Edgar Filing: AVISTA CORP

AVA-2014.06.30-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________________________

Form 10-Q

(Mark One)



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

FOR THE QUARTERLY PERIOD ENDED June 30, 2014 OR



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

FOR THE TRANSITION PERIOD FROM TO

Commission file number 1-3701

__________________________________________________________________________________________

AVISTA CORPORATION

(Exact name of Registrant as specified in its charter)



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

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

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

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

None

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

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

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

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



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

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

As of July 31, 2014, 64,432,985 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.

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AVISTA CORPORATION

INDEX



			Page No.
Part I. Financial Information
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Statements of Income - Three Months Ended June 30, 2014 and 2013	4
		Condensed Consolidated Statements of Income - Six Months Ended June 30, 2014 and 2013	6
		Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2014 and 2013	8
		Condensed Consolidated Balance Sheets - June 30, 2014 and December 31, 2013	9
		Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013	11
		Condensed Consolidated Statements of Equity and Redeemable Noncontrolling Interests - Six Months Ended June 30, 2014 and 2013	13
		Notes to Condensed Consolidated Financial Statements	14
		Report of Independent Registered Public Accounting Firm	48

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	76

	Item 4.	Controls and Procedures	78

Part II. Other Information
	Item 1.	Legal Proceedings	79

	Item 1A.	Risk Factors	79

	Item 4.	Mine Safety Disclosures	79

	Item 6.	Exhibits	79

Signature			80

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AVISTA CORPORATION

Forward-Looking Statements

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


•	financial performance;


•	cash flows;


•	capital expenditures;


•	dividends;


•	capital structure;


•	other financial items;


•	strategic goals and objectives;


•	business environment; and


•	plans for operations.

These statements are based upon underlying assumptions (many of which are based, in turn, upon further assumptions). Such statements are made both in our reports filed under the Securities Exchange Act of 1934, as amended (including this Quarterly Report on Form 10-Q), and elsewhere. Forward-looking statements are all statements except those of historical fact including, without limitation, those that are identified by the use of words that include “will,” “may,” “could,” “should,” “intends,” “plans,” “seeks,” “anticipates,” “estimates,” “expects,” “forecasts,” “projects,” “predicts,” and similar expressions.

Forward-looking statements (including those made in this Quarterly Report on Form 10-Q) are subject to a variety of risks, uncertainties and other factors. Most of these factors are beyond our control and may have a significant effect on our operations, results of operations, financial condition or cash flows, which could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others:


•	weather conditions (temperatures, precipitation levels and wind patterns) which affect both energy demand and electric generating capability, including the effect of precipitation and temperature on hydroelectric resources, the effect of wind patterns on wind-generated power, weather-sensitive customer demand, and similar effects on supply and demand in the wholesale energy markets;


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


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


•	economic conditions in our service areas, including the economy's effects on customer demand for utility services;


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


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


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


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


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


•	volatility and illiquidity in wholesale energy markets, including the availability of willing buyers and sellers, and prices of purchased energy and demand for energy sales including related energy commodity derivative instruments that we rely upon to hedge our wholesale energy risks;


•	the outcome of pending legal proceedings arising out of the “western energy crisis” of 2000 and 2001;

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AVISTA CORPORATION


•	the outcome of legal proceedings and other contingencies;


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


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


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


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


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


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


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


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


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


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


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


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


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


•	changes in the long-term global and our utilities' service area climates, which can affect, among other things, customer demand patterns and the volume and timing of streamflows to our hydroelectric resources;


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


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


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


•	deterioration in the creditworthiness of our customers;


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


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


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


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


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


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


•	changes in tax rates and/or policies;

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AVISTA CORPORATION


•	changes in interest rates that affect borrowing costs, our ability to effectively hedge interest rates for anticipated debt issuances, variable interest rate borrowing and the extent that we recover interest costs through utility operations;


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


•	changes in our strategic business plans, which may be affected by any or all of the foregoing, including the entry into new businesses and/or the exit from existing businesses and the extent of our business development efforts where potential future business is uncertain;


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


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

•

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

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

Available Information

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

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Avista Corporation

For the Three Months Ended June 30

Dollars in thousands, except per share amounts

(Unaudited)



	2014			2013
Operating Revenues:
Utility revenues	$	303,105		$	297,719
Non-utility revenues	9,475			9,769
Total operating revenues	312,580			307,488
Operating Expenses:
Utility operating expenses:
Resource costs	128,922			126,511
Other operating expenses	67,349			65,784
Depreciation and amortization	31,180			29,025
Taxes other than income taxes	21,367			21,608
Non-utility operating expenses:
Other operating expenses	880			9,415
Depreciation and amortization	151			175
Total operating expenses	249,849			252,518
Income from continuing operations	62,731			54,970
Interest expense	18,547			19,438
Interest expense to affiliated trusts	112			117
Capitalized interest	(834		)	(942		)
Other income-net	(3,055		)	(2,192		)
Income from continuing operations before income taxes	47,961			38,549
Income tax expense	16,691			14,310
Net income from continuing operations	31,270			24,239
Net income on discontinued operations (Note 5)	69,312			1,491
Net income	100,582			25,730
Net loss (income) attributable to noncontrolling interests	289			(73		)
Net income attributable to Avista Corp. shareholders	$	100,871		$	25,657

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

Avista Corporation

For the Three Months Ended June 30

Dollars in thousands, except per share amounts

(Unaudited)



	2014		2013
Amounts attributable to Avista Corp. shareholders:
Net income from continuing operations attributable to Avista Corp. shareholders	$	31,254	$	24,212
Net income from discontinued operations attributable to Avista Corp. shareholders	69,617		1,445
Net income attributable to Avista Corp. shareholders	$	100,871	$	25,657
Weighted-average common shares outstanding (thousands), basic	60,184		59,937
Weighted-average common shares outstanding (thousands), diluted	60,463		59,962
Earnings per common share attributable to Avista Corp. shareholders, basic:
Earnings per common share from continuing operations	$	0.52	$	0.40
Earnings per common share from discontinued operations	1.16		0.03
Total earnings per common share attributable to Avista Corp. shareholders, basic	$	1.68	$	0.43
Earnings per common share attributable to Avista Corp. shareholders, diluted:
Earnings per common share from continuing operations	$	0.52	$	0.40
Earnings per common share from discontinued operations	1.15		0.03
Total earnings per common share attributable to Avista Corp. shareholders, diluted	$	1.67	$	0.43
Dividends declared per common share	$	0.3175	$	0.305

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands, except per share amounts

(Unaudited)



	2014			2013
Operating Revenues:
Utility revenues	$	740,229		$	728,846
Non-utility revenues	18,929			19,141
Total operating revenues	759,158			747,987
Operating Expenses:
Utility operating expenses:
Resource costs	349,419			356,141
Other operating expenses	134,686			131,228
Depreciation and amortization	61,906			56,960
Taxes other than income taxes	49,513			47,425
Non-utility operating expenses:
Other operating expenses	10,263			18,760
Depreciation and amortization	298			365
Total operating expenses	606,085			610,879
Income from continuing operations	153,073			137,108
Interest expense	37,291			38,686
Interest expense to affiliated trusts	223			235
Capitalized interest	(1,495		)	(1,882		)
Other income-net	(5,655		)	(3,951		)
Income from continuing operations before income taxes	122,709			104,020
Income tax expense	43,973			38,562
Net income from continuing operations	78,736			65,458
Net income from discontinued operations (Note 5)	70,827			3,373
Net income	149,563			68,831
Net income attributable to noncontrolling interests	(193		)	(833		)
Net income attributable to Avista Corp. shareholders	$	149,370		$	67,998

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (continued)

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands, except per share amounts

(Unaudited)



	2014		2013
Amounts attributable to Avista Corp. shareholders:
Net income from continuing operations attributable to Avista Corp. shareholders	$	78,730	$	65,432
Net income from discontinued operations attributable to Avista Corp. shareholders	70,640		2,566
Net income attributable to Avista Corp. shareholders	$	149,370	$	67,998
Weighted-average common shares outstanding (thousands), basic	60,153		59,926
Weighted-average common shares outstanding (thousands), diluted	60,316		59,954
Earnings per common share attributable to Avista Corp. shareholders, basic:
Earnings per common share from continuing operations	$	1.31	$	1.09
Earnings per common share from discontinued operations	1.17		0.04
Total earnings per common share attributable to Avista Corp. shareholders, basic	$	2.48	$	1.13
Earnings per common share attributable to Avista Corp. shareholders, diluted:
Earnings per common share from continuing operations	$	1.31	$	1.09
Earnings per common share from discontinued operations	1.17		0.04
Total earnings per common share attributable to Avista Corp. shareholders, diluted	$	2.48	$	1.13
Dividends declared per common share	$	0.635	$	0.61

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Avista Corporation

For the Three Months Ended June 30

Dollars in thousands

(Unaudited)



	2014		2013
Net income	$	100,582	$	25,730
Other Comprehensive Income (Loss):
Unrealized investment gains/(losses) - net of taxes of $201 and $(721), respectively	341		(1,222		)
Reclassification adjustment for realized gains on investment securities included in net income from discontinued operations - net of taxes of $0 and $(6), respectively	—		(10		)
Reclassification adjustment for realized losses on investment securities included in net income from discontinued operations - net of taxes of $273 and $0, respectively	462		—
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $62 and $99, respectively	112		183
Total other comprehensive income (loss)	915		(1,049		)
Comprehensive income	101,497		24,681
Comprehensive loss (income) attributable to noncontrolling interests	289		(73		)
Comprehensive income attributable to Avista Corporation shareholders	$	101,786	$	24,608

For the Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2014			2013
Net income	$	149,563		$	68,831
Other Comprehensive Income (Loss):
Unrealized investment gains/(losses) - net of taxes of $664 and $(760), respectively	1,126			(1,292		)
Reclassification adjustment for realized gains on investment securities included in net income from discontinued operations - net of taxes of $(1) and $(7), respectively	(2		)	(11		)
Reclassification adjustment for realized losses on investment securities included in net income from discontinued operations - net of taxes of $273 and $0, respectively	462			—
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $121 and $198, respectively	223			367
Total other comprehensive income (loss)	1,809			(936		)
Comprehensive income	151,372			67,895
Comprehensive income attributable to noncontrolling interests	(193		)	(833		)
Comprehensive income attributable to Avista Corporation shareholders	$	151,179		$	67,062

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS

Avista Corporation

Dollars in thousands

(Unaudited)



	June 30,		December 31,
	2014		2013
Assets:
Current Assets:
Cash and cash equivalents	$	207,967	$	82,574
Accounts and notes receivable-less allowances of $4,626 and $44,309, respectively	127,614		221,343
Utility energy commodity derivative assets	10,869		3,022
Regulatory asset for utility derivatives	—		10,829
Investments and funds held for clients	—		96,688
Materials and supplies, fuel stock and natural gas stored	49,437		44,946
Deferred income taxes	8,266		24,788
Income taxes receivable	—		7,783
Other current assets	38,114		57,706
Total current assets	442,267		549,679
Net Utility Property:
Utility plant in service	4,385,131		4,290,464
Construction work in progress	191,611		160,323
Total	4,576,742		4,450,787
Less: Accumulated depreciation and amortization	1,294,679		1,248,362
Total net utility property	3,282,063		3,202,425
Other Non-current Assets:
Investment in exchange power-net	12,658		13,883
Investment in affiliated trusts	11,547		11,547
Goodwill	5,246		76,257
Intangible assets-net of accumulated amortization of $0 and $36,634, respectively	—		39,576
Long-term energy contract receivable of Spokane Energy	34,541		40,619
Other property and investments-net	36,028		58,555
Total other non-current assets	100,020		240,437
Deferred Charges:
Regulatory assets for deferred income tax	66,555		71,421
Regulatory assets for pensions and other postretirement benefits	153,426		156,984
Other regulatory assets	114,253		102,915
Non-current utility energy commodity derivative assets	275		854
Non-current regulatory asset for utility derivatives	13,304		23,258
Other deferred charges	29,967		13,950
Total deferred charges	377,780		369,382
Total assets	$	4,202,130	$	4,361,923

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

Avista Corporation

Dollars in thousands

(Unaudited)



	June 30,			December 31,
	2014			2013
Liabilities and Equity:
Current Liabilities:
Accounts payable	$	73,349		$	182,088
Client fund obligations	—			99,117
Current portion of long-term debt	4,348			358
Current portion of nonrecourse long-term debt of Spokane Energy	9,812			16,407
Short-term borrowings	151,500			171,000
Utility energy commodity derivative liabilities	3,378			10,875
Income taxes payable	98,314			697
Other current liabilities	123,630			144,798
Total current liabilities	464,331			625,340
Long-term debt	1,268,530			1,272,425
Nonrecourse long-term debt of Spokane Energy	—			1,431
Long-term debt to affiliated trusts	51,547			51,547
Long-term borrowings under committed line of credit	—			46,000
Regulatory liability for utility plant retirement costs	248,129			242,850
Pensions and other postretirement benefits	103,421			122,513
Deferred income taxes	542,090			535,343
Other non-current liabilities and deferred credits	114,537			130,318
Total liabilities	2,792,585			3,027,767
Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements)

Redeemable Noncontrolling Interests	—			15,889
Equity:
Avista Corporation Shareholders’ Equity:
Common stock, no par value; 200,000,000 shares authorized; 60,220,099 and 60,076,752 shares outstanding, respectively	885,741			896,993
Accumulated other comprehensive loss	(4,010		)	(5,819		)
Retained earnings	528,285			407,092
Total Avista Corporation shareholders’ equity	1,410,016			1,298,266
Noncontrolling Interests	(471		)	20,001
Total equity	1,409,545			1,318,267
Total liabilities and equity	$	4,202,130		$	4,361,923

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2014			2013
Operating Activities:
Net income (continuing and discontinued operations)	$	149,563		$	68,831
Non-cash items included in net income:
Depreciation and amortization	68,543			64,890
Provision (benefit) for deferred income taxes	24,161			(1,404		)
Power and natural gas cost deferrals, net	(10,032		)	(430		)
Amortization of debt expense	1,889			1,895
Amortization of investment in exchange power	1,225			1,225
Stock-based compensation expense	4,838			3,080
Equity-related AFUDC	(4,237		)	(2,746		)
Pension and other postretirement benefit expense	11,585			21,478
Amortization of Spokane Energy contract	6,078			5,587
Write-off of Reardan wind generation capitalized costs	—			2,534
Gain on sale of Ecova	(161,100		)	—
Other	8,778			3,893
Contributions to defined benefit pension plan	(21,500		)	(29,340		)
Changes in certain current assets and liabilities:
Accounts and notes receivable	59,086			43,443
Materials and supplies, fuel stock and natural gas stored	(4,491		)	2,133
Other current assets	12,263			(11,365		)
Accounts payable	(34,025		)	(27,106		)
Income taxes payable	97,617			10,287
Other current liabilities	13,747			(1,090		)
Net cash provided by operating activities	223,988			155,795

Investing Activities:
Utility property capital expenditures (excluding equity-related AFUDC)	(136,514		)	(145,344		)
Other capital expenditures	(6,122		)	(1,344		)
Federal grant payments received	1,729			2,297
Cash paid for acquisition	(4,697		)	—
Decrease (increase) in funds held for clients	(18,931		)	10,675
Purchase of securities available for sale	(12,267		)	(31,949		)
Sale and maturity of securities available for sale	14,612			15,130
Proceeds from sale of Ecova, net of cash sold	229,903			—
Other	(475		)	(4,369		)
Net cash provided by (used in) investing activities	67,238			(154,904		)

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2014			2013
Financing Activities:
Net increase (decrease) in short-term borrowings	$	(19,500	)	$	43,500
Borrowings from Ecova line of credit	—			3,000
Repayment of borrowings from Ecova line of credit	(46,000		)	(5,000		)
Redemption and maturity of long-term debt	(149		)	(359		)
Maturity of nonrecourse long-term debt of Spokane Energy	(8,026		)	(7,329		)
Cash received for settlement of interest rate swap agreements	—			2,901
Issuance of common stock, net of issuance costs	1,980			3,017
Cash dividends paid	(38,327		)	(36,667		)
Increase in client fund obligations	16,216			6,220
Payment to noncontrolling interests for sale of Ecova	(54,179		)	—
Payment to option holders and redeemable noncontrolling interests for sale of Ecova	(20,871		)	—
Other	3,023			(227		)
Net cash provided by (used in) financing activities	(165,833		)	9,056

Net increase in cash and cash equivalents	125,393			9,947

Cash and cash equivalents at beginning of period	82,574			75,464

Cash and cash equivalents at end of period	$	207,967		$	85,411

Supplemental Cash Flow Information:
Cash paid during the period:
Interest	$	36,137		$	36,960
Income taxes	1,509			29,005
Non-cash financing and investing activities:
Accounts payable for capital expenditures	9,967			2,860
Valuation adjustment for redeemable noncontrolling interests	(15,873		)	2,931
Receivable for escrow amounts associated with the sale of Ecova	13,567			—

The Accompanying Notes are an Integral Part of These Statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

Avista Corporation

For the Six Months Ended June 30

Dollars in thousands

(Unaudited)



	2014			2013
Common Stock, Shares:
Shares outstanding at beginning of period	60,076,752			59,812,796
Issuance of common stock	143,347			167,227
Shares outstanding at end of period	60,220,099			59,980,023
Common Stock, Amount:
Balance at beginning of period	$	896,993		$	889,237
Equity compensation expense	4,765			2,968
Issuance of common stock, net of issuance costs	1,980			3,017
Equity transactions of consolidated subsidiaries	(1,062		)	33
Payment to option holders and redeemable noncontrolling interests for sale of Ecova	(20,871		)	—
Excess tax benefits	3,936			—
Balance at end of period	885,741			895,255
Accumulated Other Comprehensive Loss:
Balance at beginning of period	(5,819		)	(6,700		)
Other comprehensive income (loss)	1,809			(936		)
Balance at end of period	(4,010		)	(7,636		)
Retained Earnings:
Balance at beginning of period	407,092			376,940
Net income attributable to Avista Corporation shareholders	149,370			67,998
Cash dividends paid (common stock)	(38,327		)	(36,667		)
Valuation adjustments and other noncontrolling interests activity	10,150			(2,076		)
Balance at end of period	528,285			406,195
Total Avista Corporation shareholders’ equity	1,410,016			1,293,814
Noncontrolling Interests:
Balance at beginning of period	20,001			17,658
Net income attributable to noncontrolling interests	197			777
Deconsolidation of noncontrolling interests related to sale of Ecova	(23,612		)	—
Other	2,943			2,172
Balance at end of period	(471		)	20,607
Total equity	$	1,409,545		$	1,314,421
Redeemable Noncontrolling Interests:
Balance at beginning of period	$	15,889		$	4,938
Net income (loss) attributable to noncontrolling interests	(4		)	56
Purchase of subsidiary noncontrolling interests	(12		)	(325		)
Valuation adjustments and other noncontrolling interests activity	(15,873		)	3,148
Balance at end of period	$	—		$	7,817

The Accompanying Notes are an Integral Part of These Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The accompanying condensed consolidated financial statements of Avista Corporation (Avista Corp. or the Company) for the interim periods ended June 30, 2014 and 2013 are unaudited; however, in the opinion of management, the statements reflect all adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Condensed Consolidated Statements of Income for the interim periods are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters which would be included in full fiscal year consolidated financial statements; therefore, they should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Form 10-K). Please refer to the section “Acronyms and Terms” in the 2013 Form 10-K for definitions of terms. The acronyms and terms are an integral part of these condensed consolidated financial statements.

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avista Corp. is an energy company engaged in the generation, transmission and distribution of electricity and distribution of natural gas, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities provides electric distribution and transmission, as well as 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 generating facilities in Washington, Idaho, Oregon and Montana. The Company also supplies electricity to a small number of customers in Montana, most of whom are employees who operate one of the Montana generating facilities.

Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). During the first half of the year, Avista Capital’s subsidiaries included Ecova, Inc. (Ecova), which was an 80.2 percent owned subsidiary prior to its disposition on June 30, 2014. Ecova was a provider of energy efficiency and other facility information and cost management programs and services for multi-site customers and utilities throughout North America. See Note 5 for information regarding the disposition of Ecova. On July 1, 2014, Avista Corp. completed its acquisition of Alaska Energy and Resources Company (AERC), and as of that date, AERC is a wholly-owned subsidiary of Avista Corp. See Note 4 for information regarding the acquisition of AERC. Also, see Note 13 for business segment information.

Basis of Reporting

The condensed consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Ecova's revenues and expenses are included in the Condensed Consolidated Statements of Income in discontinued operations; however, there are no balance sheet amounts included for Ecova as they were disposed of as of June 30, 2014. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants.

Taxes Other Than Income Taxes

Taxes other than income taxes include state excise taxes, city occupational and franchise taxes, real and personal property taxes and certain other taxes not based on net income. These taxes are generally based on revenues or the value of property. Utility related taxes collected from customers (primarily state excise taxes and city utility taxes) are recorded as operating revenue and expense and totaled the following amounts for the three and six months ended June 30 (dollars in thousands):



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Utility taxes	$	12,469	$	12,238	$	32,207	$	30,144

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Other Income-Net

Other income-net consisted of the following items for the three and six months ended June 30 (dollars in thousands):



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Interest income	$	250	$	238	$	524	$	496
Interest income on regulatory deferrals	51		8		95		21
Equity-related AFUDC	2,203		1,355		4,237		2,746
Net gain/(loss) on investments	185		154		145		(244		)
Other income	366		437		654		932
Total	$	3,055	$	2,192	$	5,655	$	3,951

The prior period amounts included in the table above have been revised to include only the amounts related to continuing operations. All other amounts have been reclassified to discontinued operations.

Materials and Supplies, Fuel Stock and Natural Gas Stored

Inventories of materials and supplies, fuel stock and natural gas stored are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30,		December 31,
	2014		2013
Materials and supplies	$	31,016	$	28,747
Fuel stock	4,945		3,170
Natural gas stored	13,476		13,029
Total	$	49,437	$	44,946

Investments and Funds Held for Clients and Client Fund Obligations

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

Investments and funds held for clients as of December 31, 2013 are as follows (dollars in thousands):



	Amortized Cost (1)		Unrealized Gain (Loss)			Fair Value
Cash and cash equivalents	$	16,147	$	—		$	16,147
Money market funds	11,180		—			11,180
Securities available for sale:
U.S. government agency	63,633		(2,555		)	61,078
Municipal	3,497		21			3,518
Corporate fixed income – financial	3,000		—			3,000
Corporate fixed income – industrial	753		12			765
Certificates of deposit	1,000		—			1,000
Total securities available for sale	71,883		(2,522		)	69,361
Total investments and funds held for clients	$	99,210	$	(2,522	)	$	96,688


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

Investments and funds held for clients were classified as a current asset since these funds were held for the purpose of satisfying the client fund obligations. As of December 31, 2013, approximately 95 percent of the investment portfolio was rated AA-, Aa3

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and higher by nationally recognized statistical rating organizations. All fixed income securities were rated as investment grade as of December 31, 2013.

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

The following is a summary of the disposition of available-for-sale securities for the three and six months ended June 30 (dollars in thousands):



	Three months ended June 30,					Six months ended June 30,
	2014			2013		2014			2013
Proceeds from sales, maturities and calls	$	3,209		$	8,130	$	14,612		$	15,130
Gross realized gains	—			16		3			18
Gross realized losses (1)	(735		)	—		(735		)	—


(1)	The gross realized losses for both the three and six months ended June 30, 2014 were included in the determination of the gain on the disposal of Ecova and were not the result of selling any individual securities.

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



	Due within 1 year	After 1 but within 5 years	After 5 but within 10 years	After 10 years	Total
December 31, 2013	5,382	12,745	48,310	2,924	69,361

Actual maturities may differ due to call or prepayment rights and the effective maturity was 3.0 years as of December 31, 2013.

Goodwill

Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. The Company evaluates goodwill for impairment using a combination of the discounted cash flow model and a market approach on at least an annual basis or more frequently if impairment indicators arise. The Company completed its annual evaluation of goodwill for potential impairment as of December 31, 2013 for Ecova and as of November 30, 2013 for the other businesses and determined that goodwill was not impaired at that time.

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



	Ecova			Other		Accumulated Impairment Losses			Total
December 31, 2013	$	71,011		$	12,979	$	(7,733	)	$	76,257
Adjustments	112			—		—			112
Goodwill sold during the year	(71,123		)	—		—			(71,123		)
Balance as of June 30, 2014	$	—		$	12,979	$	(7,733	)	$	5,246

Accumulated impairment losses are attributable to the other businesses. The goodwill sold during the year relates to the Ecova disposition, which occurred on June 30, 2014. See Note 5 for information regarding this sales transaction.

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Intangible Assets

Amortization expense related to intangible assets was as follows for the three and six months ended June 30 (dollars in thousands):



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Intangible asset amortization	$	3,122	$	3,098	$	5,898	$	5,677

All of the intangible assets were related to Ecova, which was disposed of as of June 30, 2014. As such, there are no intangible assets remaining as of June 30, 2014 and there is no amortization expense expected for the remainder of the year and in future years. The amortization expense disclosed in the table above is included in discontinued operations for all periods presented. See Note 5 for information regarding the Ecova sales transaction.

The gross carrying amount and accumulated amortization of intangible assets as of December 31, 2013 are as follows (dollars in thousands):



	Estimated	December 31,
	Useful Lives	2013
Client relationships	2 - 12 years	$	33,562
Software development costs	3 - 7 years	39,327
Other	1 - 10 years	3,321
Total intangible assets		76,210
Client relationships accumulated amortization		(12,336		)
Software development costs accumulated amortization		(21,861		)
Other accumulated amortization		(2,437		)
Total accumulated amortization		(36,634		)
Total intangible assets - net		$	39,576

Derivative Assets and Liabilities

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

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

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

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap agreements and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 10 for the Company’s fair value disclosures.

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Regulatory Deferred Charges and Credits

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


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


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


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

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


•	required to write off its regulatory assets, and


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

Redeemable Noncontrolling Interests

At December 31, 2013, certain option holders of Ecova had the right to put their shares back to Ecova at their discretion during an annual put window. Stock options and other outstanding redeemable stock were valued at their maximum redemption amount which is equal to their intrinsic value (fair value less exercise price). Due to the disposition of Ecova, as of June 30, 2014 there are no longer any redeemable noncontrolling interests.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, consisted of the following as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30,			December 31,
	2014			2013
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(2,159) and $(2,280), respectively	$	(4,010	)	$	(4,233	)
Unrealized loss on securities available for sale - net of taxes of $0 and $(936), respectively (1)	—			(1,586		)
Total accumulated other comprehensive loss	$	(4,010	)	$	(5,819	)


(1)	This entire balance was related to Ecova, which was disposed of as of June 30, 2014.

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The following table details the reclassifications out of accumulated other comprehensive loss by component for the three and six months ended June 30 (dollars in thousands):



	Amounts Reclassified from Accumulated Other Comprehensive Loss
	Three months ended June 30,						Six months ended June 30,
Details about Accumulated Other Comprehensive Loss Components	2014			2013			2014			2013			Affected Line Item in Statement of Income
Realized gains on investment securities	$	—		$	16		$	3		$	18		(a)
Realized losses on investment securities	(735		)	—			(735		)	—			(a)
	(735		)	16			(732		)	18			Total before tax
	273			(6		)	272			(7		)	Tax benefit (expense) (a)
	$	(462	)	$	10		$	(460	)	$	11		Net of tax
Amortization of defined benefit pension items
Amortization of net loss	$	(1,952	)	$	(4,891	)	$	(3,904	)	$	(9,782	)	(b)
Adjustment due to effects of regulation	1,778			4,609			3,560			9,217			(b)
	(174		)	(282		)	(344		)	(565		)	Total before tax
	62			99			121			198			Tax benefit
	$	(112	)	$	(183	)	$	(223	)	$	(367	)	Net of tax


(a)	These amounts were included as part of net income from discontinued operations for all periods presented (see Note 5 for additional details).


(b)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 7 for additional details).

Appropriated Retained Earnings

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

The appropriated retained earnings amounts included in retained earnings were as follows as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30,		December 31,
	2014		2013
Appropriated retained earnings	$	14,270	$	9,714

Dividends

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


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


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


•	the hydroelectric licensing requirements of section 10(d) of the FPA.

Under the covenant applicable to the Company's committed line of credit agreement, which does not permit the ratio of “consolidated total debt” to “consolidated total capitalization” to be greater than 65 percent at any time, the amount of retained earnings available for dividends at June 30, 2014 was limited to approximately $395.7 million.

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Stock Repurchase Program

On June 13, 2014, Avista Corp.'s Board of Directors approved the repurchase of up to 4 million shares of the Company’s outstanding common stock. Repurchases of common stock commenced on July 7, 2014 and will not continue past December 31, 2014. The Company can also choose to terminate the repurchase program before December 31, 2014. Repurchases are made in the open market or in privately negotiated transactions. There is no assurance that the goal of repurchasing 4 million shares will be achieved. Through July 31, 2014, the Company has repurchased 292,100 shares at a total cost of $9.4 million and an average cost of $32.28 per share. All repurchased shares revert to the status of authorized but unissued shares.

Contingencies

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

NOTE 2. NEW ACCOUNTING STANDARDS

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

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

NOTE 3. VARIABLE INTEREST ENTITIES

Lancaster Power Purchase Agreement

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

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

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$286 million under the PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.

Palouse Wind Power Purchase Agreement

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

The Company evaluated this agreement to determine if it has a variable interest which must be consolidated. Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Palouse Wind facility due to the fact that it pays a fixed price per MWh, which represents the only financial obligation, and does not have any input into the management of the day-to-day operations of the facility. Accordingly, Palouse Wind is not included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $595 million under the PPA (representing the charges associated with purchasing the energy and renewable attributes through 2042) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.

NOTE 4. BUSINESS ACQUISITIONS

Alaska Energy and Resources Company

On July 1, 2014, the Company completed its acquisition of Alaska Energy and Resources Company (AERC), based in Juneau, Alaska. As of July 1, 2014 AERC is a wholly-owned subsidiary of Avista Corp.

The primary subsidiary of AERC is Alaska Electric Light and Power Company (AEL&P), a regulated utility which provides electric services to approximately 16,000 customers in the City and Borough of Juneau, Alaska. In 2013, AEL&P had 60 full-time employees. Its rate base, based on the 2013 test year was $109 million. The utility has a firm retail peak load of approximately 68 MW. AEL&P owns four hydroelectric generating facilities, having a total present capacity of 24.7 MW, and has a power purchase commitment for the output of the Snettisham hydroelectric project, having a present capacity of 78 MW, for a total hydroelectric capacity of 102.7 MW. AEL&P is not interconnected to any other electric system. The utility also has 93.9 MW of diesel generating capacity to provide back-up service to firm customers when necessary.

In addition to the regulated utility, AERC owns AJT Mining Properties, Inc. (AJT Mining), which is an inactive mining company holding certain properties.

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

In connection with the closing, Avista Corp. issued 4.5 million new shares of common stock to the shareholders of AERC at a price of $32.46 per share, which reflects a purchase price of $170 million, plus acquired cash, less outstanding debt and other closing adjustments.

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

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The contract acquisition price and the fair value of consideration transferred for AERC as of July 1, 2014 were as follows (in thousands):



	July 1, 2014
Contract acquisition price (using $32.46 per share stock price)
Gross contract price	$	170,000
Acquired cash	19,704
Acquired debt (excluding capital lease obligation)	(38,832		)
Other closing adjustments	(104		)
Total adjusted contract price	$	150,768

Fair value of consideration transferred
Avista Corp. common stock (4,500,014 shares at $33.35 per share)	$	150,075
Cash	4,697
Fair value of total consideration transferred	$	154,772

The preliminary estimated fair value of assets acquired and liabilities assumed as of July 1, 2014 were as follows (in thousands):



	July 1, 2014
Assets acquired:
Current Assets:
Cash	$	19,704
Accounts receivable-less allowance of $77	3,851
Materials and supplies	2,017
Other current assets	999
Total current assets	26,571
Utility Property:
Utility plant in service	113,964
Utility property under long-term capital lease	71,007
Construction work in progress	3,440
Total utility property	188,411
Other Non-current Assets:
Non-utility property	6,660
Electric plant held for future use	3,711
Goodwill	50,629
Other deferred charges and non-current assets	5,368
Total other non-current assets	66,368
Total assets	$	281,350

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	July 1, 2014
Liabilities Assumed:
Current Liabilities:
Accounts payable	$	700
Current portion of long-term debt and capital lease obligations	3,773
Other current liabilities	2,901
Total current liabilities	7,374
Long-term debt	37,227
Capital lease obligations	68,840
Other non-current liabilities and deferred credits	13,137
Total liabilities	$	126,578

Total identifiable net assets acquired	$	154,772

The majority of AERC’s operations are subject to the rate-setting authority of the Regulatory Commission of Alaska and are accounted for pursuant to U.S. GAAP, including the accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for AERC’s regulated operations provide revenues derived from costs, including a return on investment, of assets and liabilities included in rate base. Due to this regulation, the fair values of AERC’s assets and liabilities subject to these rate-setting provisions approximate their carrying values. There were not any identifiable intangible assets associated with this acquisition. The excess of the purchase consideration over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill at the acquisition date.

The following table summarizes the supplemental pro forma revenue, net income and earnings per share information for the three and six months ended June 30 related to the acquisition of AERC as if the acquisition had occurred on January 1, 2013 (in thousands):



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Actual Avista Corp. revenues from continuing operations	$	312,580	$	307,488	$	759,158	$	747,987
Actual Avista Corp. revenues from discontinued operations	43,150		44,560		87,534		86,967
Supplemental pro forma AERC revenues (1)	11,782		10,651		24,546		23,303
Total supplemental pro forma revenues	367,512		362,699		871,238		858,257

Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders	31,254		24,212		78,730		65,432
Actual Avista Corp. net income from discontinued operations attributable to Avista Corp. shareholders	69,617		1,445		70,640		2,566
Acquisition costs removed from Avista Corp.'s net income (2)	219		—		672		—
Supplemental pro forma AERC net income (1) (5)	2,371		1,810		5,627		7,435
Total supplemental pro forma net income	$	103,461	$	27,467	$	155,669	$	75,433
Pro forma weighted-average common shares outstanding (thousands), basic (3)	64,684		64,437		64,653		64,426
Pro forma weighted-average common shares outstanding (thousands), diluted (3)	64,963		64,462		64,816		64,454
Pro forma earnings per common share attributable to Avista Corp. shareholders
Total pro forma earnings per common share attributable to Avista Corp. shareholders, basic	$	1.60	$	0.43	$	2.41	$	1.17
Total pro forma earnings per common share attributable to Avista Corp. shareholders, diluted (4)	$	1.59	$	0.43	$	2.40	$	1.17

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(1)	Since AERC was acquired on July 1, 2014, none of the supplemental revenues and net income have been included in the actual results of Avista Corp. for the three and six months ended June 30.

(2)

The transaction costs have been expensed and presented in the Condensed Consolidated Statements of Income in other operating expenses within utility operating expenses. Since the start of the planned transaction through June 30, 2014, Avista Corp. has expensed $2.3 million (pre-tax) in total transaction fees associated with the transaction. All of the transaction expenses in 2013 were incurred during the second half of 2013. In addition to the amounts expensed, Avista Corp. has included $0.4 million in fees through June 30, 2014 associated with the issuance of common stock for the transaction as a reduction to common stock. These fees do not impact the supplemental pro forma information above.


(3)	The 4.5 million shares issued on July 1, 2014 for the acquisition of AERC were assumed to be issued on January 1, 2013 for purposes of calculating the pro forma weighted average shares outstanding.


(4)	The pro forma diluted earnings per share calculation ignores the impact of the subsidiary earnings adjustment for dilutive securities for discontinued operations as disclosed at Note 11. Earnings per Common Share Attributable to Avista Corp. Shareholders. Including this dilutive impact would not change the diluted pro forma earnings per share amount disclosed above.


(5)	The net income for the six months ended June 30, 2013 at AERC includes a gain on the sale of property of approximately $2.3 million that does not occur every year.

NOTE 5. DISCONTINUED OPERATIONS

On May 29, 2014, Avista Capital, Inc., the non-regulated subsidiary of Avista Corp., entered into a definitive agreement to sell its interest in Ecova to Cofely USA Inc., an indirect subsidiary of GDF SUEZ, a French multinational utility company, and an unrelated party to Avista Corp. The sales transaction was completed on June 30, 2014 for a sales price of $335.0 million in cash, less the payment of debt and other customary closing adjustments. At the closing of the transaction on June 30, 2014, Ecova became a wholly-owned subsidiary of Cofely USA Inc. and the Company will have no further involvement with Ecova after such date.

The purchase price of $335.0 million, as adjusted, was divided among the security holders of Ecova, including minority shareholders and option holders, pro rata based on ownership. Approximately $16.75 million (5 percent of the purchase price) will be held in escrow for 15 months from the closing of the transaction to satisfy certain indemnification obligations under the merger agreement, and an additional $1.5 million will be held in escrow pending resolution of adjustments to working capital (which is expected to occur before the end of 2014).

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

When all escrow amounts are released, the sales transaction is expected to provide cash proceeds to Avista Corp., net of debt, payment to option and minority holders, income taxes and transaction expenses, of $133.2 million (see reconciliation below) and result in a net gain of $68.1 million. The Company expects to receive the full amount of its portion of the escrow accounts; therefore, the full amounts have been included in the gain calculation.

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The summary of cash proceeds associated with the sales transaction are as follows (in thousands):



	June 30, 2014
Reconciliation to Statement of Cash Flows
Contract price	$	335,000
Closing adjustments	4,402
Gross proceeds from sale (1)	339,402
Cash sold in the transaction	(95,932		)
Avista Corp. portion of proceeds held in escrow	(13,567		)
Gross proceeds from sale of Ecova, net of cash sold (per Statement of Cash Flows)	$	229,903

Reconciliation of expected net proceeds
Gross proceeds from sale (1)	$	339,402
Repayment of long-term borrowings under committed line of credit	(40,000		)
Payment to option holders and redeemable noncontrolling interests	(20,871		)
Payment to noncontrolling interests	(54,179		)
Transaction expenses withheld from proceeds	(5,390		)
Avista Corp. portion of proceeds held in escrow	(13,567		)
Net proceeds to Avista Capital at transaction closing	205,395
Estimated tax payments to be made in 2014	(85,756		)
Avista Corp. portion of proceeds held in escrow to be received in the future	13,567
Total net proceeds related to sales transaction	$	133,206


(1)	Of this total amount, approximately $16.75 million will be held in escrow for 15 months from the transaction closing date for any indemnity claims and an additional $1.5 million will be held in escrow pending resolution of adjustments to working capital (which is expected to occur before the end of 2014).

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Prior to the completion of the sales transaction, Ecova was a reportable business segment. The major classes of assets and liabilities and their carrying amounts immediately prior to the completion of the sales transaction were as follows:



	June 30, 2014
Assets:
Current Assets:
Cash and cash equivalents	$	95,932
Accounts and notes receivable-less allowances of $410	32,070
Investments and funds held for clients	114,598
Income taxes receivable	2,548
Other current assets	8,908
Total current assets	254,056
Other Non-current Assets:
Goodwill	71,123
Intangible assets-net of accumulated amortization of $42,266	37,185
Other property and investments-net	4,656
Total other non-current assets	112,964
Total assets	367,020
Liabilities:
Current Liabilities:
Accounts payable	72,453
Client fund obligations	115,333
Current portion of long-term debt	67
Other current liabilities	35,329
Total current liabilities	223,182
Long-term borrowings under committed line of credit	40,000
Other non-current liabilities	2,117
Total liabilities	$	265,299

Amounts reported in discontinued operations for 2013 and 2014 relate solely to the Ecova business segment. The following table presents amounts that were included in discontinued operations for the three and six months ended June 30 (dollars in thousands):



	Three months ended June 30,					Six months ended June 30,
	2014		2013			2014			2013
Revenues	$	43,150	$	44,560		$	87,534		$	86,967
Gain on sale of Ecova (1)	161,100		—			161,100			—
Transaction expenses and accelerated employee benefits (2)	8,976		—			8,976			—
Gain on sale of Ecova, net of transaction expenses	152,124		—			152,124			—

Income before income taxes	154,190		2,593			156,599			5,459
Income tax expense	84,878		1,102			85,772			2,086
Net income from discontinued operations	69,312		1,491			70,827			3,373
Net loss (income) attributable to noncontrolling interests	305		(46		)	(187		)	(807		)
Net income from discontinued operations attributable to Avista Corp. shareholders	$	69,617	$	1,445		$	70,640		$	2,566


(1)	This represents the gross gain recorded to discontinued operations. The gain net of taxes and transactions expenses is $68.1 million.

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(2)

This represents Avista Corp.'s portion of the total transaction expenses. All transaction expenses paid on the Ecova sale were $10.9 million, of which $5.4 million were withheld from the net proceeds and the remainder were paid during the second quarter of 2014. The transaction expenses were for legal, accounting and other consulting fees and the accelerated employee benefits related to employee stock options which were settled in accordance with the Ecova equity plan.

NOTE 6. DERIVATIVES AND RISK MANAGEMENT

Energy Commodity Derivatives

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

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

Avista Utilities makes continuing projections of:


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


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

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


•	purchasing fuel for generation,


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


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

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

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

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Natural gas resource optimization activities include:


•	wholesale market sales of surplus natural gas supplies,


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


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

The following table presents the underlying energy commodity derivative volumes as of June 30, 2014 that are expected to be delivered in each respective year (in thousands of MWhs and mmBTUs):



	Purchases				Sales
	Electric Derivatives		Gas Derivatives		Electric Derivatives		Gas Derivatives
Year	Physical (1) MWH	Financial (1) MWH	Physical (1) mmBTUs	Financial (1) mmBTUs	Physical (1) MWH	Financial (1) MWH	Physical (1) mmBTUs	Financial (1) mmBTUs
2014	515	1,467	13,854	80,796	465	1,768	2,620	59,008
2015	508	1,546	7,113	103,025	222	2,935	1,490	68,710
2016	397	948	2,505	56,680	287	1,634	910	46,220
2017	397	—	675	—	286	—	—	—
2018	397	—	—	—	286	—	—	—
Thereafter	235	—	—	—	158	—	—	—


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

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

Foreign Currency Exchange Contracts

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

The following table summarizes the foreign currency hedges that the Company has entered into as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30,		December 31,
	2014		2013
Number of contracts	26		23
Notional amount (in United States dollars)	$	9,719	$	8,631
Notional amount (in Canadian dollars)	10,519		9,191

Interest Rate Swap Agreements

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

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The following table summarizes the interest rate swaps that the Company has entered into as of June 30, 2014 and December 31, 2013 (dollars in thousands):



Balance Sheet Date	Number of Contracts	Notional Amount		Mandatory Cash Settlement Date
June 30, 2014	2	$	50,000	2014
	4	70,000		2015
	4	80,000		2016
	3	45,000		2017
	6	135,000		2018
December 31, 2013	2	50,000		2014
	2	45,000		2015
	2	40,000		2016
	1	15,000		2017
	4	95,000		2018

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

Derivative Instruments Summary

The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of June 30, 2014 (in thousands):



		Fair Value
Derivative	Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netting		Net Asset (Liability) in Balance Sheet
Foreign currency contracts	Other current assets	$	136	$	(1	)	$	—	$	135
Interest rate contracts	Other current assets	8,211		—			—		8,211
Interest rate contracts	Other property and investments - net	5,809		(2,269		)	—		3,540
Interest rate contracts	Other non-current liabilities and deferred credits	1,617		(22,308		)	7,040		(13,651		)
Commodity contracts (1)	Current utility energy commodity derivative assets	50,416		(39,547		)	—		10,869
Commodity contracts (1)	Non-current utility energy commodity derivative assets	367		(92		)	—		275
Commodity contracts (1)	Current utility energy commodity derivative liabilities	2,232		(5,610		)	—		(3,378		)
Commodity contracts (1)	Other non-current liabilities and deferred credits	22,375		(35,954		)	3,051		(10,528		)
Total derivative instruments recorded on the balance sheet		$	91,163	$	(105,781	)	$	10,091	$	(4,527	)

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

Fair Value

Derivative

Balance Sheet Location

Gross

Asset