%4 324,413 24
25 IDAHO TOTAL DEBT OUTSTANDING AND COST OF DEBT AT December 31, 2013 1,333,000,000$ 80,271,250$ 25
26 26
27 Adjusted Weighted Average Cost of Debt 6.02%27
28 28
29 29
30 1 Average monthly average rate over a twelve month period 30
31 2 Estimated issuance costs 31
32 3 Coupon Rate at the time of repurchase 32
33 4 Calculated using the internal rate of return method 33
34 34
AVISTA CORPORATION
Forecasted Cost of Long-Term Debt Detail - Idaho
December 31, 2013
Exhibit No. 2
Case Nos. AVU-E-12-08 AVU-G-12-07
M. Thies, Avista
Schedule 1, p. 3 of 5
1 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Avg of
2 (a)(b)( c)(d)(e)(f)(g)(h)(i)(j)(k)(l)(m)(n)(o)
3 Long-Term Debt Variable Rate $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 $40,000,000 40,000,000$
4
5 Number of Days in Month 31 28 31 30 31 30 31 31 30 31 30 31
6 Forecasted Rates*1.53%1.53%1.53%1.55%1.55%1.55%1.56%1.56%1.56%1.60%1.60%1.60%1.58%
7 Long-Term Debt Variable Rate - Interest Expense 52,576$ 47,488$ 52,576$ 51,506$ 53,223$ 51,506$ 53,733$ 53,733$ 52,000$ 55,111$ 53,333$ 55,111$ 631,897$
8
9
10
11 *Forecasted Rates are based on the Compnay's internal forecast
12
13
AVISTA CORPORATION
Cost of Long-Term Variable Rate
December 31, 2013
Exhibit No. 2
Case Nos. AVU-E-12-08 AVU-G-12-07
M. Thies, Avista
Schedule 1, p. 4 of 5
10-Q
06/30/2012 Adjustments
Regulatory
Balance
6/30/2012
Forecasted
activity
Regulatory
Balance
12/31/2013
Long-term debt 1,147,765$ 25,235$ A 1,173,000$ 120,000$ E 1,293,000$
Current Portion of long-term debt 423 (423) B - - -
Debt to Affiliated Trust 51,547 (11,547) C 40,000 - 40,000
Total long-term debt 1,199,735$ 13,265$ 1,213,000$ 120,000$ 1,333,000$
Total Avista Corporation stockholders' equity 1,216,842$ (40,635)$ D 1,176,207$ 129,619$ F 1,305,826$
A
B
C
D
2012 Equity Adjustments (dollars in thousands):
Capital Stock Expense 14,278$
Accumulated other comprehensive loss 5,158
Debt outstanding at Ecova (60,071)
(40,635)$
E
F The following is forecasted equity activity from June, 30 2012, through December 31, 2013 included in our internal forecast (dollars in thousands):
Capital Stock Expense XXX Confidential
Change in debt outstanding at Ecova XXX Confidential
Dividends XXX Confidential
Net Income XXX Confidential
Net Common Stock Issuance XXX Confidential
Adjustment to retained earnings due to
forecasted subsidary activity XXX Confidential
-$
Current portion of long-term debt excludes $423,000, which primarily relates to capital leases and debt at the subsidiaries.
This adjustment reflects the $11.547 million of these securities the Company currently holds. The $40 million adjusted balance reflects
the current outstanding balance to third party investors.
The Company excludes the following from equity: Capital Stock Expense - in order to recover the costs incurred for issuing equity, an
amount equivalent to the actual debt outstanding at the Company's subsidiary Ecova, and accumulated other comprehensive loss - in
order to reflect the Company's equity balance.
This represents the issuance of $80 million of long-term debt in 2013, $90 million of long-term debt in 2014, less $50 million of long-
term debt maturing in December 2013.
AVISTA CORPORATION
Capital Structure Reconciliation
(dollars in thousands)
Long-term Debt
Equity
These adjustments are made to reflect the Company's actual principal amount outstanding. The Company excludes amounts related
to settled interest rate swaps and unamortized debt discount. These items are included as a cost of debt. Additionally, amounts
related to capital leases are excluded from long-term debt.
Exhibit No. 2
Case Nos. AVU-E-12-08 AVU-G-12-07
M. Thies, Avista
Schedule 1, p. 5 of 5
Exhibit No. 2
Case Nos. AVU-E-12-08 & AVU-G-12-07
M. Thies, Avista
Schedule 2, p. 1 of 1

CONFIDENTIAL subject to Attorney’s Certificate of Confidentiality

Capital Structure Reconciliation
Pages 1 of 1