Edgar Filing: AVISTA CORP

AVA-2015.03.31-10Q

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, 2015 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, 2015, 62,273,807 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, 2015 and 2014	4
		Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2015 and 2014	6
		Condensed Consolidated Balance Sheets - March 31, 2015 and December 31, 2014	7
		Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2015 and 2014	9
		Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests - Three Months Ended March 31, 2015 and 2014	11
		Notes to Condensed Consolidated Financial Statements	12
		Report of Independent Registered Public Accounting Firm	39

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59

	Item 4.	Controls and Procedures	60

Part II. Other Information
	Item 1.	Legal Proceedings	62

	Item 1A.	Risk Factors	62

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

	Item 4.	Mine Safety Disclosures	62

	Item 6.	Exhibits	62

Signature			64

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AVISTA CORPORATION

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 are based upon 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, uncertainties and other factors. Most of these factors are beyond our control and may have a significant effect on our operations, results of operations, financial condition or cash flows, which 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 both energy demand and electric generating capability, including the effect of precipitation and temperature on hydroelectric resources, the effect of wind patterns on wind-generated power, weather-sensitive customer demand, and similar effects 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 and discretion over allowed return on investment;

•

volatility and illiquidity in wholesale energy markets, including the availability of willing buyers and sellers, 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 the economy's effects on customer demand for utility services;


•	declining energy demand related to customer energy efficiency and/or conservation measures;


•	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;


•	political pressures or regulatory practices that could constrain or place additional cost burdens on our energy supply sources, such as campaigns to halt coal-fired power generation and opposition to other thermal generation, wind turbines or hydroelectric facilities;


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


•	the outcome of pending legal proceedings arising out of the “western energy crisis” of 2000 and 2001, specifically related to the Pacific Northwest refund proceedings;


•	the outcome of legal proceedings and other contingencies;

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AVISTA CORPORATION


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


•	wholesale and retail competition including alternative energy sources, growth in customer-owned power resource technologies that displace utility-supplied energy or that may be sold back to the utility, and alternative energy suppliers and delivery arrangements;


•	growth or decline of our customer base and the extent to which new uses for our services may materialize or existing uses may decline;


•	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, avalanches or other incidents that may impair assets and may disrupt operations of any of our generation facilities, transmission and distribution systems or other operations;


•	public injuries or damage 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;


•	cyber attacks or other potential lapses that result in unauthorized disclosure of private information, which could result in liabilities against us, costs to investigate, remediate and defend, and damage to our reputation;


•	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 global and our utilities' service area climates, 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 or disruptions to the supply chain;


•	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 restrictive covenants in our financing arrangements and wholesale energy contracts;


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


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


•	work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages, 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 interest rates that affect borrowing costs, our ability to effectively hedge interest rates for anticipated debt issuances, variable interest rate borrowing and the extent that we recover interest costs through utility operations;

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AVISTA CORPORATION


•	potential difficulties 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;


•	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 and the extent of our business development efforts where potential future business is uncertain;


•	compliance with extensive federal, state and local legislation and regulation, including numerous environmental, health, safety and other laws and regulations that affect our operations and costs;


•	our ability to fully collect the indemnification escrow amounts because of information that was covered under management's representations and warranties related to the Ecova sale which could be inaccurate or incomplete at the time of sale, or because of new information which could be identified subsequent to the sale date, and

•

adverse impacts to our Alaska operations because a majority of the hydroelectric power generation for such operations is provided by a single facility that is subject to a long-term power purchase agreement; hence any issues that negatively affect this facility’s ability to generate or transmit power, the cost and ability to replace power in the event of an extended outage, any decrease in the demand for the power generated by this facility or any loss by our subsidiary of its contractual rights with respect thereto or other adverse effect thereon could negatively affect our Alaska operations' financial results.

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.

Available Information

Our website address is www.avistacorp.com. We make annual, quarterly and current reports available at our website as soon as practicable after electronically filing these reports with the Securities and Exchange Commission. Information contained on our website is not part of this report.

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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)



	2015			2014
Operating Revenues:
Utility revenues	$	436,407		$	437,124
Non-utility revenues	10,083			9,454
Total operating revenues	446,490			446,578
Operating Expenses:
Utility operating expenses:
Resource costs	209,560			220,497
Other operating expenses	73,172			67,337
Depreciation and amortization	34,300			30,726
Taxes other than income taxes	29,898			28,146
Non-utility operating expenses:
Other operating expenses	9,816			9,383
Depreciation and amortization	169			147
Total operating expenses	356,915			356,236
Income from continuing operations	89,575			90,342
Interest expense	19,902			18,744
Interest expense to affiliated trusts	112			111
Capitalized interest	(917		)	(661		)
Other income-net	(2,231		)	(2,600		)
Income from continuing operations before income taxes	72,709			74,748
Income tax expense	26,247			27,282
Net income from continuing operations	46,462			47,466
Net income from discontinued operations (Note 4)	—			1,515
Net income	46,462			48,981
Net income attributable to noncontrolling interests	(13		)	(482		)
Net income attributable to Avista Corp. shareholders	$	46,449		$	48,499

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands, except per share amounts

(Unaudited)



	2015		2014
Amounts attributable to Avista Corp. shareholders:
Net income from continuing operations attributable to Avista Corp. shareholders	$	46,449	$	47,476
Net income from discontinued operations attributable to Avista Corp. shareholders	—		1,023
Net income attributable to Avista Corp. shareholders	$	46,449	$	48,499
Weighted-average common shares outstanding (thousands), basic	62,318		60,122
Weighted-average common shares outstanding (thousands), diluted	62,889		60,168
Earnings per common share attributable to Avista Corp. shareholders, basic:
Earnings per common share from continuing operations	$	0.75	$	0.79
Earnings per common share from discontinued operations	—		0.02
Total earnings per common share attributable to Avista Corp. shareholders, basic	$	0.75	$	0.81
Earnings per common share attributable to Avista Corp. shareholders, diluted:
Earnings per common share from continuing operations	$	0.74	$	0.79
Earnings per common share from discontinued operations	—		0.02
Total earnings per common share attributable to Avista Corp. shareholders, diluted	$	0.74	$	0.81
Dividends declared per common share	$	0.33	$	0.3175

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)



	2015			2014
Net income	$	46,462		$	48,981
Other Comprehensive Income (Loss):
Unrealized investment gains - net of taxes of $0 and $463, respectively	—			785
Reclassification adjustment for realized gains on investment securities included in net income from discontinued operations - net of taxes of $0 and $(1), respectively	—			(2		)
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $132 and $59, respectively	246			111
Total other comprehensive income	246			894
Comprehensive income	46,708			49,875
Comprehensive income attributable to noncontrolling interests	(13		)	(482		)
Comprehensive income attributable to Avista Corporation shareholders	$	46,695		$	49,393

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,
	2015		2014
Assets:
Current Assets:
Cash and cash equivalents	$	22,081	$	22,143
Accounts and notes receivable-less allowances of $6,481 and $4,888, respectively	162,203		171,925
Utility energy commodity derivative assets	1,579		1,525
Regulatory asset for utility derivatives	16,058		29,640
Materials and supplies, fuel stock and natural gas stored	43,785		66,356
Deferred income taxes	20,589		14,794
Income taxes receivable	562		43,893
Other current assets	43,639		45,071
Total current assets	310,496		395,347
Net Utility Property:
Utility plant in service	4,858,902		4,718,062
Construction work in progress	148,291		227,758
Total	5,007,193		4,945,820
Less: Accumulated depreciation and amortization	1,356,114		1,325,858
Total net utility property	3,651,079		3,619,962
Other Non-current Assets:
Investment in exchange power-net	10,821		11,433
Investment in affiliated trusts	11,547		11,547
Goodwill	57,976		57,976
Long-term energy contract receivable of Spokane Energy	24,931		28,202
Other property and investments-net	41,413		42,016
Total other non-current assets	146,688		151,174
Deferred Charges:
Regulatory assets for deferred income tax	98,606		100,412
Regulatory assets for pensions and other postretirement benefits	232,721		235,758
Other regulatory assets	95,618		91,920
Regulatory asset for unsettled interest rate swaps	112,835		77,063
Non-current regulatory asset for utility derivatives	24,145		24,483
Other deferred charges	16,841		16,212
Total deferred charges	580,766		545,848
Total assets	$	4,689,029	$	4,712,331

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,
	2015			2014
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	62,853		$	112,974
Current portion of long-term debt and capital leases	3,132			6,424
Current portion of nonrecourse long-term debt of Spokane Energy	—			1,431
Short-term borrowings	65,000			105,000
Utility energy commodity derivative liabilities	14,178			18,045
Income taxes payable	20,335			173
Other current liabilities	160,130			141,222
Total current liabilities	325,628			385,269
Long-term debt and capital leases	1,495,546			1,492,062
Long-term debt to affiliated trusts	51,547			51,547
Regulatory liability for utility plant retirement costs	257,146			254,140
Pensions and other postretirement benefits	188,798			189,489
Deferred income taxes	714,440			710,342
Other non-current liabilities and deferred credits	149,165			146,240
Total liabilities	3,182,270			3,229,089
Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements)

Equity:
Avista Corporation Shareholders’ Equity:
Common stock, no par value; 200,000,000 shares authorized; 62,271,133 and 62,243,374 shares outstanding	998,975			999,960
Accumulated other comprehensive loss	(7,642		)	(7,888		)
Retained earnings	515,842			491,599
Total Avista Corporation shareholders’ equity	1,507,175			1,483,671
Noncontrolling Interests	(416		)	(429		)
Total equity	1,506,759			1,483,242
Total liabilities and equity	$	4,689,029		$	4,712,331

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)



	2015			2014
Operating Activities:
Net income	$	46,462		$	48,981
Non-cash items included in net income:
Depreciation and amortization	35,379			34,582
Provision (benefit) for deferred income taxes	(82		)	1,453
Power and natural gas cost amortizations (deferrals), net	8,196			(8,041		)
Amortization of debt expense	895			953
Amortization of investment in exchange power	613			613
Stock-based compensation expense	1,707			1,551
Equity-related AFUDC	(2,215		)	(2,034		)
Pension and other postretirement benefit expense	9,217			7,415
Amortization of Spokane Energy contract	3,271			3,007
Other	(3,077		)	4,212
Contributions to defined benefit pension plan	(4,000		)	(11,000		)
Changes in certain current assets and liabilities:
Accounts and notes receivable	2,664			17,257
Materials and supplies, fuel stock and natural gas stored	22,571			12,141
Decrease (increase) in collateral posted for derivative instruments	(18,516		)	26,756
Income taxes receivable	43,331			7,783
Other current assets	471			(1,494		)
Accounts payable	(30,545		)	(11,065		)
Income taxes payable	20,162			19,412
Other current liabilities	10,274			4,416
Net cash provided by operating activities	146,778			156,898

Investing Activities:
Utility property capital expenditures (excluding equity-related AFUDC)	(81,597		)	(59,725		)
Other capital expenditures	(412		)	(3,929		)
Federal and state grant payments received	943			876
Increase in funds held for clients	—			(9,346		)
Sale and maturity of securities available for sale	—			11,403
Other	891			24
Net cash used in investing activities	(80,175		)	(60,697		)

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)



	2015			2014
Financing Activities:
Net decrease in short-term borrowings	$	(40,000	)	$	(60,000	)
Repayment of borrowings from Ecova line of credit	—			(4,000		)
Redemption and maturity of long-term debt	(639		)	(69		)
Maturity of nonrecourse long-term debt of Spokane Energy	(1,431		)	(3,966		)
Issuance of common stock, net of issuance costs	371			638
Repurchase of common stock	(2,920		)	—
Cash dividends paid	(20,717		)	(19,217		)
Decrease in client fund obligations	—			(1,989		)
Other	(1,329		)	—
Net cash used in financing activities	(66,665		)	(88,603		)

Net increase (decrease) in cash and cash equivalents	(62		)	7,598

Cash and cash equivalents at beginning of period	22,143			82,574

Cash and cash equivalents at end of period	$	22,081		$	90,172

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)



	2015			2014
Common Stock, Shares:
Shares outstanding at beginning of period	62,243,374			60,076,752
Shares issued	117,159			84,388
Shares repurchased	(89,400		)	—
Shares outstanding at end of period	62,271,133			60,161,140
Common Stock, Amount:
Balance at beginning of period	$	999,960		$	896,993
Equity compensation expense	1,513			1,619
Issuance of common stock, net of issuance costs and excess tax benefits	413			638
Payment of minimum tax withholdings for share-based payment awards	(1,480		)	—
Repurchase of common stock	(1,431		)	—
Equity transactions of consolidated subsidiaries	—			(213		)
Balance at end of period	998,975			899,037
Accumulated Other Comprehensive Loss:
Balance at beginning of period	(7,888		)	(5,819		)
Other comprehensive income	246			894
Balance at end of period	(7,642		)	(4,925		)
Retained Earnings:
Balance at beginning of period	491,599			407,092
Net income attributable to Avista Corporation shareholders	46,449			48,499
Cash dividends paid (common stock)	(20,717		)	(19,217		)
Repurchase of common stock	(1,489		)	—
Valuation adjustments and other noncontrolling interests activity	—			(4		)
Balance at end of period	515,842			436,370
Total Avista Corporation shareholders’ equity	1,507,175			1,330,482
Noncontrolling Interests:
Balance at beginning of period	(429		)	20,001
Net income attributable to noncontrolling interests	13			458
Other	—			172
Balance at end of period	(416		)	20,631
Total equity	$	1,506,759		$	1,351,113
Redeemable Noncontrolling Interests:
Balance at beginning of period	$	—		$	15,889
Net income attributable to noncontrolling interests	—			24
Purchase of subsidiary noncontrolling interests	—			(3		)
Valuation adjustments and other noncontrolling interests activity	—			50
Balance at end of period	$	—		$	15,960

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, 2015 and 2014 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, 2014 (2014 Form 10-K). Please refer to the section “Acronyms and Terms” in the 2014 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 Corp. is primarily an electric and natural gas utility with certain other business ventures. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations in the Pacific Northwest. Avista Utilities provides electric distribution and transmission, and natural gas distribution services in parts of eastern Washington and northern Idaho. Avista Utilities also provides natural gas distribution service in parts of northeastern and southwestern Oregon. Avista Utilities has electric generating facilities in Washington, Idaho, Oregon and Montana. Avista Utilities also supplies electricity to a small number of customers in Montana, most of whom are employees who operate Avista Utilities' Noxon Rapids generating facility.

On July 1, 2014, Avista Corp. acquired Alaska Energy and Resources Company (AERC), and as of that date, AERC is a wholly-owned subsidiary of Avista Corp. The primary subsidiary of AERC is Alaska Electric Light and Power Company (AEL&P), comprising the regulated utility operations in Alaska. There are no AERC earnings included in the overall results of Avista Corp. in the first half of 2014. See Note 3 for information regarding the acquisition of AERC.

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). During the first half of 2014, Avista Capital’s subsidiaries included Ecova, Inc. (Ecova), which was an 80.2 percent owned subsidiary prior to its disposition on June 30, 2014. Ecova was 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 4 for information regarding the disposition of Ecova and 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 and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Ecova's revenues and expenses are included in the Condensed Consolidated Statements of Income in discontinued operations; however, as of June 30, 2014 and for all subsequent reporting periods there are no balance sheet amounts included for Ecova. All tables throughout the Notes to Condensed Consolidated Financial Statements that present Condensed Consolidated Statements of Income information were revised to include only the amounts from continuing operations. 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):



	2015		2014
Utility taxes	$	19,498	$	19,738

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Other Income-Net

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



	2015			2014
Interest income	$	243		$	274
Interest income on regulatory deferrals	20			44
Equity-related AFUDC	2,215			2,034
Net loss on investments	(384		)	(40		)
Other income	137			288
Total	$	2,231		$	2,600

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, 2015 and December 31, 2014 (dollars in thousands):



	March 31,		December 31,
	2015		2014
Materials and supplies	$	33,271	$	32,483
Fuel stock	5,508		5,142
Natural gas stored	5,006		28,731
Total	$	43,785	$	66,356

Investments and Funds Held for Clients and Client Fund Obligations

In connection with its bill paying services, Ecova collected funds from its clients and remitted the funds to the appropriate utility or other service provider. Some of the funds collected were invested by Ecova and classified as investments and funds held for clients, and a related liability for client fund obligations was recorded. Investments and funds held for clients included cash and cash equivalent investments, money market funds and investment securities classified as available for sale. Ecova did not invest the funds directly for the clients' benefit; therefore, Ecova bore the risk of loss associated with the investments. As of June 30, 2014 and for all subsequent reporting periods there are no longer any investments and funds held for clients due to the disposition of Ecova.

The following is a summary of the disposition of available-for-sale securities for the three months ended March 31, 2014 (dollars in thousands):



	2014
Proceeds from sales, maturities and calls	$	11,403
Gross realized gains	3

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 a derivative depends on the intended use of such 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 energy 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 delivery. 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 periods of delivery, 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.

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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.

For interest rate swap agreements, each period Avista Utilities records all mark-to-market gains and losses as assets and liabilities and records offsetting regulatory assets and liabilities, such that there is no income statement impact. This is similar to the treatment of energy commodity derivatives described above. Upon settlement of 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 term of the associated debt.

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.

Regulatory Deferred Charges and Credits

The Company follows the accounting practices for regulated operations for its regulated utility businesses 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, 2015 and December 31, 2014 (dollars in thousands):



	March 31,			December 31,
	2015			2014
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(4,115) and $(4,247), respectively	$	(7,642	)	$	(7,888	)

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The following table details the reclassifications out of accumulated other comprehensive loss by component for the three months ended March 31 (dollars in thousands). Items in parenthesis indicate reductions to net income.



	Amounts Reclassified from Accumulated Other Comprehensive Loss
Details about Accumulated Other Comprehensive Loss Components	2015			2014			Affected Line Item in Statement of Income
Realized gains on investment securities	$	—		$	3		(a)
	—			3			Total before tax
	—			(1		)	Tax expense (a)
	$	—		$	2		Net of tax
Amortization of defined benefit pension items
Amortization of net prior service cost	$	273		$	38		(b)
Amortization of net loss	(3,688		)	(1,990		)	(b)
Adjustment due to effects of regulation	3,037			1,782			(b)
	(378		)	(170		)	Total before tax
	132			59			Tax benefit
	$	(246	)	$	(111	)	Net of tax


(a)	These amounts were included as part of net income from discontinued operations (see Note 4 for additional details).


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

Dividends

The payment of dividends on common stock could be limited by:


•	certain covenants applicable to preferred stock (when outstanding) contained in the Company’s Restated Articles of Incorporation, as amended (currently there are no preferred shares outstanding),


•	certain covenants applicable to the Company's outstanding long-term debt and committed line of credit agreements,


•	the hydroelectric licensing requirements of section 10(d) of the FPA (see Note 1), and

•

certain requirements under the Public Utility Commission of Oregon (OPUC) approval of the AERC acquisition. After July 1, 2015 (one year following the acquisition date), the OPUC does not permit one-time or special dividends from AERC to Avista Corp. and does not permit Avista Utilities' total equity to total capitalization to be less than 40 percent, without approval from the OPUC. However, the OPUC approval does allow for regular distributions of AERC earnings to Avista Corp. as long as AERC remains sufficiently capitalized and insured.

Under the covenant applicable to the Company's committed line of credit agreement, which does not permit the ratio of “consolidated total debt” to “consolidated total capitalization” to be greater than 65 percent at any time, the amount of retained earnings available for dividends at March 31, 2015 was limited to approximately $414.3 million.

Under the requirements of the OPUC approval of the AERC acquisition as outlined above, the amount available for dividends at March 31, 2015 was limited to approximately $278.4 million.

Stock Repurchase Program

On December 16, 2014, the Company announced that Avista Corp.'s Board of Directors approved the repurchase of up to 800,000 shares of the Company’s outstanding common stock, commencing on January 2, 2015, and expiring on March 31, 2015 (first quarter 2015 program). The number of shares repurchased through the first quarter 2015 program were in addition to the number of shares repurchased during 2014 under a separate stock repurchase program, which expired on December 31, 2014. The parameters of the first quarter 2015 program were consistent with the parameters of the 2014 program. Through March 31, 2015, the Company repurchased 89,400 shares under the first quarter 2015 program at a total cost of $2.9 million and an average cost of $32.66 per share. All repurchased shares reverted to the status of authorized but unissued shares.

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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. As of March 31, 2015, the Company has not recorded any significant amounts related to unresolved contingencies.

Reclassifications

Certain prior year amounts on the Company's Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Balances Sheets were reclassified to conform to the current year presentation. In the current year Condensed Consolidated Statements of Cash Flows, "Decrease (increase) in collateral posted for derivative instruments," "Income taxes receivable," and "Income taxes payable" were added as their own line items. These were previously included in "Other current assets" and "Other current liabilities" in the operating activities section. In the current year Condensed Consolidated Balance Sheets, "Income taxes payable" was added as its own line item. This was previously included in "Other current liabilities."

NOTE 2. NEW ACCOUNTING STANDARDS

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." This ASU amends the definition of a discontinued operation and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. ASU 2014-08 makes it more difficult for a disposal transaction to qualify as a discontinued operation. In addition, the ASU requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the Balance Sheet rather than just the current period and it requires additional disclosures on the face of the Statement of Cash Flows regarding discontinued operations. This ASU is effective for periods beginning on or after December 15, 2014; however, early adoption is permitted. The Company evaluated this standard and determined that it would not early adopt this standard. Since the disposition of Ecova occurred before the effective date of this standard, and the Company did not early adopt this standard, there is no impact on the Company's financial condition, results of operations and cash flows in the current year.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity identifies the various performance obligations in a contract, allocates the transaction price among the performance obligations and recognizes revenue as the entity satisfies the performance obligations. This ASU is effective for periods beginning after December 15, 2016 and early adoption is not permitted. However, while this ASU is not effective until 2017, it will require retroactive application to all periods presented in the financial statements. As such, at adoption in 2017, amounts in 2015 and 2016 may have to be revised or a cumulative adjustment to opening retained earnings may have to be recorded. The Company is currently evaluating this standard and cannot, at this time, estimate the potential impact on its future financial condition, results of operations and cash flows.

In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." This ASU significantly changes the consolidation analysis required under GAAP, including the identification of variable interest entities (VIE). The ASU also removes the deferral of the VIE analysis related to investments in certain investment funds, which will result in a different consolidation evaluation for these types of investments. This ASU is effective for periods beginning on or after December 15, 2015; however, early adoption is permitted. The Company evaluated this standard and determined that it will not early adopt this standard. The Company is evaluating this standard and cannot, at this time, estimate the potential impact on its future financial condition, results of operations and cash flows.

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." This ASU amends the presentation of debt issuance costs in the financial statements such that an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as a deferred asset. Amortization of the costs will continue to be reported as interest expense. This ASU is effective for periods beginning on or after December 15, 2015; however, early adoption is permitted. Upon adoption, entities will apply the new guidance retrospectively to all comparable prior periods presented in the financial statements. The Company evaluated this standard and determined that it would not early adopt this standard during the first quarter of 2015. Upon adoption, the Company will revise its current presentation of debt issuance costs in the Condensed Consolidated Balance Sheets; however,

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the Company does not expect a material impact on its future financial condition, results of operations and cash flows as a result of the adoption.

In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." This ASU provides guidance on how organizations should account for fees paid in a cloud computing arrangement, including helping organizations understand whether their arrangement includes a software license. If the arrangement includes a software license, the software license would be accounted for in a manner consistent with internal-use software. If a cloud-computing arrangement does not include a software license, the customer is required to account for the arrangement as a service contract. This ASU is effective for periods beginning on or after December 15, 2015; however, early adoption is permitted. The Company evaluated this standard and determined that it will not early adopt this standard. Upon adoption, an entity can elect to apply this ASU prospectively or retroactively and disclose the method selected. The Company is evaluating this standard and cannot, at this time, estimate the potential impact on its future financial condition, results of operations and cash flows.

NOTE 3. BUSINESS ACQUISITIONS

Alaska Energy and Resources Company

On July 1, 2014, the Company acquired AERC, based in Juneau, Alaska, and as of that date, AERC became a wholly-owned subsidiary of Avista Corp.

The primary subsidiary of AERC is AEL&P, a regulated utility which provides electric services to 16,452 customers in the City and Borough of Juneau (CBJ), Alaska. In addition to the regulated utility, AERC owns AJT Mining, which is an inactive mining company holding certain properties.

The purpose of the acquisition was to expand and diversify Avista Corp.'s energy assets and deliver long-term value to its customers, communities and investors.

In connection with the closing, on July 1, 2014 Avista Corp. issued 4,500,014 new shares of common stock to the shareholders of AERC based on a contractual formula that resulted in a price of $32.46 per share, reflecting a purchase price of $170.0 million, plus acquired cash, less outstanding debt and other closing adjustments.

The $32.46 price per share of Avista Corp. common stock was determined based on the average closing stock price of Avista Corp. common stock for the 10 consecutive trading days immediately preceding, but not including, the trading day prior to July 1, 2014. This value was used solely for determining the number of shares to issue based on the adjusted contract closing price (see reconciliation below). The fair value of the consideration transferred at the closing date was based on the closing stock price of Avista Corp. common stock on July 1, 2014, which was $33.35 per share.

On October 1, 2014, a working capital adjustment was made in accordance with the agreement and plan of merger which resulted in Avista Corp. issuing an additional 1,427 shares of common stock to the shareholders of AERC. The number of shares issued on October 1, 2014 was based on the same contractual formula described above. The fair value of the new shares issued in October was $30.71 per share, which was the closing stock price of Avista Corp. common stock on that date.

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The contract acquisition price and the fair value of consideration transferred for AERC were as follows (in thousands, except "per share" and number of shares data):



	July 1, 2014
Contract acquisition price (using the calculated $32.46 per share common stock price)
Gross contract price	$	170,000
Acquired cash	19,704
Acquired debt (excluding capital lease obligation)	(38,832		)
Other closing adjustments	(58		)
Total adjusted contract price	$	150,814

Fair value of consideration transferred
Avista Corp. common stock (4,500,014 shares at $33.35 per share)	$	150,075
Avista Corp. common stock (1,427 shares at $30.71 per share)	44
Cash	4,697
Fair value of total consideration transferred	$	154,816

The estimated fair value of assets acquired and liabilities assumed as of July 1, 2014 have not changed from the amounts disclosed in the Company's 2014 Form 10-K. The transaction resulted in the recording of $52.7 million in goodwill during 2014. The goodwill associated with this acquisition is not deductible for tax purposes.

The majority of AERC’s operations are subject to the rate-setting authority of the Regulatory Commission of Alaska (RCA) and are accounted for pursuant to GAAP, including the accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for AERC’s regulated operations provide revenues derived from costs, including a return on investment, of assets and liabilities included in rate base. Due to this regulation, the fair values of AERC’s assets and liabilities subject to these rate-setting provisions are assumed to approximate their carrying values. There were not any identifiable intangible assets associated with this acquisition. The excess of the purchase consideration over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill at the acquisition date. The goodwill reflects the value paid for the expected continued growth of a rate-regulated business located in a defined service area with a constructive regulatory environment, the attractiveness of stable, growing cash flows, as well as providing a platform for potential future growth outside of the rate-regulated electric utility in Alaska.

The following table summarizes the supplemental pro forma information for the three months ended March 31, 2014 compared to actual 2015 information related to the acquisition of AERC as if the acquisition had occurred on January 1, 2013 (dollars in thousands - unaudited):



	Actual		Pro forma
	2015		2014
Actual Avista Corp. revenues from continuing operations (excluding AERC)	$	433,699	$	446,578
Supplemental pro forma AERC revenues (1)	12,791		13,186
Total pro forma revenues	446,490		459,764

Actual AERC revenues included in Avista Corp. revenues (1)	12,791		—

Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders (excluding AERC)	43,918		47,476
Actual Avista Corp. net income from discontinued operations attributable to Avista Corp. shareholders	—		1,023
Adjustment to Avista Corp.'s net income for acquisition costs (net of tax) (2)	5		294
Supplemental pro forma AERC net income (1)	2,531		3,256
Total pro forma net income	46,454		52,049

Actual AERC net income included in Avista Corp. net income (1)	$	2,531	$	—

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(1)	AERC was acquired on July 1, 2014; therefore, none of the supplemental revenues and net income for the first quarter of 2014 were included in the actual results of Avista Corp. for that period. The amounts disclosed for the first quarter of 2015 were included in the overall results of Avista Corp.

(2)

This adjustment is to treat all transaction costs as if they occurred on January 1, 2013 and to remove them from the periods in which they actually occurred. The transaction costs were expensed and presented in the Condensed Consolidated Statements of Income in other operating expenses within utility operating expenses. Since the start of the transaction through March 31, 2015, Avista Corp. has expensed $3.0 million (pre-tax) in total transaction fees. In addition to the amounts expensed, through March 31, 2015, Avista Corp. has included $0.4 million in fees associated with the issuance of common stock for the transaction as a reduction to common stock. These fees do not impact the supplemental pro forma information above.

NOTE 4. DISCONTINUED OPERATIONS

On June 30, 2014, Avista Capital, the non-regulated subsidiary of Avista Corp., completed the sale of its interest in Ecova to Cofely USA Inc., an indirect subsidiary of GDF SUEZ, a French multinational utility company, and an unrelated party to Avista Corp. The sale price was $335.0 million in cash, less the payment of debt and other customary closing adjustments. At the closing of the transaction on June 30, 2014, Ecova became a wholly-owned subsidiary of Cofely USA Inc. and the Company will have no further involvement with Ecova after such date.

The purchase price of $335.0 million, as adjusted, was divided among the security holders of Ecova, including minority shareholders and option holders, pro rata based on ownership. Approximately $16.8 million (5 percent of the purchase price) will be held in escrow for 15 months from the closing of the transaction to satisfy certain indemnification obligations under the merger agreement. An additional $1.0 million is being held in escrow pending resolution of adjustments to working capital, which is expected to be resolved in 2015.

Avista Capital and Cofely USA Inc. agreed to make an election under Section 338(h)(10) of the Internal Revenue Code (Code) of 1986, as amended, with respect to the purchase and sale of Ecova to allocate the merger consideration among the assets of Ecova deemed to have been acquired in the merger.

When all escrow amounts are released, the sales transaction is expected to provide cash proceeds to Avista Corp., net of debt, payment to option and minority holders, income taxes and transaction expenses, of $143.5 million and result in a net gain of $69.7 million (which was mostly recognized during the second quarter of 2014 and had some insignificant true-ups during the third and fourth quarters of 2014). These amounts have not changed from the amounts disclosed in the Company's 2014 Form 10-K. The Company expects to receive the full amount of its portion of the remaining escrow accounts; therefore, these amounts were included in the gain calculation.

Prior to the completion of the sale, Ecova was a reportable business segment. Amounts reported in discontinued operations for 2014 relate solely to the Ecova business segment. The following table presents amounts that were included in discontinued operations for the three months ended March 31, 2014 (dollars in thousands):



	2014
Revenues	$	44,384
Income before income taxes	2,409
Income tax expense	894
Net income from discontinued operations	1,515
Net income attributable to noncontrolling interests	(492		)
Net income from discontinued operations attributable to Avista Corp. shareholders	$	1,023

Avista Corp.'s portion of the total transaction expenses was $9.1 million (including amounts which were withheld from the transaction net proceeds) and these were recognized during the second and third quarters of 2014. All transaction expenses paid on the Ecova sale (including Avista Corp.'s portion and the portion attributable to the minority interest holders of Ecova) were $11.0 million, and of this amount, $5.4 million were withheld from the net proceeds and the remainder were paid during the second and third quarter of 2014. The transaction expenses were for legal, accounting and other consulting fees and the accelerated employee benefits related to employee stock options which were settled in accordance with the Ecova equity plan.

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NOTE 5. DERIVATIVES AND RISK MANAGEMENT

The below disclosures in Note 5 apply only to Avista Corp. and Avista Utilities; AERC and its primary subsidiary AEL&P do not enter into derivative instruments.

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 the Company's resource procurement and management operations in the electric business, the Company engages in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve the Company's load obligations and the use of these resources to capture available economic value. The Company transacts 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 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, the Company makes 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 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.

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

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•	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, 2015 that are expected to be delivered 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 (1) MWH	Financial (1) MWH	Physical (1) mmBTUs	Financial (1) mmBTUs
2015	203	1,839	10,357	97,928	253	2,730	2,079	83,313
2016	397	1,287	2,505	81,730	287	1,826	910	63,000
2017	397	—	675	31,930	286	483	—	15,420
2018	397	—	—	6,795	286	—	—	—
2019	235	—	—	4,050	158	—	—	—
Thereafter	—	—	—	—	—	—	—	—


(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 electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are delivered 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 60 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, 2015 and December 31, 2014 (dollars in thousands):



	March 31,		December 31,
	2015		2014
Number of contracts	25		18
Notional amount (in United States dollars)	$	4,357	$	5,474
Notional amount (in Canadian dollars)	5,498		6,198

Interest Rate Swap Agreements

Avista Corp. is affected by fluctuating interest rates related to a portion of its existing debt and future borrowing requirements. The Finance Committee of the Board of Directors periodically reviews and discusses interest rate risk management processes and focuses on the steps management has undertaken to manage it. The Risk Management Committee also reviews the interest risk management plan. Avista Corp. manages interest rate exposure by limiting the variable rate exposures to a percentage of total capitalization. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance of long-term debt and optional debt redemptions and through the use of fixed rate long-term debt with varying maturities. The Company also 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 swaps and U.S. Treasury lock agreements are considered economic hedges against fluctuations in future cash flows associated with anticipated debt issuances.

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The following table summarizes the interest rate swaps that the Company has entered into as of March 31, 2015 and December 31, 2014 (dollars in thousands):



Balance Sheet Date	Number of Contracts	Notional Amount	Mandatory Cash Settlement Date
March 31, 2015	5	75,000	2015
	6	115,000	2016
	3	45,000	2017
	11	245,000	2018
	1	20,000	2019
December 31, 2014	5	75,000	2015
	5	95,000	2016
	3	45,000	2017
	9	205,000	2018

Upon settlement of 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 term of the associated debt.

As of March 31, 2015, the fair value of the outstanding interest rate swaps decreased significantly compared to December 31, 2014 (see the table below). The fair value decrease was the result of a net increase in the notional amount of outstanding swap agreements and a decline in market interest rates below the rates that were fixed in the outstanding swaps. The Company would be required to make cash payments to settle the interest rate swaps if the fixed rates are higher than prevailing market rates at the date of settlement. Conversely, the Company receives cash to settle its interest rate swaps when prevailing market rates at the time of settlement exceed the fixed swap rates.

Summary of Outstanding Derivative Instruments

As of March 31, 2015, the Company has multiple master netting agreements with a variety of entities that allow for cross-commodity netting under ASC 815-10-45. The Company does not have any agreements which allow for cross-affiliate netting among multiple affiliated legal entities. The amounts recorded on the Condensed Consolidated Balance Sheet as of March 31, 2015 and December 31, 2014 reflect the offsetting of derivative assets and liabilities where a legal right of offset exists.

The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of March 31, 2015 (in thousands):



		Fair Value
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netting		Net Asset (Liability) in Balance Sheet
Foreign currency contracts	Other current liabilities	$	14	$	(24	)	$	—	$	(10	)
Interest rate contracts	Other current liabilities	—		(12,819		)	677		(12,142		)
Interest rate contracts	Other non-current liabilities and deferred credits	—		(100,016		)	49,813		(50,203		)
Commodity contracts	Current utility energy commodity derivative assets	41,898		(40,319		)	—		1,579
Commodity contracts	Current utility energy commodity derivative liabilities	22,658		(40,298		)	3,462		(14,178		)
Commodity contracts	Other non-current liabilities and deferred credits	33,370		(57,515		)	3,982		(20,163		)
Total derivative instruments recorded on the balance sheet		$	97,940	$	(250,991	)	$	57,934	$	(95,117	)

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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, 2014 (in thousands):



		Fair Value
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netting		Net Asset (Liability) in Balance Sheet
Foreign currency contracts	Other current liabilities	$	1	$	(21	)	$	—	$	(20	)
Interest rate contracts	Other current assets	966		(506		)	—		460
Interest rate contracts	Other current liabilities	—		(7,325		)	—		(7,325		)
Interest rate contracts	Other non-current liabilities and deferred credits	—		(69,737		)	28,880		(40,857		)
Commodity contracts	Current utility energy commodity derivative assets	2,063		(538		)	—		1,525
Commodity contracts	Current utility energy commodity derivative liabilities	66,421		(97,586		)	13,120		(18,045		)
Commodity contracts	Other non-current liabilities and deferred credits	29,594		(54,077		)	2,390		(22,093		)
Total derivative instruments recorded on the balance sheet		$	99,045	$	(229,790	)	$	44,390	$	(86,355	)

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.

The following table presents the Company's collateral outstanding related to its derivative instruments as of March 31, 2015 and December 31, 2014 (in thousands):



	March 31, 2015		December 31, 2014
Energy commodity derivatives
Cash collateral posted	$	17,471	$	20,565
Letters of credit outstanding	7,500		14,500
Balance sheet offsetting (cash collateral against net derivative positions)	7,444		15,510

Interest rate swaps
Cash collateral posted	50,490		28,880
Letters of credit outstanding	17,900		10,900
Balance sheet offsetting (cash collateral against net derivative positions)	50,490		28,880

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.

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The following table presents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position and the amount of additional collateral the Company could be required to post as of March 31, 2015 and December 31, 2014 (in thousands):



	March 31, 2015		December 31, 2014
Liabilities with credit-risk-related contingent features	$	6,640	$	12,911
Additional collateral to post	6,638		16,227

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.

The Company enters into bilateral transactions with various counterparties. The Company also trades 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

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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 pension and other postretirement benefit plans described below only relate to Avista Utilities and AEL&P. METALfx (not discussed below) has a salary deferral 401(k) savings plan that is a defined contribution plan and has historically not been significant to the Company.

Avista Utilities

The Company has a defined benefit pension plan covering the majority of 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 deductible for income tax purposes. The Company contributed $4.0 million in cash to the pension plan for the three months ended March 31, 2015 and expects to contribute a total of $12.0 million in cash to the plan during 2015. The Company contributed $32.0 million in cash to the pension plan in 2014.

The Company also has a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to executive officers and certain key employees of the Company. The SERP is intended to provide benefits to individuals 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 eligible retired employees. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services. The liability and expense of this plan are included as other postretirement benefits.

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
	2015			2014			2015			2014
Three months ended March 31:
Service cost	$	4,949		$	5,018		$	699		$	974
Interest cost	6,672			6,706			1,331			1,353
Expected return on plan assets	(7,416		)	(8,110		)	(431		)	(472		)
Amortization of prior service cost	6			6			(279		)	(43		)
Net loss recognition	2,394			1,157			1,292			826
Net periodic benefit cost	$	6,605		$	4,777		$	2,612		$	2,638

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AEL&P

Union Employees

Pension benefits for all union employees of AEL&P are provided through the Alaska Electrical Pension Fund Retirement Plan, a multiemployer plan to which AEL&P pays a defined contribution amount per union employee pursuant to a collective bargaining agreement with the IBEW.

AEL&P also participates in a multiemployer plan that provides substantially all union workers with health care and other welfare benefits during their working lives and after retirement. AEL&P pays a defined contribution amount per union employee pursuant to a collective bargaining agreement with the IBEW.

Non-Union Employees

AEL&P has a defined contribution money purchase pension plan covering substantially all employees of AEL&P that are not covered by a collective bargaining agreement. Contributions to the plan are made based on a percentage of each qualifying employee's compensation.

AEL&P also has a noncontributory 401(k) savings plan, which covers substantially all nonunion employees who have completed 1,000 hours of service during a 12-month period. Employees who elect to participate may contribute up to the Internal Revenue Service's maximum amount.

The pension and other postretirement plans described above for AEL&P are not significant to Avista Corp.

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 that expires in April 2019.

Balances outstanding and interest rates of borrowings (excluding letters of credit) under the Company’s revolving committed lines of credit were as follows as of March 31, 2015 and December 31, 2014 (dollars in thousands):



	March 31,			December 31,
	2015			2014
Borrowings outstanding at end of period	$	65,000		$	105,000
Letters of credit outstanding at end of period	$	35,579		$	32,579
Average interest rate on borrowings at end of period	0.94		%	0.93		%

AEL&P

AEL&P has a committed line of credit in the amount of $25.0 million that expires in November 2019. As of March 31, 2015 and December 31, 2014, there were no borrowings outstanding under this committed line of credit.

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NOTE 8. LONG-TERM DEBT

The following details long-term debt outstanding as of March 31, 2015 and December 31, 2014 (dollars in thousands):



Maturity		Interest	March 31,			December 31,
Year	Description	Rate	2015			2014
Avista Corp. Secured Long-Term Debt
2016	First Mortgage Bonds	0.84%	$	90,000		$	90,000
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 (1)	(1)	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
2044	First Mortgage Bonds	4.11%	60,000			60,000
2047	First Mortgage Bonds	4.23%	80,000			80,000
	Total Avista Corp. secured long-term debt		1,436,700			1,436,700
Alaska Electric Light and Power Company Secured Long-Term Debt
2044	First Mortgage Bonds	4.54%	75,000			75,000
	Total consolidated secured long-term debt		1,511,700			1,511,700
Alaska Energy and Resources Company Unsecured Long-Term Debt
2019	Unsecured Term Loan	3.85%	15,000			15,000
	Total secured and unsecured long-term debt		1,526,700			1,526,700
	Other long-term debt and capital leases		74,198			74,149
	Settled interest rate swaps (2)		(17,439		)	(17,541		)
	Unamortized debt discount		(1,081		)	(1,122		)
	Total		1,582,378			1,582,186
	Secured Pollution Control Bonds held by Avista Corporation (1)		(83,700		)	(83,700		)
	Current portion of long-term debt and capital leases		(3,132		)	(6,424		)
	Total long-term debt and capital leases		$	1,495,546		$	1,492,062

(1)

In December 2010, $66.7 million and $17.0 million of the City of Forsyth, Montana Pollution Control Revenue Refunding Bonds (Avista Corporation Colstrip Project) due in 2032 and 2034, respectively, which had been held by Avista Corp. since 2008 and 2009, respectively, were refunded by new bond issues (Series 2010A and 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, 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 Sheets.


(2)	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 associated debt and included as a part of the Company's cost of debt calculation for ratemaking purposes.

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Snettisham Capital Lease Obligation

Included in long-term capital leases above is a power purchase agreement between AEL&P and Alaska Industrial Development and Export Authority (AIDEA), an agency of the State of Alaska, under which AEL&P has a take-or-pay obligation, expiring in December 2038, to purchase all the output of the 78 MW Snettisham hydroelectric project. For accounting purposes, this power purchase agreement is treated as a capital lease.

The balances related to the Snettisham capital lease obligation as of March 31, 2015 and December 31, 2014 were as follows (dollars in thousands):



	March 31,		December 31,
	2015		2014
Capital lease obligation (1)	$	69,398	$	69,955
Capital lease asset (2)	71,007		71,007
Accumulated amortization of capital lease asset (2)	2,731		1,821


(1)	The capital lease obligation amount is equal to the amount of AIDEA's revenue bonds outstanding.


(2)	These amounts are included in utility plant in service on the Condensed Consolidated Balance Sheet.

Interest on the capital lease obligation and amortization of the capital lease asset are included in utility resource costs in the Condensed Consolidated Statements of Income and totaled the following amounts for the three months ended March 31 (dollars in thousands):



	2015		2014
Interest on capital lease obligation	$	923	$	—
Amortization of capital lease asset	910		—

AIDEA issued $100.0 million in revenue bonds in 1998 to finance its acquisition of the project and the payments by AEL&P are designed to be more than sufficient to enable the AIDEA to pay the principal and interest amount of its revenue bonds, bearing interest at rates ranging from 4.9 percent to 6.0 percent and maturing in January 2034. AEL&P will make its last bond payment to AIDEA in December 2033. The payments by AEL&P under the agreement are unconditional, notwithstanding any suspension, reduction or curtailment of the operation of the project. The bonds are payable solely out of AIDEA's receipts under the agreement. AEL&P is also obligated to operate, maintain and insure the project. AEL&P's payments for power under the agreement are approximately $10.6 million per year, while debt service on the bonds is approximately $5.9 million per year, which is included in the $10.6 million total cost of power.

In May 2015, AIDEA posted a notice on the Electronic Municipal Market Access and the Bloomberg websites indicating it is considering an offering of tax-exempt refunding bonds with the purpose of refunding all or a portion of their outstanding revenue bonds associated with the Snettisham Hydroelectric Project. The transaction is currently anticipated to price in June 2015. The size and timing of the anticipated transaction remains subject to market conditions and AIDEA reserves the right to change or modify its plans as it deems appropriate. AIDEA is under no obligation to pursue this transaction or any other new money or refunding issue and there is no guarantee any contemplated transactions will be consummated.

Snettisham Electric Company, a non-operating subsidiary of AERC, has the option to purchase the Snettisham project with certain conditions at any time for the principal amount of the bonds outstanding at that time.

While the power purchase agreement is treated as a capital lease for accounting purposes, for ratemaking purposes, this agreement is treated as an operating lease with a constant level of annual rental expense (straight line expense). Because of this regulatory treatment, any difference between the operating lease expense for ratemaking purposes and the expenses recognized under capital lease treatment (interest and depreciation of the capital lease asset) is recorded as a regulatory asset and amortized during the later years of the lease when the capital lease expense is less than the operating lease expense included in base rates.

The Company evaluated this agreement to determine if it has a variable interest which must be consolidated. Based on this evaluation, AIDEA will not be consolidated under ASC 810 "Consolidation" because AIDEA is a government agency and ASC 810 has a specific scope exception which does not allow for the consolidation of government organizations.

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The following table details future capital lease obligations, including interest, under the Snettisham PPA (dollars in thousands):



	Remaining
	2015		2016		2017		2018		2019		Thereafter		Total
Principal	$	1,673	$	2,350	$	2,480	$	2,615	$	2,755	$	57,525	$	69,398
Interest	2,767		3,567		3,438		3,305		3,165		25,364		41,606
Total	$	4,440	$	5,917	$	5,918	$	5,920	$	5,920	$	82,889	$	111,004

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 and material 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.

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, 2015 and December 31, 2014 (dollars in thousands):



	March 31, 2015				December 31, 2014
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt (Level 2)	$	951,000	$	1,132,109	$	951,000	$	1,118,972
Long-term debt (Level 3)	492,000		542,349		492,000		527,663
Snettisham capital lease obligation (Level 3)	69,398		79,928		69,955		79,290
Nonrecourse long-term debt (Level 3)	—		—		1,431		1,440
Long-term debt to affiliated trusts (Level 3)	51,547		37,629		51,547		38,582

These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available market information, which generally consists of estimated market prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers consisted of par values of 73.00 to 134.52, where a par value of 100.0 represents the carrying value recorded on the Consolidated Balance Sheets. Due to the unique nature of the Snettisham capital lease obligation, the estimated fair value of this item was determined based on a discounted cash flow model using available

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market information. The Snettisham capital lease obligation was discounted to present value using the Moody's Aaa Corporate discount rate as published by the Federal Reserve on March 31, 2015.

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, 2015 and December 31, 2014 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, 2015
Assets:
Energy commodity derivatives	$	—	$	96,319	$	—	$	(95,557	)	$	762
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		1,607		(790		)	817
Foreign currency derivatives	—		14		—		(14		)	—
Deferred compensation assets:
Fixed income securities (2)	1,866		—		—		—			1,866
Equity securities (2)	6,233		—		—		—			6,233
Total	$	8,099	$	96,333	$	1,607	$	(96,361	)	$	9,678
Liabilities:
Energy commodity derivatives	$	—	$	111,188	$	—	$	(103,001	)	$	8,187
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		790		(790		)	—
Power exchange agreement	—		—		25,903		—			25,903
Power option agreement	—		—		251		—			251
Foreign currency derivatives	—		24		—		(14		)	10
Interest rate swaps	—		112,835		—		(50,490		)	62,345
Total	$	—	$	224,047	$	26,944	$	(154,295	)	$	96,696

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	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
December 31, 2014
Assets:
Energy commodity derivatives	$	—	$	96,729	$	—	$	(95,204	)	$	1,525
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		1,349		(1,349		)	—
Foreign currency derivatives	—		1		—		(1		)