Edgar Filing: AVISTA CORP

AVA-2013.03.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________________________

Form 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2013 OR



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-3701

__________________________________________________________________________________________

AVISTA CORPORATION

(Exact name of Registrant as specified in its charter)



Washington		91-0462470
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1411 East Mission Avenue, Spokane, Washington		99202-2600
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 509-489-0500

Web site: http://www.avistacorp.com

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

As of April 30, 2013, 59,920,196 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.

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AVISTA CORPORATION

INDEX



			Page No.
Part I. Financial Information
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Statements of Income - Three Months Ended March 31, 2013 and 2012	3
		Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2013 and 2012	4
		Condensed Consolidated Balance Sheets - March 31, 2013 and December 31, 2012	5
		Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2013 and 2012	7
		Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests - Three Months Ended March 31, 2013 and 2012	9
		Notes to Condensed Consolidated Financial Statements	10
		Report of Independent Registered Public Accounting Firm	38

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58

	Item 4.	Controls and Procedures	59

Part II. Other Information
	Item 1.	Legal Proceedings	61

	Item 1A.	Risk Factors	61

	Item 4.	Mine Safety Disclosures	61

	Item 6.	Exhibits	61

Signature			62

FORWARD-LOOKING STATEMENTS

From time to time, we make forward-looking statements such as statements regarding projected or future:


•	financial performance;


•	cash flows;


•	capital expenditures;


•	dividends;


•	capital structure;


•	other financial items;


•	strategic goals and objectives;


•	business environment; and


•	plans for operations.

These statements have underlying assumptions (many of which are based, in turn, upon further assumptions). Such statements are made both in our reports filed under the Securities Exchange Act of 1934, as amended (including this Quarterly Report on Form 10-Q), and elsewhere. Forward-looking statements are all statements except those of historical fact including, without limitation, those that are identified by the use of words that include “will,” “may,” “could,” “should,” “intends,” “plans,” “seeks,” “anticipates,” “estimates,” “expects,” “forecasts,” “projects,” “predicts,” and similar expressions. Forward-looking statements (including those made in this Quarterly Report on Form 10-Q) are subject to a variety of risks and uncertainties and other factors. Many of these factors are beyond our control and they could have a significant effect on our operations, results of operations, financial condition or cash flows. This could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others:


•	weather conditions (temperatures, precipitation levels and wind patterns) which affect energy demand and electric generation, including the effect of precipitation and temperature on hydroelectric resources, the effect of wind patterns

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AVISTA CORPORATION

on wind-generated power, weather-sensitive customer demand, and similar impacts on supply and demand in the wholesale energy markets;


•	state and federal regulatory decisions that affect our ability to recover costs and earn a reasonable return including, but not limited to, disallowance or delay in the recovery of capital investments and operating costs;


•	changes in wholesale energy prices that can affect operating income, cash requirements to purchase electricity and natural gas, value received for wholesale sales, collateral required of us by counterparties on wholesale energy transactions and credit risk to us from such transactions, and the market value of derivative assets and liabilities;


•	economic conditions in our service areas, including customer demand for utility services;


•	the effect of increased customer energy efficiency;


•	our ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by various factors including our credit ratings, interest rates and other capital market conditions and the global economy;


•	the potential effects of legislation or administrative rulemaking, including possible effects on our generating resources of restrictions on greenhouse gas emissions to mitigate concerns over global climate changes;


•	changes in actuarial assumptions, interest rates and the actual return on plan assets for our pension and other postretirement medical plans, which can affect future funding obligations, pension and other postretirement medical expense and pension and other postretirement medical plan liabilities;


•	volatility and illiquidity in wholesale energy markets, including the availability of willing buyers and sellers, and prices of purchased energy and demand for energy sales;


•	the outcome of pending regulatory and legal proceedings arising out of the “western energy crisis” of 2000 and 2001, including possible refunds;


•	the outcome of legal proceedings and other contingencies;


•	changes in, and compliance with, environmental and endangered species laws, regulations, decisions and policies, including present and potential environmental remediation costs;


•	wholesale and retail competition including alternative energy sources, suppliers and delivery arrangements and the extent that new uses for our services may materialize;


•	the ability to comply with the terms of the licenses for our hydroelectric generating facilities at cost-effective levels;


•	severe weather or natural disasters that can disrupt energy generation, transmission and distribution, as well as the availability and costs of materials, equipment, supplies and support services;


•	explosions, fires, accidents, mechanical breakdowns, or other incidents that may cause unplanned outages at any of our generation facilities, transmission and distribution systems or other operations;


•	public injuries or damages arising from or allegedly arising from our operations;


•	blackouts or disruptions of interconnected transmission systems (the regional power grid);


•	disruption to information systems, automated controls and other technologies that we rely on for our operations, communications and customer service;


•	terrorist attacks, cyber attacks or other malicious acts that may disrupt or cause damage to our utility assets or to the national economy in general, including any effects of terrorism, cyber attacks or vandalism that damage or disrupt information technology systems;


•	delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities;


•	changes in the costs to implement new information technology systems and/or obstacles that impede our ability to complete such projects timely and effectively;


•	changes in the long-term climate of the Pacific Northwest, which can affect, among other things, customer demand patterns and the volume and timing of streamflows to our hydroelectric resources;


•	changes in industrial, commercial and residential growth and demographic patterns in our service territory or changes in demand by significant customers;


•	the loss of key suppliers for materials or services;

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AVISTA CORPORATION


•	default or nonperformance on the part of any parties from which we purchase and/or sell capacity or energy;


•	deterioration in the creditworthiness of our customers;


•	potential decline in our credit ratings, with effects including impeded access to capital markets, higher interest costs, and certain ratings trigger covenants in our financing arrangements and wholesale energy contracts;


•	increasing health care costs and the resulting effect on health insurance provided to our employees and retirees;


•	increasing costs of insurance, more restricted coverage terms and our ability to obtain insurance;


•	work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages or the loss of key executives, availability of workers in a variety of skill areas, and our ability to recruit and retain employees;


•	the potential effects of negative publicity regarding business practices - whether true or not - which could result in litigation or a decline in our common stock price;


•	changes in technologies, possibly making some of the current technology obsolete;


•	changes in tax rates and/or policies;


•	changes in the payment acceptance policies of Ecova’s client vendors that could reduce operating revenues;


•	potential difficulties for Ecova in integrating acquired operations and in realizing expected opportunities, diversions of management resources and losses of key employees, challenges with respect to operating new businesses and other unanticipated risks and liabilities; and


•	changes in our strategic business plans, which may be affected by any or all of the foregoing, including the entry into new businesses and/or the exit from existing businesses.

Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonable based on, without limitation, an examination of historical operating trends, our records and other information available from third parties. However, there can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New risks, uncertainties and other factors emerge from time to time, and it is not possible for us to predict all such factors, nor can we assess the effect of each such factor on our business or the extent that any such factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands, except per share amounts

(Unaudited)



	2013			2012
Operating Revenues:
Utility revenues	$	431,127		$	405,460
Ecova revenues	42,407			37,010
Other non-utility revenues	9,372			9,787
Total operating revenues	482,906			452,257
Operating Expenses:
Utility operating expenses:
Resource costs	229,630			211,012
Other operating expenses	65,444			65,322
Depreciation and amortization	27,935			27,318
Taxes other than income taxes	25,817			25,166
Ecova operating expenses:
Other operating expenses	35,990			35,774
Depreciation and amortization	3,493			2,836
Other non-utility operating expenses:
Other operating expenses	9,345			8,267
Depreciation and amortization	190			168
Total operating expenses	397,844			375,863
Income from operations	85,062			76,394
Interest expense	19,692			19,137
Interest expense to affiliated trusts	118			140
Capitalized interest	(940		)	(525		)
Other income-net	(2,145		)	(1,709		)
Income before income taxes	68,337			59,351
Income tax expense	25,236			21,138
Net income	43,101			38,213
Net loss (income) attributable to noncontrolling interests	(760		)	175
Net income attributable to Avista Corporation shareholders	$	42,341		$	38,388
Weighted-average common shares outstanding (thousands), basic	59,866			58,581
Weighted-average common shares outstanding (thousands), diluted	59,898			58,950
Earnings per common share attributable to Avista Corporation shareholders:
Basic	$	0.71		$	0.66
Diluted	$	0.71		$	0.65
Dividends paid per common share	$	0.305		$	0.29

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands

(Unaudited)



	2013			2012
Net income	$	43,101		$	38,213
Other Comprehensive Income (Loss):
Unrealized investment gains/(losses) - net of taxes of $(39) and $39, respectively	(70		)	69
Reclassification adjustment for realized gains on investment securities included in net income - net of taxes of $(1) and $(5), respectively	(1		)	(11		)
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $99 and $82, respectively	184			153
Total other comprehensive income	113			211
Comprehensive income	43,214			38,424
Comprehensive loss (income) attributable to noncontrolling interests	(760		)	175
Comprehensive income attributable to Avista Corporation shareholders	$	42,454		$	38,599

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS

Avista Corporation

Dollars in thousands

(Unaudited)



	March 31,		December 31,
	2013		2012
Assets:
Current Assets:
Cash and cash equivalents	$	89,197	$	75,464
Accounts and notes receivable-less allowances of $44,652 and $44,155, respectively	190,197		193,683
Utility energy commodity derivative assets	4,706		4,139
Regulatory asset for utility derivatives	14,577		35,082
Investments and funds held for clients	103,392		88,272
Materials and supplies, fuel stock and natural gas stored	30,318		47,455
Deferred income taxes	31,968		34,281
Income taxes receivable	3,556		2,777
Other current assets	39,103		24,641
Total current assets	507,014		505,794
Net Utility Property:
Utility plant in service	4,115,253		4,054,644
Construction work in progress	134,741		143,098
Total	4,249,994		4,197,742
Less: Accumulated depreciation and amortization	1,196,506		1,174,026
Total net utility property	3,053,488		3,023,716
Other Non-current Assets:
Investment in exchange power-net	15,721		16,333
Investment in affiliated trusts	11,547		11,547
Goodwill	76,762		75,959
Intangible assets-net of accumulated amortization of $28,322 and $26,030, respectively	43,884		46,256
Long-term energy contract receivable of Spokane Energy	49,269		52,033
Other property and investments-net	52,181		46,542
Total other non-current assets	249,364		248,670
Deferred Charges:
Regulatory assets for deferred income tax	72,946		79,406
Regulatory assets for pensions and other postretirement benefits	301,725		306,408
Other regulatory assets	106,291		103,946
Non-current utility energy commodity derivative assets	925		1,093
Non-current regulatory asset for utility derivatives	22,192		25,218
Other deferred charges	18,193		18,928
Total deferred charges	522,272		534,999
Total assets	$	4,332,138	$	4,313,179

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

Avista Corporation

Dollars in thousands

(Unaudited)



	March 31,			December 31,
	2013			2012
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	161,503		$	198,914
Client fund obligations	103,238			87,839
Current portion of long-term debt	50,354			50,372
Current portion of nonrecourse long-term debt of Spokane Energy	15,309			14,965
Short-term borrowings	52,500			52,000
Utility energy commodity derivative liabilities	12,345			29,515
Other current liabilities	184,534			142,544
Total current liabilities	579,783			576,149
Long-term debt	1,178,766			1,178,367
Nonrecourse long-term debt of Spokane Energy	13,872			17,838
Long-term debt to affiliated trusts	51,547			51,547
Long-term borrowings under committed line of credit	54,000			54,000
Regulatory liability for utility plant retirement costs	237,967			234,128
Pensions and other postretirement benefits	274,180			283,985
Deferred income taxes	522,920			524,877
Other non-current liabilities and deferred credits	106,395			110,215
Total liabilities	3,019,430			3,031,106
Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements)

Redeemable Noncontrolling Interests	7,970			4,938
Equity:
Avista Corporation Stockholders’ Equity:
Common stock, no par value; 200,000,000 shares authorized; 59,912,087 and 59,812,796 shares outstanding, respectively	891,759			889,237
Accumulated other comprehensive loss	(6,587		)	(6,700		)
Retained earnings	398,804			376,940
Total Avista Corporation stockholders’ equity	1,283,976			1,259,477
Noncontrolling Interests	20,762			17,658
Total equity	1,304,738			1,277,135
Total liabilities and equity	$	4,332,138		$	4,313,179

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands

(Unaudited)



	2013			2012
Operating Activities:
Net income	$	43,101		$	38,213
Non-cash items included in net income:
Depreciation and amortization	31,618			30,322
Provision (benefit) for deferred income taxes	1,120			(303		)
Power and natural gas cost amortizations, net	2,545			4,098
Amortization of debt expense	947			965
Amortization of investment in exchange power	613			613
Stock-based compensation expense	1,464			1,618
Equity-related AFUDC	(1,391		)	(843		)
Pension and other postretirement benefit expense	10,949			9,727
Amortization of Spokane Energy contract	2,764			2,541
Other	1,118			(151		)
Contributions to defined benefit pension plan	(14,670		)	(14,700		)
Changes in working capital components:
Accounts and notes receivable	2,432			16,079
Materials and supplies, fuel stock and natural gas stored	17,137			15,652
Other current assets	(14,288		)	21,265
Accounts payable	(20,778		)	(16,112		)
Other current liabilities	40,698			12,315
Net cash provided by operating activities	105,379			121,299

Investing Activities:
Utility property capital expenditures (excluding equity-related AFUDC)	(70,645		)	(57,771		)
Other capital expenditures	(819		)	(1,144		)
Federal grant payments received	1,567			2,855
Cash paid by subsidiaries for acquisitions, net of cash received	—			(50,310		)
Decrease (increase) in funds held for clients	2,816			(35,857		)
Purchase of securities available for sale	(24,956		)	(36,461		)
Sale and maturity of securities available for sale	7,000			27,000
Other	(1,649		)	(2,628		)
Net cash used in investing activities	(86,686		)	(154,316		)

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands

(Unaudited)



	2013			2012
Financing Activities:
Net increase (decrease) in short-term borrowings	$	500		$	(24,000	)
Borrowings from Ecova line of credit	3,000			25,000
Repayment of borrowings from Ecova line of credit	(3,000		)	—
Redemption and maturity of long-term debt	(101		)	(65		)
Maturity of nonrecourse long-term debt of Spokane Energy	(3,622		)	(3,307		)
Long-term debt and short-term borrowing issuance costs	(11		)	(33		)
Issuance of common stock	1,149			1,437
Cash dividends paid	(18,384		)	(17,073		)
Purchase of subsidiary noncontrolling interest	—			(134		)
Increase in client fund obligations	15,399			45,169
Issuance of subsidiary noncontrolling interest	—			3,714
Other	110			350
Net cash provided by (used in) financing activities	(4,960		)	31,058

Net increase (decrease) in cash and cash equivalents	13,733			(1,959		)

Cash and cash equivalents at beginning of period	75,464			74,662

Cash and cash equivalents at end of period	$	89,197		$	72,703

Supplemental Cash Flow Information:
Cash paid during the period:
Interest	$	7,391		$	6,680
Income taxes	1,329			1,322
Non-cash financing and investing activities:
Accounts payable for capital expenditures	4,730			2,677
Redeemable noncontrolling interests	2,870			1,764

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands

(Unaudited)



	2013			2012
Common Stock, Shares:
Shares outstanding at beginning of period	59,812,796			58,422,781
Issuance of common stock	99,291			248,020
Shares outstanding at end of period	59,912,087			58,670,801
Common Stock, Amount:
Balance at beginning of period	$	889,237		$	855,188
Equity compensation expense	1,461			1,120
Issuance of common stock, net of issuance costs	1,149			1,437
Equity transactions of consolidated subsidiaries	(88		)	2
Balance at end of period	891,759			857,747
Accumulated Other Comprehensive Loss:
Balance at beginning of period	(6,700		)	(5,637		)
Other comprehensive income	113			211
Balance at end of period	(6,587		)	(5,426		)
Retained Earnings:
Balance at beginning of period	376,940			336,150
Net income attributable to Avista Corporation shareholders	42,341			38,388
Cash dividends paid (common stock)	(18,384		)	(17,073		)
Valuation adjustments and other noncontrolling interests activity	(2,093		)	(1,647		)
Balance at end of period	398,804			355,818
Total Avista Corporation stockholders’ equity	1,283,976			1,208,139
Noncontrolling Interests:
Balance at beginning of period	17,658			174
Net income attributable to noncontrolling interests	733			31
Deconsolidation of variable interest entity	—			(673		)
Other	2,371			—
Balance at end of period	20,762			(468		)
Total equity	$	1,304,738		$	1,207,671
Redeemable Noncontrolling Interests:
Balance at beginning of period	$	4,938		$	51,809
Net income (loss) attributable to noncontrolling interests	27			(206		)
Issuance of subsidiary noncontrolling interests	—			3,714
Purchase of subsidiary noncontrolling interests	—			(134		)
Valuation adjustments and other noncontrolling interests activity	3,005			2,450
Balance at end of period	$	7,970		$	57,633

The Accompanying Notes are an Integral Part of These Statements.

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AVISTA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The accompanying condensed consolidated financial statements of Avista Corporation (Avista Corp. or the Company) for the interim periods ended March 31, 2013 and 2012 are unaudited; however, in the opinion of management, the statements reflect all adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Condensed Consolidated Statements of Income for the interim periods are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters which would be included in full fiscal year consolidated financial statements; therefore, they should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K). Please refer to the section “Acronyms and Terms” in the 2012 Form 10-K for definitions of terms. The acronyms and terms are an integral part of these condensed consolidated financial statements.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avista Corporation is an energy company engaged in the generation, transmission and distribution of energy, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities generates, transmits and distributes electricity in parts of eastern Washington, northern Idaho, and western Montana. In addition, Avista Utilities has electric generating facilities in Montana and northern Oregon. Avista Utilities also provides natural gas distribution service in parts of eastern Washington and northern Idaho, as well as parts of northeastern and southwestern Oregon. Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). Avista Capital’s subsidiaries include Ecova, Inc. (Ecova), a 78.9 percent owned subsidiary as of March 31, 2013. Ecova is a provider of energy efficiency and other facility information and cost management programs and services for multi-site customers and utilities throughout North America. See Note 12 for business segment information.

Basis of Reporting

The condensed consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries, including Ecova and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants.

Taxes Other Than Income Taxes

Taxes other than income taxes include state excise taxes, city occupational and franchise taxes, real and personal property taxes and certain other taxes not based on net income. These taxes are generally based on revenues or the value of property. Utility related taxes collected from customers (primarily state excise taxes and city utility taxes) are recorded as operating revenue and expense and totaled the following amounts for the three months ended March 31 (dollars in thousands):



	2013		2012
Utility taxes	$	17,906	$	17,834

Other Income - Net

Other Income - net consisted of the following items for the three months ended March 31 (dollars in thousands):



	2013			2012
Interest income	$	(258	)	$	(275	)
Interest income on regulatory deferrals	(13		)	(8		)
Equity-related AFUDC	(1,391		)	(843		)
Net loss on investments	398			439
Other income	(881		)	(1,022		)
Total (1)	$	(2,145	)	$	(1,709	)


(1)	The 2012 amount includes an immaterial correction of an error related to the reclassification of certain operating expenses

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AVISTA CORPORATION

from other expense-net to utility and non-utility other operating expenses and utility taxes other than income taxes. This correction did not have an impact on net income or earnings per share. See further discussion of this reclassification below under "Immaterial Correction of an Error."

Materials and Supplies, Fuel Stock and Natural Gas Stored

Inventories of materials and supplies, fuel stock and natural gas stored are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,		December 31,
	2013		2012
Materials and supplies	$	26,511	$	26,058
Fuel stock	3,478		4,121
Natural gas stored	329		17,276
Total	$	30,318	$	47,455

Investments and Funds Held for Clients and Client Fund Obligations

In connection with the bill paying services, Ecova collects funds from its clients and remits the funds to the appropriate utility or other service provider. Some of the funds collected are invested by Ecova and classified as investments and funds held for clients, and a related liability for client fund obligations is recorded. Investments and funds held for clients include cash and cash equivalent investments, money market funds and investment securities classified as available for sale. Ecova does not invest the funds directly for the clients' benefit; therefore, Ecova bears the risk of loss associated with the investments. Investments and funds held for clients as of March 31, 2013 are as follows (dollars in thousands):



	Amortized Cost (1)		Unrealized Gain (Loss)		Fair Value
Cash and cash equivalents	$	26,315	$	—	$	26,315
Securities available for sale:
U.S. government agency	64,458		47		64,505
Municipal	3,595		33		3,628
Corporate fixed income – financial	4,001		10		4,011
Corporate fixed income – industrial	3,869		48		3,917
Certificates of deposit	1,000		16		1,016
Total securities available for sale	76,923		154		77,077
Total investments and funds held for clients	$	103,238	$	154	$	103,392

Investments and funds held for clients as of December 31, 2012 are as follows (dollars in thousands):



	Amortized Cost (1)		Unrealized Gain (Loss)		Fair Value
Cash and cash equivalents	$	13,867	$	—	$	13,867
Money market funds	15,084		—		15,084
Securities available for sale:
U.S. government agency	48,340		156		48,496
Municipal	820		28		848
Corporate fixed income – financial	5,010		16		5,026
Corporate fixed income – industrial	3,887		49		3,936
Corporate fixed income – utility	—		—		—
Certificates of deposit	1,000		15		1,015
Total securities available for sale	59,057		264		59,321
Total investments and funds held for clients	$	88,008	$	264	$	88,272


(1)	Amortized cost represents the original purchase price of the investments, plus or minus any amortized purchase premiums or accreted purchase discounts.

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Investments and funds held for clients are classified as a current asset since these funds are held for the purpose of satisfying the client fund obligations. Approximately 95 percent and 97 percent of the investment portfolio is rated AA-, Aa3 and higher as of March 31, 2013 and December 31, 2012, respectively, by nationally recognized statistical rating organizations. All fixed income securities were rated as investment grade as of March 31, 2013 and December 31, 2012.

Ecova reviews its investments continuously for indicators of other-than-temporary impairment. To make this determination, Ecova employs a methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Ecova evaluates, among other factors, general market conditions, credit quality of instrument issuers, the length of time and extent to which the fair value is less than cost, and whether it has plans to sell the security or it is more-likely-than not that Ecova will be required to sell the security before recovery. Ecova also considers specific adverse conditions related to the financial health of and specific prospects for the issuer as well as other cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the investment is established. Based on Ecova’s analysis, securities available for sale do not meet the criteria for other-than-temporary impairment as of March 31, 2013 or December 31, 2012.

Proceeds from sales, maturities and calls of securities available for sale were $7.0 million and $27.0 million, for the three months ended March 31, 2013 and March 31, 2012, respectively. Gross realized gains were negligible for the three months ended March 31, 2013 and March 31, 2012. There were not any gross realized losses during these periods.

Contractual maturities of securities available for sale as of March 31, 2013 and December 31, 2012 are as follows (dollars in thousands):



	Due within 1 year		After 1 but within 5 years		After 5 but within 10 years		After 10 years		Total
March 31, 2013	$	5,428	$	16,162	$	51,486	$	4,001	$	77,077
December 31, 2012	3,047		11,786		41,485		3,003		59,321

Actual maturities may differ due to call or prepayment rights and the effective maturity was 3.8 years as of March 31, 2013 and 1.9 years as of December 31, 2012.

Goodwill

Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. The Company evaluates goodwill for impairment using a discounted cash flow model on at least an annual basis or more frequently if impairment indicators arise. The Company completed its annual evaluation of goodwill for potential impairment as of December 31, 2012 for Ecova and as of November 30, 2012 for the other businesses and determined that goodwill was not impaired at that time.

The changes in the carrying amount of goodwill are as follows (dollars in thousands):



	Ecova		Other		Accumulated Impairment Losses			Total
Balance as of December 31, 2012	$	70,713	$	12,979	$	(7,733	)	$	75,959
Adjustments	803		—		—			803
Balance as of March 31, 2013	$	71,516	$	12,979	$	(7,733	)	$	76,762

Accumulated impairment losses are attributable to the other businesses. The adjustment to goodwill recorded represents a purchase accounting adjustment for Ecova's acquisition of LPB based upon final review of the fair market value of the noncontrolling interests associated with a portion of the LPB business and based on review of the fair market value of the client relationship intangible asset.

Intangible Assets

Intangible assets represent the amounts assigned to client relationships related to the Ecova acquisition of Cadence Network in 2008 (estimated amortization period of 12 years), Loyalton in 2010 (estimated amortization period of 6 years), Prenova in 2011 (estimated amortization period of 9 years) and LPB in 2012 (estimated amortization period of 6 years), and software development costs (estimated amortization period of 3 to 5 years).

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Amortization expense related to Intangible Assets was as follows for the three months ended March 31 (dollars in thousands):



	2013		2012
Intangible asset amortization	$	2,579	$	2,097

The following table details the estimated amortization expense related to Intangible Assets for each of the five years ending December 31 (dollars in thousands):



	2013		2014		2015		2016		2017
Estimated amortization expense	$	8,074	$	9,663	$	7,599	$	6,477	$	5,584

The gross carrying amount and accumulated amortization of Intangible Assets as of March 31, 2013 and December 31, 2012 are as follows (dollars in thousands):



	March 31,			December 31,
	2013			2012
Client backlog and relationships	$	33,559		$	32,059
Software development costs	35,296			33,990
Other	3,351			6,237
Total intangible assets	72,206			72,286
Client relationships accumulated amortization	(8,808		)	(7,793		)
Software development costs accumulated amortization	(17,645		)	(16,557		)
Other accumulated amortization	(1,869		)	(1,680		)
Total accumulated amortization	(28,322		)	(26,030		)
Total intangible assets - net	$	43,884		$	46,256

Of the total net intangible assets above, intangible assets associated with Ecova represent approximately $43.1 million and $45.4 million at March 31, 2013 and December 31, 2012, respectively.

Derivative Assets and Liabilities

Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for any particular derivative depends on the intended use of that derivative and the resulting designation.

The Washington Utilities and Transportation Commission (UTC) and the Idaho Public Utilities Commission (IPUC) issued accounting orders authorizing Avista Utilities to offset commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition of mark-to-market gains and losses on energy commodity transactions until the period of settlement. The orders provide for Avista Utilities to not recognize the unrealized gain or loss on utility derivative commodity instruments in the Condensed Consolidated Statements of Income. Realized gains or losses are recognized in the period of settlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory approval, result in adjustments to retail rates through purchased gas cost adjustments, the Energy Recovery Mechanism (ERM) in Washington, the Power Cost Adjustment (PCA) mechanism in Idaho, and periodic general rates cases. Regulatory assets are assessed regularly and are probable for recovery through future rates.

Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an offsetting regulatory asset or liability. Contracts that are not considered derivatives are accounted for on the accrual basis until they are settled or realized, unless there is a decline in the fair value of the contract that is determined to be other-than-temporary.

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap agreements and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 9 for the Company’s fair value disclosures.

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Regulatory Deferred Charges and Credits

The Company prepares its condensed consolidated financial statements in accordance with regulatory accounting practices because:


•	rates for regulated services are established by or subject to approval by independent third-party regulators,


•	the regulated rates are designed to recover the cost of providing the regulated services, and


•	in view of demand for the regulated services and the level of competition, it is reasonable to assume that rates can be charged to and collected from customers at levels that will recover costs.

Regulatory accounting practices require that certain costs and/or obligations (such as incurred power and natural gas costs not currently included in rates, but expected to be recovered or refunded in the future) are reflected as deferred charges or credits on the Condensed Consolidated Balance Sheets. These costs and/or obligations are not reflected in the Condensed Consolidated Statements of Income until the period during which matching revenues are recognized. If at some point in the future the Company determines that it no longer meets the criteria for continued application of regulatory accounting practices for all or a portion of its regulated operations, the Company could be:


•	required to write off its regulatory assets, and


•	precluded from the future deferral of costs not recovered through rates at the time such costs are incurred, even if the Company expected to recover such costs in the future.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, consisted of the following as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,			December 31,
	2013			2012
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(3,599) and $(3,698), respectively	$	(6,684	)	$	(6,867	)
Unrealized gain on securities available for sale - net of taxes of $54 and $99, respectively	97			167
Total accumulated other comprehensive loss	$	(6,587	)	$	(6,700	)

The following table details the reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31, 2013 (dollars in thousands):



Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in Statement of Income
Realized gains on investment securities	$	2		Other income-net
	2			Total before tax
	(1		)	Tax expense
	$	1		Net of tax
Amortization of defined benefit pension items
Amortization of net loss	$	(4,891	)	(a)
Adjustment due to effects of regulation	4,608			(a)
	(283		)	Total before tax
	99			Tax benefit
	$	(184	)	Net of tax


(a)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 6 for additional details).

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Contingencies

The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency if it is probable that a liability has been incurred and the amount of the loss or impairment can be reasonably estimated. The Company also discloses losses that do not meet these conditions for accrual, if there is a reasonable possibility that a loss may be incurred.

Voluntary Severance Incentive Program

At December 31, 2012, the Company accrued total severance costs of $7.3 million (pre-tax) related to the voluntary termination of 55 employees. The total severance costs were made up of the severance payments and the related payroll taxes and employee benefit costs. All terminations under the voluntary severance incentive program were completed by December 31, 2012. The cost of the program was recognized as expense during the fourth quarter of 2012 and severance pay was distributed in a single lump sum cash payment to each participant during January 2013. As of March 31, 2013, there was no remaining liability accrued.

Immaterial Correction of an Error

Subsequent to the issuance of the Company's condensed consolidated financial statements for the three months ended March 31, 2012, the Company's management identified certain employee-related operating expenses, dues and donations, and other operating expenses totaling $2.3 million for the three months ended March 31, 2012, which had been erroneously included in “Other expense-net” in the previously issued financial statements rather than as a reduction to “Income from operations.” Accordingly, such classification has been corrected in the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2012 by including these costs within “other” operating expenses. The restated items are also reflected in the information presented in Note 12, Information by Business Segments. Such items had no effect on net income or earnings per share.

Reclassifications

Certain prior year amounts on the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. In the current year Condensed Consolidated Statements of Income, Ecova operating revenues and operating expenses have been reclassified to separate line items. Previously, such amounts had been classified within the line items captioned "Other non-utility revenues" and “Other non-utility operating expenses”, respectively. Also, see Note 1, “Other Income-Net” concerning a corrective reclassification made to certain 2012 operating expenses. In the current year Condensed Consolidated Statements of Cash Flows, "Amortization of investment in exchange power", "Stock-based compensation expense", "Pension and other postretirement benefit expense" and "Amortization of Spokane Energy contract" have been added as their own line items. These were previously included in "Other" in the operating activities section.

NOTE 2. NEW ACCOUNTING STANDARDS

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU does not change current requirements for reporting net income or other comprehensive income in financial statements; however, it requires entities to disclose the effect on the line items of net income for reclassifications out of accumulated other comprehensive income if the item being reclassified is required to be reclassified in its entirety to net income under U.S. GAAP. For other items that are not required to be reclassified in their entirety to net income under U.S. GAAP, an entity is required to cross-reference other disclosures required under U.S. GAAP to provide additional detail about those items. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU required additional disclosures in the Company's financial statements; however, it did not have any impact on the Company's financial condition, results of operations and cash flows.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU enhances disclosure requirements about the nature of an entity's right to offset and related arrangements associated with its financial instruments and derivative instruments. ASU No. 2011-11 requires the disclosure of the gross amounts subject to rights of set off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU required additional disclosures in the Company's financial statements; however, it did not have any impact on the Company's financial condition, results of operations and cash flows.

In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU clarifies which instruments and transactions are subject to the enhanced disclosure

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requirements of ASU 2011-11 regarding the offsetting of financial assets and liabilities. ASU No. 2013-01 limits the scope of ASU No. 2011-11 to only recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and borrowing and lending securities transactions that are offset in accordance with either Accounting Standards Codification (ASC) 210-20-45 or ASC 815-10-45. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU did not have any impact on the Company's financial condition, results of operations and cash flows.

NOTE 3. VARIABLE INTEREST ENTITIES

Lancaster Power Purchase Agreement

The Company has a power purchase agreement (PPA) for the purchase of all the output of the Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in Idaho, owned by an unrelated third-party (Rathdrum Power LLC), through 2026.

Avista Corp. has a variable interest in the PPA. Accordingly, Avista Corp. made an evaluation of which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and which interest holders have the obligation to absorb losses or receive benefits that could be significant to the entity. Avista Corp. pays a fixed capacity and operations and maintenance payment and certain monthly variable costs under the PPA. Under the terms of the PPA, Avista Corp. makes the dispatch decisions, provides all natural gas fuel and receives all of the electric energy output from the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation of the Lancaster Plant and makes operating and maintenance decisions. Rathdrum Power LLC controls all of the rights and obligations of the Lancaster Plant after the expiration of the PPA in 2026. It is estimated that the plant will have 15 to 25 years of useful life after that time. Rathdrum Power LLC bears the maintenance risk of the plant and will receive the residual value of the Lancaster Plant. Avista Corp. has no debt or equity investments in the Lancaster Plant and does not provide financial support through liquidity arrangements or other commitments (other than the PPA). Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Lancaster Plant. Accordingly, neither the Lancaster Plant nor Rathdrum Power LLC is included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $314 million under the PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.

Palouse Wind Power Purchase Agreement

In June 2011, the Company entered into a 30-year PPA with Palouse Wind, LLC (Palouse Wind), an affiliate of First Wind Holdings, LLC. The PPA relates to a wind project that was developed by Palouse Wind in Whitman County, Washington and under the terms of PPA, the Company acquires all of the power and renewable attributes produced by the wind project for a fixed price per MWh, which escalates annually, without consideration for market fluctuations. The wind project has a nameplate capacity of approximately 105 MW and is expected to produce approximately 40 aMW annually. The project was completed and energy deliveries began during the fourth quarter of 2012. Under the PPA, the Company has an annual option to purchase the wind project following the 10^th anniversary of the commercial operation date at a fixed price determined under the contract.

The Company evaluated this agreement to determine if it has a variable interest which must be consolidated. Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Palouse Wind facility due to the fact that it pays a fixed price per MWh, which represents the only financial obligation, and does not have any input into the management of the day-to-day operations of the facility. Accordingly, Palouse Wind is not included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $572 million under the PPA (representing the charges associated with purchasing the energy and renewable attributes through 2042) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.

NOTE 4. REDEEMABLE NONCONTROLLING INTERESTS AND SUBSIDIARY ACQUISITIONS

Certain minority shareholders and option holders of Ecova have the right to put their shares back to Ecova at their discretion during an annual put window. Stock options and other outstanding redeemable stock are valued at their maximum redemption amount which is equal to their intrinsic value (fair value less exercise price).

The following details redeemable noncontrolling interests as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,		December 31,
	2013		2012
Stock options and other outstanding redeemable stock	$	7,970	$	4,938

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On January 31, 2012, Ecova acquired all of the capital stock of LPB Energy Management (LPB), a Dallas, Texas-based energy management company. The cash paid for the acquisition of LPB of $50.6 million was funded by Ecova through $25.0 million of borrowings under its committed credit agreement, a $20.0 million equity infusion from existing shareholders (including Avista Capital and the other owners of Ecova), and available cash. The acquired assets and assumed liabilities of LPB were recorded at their respective estimated fair values as of the date of acquisition. Assets recorded include the following: accounts receivable of $2.5 million, goodwill of $34.0 million, client backlog of $8.2 million (estimated amortization period of 6 years), client relationships of $6.3 million (estimated amortization period of 6 years) and internal use software of $2.5 million (estimated amortization period of 3 to 5 years). These intangible assets are included in intangible assets on the Condensed Consolidated Balance Sheet. Included in the goodwill amount is $1.1 million attributable to assembled workforce that is deductible and will be amortized for tax purposes over a 15-year period and is subject to impairment review annually. The results of operations of LPB are included in the condensed consolidated financial statements beginning February 1, 2012. The sellers of LPB did not receive additional purchase price payments in 2012; however, they have the potential to receive additional purchase price payments of $1.0 million in 2013 and $1.5 million in 2014. These payments are contingent upon reaching certain revenue thresholds for certain customer contracts. As of March 31, 2013, Ecova has recorded a contingent liability of $0.3 million based on management's assessment of the probability of the revenue thresholds being achieved.

Pro forma disclosures reflecting the effects of Ecova’s acquisitions are not presented, as the acquisitions are not material to Avista Corp.’s condensed consolidated financial condition or results of operations.

NOTE 5. DERIVATIVES AND RISK MANAGEMENT

Energy Commodity Derivatives

Avista Utilities is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in general, the risk of fluctuation in the market price of the commodity being traded and is influenced primarily by supply and demand. Market risk includes the fluctuation in the market price of associated derivative commodity instruments. Avista Utilities utilizes derivative instruments, such as forwards, futures, swaps and options in order to manage the various risks relating to these commodity price exposures. The Company has an energy resources risk policy and control procedures to manage these risks. The Company’s Risk Management Committee establishes the Company’s energy resources risk policy and monitors compliance. The Risk Management Committee is comprised of certain Company officers and other members of management. The Audit Committee of the Company’s Board of Directors periodically reviews and discusses enterprise risk management processes, and it focuses on the Company’s material financial and accounting risk exposures and the steps management has undertaken to control them.

As part of our resource procurement and management operations in the electric business, we engage in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve our load obligations and the use of these resources to capture available economic value. We transact in wholesale markets by selling and purchasing electric capacity and energy, fuel for electric generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part of the process of matching resources with our load obligations and hedging the related financial risks. These transactions range from terms of intra-hour up to multiple years.

Avista Utilities makes continuing projections of:


•	electric loads at various points in time (ranging from intra-hour to multiple years) based on, among other things, estimates of customer usage and weather, historical data and contract terms, and


•	resource availability at these points in time based on, among other things, fuel choices and fuel markets, estimates of streamflows, availability of generating units, historic and forward market information, contract terms, and experience.

On the basis of these projections, we make purchases and sales of electric capacity and energy, fuel for electric generation, and related derivative instruments to match expected resources to expected electric load requirements and reduce our exposure to electricity (or fuel) market price changes. Resource optimization involves generating plant dispatch and scheduling available resources and also includes transactions such as:


•	purchasing fuel for generation,


•	when economical, selling fuel and substituting wholesale electric purchases, and


•	other wholesale transactions to capture the value of generation and transmission resources and fuel delivery capacity contracts.

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Avista Utilities’ optimization process includes entering into hedging transactions to manage risks. Transactions include both physical energy contracts and related derivative instruments.

As part of its resource procurement and management of its natural gas business, Avista Utilities makes continuing projections of its natural gas loads and assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low and average monthly requirements and delivery constraints from natural gas supply locations to Avista Utilities’ distribution system. However, daily variations in natural gas demand can be significantly different than monthly demand projections. On the basis of these projections, Avista Utilities plans and executes a series of transactions to hedge a significant portion of its projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend as much as four natural gas operating years (November through October) into the future. Avista Utilities also leaves a significant portion of its natural gas supply requirements unhedged for purchase in short-term and spot markets.

Natural gas resource optimization activities include:


•	wholesale market sales of surplus natural gas supplies,


•	optimization of interstate pipeline transportation capacity not needed to serve daily load, and


•	purchases and sales of natural gas to optimize use of storage capacity.

The following table presents the underlying energy commodity derivative volumes as of March 31, 2013 that are expected to settle in each respective year (in thousands of MWhs and mmBTUs):



	Purchases				Sales
	Electric Derivatives		Gas Derivatives		Electric Derivatives		Gas Derivatives
Year	Physical (1) MWH	Financial (1) MWH	Physical (1) mmBTUs	Financial (1) mmBTUs	Physical MWH	Financial MWH	Physical mmBTUs	Financial mmBTUs
2013	860	2,585	16,717	82,019	641	2,791	3,000	73,896
2014	559	801	6,578	75,187	377	2,305	1,786	44,153
2015	379	737	3,390	53,040	286	1,271	—	43,190
2016	367	—	1,365	16,640	287	675	—	6,060
2017	366	—	—	—	286	—	—	—
Thereafter	583	—	—	—	443	—	—	—


(1)	Physical transactions represent commodity transactions where Avista Utilities will take delivery of either electricity or natural gas and financial transactions represent derivative instruments with no physical delivery, such as futures, swaps, or options.

The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they settle and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to be collected through retail rates from customers.

Foreign Currency Exchange Contracts

A significant portion of Avista Utilities’ natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most of those transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion of Avista Utilities’ short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices and settled within sixty days with U.S. dollars. Avista Utilities hedges a portion of the foreign currency risk by purchasing Canadian currency contracts when such commodity transactions are initiated. This risk has not had a material effect on the Company’s financial condition, results of operations or cash flows and these differences in cost related to currency fluctuations were included with natural gas supply costs for ratemaking. The following table summarizes the foreign currency hedges that the Company has entered into as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,		December 31,
	2013		2012
Number of contracts	22		20
Notional amount (in United States dollars)	$	4,369	$	12,621
Notional amount (in Canadian dollars)	4,471		12,502

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Interest Rate Swap Agreements

Avista Corp. hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swaps and U.S. Treasury lock agreements. These interest rate swap agreements are considered economic hedges against fluctuations in future cash flows associated with anticipated debt issuances.

The following table summarizes the interest rate swaps that the Company has entered into as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,		December 31,
	2013		2012
Number of contracts	2		2
Notional amount	$	85,000	$	85,000
Mandatory cash settlement date	June 2013		June 2013
Number of contracts	2		2
Notional amount	$	50,000	$	50,000
Mandatory cash settlement date	October 2014		October 2014
Number of contracts	1		1
Notional amount	$	25,000	$	25,000
Mandatory cash settlement date	October 2015		October 2015

Upon settlement of the interest rate swaps, the regulatory asset or liability (included as part of long-term debt) is amortized as a component of interest expense over the life of the forecasted interest payments.

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Derivative Instruments Summary

The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of March 31, 2013 (in thousands):



		Fair Value
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netting		Net Asset (Liability) in Balance Sheet			Gross Assets Not Offset			Gross Liabilities Not Offset			Net Asset (Liability)
Foreign currency contracts	Other current assets	$	29	$	(9	)	$	—	$	20		$	—		$	—		$	20
Interest rate contracts	Other current assets	2,349		—			—		2,349			—			—			2,349
Interest rate contracts	Other property and investments - net	10,555		—			—		10,555			—			—			10,555
Commodity contracts (1)	Current utility energy commodity derivative assets	10,333		(5,627		)	—		4,706			(5,090		)	4,041			3,657
Commodity contracts (1)	Non-current utility energy commodity derivative assets	2,061		(1,136		)	—		925			—			(334		)	591
Commodity contracts (1)	Current utility energy commodity derivative liabilities	35,117		(54,404		)	6,942		(12,345		)	5,090			(4,041		)	(11,296		)
Commodity contracts (1)	Other non-current liabilities and deferred credits	25,096		(48,213		)	3,930		(19,187		)	—			334			(18,853		)
Total derivative instruments recorded on the balance sheet		$	85,540	$	(109,389	)	$	10,872	$	(12,977	)	$	—		$	—		$	(12,977	)

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The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of December 31, 2012 (in thousands):



		Fair Value
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netting		Net Asset (Liability) in Balance Sheet			Gross Assets Not Offset			Gross Liabilities Not Offset			Net Asset (Liability)
Foreign currency contracts	Other current liabilities	$	7	$	(34	)	$	—	$	(27	)	$	—		$	—		$	(27	)
Interest rate contracts	Other current liabilities	—		(1,406		)	—		(1,406		)	—			—			(1,406		)
Interest rate contracts	Other property and investments - net	7,265		—			—		7,265			—			—			7,265
Commodity contracts (1)	Current utility energy commodity derivative assets	10,772		(6,633		)	—		4,139			(9,678		)	6,572			1,033
Commodity contracts (1)	Non-current utility energy commodity derivative assets	18,779		(17,686		)	—		1,093			—			—			1,093
Commodity contracts (1)	Current utility energy commodity derivative liabilities	50,227		(89,449		)	9,707		(29,515		)	9,678			(6,572		)	(26,409		)
Commodity contracts (1)	Other non-current liabilities and deferred credits	2,247		(28,558		)	—		(26,311		)	—			—			(26,311		)
Total derivative instruments recorded on the balance sheet		$	89,297	$	(143,766	)	$	9,707	$	(44,762	)	$	—		$	—		$	(44,762	)

(1)

Avista Corp. has a master netting agreement that governs the transactions of multiple affiliated legal entities under this single master netting agreement. This master netting agreement allows for cross-commodity netting (i.e. netting physical power, physical natural gas, and financial transactions) and cross-affiliate netting for the parties to the agreement. Avista Corp. performs cross-commodity netting for each legal entity that is a party to the master netting agreement for presentation in the Condensed Consolidated Balance Sheets; however, Avista Corp. does not perform cross-affiliate netting because the Company believes that cross-affiliate netting may not be enforceable. Therefore, the requirements for cross-affiliate netting under ASC 210-20-45 are not applicable for Avista Corp.

Exposure to Demands for Collateral

The Company's derivative contracts often require collateral (in the form of cash or letters of credit) or other credit enhancements, or reductions or terminations of a portion of the contract through cash settlement, in the event of a downgrade in the Company's credit ratings or changes in market prices. In periods of price volatility, the level of exposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit facilities and cash. The Company actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements. As of March 31, 2013, the Company had cash deposited as collateral of $21.9 million and letters of credit of $10.1 million outstanding related to its energy derivative contracts. The Condensed Consolidated Balance Sheet at March 31, 2013 reflects the offsetting of $10.9 million of cash collateral against net derivative positions where a legal right of offset exists.

Certain of the Company’s derivative instruments contain provisions that require the Company to maintain an investment grade credit rating from the major credit rating agencies. If the Company’s credit ratings were to fall below “investment grade,” it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of March 31, 2013 was $17.8 million. If the credit-risk-related contingent features underlying these agreements were triggered on March 31, 2013, the Company could be required to post $11.5 million of additional collateral to its counterparties.

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AVISTA CORPORATION

Credit Risk

Credit risk relates to the potential losses that the Company would incur as a result of non-performance by counterparties of their contractual obligations to deliver energy or make financial settlements. The Company often extends credit to counterparties and customers and is exposed to the risk that it may not be able to collect amounts owed to the Company. Credit risk includes potential counterparty default due to circumstances:


•	relating directly to it,


•	caused by market price changes, and


•	relating to other market participants that have a direct or indirect relationship with such counterparty.

Changes in market prices may dramatically alter the size of credit risk with counterparties, even when conservative credit limits are established. Should a counterparty fail to perform, the Company may be required to honor the underlying commitment or to replace existing contracts with contracts at then-current market prices.

We enter into bilateral transactions between Avista and various counterparties. We also trade energy and related derivative instruments through clearinghouse exchanges.

The Company seeks to mitigate bilateral credit risk by:


•	entering into bilateral contracts that specify credit terms and protections against default,


•	applying credit limits and duration criteria to existing and prospective counterparties,


•	actively monitoring current credit exposures,


•	asserting our collateral rights with counterparties,


•	carrying out transaction settlements timely and effectively, and


•	conducting transactions on exchanges with fully collateralized clearing arrangements that significantly reduce counterparty default risk.

The Company's credit policy includes an evaluation of the financial condition of counterparties. Credit risk management includes collateral requirements or other credit enhancements, such as letters of credit or parent company guarantees. The Company enters into various agreements that address credit risks including standardized agreements that allow for the netting or offsetting of positive and negative exposures.

The Company has concentrations of suppliers and customers in the electric and natural gas industries including:


•	electric and natural gas utilities,


•	electric generators and transmission providers,


•	natural gas producers and pipelines,


•	financial institutions including commodity clearing exchanges and related parties, and


•	energy marketing and trading companies.

In addition, the Company has concentrations of credit risk related to geographic location as it operates in the western United States and western Canada. These concentrations of counterparties and concentrations of geographic location may impact the Company’s overall exposure to credit risk because the counterparties may be similarly affected by changes in conditions.

The Company maintains credit support agreements with certain counterparties and margin calls are periodically made and/or received. Margin calls are triggered when exposures exceed contractual limits or when there are changes in a counterparty’s creditworthiness. Price movements in electricity and natural gas can generate exposure levels in excess of these contractual limits. Negotiating for collateral in the form of cash, letters of credit, or performance guarantees is common industry practice.

NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all regular full-time employees at Avista Utilities. Individual benefits under this plan are based upon the employee’s years of service, date of hire and average compensation as specified in the plan. The Company’s funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum amounts that are currently

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AVISTA CORPORATION

deductible for income tax purposes. The Company contributed $14.7 million in cash to the pension plan for the three months ended March 31, 2013. The Company expects to contribute $44 million in cash to the pension plan in 2013. The Company contributed $44 million in cash to the pension plan in 2012.

The Company also has a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to executive officers of the Company. The SERP is intended to provide benefits to executive officers whose benefits under the pension plan are reduced due to the application of Section 415 of the Internal Revenue Code of 1986 and the deferral of salary under deferred compensation plans. The liability and expense for this plan are included as pension benefits in the tables included in this Note.

The Company provides certain health care and life insurance benefits for substantially all of its retired employees. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services.

The Company has a Health Reimbursement Arrangement to provide employees with tax-advantaged funds to pay for allowable medical expenses upon retirement. The amount earned by the employee is fixed on the retirement date based on the employee’s years of service and the ending salary. The liability and expense of this plan are included as other postretirement benefits.

The Company provides death benefits to beneficiaries of executive officers who die during their term of office or after retirement. Under the plan, an executive officer’s designated beneficiary will receive a payment equal to twice the executive officer’s annual base salary at the time of death (or if death occurs after retirement, a payment equal to twice the executive officer’s total annual pension benefit). The liability and expense for this plan are included as other postretirement benefits.

The Company uses a December 31 measurement date for its pension and other postretirement benefit plans. The following table sets forth the components of net periodic benefit costs for the three months ended March 31 (dollars in thousands):



	Pension Benefits						Other Post-retirement Benefits
	2013			2012			2013			2012
Service cost	$	4,743		$	3,791		$	1,032		$	689
Interest cost	5,978			6,109			1,390			1,281
Expected return on plan assets	(6,900		)	(6,000		)	(400		)	(375		)
Transition obligation recognition	—			—			—			126
Amortization of prior service cost	75			75			(37		)	(38		)
Net loss recognition	3,547			2,757			1,521			1,312
Net periodic benefit cost	$	7,443		$	6,732		$	3,506		$	2,995

NOTE 7. COMMITTED LINES OF CREDIT

Avista Corp.

Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million with an expiration date of February 2017. The committed line of credit is secured by non-transferable First Mortgage Bonds of the Company issued to the agent bank that would only become due and payable in the event, and then only to the extent, that the Company defaults on its obligations under the committed line of credit.

The committed line of credit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the ratio of “consolidated total debt” to “consolidated total capitalization” of Avista Corp. to be greater than 65 percent at any time. As of March 31, 2013, the Company was in compliance with this covenant.

Balances outstanding and interest rates of borrowings under the Company’s revolving committed line of credit were as follows as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,			December 31,
	2013			2012
Borrowings outstanding at end of period	$	52,500		$	52,000
Letters of credit outstanding at end of period	$	12,608		$	35,885
Average interest rate on borrowings at end of period	1.17		%	1.12		%

As of March 31, 2013 the borrowings outstanding under Avista Corp.'s committed line of credit were classified as short-term borrowings on the Condensed Consolidated Balance Sheet.

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AVISTA CORPORATION

Ecova

Ecova has a $125.0 million committed line of credit agreement with various financial institutions that has an expiration date of July 2017. The credit agreement is secured by all of Ecova's assets excluding investments and funds held for clients.

The committed line of credit agreement contains customary covenants and default provisions, including a covenant which requires that Ecova's “Consolidated Total Funded Debt to EBITDA Ratio” (as defined in the credit agreement) must be 2.50 to 1.00 or less, with provisions in the credit agreement allowing for a temporary increase of this ratio if a qualified acquisition is consummated by Ecova. In addition, Ecova's “Consolidated Fixed Charge Coverage Ratio” (as defined in the credit agreement) must be greater than 1.50 to 1.00 as of the last day of any fiscal quarter. As of March 31, 2013, Ecova was in compliance with these covenants.

Balances outstanding and interest rates of borrowings under Ecova’s credit agreements were as follows as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31,			December 31,
	2013			2012
Borrowings outstanding at end of period	$	54,000		$	54,000
Average interest rate on borrowings at end of period	2.21		%	2.21		%

As of March 31, 2013 the borrowings outstanding under Ecova's committed line of credit were classified as long-term borrowings under committed line of credit on the Condensed Consolidated Balance Sheet.

NOTE 8. LONG-TERM DEBT

The following details long-term debt outstanding as of March 31, 2013 and December 31, 2012 (dollars in thousands):



Maturity		Interest	March 31,			December 31,
Year	Description	Rate	2013			2012
2013	First Mortgage Bonds	1.68%	$	50,000		$	50,000
2018	First Mortgage Bonds	5.95%	250,000			250,000
2018	Secured Medium-Term Notes	7.39%-7.45%	22,500			22,500
2019	First Mortgage Bonds	5.45%	90,000			90,000
2020	First Mortgage Bonds	3.89%	52,000			52,000
2022	First Mortgage Bonds	5.13%	250,000			250,000
2023	Secured Medium-Term Notes	7.18%-7.54%	13,500			13,500
2028	Secured Medium-Term Notes	6.37%	25,000			25,000
2032	Secured Pollution Control Bonds (1)	(1)	66,700			66,700
2034	Secured Pollution Control Bonds (2)	(2)	17,000			17,000
2035	First Mortgage Bonds	6.25%	150,000			150,000
2037	First Mortgage Bonds	5.70%	150,000			150,000
2040	First Mortgage Bonds	5.55%	35,000			35,000
2041	First Mortgage Bonds	4.45%	85,000			85,000
2047	First Mortgage Bonds	4.23%	80,000			80,000
	Total secured long-term debt		1,336,700			1,336,700
	Other long-term debt and capital leases		4,991			5,092
	Settled interest rate swaps (3)		(27,460		)	(27,900		)
	Unamortized debt discount		(1,411		)	(1,453		)
	Total		1,312,820			1,312,439
	Secured Pollution Control Bonds held by Avista Corporation (1) (2)		(83,700		)	(83,700		)
	Current portion of long-term debt		(50,354		)	(50,372		)
	Total long-term debt		$	1,178,766		$	1,178,367

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AVISTA CORPORATION

(1)

In December 2010, $66.7 million of the City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) due 2032, which had been held by Avista Corp. since 2008, were refunded by a new bond issue (Series 2010A). The new bonds were not offered to the public and were purchased by Avista Corp. due to market conditions. The Company expects that at a later date, subject to market conditions, these bonds may be remarketed to unaffiliated investors. So long as Avista Corp. is the holder of these bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s Condensed Consolidated Balance Sheet.

(2)

In December 2010, $17.0 million of the City of Forsyth, Montana Pollution Control Revenue Refunding Bonds, (Avista Corporation Colstrip Project) due 2034, which had been held by Avista Corp. since 2009, were refunded by a new bond issue (Series 2010B). The new bonds were not offered to the public and were purchased by Avista Corp. due to market conditions. The Company expects that at a later date, subject to market conditions, the bonds may be remarketed to unaffiliated investors. So long as Avista Corp. is the holder of these bonds, the bonds will not be reflected as an asset or a liability on Avista Corp.'s Condensed Consolidated Balance Sheet.


(3)	Upon settlement of interest rate swaps, these are recorded as a regulatory asset or liability and included as part of long-term debt above. They are amortized as a component of interest expense over the life of the forecasted interest payments and included as a part of the Company's cost of debt calculation for rate-making purposes.

Nonrecourse Long-Term Debt

Nonrecourse long-term debt (including current portion) represents the long-term debt of Spokane Energy. To provide funding to acquire a long-term fixed rate electric capacity contract from Avista Corp., Spokane Energy borrowed $145.0 million from a funding trust in December 1998. The long-term debt has scheduled monthly installments and interest at a fixed rate of 8.45 percent with the final payment due in January 2015. Spokane Energy bears full recourse risk for the debt, which is secured by the fixed rate electric capacity contract and $1.6 million of funds held in a trust account.

NOTE 9. FAIR VALUE

The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term borrowings are reasonable estimates of their fair values. Long-term debt (including current portion, but excluding capital leases), nonrecourse long-term debt and long-term debt to affiliated trusts are reported at carrying value on the Condensed Consolidated Balance Sheets.

The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

The three levels of the fair value hierarchy are defined as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values incorporates various factors that not only include the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit), but also the impact of Avista Corp.’s nonperformance risk on its liabilities.

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AVISTA CORPORATION

The following table sets forth the carrying value and estimated fair value of the Company’s financial instruments not reported at estimated fair value on the Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 (dollars in thousands):



	March 31, 2013				December 31, 2012
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt (Level 2)	$	951,000	$	1,149,134	$	951,000	$	1,164,639
Long-term debt (Level 3)	302,000		311,479		302,000		320,892
Nonrecourse long-term debt (Level 3)	29,181		31,201		32,803		35,297
Long-term debt to affiliated trusts (Level 3)	51,547		37,109		51,547		43,686

These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available market information. Due to the unique nature of the long-term fixed rate electric capacity contract securing the long-term debt of Spokane Energy (nonrecourse long-term debt), the estimated fair value of nonrecourse long-term debt was determined based on a discounted cash flow model using available market information.

The following table discloses by level within the fair value hierarchy the Company’s assets and liabilities measured and reported on the Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012 at fair value on a recurring basis (dollars in thousands):



	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
March 31, 2013
Assets:
Energy commodity derivatives	$	—	$	72,555	$	—	$	(66,924	)	$	5,631
Level 3 energy commodity derivatives:
Power exchange agreements	—		—		52		(52		)	—
Foreign currency derivatives	—		29		—		(9		)	20
Interest rate swaps	—		12,904		—		—			12,904
Investments and funds held for clients:
Securities available for sale:
U.S. government agency	—		64,505		—		—			64,505
Municipal	—		3,628		—		—			3,628
Corporate fixed income – financial	—		4,011		—		—			4,011
Corporate fixed income – industrial	—		3,917		—		—			3,917
Certificate of deposits	—		1,016		—		—			1,016
Funds held in trust account of Spokane Energy	1,600		—		—		—			1,600
Deferred compensation assets:
Fixed income securities (2)	2,093		—		—		—			2,093
Equity securities (2)	6,183		—		—		—			6,183
Total	$	9,876	$	162,565	$	52	$	(66,985	)	$	105,508
Liabilities:
Energy commodity derivatives	$	—	$	89,674	$	—	$	(77,796	)	$	11,878
Level 3 energy commodity derivatives:
Natural gas exchange agreements	—		—		1,991		—			1,991
Power exchange agreements	—		—		16,515		(52		)	16,463
Power option agreements	—		—		1,200		—			1,200
Foreign currency derivatives	—		9		—		(9		)	—
Total	$	—	$	89,683	$	19,706	$	(77,857	)	$	31,532