20170609Thies 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-17-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-17-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) MARK T. THIES
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

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

Thies, Di 2
Avista Corporation
Q. What is the scope of your testimony in this 1
proceeding? 2
A. I will provide a financial overview of Avista
Corporation as well as explain the proposed capital structure,
overall rate of return, and our credit ratings. Additionally,
I will summarize our capital expenditures program. Mr. Adrien
McKenzie, on behalf of Avista, will provide additional
testimony related to the appropriate return on equity for
Avista, based on our specific circumstances, together with the
current state of the financial markets.
In brief, I will provide information that shows:
 Avista’s plans call for a continuation of utility
capital investments in generation, transmission and
distribution systems to preserve and enhance service
reliability for our customers. Capital expenditures
of approximately $2 billion are planned for the five-
year period ending December 31, 2021. Avista needs
adequate cash flow from operations to fund these
requirements and for repayment of maturing debt,
together with access to capital from external sources
under reasonable terms, on a sustainable basis.
 We are proposing an overall rate of return of 7.81
percent, which includes a 50.0 percent common equity
ratio, a 9.9 percent return on equity, and a cost of
debt of 5.72 percent. We believe our proposed overall
rate of return of 7.81 percent and proposed capital
structure provide a reasonable balance between safety
and economy.
 Avista’s corporate credit rating from Standard & Poor’s 29
is currently BBB and Baa1 from Moody’s Investors 30
Service. Avista must operate at a level that will
support a solid investment grade corporate credit
rating in order to access capital markets at reasonable
rates. A supportive regulatory environment is an

Thies, Di 3
Avista Corporation
important consideration by the rating agencies when
reviewing Avista. Maintaining solid credit metrics and
credit ratings will also help support a stock price
necessary to issue equity under reasonable terms to
fund capital requirements.
A table of contents for my testimony is as follows:
Description Page
I. Introduction 1
II. Financial Overview 4
III. Capital Expenditures 6
IV. Maturing Debt 8
V. Capital Structure 11
VI. Proposed Rate of Return 16
VII. Credit Ratings 21
15
Q. Are you sponsoring any exhibits with your direct 16
testimony? 17
A. Yes. I am sponsoring Exhibit No. 2, Schedules 1
through 4. Schedule 1, page 1, includes Avista’s credit ratings 19
by S&P and Moody’s. Avista’s actual capital structure at
December 31, 2016, and proposed capital structure at January 1,
2018, are included on page 2, with supporting information on
pages 3 through 5. Confidential Exhibit No. 2, Schedule 2C
includes the Company’s planned capital expenditures and long-
term debt issuances by year. Confidential Exhibit No. 2,
Schedule 3C includes our Interest Rate Risk Management Plan.
Finally, Exhibit No. 2, Schedule 4 includes the weighted cost

Thies, Di 4
Avista Corporation
of equity requested by investor-owned utilities from May 1,
2016, through April 30, 2017. 2

II. FINANCIAL OVERVIEW 4
Q. Please provide an overview of Avista's financial 5
situation. 6
A. We are operating the business efficiently for our
customers, ensuring that our energy service is reliable and
customers are satisfied while at the same time keeping costs as
low as reasonably possible. An efficient, well-run business is
not only important to our customers but also important to
investors. We plan and execute on a capital financing plan
that provides a prudent capital structure and liquidity
necessary for our operations. We honor prior financial
commitments and we continue to rely on external capital for
sustained utility operations. We initiate regulatory processes
to seek timely recovery of our costs with the goal of achieving
earned returns close to those allowed by regulators in each of
the states we serve. These elements – cost management, capital
and revenues that support operations – are key determinants to
the rating agencies whose credit ratings are critical measures
of our financial situation.
Q. What steps is the Company taking to maintain and 23
improve its financial health? 24

Thies, Di 5
Avista Corporation
A. We are working to assure there are adequate funds for
operations, capital expenditures and debt maturities. We
obtain a portion of these funds through the issuance of long-
term debt and common equity. We actively manage risks related
to the issuance of long-term debt through our interest rate
risk mitigation plan and we maintain a proper balance of debt
and common equity through regular issuances and other
transactions. We actively manage energy resource risks and
other financial uncertainties inherent in supplying reliable
energy services to our customers. We create financial plans
and forecasts to model our income, expenses and investments,
providing a basis for prudent financial planning. We seek
timely recovery of our costs through general rate cases and
other ratemaking mechanisms.
The Company currently has a sound financial profile. It
is very important for Avista to maintain and enhance its
financial position in order to access debt and equity financing
as Avista funds significant future capital investments and
refinances maturing debt.
A key component of a continued long-term sound financial
profile is the ability to receive timely recovery of capital
additions and expenses, so the Company can earn its authorized
return. When regulatory mechanisms do not respond to changing
cost factors, the level of return can move substantially below

Thies, Di 6
Avista Corporation
* The higher level of capital expenditure in 2015 was driven by storm costs for the November
windstorm, and costs related to a renegotiation of the Coyote Springs Long Term Service
Agreement, which occurred late in the year.
the authorized level. This creates financial weakness and
concern in financial markets about the long-term stability of
the Company.
4
III. CAPITAL EXPENDITURES 5
Q. What is Avista’s recent and planned capital 6
expenditure levels? 7
A. Illustration No. 1 below summarizes the capital
expenditure levels for recent years, as well as planned
expenditures through 2021.
Illustration No. 1 11
Capital Expenditures 12
13
14
15
16
17
18
19
20
21
22

$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(i
n

m
i
l
l
i
o
n
s
)
Electric T&D Other ET Growth Generation Gas Environmental
Planned

Thies, Di 7
Avista Corporation
The capital expenditure level is expected to remain
constant at $405 million annually from 2017 through 2021.
Q. What is the basis for the Company’s planned level of 3
capital expenditures? 4
A. The level of capital investment in recent years has
been driven primarily by the business need to fund a greater
portion of the departmental requests for new capital
investments that, in the past, were unfunded.
As Mr. Morris explains in his testimony, each year the
departments across the Company assess the near-term needs to
maintain and upgrade the utility infrastructure and technology
necessary to continue to provide safe, reliable service to
customers, as well as maintain a high level of customer
satisfaction. The departments develop business cases for
specific projects and programs that explain and support the
need for the capital investment. These business cases are
submitted to a Capital Planning Group that meets on a regular
basis to review and prioritize all proposed utility capital
investment projects.
After taking into consideration a number of factors,
senior management of Avista establishes a proposed capital

Thies, Di 8
Avista Corporation
budget amount for each year of the next five years, which is
presented to the Finance Committee of the Board of Directors1.
Company witnesses Mr. Kinney, Ms. Rosentrater, and Mr.
Kensok provide additional details on why the specific capital
investments are needed in the time frame in which they are
planned, and also address the risks and/or consequences of not
completing the investments.
8
IV. MATURING DEBT 9
Q. How is Avista affected by maturing debt obligations 10
from 2018 through 2022?
A. Beginning in 2018 through 2022 the Company is
obligated to repay maturing long-term debt totaling $654.5
million. The table in Illustration No. 3 below shows the
Company’s maturing long-term debt from 2018 through 2022.
Within this five-year period, a large concentration – $272.5
million – matures within the second quarter of 2018, and another
$250 million within the second quarter of 2022.

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

Thies, Di 9
Avista Corporation
Illustration No. 3 1
2
3
4
5
6
7
8
9
10
These debt obligations originated as early as 1993 and
their original terms were three, ten, fifteen and twenty-five
years. These maturing obligations represent over a third (39
percent) of the Company’s long-term debt outstanding at the end
of 2016, which is a significant portion of our capital
structure. The Company typically replaces maturing long-term
debt with new issuances of debt. It will be necessary for
Avista to be in a favorable financial position to complete the
expected debt refunding, while also obtaining debt and equity
to fund capital expenditures each year and maintain an adequate
capital structure.
Q. What are the Company’s expected long-term debt 22
issuances in the next several years? 23
Avista Corp
Long-Term Debt Maturities, 2018-2022
Maturity
Year Principal Amount Coupon Rate Date Issued Maturity Date
2018
$7,000,000
$250,000,000
$15,500,000

7.39 percent
5.95 percent
7.45 percent
5/11/1993
4/3/2008
6/9/1993
5/11/2018
6/1/2018
6/11/2018
2019 $90,000,000 5.45 percent 11/18/2004 12/2/2019
2020 $52,000,000 3.89 percent 12/20/2010 12/20/2020
2021 $0
2022 $250,000,000 5.13 percent 9/22/2009 4/1/2022
Total $654,500,000

Thies, Di 10
Avista Corporation
A. To provide adequate funding for the significant
capital expenditures noted in Section III above and to repay
maturing long-term debt, we are forecasting the issuance of
long-term debt every year for the next several years, as shown
in Exhibit No. 2, Confidential Schedule 2C. 5
Q. Are there other debt obligations that the Company 6
must consider? 7
A. Yes. In addition to long-term debt, the Company’s 8
$400 million revolving credit facility expires in April 2021.
The Company relies on this credit facility to provide, among
other things, funding to cover month-to-month variations in
cash flows, interim funding for capital expenditures, and
credit support in the form of cash and letters of credit that
are required for energy resources commitments and other
contractual obligations. Our credit facility was amended in
May 2016, which stretched the expiration date to April 18, 2021,
five years past the amendment date. The extension also allows
amortization of fees over a longer time horizon, which decreased
the monthly expense.
We expect to initiate the renewal or replacement of the
credit facility before the existing arrangement expires. Any
outstanding balances borrowed under the revolving credit
facility become due and payable when the facility expires.
Again, a strong financial position will be necessary to gain

Thies, Di 11
Avista Corporation
access to a new or renewed revolving credit facility prior to
expiration of the existing facility.

V. CAPITAL STRUCTURE 4
Q. What capital structure and rate of return does the 5
Company request in this proceeding?
A. Our requested capital structure is 50.0 percent debt
and 50.0 percent equity with a requested overall rate of return
in this proceeding of 7.81 percent, as shown in Illustration
No. 4 below. The requested capital structure is consistent
with that currently authorized (per Case No. AVU-E-16-03). 11
Illustration No. 4 12
13
14
15
16
17
18
Q. Is the capital structure reflected in Illustration 19
No. 4 above calculated in a manner similar to the capital 20
structure calculated in Avista's recent rate proceedings? 21
A. Yes. This methodology includes long-term debt and
equity outstanding for Avista Corp., including the impact of
costs related to the issuance of that debt and equity.
Proposed Component
Structure Cost Cost
Total Debt 50.0%5.72%2.86%
Common Equity 50.0%9.90%4.95%
Total 100.0%7.81%
AVISTA CORPORATION
Proposed Cost of Capital

Thies, Di 12
Avista Corporation
Debt and equity for AERC2, which was acquired in mid-2014,
are excluded from this calculation and do not impact the capital
structure calculation for this rate proceeding.
Q. How does the Company determine the amount of long-4
term debt and common equity to be included in its capital 5
structure? 6
A. As a regulated utility, Avista has an obligation to
provide safe and reliable service to customers while balancing
fiscal safety and economy, in both the short term and long term.
Through our planning process we determine the amount of new
financing needed to support our capital expenditure programs
while maintaining an optimal capital structure that balances
and supports our current credit ratings and provides
flexibility for anticipated future capital requirements.
Q. Why is the Company proposing a 50.0 percent equity 15
ratio? 16
A. On December 31, 2016, Avista’s common equity 17
percentage for the Idaho jurisdiction was 49.9 percent. The
Company continues to evaluate the extent and timing of equity
issuances for 2017-2021, taking into account our capital

2On July 1, 2014, the Company acquired Alaska Energy and Resources Company
(AERC). AERC’s primary subsidiary is Alaska Electric Light and Power
Company (AEL&P), a wholly-owned corporation of AERC and a vertically
integrated electric utility providing electric service to the City and
Borough of Juneau. AERC and AEL&P are separate legal entities and their
debt is backed by the assets and equity of AERC and AEL&P.

Thies, Di 13
Avista Corporation
expenditures and other financial requirements. These steps to
manage our equity level are expected to result in a common
equity level of 49.9% at December 31, 2017, as shown on page 5
of Exhibit No. 2, Schedule 1.
Maintaining a 50.0 percent common equity ratio has several
benefits for customers. We are dependent on raising funds in
capital markets throughout all business cycles. These cycles
include times of contraction and expansion. A solid financial
profile will assist us in accessing debt capital markets on
reasonable terms in both favorable financial markets and when
there are disruptions in the financial markets.
Additionally, a 50.0 percent common equity ratio
solidifies our current credit ratings and moves us closer to
our long-term goal of having a corporate credit rating of BBB+.
A rating of BBB+ would be consistent with the natural gas and
electric industry average, which I will further explain later
in my testimony. We rely on credit ratings in order to access
capital markets on reasonable terms. Moving further away from
non-investment grade (BB+) provides more stability for the
Company, which is also beneficial for customers. We believe
our requested 50.0 percent equity appropriately balances safety
and economy for customers.

Thies, Di 14
Avista Corporation
Q. In attracting capital under reasonable terms, is it 1
necessary to attract capital from both debt and equity 2
investors? 3
A. Yes, it is absolutely essential. As a publicly traded
company we have two primary sources of external capital: debt
and equity investors. As of December 31, 2016, we had
approximately $3.15 billion of debt and equity. Approximately
half of our capital structure is funded by debt holders and the
other half is funded by equity investors and retained earnings.
Rating agencies and potential debt investors tend to place
significant emphasis on maintaining strong financial metrics
and credit ratings that support access to debt capital markets
under reasonable terms. Leverage – or the extent that a company
uses debt in lieu of equity in its capital structure – is a key
credit metric and, therefore, access to equity capital markets
is critically important to long-term debt investors. This
emphasis on financial metrics and credit ratings is shared by
equity investors who also focus on cash flows, capital structure
and liquidity, much like debt investors.
The level of common equity in our capital structure can
have a direct impact on investors’ decisions. A balanced
capital structure allows us access to both debt and equity
markets under reasonable terms on a sustainable basis. Being
able to choose specific financing methods at any given time

Thies, Di 15
Avista Corporation
also allows the Company to take advantage of better choices
that may prevail as the relative advantages of debt or equity
markets can ebb and flow at different times.
Q. Are the debt and equity markets competitive markets?
A. Yes. Our ability to attract new capital, especially
equity capital, under reasonable terms is dependent on our
ability to offer a risk/reward opportunity that is equal to or
better than investors’ other alternatives. We are competing
with not only other utilities but also with businesses in other
sectors of the economy. Demand for our stock supports our stock
price, which provides us the opportunity to issue additional
shares under reasonable terms to fund capital investment
requirements.
Q. What is Avista doing to attract equity investment? 14
A. We are requesting a capital structure that provides
us the opportunity to have financial metrics that offer a
risk/reward proposition that is competitive and attractive for
equity holders. We target a dividend payout ratio that is
comparable with other utilities in the industry. This is an
essential element, along with potential growth, in providing a
competitive risk/reward opportunity for equity investors.
Tracking mechanisms, such as the Fixed Cost Adjustment,
the Power Cost Adjustment and the Purchased Gas Adjustment
approved by the IPUC, and similar mechanisms approved by

Thies, Di 16
Avista Corporation
Avista’s other regulatory commissions, help balance the risk of
owning and operating the business in a manner that places us in
a position to offer a risk/reward opportunity that is
competitive with not only other utilities, but with businesses
in other sectors of the economy.

VI. PROPOSED RATE OF RETURN 7
Q. Has Avista prepared an exhibit that includes the 8
components of Avista's requested rate of return of 7.81 percent? 9
A. Yes. Exhibit No. 2, Schedule 1, page 2 shows the
components of Avista’s requested rate of return of 7.81 percent.
Q. What is the Company’s overall cost of debt? 12
A. Our requested overall cost of debt is 5.72 percent.
We have continued to issue debt with varying maturities to
balance the cost of debt and the weighted average maturity.
This practice has provided us with the ability to take advantage
of historically low rates on both the short end and long end of
the yield curve.
The Company’s credit ratings have supported reasonable
demand for Avista debt by potential investors. We have further
enhanced credit quality and reduced interest cost by issuing
debt that is secured by first mortgage bonds.

Thies, Di 17
Avista Corporation
We plan to continue issuing long-term debt with various
maturities for the foreseeable future in order to fund our
capital expenditure program and long-term debt maturities.
There are a number of factors that should be taken into
consideration in choosing the term of new debt issuances. For
example, in the current interest rate environment where the
interest rate spread for 30-year and 10-year terms is relatively
narrow (i.e. presently there is a low premium for 30-year debt
versus 10-year debt), would support increased reliance on
longer-term debt. 10
In addition, much of Avista’s utility assets are long-
lived assets. A 30-year term for debt is a closer match to the
average life of the underlying assets that are being financed.
Decisions on the term of the debt are generally made closer to
the time that new debt is issued. Based on information
available today, the issuances of debt in 2018 will likely be
heavily weighted toward a 30-year term, due in large part to
the matching of the financing to the life of the assets being
financed, and the narrow rate spread for 30-year vs 10-year
terms. 20
The Company’s credit ratings have supported reasonable 21
demand for Avista debt by potential investors. We have further
enhanced credit quality and reduced interest cost by issuing
debt that is secured by first mortgage bonds.

Thies, Di 18
Avista Corporation
Q. What is the Company doing to mitigate interest rate 1
risk related to future long-term debt issuances? 2
A. As mentioned earlier, we are forecasting $2 billion
in capital expenditures over the next five years. Additionally,
we have $654.5 million of debt maturing during the same period.
This results in a significant need for the issuance of long-
term debt to fund these capital expenditures and maturing debt
while maintaining an appropriate capital structure.
We usually rely on short-term debt as interim financing
for capital expenditures, with issuances of long-term debt in
larger transactions approximately once a year. As a result, we
access long-term debt capital markets on limited occasions, so
our exposure to prevailing long-term interest rates can occur
all at once rather than across market cycles. To mitigate
interest rate risks, we hedge the rates for a portion of
forecasted debt issuances over several years leading up to the
date we anticipate each issuance.
We also manage interest rate risk exposure by limiting the
extent of outstanding debt that is subject to variable interest
rates rather than fixed rates. In addition, we issue fixed
rate long-term debt with varying maturities to manage the amount
of debt that is required to be refinanced in any period (looking
ahead to its future maturity), and to obtain rates across a

Thies, Di 19
Avista Corporation
broader spectrum of prevailing terms which tend to be priced at
different interest rates.
Q. Does the Company have guidelines regarding its 3
interest rate risk management? 4
A. Yes. The Company’s Interest Rate Risk Management 5
Plan, attached as Exhibit No. 2, Confidential Schedule 3C, is
designed to reduce uncertainty of the effective interest cost
of future debt issuances. The plan provides guidelines for
hedging a portion of interest rate risk with financial
derivative instruments. We settle these hedge transactions for
cash simultaneously when a related new fixed-rate debt issuance
is priced in the market. The settlement proceeds (which may be
positive or negative) are amortized over the life of the new
debt issuance.
The interest rate risk management plan provides that hedge
transactions are executed solely to reduce interest rate
uncertainty on future debt that is included in the Company’s 17
five-year forecast3. The hedge transactions do not involve
speculation about the movement of future interest rates.
Q. The Company is requesting a 9.9% return on equity. 20
Please explain why the Company believes this is reasonable. 21

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

Thies, Di 20
Avista Corporation
A. We agree with the analyses presented by Mr. McKenzie
which demonstrate that the proposed 9.9 percent ROE, together
with the proposed equity layer of 50.0%, would properly balance
safety and economy for customers, provide Avista with an
opportunity to earn a fair and reasonable return, and provide
access to capital markets under reasonable terms and on a
sustainable basis.
Q. How does Avista’s requested 4.95 percent weighted 8
cost of equity compare with the weighted cost of equity recently 9
requested by electric and natural gas utilities in other 10
jurisdictions? 11
A. Chart No. 2 below shows the weighted cost of equity
requested and pending by investor-owned utilities across the
country, for the twelve-month period from May 1, 2016 through
April 30, 2017.

Thies, Di 21
Avista Corporation
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Requested Weighted Cost of Equity
Avista
Proposed
4.95%
Chart No. 24
2
3
4
5
6
7
8
9
Avista’s proposed weighted cost of equity of 4.95 percent,
which is also shown in the chart above, is in the lower half of
the range of these weighted cost of equity numbers. Additional
details related to this chart, including the names of the
utilities, are provided in Exhibit No. 2, Schedule 4.
Because Avista competes with other utilities for equity
investor dollars, it is essential for Avista to be able to
provide an earnings opportunity that is competitive with other
utilities.
VII. CREDIT RATINGS
Q. How important are credit ratings for Avista? 20
A. Utilities require ready access to capital markets in
all types of economic environments. The capital intensive

4 Source – SNL Financial, Rate Cases pending May 1, 2016 through April
30, 2017.

Thies, Di 22
Avista Corporation
nature of our business, with energy supply and delivery
dependent on costly long-term projects to fulfill our
obligation to serve customers, necessitates the ability to
obtain funding from the financial markets under reasonable
terms at regular intervals. In order to have this ability,
investors need to understand the risks related to any of their
investments. Financial commitments by our investors generally
stretch for many years – even decades – and the potential for
volatility in costs (arising from energy commodities, natural
disasters and other causes) is a key concern to them. To help
investors assess the creditworthiness of a company, nationally
recognized statistical rating organizations (rating agencies)
developed their own standardized ratings scales, otherwise
known as credit ratings. These credit ratings indicate the
creditworthiness of a company and assist investors in
determining if they want to invest in a company and its
comparative level of risk compared to other investment choices.
Q. Please summarize the credit ratings for Avista. 18
A. Avista’ credit ratings, assigned by Standard & Poor’s
(S&P) and Moody’s Investor Service (Moody’s) are as follows:

S&P Moody’s
Senior Secured Debt A- A2
Corporate Credit Rating BBB Baa1
Outlook Stable Stable
1

Thies, Di 23
Avista Corporation
Additional information on our credit ratings has been
provided on page 1 of Exhibit No. 2, Schedule 1.
Q. Please explain the implications of the credit ratings 3
in terms of the Company’s ability to access capital markets. 4
A. Credit ratings impact investor demand and expected
returns. More specifically, when we issue debt, the credit
rating can affect the determination of the interest rate at
which the debt will be issued. The credit rating can also
affect the type of investor who will be interested in purchasing
the debt. For each type of investment a potential investor
could make, the investor looks at the quality of that investment
in terms of the risk they are taking and the priority they would
have for payment of principal and interest in the event that
the organization experiences severe financial stress.
Investment risks include, but are not limited to, liquidity
risk, market risk, operational risk, regulatory risk, and
credit risk. These risks are considered by S&P, Moody’s and 17
investors in assessing our creditworthiness.
In challenging credit markets, where investors are less
likely to buy corporate bonds (as opposed to U.S. Government
bonds), a stronger credit rating will attract more investors,
and a weaker credit rating could reduce or eliminate the number
of potential investors. Thus, weaker credit ratings may result
in a company having more difficulty accessing capital markets

Thies, Di 24
Avista Corporation
and/or incurring significantly higher costs when accessing
capital.
Q. What credit rating does Avista believe is 3
appropriate? 4
A. Avista’s current S&P corporate credit rating is BBB.
We believe operating at a corporate credit rating level (senior
unsecured) of BBB+ is comparable with other US utilities
providing both electricity and natural gas. As shown in
Illustration No. 6, the average credit rating for U.S. Regulated
Combined Gas and Electric Utilities is BBB+ and the most common
rating is A-. The average and most common ratings are one and
two notches higher, respectively, than Avista’s rating.
Illustration No. 6 13
14
15
16
17
18
19
20
21
22

Thies, Di 25
Avista Corporation
We expect that a continued focus on the regulated utility,
conservative financing strategies and a supportive regulatory
environment will contribute toward an upgrade to a BBB+
corporate credit rating for Avista. Operating with a BBB+
credit rating would likely attract additional investors, lower
our debt pricing for future financings, and make us more
competitive with other utilities. In addition, financially
healthy utilities are better able to invest in the required
infrastructure over time to serve their customers, and to
withstand the challenges facing the industry and disruptions in
the financial market.
Q. How important is the regulatory environment in which 12
the Company operates? 13
A. Both Moody’s and S&P cite the regulatory environment
in which a regulated utility operates as the dominant
qualitative factor to determine a company’s creditworthiness.
Moody's rating methodology is based on four primary factors.
Two of those factors – a utility’s “regulatory framework” and
its “ability to recover costs and earn returns” – make up 50
percent of Moody’s rating methodology5.
S&P states the following6:

5Moody’s Investors Service, Rating Methodology: Regulated Electric and Gas
Utilities, December 23, 2013.
6Standard and Poor’s, Key Credit Factors: Business and Financial Risks in
the Investor-owned Utility Industry, March 2010.

Thies, Di 26
Avista Corporation
Regulation is the most critical aspect that underlies
regulated integrated utilities’ creditworthiness.
Regulatory decisions can profoundly affect financial
performance. Our assessment of the regulatory
environments in which a utility operates is guided by
certain principles, most prominently consistency and
predictability, as well as efficiency and timeliness.
For a regulatory process to be considered supportive
of credit quality, it must limit uncertainty in the
recovery of a utility’s investment. They must also
eliminate, or at least greatly reduce, the issue of
rate-case lag, especially when a utility engages in
a sizable capital expenditure program.
Because of the major capital expenditures planned by
Avista and future maturities of long-term debt, a supportive
regulatory environment is essential in maintaining our current
credit rating.
Q. Does this conclude your pre-filed direct testimony? 18
A. Yes.