CFA Institute Research Challenge Hosted in Spokane, .docx

CFA Institute Research Challenge
Hosted in
Spokane, Washington
Eastern Washington University
Daniel Goodman, Danielle Good, Leah Robinson, and Sandra
Jeffries
1
Eastern Washington University Student Research
This report is published for educational purposes only by
students competing in The CFA Institute Research Challenge
Electric & Gas Utilities, Utilities Industry
New York Stock Exchange (NYSE)
Avista Corp
Date: 1/9/2014
Ticker: AVA

Current Price: $35.48
Dividend Yield: 3.6%
Recommendation: SELL
Target Price: $25.11
Investment Highlights
We have a sell recommendation of the stock, based on target
price of $25.11.
ue to zero-interest rate environment and the
temporary increase in demand from
investors seeking higher yielding securities.
company in new geographic area.
d low precipitation (low
snowfall), which may impact 2015 hydro-
electricity generation.
Avista Stock Information
Price (1/9/15 Closing Date) $35.48
52-Week Price Range $27.99 - $37.37
Beta (β) 0.83
Dividend 1.27 (3.70%)
Dividend Payout Ratio 40%
Book Value Per Share 23.75
ROE (ttm) 9.08 %
P/E (ttm) 11.29
EPS (ttm) 3.13
Sustainable Growth Rate 3.99%*

Source: Yahoo! Finance, Team Calculation*
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Date
Avista's Monthly Closing Stock Price for the Last 5 Years
(2009-2014)
CFA Institute Research Challenge 1/12/2014
2
Business Description
Avista Corp (AVA) is a producer and distributor of electric and
natural gas
energy services to residential and commercial customers located
in eastern
Washington, northern Idaho, portions of Oregon, and portions
of Alaska.
Originally founded as The Washington Water Power Company,
Avista established
its roots in the Inland Northwest in 1889. The company’s
innovative business
practices led to the development of the first Spokane River
hydroelectric
generator and state-of-the-art wind turbines on the Palouse Hills
of eastern
Washington. Avista takes pride in its commitment to
philanthropic practices that
enrich the communities in which the company conducts business
in.
Avista consists of two business segments, Avista Utilities and
the recently
acquired Alaska Energy & Resources Company (AEL&P).

Avista Utilities regulates
the electric and natural gas operations of the business, including
the generation,
transmission, and distribution of electricity and natural gas, and
also facilitates
the wholesale purchases and sales of electricity and natural gas.
The customers
served by this segment include residents, businesses, and
communities,
consisting of approximately 1.5 million people in a 30,000-
square-mile area of
eastern Washington, northern Idaho, and Oregon. AEL&P was
acquired on July 1,
2014, just shortly after the disposition of a former segment,
ECOVA, and is the
provider of retail electric service in the city and borough of
Juneau, Alaska. The
subsidiary of AEL&P, Alaska Electric Light & Power Company,
was founded in
1893 and is the oldest regulated electric utility in the state of
Alaska.
Industry Overview
The diversified utilities industry focuses on the distribution and
transmission of
electricity, natural gas, and water to businesses and consumers.
The industry has
numerous participant companies with their own target markets.
These regional
markets are subject to a local approval process mandated by the
state(s) in which
they reside. Due to regulation and high start-up costs, most of
these companies
are monopolies or duopolies sanctioned by the government. As
a result, the

government often determines the prices that these utility
companies can charge
for their services. Federal, state, and local government agencies
work to ensure
that these utility monopolies are providing their customers with
a rational service
level at a sensible price. In order to raise prices, public utility
companies must file
a rate case, which is a lengthy process of appealing to the public
utilities
commission, usually filed per annum.
There is a wholesale side to the diversified utilities industry
that comes into play
when a power company generates electricity that they do not
deliver to the end-
user. The energy generated by these companies is often bought
and resold
several times before it is delivered to the final consumer and the
transactions that
unfold through this process make-up the wholesale market.
Many of the sales
take place across multiple states and are regulated federally.
The wholesale
market is useful to companies, such as Avista, at times when the
amount of
electricity that they can generate does not keep up with the
demand of their
customers. Using the wholesale market to fill this demand
negatively impacts
revenue potential because the cost of generating their own
electricity is cheaper
than the cost of acquiring it from somewhere else; therefore,
Avista must absorb
2.20%

3.33%
25.29%
Avista's Market Cap. Compared to Competition
Avista (AVA) IdaCorp (IDA) PG&E Corp. (PCG)
3
that cost because they are not able to raise the prices of their
customers without
filing a rate case.
The diversified utilities industry typically offers a high
dividend yield and is stable
with low risk due to the universal demand for its product.
Industry Analysis
Porter’s Five-Force Analysis
1. Industry Competition (rivalry)
The rivalry amongst utility companies is increasing as they fight
to attain the
market share that is necessary to create the economies of scale
needed to bring
down costs. Due to the nearly universal use of utilities, the
main option for
competitors is to lower their prices, which in turn dives the
profitability of the

industry down. Some competitors are trying to segment the
market by offering
bundled services to increase value to their customers; however,
it is assumed that
the electricity market will work against these attempts and
eventually neutralize
them.
2. Threat of Substitute Products
Power is a necessity and there is no substitute for it. The
modern world depends
on it, therefore, even if the prices were to increase rapidly, the
consumption rate
would remain nearly the same, at least in the short-run. There
is no substitute for
power, but there are substitute methods for generating power, so
in the long-run
if prices were to remain high, consumers would look for other
ways to fill their
electrical needs. The use of small generators, micro-turbines,
solar power, and
fuel cells are a few examples of nontraditional options for the
generation of
electricity that could pave the way for users to bypass the
current energy grids all
together, or at least to greatly diminish their use.
3. Threat of New Entrants
The threat of new companies emerging into the utilities market
is almost
nonexistent due to the high upfront costs required to establish
power generation
plants. Competitors would need a substantial amount of initial
capital and must
endure rigorous regulatory constraints. In addition, new
companies would need

to appeal to the public in a way that would convince customers
that the new utility
company is better equipped to serve them than their current
utility company.
Time is a necessity when trying to achieve a foothold in a
service area, so upfront
costs will not realize recompense for many years, if at all. New
entrants will find
it hard to have price wars to gain customer approval because the
government
regulates the prices. An exception exists in which a potential
entrant were to buy
an existing utility company.
4. Bargaining Power of Consumers
In the commercial and industrial markets, power is shifting
toward the consumer.
Residential markets have very little to no bargaining power.
Electricity is the
same no matter who produces it; therefore, it is a commodity
item and can be
bargained for. Commercial and industrial consumers are
beginning to seek out
lower prices and better contract terms. Locking in long-term
contracts at low
prices places the risk of fluctuating prices of electricity onto the
utility company
and away from the end-user. As competition in the utility
market becomes more
competitive, consumers may see more and more bargaining
power over utilities.

4
5. Bargaining Power of Suppliers
A limited number of companies monopolize the power systems
supply chain and
there is not a lot of intense competition between them.
Suppliers do enjoy
significant power over the generation companies because they
can choose where
to get the power that they supply to the end user. They can
purchase power from
the lowest priced generating company and bypass the others.
The wholesale
market is seeing the emergence of many new suppliers and over
time profitability
per supplier will decline.
Summary
According to Porter’s five forces model, the diversified utilities
industry should
enjoy high profitability when facing weak suppliers, weak
buyers, few substitutes,
little rivalry, and high barriers to entry, but it is not highly
profitable. Although
the industry scores favorably on all five of these points, it is
hindered by
regulatory pricing. Regulatory pricing has contributed to a low
return on equity
level for Avista utilities, resulting in no economic value added
for its shareholders.
Company Analysis
Competitive Strengths

Low Cost Electric Power Source
As the results of the prior financial year (2013) were
announced, the performance
of the company had surpassed the company’s expectations,
contributing to a net
income attributable to Avista Corp shareholders of $111.1
million for the y ear.
The higher than expected performance was due to warmer than
normal
temperatures during summer, cooler than normal temperatures
during fall,
which led to lower than expected operating costs. The lowering
of costs is what
enables the company to keep both customers and shareholders
satisfied. This was
evident in 2013 when there was the implementation of new rates
in Washington
and Idaho for the next two years. This gives rate certainty and
clarity to customers
for the next two years, thus putting Avista ahead in terms of
price.
Diverse Mix of Power Generation
Avista Corp uses a diverse mix of power generation to ensure
that there is
continuous flow of power. For this reason, it does not depend on
one mode of
generating power, but several, such as biomass, water, and other
renewable
sources. In addition, more than 50% of power generated comes
from renewable
sources that reduce the use of timber.
Access to Capital
The company has a strong financial base that can carry out its
operations

efficiently. In the year 2013, it had a capital budget of $335
million to cater for its
operations. This included generation, transmission, generation,
growth,
environmental, technology and fleet. Avista had revenues of
over $1.6 billion,
thus putting it in a position that is able to finance and sustain
itself. Over the
years, it has been distributing dividends to its shareholders,
indicating strong
performance of the company in the utilities industry. Avista
had $201.6 million
in available liquidity, which is under the $400 million line of
credit. It took a $90
million loan, which matures in 2016, and also issued $4.6
million in common stock
for dividend reinvestment.
Location Residential Commercial Industrial
1,000 KWH 14,000 KWH 200,000 KWH
Birmingham, AL $119.91 $1,617 $17,834
Boston, MA $165.86 $2,224 $39,599
Chicago, IL $118.90 $1,368 NA
Colorado Springs, CO $95.24 $1,200 $22,099
Henderson, NV $127.12 $1,098 $21,265
Madison, WI $148.66 $1,645 $27,255
Portland, OR $108.33 $1,251 $17,299

Raleigh, NC $106.00 $1,092 $22,242
Salt Lake, UT $95.96 $1,138 $21,834
San Diego, CA $217.55 $2,071 $37,777
Seattle, WA $97.33 $1,296 $20,407
Spokane, WA $76.75 $1,325 $18,797
Tucson, AZ $94.07 $1,541 $21,441
National Average $125.91 $1,535 $23,711
Source: Greater Spokane
5
Entrenched Market Position
It is usually every company’s desire to have an edge above the
rest. For this
reason, organizations endeavor to position their product well to
attract more
customers. There are different aspects of positioning. These are
brand
positioning, product positioning, competitive pricing,
competitive positioning
and alternatives to marketing firms. Avista is known for its
diversity of products
in the energy sector, thus it uses its expertise in this area to
position itself as a

more superior brand. In the year 2013, Avista Corp acquired
Alaska Energy and
Resources Company (AERC), which serves its customers with
clean renewable
hydroelectric power in the Juneau, Alaska area. The transaction
is set to put the
company on another level of ensuring its operations cover a
wide geographical
area.
Management
Avista has had tremendous success through the years due to its
strength in
leadership. The company endeavors to pick the best leaders for
the company and
it has stayed true to this ideology. Through the leadership of
Scott Morris, the
president, chairman, and chief executive officer, the company
has continued to
show growth amidst some turbulence. This gives investors
peace of mind as they
are assured the security of their investment.
Competitive Strategies
Generation Capacity Diversification
Avista incorporates a diverse mix of electric generation
capacity; to the left there
is a chart that shows the five different forms of Avista’s
generation capacities.
Hydropower and natural gas are Avista’s two main sources of
electricity
generation. Washington requires a portfolio to be composed of
at least 15%
renewable generation capacity, such as hydropower; Avista has
far more

hydropower in their portfolio. Their diversification allows them
to sustain their
long-term demand. Avista is one of the greenest utility
companies in the country
and they were “green before it was cool to be green”.
High Customer Appreciation
Avista strives to provide quality service and low prices to its
customers, enabling
them to achieve a customer satisfaction rating of 90% or above
since 1999. Avista
also seeks customer satisfaction through philanthropic
community orientation.
They provide energy assistance programs and continually invest
in the
communities that they serve through charitable giving and
volunteer hours. Due
to Avista’s long history in their communities, 125 years to be
exact, they have
acquired an extreme amount of customer trust and reliability.
Growth Through Acquisition
Avista has several competitive strategies, the first of which is
growth through
acquisition. Avista acquired Alaska Electric Light and Power
Company (AEL&P)
on July 1, 2014, as management views this as a “gateway to new
growth”. Avista
feels this will allow them to seek new paths for future growth
that may lead to
branching out services into the greater Alaska area. Alaska also
has the highest
allowed rate of return on equity of 12.87% out of all the other
states Avista
operates in; Washington and Idaho both allow 9.8% ROE and
Oregon allows

9.65% ROE.
48%
35%
9%
6%
2%
Electricity Generation Resource Mix
Hydro Natural Gas Coal Wind Biomass
6
Commitment to Stable Dividend
Finally, Avista has committed itself to providing a stable
earnings base and a
consistently growing dividend yield for its shareholders. Their
current dividend
yield is 3.7%, which is a very attractive level in the current low
interest rate
environment.
Financial Analysis
Balance Sheet & Leverage

Due to the high capital requirements of being a utility company,
Avista is
extremely asset heavy with property, plant and equipment,
constituting
approximately 75% of the firm’s assets. The leverage of the
firm is high, but is
state regulated. The debt-to-equity ratio must be maintained at
approximately a
1:1 ratio in order to stay compliant. They currently stand with a
debt of 49.7%
and equity of 50.3%. The firm’s total debt is approximately
70% of its assets with
the remaining 30% in equity. In regards to the firm’s equity
multiplier (leverage),
they place at 3.36 times.
Due to the firm’s low cash and equivalents, the firm’s liquidity
is relatively poor.
The firm currently has a current ratio of .88, a quick ratio of
.81, and a cash ratio
of .13. Although the figures are low, they rank second to its
competitors PG&E
(current ratio = .8, quick ratio = .74, cash ratio = .08) and
IdaCorp (current ratio =
1.90, quick ratio = 1.52, cash ratio = .31). (See Appendix 6)
Income Statement & Forecast
Based on the fiscal year of 2013, Avista realized a profitability
margin of 6.86%
and an operating margin of 15.10%. Although the margins are
low, they do not
stray too far from its competitors’ (PG&E and IdaCorp)
profitability margins,
which are 5.31% and 14.64%, and Oms of 11.30% and 23.41%,
respectively.

Using both information from Avista’s SEC 2013 10K filing and
team computation,
the team built a pro forma statement looking up to the fiscal
year of 2017. The
growth rate used was the firm’s sustainable growth rate,
discussed later in the
paper. We determined that the firm’s margins appear to be
stable based on the
assumption that both revenues and expenses are perfectly
correlated and that
current conditions are constant. (See Appendix 3)
Sales Analysis
Using a linear regression model, Avista’s sales since 2002 have
fallen below the
trend line of the forecast, with the exception of 2005, 2006, and
2008. The
statistics yielded a mean absolute deviation (MAD), the
absolute deviation in sales
predicted by the model, of $77,891,938. This translated to a
mean absolute
percentage deviation of 5.45%. The correlation of the model,
based on the
variables ‘years’ (x) and ‘annual sales’ (y), shows a Pearson’s
coefficient of .87.
The correlation within the model is moderately strong,
indicating that the model
should be used but should be monitored and updated as new
data becomes
available in order to improve accuracy. The model’s high and
low-end revenue
predictions for the fiscal year of 2014 are $1,680,658,183 and
$1,836,442,059,
respectively. (See Appendix 4)

45%
39%
15%
1%
Avista's Electric Operating Revenues - 2013
Residential Commercial Industrial Public Street & Road
Lighting
66%
32%
1% 1%
Avista Gas Operating Revenues -2013
Residential Commercial Industrial Interruptible
Debt
49.7%
Equity
50.3%
Avista's Consolidated Capital Structure

7
Net Income Analysis
Using a linear regression model, Avista’s net income has
exceeded the forecast
trend line 75% of the time. The statistics yielded a mean
absolute deviation
(MAD) of $9,902,394. This translated to a mean absolute
percentage deviation of
14.67%. The correlation of the model, based on the variables
‘years’ (x) and
‘annual operating revenues’ (y), shows a Pearson’s coefficient
of .89. The
correlation within the model is moderately strong, indicating the
model should
be used carefully, due to the high MAD, and should be
monitored and updated as
new data becomes available in order to improve accuracy. The
model’s high and
low-end revenue predictions for the fiscal year of 2014 are
$101,933,499 and
$121,783,288, respectively. (See Appendix 5)
Profitability Margin
As shown in the adjoining table, from 2010 to 2013, Avista’s
profitability margin
has been relatively stable at approximately 6%. Compared to its
closest
competitors, PG&E (approximately 5.5%) and IdaCorp
(approximately 15%),
Avista falls in second place. Concerning the fiscal year of
2014, investors should
be aware that the profitability margin will be inflated due to the

recent disposition
of ECOVA, which skyrocketed their bottom line for 2014Q2,
giving them a 37.61%
PM.
ROE Analysis
Avista is currently sitting at an ROE of 9.08%. As mentioned in
the profitability
margin section above, Avista’s 2014Q2 was inflated due to the
recent disposition
of ECOVA. As a result, the ROE of 9.08% is not an accurate
measure and instead
the historical ROE should be used. After compiling the data
from the SEC filings
from 2002 to 2013, we have determined that the most accurate
measure of the
company’s ROE is 6.64%, its historical ROE. Compared to the
ROE caps based on
the states in which Avista operates (Washington: 9.8%, Oregon:
9.65%, Idaho:
9.8%, Alaska: 12.87%), Avista falls short of its potential
returns.
Stock Valuations
Utility stocks, in general, become more attractive as interest
rates decrease; the
market is currently in a “zero-interest” environment. We feel
that Avista’s stock
is inflated due to the temporary increase in demand from
investors seeking higher
yielding securities.
Sustainable Growth Rate

In determining an appropriate growth rate, we determined that
the sustainable
growth rate was most appropriate. A sustainable growth rate is
defined as the
rate of growth a firm can sustain without having to increase its
financial leverage.
Since Avista’s debt-to-equity ratio must be maintained at an
approximate 1:1
ratio, the sustainable growth rate is a perfect match. In
calculating the growth
rate, we used the historical ROE of 6.64%, as we feel that the
current ROE of
9.08% is inflated and, therefore, an inaccurate representation of
what the firm
should normally realize. With using the appropriate ROE and
Avista’s plowback
ratio of 60%, we have concluded that the growth rate of 3.99%
is most
appropriate when using the valuation models to determine the
equity’s fair
market price. (See Appendix 15)
Sustainable Growth Rate: 3.99%*
Historical ROE 6.64%*
Plowback Ratio 60%
Dividend: $1.27
Discount Rate: 8.98%*
Market Return 10%*
Risk Free Rate 4%*

Beta (β) 0.83
Book Value: $23.75
ROE (ttm): 9.08%
Valuation Assumptions
Source: Yahoo! Finance,
Team Estimation* & Team Calculation*
Year PM
2010 5.93%
2011 6.19%
2012 5.06%
2013 6.86%
2014 Q1 9.88%
2014 Q2 37.61%
2014 Q3 3.47%
Profitability Margin
Source: Yahoo! Finance

8
Discount Rate
Using a risk-free rate of 4% and a market risk premium of 6%,
along with Avista’s
beta of .83, we calculated a discount rate of 8.98%. Due to the
recent recession,
interest rates and returns are not representative of the historical
figures, which
is why we took an average of the last 20 years. One could argue
that we should
use the current risk-free rate and the YTD market risk premium,
but it would not
be accurate from a historical standpoint. The risk-free rate is at
a historical low
and the S&P 500 has recently seen historical highs. (See
Appendix 15)
Dividend Discount Model
This first model used, the Dividend Discount Model, was
selected based on
Avista’s track record of maintaining a dividend since 1988.
Based on the declared
dividend of $1.27, the team computed discount rate, and the
team computed
growth rate, we found a valuation of $26.47 for the equity, only
a few dollars off
from the book value of the share. (See Appendix 15)
Residual Income Model
The second model used was the Residual Income Model. The
reason for the
selection of this model is because of its ability to show an

equity’s economic value
based on its ROE. For the model calculations, we used Avista’s
12-month-trailing
ROE of 9.08%, instead of its historical ROE, in order to
determine whether there
is any current economic value inherent in the stock. Based on
the 9.08% ROE, the
equity’s book value, the team computed discount rate, and the
team computed
growth rate, we found a valuation of $23.75, equal to the book
value. (See
Appendix 15)
Low ROE and Economic Value
Avista has a low historical ROE of 6.64%. Due to this low
level of ROE, Avista
doesn’t provide any economic value to the market place. The
Residual Income
Model shows that because historical ROE is roughly equal to
the cost of equity, or
the discount rate, Avista’s stock price should be evaluated at a
price equal to their
book value.
Interest Rate and AVA Price Correlation
Appendix 16 contains a chart depicting the correlation between
the Avista stock
price, from the year 2000 to current, and the 10-year t-note
interest rates. There
is a -.58 correlation, showing a moderate-high negative
correlation; Avista stock
price and interest rates move in opposite directions. As interest
rates decrease,
via Fed regulation, Avista’s stock price becomes more attractive

due to the higher
dividend yield, comparatively. An investor can earn a higher
return from Avista
stocks over the interest they would obtain from investing money
into a U.S.
Treasury Bond.
Currently, the T-note interest rates are at an all-time low; we
estimate that the
Fed will increase them sometime in 2015, as the U.S. economy
continues to
improve. This means that interest rates will increase and Avista
stock price will
become less attractive; when demand goes down, price goes
down. As a result,
the current stock price for Avista is overinflated due to the
temporary increase in
demand.
Year ROE
2002 4.20%
2003 5.92%
2004 4.67%
2005 5.86%
2006 7.98%
2007 4.21%
2008 7.39%

2009 8.29%
2010 8.21%
2011 8.45%
2012 6.12%
2013 8.43%
Average 6.64%*
Avista ROE from 2002 - 2013
Source : Yahoo! Finance, Team Calculation*
9
Stock Fair Value Estimate
Taking the two values from the two different models and
averaging them, our
group came up with a price target of $25.11 for Avista’s stock.
As previously
stated, Avista’s stock price is currently inflated due to the
temporary increase in
demand. This increase in demand is due to the very low Fed
interest rates. Avista
has consistently had a very low ROE, resulting in low to no
economic value added
to the market. Avista’s stock price is over magnified and

should only be
considered worth a price equal to or close to its book value.
Investment Recommendation
We recommend a sell of the Avista stock with a target price of
$25.11 and a
downside of 29.23%. Due to the low interest rate era, Avista
provides a stable,
and somewhat riskless return. Currently, Avista’s dividend yield
is higher than a
10-year T-note interest rate, but it should be noted that the price
of the equity and
the interest rate of the T-note are negatively correlated with a
Pearson’s
coefficient of approximately -.6. Due to the negative correlation
and the interest
rates potentially rising this year, the equity is at risk of
decreasing in market
value.
In conjunction to the correlation statistics, the average of the
Dividend Growth
Model and the Residual Income Model show that the current
price is too high and
the historical ROE, in comparison to the ROE caps of the states
in which Avista
operates in, does not provide any economic value. Therefore,
the equity should
be valued at the same price as their book value.
Investment Risk Factors
Interest Rate and Avista Price Correlation
The correlation between interest rates and Avista’s stock price
is a huge risk

factor. A graph can be found in Appendix 16 that provides
more of a visual.
According to history, there is a trend; when interest rates go
down, Avista stock
prices go up. As stated before, the U.S. economy is currently in
a “zero” interest
rate environment, if you will. Generally, people who are
looking for a “riskless”
investment put money into U.S. Treasury Bonds; with the
current all-time lows,
people are searching for alternatives. Avista stock, and utility
stock in general,
are returning much higher returns; customers view these stocks
as the next best
alternative because utilities are a commodity. The commodity
factor gives
customers the assumption of a relatively riskless investment.
Demand has
increased for Avista stock; when demand increases, price goes
up. Demand and
supply are positively correlated, basic economic rule; this
proves that because of
the increase in demand the Avista stock is temporally increased.
When the Fed
increases interest rates, demand for Avista stock will decrease
and U.S. Treasury
Bonds will increase. This is a risk from an investor standpoint
because if the Fed
raises interest rates, which we believe will happen in 2015,
Avista stock price will
significantly decrease.

10
Power of Larger Customers
Avista’s larger customers, industrial and commercial buyers,
prefer long-term
contracts; thus, locking in their price for electric services. In
turn, if Avista’s costs
increase, and even upon winning a rate case, these particular
customers are
grandfathered in. This shifts the risk of price changes from the
customers back to
Avista. Avista must carefully maintain and plan for their
increases in their costs
because of these long-term contracts. This is a risk from an
investor standpoint
because if the contract term lengths are too long and prices
significantly increase
during that time, Avista will not be able to make enough money
from their main
customers.
Acquisition Uncertainty
As previously stated, in 2014 Avista acquired a company in
Alaska, AEL&P.
AEL&P is located in an area that Avista has not previously
conducted business in
and with that comes uncertainty. With any acquisition, there is
worry as to
whether or not it was a good move for the company and whether
it will be a
downfall or a triumph for Avista. Alaska is also far away, if

you will, from the other
states Avista participates in (Washington, Oregon, and Idaho).
If for some reason
Avista is having trouble with their power sources in Oregon,
they can easily pull
power in from Washington and Idaho to offset the deficit.
Alaska, on the other
hand, does not have any sort of connections to this territory and
Avista needs to
find a way for backup generation. While acquiring AEL&P may
or may not be a
good move for Avista, it is too soon to tell, and, therefore, it is
a risk from an
investor standpoint.
Low Snow Fall
Seasonal precipitations are a significant risk factor for Avista.
In Spokane, the
current (2014-2015) winter season has been very mild with
minimal snowfall.
This heavily affects Avista because they must plan around the
seasonal trends, as
they cannot control Mother Nature. With the low snowfall this
year, there is less
water precipitation and Avista needs to plan for changes in their
usage of
Hydropower generation. Avista’s generation capacities are
almost 50%
composed of Hydro and without a lot of snow, there might be
some difficulties for
the summer of 2015. Avista might have to use alternative
sources or buy from
the outside market in order to maintain their customer’s demand
for electricity.
This is a risk from an investor standpoint because if Avista

doesn’t plan
accordingly, they may have to purchase electricity from the
wholesale market and
at a much higher cost. A revised rate case would help Avista
offset the higher
costs, but the cost and time needed to propose and get a revised
rate case to pass
in such a short time period would not be feasible at this point,
which means Avista
may lose potential profits in the upcoming year.
11
Disclosures
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report
does not hold a financial interest in the securities of
this company.
The author(s), or a member of their household, of this report
does not know of the existence of any conflicts of
interest that might bias the content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on
investment banking revenue.
Position as an officer or director:
The author(s), or a member of their household, does not serve as

an officer, director or advisory board member of
the subject company.
Market making:
The author(s) does not act as a market maker in the subject
company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived
from sources generally available to the public and
believed by the author(s) to be reliable, but the author(s) does
not make any representation or warranty, express or
implied, as to its accuracy or completeness. The information is
not intended to be used as the basis of any investment
decisions by any person or entity. This information does not
constitute investment advice, nor is it an offer or a
solicitation of an offer to buy or sell any security. This report
should not be considered to be a recommendation by
any individual affiliated with Eastern Washington University,
CFA Institute or the CFA Institute Research Challenge
with regard to this company’s stock.
CFA Institute Research Challenge
12
Appendices
Appendix 1:

Historical Balance Sheet
Period Ending 2011 2012 2013
Assets
Current Assests
Cash and Cash Equivalents 74,662$ $ 75,464 $
82,574
Net Receivables 249,303 230,741
253,914
Inventory 52,006 47,455 44,946
Other Current Assets 238,585 152,134 168,245
Total Current Assets 614,556$ $ 505,794 549,679$
Long Term Investments 93,040 81,006
66,903
Property Plant and Equipment 2,906,463 3,070,258
3,260,980
Goodwill 39,045 75,969 76,257
Intangible Assets 34,622 46,256 39,576
Other Assets 505,018 514,978 354,578
Deferred Long Term Asset Charges 21,787
18,928 13,950

Total Assets 4,214,531$ $ 4,313,179 4,361,923$
Liabilities
Current Liabilities
Accounts Payable 166,954 198,914 182,088
Short/Current Long Term Debt 235,467 205,176
286,882
Other Current Liabilities 224,753 172,059
156,370
Total Current Liabilities 627,174$ 576,149$
625,340$
Long Term Debt 1,202,629 1,250,205 1,319,856
Other Liabilities 641,090 679,875 547,228
Deferred Long Term Liability Charges 505,954 524,877
535,343
Minority Interest 174 17,658 20,001
Total Liabilities 2,977,021$ 3,048,764$ 3,047,768$
Stockholders' Equity
Misc Stocks Options Warrants 51,809 4,938
15,889
Common Stock 855,188 889,237 896,993
Retained Earnings 336,150 376,940 407,072
Other Stockholder Equity 5,637- 6,700-

5,819-
Total Stockholder Equity 1,185,701$ 1,259,477$
1,298,266$
Net Tangible Assets 1,112,034$ 1,137,262$
1,182,433$
Historical Balance Sheet
All Numbers are in Thousands
13
Appendix 2:
Historical Cash Flow Statement
Period Ending 2011 2012 2013
Net Income 100,224$ 78,210$ 111,077$
Operating Activities
Depreciation 152,182 149,849 141,458
Adjustments to Net Income 28,617 24,280 37,004

Changes in Accounts Receivables 30,616 8,100 (32,675)
Changes in Liabilities (18,220) 23,715 438
Changes in Inventories (3,388) 4,551 2,509
Changes in Other Operating Activities (23,881) 27,258 (18,471)
Total Cash Flow From Operating Activities 269,465.00$
316,553.00$ 242,557.00$
Investing Activities
Capital Expenditures (243,372) (275,974) (303,113)
Investments (127,963) (12,685) (12,989)
Other Cash Flows from Investing Activities 89,054 (6,009)
3,885
Total Cash Flow from Investint Activities (282,281.00)$
(294,668.00)$ (312,217.00)$
Financing Activities
Dividends Paid (63,737) (68,552) (73,276)
Sale Purchase of Stock 20,284 31,876 502
Net Borrowings 71,545 33,079 146,320
Other Cash Flows from Financing Activities (10,027) (17,486)
3,224
Total Cash Flows from Financing Activities 18,065.00$
(21,083.00)$ 76,770.00$

Effect of Exchange Rate Changes 0 0 0
Change in Cash and Cash Equivalents 5,249$ 802$
7,110$
Historical Cash Flow Statement
14
Appendix 3:
Pro Forma Income Statement
Period Ending 2011 2012 2013 2014* 2015* 2016* 2017*
Total Revenue 1,619,780$ 1,547,002$ 1,618,505$ 1,683,083$
1,750,238$ 1,820,073$ 1,892,694$
Cost of Revenue 790,048 693,127 689,586 717,100 745,713
775,467 806,408
Gross Profit 829,732 853,875 928,919 965,983 1,004,526
1,044,606 1,086,286

Operating Expenses
Research Development 0 0 0 0 0 0 0
Selling General and Administrative 488,128 537,403 551,337
573,335 596,211 620,000 644,738
Non Recurring 0 0 0 0 0 0 0
Others 113,600 126,402 133,189 138,503 144,030 149,776
155,752
Total Operating Expenses 601,728 663,805 684,526 711,839
740,241 769,777 800,491
Operating Income or Loss 228,004 190,070 244,393 254,144
264,285 274,830 285,795
Income from Continuing Operations
Total Other Income/Expenses Net 3,433 5,025 6,677 6,943
7,220 7,509 7,808
Earnings Before Interest and Taxes 231,437 195,095 251,070
261,088 271,505 282,338 293,603
Less Interest Expense 71,266 75,034 75,546 78,560 81,695
84,954 88,344
Income Before Tax 160,171 120,061 175,524 182,527 189,810
197,384 205,259
Less Income Tax Expense 56,632 41,261 63,230 65,753 68,376
71,105 73,942
Minority Interest (3,315) (590) (1,217) (609) 0 0 0

Net Income 100,224 78,210 111,077 116,166 121,434 126,279
131,318
Preferred Stock and Other Adjustments 0 0 0 0 0 0 0
Net Income Applicable to Common Shares 100,224$ 78,210$
111,077$ 116,166$ 121,434$ 126,279$ 131,318$
Pro Forma Income Statement
Source : Yahoo! Finance, Team Forecasting*
15
Appendix 4:
Sales Forecast
Year Actual Op Revenues Forecast Error Abs Error
2002 $1,062,916,000 $1,151,213,128 ($88,297,128)
$88,297,128
2003 1,123,385,000 1,201,824,544 (78,439,544) 78,439,544
2004 1,151,580,000 1,252,435,960 (100,855,960) 100,855,960

2005 1,359,607,000 1,303,047,376 56,559,624 56,559,624
2006 1,506,311,000 1,353,658,793 152,652,207 152,652,207
2007 1,417,757,000 1,404,270,209 13,486,791 13,486,791
2008 1,676,763,000 1,454,881,625 221,881,375 221,881,375
2009 1,512,565,000 1,505,493,041 7,071,959 7,071,959
2010 1,558,740,000 1,556,104,457 2,635,543 2,635,543
2011 1,619,780,000 1,606,715,873 13,064,127 13,064,127
2012 1,547,002,000 1,657,327,289 (110,325,289) 110,325,289
2013 1,618,505,000 1,707,938,705 (89,433,705) 89,433,705
MAD = $77,891,938
MAPD = 5.45%
r = 0.8675
2014 Op Revenue Forecast: $1,758,550,121
16
Appendix 5:
Net Income Forecast

Year Actual Op Revenues Forecast Error Abs Error
2002 $31,307,000 $30,012,090 $1,294,910 $1,294,910
2003 44,504,000 36,830,740 7,673,260 7,673,260
2004 35,154,000 43,649,390 (8,495,390) 8,495,390
2005 45,168,000 50,468,041 (5,300,041) 5,300,041
2006 72,941,000 57,286,691 15,654,309 15,654,309
2007 38,475,000 64,105,341 (25,630,341) 25,630,341
2008 73,620,000 70,923,992 2,696,008 2,696,008
2009 87,071,000 77,742,642 9,328,358 9,328,358
2010 92,425,000 84,561,293 7,863,707 7,863,707
2011 100,224,000 91,379,943 8,844,057 8,844,057
2012 78,210,000 98,198,593 (19,988,593) 19,988,593
2013 111,077,000 105,017,244 6,059,756 6,059,756
MAD = $9,902,394
MAPD = 14.67%
r = 0.8906

2014 Net Income Forecast: $111,835,894
17
Appendix 6:
Balance Sheet Margin
Liquidity 2013
Current Ratio 0.88
Quick Ratio 0.81
Cash Ratio 0.13
Total Debt Ratio 0.7
Debt-Equity Ratio 1.02
Equity Multiplier 3.36
Long-Term Debt Ratio 0.5
Profit Margin 6.86%
Operating Margin 15.10%
ROA 2.55%

ROE 8.56%
Financial Leverage
Profitability
18
Appendix 7:
Historical Dividends Chart
$-
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2011 2012 2013 2014
A
m
o
u
n
t
(D
o
ll
a
rs
)
Year
Avista's Dividends from 2000-2014
19
Appendix 8:
Capital Expenditures Chart

$303
$276
$243
$355 $355 $350
$-
$50
$100
$150
$200
$250
$300
$350
$400
2011 2012 2013 2014 2015 2016
A
m
o
u
n
t

(B
il
li
o
n
s
o
f
D
o
ll
a
rs
)
Year
Avista's CapEx from 2011-2016
20
Appendix 9:
Maturity Structure Chart

$90.0
$273.0
$90.0
$52.0
$250.0
$13.5
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
A
m
o
u

n
t
(M
il
li
o
n
s
o
f
D
o
ll
a
rs
)
Year
Avista's Maturity Structure
21
Appendix 10:

P/E versus T-note Closing Price
0
5
10
15
20
25
30
35
T
-N
o
te
P
ri
ce
&
A
V
A

P
/E
Year
Avista P/E vs. T-Note Closing Price
T-Note Closing Price
AVA P/E
22
Appendix 11:
Historical Return on Equity Chart
4.20%
5.92%
4.67%
5.86%
7.98%
4.21%

7.39%
8.29% 8.21%
8.45%
6.12%
8.43%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2013
A
v
is

ta
R
O
E
(
P
e
rc
e
n
ta
g
e
)
Year
23
Appendix 12:
Historical Profit Margin Chart

0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2010 2011 2012 2013 2014 Q1 2014 Q2 2014 Q3
P
ro
fi
t
M
a
rg
in
(P

e
rc
e
n
ta
g
e
s)
Year, Quarter
Avista's Profit Margin 2010-2014 (Q1-Q3)
24
Appendix 13:
Sales Analysis
Sales Dollars are in Thousands
Source: Yahoo! Finance, Team Forecasting*
$-
$200,000

$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2013 2014*
S
a
le
s
(T
h
o
u
sa
n

d
s
o
f
D
o
ll
a
rs
)
Year
Sales Analysis
Actual Op Revenues Forecast
25
Appendix 14:
Net Income Analysis
Net Income Values are in Thousands of Dollars

Source: Yahoo! Finance, Team Forecasting*
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2013 2014*
N
e
t
In
co
m
e
(
T
h
o
u

sa
n
d
s
o
f
D
o
ll
a
rs
)
Year
Net Income Analysis
Actual Op Revenues Forecast
26
Appendix 15:
Stock Valuation Model

Sustainable Growth Rate Calculation
Year ROE
2002 4.20%
2003 5.92%
2004 4.67%
2005 5.86%
2006 7.98%
2007 4.21%
2008 7.39%
2009 8.29%
2010 8.21%
2011 8.45%
2012 6.12%
2013 8.43%
Historical ROE (Avg.) 6.64%*
Source: Yahoo! Finance, Team Calculation*
�� ℎ �� = ��
�� ∗ ��
�� ℎ �� = 6.64% ∗ 60% =
3.99%
Determining Discount Rate
�� (�) = �� + � ∗
��

�� (�) = 4% + .83 ∗ 6% = 8.98%
Dividend Discount Model Calculation
�� =
�� ∗ 1 + �
� − �
�� =
$1.27 ∗ 1 + 3.99%
8.98% − 3.99%
= $��. ��
Residual Income Model
�� = ��0 +
�� − �
� − �
∗ ��0
�� = $23.75 +
9.08% − 8.98%
8.98% − 3.99%
∗ $23.75 = $��. ��
Weighted Average Stock Value
(50% × $26.47) + (50% × $23.75) = $��. ��

27
Appendix 16:
Closing Stock Price Correlation with Interest Rate Chart
0
1
2
3
4
5
6
7
8
0
5
10

15
20
25
30
35
40
45
50
3-Jan-00 3-Jan-01 3-Jan-02 3-Jan-03 3-Jan-04 3-Jan-05 3-Jan-
06 3-Jan-07 3-Jan-08 3-Jan-09 3-Jan-10 3-Jan-11 3-Jan-12 3-
Jan-13 3-Jan-14
1
0
Y
e
a
r
T
-N
o
te

I
n
te
re
st
R
a
te
A
v
is
ta
S
to
ck
P
ri
ce
s
Dates
Weekly Closing Prices from 2000 - 2014
AVISTA CLOSE PRICE 10YR T-NOTE ADJ. CLOSE

28
Appendix 17:
Geographic Map of Service Territory
NOTE: The above map does not include coverage areas in
Alaska.
29
Appendix 18:
Institutional Ownership
30
Appendix 19:
Insider Trades

31
Appendix 20:
References
^TNX Historical Prices. (n.d.). Retrieved November 25, 2014,
from http://finance.yahoo.com/q/hp?s=^TNX
Historical Prices
AVA Historical Prices. (n.d.). Retrieved November 25, 2014,
from http://finance.yahoo.com/q/hp?s=AVA Historical
Prices
Avista Corp. (AVA). (n.d.). Retrieved November 20, 2014, from
http://finance.yahoo.com/q?s=ava
Avista Corp - Investor Relations - Event Details. (2014,
December 1). Retrieved from
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Avista Logo [Web Graphic]. Retrieved from
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content/uploads/2014/01/Avista-
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Avista Utilities. (2012, November 1). Retrieved from
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Das, Udaibir S, Michael G. Papaioannou, and Christoph
Trebesch. Sovereign Default Risk and Private Sector Access
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Electric Power Supply Association. (2014). EPSA: Electricity
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Retrieved from
https://www.epsa.org/industry/primer/?fa=wholesaleMarket
Electricity. (n.d.). Retrieved January 6, 2015, from
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electricity.html
Hansen, Don R, Maryanne M. Mowen, and Liming Guan. Cost
Management: Accounting and Control. Mason, Ohio:
South-Western, 2009. Print.
Harris, Z. (2014, September). IBISWorld Search Results.
Retrieved from
https://www.ibisworld.com/search/detail.aspx?st=22121%20Nat
ural%20Gas%20Distribution%20in%20
the%20US%20Industry%20Report%20(1)
Investopedia staff. (2014, December). The Industry Handbook:
The Utilties Industry | Investopedia. Retrieved from
http://www.investopedia.com/features/industryhandbook/utilitie
s.asp
Morris, S. (Director) (2014, November 25). CFA Regional

Company Meeting. Lecture conducted from CFA Institute
and Avista Corp., Spokane, WA.
Nasdaq staff. (n.d.). Public Utilities North America Companies
- NASDAQ.com. Retrieved December 12, 2014, from
http://www.nasdaq.com/screening/companies-by-
industry.aspx?industry=Public+Utilities=North+America
Public Utilities - encyclopedia article about Public Utilities.
(n.d.). Retrieved December 12, 2014, from
http://encyclopedia.thefreedictionary.com/public+utilities
Plunkett, W R. Management: Meeting and Exceeding Customer
Expectations. Mason, OH, 2013. Print.
Revenue, EPS, & Dividend - Avista Corporation (AVA) -
NASDAQ.com. (n.d.). Retrieved January 3, 2015, from
http://www.nasdaq.com/symbol/ava/revenue-eps
Ulama, D. (2014, September). IBISWorld Search Results.
Retrieved from
https://www.ibisworld.com/search/detail.aspx?st=22112%20Ele
ctric%20Power%20Transmission%20in
%20the%20US%20Industry%20Report%20(1)

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