Edgar Filing: AVISTA CORP

10-Q

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, 2016 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, 2016, 63,210,140 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.

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AVISTA CORPORATION

INDEX



Item No.		Page No.

	Forward-Looking Statements	1
	Available Information	4
Part I. Financial Information
Item 1.	Condensed Consolidated Financial Statements	5
	Condensed Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2015	5
	Condensed Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2015	6
	Condensed Consolidated Balance Sheets - March 31, 2016 and December 31, 2015	7
	Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015	9
	Condensed Consolidated Statements of Equity - Three Months Ended March 31, 2016 and 2015	11
	Notes to Condensed Consolidated Financial Statements	12
	Note 1. Summary of Significant Accounting Policies	12
	Note 2. New Accounting Standards	15
	Note 3. Variable Interest Entities	16
	Note 4. Derivatives and Risk Management	17
	Note 5. Pension Plans and Other Postretirement Benefit Plans	22
	Note 6. Committed Lines of Credit	23
	Note 7. Long-Term Debt and Capital Leases	24
	Note 8. Long-Term Debt to Affiliated Trusts	25
	Note 9. Fair Value	26
	Note 10. Earnings per Common Share Attributable to Avista Corporation Shareholders	30
	Note 11. Commitments and Contingencies	30
	Note 12. Information by Business Segments	32
	Report of Independent Registered Public Accounting Firm	34

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Business Segments	35
	Executive Level Summary	35
	Regulatory Matters	36
	Results of Operations - Overall	41
	Results of Operations - Avista Utilities	41
	Results of Operations - Alaska Electric Light and Power Company	48
	Results of Operations - Other Businesses	50
	Critical Accounting Policies and Estimates	50
	Liquidity and Capital Resources	50
	Overall Liquidity	50
	Review of Cash Flow Statement	51
	Capital Resources	52
	Capital Expenditures	53
	Off-Balance Sheet Arrangements	53
	Pension Plan	53
	Credit Ratings	54
	Dividends	54
	Contractual Obligations	54

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AVISTA CORPORATION



	Economic Conditions	54
	Environmental Issues and Other Contingencies	55
	Enterprise Risk Management	56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

Part II. Other Information
Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 4.	Mine Safety Disclosures	58

Item 6.	Exhibits	59

	Signature	60

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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:

Financial Risk


•	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;


•	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;


•	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 to which we recover interest costs through utility operations;


•	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;


•	external pressure to meet financial goals that can lead to short-term or expedient decisions that reduce the likelihood of long-term objectives being met;


•	deterioration in the creditworthiness of our customers;


•	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;


•	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;


•	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;

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AVISTA CORPORATION

Utility Regulatory Risk


•	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, operating costs and commodity costs and discretion over allowed return on investment;


•	possibility that our integrated resource plans for electric and natural gas will not be acknowledged by the state commissions;

Energy Commodity Risk

•

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 in wholesale energy transactions and credit risk to us from such transactions, and the market value of derivative assets and liabilities;


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


•	potential obsolescence of our power supply resources;

Operational Risk


•	severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, snow and ice storms, that can disrupt energy generation, transmission and distribution, as well as the availability and costs of materials, equipment, supplies and support services;


•	explosions, fires, accidents, mechanical breakdowns or other incidents that may impair assets and may disrupt operations of any of our generation facilities, transmission and distribution systems or other operations and may require us to purchase replacement power;


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


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


•	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;


•	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;


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


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


•	third party construction of buildings, billboard signs or towers within our rights of way, or placement of fuel receptacles within close proximity to our transformers or other equipment, including overbuild atop natural gas distribution lines;


•	the loss of key suppliers for materials or services or disruptions to the supply chain;


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


•	adverse impacts to our Alaska operations that could result from an extended outage of its hydroelectric generating resources or its inability to deliver energy, due to its lack of interconnectivity to any other electrical grids and the extensive cost of replacement power (diesel);

Compliance Risk


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


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

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AVISTA CORPORATION

Technology Risk


•	cyber attacks on us or our vendors 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;


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


•	changes in the costs to operate and maintain current production technology or to implement new information technology systems that impede our ability to complete such projects timely and effectively;


•	changes in technologies, possibly making some of the current technology we utilize obsolete or the introduction of new technology that may create new cyber security related risk;


•	insufficient technology skills, which could lead to the inability to develop, modify or maintain our information systems;

Strategic Risk


•	growth or decline of our customer base and the extent to which new uses for our services may materialize or existing uses may decline, including, but not limited to, the effect of the trend toward distributed generation at customer sites;


•	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;


•	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 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;

External Mandates Risk


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


•	the potential effects of legislation or administrative rulemaking at the federal, state or local levels, 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 distribution systems through accelerated adoption of distributed generation or electric-powered transportation or 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;


•	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;


•	failure to identify changes in legislation, taxation and regulatory issues which are detrimental or beneficial to our overall business; and


•	the risk of municipalization in any of our service territories.

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. There can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New risks, uncertainties and other factors emerge from time to time, and it is not possible for us to predict all such factors, nor can we assess the effect of each such factor on our business or the extent that any such factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.

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AVISTA CORPORATION

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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PART I. Financial Information

Item 1. Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands, except per share amounts

(Unaudited)



	2016			2015
Operating Revenues:
Utility revenues	$	412,793		$	436,407
Non-utility revenues	5,380			10,083
Total operating revenues	418,173			446,490
Operating Expenses:
Utility operating expenses:
Resource costs	161,719			209,560
Other operating expenses	75,779			73,172
Depreciation and amortization	39,192			34,300
Taxes other than income taxes	29,385			29,898
Non-utility operating expenses:
Other operating expenses	5,825			9,816
Depreciation and amortization	188			169
Total operating expenses	312,088			356,915
Income from operations	106,085			89,575
Interest expense	21,273			19,902
Interest expense to affiliated trusts	138			112
Capitalized interest	(914		)	(917		)
Other income-net	(2,422		)	(2,231		)
Income before income taxes	88,010			72,709
Income tax expense	31,942			26,247
Net income	56,068			46,462
Net income attributable to noncontrolling interests	(16		)	(13		)
Net income attributable to Avista Corp. shareholders	$	56,052		$	46,449
Weighted-average common shares outstanding (thousands), basic	62,605			62,318
Weighted-average common shares outstanding (thousands), diluted	62,907			62,889
Earnings per common share attributable to Avista Corp. shareholders:
Basic	$	0.90		$	0.75
Diluted	$	0.89		$	0.74
Dividends declared per common share	$	0.3425		$	0.33

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)



	2016			2015
Net income	$	56,068		$	46,462
Other Comprehensive Income (Loss):
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $(663) and $132, respectively	(1,229		)	246
Total other comprehensive income (loss)	(1,229		)	246
Comprehensive income	54,839			46,708
Comprehensive income attributable to noncontrolling interests	(16		)	(13		)
Comprehensive income attributable to Avista Corporation shareholders	$	54,823		$	46,695

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,
	2016		2015
Assets:
Current Assets:
Cash and cash equivalents	$	12,767	$	10,484
Accounts and notes receivable-less allowances of $5,251 and $4,530, respectively	149,537		169,413
Utility energy commodity derivative assets	127		683
Regulatory asset for utility derivatives	22,830		17,260
Materials and supplies, fuel stock and stored natural gas	43,885		54,148
Income taxes receivable	12,911		24,121
Other current assets	37,167		29,937
Total current assets	279,224		306,046
Net Utility Property:
Utility plant in service	5,218,583		5,129,192
Construction work in progress	174,877		202,683
Total	5,393,460		5,331,875
Less: Accumulated depreciation and amortization	1,465,883		1,433,286
Total net utility property	3,927,577		3,898,589
Other Non-current Assets:
Investment in exchange power-net	8,371		8,983
Investment in affiliated trusts	11,547		11,547
Goodwill	57,672		57,672
Long-term energy contract receivable	11,136		14,694
Other property and investments-net and other non-current assets	54,065		50,750
Total other non-current assets	142,791		143,646
Deferred Charges:
Regulatory assets for deferred income tax	100,708		101,240
Regulatory assets for pensions and other postretirement benefits	229,877		235,009
Other regulatory assets	99,142		99,798
Regulatory asset for unsettled interest rate swaps	144,966		83,973
Non-current regulatory asset for utility commodity derivatives	25,834		32,420
Other deferred charges	5,894		5,928
Total deferred charges	606,421		558,368
Total assets	$	4,956,013	$	4,906,649

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,
	2016			2015
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	59,140		$	114,349
Current portion of long-term debt and capital leases	93,197			93,167
Short-term borrowings	90,000			105,000
Utility energy commodity derivative liabilities	10,695			14,268
Other current liabilities	178,809			147,896
Total current liabilities	431,841			474,680
Long-term debt and capital leases	1,479,791			1,480,111
Long-term debt to affiliated trusts	51,547			51,547
Regulatory liability for utility plant retirement costs	264,951			261,594
Pensions and other postretirement benefits	202,013			201,453
Deferred income taxes	762,522			747,477
Other non-current liabilities and deferred credits	174,080			161,500
Total liabilities	3,366,745			3,378,362
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; 63,208,059 and 62,312,651 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively	1,032,023			1,004,336
Accumulated other comprehensive loss	(7,879		)	(6,650		)
Retained earnings	565,447			530,940
Total Avista Corporation shareholders’ equity	1,589,591			1,528,626
Noncontrolling Interests	(323		)	(339		)
Total equity	1,589,268			1,528,287
Total liabilities and equity	$	4,956,013		$	4,906,649

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)



	2016			2015
Operating Activities:
Net income	$	56,068		$	46,462
Non-cash items included in net income:
Depreciation and amortization	40,291			35,379
Deferred income tax provision (benefit) and investment tax credits	34,030			(82		)
Power and natural gas cost amortizations, net	5,379			8,196
Amortization of debt expense	876			895
Amortization of investment in exchange power	613			613
Stock-based compensation expense	2,313			1,707
Equity-related AFUDC	(2,261		)	(2,215		)
Pension and other postretirement benefit expense	9,475			9,217
Amortization of Spokane Energy contract	3,558			3,271
Other	(12,747		)	(3,077		)
Contributions to defined benefit pension plan	(4,000		)	(4,000		)
Changes in certain current assets and liabilities:
Accounts and notes receivable	18,364			2,664
Materials and supplies, fuel stock and stored natural gas	10,263			22,571
Increase in collateral posted for derivative instruments	(42,871		)	(18,516		)
Income taxes receivable	11,210			43,331
Other current assets	(10,978		)	471
Accounts payable	(30,804		)	(30,545		)
Income taxes payable	1,067			20,162
Other current liabilities	15,701			10,274
Net cash provided by operating activities	105,547			146,778

Investing Activities:
Utility property capital expenditures (excluding equity-related AFUDC)	(88,878		)	(81,597		)
Other capital expenditures	(119		)	(412		)
Other	(2,657		)	1,834
Net cash used in investing activities	(91,654		)	(80,175		)

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)



	2016			2015
Financing Activities:
Net decrease in short-term borrowings	$	(15,000	)	$	(40,000	)
Redemption and maturity of long-term debt	(792		)	(639		)
Maturity of nonrecourse long-term debt of Spokane Energy	—			(1,431		)
Issuance of common stock, net of issuance costs	27,150			371
Repurchase of common stock	—			(2,920		)
Cash dividends paid	(21,545		)	(20,717		)
Other	(1,423		)	(1,329		)
Net cash used in financing activities	(11,610		)	(66,665		)

Net increase (decrease) in cash and cash equivalents	2,283			(62		)

Cash and cash equivalents at beginning of period	10,484			22,143

Cash and cash equivalents at end of period	$	12,767		$	22,081

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Avista Corporation

For the Three Months Ended March 31

Dollars in thousands

(Unaudited)



	2016			2015
Common Stock, Shares:
Shares outstanding at beginning of period	62,312,651			62,243,374
Shares issued	895,408			117,159
Shares repurchased	—			(89,400		)
Shares outstanding at end of period	63,208,059			62,271,133
Common Stock, Amount:
Balance at beginning of period	$	1,004,336		$	999,960
Equity compensation expense	1,967			1,513
Issuance of common stock, net of issuance costs	27,150			371
Payment of minimum tax withholdings for share-based payment awards	(3,027		)	(1,480		)
Repurchase of common stock	—			(1,431		)
Excess tax benefits	1,597			42
Balance at end of period	1,032,023			998,975
Accumulated Other Comprehensive Loss:
Balance at beginning of period	(6,650		)	(7,888		)
Other comprehensive income (loss)	(1,229		)	246
Balance at end of period	(7,879		)	(7,642		)
Retained Earnings:
Balance at beginning of period	530,940			491,599
Net income attributable to Avista Corporation shareholders	56,052			46,449
Cash dividends paid (common stock)	(21,545		)	(20,717		)
Repurchase of common stock	—			(1,489		)
Balance at end of period	565,447			515,842
Total Avista Corporation shareholders’ equity	1,589,591			1,507,175
Noncontrolling Interests:
Balance at beginning of period	(339		)	(429		)
Net income attributable to noncontrolling interests	16			13
Balance at end of period	(323		)	(416		)
Total equity	$	1,589,268		$	1,506,759

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, 2016 and 2015 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 (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, 2015 (2015 Form 10-K). Please refer to the section “Acronyms and Terms” in the 2015 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.

Alaska Energy and Resources Company (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. Avista Capital, Inc. (Avista Capital), a wholly owned non-regulated subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, with the exception of AJT Mining Properties, Inc. in Alaska.

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. 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 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. Taxes other than income taxes consisted of the following items for the three months ended March 31 (dollars in thousands):



	2016		2015
Utility related taxes	$	18,365	$	19,498
Property taxes	10,420		9,686
Other taxes	600		714
Total	$	29,385	$	29,898

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AVISTA CORPORATION

Other Income-Net

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



	2016			2015
Interest income	$	540		$	263
Equity-related AFUDC	2,261			2,215
Other income (loss)	(379		)	(247		)
Total	$	2,422		$	2,231

Materials and Supplies, Fuel Stock and Stored Natural Gas

Inventories of materials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower of cost or net realizable value for our non-regulated operations and consisted of the following as of March 31, 2016 and December 31, 2015 (dollars in thousands):



	March 31,		December 31,
	2016		2015
Materials and supplies	$	38,718	$	37,101
Fuel stock	4,254		4,273
Stored natural gas	913		12,774
Total	$	43,885	$	54,148

Derivative Assets and Liabilities

Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value.

The Washington Utilities and Transportation Commission (UTC) and the Idaho Public Utilities Commission (IPUC) issued accounting orders authorizing Avista Corp. 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 Corp. 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, result in adjustments to retail rates through purchased gas cost adjustments, the Energy Recovery Mechanism (ERM) in Washington, the Power Cost Adjustment (PCA) mechanism in Idaho, and periodic general rates cases. Regulatory assets are assessed regularly and are probable for recovery through future rates.

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

For interest rate swap derivatives, each period Avista Corp. 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. 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. While the Company has not received any formal accounting orders from the various state commissions providing for the offset of interest rate swap assets and liabilities with regulatory assets and liabilities, the interest rate swap derivatives are risk management tools similar to energy commodity derivatives and the Company believes that the prior practice of the commissions to provide recovery through the ratemaking process justifies this accounting treatment.

As of March 31, 2016, the Company has multiple master netting agreements with a variety of entities that allow for cross-commodity netting of derivative agreements with the same counterparty (i.e. power derivatives can be netted with natural gas derivatives) under ASC 815-10-45. In addition, some master netting agreements allow for the netting of commodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for presentation in the Condensed Consolidated Balance Sheets.

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Fair Value Measurements

Fair value represents the price that would be received when selling 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, deferred compensation assets, as well as derivatives related to interest rate swap derivatives and foreign currency exchange derivatives, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 9 for the Company’s fair value disclosures.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, consisted of the following as of March 31, 2016 and December 31, 2015 (dollars in thousands):



	March 31,		December 31,
	2016		2015
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $4,243 and $3,580, respectively	$	7,879	$	6,650

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	2016			2015			Affected Line Item in Statement of Income
Amortization of defined benefit pension items
Amortization of net prior service cost	$	311		$	273		(a)
Amortization of net loss	(3,642		)	(3,688		)	(a)
Adjustment due to effects of regulation	5,223			3,037			(a) (b)
	1,892			(378		)	Total before tax
	(663		)	132			Tax expense (benefit)
	$	1,229		$	(246	)	Net of tax


(a)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 5 for additional details).


(b)	The adjustment for the effects of regulation during the first quarter of 2016 includes approximately $2.1 million related to the reclassification of a pension regulatory asset associated with one of our jurisdictions into accumulated other comprehensive loss.

Appropriated Retained Earnings

In accordance with the hydroelectric licensing requirements of section 10(d) of the Federal Power Act (FPA), the Company maintains an appropriated retained earnings account for any earnings in excess of the specified rate of return on the Company's investment in the licenses for its various hydroelectric projects. Per section 10(d) of the FPA, the Company must maintain these excess earnings in an appropriated retained earnings account until the termination of the licensing agreements or apply them to reduce the net investment in the licenses of the hydroelectric projects at the discretion of the Federal Energy Regulatory Commission (FERC). The Company typically calculates the earnings in excess of the specified rate of return on an annual basis, usually during the second quarter.

In addition to the hydroelectric project licenses identified above for Avista Utilities, the requirements of section 10(d) of the FPA also apply to the AEL&P licenses for Lake Dorothy and Annex Creek/Salmon Creek (combined).

The appropriated retained earnings amounts included in retained earnings were as follows as of March 31, 2016 and December 31, 2015 (dollars in thousands):



	March 31,		December 31,
	2016		2015
Appropriated retained earnings	$	21,030	$	21,030

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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 above), which does not allow appropriated retained earnings to be distributed as dividends,

•

certain requirements under the Public Utility Commission of Oregon (OPUC) approval of the AERC acquisition. As of 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, 2016 was limited to $429.3 million.

Under the requirements of the OPUC approval of the AERC acquisition as outlined above, the amount available for dividends at March 31, 2016 was limited to $275.4 million.

Sales Agency Agreements

In March 2016, the Company entered into four separate sales agency agreements under which the sales agents, as Avista Corp.’s agents, may offer and sell up to 3.8 million new shares of Avista Corp.'s common stock, no par value, from time to time. The sales agency agreements expire on February 29, 2020. In the three months ended March 31, 2016, 0.7 million shares were issued under these agreements resulting in total net proceeds of $27.1 million, leaving 3.1 million shares remaining to be issued.

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, 2016, the Company has not recorded any significant amounts related to unresolved contingencies.

NOTE 2. NEW ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 was originally effective for periods beginning after December 15, 2016 and early adoption is not permitted. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 for one year, with adoption as of the original date permitted. However, while this ASU is not effective until 2018, it will require retroactive application to all periods presented in the financial statements. As such, at adoption, amounts from the two preceding years may have to be revised or a cumulative adjustment to opening retained earnings may have to be recorded. 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 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. The Company

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adopted this standard effective January 1, 2016, which resulted in additional disclosures surrounding the Company's investments in VIEs. See Note 3 for additional discussion regarding the adoption of this ASU.

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 was effective for periods beginning on or after December 15, 2015 and the Company adopted this standard on a prospective basis effective January 1, 2016. The adoption of this standard did not result in any changes to the Company's existing accounting and did not impact the Company's financial condition, results of operations and cash flows.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” This ASU introduces a new lessee model that brings most leases onto the balance sheet. The standard also aligns certain of the underlying principles of the new lessor model with those in Accounting Standards Codification (ASC) Topic 606, the FASB’s new revenue recognition standard. Furthermore, this ASU addresses other concerns related to the current leases model; for example, eliminating the required use of bright-line tests in current GAAP for determining lease classification (operating leases versus capital leases). This ASU also includes enhanced disclosures surrounding leases. This ASU is effective for periods beginning on or after December 15, 2018; however, early adoption is permitted. Upon adoption, this ASU must be applied using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. The Company evaluated this standard and determined that it will not early adopt this standard as of March 31, 2016. The Company is still in the process of determining the potential impact on its future financial condition, results of operations and cash flows.

In March 2016, the FASB issued ASU 2016-09 "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." This ASU simplifies several aspects of the accounting for employee share-based payment transactions including allowing excess tax benefits or tax deficiencies to be recognized as income tax benefits or expenses in the Statements of Income rather than in Additional Paid in Capital (APIC). Also, excess tax benefits no longer represent a financing cash inflow on the Statement of Cash Flows and instead will be included as an operating activity. Under this ASU, excess tax benefits and tax deficiencies will be excluded from the calculation of diluted earnings per share, whereas under current accounting guidance, these amounts must be estimated and included in the calculation. In addition, this ASU simplifies the accounting for forfeitures and changes the statutory tax withholding requirements for share-based payments. This ASU is effective for periods beginning after December 15, 2016 and early adoption is permitted. The Company evaluated this standard and determined that it will not early adopt this standard as of March 31, 2016. The Company is still in the process of determining the potential impact on its future financial condition, results of operations and cash flows.

NOTE 3. VARIABLE INTEREST ENTITIES

Lancaster Power Purchase Agreement

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

Avista Corp. has a variable interest in the PPA. Accordingly, Avista Corp. made an evaluation of which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and which interest holders have the obligation to absorb losses or receive benefits that could be significant to the entity. Avista Corp. pays a fixed capacity and operations and maintenance payment and certain monthly variable costs under the PPA. Under the terms of the PPA, Avista Corp. makes the dispatch decisions, provides all natural gas fuel and receives all of the electric energy output from the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation of the Lancaster Plant and makes operating and maintenance decisions. Rathdrum Power LLC controls all of the rights and obligations of the Lancaster Plant after the expiration of the PPA in 2026. It is estimated that the plant will have 15 to 25 years of useful life after that time. Rathdrum Power LLC bears the maintenance risk of the plant and will receive the residual value of the Lancaster Plant. Avista Corp. has no debt or equity investments in the Lancaster Plant and does not provide financial support through liquidity arrangements or other commitments (other than the PPA). Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Lancaster Plant. Accordingly, neither the Lancaster Plant nor Rathdrum Power LLC is included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $289.9 million under the PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss. These payments are due regardless of plant performance; however, the Company believes that such costs will be recovered through retail rates.

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Limited Partnerships and Similar Entities

The Company adopted ASU No. 2015-02 effective January 1, 2016. As a result of the adoption of this ASU, the Company evaluated all of its existing investments to determine if any entities would be considered VIEs under the new guidance and whether consolidation would be required. Under the ASU, a limited partnership or similar legal entity that is the functional equivalent of a limited partnership would be considered a VIE regardless of whether it otherwise qualifies as a voting interest entity unless a simple majority or lower threshold of the “unrelated” limited partners (i.e., parties other than the general partner, entities under common control with the general partner, and other parties acting on behalf of the general partner) have substantive kick-out rights (including liquidation rights) or participating rights.

The Company has five investments in limited partnerships (or the functional equivalent) where Avista Corp. is a limited partner investor in an investment fund where the general partner makes all the investment and operating decisions with regards to the partnership and fund. To remove the general partner from any of the funds, approval from greater than a simple majority of the limited partners is required. As such, the limited partners do not have substantive kick-out rights and these investment are considered VIEs. Consolidation of these VIEs by Avista Corp. is not required because the Company does not have majority ownership in any of the funds, it does not have the power to direct any activities of the funds and it does not have the power to appoint executive leadership, including the board of directors.

Avista Corp. participates in profits and losses of the investment funds based on its ownership percentage and its losses are capped at its total initial investment in the funds. Avista Corp. does not have any additional commitments beyond its initial investment. In addition, the Company is not allowed to withdraw any capital contributions from the investment funds until after the funds' expiration dates and all liabilities of the funds are settled. The expiration dates range from 2016 to 2032, with one investment having no termination date (perpetual). As of March 31, 2016, the Company has a total carrying amount in these investment funds of $5.8 million.

NOTE 4. DERIVATIVES AND RISK MANAGEMENT

The disclosures below in Note 4 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.

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 a portion of the related financial risks. These transactions range from terms of intra-hour up to multiple years.

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 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.

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The following table presents the underlying energy commodity derivative volumes as of March 31, 2016 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
2016	213	1,643	13,846	127,565	200	1,916	968	104,118
2017	397	97	1,265	58,238	255	483	1,360	41,918
2018	397	—	—	23,903	286	192	1,360	6,363
2019	235	—	610	10,245	158	—	1,345	—
2020	—	—	910	1,815	—	—	1,430	—
Thereafter	—	—	—	—	—	—	1,060	—

The following table presents the underlying energy commodity derivative volumes as of December 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
2016	407	1,954	17,252	142,693	280	2,656	3,182	112,233
2017	397	97	675	49,200	255	483	1,360	26,965
2018	397	—	—	15,118	286	—	1,360	2,738
2019	235	—	305	6,935	158	—	1,345	—
2020	—	—	455	905	—	—	1,430	—
Thereafter	—	—	—	—	—	—	1,060	—


(1)	Physical transactions represent commodity transactions in which Avista Utilities will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of gain or loss but with no physical delivery of the commodity, such as futures, swaps, options, or forward contracts.

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 Purchased Gas Adjustments (PGA)), or in the general rate case process, and are expected to be collected through retail rates from customers.

Foreign Currency Exchange Derivatives

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 derivatives when such commodity transactions are initiated. The foreign currency exchange derivatives and the unhedged foreign currency risk have 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 are included with natural gas supply costs for ratemaking.

The following table summarizes the foreign currency derivatives that the Company has outstanding as of March 31, 2016 and December 31, 2015 (dollars in thousands):



	March 31,		December 31,
	2016		2015
Number of contracts	24		24
Notional amount (in United States currency)	$	2,787	$	1,463
Notional amount (in Canadian currency)	3,700		2,002

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Interest Rate Derivatives

Avista Corp. is affected by fluctuating interest rates related to a portion of its existing debt, and future borrowing requirements. The Company 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.

The following table summarizes the interest rate swaps that the Company has entered into as of March 31, 2016 and December 31, 2015 (dollars in thousands):



Balance Sheet Date	Number of Contracts	Notional Amount	Mandatory Cash Settlement Date
March 31, 2016	6	115,000	2016
	4	55,000	2017
	13	265,000	2018
	3	40,000	2019
	4	50,000	2022
December 31, 2015	6	115,000	2016
	3	45,000	2017
	11	245,000	2018
	2	30,000	2019
	1	20,000	2022

The fair value of outstanding interest rate swaps can vary significantly from period to period depending on the total notional amount of swaps outstanding and fluctuations in market interest rates compared to the interest rates fixed by the 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

The amounts recorded on the Condensed Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015 reflect the offsetting of derivative assets and liabilities where a legal right of offset exists.

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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 March 31, 2016 (in thousands):



		Fair Value as of March 31, 2016
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency contracts	Other current assets	$	64	$	—		$	—	$	64
Interest rate contracts	Other property and investments-net and other non-current assets	451		—			—		451
Interest rate contracts	Other current liabilities	—		(38,802		)	10,558		(28,244		)
Interest rate contracts	Other non-current liabilities and deferred credits	443		(106,607		)	65,442		(40,722		)
Commodity contracts	Current utility energy commodity derivative assets	127		—			—		127
Commodity contracts	Non-current utility energy commodity derivative assets	136		(51		)	—		85
Commodity contracts	Current utility energy commodity derivative liabilities	68,153		(91,109		)	12,261		(10,695		)
Commodity contracts	Other non-current liabilities and deferred credits	7,967		(33,886		)	7,711		(18,208		)
Total derivative instruments recorded on the balance sheet		$	77,341	$	(270,455	)	$	95,972	$	(97,142	)

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



		Fair Value as of December 31, 2015
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency contracts	Other current liabilities	$	2	$	(19	)	$	—	$	(17	)
Interest rate contracts	Other property and investments-net and other non-current assets	23		—			—		23
Interest rate contracts	Other current liabilities	118		(23,262		)	3,880		(19,264		)
Interest rate contracts	Other non-current liabilities and deferred credits	1,407		(62,236		)	30,150		(30,679		)
Commodity contracts	Current utility energy commodity derivative assets	1,236		(553		)	—		683
Commodity contracts	Current utility energy commodity derivative liabilities	67,466		(85,409		)	3,675		(14,268		)
Commodity contracts	Other non-current liabilities and deferred credits	6,613		(39,033		)	10,851		(21,569		)
Total derivative instruments recorded on the balance sheet		$	76,865	$	(210,512	)	$	48,556	$	(85,091	)

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.

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The following table presents the Company's collateral outstanding related to its derivative instruments as of March 31, 2016 and December 31, 2015 (in thousands):



	March 31,		December 31,
	2016		2015
Energy commodity derivatives
Cash collateral posted	$	29,618	$	28,716
Letters of credit outstanding	23,700		28,200
Balance sheet offsetting (cash collateral against net derivative positions)	19,972		14,526

Interest rate swap derivatives
Cash collateral posted	76,000		34,030
Letters of credit outstanding	16,700		9,600
Balance sheet offsetting (cash collateral against net derivative positions)	76,000		34,030

There was no cash collateral or letters of credit outstanding as of March 31, 2016 and December 31, 2015 related to foreign currency exchange derivatives.

Certain of the Company’s derivative instruments contain provisions that require the Company to maintain an "investment grade" credit rating from the major credit rating agencies. If the Company’s credit ratings were to fall below “investment grade,” it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions.

The 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, 2016 and December 31, 2015 (in thousands):



	March 31,		December 31,
	2016		2015
Energy commodity derivatives
Liabilities with credit-risk-related contingent features	$	1,655	$	7,090
Additional collateral to post	1,416		6,980

Interest rate swap derivatives
Liabilities with credit-risk-related contingent features	145,409		85,498
Additional collateral to post	25,420		18,750

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 transacts in energy and related derivative instruments through clearinghouse exchanges.

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

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

NOTE 5. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The pension and other postretirement benefit plans described below only relate to Avista Utilities. AEL&P (not discussed below) participates in a defined contribution multiemployer plan for its union workers and a defined contribution money purchase pension plan for its nonunion workers. METALfx (not discussed below) has a defined contribution 401(k) savings plan. None of the subsidiary retirement plans, individually or in the aggregate, are significant to Avista Corp.

Avista Utilities

The Company has a defined benefit pension plan covering the majority of all regular full-time employees at Avista Utilities that were hired prior to January 1, 2014. 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. Non-union employees hired on or after January 1, 2014 participate in a defined contribution 401(k) plan in lieu of a defined benefit pension plan. Union employees hired on or after January 1, 2014 continue to be covered under the defined benefit pension 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, 2016 and expects to contribute $12.0 million total in 2016. The Company contributed $12.0 million in cash to the pension plan in 2015.

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 defined benefit 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 the SERP 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 that were hired prior to January 1, 2014. 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. Non-union employees hired on or after January 1, 2014 will have access to the retiree medical plan upon retirement; however, Avista Corp. will no longer provide a contribution toward their medical premium. Union employees hired on or after January 1, 2014 continue to receive a contribution from Avista Corp. toward their medical premiums upon retirement.

The Company has a Health Reimbursement Arrangement (HRA) 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 the HRA 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.

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The Company uses a December 31 measurement date for its defined benefit 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
	2016			2015			2016			2015
Service cost	$	4,519		$	4,949		$	779		$	699
Interest cost	6,900			6,672			1,559			1,331
Expected return on plan assets	(6,750		)	(7,416		)	(475		)	(431		)
Amortization of prior service cost	—			6			(312		)	(279		)
Net loss recognition	1,890			2,394			1,365			1,292
Net periodic benefit cost	$	6,559		$	6,605		$	2,916		$	2,612

NOTE 6. 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. The Company has the option to request an extension for an additional one or two years beyond April 2019, provided that (1) no event of default has occurred and is continuing prior to the requested extension and (2) the remaining term of agreement, including the requested extension period, does not exceed five years. During April 2016, the Company notified the lending financial institutions that it intends to exercise the two-year extension option with the extension expected to be finalized during the second quarter of 2016.

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, 2016 and December 31, 2015 (dollars in thousands):



	March 31,			December 31,
	2016			2015
Borrowings outstanding at end of period	$	90,000		$	105,000
Letters of credit outstanding at end of period	$	46,695		$	44,595
Average interest rate on borrowings at end of period	1.19		%	1.18		%

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, 2016 and December 31, 2015, there were no borrowings outstanding under this committed line of credit.

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NOTE 7. LONG-TERM DEBT AND CAPITAL LEASES

The following details long-term debt outstanding as of March 31, 2016 and December 31, 2015 (dollars in thousands):



Maturity		Interest	March 31,			December 31,
Year	Description	Rate	2016			2015
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
2045	First Mortgage Bonds	4.37%	100,000			100,000
2047	First Mortgage Bonds	4.23%	80,000			80,000
	Total Avista Corp. secured long-term debt		1,536,700			1,536,700
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		1,611,700			1,611,700
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		1,626,700			1,626,700
Other Long-Term Debt Components
	Capital lease obligations		67,810			68,601
	Settled interest rate swaps (2)		(26,334		)	(26,515		)
	Unamortized debt discount		(916		)	(956		)
	Unamortized long-term debt issuance costs		(10,572		)	(10,852		)
	Total		1,656,688			1,656,978
	Secured Pollution Control Bonds held by Avista Corporation (1)		(83,700		)	(83,700		)
	Current portion of long-term debt and capital leases		(93,197		)	(93,167		)
	Total long-term debt and capital leases		$	1,479,791		$	1,480,111

(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.

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(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.

Snettisham Capital Lease Obligation

Included in long-term capital leases above is a PPA 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, 2016 and December 31, 2015 were as follows (dollars in thousands):



	March 31,		December 31,
	2016		2015
Capital lease obligation (1)	$	63,881	$	64,455
Capital lease asset (2)	71,007		71,007
Accumulated amortization of capital lease asset (2)	6,372		5,462


(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):



	2016		2015
Interest on capital lease obligation	$	789	$	923
Amortization of capital lease asset	910		910

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



	Remaining
	2016		2017		2018		2019		2020		Thereafter		Total
Principal	$	1,721	$	2,415	$	2,535	$	2,660	$	2,800	$	51,750	$	63,881
Interest	2,368		3,042		2,921		2,795		2,662		19,195		32,983
Total	$	4,089	$	5,457	$	5,456	$	5,455	$	5,462	$	70,945	$	96,864

NOTE 8. LONG-TERM DEBT TO AFFILIATED TRUSTS

In 1997, the Company issued Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, with a principal amount of $51.5 million to Avista Capital II, an affiliated business trust formed by the Company. Avista Capital II issued $50.0 million of Preferred Trust Securities with a floating distribution rate of LIBOR plus 0.875 percent, calculated and reset quarterly. The distribution rates paid were as follows during the three months ended March 31, 2016 and the year ended December 31, 2015:



	March 31,		December 31,
	2016		2015
Low distribution rate	1.29	%	1.11	%
High distribution rate	1.51	%	1.29	%
Distribution rate at the end of the period	1.51	%	1.29	%

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Concurrent with the issuance of the Preferred Trust Securities, Avista Capital II issued $1.5 million of Common Trust Securities to the Company. These debt securities may be redeemed at the option of Avista Capital II on or after June 1, 2007 and mature on June 1, 2037. In December 2000, the Company purchased $10.0 million of these Preferred Trust Securities.

The Company owns 100 percent of Avista Capital II and has solely and unconditionally guaranteed the payment of distributions on, and redemption price and liquidation amount for, the Preferred Trust Securities to the extent that Avista Capital II has funds available for such payments from the respective debt securities. Upon maturity or prior redemption of such debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not include these capital trusts in its consolidated financial statements as Avista Corp. is not the primary beneficiary. As such, the sole assets of the capital trusts are $51.5 million of junior subordinated deferrable interest debentures of Avista Corp., which are reflected on the Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015. Interest expense to affiliated trusts in the Condensed Consolidated Statements of Income represents interest expense on these debentures.

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) 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, 2016 and December 31, 2015 (dollars in thousands):



	March 31, 2016				December 31, 2015
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt (Level 2)	$	951,000	$	1,079,527	$	951,000	$	1,055,797
Long-term debt (Level 3)	592,000		634,929		592,000		595,018
Snettisham capital lease obligation (Level 3)	63,881		64,372		64,455		63,150
Long-term debt to affiliated trusts (Level 3)	51,547		37,114		51,547		36,083

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.

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The price ranges obtained from the third party brokers consisted of par values of 72.00 to 127.94, where a par value of 100.0 represents the carrying value recorded on the Condensed Consolidated Balance Sheets. Level 2 long-term debt represents publicly issued bonds with quoted market prices; however, due to their limited trading activity, they are classified as level 2 because brokers must generate quotes and make estimates if there is no trading activity near a period end. Level 3 long-term debt consists of private placement bonds and debt to affiliated trusts, which typically have no secondary trading activity. Fair values in Level 3 are estimated based on market prices from third party brokers using secondary market quotes for debt with similar risk and terms to generate quotes for Avista Corp. bonds. Due to the unique nature of the Snettisham capital lease obligation, the estimated fair value of these items was determined based on a discounted cash flow model using available 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, 2016.

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, 2016 and December 31, 2015 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, 2016
Assets:
Energy commodity derivatives	$	—	$	76,124	$	—	$	(75,912	)	$	212
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		259		(259		)	—
Foreign currency derivatives	—		64		—		—			64
Interest rate swaps	—		894		—		(443		)	451
Deferred compensation assets:
Fixed income securities (2)	1,759		—		—		—			1,759
Equity securities (2)	5,182		—		—		—			5,182
Total	$	6,941	$	77,082	$	259	$	(76,614	)	$	7,668
Liabilities:
Energy commodity derivatives	$	—	$	98,491	$	—	$	(95,884	)	$	2,607
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		6,265		(259		)	6,006
Power exchange agreement	—		—		20,193		—			20,193
Power option agreement	—		—		97		—			97
Interest rate swaps	—		145,409		—		(76,443		)	68,966
Total	$	—	$	243,900	$	26,555	$	(172,586	)	$	97,869

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	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
December 31, 2015
Assets:
Energy commodity derivatives	$	—	$	74,637	$	—	$	(73,954	)	$	683
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		678		(678		)	—
Foreign currency derivatives	—		2		—		(2		)	—
Interest rate swaps	—		1,548		—		—			1,548
Deferred compensation assets:
Fixed income securities (2)	1,727		—		—		—			1,727
Equity securities (2)	5,761		—		—		—			5,761
Total	$	7,488	$	76,187	$	678	$