Edgar Filing: AVISTA CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________________________

Form 10-K

(Mark One)



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

FOR THE FISCAL YEAR ENDED December 31, 2018 OR



o	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

Securities registered pursuant to Section 12(b) of the Act:



Title of Class		Name of Each Exchange on Which Registered
Common Stock, no par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of Class

Preferred Stock, Cumulative, Without Par Value

__________________________________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

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 o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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



Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The aggregate market value of the Registrant’s outstanding Common Stock, no par value (the only class of voting stock), held by non-affiliates is $3,459,103,329 based on the last reported sale price thereof on the consolidated tape on June 30, 2018.

As of January 31, 2019, 65,716,069 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.

__________________________________________________________________________________________

Documents Incorporated By Reference



Document		Part of Form 10-K into Which Document is Incorporated
Proxy Statement to be filed in connection with the annual meeting of shareholders to be held on May 9, 2019. Prior to such filing, the Proxy Statement filed in connection with the annual meeting of shareholders held on May 10, 2018.		Part III, Items 10, 11, 12, 13 and 14

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INDEX



Item No.		Page No.
	Acronyms and Terms	iv
	Forward-Looking Statements	1
	Available Information	4
	Part I
1	Business	4
	Company Overview	4
	Avista Utilities	4
	General	4
	Electric Operations	5
	Electric Requirements	5
	Electric Resources	5
	Hydroelectric Licenses	8
	Future Resource Needs	8
	Natural Gas Operations	10
	Regulatory Issues	11
	Federal Laws Related to Wholesale Competition	13
	Regional Transmission Planning	13
	Regional Energy Markets	13
	Reliability Standards	13
	Vulnerability to Cyberattack	14
	Avista Utilities Operating Statistics	15
	Alaska Electric Light and Power Company	18
	Alaska Electric Light and Power Company Operating Statistics	19
	Other Businesses	20
1A.	Risk Factors	20
1B.	Unresolved Staff Comments	27
2	Properties	27
	Avista Utilities	28
	Alaska Electric Light and Power Company	30
3	Legal Proceedings	30
4	Mine Safety Disclosures	30	*
	Part II
5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
6	Selected Financial Data	31
7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	Business Segments	32
	Executive Level Summary	33
	Regulatory Matters	34
	Results of Operations - Overall	40
	Non-GAAP Financial Measures	42
	Results of Operations - Avista Utilities	42
	Results of Operations - Alaska Electric Light and Power Company	54
	Results of Operations - Other Businesses	55
	Accounting Standards to Be Adopted in 2019	56
	Critical Accounting Policies and Estimates	56
	Liquidity and Capital Resources	58
	Overall Liquidity	58

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	Review of Consolidated Cash Flow Statement	59
	Capital Resources	61
	Utility Capital Expenditures	63
	Non-Regulated Investments and Capital Expenditures	64
	Off-Balance Sheet Arrangements	64
	Pension Plan	64
	Credit Ratings	64
	Dividends	65
	Contractual Obligations	65
	Competition	66
	Economic Conditions and Utility Load Growth	67
	Environmental Issues and Other Contingencies	68
	Enterprise Risk Management	72
7A.	Quantitative and Qualitative Disclosures about Market Risk	78
8.	Financial Statements and Supplementary Data	79
	Report of Independent Registered Public Accounting Firm	80
	Financial Statements	81
	Consolidated Statements of Income	81
	Consolidated Statements of Comprehensive Income	82
	Consolidated Balance Sheets	83
	Consolidated Statements of Cash Flows	84
	Consolidated Statements of Equity	86
	Notes to Consolidated Financial Statements	87
	Note 1. Summary of Significant Accounting Policies	87
	Note 2. New Accounting Standards	94
	Note 3. Balance Sheet Components	96
	Note 4. Revenue	97
	Note 5. Variable Interest Entities	101
	Note 6. Derivatives and Risk Management	102
	Note 7. Jointly Owned Electric Facilities	106
	Note 8. Property, Plant and Equipment	106
	Note 9. Asset Retirement Obligations	107
	Note 10. Pension Plans and Other Postretirement Benefit Plans	108
	Note 11. Accounting for Income Taxes	113
	Note 12. Energy Purchase Contracts	116
	Note 13. Committed Lines of Credit	117
	Note 14. Long-Term Debt and Capital Leases	118
	Note 15. Long-Term Debt to Affiliated Trusts	120
	Note 16. Fair Value	120
	Note 17. Common Stock	125
	Note 18. Accumulated Other Comprehensive Loss	125
	Note 19. Earnings per Common Share Attributable to Avista Corporation Shareholders	126
	Note 20. Commitments and Contingencies	126
	Note 21. Regulatory Matters	129
	Note 22. Information by Business Segments	132
	Note 23. Selected Quarterly Financial Data (Unaudited)	134
	Note 24. Termination of Proposed Acquisition by Hydro One	135
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	136	*
9A.	Controls and Procedures	136
9B.	Other Information	138
	Part III

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10.	Directors, Executive Officers and Corporate Governance	138
11.	Executive Compensation	139
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	139
13.	Certain Relationships and Related Transactions, and Director Independence	140
14.	Principal Accounting Fees and Services	140
	Part IV
15.	Exhibits, Financial Statement Schedules	141
	Exhibit Index	142
	Signatures	148

* = not an applicable item in the 2018 calendar year for Avista Corp.

iii

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ACRONYMS AND TERMS

(The following acronyms and terms are found in multiple locations within the document)



Acronym/Term	Meaning
aMW	-	Average Megawatt - a measure of the average rate at which a particular generating source produces energy over a period of time
AEL&P	-	Alaska Electric Light and Power Company, the primary operating subsidiary of AERC, which provides electric services in Juneau, Alaska
AERC	-	Alaska Energy and Resources Company, the Company's wholly-owned subsidiary based in Juneau, Alaska
AFUDC	-	Allowance for Funds Used During Construction; represents the cost of both the debt and equity funds used to finance utility plant additions during the construction period
AM&D	-	Advanced Manufacturing and Development, does business as METALfx
ARAM	-	Average Rate Assumption Method
ASC	-	Accounting Standards Codification
ASU	-	Accounting Standards Update
Avista Capital	-	Parent company to the Company’s non-utility businesses
Avista Corp.	-	Avista Corporation, the Company
Avista Energy	-	Avista Energy, Inc., an inactive electricity and natural gas marketing, trading and resource management business, subsidiary of Avista Capital
Avista Utilities	-	Operating division of Avista Corp. (not a subsidiary) comprising the regulated utility operations in the Pacific Northwest
BPA	-	Bonneville Power Administration
Capacity	-	The rate at which a particular generating source is capable of producing energy, measured in KW or MW
Cabinet Gorge	-	The Cabinet Gorge Hydroelectric Generating Project, located on the Clark Fork River in Idaho
Colstrip	-	The coal-fired Colstrip Generating Plant in southeastern Montana
Coyote Springs 2	-	The natural gas-fired combined-cycle Coyote Springs 2 Generating Plant located near Boardman, Oregon
CT	-	Combustion turbine
Deadband or ERM deadband	-	The first $4.0 million in annual power supply costs above or below the amount included in base retail rates in Washington under the ERM in the state of Washington
Ecology	-	The state of Washington’s Department of Ecology
EIM	-	Energy Imbalance Market
Energy	-	The amount of electricity produced or consumed over a period of time, measured in KWh or MWh. Also, refers to natural gas consumed and is measured in dekatherms.
EPA	-	Environmental Protection Agency
ERM	-	The Energy Recovery Mechanism, a mechanism for accounting and rate recovery of certain power supply costs accepted by the utility commission in the state of Washington
FASB	-	Financial Accounting Standards Board
FCA	-	Fixed Cost Adjustment, the electric and natural gas decoupling mechanism in Idaho.
FERC	-	Federal Energy Regulatory Commission
GAAP	-	Generally Accepted Accounting Principles
GHG	-	Greenhouse gas
GS	-	Generating station
Hydro One	-	Hydro One Limited, based in Toronto, Ontario, Canada.
IPUC	-	Idaho Public Utilities Commission
IRP	-	Integrated Resource Plan
Jackson Prairie	-	Jackson Prairie Natural Gas Storage Project, an underground natural gas storage field located near Chehalis, Washington
Juneau	-	The City and Borough of Juneau, Alaska

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kV	-	Kilovolt (1000 volts): a measure of capacity on transmission lines
KW, KWh	-	Kilowatt (1000 watts): a measure of generating output or capability. Kilowatt-hour (1000 watt hours): a measure of energy produced
Lancaster Plant	-	A natural gas-fired combined cycle combustion turbine plant located in Idaho
LNG	-	Liquefied Natural Gas
MPSC	-	Public Service Commission of the State of Montana
MW, MWh	-	Megawatt: 1000 KW. Megawatt-hour: 1000 KWh
NERC	-	North American Electricity Reliability Corporation
Noxon Rapids	-	The Noxon Rapids Hydroelectric Generating Project, located on the Clark Fork River in Montana
OPUC	-	The Public Utility Commission of Oregon
PCA	-	The Power Cost Adjustment mechanism, a procedure for accounting and rate recovery of certain power supply costs accepted by the utility commission in the state of Idaho
PGA	-	Purchased Gas Adjustment
PPA	-	Power Purchase Agreement
PUD	-	Public Utility District
RCA	-	The Regulatory Commission of Alaska
REC	-	Renewable energy credit
ROE	-	Return on equity
ROR	-	Rate of return on rate base
SEC	-	U.S. Securities and Exchange Commission
Spokane Energy	-	Spokane Energy, LLC (dissolved in the third quarter of 2015), a special purpose limited liability company and all of its membership capital was owned by Avista Corp.
TCJA	-	The "Tax Cuts and Jobs Act," signed into law on December 22, 2017.
Therm	-	Unit of measurement for natural gas; a therm is equal to approximately one hundred cubic feet (volume) or 100,000 BTUs (energy)
Watt	-	Unit of measurement for electricity; a watt is equal to the rate of work represented by a current of one ampere under a pressure of one volt
WUTC	-	Washington Utilities and Transportation Commission

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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 Annual Report on Form 10-K), 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 Annual Report on Form 10-K) 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, which affect both energy demand and electric generating capability, including the impact of precipitation and temperature on hydroelectric resources, the impact of wind patterns on wind-generated power, weather-sensitive customer demand, and similar impacts 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, other capital market conditions and global economic conditions;


•	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;


•	deterioration in the creditworthiness of our customers;


•	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, conservation measures and/or increased distributed generation;


•	changes in the long-term global climate and the long-term climate within our utilities' service areas, which can affect, among other things, customer demand patterns, the volume and timing of streamflows to our hydroelectric resources, as well as increased risk of severe weather or natural disasters, including wildfires;


•	industry and geographic concentrations which may increase our exposure to credit risks due to counterparties, suppliers and customers being similarly affected by changing conditions;

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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, commodity costs, interest rate swap derivatives and discretion over allowed return on investment;


•	the loss of regulatory accounting treatment, which could require the write-off of regulatory assets and the loss of regulatory deferral and recovery mechanisms;

Energy Commodity Risk

•

volatility and illiquidity in wholesale energy markets, including exchanges, 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 individual counterparties and/or exchanges 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 environmental regulations or lawsuits affecting our ability to utilize or resulting in the obsolescence of our power supply resources;


•	explosions, fires, accidents, pipeline ruptures or other incidents that may limit energy supply to our facilities or our surrounding territory, which could result in a shortage of commodities in the market that could increase the cost of replacement commodities from other sources;

Operational Risk


•	severe weather or natural disasters, including, but not limited to, avalanches, wind storms, wildfires, earthquakes, snow and ice storms, that can disrupt energy generation, transmission and distribution, as well as the availability and costs of fuel, 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 electric and natural gas distribution systems or other operations and may require us to purchase replacement power;


•	explosions, fires, accidents or other incidents arising from or allegedly arising from our operations that may cause wildfires, injuries to the public or property damage;


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


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


•	increasing health care costs and cost of health insurance provided to our employees and retirees;


•	third party construction of buildings, billboard signs, towers or other structures within our rights of way, or placement of fuel containers 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 other disruptions to the supply chain;


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


•	changing river regulation or operations at hydroelectric facilities not owned by us, which could impact our hydroelectric facilities downstream;

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•	change in the use, availability or abundancy of water resources and/or rights needed for operation of our hydroelectric facilities;

Compliance Risk


•	compliance with extensive federal, state and local legislation and regulation applicable to us, 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;

Cyber and Technology Risk


•	cyberattacks 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 costs that impede our ability to effectively implement new information technology systems or to operate and maintain current production technology;


•	changes in technologies, possibly making some of the current technology we utilize obsolete or introducing new cyber security risks;


•	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;


•	the potential effects of negative publicity regarding our business practices, whether true or not, which could hurt our reputation and 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;


•	entering into or growth of non-regulated activities may increase earnings volatility;


•	termination of the proposed acquisition of the Company by Hydro One could lead to potential legal proceedings;

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 initiatives, legislation or administrative rulemaking at the federal, state or local levels, including possible effects on our generating resources or 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 that are detrimental or beneficial to our overall business;


•	policy and/or legislative changes in various regulated areas, including, but not limited to, environmental regulation, healthcare regulations and import/export regulations; and

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•	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.

Available Information

Our website address is www.myavista.com. We make annual, quarterly and current reports available on our website as soon as practicable after electronically filing these reports with the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. Information contained on these websites are not part of this report.

PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

Avista Corp., incorporated in the territory of Washington in 1889, is primarily an electric and natural gas utility with certain other business ventures. As of December 31, 2018, we employed 1,766 people in our Pacific Northwest utility operations (Avista Utilities) and 260 people in our subsidiary businesses (including our Juneau, Alaska utility operations). Our corporate headquarters are in Spokane, Washington, the second-largest city in Washington. Spokane serves as the business, transportation, medical, industrial and cultural hub of the Inland Northwest region (eastern Washington and northern Idaho). Regional services include government and higher education, medical services, retail trade and finance. Through our subsidiary AEL&P, we also provide electric utility services in Juneau, Alaska.

As of December 31, 2018, we have two reportable business segments as follows:

•

Avista Utilities – 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. Avista Utilities also engages in wholesale purchases and sales of electricity and natural gas as an integral part of energy resource management and its load-serving obligation.


•	AEL&P - a utility providing electric services in Juneau, Alaska that is a wholly-owned subsidiary and the primary operating subsidiary of AERC.

We have other businesses, including sheet metal fabrication, venture fund investments, real estate investments, as well as certain other investments of Avista Capital, which is a direct, wholly owned subsidiary of Avista Corp. These activities do not represent a reportable business segment and are conducted by various direct and indirect subsidiaries of Avista Corp.

Total Avista Corp. shareholders’ equity was $1,773.2 million as of December 31, 2018, of which $46.9 million represented our investment in Avista Capital and $106.6 million represented our investment in AERC.

See “Item 6. Selected Financial Data” and “Note 22 of the Notes to Consolidated Financial Statements” for information with respect to the operating performance of each business segment (and other subsidiaries).

AVISTA UTILITIES

General

At the end of 2018, Avista Utilities supplied retail electric service to approximately 388,000 customers and retail natural gas service to approximately 355,000 customers across its service territory. Avista Utilities' service territory covers 30,000 square miles with a population of 1.7 million. See “Item 2. Properties” for further information on our utility assets. See “Item 7.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations – Economic Conditions and Utility Load Growth” for information on economic conditions in our service territory.

Electric Operations

General Avista Utilities generates, transmits and distributes electricity, serving electric customers in eastern Washington and northern Idaho and a small number of customers in Montana, most of whom are employees who operate Avista Utilities' Noxon Rapids generating facility.

Avista Utilities generates electricity from facilities that we own and purchases capacity, energy and fuel for generation under long-term and short-term contracts to meet customer load obligations. We also sell electric capacity and energy, as well as surplus fuel in the wholesale market in connection with our resource optimization activities as described below.

As part of Avista Utilities' resource procurement and management operations in the electric business, we engage in an ongoing process of resource optimization, which involves the selection from available energy resources to serve our load obligations and the use of these resources to capture economic value through wholesale market transactions. These include sales and purchases of electric capacity and energy, fuel for electric generation, and derivative contracts related to capacity, energy, fuel and fuel transportation. Such transactions are part of the process of matching available resources with load obligations and hedging a portion of the related financial risks. In order to implement this process, we make continuing projections of:


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


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

On the basis of these projections, we make purchases and sales of electric capacity and energy, fuel for electric generation, and related derivative contracts to match expected resources to expected electric load requirements and reduce our exposure to electricity (or fuel) market price changes. The process of resource optimization involves scheduling and dispatching available resources as well as the following:


•	purchasing fuel for generation,


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


•	other wholesale transactions to capture the value of generating resources, transmission contract rights and fuel delivery (transport) capacity contracts.

This optimization process includes entering into hedging transactions to manage risks. Transactions include both physical energy contracts and related derivative instruments, and the terms range from intra-hour up to multiple years.

Avista Utilities' generation assets are interconnected through the regional transmission system and are operated on a coordinated basis to enhance load-serving capability and reliability. We acquire both long-term and short-term transmission capacity to facilitate all of our energy and capacity transactions. We provide transmission and ancillary services in eastern Washington, northern Idaho and western Montana.

Electric Requirements

Avista Utilities' peak electric native load requirement for 2018 was 1,716 MW, which occurred on August 10, 2018. In 2017, our peak electric native load was 1,681 MW, which occurred during the winter, and in 2016, it was 1,655 MW, which also occurred during the winter.

Electric Resources

Avista Utilities has a diverse electric resource mix of Company-owned and contracted hydroelectric, thermal and wind generation facilities, and other contracts for power purchases and exchanges. As of December 31, 2018, Avista Utilities' electric generation resource mix (including contracts for power purchases) was approximately 51 percent hydroelectric, 45 percent thermal and 4 percent wind. See “Item 2. Properties” for detailed information on Company-owned generating facilities.

Hydroelectric Resources Avista Utilities owns and operates six hydroelectric projects on the Spokane River and two hydroelectric projects on the Clark Fork River. Hydroelectric generation is typically our lowest cost source per MWh of electric energy and the availability of hydroelectric generation has a significant effect on total power supply costs. Under normal streamflow and operating conditions, we estimate that we would be able to meet approximately one-half of our total average

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electric requirements (both retail and long-term wholesale) with the combination of our hydroelectric generation and long-term hydroelectric purchase contracts with certain PUDs in the state of Washington. Our estimate of normal annual hydroelectric generation for 2019 (including resources purchased under long-term hydroelectric contracts with certain PUDs) is 584 aMW (or 5.1 million MWhs).

The following graph shows Avista Utilities' hydroelectric generation (in thousands of MWhs) during the year ended December 31:

(1)

Normal hydroelectric generation is determined by reference to the effect of upstream dam regulation on median natural water flow. Natural water flow is the flow of the rivers without the influence of dams, whereas regulated water flow takes into account any water flow changes from upstream dams due to releasing or holding back water. The calculation of normal varies annually due to the timing of upstream dam regulation throughout the year, as well as changes in PUD contracts.

Thermal Resources Avista Utilities owns the following thermal generating resources:


•	the combined cycle CT natural gas-fired Coyote Springs 2 located near Boardman, Oregon,


•	a 15 percent interest in a twin-unit, coal-fired boiler generating facility, Colstrip 3 & 4, located in southeastern Montana,


•	a wood waste-fired boiler generating facility known as the Kettle Falls Generating Station (Kettle Falls GS) in northeastern Washington,


•	a two-unit natural gas-fired CT generating facility, located in northeastern Spokane (Northeast CT),


•	a two-unit natural gas-fired CT generating facility in northern Idaho (Rathdrum CT), and


•	two small natural gas-fired generating facilities (Boulder Park GS and Kettle Falls CT).

Coyote Springs 2, which is operated by Portland General Electric Company, is supplied with natural gas under a combination of term contracts and spot market purchases, including transportation agreements with bilateral renewal rights.

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Colstrip, which is operated by Talen Montana, is supplied with fuel from adjacent coal reserves under coal supply and transportation agreements. The current contract for coal supply extends through 2019; however, the coal mine operator is in bankruptcy and has indicated it will reject the current contract in its bankruptcy. The Colstrip co-owners are exploring their options in the bankruptcy court, and have filed an objection to the confirmation plan. In addition, see “Item 7. Management's Discussion and Analysis – Environmental Issues and Contingencies" for further discussion regarding environmental issues surrounding Colstrip.

The primary fuel for the Kettle Falls GS is wood waste generated as a by-product and delivered by trucks from forest industry operations within 100 miles of the plant. A combination of long-term contracts and spot purchases has provided, and is expected to meet, fuel requirements for the Kettle Falls GS.

The Northeast CT, Rathdrum CT, Boulder Park GS and Kettle Falls CT generating units are primarily used to meet peaking electric requirements. We also operate these facilities when marginal costs are below prevailing wholesale electric prices. These generating facilities have access to natural gas supplies that are adequate to meet their respective operating needs.

See "Item 2. Properties - Avista Utilities - Generation Properties" for the nameplate rating and present generating capabilities of the above thermal resources.

We have the exclusive rights to all the capacity of the Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in northern Idaho, owned by an unrelated third-party. All of the output from the Lancaster Plant is contracted to us through 2026 under a PPA. Under the terms of the PPA, we make the dispatch decisions, provide all natural gas fuel and receive all of the electric energy output from the Lancaster Plant; therefore, we consider this plant in our baseload resources. See "Note 5 of the Notes to Consolidated Financial Statements" for further discussion of this PPA.

The following graph shows Avista Utilities' thermal generation (in thousands of MWhs) during the year ended December 31:

Wind Resources We have exclusive rights to all the capacity of Palouse Wind, a wind generation project developed, owned and managed by an unrelated third-party and located in Whitman County, Washington. The PPA expires in 2042 and requires us to acquire all of the power and renewable attributes produced by the project at a fixed price per MWh with a fixed escalation of the price over the term of the agreement. The project has a nameplate capacity of 105 MW. Generation from Palouse Wind was 327,172 MWhs in 2018, 300,380 MWhs in 2017 and 349,771 MWhs in 2016. We have an annual option to purchase the wind project beginning in December 2022. The purchase price is a fixed price per KW of in-service capacity with a fixed decline in

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the price per KW over the remaining 20-year term of the PPA. Under the terms of the PPA, we do not have any input into the day-to-day operation of the project, including maintenance decisions. All such rights are held by the owner.

Solar Resources We have exclusive rights to all the capacity of the Lind Solar Farm, a solar generation project developed, owned and managed by an unrelated third-party and located in Lind, Washington. The PPA expires in 2038 and requires us to acquire all the power and renewable attributes produced by the project at a fixed price per MWh. The project has a nameplate capacity of 28 MW. The facility became operational in the fourth quarter of 2018 and generated 584 MWhs in 2018. Under the terms of the PPA, we do not have any input into the day-to-day operation of the project, including maintenance decisions. All such rights are held by the owner. In addition to the Lind Solar Farm, we also own a community solar array located in Spokane Valley, Washington with a nameplate capacity of 0.4 MW. The community solar array generated 538 MWhs during 2018.

Other Purchases, Exchanges and Sales In addition to the resources described above, we purchase and sell power under various long-term contracts, and we also enter into short-term purchases and sales. Further, pursuant to The Public Utility Regulatory Policies Act of 1978, as amended, we are required to purchase generation from qualifying facilities. This includes, among other resources, hydroelectric projects, cogeneration projects and wind generation projects at rates approved by the WUTC and the IPUC.

See “Avista Utilities Electric Operating Statistics – Electric Operations” below for annual quantities of purchased power, wholesale power sales and power from exchanges in 2018, 2017 and 2016. See “Electric Operations” above for additional information with respect to the use of wholesale purchases and sales as part of our resource optimization process and also see "Future Resource Needs" below for the magnitude of these power purchase and sales contracts in future periods.

Hydroelectric Licenses

Avista Corp. is a licensee under the Federal Power Act (FPA) as administered by the FERC, which includes regulation of hydroelectric generation resources. Excluding the Little Falls Hydroelectric Generating Project (Little Falls), our other seven hydroelectric plants are regulated by the FERC through two project licenses. The licensed projects are subject to the provisions of Part I of the FPA. These provisions include payment for headwater benefits, condemnation of licensed projects upon payment of just compensation, and take-over by the federal government of such projects after the expiration of the license upon payment of the lesser of “net investment” or “fair value” of the project, in either case, plus severance damages. In the unlikely event that a take-over occurs, it could lead to either the decommissioning of the hydroelectric project or offering the project to another party (likely through sale and transfer of the license).

Cabinet Gorge and Noxon Rapids are under one 45-year FERC license issued in 2001. See “Cabinet Gorge Total Dissolved Gas Abatement Plan” in “Note 20 of the Notes to Consolidated Financial Statements” for discussion of dissolved atmospheric gas levels that exceed state of Idaho and federal numeric water quality standards downstream of Cabinet Gorge during periods when we must divert excess river flows over the spillway, as well as our mitigation plans and efforts.

Five of our six hydroelectric projects on the Spokane River (Long Lake, Nine Mile, Upper Falls, Monroe Street and Post Falls) are under one 50-year FERC license issued in 2009 and are referred to collectively as the Spokane River Project. The sixth, Little Falls, is operated under separate Congressional authority and is not licensed by the FERC.

Future Resource Needs

Avista Utilities has operational strategies to provide sufficient resources to meet our energy requirements under a range of operating conditions. These operational strategies consider the amount of energy needed, which varies widely because of the factors that influence demand over intra-hour, hourly, daily, monthly and annual durations. Our average hourly load was 1,034 aMW in 2018, 1,070 aMW in 2017 and 1,033 aMW in 2016.

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The following graph shows our forecast of our average annual energy requirements and our available resources for 2019 through 2022:


(1)	The contracts for power sales decrease due to certain contracts expiring in each of these years. We are evaluating the future plan for the additional resources made available due to the expiration of these contracts.


(2)	The forecast assumes near normal hydroelectric generation.


(3)	Includes the Lancaster Plant PPA. Excludes Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT, as these are considered peaking facilities and are generally not used to meet our base load requirements.


(4)	Other contracts for power purchases includes power purchase agreements for solar and wind energy.


(5)	The combined maximum capacity of Boulder Park GS, Kettle Falls CT, Northeast CT and Rathdrum CT is 278 MW, with estimated available energy production as indicated for each year.

In August 2017, we filed our 2017 Electric IRP with the WUTC and the IPUC. The WUTC and IPUC review the IRPs and give the public the opportunity to comment. The WUTC and IPUC do not approve or disapprove of the content in the IRPs; rather they acknowledge that the IRPs were prepared in accordance with applicable standards if that is the case. The IRP details projected growth in demand for energy and the new resources needed to serve customers over the next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project.

Highlights of the 2017 IRP include the following expectations and/or assumptions:


•	Our current generation resources will remain cost effective and reliable sources of power to meet future customer needs over the next 20 years.


•	Energy storage costs are significantly lower than those assumed in the 2015 IRP, which, for the first time, makes the energy storage technology operationally attractive in meeting energy needs in the 20-year timeframe of the 2017 IRP.


•	A power purchase agreement for a solar facility with at least 15 MW for our new Solar Select Program for commercial and industrial customers.


•	Conservation will effectively provide 53 percent of the requirements of future load growth.


•	Colstrip will remain a cost effective and reliable source of power to meet future customer needs.

We are required to file an electric IRP every two years. We filed petitions with the WUTC and IPUC in January 2019 to extend the current electric IRP from August 31, 2019 to February 28, 2020 because of the uncertainty created by the current legislative energy proposals in Washington. The WUTC approved our petition in February 2019. We expect the IPUC to approve our

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petition during the first quarter 2019. Our resource strategy may change from the 2017 IRP based on market, legislative and regulatory developments.

We are subject to the Washington state Energy Independence Act, which requires us to obtain a portion of our electricity from qualifying renewable resources or through purchase of RECs and acquiring all cost effective conservation measures. Future generation resource decisions will be affected by legislation for restrictions on greenhouse gas emissions and renewable energy requirements.

See “Item 7. Management’s Discussion and Analysis of Financial Condition – Environmental Issues and Contingencies” for information related to existing laws, as well as potential legislation that could influence our future electric resource mix.

Natural Gas Operations

General Avista Utilities provides natural gas distribution services to retail customers in parts of eastern Washington, northern Idaho, and northeastern and southwestern Oregon.

Market prices for natural gas, like other commodities, can be volatile. Our natural gas procurement strategy is to provide a reliable supply to our customers with some level of price certainty. We procure natural gas from various supply basins and over varying time periods. The resulting portfolio is a diversified mix of forward fixed price purchases, index and spot market purchases, utilizing physical and financial derivative instruments. We also use natural gas storage to support high demand periods and to procure natural gas when prices may be lower. Securing prices throughout the year and even into subsequent years provides a level of price certainty and can mitigate price volatility to customers between years.

Weather is a key component of our natural gas customer load. This load is highly variable and daily natural gas loads can differ significantly from the monthly forecasted load projections. We make continuing projections of our natural gas loads and assess available natural gas resources. On the basis of these projections, we plan and execute a series of transactions to hedge a portion of our customers' projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend for multiple years into the future. We also leave a portion of our natural gas supply requirements unhedged for purchase in the short-term spot markets.

Our purchase of natural gas supply is governed by our procurement plan and is reviewed and approved annually by the Risk Management Committee (RMC), which is comprised of certain officers and other management personnel. Once approval is received, the plan is implemented and monitored by our gas supply and risk management groups.

The plan’s progress is also presented to the WUTC and IPUC staff in semi-annual meetings, and updates are given to the OPUC staff quarterly. The RMC is provided with an update on plan results and changes in their monthly meetings. These activities provide transparency for the natural gas supply procurement plan. Any material changes to the plan are documented and communicated to RMC members.

As part of the process of balancing natural gas retail load requirements with resources, we engage in the wholesale purchase and sale of natural gas. We plan for sufficient natural gas delivery capacity to serve our retail customers for a theoretical peak day event. We generally have more pipeline and storage capacity than what is needed during periods other than a peak day. We optimize our natural gas resources by using market opportunities to generate economic value that helps mitigate fixed costs. Wholesale sales are delivered through wholesale market facilities outside of our natural gas distribution system. Natural gas resource 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.

We also provide distribution transportation service to qualified, large commercial and industrial natural gas customers who purchase natural gas through third-party marketers. For these customers, we receive their purchased natural gas from such third-party marketers into our distribution system and deliver it to the customers’ premise.

Optimization transactions that we engage in throughout the year are included in our annual purchased gas cost adjustment filings with the various commissions and are subject to review for prudence during this process.

Natural Gas Supply Avista Utilities purchases all of its natural gas in wholesale markets. We are connected to multiple supply basins in the western United States and Canada through firm capacity transportation rights on six different pipeline networks. Access to this diverse portfolio of natural gas resources allows us to make natural gas procurement decisions that benefit our

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natural gas customers. These interstate pipeline transportation rights provide the capacity to serve approximately 25 percent of peak natural gas customer demands from domestic sources and 75 percent from Canadian sourced supply. Natural gas prices in the Pacific Northwest are affected by global energy markets, as well as supply and demand factors in other regions of the United States and Canada. Future prices and delivery constraints may cause our resource mix to vary.

Natural Gas Storage Avista Utilities owns a one-third interest in Jackson Prairie, an underground aquifer natural gas storage field located near Chehalis, Washington. Jackson Prairie has a total peak day deliverability of 12 million therms, with a total working natural gas capacity of 256 million therms. As an owner, our share is one-third of the peak day deliverability and total working capacity. We also contract for additional storage capacity and delivery at Jackson Prairie from Northwest Pipeline for a portion of their one-third share of the storage project.

We optimize our natural gas storage capacity throughout the year by executing transactions that capture favorable market price spreads. Natural gas buyers identify opportunities to purchase lower cost natural gas in the immediate term to inject into storage, and then sell the gas in a forward market to be withdrawn at a later time. The reverse of this type of transaction also occurs. These transactions lock in incremental value for customers. Jackson Prairie is also used as a variable peaking resource, and to protect from extreme daily price volatility during cold weather or other events affecting the market.

Future Resource Needs In August 2018, we filed our 2018 Natural Gas IRP with the WUTC, the IPUC and the OPUC. The IRP details projected growth in demand for energy and the new resources needed to serve customers over the next 20 years. We regard the IRP as a tool for resource evaluation, rather than an acquisition plan for a particular project.

Highlights of the 2018 natural gas IRP include the following expectations and/or assumptions:


•	We will need no additional natural gas transportation resources during the 20-year planning horizon in Washington, Idaho, or Oregon.


•	Due to expected carbon legislation at the state levels through a cap and trade mechanism (Oregon) or a fee mechanism (Washington), we expect natural gas prices to include a carbon price adder in Oregon and Washington, but not in Idaho.


•	North American supplies of natural gas will continue to be abundant led by shale gas development.


•	Customer growth in our service territory will increase slightly compared to the 2016 IRP. There will be increasing interest from customers to utilize natural gas for heating due to its abundant supply and consequent low cost.


•	We anticipate that any increased demand for natural gas regionally will primarily come from power generation as natural gas is increasingly being used to back up solar and wind technology, and also to replace retired coal plants. There is also potential for increased usage in other markets, such as LNG exports or exports to Mexico.


•	Slightly higher customer growth will continue to be offset by lower use per customer and an increased amount of demand side management (DSM). The combination of low priced natural gas in addition to carbon fees or other programs has led to a higher potential for DSM measures as compared to the previous three IRPs.

•

The availability of natural gas in North America will continue to change global LNG dynamics. Existing and new LNG facilities will look to export low cost North American natural gas to the higher priced foreign markets. This could alter the price of natural gas and/or transportation in U.S. markets, constrain existing pipeline networks, stimulate development of new pipeline resources and change flows of natural gas across North America.

We will monitor these assumptions on an on-going basis and adjust our resource requirements accordingly.

We are required to file a natural gas IRP every two years, with the next IRP expected to be filed during the third quarter of 2020. Our resource strategy in our 2020 IRP may change from the 2018 IRP based on market, legislative and regulatory developments.

Regulatory Issues

General As a public utility, Avista Corp. is subject to regulation by state utility commissions for prices, accounting, the issuance of securities and other matters. The retail electric and natural gas operations are subject to the jurisdiction of the WUTC, IPUC, OPUC and MPSC. Approval of the issuance of securities is not required from the MPSC. We are also subject to

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the jurisdiction of the FERC for licensing of hydroelectric generation resources, and for electric transmission services and wholesale sales.

Since Avista Corp. is a “holding company” (in addition to being itself an operating utility), we are also subject to the jurisdiction of the FERC under the Public Utility Holding Company Act of 2005, which imposes certain reporting and other requirements. We, and all of our subsidiaries (whether or not engaged in any energy related business), are required to maintain books, accounts and other records in accordance with the FERC regulations and to make them available to the FERC and the state utility commissions. In addition, upon the request of any jurisdictional state utility commission, the FERC would have the authority to review assignment of costs of non-power goods and administrative services among us and our subsidiaries. The FERC has the authority generally to require that rates subject to its jurisdiction be just and reasonable and in this context would continue to be able to, among other things, review transactions of any affiliated company.

Our rates for retail electric and natural gas services (other than specially negotiated retail rates for industrial or large commercial customers, which are subject to regulatory review and approval) are generally determined on a “cost of service” basis.

Rates are designed to provide an opportunity for us to recover allowable operating expenses and earn a return of and a reasonable return on “rate base.” Rate base is generally determined by reference to the original cost (net of accumulated depreciation) of utility plant in service, subject to various adjustments for deferred income taxes and other items. Over time, rate base is increased by additions to utility plant in service and reduced by depreciation and retirement of utility plant and write-offs as authorized by the utility commissions. Our operating expenses and rate base are allocated or directly assigned to five regulatory jurisdictions: electric in Washington and Idaho, and natural gas in Washington, Idaho and Oregon. In general, requests for new retail rates are made on the basis of revenues, operating expenses and net investment for a test year that ended prior to the date of the request, subject to possible adjustments, which differ among the various jurisdictions, designed to reflect the expected revenues, operating expenses and net investment during the period new retail rates will be in effect. The retail rates approved by the state commissions in a rate proceeding may not provide sufficient revenues to provide recovery of costs and a reasonable return on investment for a number of reasons, including, but not limited to, ongoing capital expenditures and unexpected changes in revenues and expenses following the time new retail rates are requested in the rate proceeding, the denial by the commission of recovery, or timely recovery, of certain expenses or investment and the limitation by the commission of the authorized return on investment.

Our rates for wholesale electric and natural gas transmission services are based on either “cost of service” principles or market-based rates as set forth by the FERC. See “Notes 1, 11 and 21 of the Notes to Consolidated Financial Statements” for additional information about regulation, depreciation and deferred income taxes.

General Rate Cases Avista Utilities regularly reviews the need for electric and natural gas rate changes in each state in which we provide service. See “Item 7. Management’s Discussion and Analysis – Regulatory Matters – General Rate Cases” for information on general rate case activity.

Power Cost Deferrals Avista Utilities defers the recognition in the income statement of certain power supply costs that vary from the level currently recovered from our retail customers as authorized by the WUTC and the IPUC. See “Item 7. Management’s Discussion and Analysis – Regulatory Matters – Power Cost Deferrals and Recovery Mechanisms” and “Note 21 of the Notes to Consolidated Financial Statements” for information on power cost deferrals and recovery mechanisms in Washington and Idaho.

Purchased Gas Adjustments (PGA) Under established regulatory practices in each state, Avista Utilities defers the recognition in the income statement of the natural gas costs that vary from the level currently recovered from our retail customers as authorized by each of our jurisdictions. See “Item 7. Management’s Discussion and Analysis – Regulatory Matters – Purchased Gas Adjustments” and “Note 21 of the Notes to Consolidated Financial Statements” for information on natural gas cost deferrals and recovery mechanisms in Washington, Idaho and Oregon.

Decoupling Mechanisms Decoupling (also known as FCA in Idaho) is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each of its jurisdictions, Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number of customers in certain customer rate classes and assumed "normal" usage, rather than being based on actual usage. The difference between revenues based on the number of customers and "normal" sales and revenues based on actual usage is deferred and either surcharged or rebated to customers beginning in the following year. See “Item 7. Management’s Discussion and Analysis – Regulatory Matters – Decoupling and Earnings Sharing Mechanisms” for further discussion of these mechanisms.

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Federal Laws Related to Wholesale Competition

Federal law promotes practices that foster competition in the electric wholesale energy market. The FERC requires electric utilities to transmit power and energy to or for wholesale purchasers and sellers, and requires electric utilities to enhance or construct transmission facilities to create additional transmission capacity for the purpose of providing these services. Public utilities (through subsidiaries or affiliates) and other entities may participate in the development of independent electric generating plants for sales to wholesale customers.

Public utilities operating under the FPA are required to provide open and non-discriminatory access to their transmission systems to third parties and establish an Open Access Same-Time Information System to provide an electronic means by which transmission customers can obtain information about available transmission capacity and purchase transmission access. The FERC also requires each public utility subject to the rules to operate its transmission and wholesale power merchant operating functions separately and to comply with standards of conduct designed to ensure that all wholesale users, including the public utility’s power merchant operations, have equal access to the public utility’s transmission system. Our compliance with these standards has not had any substantive impact on the operation, maintenance and marketing of our transmission system or our ability to provide service to customers.

See “Item 7. Management’s Discussion and Analysis – Competition” for further information.

Regional Transmission Planning

Beginning with FERC Order No. 888 and continuing with subsequent rulemakings and policies, the FERC has encouraged better coordination and operational consistency aimed to capture efficiencies that might otherwise be gained through the formation of a Regional Transmission Organization or an independent system operator (ISO).

Avista Utilities meets its FERC requirements to coordinate transmission planning activities with other regional entities through ColumbiaGrid. ColumbiaGrid is a Washington nonprofit membership corporation with an independent board formed to improve the operational efficiency, reliability, and planned expansion of the transmission grid in the Pacific Northwest. We became a member of ColumbiaGrid in 2006 during its formation. ColumbiaGrid is not an ISO, but fills the role of facilitating the regional transmission planning requirements of FERC Order No. 1000, and other clarifying FERC Orders, for its members. ColumbiaGrid and its members also work with other western organizations to address transmission planning, including WestConnect and the Northern Tier Transmission Group (NTTG). In 2011, we became a registered Planning Participant of the NTTG. We will continue to assess the benefits of entering into other functional agreements with ColumbiaGrid and/or participating in other forums to attain operational efficiencies and to meet FERC policy objectives.

Certain ColumbiaGrid members, including the BPA (ColumbiaGrid’s largest funding member), have commenced the process to withdraw from ColumbiaGrid by giving notice of withdrawal from the ColumbiaGrid Planning and Expansion Functional Agreement. On December 18, 2018, Avista Corp. submitted its notice of intent to withdraw from the ColumbiaGrid Planning and Expansion Functional Agreement. Unless rescinded, Avista Corp.’s withdrawal from the Planning and Expansion Functional Agreement will be effective on December 31, 2020. Avista Corp. is currently working with transmission providers from the NTTG and ColumbiaGrid to establish a new regional transmission planning organization that will facilitate regional transmission planning for Avista Corp. and other member organizations.

Regional Energy Markets

The California Independent System Operator (CAISO) operates an EIM in the western United States. Most investor-owned utilities in the Pacific Northwest are either participants in the CAISO EIM or plan to integrate into the market in the near future. The decision to join the CAISO EIM is based on a number of factors, including the amount of variable generating resources in the utilities’ systems, the ability to manage the variable generating resources within the utilities’ systems, the costs associated with joining the CAISO EIM, and the economic benefits associated with joining the CAISO EIM. As additional utilities join the CAISO EIM, there could be a reduction in bilateral market liquidity and opportunities for wholesale transactions in the Pacific Northwest. As market fundamentals and our business needs evolve, we continue to evaluate the drivers (including weighing the advantages and disadvantages) with respect to joining the CAISO EIM. We plan to refine our analyses, including cost estimates, and make a decision in 2019 with regards to participation in the EIM.

Reliability Standards

Among its other provisions, the U.S. Energy Policy Act provides for the implementation of mandatory reliability standards and authorizes the FERC to assess penalties for non-compliance with these standards and other FERC regulations.

The FERC certified the NERC as the single Electric Reliability Organization authorized to establish and enforce reliability standards and delegate authority to regional entities for the purpose of establishing and enforcing reliability standards. The

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FERC approves NERC Reliability Standards, including western region standards that make up the set of legally enforceable standards for the United States bulk electric system. The first of these reliability standards became effective in 2007. From time to time new standards are developed or existing standards are updated, revised, consolidated or eliminated pursuant to an industry-involved process. We are required to self-certify our compliance with these standards on an annual basis and undergo regularly scheduled periodic reviews by the NERC and its regional entity, the Western Electricity Coordinating Council (WECC). Failure to comply with NERC reliability standards could result in financial penalties of up to $1 million per day per violation. We have a robust internal compliance program in place to manage compliance activities and mitigate the risk of potential noncompliance with these standards. We do not expect the costs associated with compliance with these standards to have a material impact on our financial results.

Peak Reliability is the reliability coordinator in the Western Interconnection that performs reliability coordinator functions for its funding parties, including Avista Corp. The CAISO, which is a significant Peak Reliability funding party recently submitted its notice of withdrawal from Peak Reliability, effective September 2, 2019. After the CAISO submitted its notice of withdrawal from Peak Reliability, other funding parties, including Avista Corp., also submitted a revocable notice of withdrawal from Peak Reliability. Unless revoked, our withdrawal from Peak Reliability will be effective on December 31, 2019. We have signed an agreement to receive reliability coordination services from the CAISO. We are scheduled to transition to the CAISO for reliability coordination services in November 2019.

Vulnerability to Cyberattack

The energy sector, particularly electric and natural gas utility companies in the United States and abroad, have become the subject of cyberattacks with increased frequency. The Company’s administrative and operating networks are targeted by hackers on a regular basis.

A successful attack on the Company’s administrative networks could compromise the security and privacy of data, including operating, financial and personal information. A successful attack on the Company’s operating networks could impair the operation of the Company’s electric and/or natural gas utility facilities, possibly resulting in the inability to provide electric and/or natural gas service for extended periods of time.

The Company continually reinforces and updates its defensive systems and is in compliance with NERC’s reliability standards. See “Reliability Standards," "Item 1A. Risk Factors – Cyber and Technology Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Enterprise Risk Management – Cyber and Technology Risks” for further information.

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AVISTA UTILITIES ELECTRIC OPERATING STATISTICS



	Years Ended December 31,
	2018			2017			2016
ELECTRIC OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Residential	$	368,753		$	381,682		$	339,210
Commercial	314,532			311,593			305,613
Industrial	109,846			110,982			107,296
Public street and highway lighting	7,539			7,484			7,662
Total retail	800,670			811,741			759,781
Wholesale	84,956			81,512			112,071
Sales of fuel	62,219			64,925			78,334
Other	29,301			31,614			28,492
Alternative revenue programs	4,870			(8,220		)	17,349
Deferrals and amortizations for rate refunds to customers	(11,477		)	(1,182		)	932
Total electric operating revenues	$	970,539		$	980,390		$	996,959
ENERGY SALES (Thousands of MWhs):
Residential	3,627			3,840			3,528
Commercial	3,156			3,222			3,183
Industrial	1,772			1,815			1,763
Public street and highway lighting	18			20			23
Total retail	8,573			8,897			8,497
Wholesale	3,632			2,881			2,998
Total electric energy sales	12,205			11,778			11,495
ENERGY RESOURCES (Thousands of MWhs):
Hydro generation (from Company facilities)	4,029			3,978			3,836
Thermal generation (from Company facilities)	3,424			3,476			3,626
Purchased power	5,349			4,809			4,597
Power exchanges	(109		)	(6		)	(6		)
Total power resources	12,693			12,257			12,053
Energy losses and Company use	(488		)	(479		)	(558		)
Total energy resources (net of losses)	12,205			11,778			11,495
NUMBER OF RETAIL CUSTOMERS (Average for Period):
Residential	340,308			334,848			330,699
Commercial	42,618			42,154			41,785
Industrial	1,318			1,328			1,342
Public street and highway lighting	594			569			558
Total electric retail customers	384,838			378,899			374,384
RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh)	10,658			11,469			10,667
Revenue per KWh (in cents)	10.17			9.94			9.62
Annual revenue per customer	$	1,083.58		$	1,139.87		$	1,025.74
AVERAGE HOURLY LOAD (aMW)	1,034			1,070			1,033

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AVISTA UTILITIES ELECTRIC OPERATING STATISTICS



	Years Ended December 31,
	2018		2017		2016
RETAIL NATIVE LOAD at time of system peak (MW):
Winter	1,555		1,681		1,655
Summer	1,716		1,596		1,587
COOLING DEGREE DAYS: (1)
Spokane, WA
Actual	517		743		474
Historical average	544		529		545
% of average	95	%	140	%	87	%
HEATING DEGREE DAYS: (2)
Spokane, WA
Actual	6,159		6,783		5,790
Historical average	6,593		6,578		6,680
% of average	93	%	103	%	87	%


(1)	Cooling degree days are the measure of the warmness of weather experienced, based on the extent to which the average of high and low temperatures for a day exceeds 65 degrees Fahrenheit (annual degree days above historic indicate warmer than average temperatures).


(2)	Heating degree days are the measure of the coldness of weather experienced, based on the extent to which the average of high and low temperatures for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures).

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AVISTA UTILITIES NATURAL GAS OPERATING STATISTICS



	Years Ended December 31,
	2018			2017			2016
NATURAL GAS OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Residential	$	194,340		$	220,176		$	195,275
Commercial	89,341			104,240			92,978
Interruptible	1,886			1,901			2,179
Industrial	2,867			3,756			3,348
Total retail	288,434			330,073			293,780
Wholesale	137,070			142,722			153,446
Transportation	9,103			9,208			8,339
Other	6,824			6,412			5,787
Alternative revenue programs	(3,962		)	(11,374		)	12,309
Deferrals and amortizations for rate refunds to customers	(6,764		)	(2,392		)	(2,767		)
Total natural gas operating revenues	$	430,705		$	474,649		$	470,894
THERMS DELIVERED (Thousands of Therms):
Residential	208,344			221,982			186,565
Commercial	124,670			133,343			112,686
Interruptible	5,750			5,465			5,700
Industrial	5,801			6,340			5,234
Total retail	344,565			367,130			310,185
Wholesale	503,913			545,348			684,317
Transportation	176,439			186,222			178,377
Interdepartmental and Company use	412			441			378
Total therms delivered	1,025,329			1,099,141			1,173,257
NUMBER OF RETAIL CUSTOMERS (Average for Period):
Residential	314,800			307,375			300,883
Commercial	35,488			35,192			34,868
Interruptible	39			37			37
Industrial	246			251			255
Total natural gas retail customers	350,573			342,855			336,043
RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (therms)	662			722			620
Revenue per therm (in dollars)	$	0.93		$	0.99		$	1.05
Annual revenue per customer	$	617.35		$	716.31		$	649.01
HEATING DEGREE DAYS: (1)
Spokane, WA
Actual	6,159			6,783			5,790
Historical average	6,593			6,578			6,680
% of average	93		%	103		%	87		%
Medford, OR
Actual	4,155			4,254			3,637
Historical average	4,297			4,305			4,325
% of average	97		%	99		%	84		%


(1)	Heating degree days are the measure of the coldness of weather experienced, based on the extent to which the average of high and low temperatures for a day falls below 65 degrees Fahrenheit (annual degree days below historic indicate warmer than average temperatures).

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AVISTA CORPORATION

ALASKA ELECTRIC LIGHT AND POWER COMPANY

AEL&P is the primary operating subsidiary of AERC. AEL&P is the sole utility providing electrical energy in Juneau, Alaska. Juneau is a geographically isolated community with no electric interconnections with the transmission facilities of other utilities and no pipeline access to natural gas or other fuels. Juneau’s economy is primarily driven by government activities, tourism, commercial fishing, and mining, as well as activities as the commercial hub of southeast Alaska.

AEL&P owns and operates electric generation, transmission and distribution facilities located in Juneau. AEL&P operates five hydroelectric generation facilities with 102.7 MW of hydroelectric generation capacity as of December 31, 2018. AEL&P owns four of these generation facilities (totaling 24.5 MW of capacity) and has a PPA for the output of the Snettisham hydroelectric project (totaling 78.2 MW of capacity).

The Snettisham hydroelectric project is owned by the Alaska Industrial Development and Export Authority (AIDEA), a public corporation of the State of Alaska. AIDEA issued revenue bonds in 1998 (which were refinanced in 2015) to finance its acquisition of the project. These bonds were outstanding in the amount of $57.2 million at December 31, 2018 and mature in January 2034. AEL&P has a PPA and operating and maintenance agreement with the AIDEA to operate and maintain the facility. This PPA is a take-or-pay obligation, expiring in December 2038, to purchase all of the output of the project. AIDEA's bonds are payable solely out of the revenues received under the PPA.

For accounting purposes, this PPA is treated as a capital lease and, as of December 31, 2018, the capital lease obligation was $57.2 million. Snettisham Electric Company, a non-operating subsidiary of AERC, has the option to purchase the Snettisham project at any time for a price equal to the principal amount of the bonds outstanding at that time. See "Note 14 of the Notes to Consolidated Financial Statements" for further discussion of the Snettisham capital lease obligation.

As of December 31, 2018, AEL&P also had 107.5 MW of diesel generating capacity from four facilities to provide back-up service to firm customers when necessary.

The following graph shows AEL&P's hydroelectric generation (in thousands of MWhs) during the time periods indicated below:

Normal hydroelectric generation is defined as the energy output of the plant during a year with average inflows to the reservoir. Normal annual hydroelectric generation for AEL&P is approximately 430,000 MWhs.

As of December 31, 2018, AEL&P served approximately 17,000 customers. Its primary customers include city, state and federal governmental entities located in Juneau, as well as a mine located in the Juneau area. Most of AEL&P’s customers are served on a firm basis while certain of its customers, including its largest customer, are served on an interruptible sales basis. AEL&P maintains separate rate tariffs for each of its customer classes, as well as seasonal rates.

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AEL&P’s operations are subject to regulation by the RCA with respect to rates, standard of service, facilities, accounting and certain other matters, but not with respect to the issuance of securities. Rate adjustments for AEL&P’s customers require approval by the RCA pursuant to RCA regulations. See "Item 7. Management's Discussion and Analysis – Regulatory Matters" for further discussion of AEL&P's latest general rate case filing, including its capital structure.

AEL&P is also subject to the jurisdiction of the FERC with respect to permits and licenses necessary to operate certain of its hydroelectric facilities. One of these licenses (for the Salmon Creek and Annex Creek hydroelectric projects) was renewed for 40 years, effective September 1, 2018. Since AEL&P has no electric interconnection with other utilities and makes no wholesale sales, it is not subject to general FERC jurisdiction, other than the reporting and other requirements of the Public Utility Holding Company Act of 2005 as an Avista Corp. subsidiary.

The Snettisham hydroelectric project is subject to regulation by the State of Alaska with respect to dam safety and certain aspects of its operations. In addition, AEL&P is subject to regulation with respect to air and water quality, land use and other environmental matters under both federal and state laws.

AEL&P ELECTRIC OPERATING STATISTICS



	Years Ended December 31,
	2018			2017			2016
ELECTRIC OPERATIONS
OPERATING REVENUES (Dollars in Thousands):
Residential	$	18,506		$	20,504		$	18,207
Commercial and government	25,989			31,726			27,322
Public street and highway lighting	263			279			266
Total retail	44,758			52,509			45,795
Other	(1,159		)	518			481
Total electric operating revenues	$	43,599		$	53,027		$	46,276
ENERGY SALES (Thousands of MWhs):
Residential	149			151			139
Commercial and government	241			262			253
Public street and highway lighting	1			1			1
Total electric energy sales	391			414			393
NUMBER OF RETAIL CUSTOMERS (Average for Period):
Residential	14,677			14,575			14,448
Commercial and government	2,234			2,210			2,181
Public street and highway lighting	224			217			211
Total electric retail customers	17,135			17,002			16,840
RESIDENTIAL SERVICE AVERAGES:
Annual use per customer (KWh)	10,152			10,360			9,621
Revenue per KWh (in cents)	12.42			13.58			13.10
Annual revenue per customer	$	1,260.88		$	1,406.79		$	1,260.17
HEATING DEGREE DAYS: (1)
Juneau, AK
Actual	7,973			8,515			7,301
Historical average	8,351			8,351			8,351
% of average	95		%	102		%	87		%


(1)	Heating degree days are the measure of the coldness of weather experienced, based on the extent to which the average of high and low temperatures for a day falls below 65 degrees Fahrenheit (annual heating degree days below historical average indicate warmer than average temperatures).

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OTHER BUSINESSES

The following table shows our assets related to our other businesses, including intercompany amounts as of December 31, 2018 and 2017 (dollars in thousands):



Entity and Asset Type	2018		2017
Avista Capital
Salix, Inc. - wholly-owned subsidiary	$	4,209	$	4,392
Equity investments	1,568		2,561
Other assets	2,937		2,826
Avista Development
Equity investments	27,689		19,573
Real estate	18,573		17,102
Notes receivable and other assets	9,296		6,385
METALfx - wholly-owned subsidiary	13,497		11,599
Alaska companies (AERC and AJT Mining)	9,281		8,803
Total	$	87,050	$	73,241

Avista Capital


•	Salix, Inc. is a wholly-owned subsidiary of Avista Capital that explores markets that could be served with LNG, primarily in western North America.


•	Equity investments are primarily in an emerging technology venture capital fund.

Avista Development


•	Equity investments are primarily in emerging technology venture capital funds and companies, including an investment in a predictive data science company and an investment in a joint venture focused on local real estate development and economic growth.


•	Real estate consists primarily of mixed use commercial and retail office space.


•	Notes receivable and other assets are primarily long-term notes receivable made to a company focused on spurring economic development throughout Washington State and to a predictive data science company.


•	AM&D, doing business as METALfx, performs custom sheet metal fabrication of electronic enclosures, parts and systems for the computer, construction, telecom, renewable energy and medical industries. The asset balance above excludes an intercompany loan from METALfx to Avista Corp. The loan balance was $1.0 million as of December 31, 2018 and $5.6 million as of December 31, 2017.

Alaska companies


•	Includes AERC and AJT Mining, which is a wholly-owned subsidiary of AERC and is an inactive mining company holding certain real estate.

Over time as opportunities arise, we dispose of investments and phase out operations that do not fit with our overall corporate strategy. However, we may invest incremental funds to protect our existing investments and invest in new businesses that we believe fit with our overall corporate strategy.

ITEM 1A. RISK FACTORS

RISK FACTORS

The following factors could have a significant impact on our operations, results of operations, financial condition or cash flows. These factors could cause future results or outcomes to differ materially from those discussed in our reports filed with the SEC (including this Annual Report on Form 10-K), and elsewhere. Please also see “Forward-Looking Statements” for additional factors which could have a significant impact on our operations, results of operations, financial condition or cash flows and could cause actual results to differ materially from those anticipated in such statements.

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Financial Risk Factors

Weather (temperatures, precipitation levels, wind patterns and storms) has a significant effect on our results of operations, financial condition and cash flows.

Weather impacts are described in the following subtopics:


•	certain retail electricity and natural gas sales,


•	the cost of natural gas supply, and


•	the cost of power supply.

Certain retail electricity and natural gas sales volumes vary directly with changes in temperatures. We normally have our highest retail (electric and natural gas) energy sales during the winter heating season in the first and fourth quarters of the year. We also have high electricity demand for air conditioning during the summer (third quarter) in the Pacific Northwest. In general, warmer weather in the heating season and cooler weather in the cooling season will reduce our customers’ energy demand and our retail operating revenues. The revenue and earnings impact of weather fluctuations is somewhat mitigated by our decoupling mechanisms; however, we could experience liquidity constraints during the period between when decoupling revenue is earned and when it is subsequently collected from customers through retail rates.

The cost of natural gas supply tends to increase with higher demand during periods of cold weather. Inter-regional natural gas pipelines and competition for supply can allow demand-driven price volatility in other regions of North America to affect prices in the Pacific Northwest, even though there may be less extreme weather conditions in the Pacific Northwest. Increased costs adversely affect cash flows when we purchase natural gas for retail supply at prices above the amount then allowed for recovery in retail rates. We defer differences between actual natural gas supply costs and the amount currently recovered in retail rates and we are generally allowed to recover substantially all of these differences after regulatory review. However, these deferred costs require cash outflows from the time of natural gas purchases until the costs are later recovered through retail sales.

The cost of power supply can be significantly affected by weather. Precipitation (consisting of snowpack, its water content and melting pattern plus rainfall) and other streamflow conditions (such as regional water storage operations) significantly affect hydroelectric generation capability. Variations in hydroelectric generation inversely affect our reliance on market purchases and thermal generation. To the extent that hydroelectric generation is less than normal, significantly more costly power supply resources must be acquired and the ability to realize net benefits from surplus hydroelectric wholesale sales is reduced. Wholesale prices also vary based on wind patterns as wind generation capacity is material in the Pacific Northwest but its contribution to supply is inconsistent.

The price of power in the wholesale energy markets tends to be higher during periods of high regional demand, such as occurs with temperature extremes. We may need to purchase power in the wholesale market during peak price periods. The price of natural gas as fuel for natural gas-fired electric generation also tends to increase during periods of high demand which are often related to temperature extremes. We may need to purchase natural gas fuel in these periods of high prices to meet electric demands. The cost of power supply during peak usage periods may be higher than the retail sales price or the amount allowed in retail rates by our regulators. To the extent that power supply costs are above the amount allowed currently in retail rates, the difference is partially absorbed by the Company in current expense and is partially deferred or shared with customers through regulatory mechanisms.

The price of power tends to be lower during periods with excess supply, such as the spring when hydroelectric conditions are usually at their maximum and various facilities are required to operate to meet environmental mandates. Oversupply can be exacerbated when intermittent resources such as wind generation are producing output that may be supported by price subsidies. In extreme situations, we may be required to sell excess energy at negative prices.

As a result of these combined factors, our net cost of power supply – the difference between our costs of generation and market purchases, reduced by our revenue from wholesale sales – varies significantly because of weather.

We rely on regular access to financial markets but we cannot assure favorable or reasonable financing terms will be available when we need them.

Access to capital markets is critical to our operations and our capital structure. We have significant capital requirements that we expect to fund, in part, by accessing capital markets. As such, the state of financial markets and credit availability in the global, United States and regional economies impacts our financial condition. We could experience increased borrowing costs or limited access to capital on reasonable terms.

We access long-term capital markets to finance capital expenditures, repay maturing long-term debt and obtain additional working capital from time-to-time. Our ability to access capital on reasonable terms is subject to numerous factors and market

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conditions, many of which are beyond our control. If we are unable to obtain capital on reasonable terms, it may limit or prohibit our ability to finance capital expenditures and repay maturing long-term debt. Our liquidity needs could exceed our short-term credit availability and lead to defaults on various financing arrangements. We would also likely be prohibited from paying dividends on our common stock.

Performance of the financial markets could also result in significant declines in the market values of assets held by our pension plan and/or a significant increase in the pension liability (which impacts the funded status of the plan) and could increase future funding obligations and pension expense.

We rely on credit from financial institutions for short-term borrowings. We need adequate levels of credit with financial institutions for short-term liquidity. We have a $400.0 million committed line of credit that expires in April 2021. Our subsidiary AEL&P has a $25.0 million committed line of credit that expires in November 2019. There is no assurance that we will have access to credit beyond these expiration dates. The committed line of credit agreements contain customary covenants and default provisions.

Any default on the lines of credit or other financing arrangements of Avista Corp. or any of our “significant subsidiaries,” if any, could result in cross-defaults to other agreements of such entity, and/or to the line of credit or other financing arrangements of any other of such entities. Any defaults could also induce vendors and other counterparties to demand collateral. In the event of any such default, it would be difficult for us to obtain financing on reasonable terms to pay creditors or fund operations. We would also likely be prohibited from paying dividends on our common stock.

We hedge a portion of our interest rate risk with financial derivative instruments, which may include interest rate swap derivatives and U.S. Treasury lock agreements. If market interest rates decrease below the interest rates we have locked in, this will result in a liability related to our interest rate swap derivatives, which can be significant. As of December 31, 2018, we had a net interest rate swap derivative liability of $2.7 million, reflecting a decline in interest rates since the time we entered into the agreements. We did not have any U.S. Treasury lock agreements outstanding as of December 31, 2018. We may be required to post cash or letters of credit as collateral depending on fluctuations in the fair value of the derivative instruments. Settlement of interest rate swap derivative instruments in a liability position could require a significant amount of cash, which could negatively impact our liquidity and short-term credit availability and increase interest expense over the term of the associated debt.

Downgrades in our credit ratings could impede our ability to obtain financing, adversely affect the terms of financing and impact our ability to transact for or hedge energy resources. If we do not maintain our investment grade credit rating with the major credit rating agencies, we could expect increased debt service costs, limitations on our ability to access capital markets or obtain other financing on reasonable terms, and requirements to provide collateral (in the form of cash or letters of credit) to lenders and counterparties. In addition, credit rating downgrades could reduce the number of counterparties willing to do business with us or result in the termination of outstanding regulatory authorizations for certain financing activities.

Credit risk may be affected by industry concentration and geographic concentration.

We have concentrations of suppliers and customers in the electric and natural gas industries including:


•	electric and natural gas utilities,


•	electric generators and transmission providers,


•	oil and natural gas producers and pipelines,


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


•	energy marketing and trading companies.

We have concentrations of credit risk related to our geographic location in the western United States and western Canada energy markets. These concentrations of counterparties and concentrations of geographic location may affect our overall exposure to credit risk because the counterparties may be similarly affected by changes in conditions.

Utility Regulatory Risk Factors

Regulators may not grant rates that provide timely or sufficient recovery of our costs or allow a reasonable rate of return for our shareholders.

Avista Utilities' annual operating expenses and the costs associated with incremental investments in utility assets continue to grow at a faster rate than revenue growth. Our ability to recover these expenses and capital costs depends on the amount and timeliness of retail rate changes allowed by regulatory agencies. We expect to periodically file for rate increases with regulatory agencies to recover our expenses and capital costs and provide an opportunity to earn a reasonable rate of return for

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shareholders. If regulators do not grant rate increases or grant substantially lower rate increases than our requests in the future or if recovery of deferred expenses is disallowed, it could have a negative effect on our operating revenues, net income and cash flows. During 2018, Moody's downgraded our credit rating due in part to less predictability with regulatory outcomes in Washington as a contributing factor for the downgrade. Further actions by the credit rating agencies may make it more costly for us to issue future debt securities and could increase borrowing costs under our credit facilities. See further discussion of regulatory matters in "Item 7. Management's Discussion and Analysis – Regulatory Matters."

In the future, we may no longer meet the criteria for continued application of regulatory accounting practices for all or a portion of our regulated operations.

If we could no longer apply regulatory accounting, we could be:


•	required to write off our regulatory assets, and


•	precluded from the future deferral of costs or decoupled revenues not recovered through rates at the time such amounts are incurred, even if we are expected to recover these amounts from customers in the future.

See further discussion at "Note 1 of the Notes to Consolidated Financial Statements – Regulatory Deferred Charges and Credits."

Energy Commodity Risk Factors

Energy commodity price changes affect our cash flows and results of operations.

Energy commodity prices can be volatile. We rely on energy markets and other counterparties for energy supply, surplus and optimization transactions and commodity price hedging. A combination of factors exposes our operations to commodity price risks, including:


•	our obligation to serve our retail customers at rates set through the regulatory process - we cannot decline to serve our customers and we cannot change retail rates to reflect current energy prices unless and until we receive regulatory approval,


•	customer demand, which is beyond our control because of weather, customer choices, prevailing economic conditions and other factors,


•	some of our energy supply cost is fixed by the nature of the energy-producing assets or through contractual arrangements (however, a significant portion of our energy resource costs are not fixed), and


•	the potential non-performance by commodity counterparties, which could lead to replacement of the scheduled energy or natural gas at higher prices.

Because we must supply the amount of energy demanded by our customers and we must sell it at fixed rates and only a portion of our energy supply costs are fixed, we are subject to the risk of buying energy at higher prices in wholesale energy markets (and the risk of selling energy at lower prices if we are in a surplus position). Electricity and natural gas in wholesale markets are commodities with historically high price volatility. Changes in wholesale energy prices affect, among other things, the cash requirements to purchase electricity and natural gas for retail customers or wholesale obligations and the market value of derivative assets and liabilities.

When we enter into fixed price energy commodity transactions for future delivery, we are subject to credit terms that may require us to provide collateral to wholesale counterparties related to the difference between current prices and the agreed upon fixed prices. These collateral requirements can place significant demands on our cash flows or borrowing arrangements. Price volatility can cause collateral requirements to change quickly and significantly.

Cash flow deferrals related to energy commodities can be significant. We are permitted to collect from customers only amounts approved by regulatory commissions. However, our costs to provide energy service can be much higher or lower than the amounts currently billed to customers. We are permitted to defer income statement recognition and recovery from customers for some of these differences, which are recorded as deferred charges with the opportunity for future recovery through retail rates. These deferred costs are subject to review for prudence and potential disallowance by regulators, who have discretion as to the extent and timing of future recovery or refund to customers.

Power and natural gas costs higher than those recovered in retail rates reduce cash flows. Amounts that are not allowed for deferral or which are not approved to become part of customer rates affect our results of operations.

Even if our regulators ultimately allow us to recover deferred power and natural gas costs, our operating cash flows can be negatively affected until these costs are recovered from customers.

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Fluctuating energy commodity prices and volumes in relation to our energy risk management process can cause volatility in our cash flows and results of operations. We engage in active hedging and resource optimization practices to reduce energy cost volatility and economic exposure related to commodity price fluctuations. We routinely enter into contracts to hedge a portion of our purchase and sale commitments for electricity and natural gas, as well as forecasted excess or deficit energy positions and inventories of natural gas. We use physical energy contracts and derivative instruments, such as forwards, futures, swaps and options traded in the over-the-counter markets or on exchanges. If market prices decrease compared to the prices we have locked in with our energy commodity derivatives, this will result in a liability related to these derivatives, which can be significant. As of December 31, 2018, we had a gross energy commodity derivative liability of $94.6 million (exclusive of amounts posted as collateral and derivative assets eligible for net balance sheet presentation). As a result of price fluctuations, we may be required to post significant amounts of cash or letters of credit as collateral depending on fluctuations in the fair value of the derivative instruments. As of December 31, 2018, we had $78.0 million posted as cash collateral and $6.5 million of letters of credit posted as collateral.

We do not attempt to fully hedge our energy resource assets or our forecasted net positions for various time horizons. To the extent we have positions that are not hedged, or if hedging positions do not fully match the corresponding purchase or sale, fluctuating commodity prices could have a material effect on our operating revenues, resource costs, derivative assets and liabilities, and operating cash flows. In addition, actual loads and resources typically vary from forecasts, sometimes to a significant degree, which require additional transactions or dispatch decisions that impact cash flows.

The hedges we enter into are reviewed for prudence by our various regulators and any deferred costs (including those as a result of our hedging transactions) are subject to review for prudence and potential disallowance by regulators.

Generation plants may become obsolete. We rely on a variety of generation and energy commodity market sources to fulfill our obligation to serve customers and meet the demands of our counterparty agreements. There is the potential that some of our generation sources, such as coal, may become obsolete or be prematurely retired through regulatory action or legislation. This could result in higher commodity costs to replace the lost generation, as well as higher costs to retire the generation source before the end of its expected life.

Operational Risk Factors

We are subject to various operational and event risks.

Our operations are subject to operational and event risks that include:


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


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


•	unplanned outages at generating plants,


•	fuel cost and availability, including delivery constraints,


•	explosions, fires, accidents, or mechanical breakdowns that may occur while operating and maintaining our generation, transmission and distribution systems,


•	property damage or injuries to third parties caused by our generation, transmission and distribution systems,


•	wildfires caused by our transmission and distribution systems, which could result in extensive property damage or injuries to third parties,


•	natural disasters that can disrupt energy generation, transmission and distribution, and general business operations,


•	terrorist attacks or other malicious acts that may disrupt or cause damage to our utility assets or the vendors we utilize, and


•	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.

Disasters may affect the general economy, financial and capital markets, specific industries, or our ability to conduct business. As protection against operational and event risks, we maintain business continuity and disaster recovery plans, maintain insurance coverage against some, but not all, potential losses and we seek to negotiate indemnification arrangements with contractors for certain event risks. However, insurance or indemnification agreements may not be adequate to protect us against liability, extra expenses and operating disruptions from all of the operational and event risks described above. In addition, we are subject to the risk that insurers and/or other parties will dispute or be unable to perform on their obligations to us. If

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insurance or indemnification agreements are unable to adequately protect us or reimburse us for out-of-pocket costs, it could have a material adverse effect on our results of operations, financial condition and cash flows.

Damage to facilities may be caused by severe weather or natural disasters, such as snow, ice, wind storms, wildfires, earthquakes or avalanches. The cost to implement rapid or any repair to such facilities can be significant. Overhead electric lines are most susceptible to damage caused by severe weather.

Adverse impacts to AEL&P 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 cost of replacement power (diesel).

AEL&P operates several hydroelectric power generation facilities and has diesel generating capacity from multiple facilities to provide backup service to firm customers when necessary; however, a single hydroelectric power generation facility, the Snettisham hydroelectric project, provides approximately two-thirds of AEL&P’s hydroelectric power generation. Any issues that negatively affect AEL&P's ability to generate or transmit power or any decrease in the demand for the power generated by AEL&P could negatively affect our results of operations, financial condition and cash flows.

Compliance Risk Factors

There have been numerous changes in legislation, related administrative rulemakings, and Executive Orders, including periodic audits of compliance with such rules, which may adversely affect our operational and financial performance.

We expect to continue to be affected by legislation at the national, state and local level, as well as by administrative rules and requirements published by government agencies, including but not limited to the FERC, the EPA and state regulators. We are also subject to NERC and WECC reliability standards. The FERC, the NERC and the WECC perform periodic audits of the Company. Failure to comply with the FERC, the NERC, or the WECC requirements can result in financial penalties of up to $1 million per day per violation.

Future legislation, administrative rules or Executive Orders could have a material adverse effect on our operations, results of operations, financial condition and cash flows.

Actions or limitations to address concerns over long-term climate change, both globally and within our utilities' service areas, may affect our operations and financial performance.

Legislative, regulatory and advocacy efforts at the state, national and international levels concerning climate change and other environmental issues could have significant impacts on our operations. The electric and natural gas utility industries are frequently affected by proposals to curb greenhouse gas and other air emissions. Various regulatory and legislative proposals have been made to limit or further restrict byproducts of combustion, including that resulting from the use of natural gas by our customers. In addition, regionally, there are a number of regulatory and legislative initiatives that have been proposed which could introduce carbon pricing or cap-and-trade mechanisms related to greenhouse gas emissions, and we cannot predict whether any such proposals will be enacted. Such proposals, if adopted, could restrict the operation and raise the costs of our power generation resources as well as the distribution of natural gas to our customers.

We expect continuing activity in the future and we are evaluating the extent to which potential changes to environmental laws and regulations may:


•	increase the operating costs of generating plants,


•	increase the lead time and capital costs for the construction of new generating plants,


•	require modification of our existing generating plants,


•	require existing generating plant operations to be curtailed or shut down,


•	reduce the amount of energy available from our generating plants,


•	restrict the types of generating plants that can be built or contracted with,


•	require construction of specific types of generation plants at higher cost, and


•	increase the cost of distributing natural gas to customers.

We have contingent liabilities, including certain matters related to potential environmental liabilities, and cannot predict the outcome of these matters.

In the normal course of our business, we have matters that are the subject of ongoing litigation, mediation, investigation and/or negotiation. We cannot predict the ultimate outcome or potential impact of any particular issue, including the extent, if any, of insurance coverage or that amounts payable by us may be recoverable through the ratemaking process. We are subject to

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environmental regulation by federal, state and local authorities related to our past, present and future operations. See “Note 20 of the Notes to Consolidated Financial Statements” for further details of these matters.

Cyber and Technology Risk Factors

Cyberattacks, terrorism or other malicious acts could disrupt our businesses and have a negative impact on our results of operations and cash flows.

In the course of our operations, we rely on interconnected technology systems for operation of our generating plants, electric transmission and distribution systems, natural gas distribution systems, customer billing and customer service, accounting and other administrative processes and compliance with various regulations. In addition, in the ordinary course of business, we collect and retain sensitive information including personal information about our customers and employees.

There are various risks associated with technology systems such as hardware or software failure, communications failure, data distortion or destruction, unauthorized access to data, misuse of proprietary or confidential data, unauthorized control through electronic means, programming mistakes and other deliberate or inadvertent human errors.

Cyberattacks, terrorism or other malicious acts could damage, destroy or disrupt these systems for an extended period of time. The energy sector, particularly electric and natural gas utility companies have become the subject of cyberattacks with increased frequency. Our administrative and operating networks are targeted by hackers on a regular basis. Additionally, the facilities and systems of clients, suppliers and third party service providers could be vulnerable to the same cyber or terrorism risks as our facilities and systems and such third party systems may be interconnected to our systems both physically and technologically. Therefore, an event caused by cyberattacks or other malicious act at an interconnected third party could impact our business and facilities similarly. Any failure, unexpected, or unauthorized use of technology systems could result in the unavailability of such systems, and could result in a loss of operating revenues, an increase in operating expenses and costs to repair or replace damaged assets. Any of the above could also result in the loss or release of confidential customer and/or employee information or other proprietary data that could adversely affect our reputation and competitiveness, could result in costly litigation and negatively impact our results of operations. These cyberattacks have become more common and sophisticated and, as such, we could be required to incur costs to strengthen our systems and respond to emerging concerns.

Terrorist attacks could also be directed at our physical electric and natural gas facilities, as well as technology systems or at an interconnected third party, which could result in disruption to our systems.

We may be adversely affected by our inability to successfully implement certain technology projects.

We are in the process of replacing all of our electric meter infrastructure in Washington State with two-way communication advanced metering infrastructure (AMI). There are inherent risks associated with replacing and changing these types of systems, such as incorrect or nonfunctioning metering and/or delayed or inaccurate customer bills or unplanned outages, which could have a material adverse effect on our results of operations, financial condition and cash flows. Finally, there is the risk that we ultimately do not complete the project and will incur contract cancellation or other costs, which could be significant.

Strategic Risk Factors

Our strategic business plans, which may be affected by any or all of the foregoing, may change, 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.

Our strategic business plans could be affected by or result in any of the following:


•	disruptive innovations in the marketplace may outpace our ability to compete or manage our risk,


•	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,


•	market or other conditions may adversely affect our operations or require changes to our business strategy, which could result in a non-cash goodwill impairment charge that would reduce assets and reduce our net income, and


•	potential reputational risk arising from repeated general rate case filings, degradation in the quality of service, or from failed strategic investments and opportunities, which could erode shareholder, customer and community satisfaction with our Company.

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Legal proceedings related to the terminated acquisition by Hydro One

In connection with the proposed acquisition, three lawsuits were filed in the United States District Court for the Eastern District of Washington and one lawsuit was filed in the Superior Court for the State of Washington in and for Spokane County. The three federal lawsuits were voluntarily dismissed by the plaintiffs.

The Washington State complaint generally alleged that the members of the Board breached their fiduciary duties by, among other things, conducting an allegedly inadequate sale process and agreeing to the acquisition at a price that allegedly undervalues Avista Corp., and that Hydro One, Olympus Holding Corp., and Olympus Corp. aided and abetted those purported breaches of duty. The aiding and abetting claims were brought only against Hydro One, Olympus Holding Corp. and Olympus Corp. The complaints seek various remedies, including an injunction against the acquisition and monetary damages, including attorneys’ fees and expenses. The complaint was stayed by the court until the closing of the transaction at which time the plaintiff would have the option to file an amended complaint within 30 days of such closing. If the amended complaint was not filed within the 30 days the suit would be dismissed. Since the transaction will not close, the status of this lawsuit is unknown.

Since Avista Corp. is obligated to indemnify the defendants under its articles of incorporation, bylaws and separate agreements, the outcome of the lawsuit could, among other things, result in a material adverse effect on Avista Corp.'s financial condition, results of operations and cash flows.

In addition to the lawsuits already filed, there could be additional legal proceedings associated with the termination of the proposed acquisition.

External Mandates Risk Factors

External mandate risk involves forces outside the Company, which may include significant changes in customer expectations, disruptive technologies that result in obsolescence of our business model and government action that could impact our Company.

Import tariffs could lead to increased prices on raw materials that are critical to our business.

Import tariffs and/or other mandates imposed by the current presidential administration could potentially lead to a trade war with other foreign governments, and could significantly increase the prices on raw materials that are critical to our business, such as steel poles or wires. In addition, tariff increases may have a similar impact to our other suppliers and certain other customers, which could increase the negative impact on our operating results or future cash flows, as well as impact customer rates.

See "Item 7. Management's Discussion and Analysis – Environmental Issues and Contingencies" and "Forward-Looking Statements" for discussion of or reference to additional external mandates which could have a material adverse effect on our results of operations, financial condition and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS

As of the filing date of this Annual Report on Form 10-K, we have no unresolved comments from the staff of the SEC.

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ITEM 2. PROPERTIES

AVISTA UTILITIES

Substantially all of Avista Utilities' properties are subject to the lien of Avista Corp.'s mortgage indenture.

Avista Utilities' electric properties, located in the states of Washington, Idaho, Montana and Oregon, include the following:

Generation Properties



	No. of Units	Nameplate Rating (MW) (1)	Present Capability (MW) (2)
Hydroelectric Generating Stations (River)
Washington:
Long Lake (Spokane)	4	70.0	88.0
Little Falls (Spokane)	4	40.4	30.3
Nine Mile (Spokane)	4	37.6	34.0
Upper Falls (Spokane)	1	10.0	10.2
Monroe Street (Spokane)	1	14.8	15.0
Idaho:
Cabinet Gorge (Clark Fork) (3)	4	265.0	273.0
Post Falls (Spokane)	6	14.8	11.9
Montana:
Noxon Rapids (Clark Fork)	5	487.8	562.4
Total Hydroelectric		940.4	1,024.8
Thermal Generating Stations (cycle, fuel source)
Washington:
Kettle Falls GS (combined-cycle, wood waste) (4)	1	50.7	53.5
Kettle Falls CT (combined-cycle, natural gas) (4)	1	7.2	6.9
Northeast CT (simple-cycle, natural gas)	2	61.8	64.8
Boulder Park GS (simple-cycle, natural gas)	6	24.6	24.6
Idaho:
Rathdrum CT (simple-cycle, natural gas)	2	166.5	166.5
Montana:
Colstrip Units 3 & 4 (simple-cycle, coal) (5)	2	233.4	222.0
Oregon:
Coyote Springs 2 (combined-cycle, natural gas)	1	295.0	295.0
Total Thermal		839.2	833.3
Total Generation Properties		1,779.6	1,858.1


(1)	Nameplate rating, also referred to as “installed capacity,” is the manufacturer’s assigned power capability under specified conditions.


(2)	Present capability is the maximum capacity of the plant under standard test conditions without exceeding specified limits of temperature, stress and environmental conditions. Information is provided as of December 31, 2018.

(3)

For Cabinet Gorge, we have water rights permitting generation up to 265 MW. However, if natural stream flows will allow for generation above our water rights, we are able to generate above our water rights. If natural stream flows only allow for generation at or below 265 MW, we are limited to generation of 265 MW. The present capability disclosed above represents the capability based on maximum stream flow conditions when we are allowed to generate above our water rights.


(4)	These generating stations can operate as separate single-cycle plants or combined-cycle with the natural gas plant providing exhaust heat to the wood boiler to increase efficiency.


(5)	Jointly owned; data refers to our 15 percent interest.

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Electric Distribution and Transmission Plant

Avista Utilities owns and operates approximately 19,000 miles of primary and secondary electric distribution lines providing service to retail customers. We have an electric transmission system of approximately 700 miles of 230 kV line and approximately 1,570 miles of 115 kV line. We also own an 11 percent interest in approximately 500 miles of a 500 kV line between Colstrip, Montana and Townsend, Montana. Our transmission and distribution systems also include numerous substations with transformers, switches, monitoring and metering devices, and other equipment.

The 230 kV lines are the backbone of our transmission grid and are used to transmit power from generation resources, including Noxon Rapids, Cabinet Gorge and the Mid-Columbia hydroelectric projects, to the major load centers in our service area, as well as to transfer power between points of interconnection with adjoining electric transmission systems. These lines interconnect at various locations with the BPA, Grant County PUD, PacifiCorp, NorthWestern Energy and Idaho Power Company and serve as points of delivery for power from generating facilities outside of our service area, including Colstrip, Coyote Springs 2 and the Lancaster Plant.

These lines also provide a means for us to optimize resources by entering into short-term purchases and sales of power with entities within and outside of the Pacific Northwest.

The 115 kV lines provide for transmission of energy and the integration of smaller generation facilities with our service-area load centers, including the Spokane River hydroelectric projects, the Kettle Falls projects, Rathdrum CT, Boulder Park GS and the Northeast CT. These lines interconnect with the BPA, Chelan County PUD, the Grand Coulee Project Hydroelectric Authority, Grant County PUD, NorthWestern Energy, PacifiCorp and Pend Oreille County PUD. Both the 115 kV and 230 kV interconnections with the BPA are used to transfer energy to facilitate service to each other’s customers that are connected through the other’s transmission system. We hold a long-term transmission agreement with the BPA that allows us to serve our native load customers that are connected through the BPA’s transmission system.

Natural Gas Plant

Avista Utilities has natural gas distribution mains of approximately 3,400 miles in Washington, 2,100 miles in Idaho and 2,400 miles in Oregon. We have natural gas transmission mains of approximately 75 miles in Washington and 15 miles in Oregon. Our natural gas system includes numerous regulator stations, service distribution lines, monitoring and metering devices, and other equipment.

We own a one-third interest in Jackson Prairie, an underground natural gas storage field located near Chehalis, Washington. See "Part 1 – Item 1. Business – Avista Utilities – Natural Gas Operations" for further discussion of Jackson Prairie.

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ALASKA ELECTRIC LIGHT AND POWER COMPANY

Substantially all of AEL&P's utility properties are subject to the lien of the AEL&P mortgage indenture.

AEL&P's utility electric properties, located in Alaska include the following:

Generation Properties and Transmission and Distribution Lines



	No. of Units	Nameplate Rating (MW) (1)	Present Capability (MW) (2)
Hydroelectric Generating Stations
Snettisham (3)	3	78.2	78.2
Lake Dorothy	1	14.3	14.3
Salmon Creek	1	8.4	5.0
Annex Creek	2	4.1	3.6
Gold Creek	3	1.6	1.6
Total Hydroelectric		106.6	102.7
Diesel Generating Stations
Lemon Creek	11	61.4	51.8
Auke Bay	3	28.4	25.2
Gold Creek	5	8.2	7
Industrial Blvd. Plant	1	23.5	23.5
Total Diesel		121.5	107.5
Total Generation Properties		228.1	210.2


(1)	Nameplate rating, also referred to as “installed capacity,” is the manufacturer’s assigned power capability under specified conditions.


(2)	Present capability is the maximum capacity of the plant under standard test conditions without exceeding specified limits of temperature, stress and environmental conditions. Information is provided as of December 31, 2018.


(3)	AEL&P does not own this generating facility but has a PPA under which it has the right to purchase, and the obligation to pay for (whether or not energy is received), all of the capacity and energy of this facility. See further information at "Part 1. Item 1. Business – Alaska Electric Light and Power Company."

In addition to the generation properties above, AEL&P owns approximately 61 miles of transmission lines, which are primarily comprised of 69 kV line, and approximately 184 miles of distribution lines.

ITEM 3. LEGAL PROCEEDINGS

See “Note 20 of Notes to Consolidated Financial Statements” for information with respect to legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Avista Corp. Market Information and Dividend Policy

Avista Corp.'s common stock is listed on the New York Stock Exchange under the ticker symbol “AVA.” As of January 31, 2019, there were 7,416 registered shareholders of our common stock.

Avista Corp.'s Board of Directors considers the level of dividends on our common stock on a recurring basis, taking into account numerous factors including, without limitation:


•	our results of operations, cash flows and financial condition,


•	the success of our business strategies, and


•	general economic and competitive conditions.

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Avista Corp.'s net income available for dividends is generally derived from our regulated utility operations (Avista Utilities and AEL&P).

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 (see "Item 7. Management's Discussion and Analysis - Capital Resources" for compliance with these covenants),


•	the hydroelectric licensing requirements of section 10(d) of the FPA (see “Note 1 of Notes to Consolidated Financial Statements”), and


•	certain requirements under the OPUC approval of the AERC acquisition in 2014. The OPUC's AERC acquisition order requires Avista Utilities to maintain a capital structure of no less than 40 percent common equity (inclusive of short-term debt). This limitation may be revised upon request by the Company with approval from the OPUC.

For additional information, see “Notes 1 and 17 of Notes to Consolidated Financial Statements.”

For information with respect to securities authorized for issuance under equity compensation plans, see “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 6. SELECTED FINANCIAL DATA



(in thousands, except per share data and ratios)	Years Ended December 31,
	2018			2017			2016			2015			2014
Operating Revenues:
Avista Utilities	$	1,325,966		$	1,370,359		$	1,372,638		$	1,411,863		$	1,413,499
AEL&P	43,599			53,027			46,276			44,778			21,644
Other	27,328			22,543			23,569			28,685			39,219
Intersegment eliminations	—			—			—			(550		)	(1,800		)
Total	$	1,396,893		$	1,445,929		$	1,442,483		$	1,484,776		$	1,472,562
Income (Loss) from Operations (pre-tax):
Avista Utilities	$	248,000		$	278,079		$	287,128		$	249,586		$	243,535
AEL&P	14,665			17,947			15,434			14,072			6,221
Other	(1,552		)	(3,847		)	(2,701		)	(2,086		)	6,391
Total	$	261,113		$	292,179		$	299,861		$	261,572		$	256,147
Net income from continuing operations	$	136,598		$	115,932		$	137,316		$	118,170		$	119,866
Net income from discontinued operations	—			—			—			5,147			72,411
Net income	136,598			115,932			137,316			123,317			192,277
Net income attributable to noncontrolling interests	(169		)	(16		)	(88		)	(90		)	(236		)
Net income attributable to Avista Corp. shareholders	$	136,429		$	115,916		$	137,228		$	123,227		$	192,041
Net Income (Loss) attributable to Avista Corporation shareholders:
Avista Utilities	$	134,874		$	114,716		$	132,490		$	113,360		$	113,263
AEL&P	8,292			9,054			7,968			6,641			3,152
Discontinued operations	—			—			—			5,147			72,390
Other	(6,737		)	(7,854		)	(3,230		)	(1,921		)	3,236
Net income attributable to Avista Corp. shareholders	$	136,429		$	115,916		$	137,228		$	123,227		$	192,041

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(in thousands, except per share data and ratios)	Years Ended December 31,
	2018			2017			2016		2015		2014
Average common shares outstanding, basic	65,673			64,496			63,508		62,301		61,632
Average common shares outstanding, diluted	65,946			64,806			63,920		62,708		61,887
Common shares outstanding at year-end	65,688			65,494			64,188		62,313		62,243
Earnings per common share attributable to Avista Corp. shareholders, basic:
Earnings per common share from continuing operations	$	2.08		$	1.80		$	2.16	$	1.90	$	1.94
Earnings per common share from discontinued operations	—			—			—		0.08		1.18
Total earnings per common share attributable to Avista Corp. shareholders, basic	$	2.08		$	1.80		$	2.16	$	1.98	$	3.12
Earnings per common share attributable to Avista Corp. shareholders, diluted:
Earnings per common share from continuing operations	$	2.07		$	1.79		$	2.15	$	1.89	$	1.93
Earnings per common share from discontinued operations	—			—			—		0.08		1.17
Total earnings per common share attributable to Avista Corp. shareholders, diluted	$	2.07		$	1.79		$	2.15	$	1.97	$	3.10

Dividends declared per common share	$	1.49		$	1.43		$	1.37	$	1.32	$	1.27
Book value per common share	$	26.99		$	26.41		$	25.69	$	24.53	$	23.84
Total Assets at Year-End:
Avista Utilities	$	5,458,104		$	5,177,878		$	4,975,555	$	4,601,708	$	4,357,760
AEL&P	272,950			278,688			273,770		265,735		263,070
Other	87,050			73,241			60,430		39,206		80,141
Intersegment eliminations	(35,528		)	(15,075		)	—		—		—
Total	$	5,782,576		$	5,514,732		$	5,309,755	$	4,906,649	$	4,700,971
Long-Term Debt and Capital Leases (including current portion)	$	1,863,174		$	1,769,237		$	1,682,004	$	1,573,278	$	1,487,126
Nonrecourse Long-Term Debt of Spokane Energy (including current portion)	$	—		$	—		$	—	$	—	$	1,431
Long-Term Debt to Affiliated Trusts	$	51,547		$	51,547		$	51,547	$	51,547	$	51,547
Total Avista Corp. Shareholders’ Equity	$	1,773,220		$	1,729,828		$	1,648,727	$	1,528,626	$	1,483,671

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Segments

As of December 31, 2018, we have two reportable business segments, Avista Utilities and AEL&P. We also have other businesses which do not represent a reportable business segment and are conducted by various direct and indirect subsidiaries of Avista Corp. See "Part I, Item 1. Business – Company Overview" for further discussion of our business segments.

The following table presents net income (loss) attributable to Avista Corp. shareholders for each of our business segments (and the other businesses) for the year ended December 31 (dollars in thousands):



	2018			2017			2016
Avista Utilities	$	134,874		$	114,716		$	132,490
AEL&P	8,292			9,054			7,968
Other	(6,737		)	(7,854		)	(3,230		)
Net income attributable to Avista Corporation shareholders	$	136,429		$	115,916		$	137,228

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Executive Level Summary

Overall Results

Net income attributable to Avista Corp. shareholders was $136.4 million for 2018, an increase from $115.9 million for 2017.

The increase in earnings was due to an increase in earnings at Avista Utilities and a decrease in losses at our other businesses, partially offset by a decrease in earnings at AEL&P.

Avista Utilities' earnings increased for 2018 primarily due to a decrease in acquisition costs relating to the terminated acquisition by Hydro One and the positive impact of general rate increases and customer growth. These factors were partially offset by increased distribution and generation operating and maintenance costs, outside service costs (other operating expenses), depreciation and amortization, and interest expense.

AEL&P earnings decreased for 2018, primarily due to an increase in depreciation and amortization and other miscellaneous expenses as well as a decrease in sales volumes to residential and commercial customers primarily during the fourth quarter of 2018.

Losses at our other businesses decreased during 2018 as 2017 included a one-time tax expense in the fourth quarter from revaluing deferred taxes to the new tax rate of 21 percent as a result of federal income tax law changes. There was also a gain in 2018 from one of our equity investments. These were partially offset by increased expenses associated with a renovation project in 2018, impairment losses and an increase in losses on certain of our subsidiary investments.

More detailed explanations of the fluctuations are provided in the results of operations and business segment discussions (Avista Utilities, AEL&P, and the other businesses).

General Rate Cases and Regulatory Lag

Due in part to the regulatory proceedings for the now terminated acquisition of the Company by Hydro One (see below), we elected not to file any general rate cases during 2018 to allow the commissions to focus on the merger proceedings. While we received a base rate increase effective January 1, 2019 in Idaho, which was related to a rate plan approved by the IPUC in 2017, we have not received base rate relief in Oregon since November 1, 2017, and have not received base rate relief in Washington since May 1, 2018. During 2017 and 2018, we continued to invest in our utility infrastructure to maintain and enhance our system; however, only limited portions of these costs are reflected in our current rates to customers. As such, we expect to experience regulatory lag during the period 2019 through 2021 due to the delay in general rate case filings and our continued investment in utility infrastructure. We plan to file general rate cases in Washington, Idaho and Oregon during the first half of 2019 with requested effective dates in early 2020 to begin remedying the regulatory lag. Going forward, we will continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. This will require adequate and timely rate relief in our jurisdictions.

Termination of the Proposed Acquisition by Hydro One

On July 19, 2017, Avista Corp. entered into a Merger Agreement that provided for Avista Corp. to become an indirect, wholly-owned subsidiary of Hydro One, subject to the satisfaction or waiver of specified closing conditions, including approval by regulatory agencies.

On January 23, 2019, Avista Corp., Hydro One and certain subsidiaries thereof, entered into a termination agreement (Termination Agreement) indicating their mutual agreement to terminate the Merger Agreement, effective immediately. Pursuant to the terms of the Merger Agreement and the Termination Agreement, Hydro One paid Avista Corp. a $103 million termination fee on January 24, 2019. The termination fee will be used for reimbursing our transaction costs incurred from 2017 to 2019. These costs, including income taxes, total approximately $51 million. The balance of the termination fee will be used for general corporate purposes and reduces our need for external financing. For further information, see "Notes 20 and 24 of the Notes to Consolidated Financial Statements.”

Federal Income Tax Law Changes

On December 22, 2017, the TCJA was signed into law, with most provisions of the new law effective on January 1, 2018. As a result of the TCJA and its reduction of the corporate income tax rate from 35 percent to 21 percent (among many other changes in the law), we recorded a regulatory liability associated with the revaluing of our deferred income tax assets and liabilities to the new corporate tax rate. The regulatory liability for plant-related excess deferred income taxes will be returned to customers through their future rates. The regulatory liability for non-plant excess deferred taxes will be returned to customers as prescribed by proposed settlement agreements in Washington, Idaho and Oregon discussed at "Regulatory Matters." The return of excess deferred income taxes does not impact our net income.

Because most of the provisions of the TCJA were effective as of January 1, 2018 but customers' rates included a 35 percent corporate tax rate built in from prior general rate cases, we began accruing for a refund to customers for the change in federal

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income tax expense beginning January 1, 2018 forward. For Washington and Idaho, this accrual was recorded until all benefits prior to a permanent rate change were properly captured through the deferral process. Refunds have begun for Washington and Idaho customers through tariffs or other regulatory mechanisms or proceedings. For Oregon, we will continue to defer these benefits until reflected in a future regulatory proceeding as approved by the OPUC.

The primary impact to us from the TCJA is the loss of the bonus depreciation tax deduction, which results in less depreciation as a current tax deduction, which increases our taxable income and results in us having to pay taxes earlier than we had projected under the old tax laws. This negative impact to cash flows has impacted certain financial metrics used by credit rating agencies to evaluate the Company. The negative impact to our financial metrics contributed to Moody's downgrading our credit rating in 2018. Moody's also cited uncertainty with respect to regulatory outcomes in Washington as a contributing factor for the downgrade. Any further actions by credit ratings agencies may make it more difficult and costly for us to issue future debt securities and could increase borrowing costs under our credit facilities. See "Credit Ratings" for additional discussion.

See "Regulatory Matters" and "Note 11 of the Notes to Consolidated Financial Statements" for additional information regarding the TCJA and its specific impacts to our financial statements.

Regulatory Matters

General Rate Cases

We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We will continue to file for rate adjustments to:


•	seek recovery of operating costs and capital investments, and


•	seek the opportunity to earn reasonable returns as allowed by regulators.

With regards to the timing and plans for future filings, the assessment of our need for rate relief and the development of rate case plans takes into consideration short-term and long-term needs, as well as specific factors that can affect the timing of rate filings. Such factors include, but are not limited to, in-service dates of major capital investments and the timing of changes in major revenue and expense items.

Avista Utilities

Washington General Rate Cases and Other Proceedings

2015 General Rate Cases

In January 2016 we received an order which was reaffirmed by the WUTC in February 2016 that concluded our electric and natural gas general rate cases that were originally filed with the WUTC in February 2015. New electric and natural gas rates were effective on January 11, 2016.

The WUTC-approved rates were designed to provide a 1.6 percent, or $8.1 million decrease in electric base revenue, and a 7.4 percent, or $10.8 million increase in natural gas base revenue. The WUTC also approved an ROR of 7.29 percent, with a common equity ratio of 48.5 percent and a 9.5 percent ROE.

In March 2016, the Public Counsel Unit of the Washington State Office of the Attorney General filed in Thurston County Superior Court a Petition for Judicial Review of the WUTC's orders that concluded our 2015 electric and natural gas general rate cases. In April 2016, this matter was certified for review directly by the Court of Appeals, an intermediate appellate court in the State of Washington.

On August 7, 2018, the Court of Appeals issued an Opinion which concluded that the WUTC's use of an attrition allowance to calculate Avista Corp.'s rate base violated Washington law. The Court struck all portions of the attrition allowance attributable to Avista Corp.’s rate base and reversed and remanded the case for the WUTC to recalculate Avista Corp.’s rates without including an attrition allowance in the calculation of rate base.

The total attrition allowance approved by the WUTC was $35.2 million, with $28.3 million related to electric and $6.9 million related to natural gas. The Company cannot predict the outcome of this matter at this time and cannot estimate how much, if any, of the attrition allowance may be removed from the general rate cases. The regulatory process to address this matter has not yet been established by the WUTC. See "Note 20 of the Notes to Consolidated Financial Statements" for further discussion of this matter.

2016 General Rate Cases

In December 2016, the WUTC issued an order related to our Washington electric and natural gas general rate cases that were originally filed with the WUTC in February 2016. The WUTC order denied the Company's proposed electric and natural gas

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rate increase requests of $38.6 million and $4.4 million, respectively. Accordingly, our electric and natural gas retail rates remained unchanged in Washington State following the order.

The primary reason given by the WUTC in reaching its conclusion was that, in our request, we did not follow an “appropriate methodology” to show the existence of attrition, as between historical data and current and projected data. In support of its decision, the WUTC stated that we did not demonstrate that our current revenue was insufficient for covering costs and providing the opportunity to earn a reasonable return during the 2017 rate period. The WUTC also stated that we did not demonstrate that our capital expenditures and increased operating costs are both necessary and immediate.

We did not appeal the WUTC's decision to the courts and instead focused on new general rate cases.

2017 General Rate Cases

On April 26, 2018, the WUTC issued a