20150601Thies Direct.pdf

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

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-15-05
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-15-01 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 T. THIES )
FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

I. INTRODUCTION 1
Q. Please state your name, business address, and present 2
position with Avista Corp. 3
A. My name is Mark T. Thies. My business address is 4
1411 East Mission Avenue, Spokane, Washington. I am employed 5
by Avista Corporation as Senior Vice President, Chief 6
Financial Officer, and Treasurer. 7
Q. Would you please describe your education and 8
business experience? 9
A. I received a Bachelor of Arts degree in 1986, with 10
majors in Accounting and Business Administration from Saint 11
Ambrose College in Davenport, Iowa, and became a Certified 12
Public Accountant in 1987. I have extensive experience in 13
finance, risk management, accounting and administration 14
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 areas 20
of South Dakota, Wyoming and Montana. I joined Black Hills 21
Corporation in 1997 upon leaving InterCoast Energy Company in 22
Des Moines, Iowa, where I was the manager of accounting. 23
Thies, Di 1 Avista Corporation

Previous to that I was a senior auditor for Arthur Anderson & 1
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 Avista 5
Corporation as well as explain the proposed capital 6
structure, overall rate of return, and our credit ratings. 7
Additionally, I will summarize our capital expenditures 8
program. Mr. Adrien McKenzie, on behalf of Avista, will 9
provide additional testimony related to the appropriate 10
capital structure and return on equity for Avista, based on 11
our specific circumstances, together with the current state 12
of the financial markets. 13
In brief, I will provide information that shows: 14
• Avista’s plans call for making significant utility capital 15
investments in our electric and natural gas systems to 16 preserve and enhance service reliability for our customers, 17 including the continued replacement of aging 18
infrastructure. Capital expenditures of $1.08 billion are 19 planned for 2015-2017. Capital expenditures of 20 approximately $1.8 billion are planned for the five-year 21 period ending December 31, 2019. Avista needs adequate 22 cash flow from operations to fund these requirements, 23
together with access to capital from external sources under 24 reasonable terms, on a sustainable basis. 25
• We are proposing an overall rate of return of 7.62 percent, 26 which includes a 50.0 percent common equity ratio, a 9.9 27 percent return on equity, and a cost of debt of 5.34 28
percent. We believe our proposed overall rate of return of 29 7.62 percent and proposed capital structure provide a 30 reasonable balance between safety and economy. 31
Thies, Di 2 Avista Corporation

• Avista’s corporate credit rating from Standard & Poor’s is 1 currently BBB and Baa1 from Moody’s Investors Service. 2 Avista must operate at a level that will support a solid 3 investment grade corporate credit rating in order to access 4 capital markets at reasonable rates. A supportive 5
regulatory environment is an important consideration by the 6 rating agencies when reviewing Avista. Maintaining solid 7
credit metrics and credit ratings will also help support a 8 stock price necessary to issue equity under reasonable 9 terms to fund capital requirements. 10
• Avista completed two significant business unit transactions 11 in 2014: the sale of Ecova and the acquisition of Alaska 12 Electric Light and Power utility operations. These 13 transactions are supportive to our business profile and 14 their financial impacts have positively complemented our 15
ongoing financial structure and operations. 16
A table of contents for my testimony is as follows: 17
Description Page 18
I. Introduction 1 19
II. Financial Overview 4 20
III. Business Unit Transactions in 2014 6 21
IV. Capital Expenditures 11 22
V. Maturing Debt 15 23
VI. Capital Structure 18 24
VII. Proposed Rate of Return 23 25
VIII. Credit ratings 30 26
27
Q. Are you sponsoring any Exhibits with your direct 28
testimony? 29
A. Yes. I am sponsoring Exhibit No. 2, Schedules 1 30
through 4, which were prepared under my direction. Avista’s 31
credit ratings by S&P and Moody’s are summarized on page 1, 32
of Schedule 1, and Avista’s actual capital structure at 33
Thies, Di 3 Avista Corporation

December 31, 2014, and the proposed capital structure at 1
December 31, 2015, are included on page 2, with supporting 2
information on pages 3 and 4. Confidential Schedule 2 3
includes the Company’s planned capital expenditures and long-4
term debt issuances by year. Confidential Schedule 3 5
includes our Interest Rate Risk Management Plan. Schedule 4 6
includes the equity ratios and returns on equity approved by 7
various state regulatory commissions from July 1, 2014 to 8
March 31, 2015. 9
10
II. FINANCIAL OVERVIEW 11
Q. Please provide an overview of Avista's financial 12
situation. 13
A. We are operating the business efficiently to keep 14
costs as low as practicable for our customers, while at the 15
same time ensuring that our energy service is reliable and 16
customers are satisfied. An efficient, well-run business is 17
not only important to our customers but also important to 18
investors. Our capital financing plan and our execution of 19
that plan provide a prudent capital structure and liquidity 20
necessary for utility operations. We initiate regulatory 21
processes to recover our costs in a timely manner with the 22
goal of achieving earned returns close to those allowed by 23
regulators in each of the states we serve. These elements – 24
Thies, Di 4 Avista Corporation

cost management, capital and revenues that support operations 1
– are key determinants to the rating agencies when they are 2
reviewing our overall credit ratings. 3
Q. What are steps the Company is taking to maintain 4
and improve its financial health? 5
A. We are working to assure there are adequate funds 6
for operations, capital expenditures and debt maturities. We 7
obtain a portion of these funds through the issuance of long-8
term debt, which is supported by our interest rate risk 9
mitigation plan, and we maintain a proper balance of debt and 10
common equity through regular securities issuances and other 11
transactions. We create financial plans and forecasts to 12
model our income, expenses and investments, providing a basis 13
for prudent financial planning. We seek timely recovery of 14
our costs through general rate cases and other ratemaking 15
mechanisms. 16
The Company currently has a sound financial profile and 17
it is very important for Avista to maintain and enhance its 18
financial position in order to access debt and equity 19
financing under reasonable terms, as Avista funds significant 20
future capital investments and refinances maturing debt. 21
Thies, Di 5 Avista Corporation

III. BUSINESS TRANSACTIONS IN 2014 1
Q. The Company completed two significant business unit 2
transactions in 2014. Please give an overview of these 3
transactions. 4
A. On June 30, 2014, the Company completed the sale of 5
its former Ecova business unit to Cofely USA Inc, an indirect 6
subsidiary of GDF SUEZ, a French multinational utility 7
company. On July 1, 2014, the Company acquired Alaska Energy 8
and Resources Company (AERC) by issuing Avista common stock 9
to the holders of AERC common stock in exchange for their 10
shares. AERC’s primary subsidiary is Alaska Electric Light 11
and Power Company (AEL&P), which provides electric service to 12
the City and Borough of Juneau, Alaska. These business unit 13
transactions also led the Company to implement a common stock 14
share repurchase program. 15
Q. How did the Ecova sale transaction affect Avista’s 16
capital structure? 17
A. Avista received cash for the sale of Ecova. The 18
price for the Ecova sale was $335 million, which was reduced 19
for payment of debt and other customary closing adjustments. 20
After repayment of debt and payments to Ecova option holders 21
and non-controlling interests, and deductions for transaction 22
expenses and a portion of proceeds held in escrow, the net 23
cash to Avista at closing was $205.4 million. Avista’s gain 24
Thies, Di 6 Avista Corporation

on the transaction resulted in income tax obligations of 1
approximately $85.8 million. Avista expects to receive 2
approximately $13.1 million from the escrow later in 2015, 3
resulting in total net cash proceeds to Avista of $133.2 4
million. Certain post-closing adjustments may affect the 5
final net proceeds and an indemnity escrow will be held until 6
15 months after the transaction closed. 7
The cash proceeds received on June 30, 2014, were 8
initially used to reduce Avista’s outstanding borrowings on 9
the short-term bank credit facility, which reduced the 10
outstanding balance from $151.5 million to zero, and a 11
portion of the cash was placed in temporary investments. 12
Q. How did the AERC acquisition transaction, which 13
closed on July 1, 2014, affect Avista’s capital structure? 14
A. We initially funded this acquisition with the 15
issuance of Avista common stock in exchange for the 16
outstanding shares of AERC common stock. The purchase price 17
for AERC at closing was $170 million, plus acquired cash of 18
$19.7 million less the assumption of $38.8 million of 19
outstanding debt and other closing adjustments per the merger 20
agreement. The Avista common stock issued in exchange for 21
AERC common stock was valued under the merger agreement at 22
$32.46 per share, resulting in issuance of 4.5 million new 23
shares of Avista common stock. The value of these shares 24
Thies, Di 7 Avista Corporation

based on the day of issue at a market price of $33.35 per 1
share was $150.1 million. The transaction also required a 2
cash payment of $4.7 million. 3
Following the closing of the transaction, debt was 4
issued by AEL&P and by AERC to rebalance the capital 5
structures of AEL&P and AERC. AEL&P issued $75 million of 6
first mortgage bonds, backed by the assets of AEL&P, and paid 7
off all of its outstanding debt (excluding debt related to a 8
purchased power contract)1. AEL&P paid a $50 million dividend 9
(via its parent, AERC) to Avista. AERC entered into a $15 10
million five-year term loan and paid a $15 million dividend 11
to Avista. These funds from AERC and AEL&P were transferred 12
to Avista, providing $65 million for utility capital 13
investment and utility operating costs at Avista, and reduced 14
Avista’s external financing that would have otherwise 15
occurred without these transactions. At December 31, 2014 16
AERC’s capital structure was 49.7% equity and 50.3% debt. 17
AERC became a wholly-owned corporation of Avista. 18
AEL&P, a vertically integrated electric utility providing 19
electric service to the City and Borough of Juneau, continues 20
to be a wholly-owned corporation of AERC. AERC and AEL&P are 21
separate legal entities and their debt is backed by the 22
1AERC’s debt and debt percentages referred to in this testimony exclude the debt obligation related to a power purchase agreement (PPA) contract held by AEL&P related to the Snettisham hydro electric generation
facility.
Thies, Di 8 Avista Corporation

assets and equity of AERC and AEL&P, and holders of their 1
debt have no recourse against Avista. Avista does not 2
provide collateral or guarantees related to AERC or AEL&P 3
debt. The debt and equity of AERC are excluded from the 4
capital structure proposed in Avista’s rate filings. 5
Q. How did Avista’s share repurchase program affect 6
the Company’s capital structure? 7
A. As I described earlier, we received cash proceeds 8
from the sale of Ecova and we issued common stock to acquire 9
AERC. The cash sale of Ecova and acquisition of AERC through 10
the issuance of equity were completed, almost simultaneously, 11
midway through 2014. We also completed new debt transactions 12
to recapitalize AERC and AEL&P during the second half of 13
2014. These transactions provided a significant amount of 14
cash to Avista, added significant equity to Avista’s capital 15
structure, and decreased debt. 16
The Company entered into a common stock repurchase 17
program in 2014 to acquire shares of Avista common stock with 18
cash. The share repurchase program was designed to reduce 19
equity and move our overall capital structure closer to our 20
target, which includes an equity ratio for our Idaho 21
operations of approximately 50% equity. 22
We implemented a share repurchase program in June of 23
2014, prior to closing on the Ecova sale and contingent on 24
Thies, Di 9 Avista Corporation

the Ecova sale being completed as planned. The program 1
allowed open market purchases of Avista common shares to 2
start on July 7, 2014, with repurchase transactions carried 3
out by an agent independent of Avista. The program 4
authorized up to four million shares to be repurchased by 5
December 31, 2014, subject to various parameters that were 6
set in June 2014. Daily purchase volumes and prices were 7
dependent on the market for Avista shares. The Company 8
retained the right to terminate the program at any time and 9
could not guaranty that the authorized number of shares would 10
be repurchased. When the program expired December 31, 2014, 11
the repurchases totaled 2,529,615 shares at a total cost of 12
$79.9 million for an average cost of $31.57 per share. On 13
December 31, 2014, Avista’s common equity percentage for the 14
Idaho jurisdiction was 50.4%. 15
We implemented a second share repurchase program in 16
December 2014, based on an expectation that the 2014 program 17
would not reach the four million share maximum before it 18
expired on December 31, 2014. The second program authorized 19
up to 800,000 shares to be purchased during the first quarter 20
of 2015, subject to certain daily volume and price 21
parameters. When the program expired March 31, 2015, the 22
repurchases totaled 89,400 shares at a total cost of $2.7 23
million for an average cost of $32.66 per share. 24
Thies, Di 10 Avista Corporation

IV. CAPITAL EXPENDITURES 1
Q. What is the Company’s recent history related to 2
capital investments? 3
A. We are making significant capital investments in 4
electric generation, transmission and distribution 5
facilities, our natural gas distribution system, and new 6
technology to better serve the needs of our customers. These 7
investments target, among other things, the preservation and 8
enhancement of safety, service reliability and the 9
replacement of aging infrastructure. For the period 2011 10
through 2014, our capital expenditures totaled $1.15 billion. 11
While there are variations among the functional areas 12
targeted for investment each year, the predominant areas have 13
included electric generation, transmission and distribution 14
facilities, natural gas distribution plant, new customer 15
hookups, environmental and regulatory requirements, 16
information technology and other supporting functions, such 17
as fleet services and facilities. 18
Q. In general, has the overall level of capital 19
investment during these years (2011-2014) matched the annual 20
capital requests submitted by the Company’s various 21
departments? 22
A. No. As Company witness Ms. Schuh explains in her 23
testimony, Avista has a Capital Planning Group that meets 24
Thies, Di 11 Avista Corporation

regularly to review and prioritize proposed utility capital 1
investment projects. Avista has typically chosen not to fund 2
all of the capital investment projects proposed by the 3
various departments, driven primarily by the Company’s desire 4
to mitigate the retail rate impacts to customers. Decisions 5
to delay funding certain projects are made only in cases 6
where the Company believes the amount of risk associated with 7
the delay is reasonable and prudent. 8
Q. What does Avista consider in setting the overall 9
level of capital investment each year? 10
A. A range of factors influences the level of capital 11
investment made each year, including but not limited to: 1) 12
the level of investment needed to meet safety, service and 13
reliability objectives and to further optimize our 14
facilities; 2) the degree of overall rate pressure faced by 15
our customers; 3) the variability of investments required for 16
major projects; 4) unanticipated capital requirements, such 17
as an unplanned outage of a large generating unit; 5) the 18
cost of debt; and 6) the opportunity to issue equity on 19
reasonable terms. 20
Q. What are Avista’s planned capital expenditure 21
levels for the next five years? 22
A. We expect to continue investing at a similar level 23
as 2014 for the next five years, with a slightly higher 24
Thies, Di 12 Avista Corporation

amount in 2015 to complete certain larger projects. The 1
chart in Illustration No. 1 below summarizes the capital 2
expenditure levels for recent years, as well as planned 3
expenditures through 2019. 4
Illustration No. 1: 5
6
7
8
9
10
11
12
13
14
After the Company’s expected $375 million capital 15
investments in 2015, the capital expenditure level is 16
expected to be $350 million annually from 2016 through 2019. 17
Q. Why did the Company increase the level of its 18
capital expenditures in recent years? 19
A. Three primary drivers have affected Avista’s level 20
of capital investment: 1) the business need to fund a 21
greater portion of the departmental requests for new capital 22
investments that in the past have not been funded; 2) the 23
need to capture investment opportunities and benefits 24
Thies, Di 13 Avista Corporation
$207
$247 $262
$296
$352 $375 $350 $350 $350 $350
$0
$50
$100
$150
$200
$250
$300
$350
$400
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
(i
n

m
i
l
l
i
o
n
s
)

Capital Expenditures
Planned

identified by our asset management capabilities, and 3) a 1
continued focus on controlling the increase in operation and 2
maintenance (O&M) spending through prudent capital 3
investment. 4
Q. Please provide some examples that illustrate the 5
key drivers. 6
A. Our aging and changing infrastructure provides 7
several challenges we need to manage to keep costs under 8
control into the future. Asset management programs and 9
projects include wood pole management, Aldyl-A pipe 10
replacement, transmission line rebuilds, and substation 11
equipment replacements and rebuilds. These asset management 12
capital investments are replacing old and failing assets 13
using a planned and systematic approach to reduce outages, 14
control costs to benefit customers over the life of these 15
assets, and reduce risks associated with failed equipment. 16
Q. Are there other reasons Avista believes this 17
increased level of capital spending is appropriate? 18
A. Yes. Interest rates remain near all-time lows, so 19
funding these capital projects now will result in a lower 20
long-term cost to customers, rather than waiting until 21
interest rates and inflation rise. In addition, Avista 22
currently does not have a need for new capacity and energy 23
resources or new renewable resources, which would otherwise 24
Thies, Di 14 Avista Corporation

put upward pressure on retail rates. Furthermore, electric 1
and natural gas commodity costs continue to be relatively 2
stable as compared to past years, and are expected to remain 3
relatively stable for the near future. 4
Funding the additional needed capital investment 5
projects now will result in lower overall bill impacts to 6
customers rather than waiting until a time when retail rates 7
are being driven higher by increasing commodity costs, 8
construction of new capacity and energy resources, and/or 9
higher inflation and interest rates. 10
11
V. MATURING DEBT 12
Q. How is Avista affected by maturing debt obligations 13
in the next five years? 14
A. In the next five years the Company is obligated to 15
repay maturing long-term debt totaling $452.5 million. The 16
table in Illustration No. 2 below shows the Company’s 17
maturing long-term debt from 2015 through 2019. Within this 18
five-year period, a large concentration – $272.5 million – 19
matures within the second quarter of 2018. 20
Thies, Di 15 Avista Corporation

Illustration No. 2: 1
2
3
4
5
6
7
8
These debt obligations originated as early as 1993 and 9
their original terms were three, ten, fifteen and twenty-five 10
years. These maturing obligations represent nearly a third 11
(32.5%) of the Company’s long-term debt outstanding at the 12
end of 2014, which is a significant portion of our capital 13
structure. The Company typically replaces maturing long-term 14
debt with new issuances of debt. It will be necessary for 15
Avista to be in a favorable financial position to complete 16
the expected debt refunding, under reasonable terms, while 17
also obtaining debt and equity to fund capital expenditures 18
each year. 19
Q. What are the Company’s expected long-term debt 20
issuances through 2019? 21
A. To provide adequate funding for the significant 22
capital expenditures noted in Section IV above and to repay 23
maturing long-term debt, we are forecasting the issuance of 24
Avista Corp.
Long-Term Debt Maturities, 2015 to 2019
Maturity Year Principal Amount Coupon Rate Date Issued Maturity Date
2015 $0 - - -
2016 $ 90,000,000 0.840% 8-14-2013 8-14-2016
2017 $0 - - -
2018
$7,000,000 7.390% 5-11-1993 5-11-2018
$250,000,000 5.950% 4-3-2008 6-1-2018
$15,500,000 7.450% 6-9-1993 6-11-2018
2019 $90,000,000 5.450% 11-18-2004 12-1-2019
Total $452,500,000

Thies, Di 16 Avista Corporation

long-term debt in each year through 2019. We plan to issue 1
$100 million in 2015. Issuances planned for 2016 through 2
2019 are provided in Exhibit No. 2, Confidential Schedule 2. 3
Q. Are there other debt obligations that the Company 4
must consider? 5
A. Yes. In addition to long-term debt, the Company’s 6
$400 million revolving credit facility expires in April 2019. 7
The Company relies on this credit facility to provide, among 8
other things, funding to cover month-to-month variations in 9
cash flows, interim funding for capital expenditures, and 10
credit support in the form of cash and letters of credit that 11
are required for energy resources commitments and other 12
contractual obligations. Our credit facility was amended in 13
April 2014, which stretched the expiration date to April 14
2019, five years past the amendment date, and reduced 15
interest rates and fees. We expect to initiate the renewal 16
or replacement of the credit facility before the existing 17
arrangement expires. Any outstanding balances borrowed under 18
the revolving credit facility become due and payable when the 19
facility expires. Again, a strong financial position will be 20
necessary to gain access to a new or renewed revolving credit 21
facility, under reasonable terms, prior to expiration of the 22
existing facility. 23
Thies, Di 17 Avista Corporation

VI. CAPITAL STRUCTURE 1
Q. What are the capital structure and rate of return 2
the Company requests in this proceeding? 3
A. Our requested capital structure is 50.0 percent 4
debt and 50.0 percent equity with a requested overall rate of 5
return in this proceeding of 7.62 percent, as shown in 6
Illustration No. 3 below. The requested capital structure is 7
based on our forecasted capital structure at December 31, 8
2015. 9
Illustration No. 3: 10
11
12
13
14
15
16
17
Q. Is the capital structure reflected in Illustration 18
No. 3 above calculated in a manner similar to the capital 19
structure calculated in Avista's recent rate proceedings? 20
A. Yes, with certain updates. This methodology 21
considers debt and equity outstanding for our Avista 22
Utilities’ regulated business, including the impact of costs 23
related to the issuance of that debt and equity. 24
Proposed Component
Structure Cost Cost
Total Debt 50.0%5.34%2.67%
Common Equity 50.0%9.90%4.95%
Total 100%7.62%
AVISTA CORPORATION
Proposed Cost of Capital
Thies, Di 18 Avista Corporation

In recent rate proceedings our capital structure 1
calculation considered the impact of our former subsidiary, 2
Ecova. The Ecova impact is completely removed since Ecova 3
was sold in mid-2014. 4
The capital related to AERC and its subsidiary, AEL&P, 5
does not impact the capital structure calculation for the 6
Avista Utilities’ rate proceeding. Debt and equity for AERC, 7
which was acquired in mid-2014, are excluded from this 8
calculation for Avista Utilities. 9
Q. How does the Company determine the amount of long-10
term debt and common equity to be included in its capital 11
structure? 12
A. As a regulated utility, Avista has a continuing 13
obligation to provide safe and reliable service to customers 14
while balancing safety and economy, in both the short term 15
and long term. Through our planning process, we determine 16
the amount of new financing needed to support our capital 17
expenditure programs while maintaining an optimal capital 18
structure that balances and supports our current credit 19
ratings and provides flexibility for anticipated future 20
capital requirements. 21
Thies, Di 19 Avista Corporation

Q. Why is the Company proposing a 50.0 percent equity 1
ratio? 2
A. On December 31, 2014, Avista’s common equity 3
percentage for the Idaho jurisdiction was 50.4%. The Company 4
continues to evaluate the extent and timing of equity 5
issuances for 2015, taking into account our capital 6
expenditures and other financial requirements. 7
Maintaining a 50.0 percent common equity ratio has 8
several benefits for customers. We are dependent on raising 9
funds in capital markets throughout all business cycles. 10
These cycles include times of contraction and expansion. A 11
solid financial profile will assist us in accessing debt 12
capital markets on reasonable terms in both favorable 13
financial markets and when there are disruptions in the 14
financial markets. 15
Additionally, a 50.0 percent common equity ratio 16
solidifies our current credit ratings and supports our long-17
term goal of moving our corporate credit rating from BBB to 18
BBB+. A rating of BBB+ would be consistent with the natural 19
gas and electric industry average, which I will further 20
explain later in my testimony. We rely on credit ratings in 21
order to access capital markets on reasonable terms. Moving 22
further away from non-investment grade (BB+) provides more 23
stability for the Company, which is also beneficial for 24
Thies, Di 20 Avista Corporation

customers. We believe our requested 50.0 percent equity 1
ratio appropriately balances safety and economy for 2
customers. 3
Q. In attracting capital under reasonable terms, is it 4
necessary to attract capital from both debt and equity 5
investors? 6
A. Yes, it is absolutely essential. As a publicly 7
traded company we have two primary sources of external 8
capital: debt and equity investors. As of December 31, 2014, 9
we had approximately $2.8 billion of long-term debt and 10
equity. Approximately half of our capital structure is 11
funded by debt holders, and the other half is funded by 12
equity investors and retained earnings. Rating agencies and 13
potential debt investors place significant emphasis on 14
maintaining credit metrics and credit ratings that support 15
access to debt capital markets under reasonable terms. 16
Leverage – or the extent that a company uses debt in lieu of 17
equity in its capital structure – is a key credit metric and, 18
therefore, access to equity capital markets is critically 19
important to long-term debt investors. This emphasis on 20
financial metrics and credit ratings is shared by equity 21
investors who also focus on cash flows, capital structure and 22
liquidity, much like debt investors. 23
Thies, Di 21 Avista Corporation

The level of common equity in our capital structure can 1
have a direct impact on investors’ decisions. A balanced 2
capital structure allows us access to both debt and equity 3
markets under reasonable terms, on a sustainable basis. 4
Being able to choose specific financing methods at any given 5
time also allows the Company to take advantage of better 6
choices that may prevail as the relative advantages of debt 7
or equity markets can ebb and flow at different times. 8
Q. Are the debt and equity markets competitive 9
markets? 10
A. Yes. Our ability to attract new capital, 11
especially equity capital, under reasonable terms is 12
dependent on our ability to offer a risk/reward opportunity 13
that is equal to or better than the equity investors’ other 14
alternatives. We are competing not only with other 15
utilities, but also with businesses in other sectors of the 16
economy. Demand for our stock supports our stock price, 17
which provides us the opportunity to issue additional shares 18
under reasonable terms to fund capital investment 19
requirements. 20
Q. What is Avista doing to attract equity investment? 21
A. We are requesting a capital structure that provides 22
us the opportunity to have financial metrics that offer a 23
Thies, Di 22 Avista Corporation

risk/reward proposition that is competitive and/or attractive 1
for equity holders. 2
We have steadily increased our dividend for common 3
shareholders over the past several years, to work toward a 4
dividend payout ratio that is comparable to other utilities 5
in the industry. This is an essential element in providing a 6
competitive risk/reward opportunity for equity investors. 7
Tracking mechanisms, such as the Power Cost Adjustment 8
and the Purchased Gas Adjustment approved by the regulatory 9
commissions, and the proposed fixed cost adjustment 10
mechanism, help balance the risk of owning and operating the 11
business in a manner that places us in a position to offer a 12
risk/reward opportunity that is competitive with not only 13
other utilities, but with businesses in other sectors of the 14
economy. 15
16
VII. PROPOSED RATE OF RETURN 17
Q. Has Avista prepared an exhibit that includes the 18
components of Avista's requested rate of return of 7.62 19
percent? 20
A. Yes. Exhibit No. 2, Schedule 1, page 2, shows the 21
components of Avista’s requested rate of return of 7.62 22
percent. 23
Thies, Di 23 Avista Corporation

Q. What is the Company’s overall cost of debt, and how 1
does it compare to its historical cost? 2
A. Our requested overall cost of debt is 5.34 percent. 3
The cost of debt has trended downward for Avista from 2003 to 4
2015, as shown in Illustration No. 4 below. 5
Illustration No. 4: 6
7
8
9
10
11
12
13
14
15
16
17
Q. Please explain why Avista’s cost of long-term debt 18
has continued to decrease. 19
A. There has been a general decline in interest rates 20
for several years while Avista has issued new debt, causing 21
the Company’s overall cost of debt to decrease. We have been 22
prudently managing our interest rate risk in anticipation of 23
periodic debt issuances, which has involved fixed rate long-24
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
2003 2008 2009 2011 2014 2015
proposed
Historical Cost of Debt
Thies, Di 24 Avista Corporation

term debt with varying maturities, and executing forward 1
starting interest rate swaps to mitigate interest rate risk 2
on a portion of the future maturing debt and our overall 3
forecasted debt issuances. 4
From 2011 through 2014 we issued $315 million in long-5
term debt. The weighted average rate of these issuances is 6
3.30 percent. These issuances have varying maturities 7
ranging from 3 years to 35 years, and a weighted average 8
maturity of 23.6 years. 9
Our most recent issuance (in 2014) was $60 million of 10
first mortgage bonds with a thirty-year maturity at a rate of 11
4.11 percent. This new debt, which matures in 2044, is the 12
lowest priced debt with a term beyond twenty years that the 13
Company has issued since the 1950s. The effective cost of 14
this debt is even lower at 3.65%, which includes the cost of 15
issuance and the impact of interest rate hedges. The $5.4 16
million positive value of the interest rate hedges (hedges 17
were settled when the coupon rate was set) improved the 18
effective yield on this debt by 0.52%. I will discuss the 19
interest rate hedging program later in my testimony. 20
The prior year (in 2013) we issued $90 million of three-21
year debt (maturing in 2016) at a very favorable rate of 22
0.84%. The effective cost of this debt is a negative 0.04%, 23
which includes the cost of issuance and the impact of 24
Thies, Di 25 Avista Corporation

interest rate hedges. We received $2.9 million for settled 1
interest rate hedges, which improved the effective yield on 2
this debt by 1.07%. 3
We have continued to issue debt with varying maturities 4
to balance the cost of debt and the weighted average 5
maturity. This practice has provided us with the ability to 6
take advantage of historically low rates on both the short 7
end and long end of the yield curve. 8
The Company’s credit ratings have supported reasonable 9
demand for Avista debt by potential investors. We have 10
further enhanced credit quality and reduced interest cost by 11
issuing debt that is secured by first mortgage bonds. 12
We plan to continue issuing long-term debt with various 13
maturities for the foreseeable future in order to fund our 14
capital expenditure program and long-term debt maturities. 15
Q. What is the Company doing to mitigate interest rate 16
risk related to future long-term debt issuances? 17
A. Our future borrowing requirements are primarily 18
driven by our significant capital expenditure program and 19
maturing debt, which creates exposure to interest rate risk. 20
As mentioned earlier, we have $1.8 billion in forecasted 21
capital expenditures over the next five years. Additionally, 22
we have $452.5 million of debt maturing during the same 23
period. We are forecasting the issuance of approximately 24
Thies, Di 26 Avista Corporation

$900 million in long-term debt from 2015 through 2019 to fund 1
these capital expenditures and maturing debt while 2
maintaining an appropriate capital structure. 3
To mitigate interest rate risks, we hedge the rates for 4
a portion of forecasted debt issuances over several years 5
leading up to the date we anticipate each issuance. We also 6
manage interest rate risk exposure by limiting the extent of 7
outstanding debt that is subject to variable interest rates 8
rather than fixed rates. In addition, we issue fixed rate 9
long-term debt with varying maturities to manage the amount 10
of debt that is required to be refinanced in any period 11
(looking ahead to its future maturity), and to obtain rates 12
across a broader spectrum of prevailing terms which tend to 13
be priced at different interest rates. 14
Q. Does the Company have guidelines regarding its 15
interest rate risk management? 16
A. Yes. The Company’s Interest Rate Risk Management 17
Plan, attached as Exhibit No. 2, Confidential Schedule 3, is 18
designed to provide a certain level of stability to future 19
cash flows, and ultimately retail rates related to future 20
interest rate variability. The plan provides guidelines for 21
hedging a portion of interest rate risk with financial 22
derivative instruments. We settle these hedge transactions 23
for cash simultaneously when a related new fixed-rate debt 24
Thies, Di 27 Avista Corporation

issuance is priced in the market. The settlement proceeds 1
(which may be positive or negative) are amortized over the 2
life of the new debt issuance. 3
The interest rate risk management plan provides that 4
hedge transactions are executed solely to reduce interest 5
rate uncertainty on future debt that is included in the 6
Company’s five-year forecast. The hedge transactions do not 7
involve speculation about the movement of future interest 8
rates. 9
Q. The Company is requesting a 9.9 percent return on 10
equity. Please explain why the Company believes this is 11
reasonable? 12
A. We agree with the analyses presented by Company 13
witness Mr. McKenzie which demonstrate that the proposed 9.9 14
percent ROE, together with the proposed equity layer of 50 15
percent, would properly balance safety and economy for 16
customers, provide Avista with an opportunity to earn a fair 17
and reasonable return, and provide access to capital markets 18
under reasonable terms on a sustainable basis. The proposed 19
weighted cost of equity is 4.95% (9.9% times 50%). 20
Q. How does Avista’s requested 4.95 percent weighted 21
cost of equity compare with the weighted cost of equity 22
recently approved for electric and natural gas utilities in 23
other jurisdictions? 24
Thies, Di 28 Avista Corporation

A. The bar chart in Illustration No. 5 below shows the 1
weighted cost of equity approved by state regulators for 2
investor-owned electric and natural gas utilities across the 3
country for the period from July 1, 2014 through March 31, 4
2015. These data in the bar chart represent all of the 5
commission decisions that specify an ROE and equity ratio for 6
utilities in the nine-month period. 7
Avista’s proposed weighted cost of equity of 4.95 8
percent, which is also shown in the chart, is in the middle 9
of the range of these weighted cost of equity numbers. 10
Avista’s current authorized weighted cost of equity of 4.9 11
percent is also shown on the chart, which is based on a 50 12
percent equity ratio and a 9.8 percent ROE. Additional 13
details related to this chart, including the names of the 14
utilities, are provided in Exhibit No. 2, Schedule 4. 15
Because Avista competes with other utilities for equity 16
investor dollars, it is important for Avista to be able to 17
provide an earnings opportunity that is competitive with 18
other utilities. 19
Thies, Di 29 Avista Corporation

Illustration No. 5: 1
Weighted Cost of Equity: Electric and Natural Gas Rate Cases2 2
3
4
5
6
7
8
9
10
11
12
13
VIII. CREDIT RATINGS 14
Q. How important are credit ratings for Avista? 15
A. Utilities require ready access to capital markets 16
in all types of economic environments. The capital intensive 17
nature of our business, with energy supply and delivery 18
dependent on costly long-term capital projects to fulfill our 19
obligation to serve customers, necessitates the ability to 20
obtain funding from the financial markets under reasonable 21
terms at regular intervals. In order to have this ability, 22
2Source: SNL Financial. Rate Cases finalized July 1, 2014 through March 31, 2015. Items added (red bars): 1) Avista’s last approved return from the Idaho Commission and 2) Avista’s proposed return in the current
filing.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%Electric & Natural Gas Rate Cases
Thies, Di 30 Avista Corporation

investors need to understand the risks related to any of 1
their investments. Financial commitments by our investors 2
generally stretch for many years – even decades – and the 3
potential for volatility in costs (arising from energy 4
commodities, natural disasters and other causes) is a key 5
concern to them. To help investors assess the 6
creditworthiness of a company, nationally recognized 7
statistical rating organizations (rating agencies) developed 8
their own standardized ratings scale, otherwise known as 9
credit ratings. These credit ratings indicate the 10
creditworthiness of a company and assist investors in 11
determining if they want to invest in a company and its 12
comparative level of risk compared to other investment 13
choices. 14
Q. Please summarize the credit ratings for Avista. 15
A. Avista’s credit ratings, assigned by Standard & 16
Poor’s (S&P) and Moody’s Investors Service are as follows: 17
Illustration No. 6: 18
19
20
21
Additional information on our credit ratings has been 22
provided on page 1 of Exhibit No. 2, Schedule 1. 23
S&P Moody’s
Senior Secured Debt A- A2
Senior Unsecured Debt BBB Baa1
Outlook Stable Stable

Thies, Di 31 Avista Corporation

Q. Please explain the implications of the credit 1
ratings in terms of the Company’s ability to access capital 2
markets. 3
A. Credit ratings impact investor demand and expected 4
returns. More specifically, when we issue debt the credit 5
rating can affect the determination of the interest rate at 6
which the debt will be issued. Credit ratings can also 7
affect the type of investor who will be interested in 8
purchasing the debt. For each type of investment a potential 9
investor could make, the investor looks at the quality of 10
that investment in terms of the risk they are taking and the 11
priority they would have for payment of principal and 12
interest in the event that the organization experiences 13
severe financial stress. Investment risks include, but are 14
not limited to, liquidity risk, market risk, operational 15
risk, and credit risk. These risks are considered by S&P, 16
Moody’s and investors in assessing our creditworthiness. 17
In challenging credit markets, where investors are less 18
likely to buy corporate bonds (as opposed to U.S. Government 19
bonds), a higher credit rating will attract more investors, 20
and a weaker credit rating could reduce or eliminate the 21
number of potential investors. Thus, weaker credit ratings 22
may result in a company having more difficulty accessing 23
Thies, Di 32 Avista Corporation

capital markets and/or incur significantly higher costs when 1
accessing capital. 2
Q. What credit rating does Avista Corporation believe 3
is appropriate? 4
A. Avista’s current S&P corporate credit rating is 5
BBB. We believe operating at a corporate credit rating level 6
(senior unsecured) of BBB+ is comparable with other US 7
utilities providing both electricity and natural gas. As 8
shown in Illustration No. 7, the average credit rating for 9
U.S. Regulated Combined Gas and Electric Utilities is BBB+. 10
Illustration No. 7: 11
12
13
14
15
16
17
18
19
We expect that a continued focus on the regulated 20
utility, conservative financing strategies and a supportive 21
regulatory environment will contribute toward an upgrade to a 22
BBB+ corporate credit rating for Avista. Operating with a 23
BBB+ credit rating would likely attract additional investors, 24
Thies, Di 33 Avista Corporation
0
20
40
60
80
A+ above A A- BBB+ BBB BBB- BB+ and
lower
S&P's Distributon of Corporate Credit Ratings
U.S. Combined Gas and Electric Utilities
As of December 2014

lower our debt pricing for future financings, and make us 1
more competitive with other utilities. 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 and potential financial market disruptions. 6
Q. How important is the regulatory environment in 7
which the Company operates? 8
A. Both Moody’s and S&P cite the regulatory 9
environment in which a regulated utility operates as the 10
dominant qualitative factor to determine a company’s 11
creditworthiness. Moody's rating methodology is based on 12
four primary factors. Two of those factors – a utility’s 13
“regulatory framework” and its “ability to recover costs and 14
earn returns” – make up 50 percent of Moody’s rating 15
methodology3. 16
S&P states the following4: 17
Regulation is the most critical aspect that 18 underlies regulated integrated utilities’ 19 creditworthiness. Regulatory decisions can 20 profoundly affect financial performance. Our 21 assessment of the regulatory environments in which a 22
utility operates is guided by certain principles, 23 most prominently consistency and predictability, as 24 well as efficiency and timeliness. For a regulatory 25
process to be considered supportive of credit 26
3Moody’s Investors Service, Rating Methodology: Regulated Electric and Gas Utilities, December 23, 2013. 4Standard and Poor’s, Key Credit Factors: Business and Financial Risks in
the Investor-owned Utility Industry, March 2010.
Thies, Di 34 Avista Corporation

quality, it must limit uncertainty in the recovery 1 of a utility’s investment. They must also 2
eliminate, or at least greatly reduce, the issue of 3 rate-case lag, especially when a utility engages in 4 a sizable capital expenditure program. 5
Because of the major capital expenditures planned by 6
Avista and future maturities of long-term debt, a supportive 7
regulatory environment is essential in maintaining and 8
improving our current credit rating. 9
Q. Does this conclude your pre-filed direct testimony? 10
A. Yes. 11
Thies, Di 35 Avista Corporation