Edgar Filing: AVISTA CORP

Document

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 June 30, 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 July 31, 2016, 63,706,037 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 and Six Months Ended June 30, 2016 and 2015	5
	Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2016 and 2015	7
	Condensed Consolidated Balance Sheets - June 30, 2016 and December 31, 2015	8
	Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015	10
	Condensed Consolidated Statements of Equity - Six Months Ended June 30, 2016 and 2015	12
	Notes to Condensed Consolidated Financial Statements	13
	Note 1. Summary of Significant Accounting Policies	13
	Note 2. New Accounting Standards	15
	Note 3. Discontinued Operations	16
	Note 4. Derivatives and Risk Management	17
	Note 5. Pension Plans and Other Postretirement Benefit Plans	21
	Note 6. Committed Lines of Credit	21
	Note 7. Long-Term Debt to Affiliated Trusts	22
	Note 8. Fair Value	22
	Note 9. Common Stock	27
	Note 10. Earnings per Common Share Attributable to Avista Corporation Shareholders	28
	Note 11. Commitments and Contingencies	28
	Note 12. Information by Business Segments	30
	Report of Independent Registered Public Accounting Firm	33

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Business Segments	34
	Executive Level Summary	34
	Regulatory Matters	34
	Results of Operations - Overall	38
	Results of Operations - Avista Utilities	39
	Results of Operations - Alaska Electric Light and Power Company	51
	Results of Operations - Other Businesses	51
	Critical Accounting Policies and Estimates	51
	Liquidity and Capital Resources	51
	Overall Liquidity	51
	Review of Cash Flow Statement	52
	Capital Resources	53
	Capital Expenditures	54
	Off-Balance Sheet Arrangements	54
	Pension Plan	54
	Contractual Obligations	54
	Environmental Issues and Other Contingencies	54
	Enterprise Risk Management	55

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AVISTA CORPORATION



Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	57

Part II. Other Information
Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 4.	Mine Safety Disclosures	57

Item 6.	Exhibits	58

	Signature	59

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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 retail rates collected from customers;


•	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 or related judicial 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 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

Dollars in thousands, except per share amounts

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Operating Revenues:
Utility revenues	$	312,888		$	330,830		$	725,681		$	767,237
Non-utility revenues	5,950			6,502			11,330			16,585
Total operating revenues	318,838			337,332			737,011			783,822
Operating Expenses:
Utility operating expenses:
Resource costs	109,815			141,116			271,534			350,676
Other operating expenses	78,666			73,112			154,445			146,284
Depreciation and amortization	39,678			35,676			78,870			69,976
Taxes other than income taxes	22,615			23,257			52,000			53,155
Non-utility operating expenses:
Other operating expenses	6,281			6,646			12,106			16,462
Depreciation and amortization	192			165			380			334
Total operating expenses	257,247			279,972			569,335			636,887
Income from operations	61,591			57,360			167,676			146,935
Interest expense	21,318			19,866			42,591			39,768
Interest expense to affiliated trusts	154			115			292			227
Capitalized interest	(837		)	(879		)	(1,751		)	(1,796		)
Other income-net	(3,041		)	(1,836		)	(5,463		)	(4,067		)
Income from continuing operations before income taxes	43,997			40,094			132,007			112,803
Income tax expense	16,710			15,016			47,055			41,263
Net income from continuing operations	27,287			25,078			84,952			71,540
Net income from discontinued operations (Note 3)	—			196			—			196
Net income	27,287			25,274			84,952			71,736
Net income attributable to noncontrolling interests	(33		)	(28		)	(49		)	(41		)
Net income attributable to Avista Corp. shareholders	$	27,254		$	25,246		$	84,903		$	71,695

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

Avista Corporation

Dollars in thousands, except per share amounts

(Unaudited)



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Amounts attributable to Avista Corp. shareholders:
Net income from continuing operations attributable to Avista Corp. shareholders	$	27,254	$	25,050	$	84,903	$	71,499
Net income from discontinued operations attributable to Avista Corp. shareholders	—		196		—		196
Net income attributable to Avista Corp. shareholders	$	27,254	$	25,246	$	84,903	$	71,695

Weighted-average common shares outstanding (thousands), basic	63,386		62,281		62,995		62,299
Weighted-average common shares outstanding (thousands), diluted	63,783		62,600		63,368		62,744

Earnings per common share attributable to Avista Corp. shareholders, basic:
Earnings per common share from continuing operations	$	0.43	$	0.41	$	1.35	$	1.15
Earnings per common share from discontinued operations	—		—		—		—
Total earnings per common share attributable to Avista Corp. shareholders, basic	$	0.43	$	0.41	$	1.35	$	1.15

Earnings per common share attributable to Avista Corp. shareholders, diluted:
Earnings per common share from continuing operations	$	0.43	$	0.40	$	1.34	$	1.14
Earnings per common share from discontinued operations	—		—		—		—
Total earnings per common share attributable to Avista Corp. shareholders, diluted	$	0.43	$	0.40	$	1.34	$	1.14
Dividends declared per common share	$	0.3425	$	0.3300	$	0.6850	$	0.6600

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Avista Corporation

Dollars in thousands

(Unaudited)



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Net income	$	27,287		$	25,274		$	84,952		$	71,736
Other Comprehensive Income (Loss):
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $76, $132, $(587) and $264 respectively	140			245			(1,089		)	491
Total other comprehensive income (loss)	140			245			(1,089		)	491
Comprehensive income	27,427			25,519			83,863			72,227
Comprehensive income attributable to noncontrolling interests	(33		)	(28		)	(49		)	(41		)
Comprehensive income attributable to Avista Corporation shareholders	$	27,394		$	25,491		$	83,814		$	72,186

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS

Avista Corporation

Dollars in thousands

(Unaudited)



	June 30,		December 31,
	2016		2015
Assets:
Current Assets:
Cash and cash equivalents	$	13,522	$	10,484
Accounts and notes receivable-less allowances of $4,507 and $4,530, respectively	121,277		169,413
Utility energy commodity derivative assets	1,730		683
Regulatory asset for utility derivatives	15,194		17,260
Materials and supplies, fuel stock and stored natural gas	51,639		54,148
Income taxes receivable	25,571		24,121
Other current assets	39,786		29,937
Total current assets	268,719		306,046
Net Utility Property:
Utility plant in service	5,303,883		5,129,192
Construction work in progress	187,946		202,683
Total	5,491,829		5,331,875
Less: Accumulated depreciation and amortization	1,501,130		1,433,286
Total net utility property	3,990,699		3,898,589
Other Non-current Assets:
Investment in exchange power-net	7,758		8,983
Investment in affiliated trusts	11,547		11,547
Goodwill	57,672		57,672
Long-term energy contract receivable	7,502		14,694
Other property and investments-net and other non-current assets	64,343		50,750
Total other non-current assets	148,822		143,646
Deferred Charges:
Regulatory assets for deferred income tax	99,325		101,240
Regulatory assets for pensions and other postretirement benefits	226,737		235,009
Other regulatory assets	111,488		99,798
Regulatory asset for unsettled interest rate swaps	191,959		83,973
Non-current regulatory asset for utility commodity derivatives	24,598		32,420
Other deferred charges	6,674		5,928
Total deferred charges	660,781		558,368
Total assets	$	5,069,021	$	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)



	June 30,			December 31,
	2016			2015
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	63,056		$	114,349
Current portion of long-term debt and capital leases	93,227			93,167
Short-term borrowings	160,000			105,000
Utility energy commodity derivative liabilities	7,981			14,268
Other current liabilities	177,450			147,896
Total current liabilities	501,714			474,680
Long-term debt and capital leases	1,479,668			1,480,111
Long-term debt to affiliated trusts	51,547			51,547
Regulatory liability for utility plant retirement costs	267,918			261,594
Pensions and other postretirement benefits	202,063			201,453
Deferred income taxes	783,955			747,477
Other non-current liabilities and deferred credits	165,419			161,500
Total liabilities	3,452,284			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; 63,704,295 and 62,312,651 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively	1,052,190			1,004,336
Accumulated other comprehensive loss	(7,739		)	(6,650		)
Retained earnings	572,576			530,940
Total Avista Corporation shareholders’ equity	1,617,027			1,528,626
Noncontrolling Interests	(290		)	(339		)
Total equity	1,616,737			1,528,287
Total liabilities and equity	$	5,069,021		$	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 Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2016			2015
Operating Activities:
Net income	$	84,952		$	71,736
Non-cash items included in net income:
Depreciation and amortization	81,071			72,131
Deferred income tax provision and investment tax credits	56,652			6,161
Power and natural gas cost amortizations, net	9,958			11,414
Amortization of debt expense	1,742			1,774
Amortization of investment in exchange power	1,225			1,225
Stock-based compensation expense	4,236			3,441
Equity-related AFUDC	(4,368		)	(3,874		)
Pension and other postretirement benefit expense	19,315			18,786
Amortization of Spokane Energy contract	7,192			6,612
Gain on sale of Ecova	—			(163		)
Decoupling regulatory deferral	(24,787		)	(6,813		)
Other	(8,137		)	1,597
Contributions to defined benefit pension plan	(8,000		)	(8,000		)
Changes in certain current assets and liabilities:
Accounts and notes receivable	50,062			25,460
Materials and supplies, fuel stock and stored natural gas	2,510			15,484
Increase in collateral posted for derivative instruments	(83,499		)	(908		)
Income taxes receivable	(1,450		)	42,951
Other current assets	(4,436		)	2,609
Accounts payable	(31,484		)	(26,396		)
Income taxes payable	860			1,055
Other current liabilities	2,337			(4,170		)
Net cash provided by operating activities	155,951			232,112

Investing Activities:
Utility property capital expenditures (excluding equity-related AFUDC)	(182,815		)	(177,752		)
Other capital expenditures	(165		)	(504		)
Cash paid in acquisition, net	—			(95		)
Proceeds from sale of Ecova, net of cash sold	—			1,022
Other	(23,644		)	1,740
Net cash used in investing activities	(206,624		)	(175,589		)

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 Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2016			2015
Financing Activities:
Net increase (decrease) in short-term borrowings	$	55,000		$	(15,000	)
Redemption and maturity of long-term debt	(1,583		)	(1,414		)
Maturity of nonrecourse long-term debt of Spokane Energy	—			(1,431		)
Issuance of common stock, net of issuance costs	47,173			1,080
Repurchase of common stock	—			(2,920		)
Cash dividends paid	(43,267		)	(41,268		)
Other	(3,612		)	(1,471		)
Net cash provided by (used in) financing activities	53,711			(62,424		)

Net increase (decrease) in cash and cash equivalents	3,038			(5,901		)

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

Cash and cash equivalents at end of period	$	13,522		$	16,242

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2016			2015
Common Stock, Shares:
Shares outstanding at beginning of period	62,312,651			62,243,374
Shares issued	1,391,644			139,962
Shares repurchased	—			(89,400		)
Shares outstanding at end of period	63,704,295			62,293,936
Common Stock, Amount:
Balance at beginning of period	$	1,004,336		$	999,960
Equity compensation expense	3,708			3,081
Issuance of common stock, net of issuance costs	47,173			1,080
Payment of minimum tax withholdings for share-based payment awards	(3,027		)	(1,480		)
Repurchase of common stock	—			(1,431		)
Excess tax benefits	—			43
Balance at end of period	1,052,190			1,001,253
Accumulated Other Comprehensive Loss:
Balance at beginning of period	(6,650		)	(7,888		)
Other comprehensive income (loss)	(1,089		)	491
Balance at end of period	(7,739		)	(7,397		)
Retained Earnings:
Balance at beginning of period	530,940			491,599
Net income attributable to Avista Corporation shareholders	84,903			71,695
Cash dividends paid (common stock)	(43,267		)	(41,268		)
Repurchase of common stock	—			(1,489		)
Balance at end of period	572,576			520,537
Total Avista Corporation shareholders’ equity	1,617,027			1,514,393
Noncontrolling Interests:
Balance at beginning of period	(339		)	(429		)
Net income attributable to noncontrolling interests	49			41
Balance at end of period	(290		)	(388		)
Total equity	$	1,616,737		$	1,514,005

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 June 30, 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 Avista Corp.'s 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 and six months ended June 30 (dollars in thousands):



	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Utility related taxes	$	12,573	$	12,941	$	30,938	$	32,439
Property taxes	9,290		9,535		19,710		19,221
Other taxes	752		781		1,352		1,495
Total	$	22,615	$	23,257	$	52,000	$	53,155

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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 June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30,		December 31,
	2016		2015
Materials and supplies	$	38,037	$	37,101
Fuel stock	5,800		4,273
Stored natural gas	7,802		12,774
Total	$	51,639	$	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 June 30, 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 Accounting Standards Codification (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.

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 8 for the Company’s fair value disclosures.

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Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, consisted of the following as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30,		December 31,
	2016		2015
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $4,167 and $3,580, respectively	$	7,739	$	6,650

The following table details the reclassifications out of accumulated other comprehensive loss by component for the three and six months ended June 30 (dollars in thousands). Items in parenthesis indicate reductions to net income.



	Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three months ended June 30,						Six months ended June 30,
Details about Accumulated Other Comprehensive Loss Components	2016			2015			2016			2015			Affected Line Item in Statement of Income
Amortization of defined benefit pension items
Amortization of net prior service cost	$	(311	)	$	(273	)	$	(622	)	$	(546	)	(a)
Amortization of net loss	3,642			3,687			$	7,284		$	7,375		(a)
Adjustment due to effects of regulation	(3,115		)	(3,037		)	(8,338		)	(6,074		)	(a) (b)
	216			377			(1,676		)	755			Total before tax
	(76		)	(132		)	587			(264		)	Tax benefit (expense)
	$	140		$	245		$	(1,089	)	$	491		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 six months ended June 30, 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.

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 June 30, 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 may 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 changes the consolidation analysis required under GAAP, including the identification of variable interest

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entities (VIE). The ASU also removes the deferral of the VIE analysis related to investments in certain investment funds, which results in a different consolidation evaluation for these types of investments. The Company adopted this standard effective January 1, 2016. The adoption of this standard resulted in the identification of several Avista Corp. investments in limited partnerships (or a functional equivalent) that are now considered VIEs under the new standard. Consolidation of these VIEs by Avista Corp. is not required because the Company does not have majority ownership in any of the entities, it does not have the power to direct any activities of the entities and it does not have the power to appoint executive leadership (including the board of directors). Avista Corp.'s total investment in these entities is not material and it does not have any additional commitments to these VIEs beyond the initial investment.

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 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 June 30, 2016. 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 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),


•	excess tax benefits no longer represent a financing cash inflow on the Statements of Cash Flows and instead will be included as an operating activity,


•	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,


•	allowing forfeitures to be accounted for as they occur, instead of estimating forfeitures, and


•	changing 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 early adopted this standard during the second quarter of 2016, with a retrospective effective date of January 1, 2016. Because this standard was adopted in the second quarter of 2016, but has a retrospective effective date of January 1, 2016, the effects from the adoption on 2016 results appear in the six months ended June 30, 2016, but are not included in the second quarter of 2016. The adoption of this standard resulted in a recognized income tax benefit of $1.6 million in 2016 associated with excess tax benefits on settled share-based employee payments. In all future reports which include the first quarter of 2016, the results for that quarter will be restated to include the effects of the excess tax benefits recognized. Periods prior to 2016 were not restated for the adoption of this accounting standard as the Company has adopted this standard on a prospective basis beginning January 1, 2016.

NOTE 3. DISCONTINUED OPERATIONS

On June 30, 2014, Avista Capital, 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 sales 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 has not had and will not have any 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, option holders and a warrant holder, pro rata based on ownership. A portion of the proceeds from the transaction was held in escrow for 15 months from the closing of the transaction to satisfy certain indemnification obligations under the merger agreement (Escrow) and there was also a portion withheld pending resolution of adjustments to working capital.

No claims were made against the Escrow and all Escrow amounts were released in October 2015 and the Company received its full portion of the Escrow proceeds together with the remainder of the working capital adjustment escrow for a total amount of $13.8 million. After consideration of all escrow amounts received, the sales transaction provided cash proceeds to Avista Corp.,

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net of debt, payment to option and minority holders, income taxes and transaction expenses, of $143.7 million and resulted in a net gain of $74.8 million. Almost all of the net gain was recognized in 2014 with some true-ups during 2015.

Prior to the completion of the sales transaction, Ecova was a reportable business segment. The following table presents amounts that were included in discontinued operations for the three and six months ended June 30, 2015 (there were no amounts recorded in 2016) (dollars in thousands):



	Three months ended June 30, 2015:			Six months ended June 30, 2015:
Gain on sale of Ecova (1)	$	163		$	163

Income before income taxes	163			163
Income tax benefit (2)	(33		)	(33		)
Net income from discontinued operations attributable to Avista Corp. shareholders	$	196		$	196


(1)	The gain recognized during the second quarter of 2015 related to the resolution of the working capital adjustment and the release of the associated escrow funds.


(2)	The tax benefit in the second quarter of 2015 resulted from a state tax true-up, partially offset by tax expense associated with the gain on sale recognized during the second quarter of 2015.

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.

The Company is required to plan for sufficient natural gas delivery capacity to serve its retail customers for a theoretical peak day event, the Company generally has more pipeline and storage capacity than what is needed during periods other than a peak day. The Company optimizes its natural gas resources by using market opportunities to generate economic value that helps mitigate fixed costs. Avista Utilities also optimizes its natural gas storage capacity by purchasing and storing natural gas when prices are traditionally lower, typically in the summer, and withdrawing during higher priced months, typically during the winter. However, if market conditions and prices indicate that the Company should buy or sell natural gas during other times in the year, the Company engages in optimization transactions to capture value in the marketplace. Natural gas optimization activities include, but are not limited to, wholesale market sales of surplus natural gas supplies, purchases and sales of natural gas to optimize use of pipeline and storage capacity, and participation in the transportation capacity release market.

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The following table presents the underlying energy commodity derivative volumes as of June 30, 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	186	1,360	12,096	95,043	200	1,665	1,395	69,463
2017	403	97	1,265	78,600	255	881	1,360	51,135
2018	397	—	—	27,553	286	192	1,360	9,093
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 the benefit or cost 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 June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30,		December 31,
	2016		2015
Number of contracts	25		24
Notional amount (in United States currency)	$	4,427	$	1,463
Notional amount (in Canadian currency)	5,699		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 outstanding unsettled interest rate swaps as of June 30, 2016 and December 31, 2015 (dollars in thousands):



Balance Sheet Date	Number of Contracts	Notional Amount		Mandatory Cash Settlement Date
June 30, 2016	6	$	115,000	2016
	4	55,000		2017
	13	265,000		2018
	4	50,000		2019
	1	10,000		2020
	5	60,000		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 June 30, 2016 and December 31, 2015 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 June 30, 2016 (in thousands):



	Fair Value as of June 30, 2016
Derivative and Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency exchange derivatives
Other current liabilities	$	11	$	(34	)	$	—	$	(23	)
Interest rate swap derivatives
Other current liabilities	—		(49,244		)	16,402		(32,842		)
Other non-current liabilities and deferred credits	187		(142,902		)	100,598		(42,117		)
Energy commodity derivatives
Current utility energy commodity derivative assets	2,389		(659		)	—		1,730
Current utility energy commodity derivative liabilities	43,089		(60,018		)	8,948		(7,981		)
Other non-current liabilities and deferred credits	6,712		(31,310		)	9,876		(14,722		)
Total derivative instruments recorded on the balance sheet	$	52,388	$	(284,167	)	$	135,824	$	(95,955	)

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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, 2015 (in thousands):



	Fair Value as of December 31, 2015
Derivative and Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency exchange derivatives
Other current liabilities	$	2	$	(19	)	$	—	$	(17	)
Interest rate swap derivatives
Other property and investments-net and other non-current assets	23		—			—		23
Other current liabilities	118		(23,262		)	3,880		(19,264		)
Other non-current liabilities and deferred credits	1,407		(62,236		)	30,150		(30,679		)
Energy commodity derivatives
Current utility energy commodity derivative assets	1,236		(553		)	—		683
Current utility energy commodity derivative liabilities	67,466		(85,409		)	3,675		(14,268		)
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.

The following table presents the Company's collateral outstanding related to its derivative instruments as of June 30, 2016 and December 31, 2015 (in thousands):



	June 30,		December 31,
	2016		2015
Energy commodity derivatives
Cash collateral posted	$	29,245	$	28,716
Letters of credit outstanding	17,500		28,200
Balance sheet offsetting (cash collateral against net derivative positions)	18,824		14,526

Interest rate swap derivatives
Cash collateral posted	117,000		34,030
Letters of credit outstanding	22,000		9,600
Balance sheet offsetting (cash collateral against net derivative positions)	117,000		34,030

There was no cash collateral or letters of credit outstanding as of June 30, 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.

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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 June 30, 2016 and December 31, 2015 (in thousands):



	June 30,		December 31,
	2016		2015
Energy commodity derivatives
Liabilities with credit-risk-related contingent features	$	1,142	$	7,090
Additional collateral to post	1,088		6,980

Interest rate swap derivatives
Liabilities with credit-risk-related contingent features	192,146		85,498
Additional collateral to post	18,520		18,750

NOTE 5. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

Avista Utilities

The Company’s pension and other postretirement plans have not changed during the six months ended June 30, 2016. 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 $8.0 million in cash to the pension plan for the six months ended June 30, 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 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 and six months ended June 30 (dollars in thousands):



	Pension Benefits						Other Post-retirement Benefits
	2016			2015			2016			2015
Three months ended June 30:
Service cost	$	4,569		$	4,984		$	804		$	721
Interest cost	6,900			6,531			1,534			1,292
Expected return on plan assets	(6,875		)	(7,075		)	(475		)	(500		)
Amortization of prior service cost	—			6			(312		)	(287		)
Net loss recognition	2,201			2,634			1,494			1,263
Net periodic benefit cost	$	6,795		$	7,080		$	3,045		$	2,489
Six months ended June 30:
Service cost	$	9,088		$	9,933		$	1,583		$	1,420
Interest cost	13,800			13,203			3,093			2,623
Expected return on plan assets	(13,625		)	(14,491		)	(950		)	(931		)
Amortization of prior service cost	—			12			(624		)	(566		)
Net loss recognition	4,091			5,028			2,859			2,555
Net periodic benefit cost	$	13,354		$	13,685		$	5,961		$	5,101

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. A two-year option was exercised by the Company in May 2016 to extend the maturity of the facility agreement to April 2021.

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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 June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30,			December 31,
	2016			2015
Borrowings outstanding at end of period	$	160,000		$	105,000
Letters of credit outstanding at end of period	$	45,795		$	44,595
Average interest rate on borrowings at end of period	1.22		%	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 June 30, 2016 and December 31, 2015, there were no borrowings or letters of credit outstanding under this committed line of credit.

NOTE 7. 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 six months ended June 30, 2016 and the year ended December 31, 2015:



	June 30,		December 31,
	2016		2015
Low distribution rate	1.29	%	1.11	%
High distribution rate	1.55	%	1.29	%
Distribution rate at the end of the period	1.55	%	1.29	%

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 June 30, 2016 and December 31, 2015. Interest expense to affiliated trusts in the Condensed Consolidated Statements of Income represents interest expense on these debentures.

NOTE 8. 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

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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 June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016				December 31, 2015
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt (Level 2)	$	951,000	$	1,098,661	$	951,000	$	1,055,797
Long-term debt (Level 3)	592,000		664,467		592,000		595,018
Snettisham capital lease obligation (Level 3)	63,308		65,708		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. The price ranges obtained from the third party brokers consisted of par values of 72.00 to 133.81, 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 June 30, 2016.

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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 June 30, 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
June 30, 2016
Assets:
Energy commodity derivatives	$	—	$	52,178	$	—	$	(50,448	)	$	1,730
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		12		(12		)	—
Foreign currency derivatives	—		11		—		(11		)	—
Interest rate swaps	—		187		—		(187		)	—
Deferred compensation assets:
Fixed income securities (2)	1,896		—		—		—			1,896
Equity securities (2)	5,461		—		—		—			5,461
Total	$	7,357	$	52,376	$	12	$	(50,658	)	$	9,087
Liabilities:
Energy commodity derivatives	$	—	$	70,399	$	—	$	(69,272	)	$	1,127
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		6,869		(12		)	6,857
Power exchange agreement	—		—		14,614		—			14,614
Power option agreement	—		—		105		—			105
Foreign currency derivatives	—		34		—		(11		)	23
Interest rate swaps	—		192,146		—		(117,187		)	74,959
Total	$	—	$	262,579	$	21,588	$	(186,482	)	$	97,685

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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	$	(74,634	)	$	9,719
Liabilities:
Energy commodity derivatives	$	—	$	97,193	$	—	$	(88,480	)	$	8,713
Level 3 energy commodity derivatives:
Natural gas exchange agreement