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AVISTA CORP - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________
Form 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2020 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, including zip code)
Registrant’s telephone number, including area code: 509-489-0500
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock
AVA
New York Stock Exchange
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  ☒    No  ☐
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 and post such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
 
 
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 ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ☐    No  ☒
As of May 1, 2020, 67,293,360 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.


AVISTA CORPORATION



AVISTA CORPORATION
INDEX
Item No.
 
 
Page
No.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i

AVISTA CORPORATION



 

ii

AVISTA CORPORATION



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
ASC
-
Accounting Standards Codification
ASU
-
Accounting Standards Update
Avista Capital
-
Parent company to the Company’s non-utility businesses, with the exception of AJT Mining Properties, Inc., which is a subsidiary of AERC.
Avista Corp.
-
Avista Corporation, the Company
Avista Utilities
-
Operating division of Avista Corp. (not a subsidiary) comprising the regulated utility operations in the Pacific Northwest
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
Cooling degree days
-
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)
COVID-19
-
Coronavirus disease 2019, a respiratory illness that was declared a pandemic in March 2020
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
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
Heating degree days
-
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).
Hydro One
-
Hydro One Limited, based in Toronto, Ontario, Canada
IPUC
-
Idaho Public Utilities Commission
Juneau
-
The City and Borough of Juneau, Alaska
KW, KWh
-
Kilowatt (1000 watts): a measure of generating power or capability. Kilowatt-hour (1000 watt hours): a measure of energy produced over a period of time
MPSC
-
Public Service Commission of the State of Montana
MW, MWh
-
Megawatt: 1000 KW. Megawatt-hour: 1000 KWh
Noxon Rapids
-
The Noxon Rapids Hydroelectric Generating Project, located on the Clark Fork River in Montana

iii

AVISTA CORPORATION



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
RCA
-
The Regulatory Commission of Alaska
REC
-
Renewable energy credit
ROE
-
Return on equity
ROR
-
Rate of return on rate base
ROU
-
Right-of-use lease asset
SEC
-
U.S. Securities and Exchange Commission
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 of electric power or capability; 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


iv

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:
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, the ordering of refunds to customers 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;
Operational Risk
•
pandemics (including the current COVID-19 pandemic), which could disrupt our business, as well as the global, national and local economy, resulting in a decline in customer demand, deterioration in the creditworthiness of our customers, increases in operating and capital costs, delays in capital projects, disruption in supply chains, and disruption, weakness and volatility in capital markets. In addition, any of these factors could negatively impact our liquidity and limit our access to capital, among other implications;
•
wildfires ignited, or allegedly ignited, by Avista Corp. equipment or facilities could cause significant loss of life and property, thereby causing serious operational and financial harm to Avista Corp. and our customers;
•
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 could 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 or incur costs to repair our facilities;
•
explosions, fires, accidents or other incidents arising from or allegedly arising from our operations that could cause injuries to the public or property damage;
•
blackouts or disruptions of interconnected transmission systems (the regional power grid);

1

AVISTA CORPORATION



•
terrorist attacks, cyberattacks or other malicious acts that could disrupt or cause damage to our utility assets or to the national or regional economy in general, including any effects of terrorism, cyberattacks, ransomware, 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 availability or cost of replacement power (diesel);
•
changing river regulation or operations at hydroelectric facilities not owned by us, which could impact our hydroelectric facilities downstream;
•
change in the use, availability or abundancy of water resources and/or rights needed for operation of our hydroelectric facilities;
Cyber and Technology Risk
•
cyberattacks on the operating systems that are used in the operation of our electric generation, transmission and distribution facilities and our natural gas distribution facilities, and cyberattacks on such systems of other energy companies with which we are interconnected, which could damage or destroy facilities or systems or disrupt operations for extended periods of time and result in the incurrence of liabilities and costs;
•
cyberattacks on the administrative systems that are used in the administration of our business, including customer billing and customer service, accounting, communications, compliance and other administrative functions, and cyberattacks on such systems of our vendors and other companies with which we do business, which could result in the disruption of business operations, the release of private information and the incurrence of liabilities and costs;
•
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 due to new uses for our services or decline in existing services, 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 could 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;
•
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;
•
entering into or growth of non-regulated activities may increase earnings volatility;

2

AVISTA CORPORATION



•
the risk of municipalization or other form of service territory reduction;
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, prohibitions or restrictions on new or existing services, 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 fossil fuel fired power generation and opposition to other thermal generation, wind turbines or hydroelectric facilities;
•
failure to identify changes in legislation, taxation and regulatory issues that could be 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;
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 could 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 could affect future funding obligations, pension and other postretirement benefit expense and the related liabilities;
•
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;
•
economic conditions nationally may affect the valuation of our unregulated portfolio companies;
•
declining energy demand related to customer energy efficiency, conservation measures and/or increased distributed generation;
•
changes in the long-term climate and weather could materially affect, among other things, customer demand, the volume and timing of streamflows required for hydroelectric generation, costs of generation, transmission and distribution. Increased or new risks may arise from severe weather or natural disasters, including wildfires;
•
industry and geographic concentrations which could increase our exposure to credit risks due to counterparties, suppliers and customers being similarly affected by changing conditions;
•
deterioration in the creditworthiness of our customers;
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 could 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;

3

AVISTA CORPORATION



•
explosions, fires, accidents, pipeline ruptures or other incidents that could 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;
Compliance Risk
•
changes in laws, regulations, decisions and policies at the federal, state or local levels, which could materially impact both our electric and gas operations and costs of operations; and
•
the ability to comply with the terms of the licenses and permits for our hydroelectric or thermal generating facilities at cost-effective levels.
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
We file annual, quarterly and current reports and proxy statements with the SEC. The SEC maintains a website that contains these documents at www.sec.gov. We make annual, quarterly and current reports and proxy statements available on our website, www.avistacorp.com, as soon as practicable after electronically filing these documents with the SEC. Except for SEC filings or portions thereof that are specifically referred to in this report, information contained on these websites is not part of this report.



4

PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Avista Corporation
For the Three Months Ended March 31
Dollars in thousands, except per share amounts
(Unaudited)
 
2020
 
2019
Operating Revenues:
 
 
 
Utility revenues:
 
 
 
Utility revenues, exclusive of alternative revenue programs
$
393,820

 
$
393,241

Alternative revenue programs
(4,413
)
 
(4,658
)
Total utility revenues
389,407

 
388,583

Non-utility revenues
823

 
7,898

Total operating revenues
390,230

 
396,481

Operating Expenses:
 
 
 
Utility operating expenses:
 
 
 
Resource costs
129,547

 
137,347

Other operating expenses
94,496

 
83,978

Merger transaction costs
—

 
19,664

Depreciation and amortization
51,421

 
48,914

Taxes other than income taxes
30,978

 
31,943

Non-utility operating expenses:
 
 
 
Other operating expenses
1,360

 
7,355

Depreciation and amortization
235

 
209

Total operating expenses
308,037

 
329,410

Income from operations
82,193

 
67,071

Interest expense
26,347

 
25,651

Interest expense to affiliated trusts
270

 
357

Capitalized interest
(998
)
 
(928
)
Merger termination fee
—

 
(103,000
)
Other income-net
(382
)
 
(907
)
Income before income taxes
56,956

 
145,898

Income tax expense
8,532

 
30,017

Net income
48,424

 
115,881

Net income attributable to noncontrolling interests
—

 
(87
)
Net income attributable to Avista Corp. shareholders
$
48,424

 
$
115,794

Weighted-average common shares outstanding (thousands), basic
67,239

 
65,733

Weighted-average common shares outstanding (thousands), diluted
67,381

 
65,941

 
 
 
 
Earnings per common share attributable to Avista Corp. shareholders:
 
 
 
Basic
$
0.72

 
$
1.76

Diluted
$
0.72

 
$
1.76

The Accompanying Notes are an Integral Part of These Statements.

5

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Avista Corporation
For the Three Months Ended March 31
Dollars in thousands
(Unaudited)
 
2020
 
2019
Net income
$
48,424

 
$
115,881

Other Comprehensive Income:
 
 
 
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $54 and $43 respectively
205

 
160

Total other comprehensive income
205

 
160

Comprehensive income
48,629

 
116,041

Comprehensive income attributable to noncontrolling interests
—

 
(87
)
Comprehensive income attributable to Avista Corporation shareholders
$
48,629

 
$
115,954


The Accompanying Notes are an Integral Part of These Statements.

6

CONDENSED CONSOLIDATED BALANCE SHEETS
Avista Corporation
Dollars in thousands
(Unaudited) 
 
March 31,
 
December 31,
 
2020
 
2019
Assets:
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
18,919

 
$
9,896

Accounts and notes receivable-less allowances of $4,576 and $2,419, respectively
155,253

 
166,657

Materials and supplies, fuel stock and stored natural gas
56,681

 
66,583

Regulatory assets
13,057

 
21,851

Other current assets
30,328

 
40,142

Total current assets
274,238

 
305,129

Net utility property
4,842,318

 
4,797,007

Goodwill
52,426

 
52,426

Non-current regulatory assets
750,866

 
670,802

Other property and investments-net and other non-current assets
254,151

 
257,092

Total assets
$
6,173,999

 
$
6,082,456

Liabilities and Equity:
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
88,184

 
$
110,219

Current portion of long-term debt
52,000

 
52,000

Short-term borrowings
185,000

 
185,800

Regulatory liabilities
66,336

 
51,715

Other current liabilities
174,286

 
130,979

Total current liabilities
565,806

 
530,713

Long-term debt
1,843,981

 
1,843,768

Long-term debt to affiliated trusts
51,547

 
51,547

Pensions and other postretirement benefits
207,313

 
212,006

Deferred income taxes
525,217

 
528,513

Non-current regulatory liabilities
783,376

 
775,436

Other non-current liabilities and deferred credits
237,664

 
201,189

Total liabilities
4,214,904

 
4,143,172

Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements)
 
 
 
Equity:
 
 
 
Avista Corporation Shareholders’ Equity:
 
 
 
Common stock, no par value; 200,000,000 shares authorized; 67,292,233 and 67,176,996 shares issued and outstanding, respectively
1,209,312

 
1,210,741

Accumulated other comprehensive loss
(10,054
)
 
(10,259
)
Retained earnings
759,837

 
738,802

Total Avista Corporation shareholders’ equity
1,959,095

 
1,939,284

Total liabilities and equity
$
6,173,999

 
$
6,082,456

The Accompanying Notes are an Integral Part of These Statements.


7

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Avista Corporation
For the Three Months Ended March 31
Dollars in thousands
(Unaudited) 
 
2020
 
2019
Operating Activities:
 
 
 
Net income
$
48,424

 
$
115,881

Non-cash items included in net income:
 
 
 
Depreciation and amortization
51,421

 
49,123

Deferred income tax provision and investment tax credits
(6,765
)
 
8,883

Power and natural gas cost amortizations (deferrals), net
6,380

 
(48,084
)
Amortization of debt expense
653

 
669

Amortization of investment in exchange power
—

 
613

Stock-based compensation expense
872

 
4,845

Equity-related AFUDC
(1,599
)
 
(1,485
)
Pension and other postretirement benefit expense
7,952

 
9,084

Other regulatory assets and liabilities and deferred debits and credits
11,902

 
1,016

Change in decoupling regulatory deferral
4,155

 
4,471

Gain on sale of investments
(3,242
)
 
—

Other
5,112

 
(1,943
)
Contributions to defined benefit pension plan
(7,300
)
 
(7,300
)
Changes in certain current assets and liabilities:
 
 
 
Accounts and notes receivable
6,078

 
(9,787
)
Materials and supplies, fuel stock and stored natural gas
9,901

 
(394
)
Collateral posted for derivative instruments
(14,283
)
 
3,432

Income taxes receivable
10,500

 
—

Income taxes payable
4,901

 
19,360

Other current assets
(2,166
)
 
1,705

Accounts payable
(19,527
)
 
16,697

Other current liabilities
21,905

 
30,095

Net cash provided by operating activities
135,274

 
196,881

 
 
 
 
Investing Activities:
 
 
 
Utility property capital expenditures (excluding equity-related AFUDC)
(95,525
)
 
(93,615
)
Issuance of notes receivable by subsidiaries
(2,779
)
 
(200
)
Equity and property investments made by subsidiaries
(1,313
)
 
(3,504
)
Proceeds from sale of investments made by subsidiaries
5,148

 
—

Other
(662
)
 
(345
)
Net cash used in investing activities
(95,131
)
 
(97,664
)
The Accompanying Notes are an Integral Part of These Statements.

8

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Avista Corporation
For the Three Months Ended March 31
Dollars in thousands
(Unaudited)
 
2020
 
2019
Financing Activities:
 
 
 
Net decrease in short-term borrowings
$
(800
)
 
$
(71,000
)
Maturity of long-term debt and finance leases
(700
)
 
(665
)
Issuance of common stock, net of issuance costs
175

 
190

Cash dividends paid
(27,389
)
 
(25,615
)
Other
(2,406
)
 
(896
)
Net cash used in financing activities
(31,120
)
 
(97,986
)
 
 
 
 
Net increase in cash and cash equivalents
9,023

 
1,231

 
 
 
 
Cash and cash equivalents at beginning of period
9,896

 
14,656

 
 
 
 
Cash and cash equivalents at end of period
$
18,919

 
$
14,861

The Accompanying Notes are an Integral Part of These Statements.



9

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Avista Corporation
For the Three Months Ended March 31
Dollars in thousands
(Unaudited)
 
2020
 
2019
Common Stock, Shares:
 
 
 
Shares outstanding at beginning of period
67,176,996

 
65,688,356

Shares issued
115,237

 
61,576

Shares outstanding at end of period
67,292,233

 
65,749,932

Common Stock, Amount:
 
 
 
Balance at beginning of period
$
1,210,741

 
$
1,136,491

Equity compensation expense
804

 
4,452

Issuance of common stock, net of issuance costs
175

 
190

Payment of minimum tax withholdings for share-based payment awards
(2,408
)
 
(891
)
Balance at end of period
1,209,312

 
1,140,242

Accumulated Other Comprehensive Loss:
 
 
 
Balance at beginning of period
(10,259
)
 
(7,866
)
Other comprehensive income
205

 
160

Balance at end of period
(10,054
)
 
(7,706
)
Retained Earnings:
 
 
 
Balance at beginning of period
738,802

 
644,595

Net income attributable to Avista Corporation shareholders
48,424

 
115,794

Cash dividends paid on common stock
(27,389
)
 
(25,615
)
Balance at end of period
759,837

 
734,774

Total Avista Corporation shareholders’ equity
1,959,095

 
1,867,310

Noncontrolling Interests:
 
 
 
Balance at beginning of period
—

 
825

Net income attributable to noncontrolling interests
—

 
87

Balance at end of period
—

 
912

Total equity
$
1,959,095

 
$
1,868,222

Dividends declared per common share
$
0.4050

 
$
0.3875

The Accompanying Notes are an Integral Part of These Statements.

10

AVISTA CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying condensed consolidated financial statements of Avista Corp. as of and for the interim periods ended March 31, 2020 and March 31, 2019 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. All such adjustments are of a normal recurring nature. The condensed consolidated financial statements have been prepared in accordance with 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, 2019 (2019 Form 10-K).
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Avista Corp. is primarily an electric and natural gas utility with certain other business ventures. Avista Utilities is an operating division of Avista Corp., comprising its 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 the Company's Noxon Rapids generating facility.
AERC is a wholly-owned subsidiary of Avista Corp. The primary subsidiary of AERC is AEL&P, which comprises Avista Corp.'s regulated utility operations in Alaska.
Avista Capital, a wholly owned non-regulated subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, with the exception of AJT Mining Properties, Inc., which is a subsidiary of AERC. See Note 16 for business segment information. See Note 18 for discussion of the sale of METALfx, an unregulated subsidiary of the Company.
Basis of Reporting
The condensed consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants.
Derivative Assets and Liabilities
Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value.
The WUTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition of mark-to-market gains and losses on energy commodity transactions until the period of delivery. Realized benefits and costs result in adjustments to retail rates through PGAs, the ERM in Washington, the PCA mechanism in Idaho, and periodic general rate cases. The resulting regulatory assets associated with energy commodity derivative instruments have been concluded to be probable of recovery through future rates.
Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an offsetting regulatory asset or liability. Contracts that are not considered derivatives are accounted for on the accrual basis until they are settled or realized unless there is a decline in the fair value of the contract that is determined to be other-than-temporary.
For interest rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities, as well as offsetting regulatory assets and liabilities, such that there is no income statement impact. The interest rate swap derivatives are risk management tools similar to energy commodity derivatives. Upon settlement of interest rate swap derivatives, the cash payments made or received are recorded as a regulatory asset or liability and are subsequently amortized as a component of interest expense over the life of the associated debt. The settled interest rate swap derivatives are also included as a part of Avista Corp.'s cost of debt calculation for ratemaking purposes.

11

AVISTA CORPORATION



The Company has multiple master netting agreements with a variety of entities that allow for cross-commodity netting of derivative agreements with the same counterparty (i.e. power derivatives can be netted with natural gas derivatives). In addition, some master netting agreements allow for the netting of commodity derivatives and interest rate swap derivatives for the same counterparty. The Company does not have any agreements which allow for cross-affiliate netting among multiple affiliated legal entities. The Company nets all derivative instruments when allowed by the agreement for presentation in the Condensed Consolidated Balance Sheets.
Fair Value Measurements
Fair value represents the price that would be received when selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, deferred compensation assets, as well as derivatives related to interest rate swaps and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 11 for the Company’s fair value disclosures.
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 loss contingencies that do not meet these conditions for accrual if there is a reasonable possibility that a material loss may be incurred. See Note 15 for further discussion of the Company's commitments and contingencies.
COVID-19
In March 2020, the Company filed an application for authorization to defer certain incremental COVID-19 related costs with the OPUC. In April and May 2020, the Company made similar filings with the IPUC and the WUTC, respectively. In Alaska, a Senate Bill was signed into law that provides for deferral and recovery of incremental COVID-19 related costs subject to approval by the RCA. The recovery of any deferred costs would be determined in future rate making proceedings.
NOTE 2. NEW ACCOUNTING STANDARDS
ASU No. 2016-12 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"
On January 1, 2020, the Company adopted ASU 2016-13, which replaces the incurred loss impairment methodology in previous GAAP with a methodology that reflects expected credit losses, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company analyzed its financial instruments within the scope of this guidance, primarily trade receivables, and it did not have a material impact to the Company's financial statements and does not require additional disclosure in these Notes to the Condensed Consolidated Financial Statements.
ASU 2018-13 "Fair Value Measurement (Topic 820)"
In August 2018, the FASB issued ASU No. 2018-13, which amends the fair value measurement disclosure requirements of ASC 820. The requirements of this ASU include additional disclosure regarding the range and weighted average used to develop significant unobservable inputs for Level 3 fair value estimates and the elimination of certain other previously required disclosures, such as the narrative description of the valuation process for Level 3 fair value measurements. This ASU became effective on January 1, 2020 and the requirements of this ASU did not have a material impact on the Company's fair value disclosures. See Note 11 for the Company's fair value disclosures.
ASU No. 2018-14 "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)"
In August 2018, the FASB issued ASU No. 2018-14, which amends ASC 715 to add, remove and/or clarify certain disclosure requirements related to defined benefit pension and other postretirement plans. The additional disclosure requirements are primarily narrative discussion of significant changes in the benefit obligations and plan assets. The removed disclosures are primarily information about accumulated other comprehensive income expected to be recognized over the next year and the effects of changes associated with assumed health care costs. This ASU is effective for periods beginning after December 15, 2021 and early adoption is permitted. The Company is in the process of evaluating this standard; however, it has determined that it will not early adopt this standard as of March 31, 2020.

12

AVISTA CORPORATION



NOTE 3. BALANCE SHEET COMPONENTS
Materials and Supplies, Fuel Stock and Stored Natural Gas
Inventories of materials and supplies, fuel stock and stored natural gas are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Materials and supplies
$
49,007

 
$
47,402

Fuel stock
4,740

 
4,875

Stored natural gas
2,934

 
14,306

Total
$
56,681

 
$
66,583


Other Current Assets
Other current assets consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Collateral posted for derivative instruments after netting with outstanding derivative liabilities
$
2,470

 
$
4,434

Prepayments
22,569

 
19,652

Income taxes receivable
—

 
11,047

Other
5,289

 
5,009

Total
$
30,328

 
$
40,142


Net Utility Property
Net utility property consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Utility plant in service
$
6,521,033

 
$
6,462,993

Construction work in progress
189,827

 
164,941

Total
6,710,860

 
6,627,934

Less: Accumulated depreciation and amortization
1,868,542

 
1,830,927

Total net utility property
$
4,842,318

 
$
4,797,007


Other Property and Investments-Net and Other Non-Current Assets
Other property and investments-net and other non-current assets consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Operating lease ROU assets
$
65,303

 
$
69,746

Finance lease ROU assets
50,069

 
50,980

Non-utility property
26,511

 
27,159

Equity investments
51,467

 
51,258

Investment in affiliated trust
11,547

 
11,547

Notes receivable
14,970

 
14,060

Deferred compensation assets
8,670

 
8,948

Other
25,614

 
23,394

Total
$
254,151

 
$
257,092



13

AVISTA CORPORATION



Other Current Liabilities
Other current liabilities consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Accrued taxes other than income taxes
$
48,980

 
$
36,965

Employee paid time off accruals
24,084

 
22,343

Accrued interest
31,033

 
16,486

Current portion of pensions and other postretirement benefits
9,811

 
8,826

Income taxes payable
5,199

 
298

Derivative liabilities
27,409

 
10,928

Other current liabilities
27,770

 
35,133

Total other current liabilities
$
174,286

 
$
130,979


Other Non-Current Liabilities and Deferred Credits
Other non-current liabilities and deferred credits consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Operating lease liabilities
$
62,145

 
$
65,565

Finance lease liabilities
51,016

 
51,750

Deferred investment tax credits
30,588

 
30,444

Asset retirement obligations
20,263

 
20,338

Derivative liabilities
60,278

 
19,685

Other
13,374

 
13,407

Total
$
237,664

 
$
201,189


Regulatory Assets and Liabilities
Regulatory assets and liabilities consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
 
Current
 
Non-Current
 
Current
 
Non-Current
Regulatory Assets
 
 
 
 
 
 
 
Energy commodity derivatives
$
78

 
$
—

 
$
6,310

 
$
264

Decoupling surcharge
10,927

 
15,504

 
12,098

 
14,806

Pension and other postretirement benefit plans
—

 
206,112

 
—

 
208,754

Interest rate swaps
—

 
246,566

 
—

 
168,594

Deferred income taxes
—

 
96,525

 
—

 
95,752

Settlement with Coeur d'Alene Tribe
—

 
41,005

 
—

 
41,332

AFUDC above FERC allowed rate
—

 
41,333

 
—

 
40,749

Demand side management programs
—

 
8,670

 
—

 
12,170

Utility plant to be abandoned
—

 
31,678

 
—

 
31,291

Other regulatory assets
2,052

 
63,473

 
3,443

 
57,090

Total regulatory assets
$
13,057

 
$
750,866

 
$
21,851

 
$
670,802

 
 
 
 
 
 
 
 


14

AVISTA CORPORATION



 
March 31, 2020
 
December 31, 2019
 
Current
 
Non-Current
 
Current
 
Non-Current
Regulatory Liabilities
 
 
 
 
 
 
 
Income tax related liabilities
$
23,975

 
$
404,046

 
$
23,803

 
$
407,549

Deferred natural gas costs
5,449

 
—

 
3,189

 
—

Deferral power costs
23,595

 
20,716

 
14,155

 
23,544

Decoupling rebate
363

 
5,972

 
255

 
2,398

Provision for rate refund (Washington remand case)
8,490

 
—

 
3,565

 
—

Utility plant retirement costs
—

 
317,203

 
—

 
312,403

Interest rate swaps
—

 
16,136

 
—

 
17,088

Other regulatory liabilities
4,464

 
19,303

 
6,748

 
12,454

Total regulatory liabilities
$
66,336

 
$
783,376

 
$
51,715

 
$
775,436


NOTE 4. REVENUE
ASC 606 defines the core principle of the revenue recognition model is that an entity should identify the various performance obligations in a contract, allocate the transaction price among the performance obligations and recognize revenue when (or as) the entity satisfies each performance obligation.
Utility Revenues
Revenue from Contracts with Customers
General
The majority of Avista Corp.’s revenue is from rate-regulated sales of electricity and natural gas to retail customers, which has two performance obligations, (1) having service available for a specified period (typically a month at a time) and (2) the delivery of energy to customers. The total energy price generally has a fixed component (basic charge) related to having service available and a usage-based component, related to the delivery and consumption of energy. The commodity is sold and/or delivered to and consumed by the customer simultaneously, and the provisions of the relevant utility commission authorization determine the charges the Company may bill the customer. Given that all revenue recognition criteria are met upon the delivery of energy to customers, revenue is recognized immediately at that time.
Revenues from contracts with customers are presented in the Condensed Consolidated Statements of Income in the line item "Utility revenues, exclusive of alternative revenue programs."
Non-Derivative Wholesale Contracts
The Company has certain wholesale contracts which are not accounted for as derivatives and, accordingly, are within the scope of ASC 606 and considered revenue from contracts with customers. Revenue is recognized as energy is delivered to the customer or the service is available for a specified period of time, consistent with the discussion of rate-regulated sales above.
Alternative Revenue Programs (Decoupling)
ASC 606 retained existing GAAP associated with alternative revenue programs, which specified that alternative revenue programs are contracts between an entity and a regulator of utilities, not a contract between an entity and a customer. GAAP requires that an entity present revenue arising from alternative revenue programs separately from revenues arising from contracts with customers on the face of the Condensed Consolidated Statements of Income. The Company's decoupling mechanisms (also known as a FCA in Idaho) qualify as alternative revenue programs. Decoupling revenue deferrals are recognized in the Condensed Consolidated Statements of Income during the period they occur (i.e. during the period of revenue shortfall or excess due to fluctuations in customer usage), subject to certain limitations, and a regulatory asset or liability is established that will be surcharged or rebated to customers in future periods. GAAP requires that for any alternative revenue program, like decoupling, the revenue must be expected to be collected from customers within 24 months of the deferral to qualify for recognition in the current period Condensed Consolidated Statement of Income. Any amounts included in the Company's decoupling program that are not expected to be collected from customers within 24 months are not recorded in the financial statements until the period in which revenue recognition criteria are met. The amounts expected to be collected from customers within 24 months represents an estimate that must be made by the Company on an ongoing basis due to it being based on the volumes of electric and natural gas sold to customers on a go-forward basis.

15

AVISTA CORPORATION



Derivative Revenue
Most wholesale electric and natural gas transactions (including both physical and financial transactions), and the sale of fuel are considered derivatives, which are specifically scoped out of ASC 606. As such, these revenues are disclosed separately from revenue from contracts with customers. Revenue is recognized for these items upon the settlement/expiration of the derivative contract. Derivative revenue includes those transactions that are entered into and settled within the same month.
Other Utility Revenue
Other utility revenue includes rent, revenues from the lineman training school, sales of materials, late fees and other charges that do not represent contracts with customers. Other utility revenue also includes the provision for earnings sharing and the deferral and amortization of refunds to customers associated with the TCJA. This revenue is scoped out of ASC 606, as this revenue does not represent items where a customer is a party that has contracted with the Company to obtain goods or services that are an output of the Company’s ordinary activities in exchange for consideration. As such, these revenues are presented separately from revenue from contracts with customers.
Other Considerations for Utility Revenues
Gross Versus Net Presentation
Revenues and resource costs from Avista Utilities’ settled energy contracts that are “booked out” (not physically delivered) are reported on a net basis as part of derivative revenues.
Utility-related taxes collected from customers (primarily state excise taxes and city utility taxes) are taxes that are imposed on Avista Utilities as opposed to being imposed on its customers; therefore, Avista Utilities is the taxpayer and records these transactions on a gross basis in revenue from contracts with customers and operating expense (taxes other than income taxes). The utility-related taxes collected from customers at AEL&P are imposed on the customers rather than AEL&P; therefore, the customers are the taxpayers and AEL&P is acting as their agent. As such, these transactions at AEL&P are presented on a net basis within revenue from contracts with customers.
Utility-related taxes that were included in revenue from contracts with customers were as follows for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Utility-related taxes
$
18,700

 
$
19,089


Non-Utility Revenues
Revenue from Contracts with Customers
Non-utility revenue from contracts with customers is derived from contracts with one performance obligation. Prior to its sale in April 2019 (See Note 18 for further discussion on the sale of METALfx), METALfx had one performance obligation, the delivery of a product, and revenues were recognized when the risk of loss transferred to the customer, which occurred when products were shipped. The Steam Plant Brew Pub serves food and beverages to customers, its one performance obligation, and recognizes revenues at the time of service to the customer.
Significant Judgments and Unsatisfied Performance Obligations
The only significant judgments involving revenue recognition are estimates surrounding unbilled revenue and receivables from contracts with customers and estimates surrounding the amount of decoupling revenues that will be collected from customers within 24 months (discussed above).
The Company has certain capacity arrangements, where the Company has a contractual obligation to provide either electric or natural gas capacity to its customers for a fixed fee. Most of these arrangements are paid for in arrears by the customers and do not result in deferred revenue and only result in receivables from the customers. The Company does have one capacity agreement where the customer makes payments throughout the year and depending on the timing of the customer payments, it can result in an immaterial amount of deferred revenue or a receivable from the customer. As of March 31, 2020, the Company estimates it had unsatisfied capacity performance obligations of $4.7 million, which will be recognized as revenue in future periods as the capacity is provided to the customers. These performance obligations are not reflected in the financial statements, as the Company has not received payment for these services.

16

AVISTA CORPORATION



Disaggregation of Total Operating Revenue
The following table disaggregates total operating revenue by segment and source for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Avista Utilities
 
 
 
Revenue from contracts with customers
$
351,628

 
$
354,301

Derivative revenues
31,075

 
24,127

Alternative revenue programs
(4,413
)
 
(4,658
)
Deferrals and amortizations for rate refunds to customers
(2,606
)
 
2,135

Other utility revenues
1,521

 
1,797

Total Avista Utilities
377,205

 
377,702

AEL&P
 
 
 
Revenue from contracts with customers
12,126

 
10,736

Deferrals and amortizations for rate refunds to customers
(48
)
 
(48
)
Other utility revenues
124

 
193

Total AEL&P
12,202

 
10,881

Other
 
 
 
Revenue from contracts with customers
514

 
7,647

Other revenues
309

 
251

Total other
823

 
7,898

Total operating revenues
$
390,230

 
$
396,481

Utility Revenue from Contracts with Customers by Type and Service
The following table disaggregates revenue from contracts with customers associated with the Company's electric operations for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
 
Avista Utilities
 
AEL&P
 
Total Utility
 
Avista Utilities
 
AEL&P
 
Total Utility
ELECTRIC OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
Revenue from contracts with customers
 
 
 
 
 
 
 
 
 
 
 
Residential
$
107,977

 
$
5,866

 
$
113,843

 
$
115,392

 
$
5,852

 
$
121,244

Commercial and governmental
78,849

 
6,199

 
85,048

 
79,245

 
4,821

 
84,066

Industrial
24,711

 
—

 
24,711

 
25,248

 
—

 
25,248

Public street and highway lighting
1,783

 
61

 
1,844

 
1,903

 
63

 
1,966

Total retail revenue
213,320

 
12,126

 
225,446

 
221,788

 
10,736

 
232,524

Transmission
3,774

 
—

 
3,774

 
5,152

 
—

 
5,152

Other revenue from contracts with customers
5,289

 
—

 
5,289

 
8,194

 
—

 
8,194

Total revenue from contracts with customers
$
222,383

 
$
12,126

 
$
234,509

 
$
235,134

 
$
10,736

 
$
245,870



17

AVISTA CORPORATION



The following table disaggregates revenue from contracts with customers associated with the Company's natural gas operations for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
 
Avista Utilities
 
Avista Utilities
NATURAL GAS OPERATIONS
 
 
 
Revenue from contracts with customers
 
 
 
Residential
$
84,173

 
$
77,336

Commercial
39,401

 
36,595

Industrial and interruptible
2,194

 
1,627

Total retail revenue
125,768

 
115,558

Transportation
2,352

 
2,484

Other revenue from contracts with customers
1,125

 
1,125

Total revenue from contracts with customers
$
129,245

 
$
119,167


NOTE 5. DERIVATIVES AND RISK MANAGEMENT
Energy Commodity Derivatives
Avista Corp. 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 Corp. utilizes derivative instruments, such as forwards, futures, swap derivatives and options, in order to manage the various risks relating to these commodity price exposures. Avista Corp. has an energy resources risk policy and control procedures to manage these risks.
As part of Avista Corp.'s resource procurement and management operations in the electric business, Avista Corp. engages in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve Avista Corp.'s load obligations and the use of these resources to capture available 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 and fuel. Such transactions are part of the process of matching resources with load obligations and hedging a portion of the related financial risks. These transactions range from terms of intra-hour up to multiple years.
As part of its resource procurement and management of its natural gas business, Avista Corp. 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 Corp.’s distribution system. However, daily variations in natural gas demand can be significantly different than monthly demand projections. On the basis of these projections, Avista Corp. plans and executes a series of transactions to hedge a portion of its projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend as much as three natural gas operating years (November through October) into the future. Avista Corp. also leaves a significant portion of its natural gas supply requirements unhedged for purchase in short-term and spot markets.
Avista Corp. plans for sufficient natural gas delivery capacity to serve its retail customers for a theoretical peak day event. Avista Corp. generally has more pipeline and storage capacity than what is needed during periods other than a peak-day. Avista Corp. optimizes its natural gas resources by using market opportunities to generate economic value that helps mitigate fixed costs. Avista Corp. also optimizes its natural gas storage capacity by purchasing and storing natural gas when prices are traditionally lower, typically in the summer, and withdrawing during higher priced months, typically during the winter. However, if market conditions and prices indicate that Avista Corp. should buy or sell natural gas at other times during the year, Avista Corp. engages in optimization transactions to capture value in the marketplace. Natural gas optimization activities include, but are not limited to, wholesale market sales of surplus natural gas supplies, purchases and sales of natural gas to optimize use of pipeline and storage capacity, and participation in the transportation capacity release market.

18

AVISTA CORPORATION



The following table presents the underlying energy commodity derivative volumes as of March 31, 2020 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
Remainder 2020
3

 
395

 
10,232

 
61,330

 
366

 
1,491

 
871

 
27,035

2021
—

 
123

 
305

 
32,120

 
—

 
246

 
1,490

 
21,700

2022
—

 
—

 
450

 
7,820

 
—

 
—

 
—

 
2,700

 
As of March 31, 2020, there are no expected deliveries of energy commodity derivatives after 2022.
The following table presents the underlying energy commodity derivative volumes as of December 31, 2019 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
2020
2

 
442

 
9,813

 
78,803

 
133

 
1,724

 
2,984

 
37,848

2021
—

 
—

 
153

 
25,523

 
—

 
246

 
1,040

 
13,108

2022
—

 
—

 
225

 
4,725

 
—

 
—

 
—

 
675

 
As of December 31, 2019, there are no expected deliveries of energy commodity derivatives after 2022.
(1)
Physical transactions represent commodity transactions in which Avista Corp. will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of the benefit or cost but with no physical delivery of the commodity, such as futures, swap derivatives, options, or forward contracts.
The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are scheduled to be delivered and will be included in the various deferral and 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 Derivatives
A significant portion of Avista Corp.’s 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 Corp.’s short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices. The short-term natural gas transactions are settled within 60 days with U.S. dollars. Avista Corp. hedges a portion of the foreign currency risk by purchasing Canadian currency exchange derivatives when such commodity transactions are initiated. The foreign currency exchange derivatives and the unhedged foreign currency risk have not had a material effect on Avista Corp.’s financial condition, results of operations or cash flows and these differences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking.
The following table summarizes the foreign currency exchange derivatives that Avista Corp. has outstanding as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Number of contracts
23

 
20

Notional amount (in United States dollars)
$
5,219

 
$
5,932

Notional amount (in Canadian dollars)
7,247

 
7,828


Interest Rate Swap Derivatives
Avista Corp. is affected by fluctuating interest rates related to a portion of its existing debt, and future borrowing requirements. Avista Corp. hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swap

19

AVISTA CORPORATION



derivatives and U.S. Treasury lock agreements. These interest rate swap derivatives and U.S. Treasury lock agreements are considered economic hedges against fluctuations in future cash flows associated with anticipated debt issuances.
The following table summarizes the unsettled interest rate swap derivatives that Avista Corp. has outstanding as of March 31, 2020 and December 31, 2019 (dollars in thousands):
Balance Sheet Date
 
Number of Contracts
 
Notional Amount
 
Mandatory Cash Settlement Date
March 31, 2020
 
7
 
$
70,000

 
2020
 
 
4
 
45,000

 
2021
 
 
11
 
120,000

 
2022
 
 
1
 
10,000

 
2023
December 31, 2019
 
7
 
70,000

 
2020
 
 
3
 
35,000

 
2021
 
 
10
 
110,000

 
2022

The fair value of outstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount of swap derivatives outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. Avista Corp. is required to make cash payments to settle the interest rate swap derivatives when the fixed rates are higher than prevailing market rates at the date of settlement. Conversely, Avista Corp. receives cash to settle its interest rate swap derivatives when prevailing market rates at the time of settlement exceed the fixed swap rates.
Summary of Outstanding Derivative Instruments
The amounts recorded on the Condensed Consolidated Balance Sheet as of March 31, 2020 and December 31, 2019 reflect the offsetting of derivative assets and liabilities where a legal right of offset exists.
The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of March 31, 2020 (in thousands):
 
 
Fair Value
Derivative and Balance Sheet Location
 
Gross
Asset
 
Gross
Liability
 
Collateral
Netted
 
Net Asset
(Liability)
on Balance
Sheet
Foreign currency exchange derivatives
 
 
 
 
 
 
 
 
Other current liabilities
 
$
36

 
$
(103
)
 
$
—

 
$
(67
)
Interest rate swap derivatives
 
 
 
 
 
 
 
 
Other current liabilities
 
—

 
(32,967
)
 
12,967

 
(20,000
)
Other non-current liabilities and deferred credits
 
—

 
(79,271
)
 
14,123

 
(65,148
)
Energy commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
28,964

 
(26,503
)
 
(695
)
 
1,766

Other property and investments-net and other non-current assets
 
6,072

 
(3,626
)
 
—

 
2,446

Other current liabilities
 
51

 
(2,590
)
 
—

 
(2,539
)
Other non-current liabilities and deferred credits
 
—

 
(24
)
 
—

 
(24
)
Total derivative instruments recorded on the balance sheet
 
$
35,123

 
$
(145,084
)
 
$
26,395

 
$
(83,566
)

20

AVISTA CORPORATION



The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of December 31, 2019 (in thousands):
 
 
Fair Value
Derivative and Balance Sheet Location
 
Gross
Asset
 
Gross
Liability
 
Collateral
Netted
 
Net Asset
(Liability)
on Balance
Sheet
Foreign currency exchange derivatives
 
 
 
 
 
 
 
 
Other current assets
 
$
97

 
$
—

 
$
—

 
$
97

Interest rate swap derivatives
 
 
 
 
 
 
 
 
Other current assets
 
589

 
—

 
—

 
589

Other current liabilities
 
238

 
(9,379
)
 
1,316

 
(7,825
)
Other non-current liabilities and deferred credits
 
725

 
(24,677
)
 
5,454

 
(18,498
)
Energy commodity derivatives
 
 
 
 
 
 
 
 
Other current assets
 
416

 
(245
)
 
—

 
171

Other property and investments-net and other non-current assets
 
6,369

 
(5,446
)
 
—

 
923

Other current liabilities
 
34,760

 
(41,241
)
 
3,378

 
(3,103
)
Other non-current liabilities and deferred credits
 
28

 
(1,215
)
 
—

 
(1,187
)
Total derivative instruments recorded on the balance sheet
 
$
43,222

 
$
(82,203
)
 
$
10,148

 
$
(28,833
)

Exposure to Demands for Collateral
Avista Corp.'s derivative contracts often require collateral (in the form of cash or letters of credit) or other credit enhancements, or reductions or terminations of a portion of the contract through cash settlement. In the event of a downgrade in Avista Corp.'s credit ratings or changes in market prices, additional collateral may be required. In periods of price volatility, the level of exposure can change significantly. As a result, sudden and significant demands may be made against Avista Corp.'s credit facilities and cash. Avista Corp. actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements.
The following table presents Avista Corp.'s collateral outstanding related to its derivative instruments as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Energy commodity derivatives
 
 
 
Cash collateral posted
$
1,775

 
$
7,812

Letters of credit outstanding
25,000

 
17,400

Balance sheet offsetting (cash collateral against net derivative positions)
(695
)
 
3,378

 
 
 
 
Interest rate swap derivatives
 
 
 
Cash collateral posted
27,090

 
6,770

Letters of credit outstanding
3,910

 
—

Balance sheet offsetting (cash collateral against net derivative positions)
27,090

 
6,770

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

21

AVISTA CORPORATION



The following table presents the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position and the amount of additional collateral Avista Corp. could be required to post as of March 31, 2020 and December 31, 2019 (in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Energy commodity derivatives
 
 
 
Liabilities with credit-risk-related contingent features
$
1

 
$
814

Additional collateral to post
1

 
814

 
 
 
 
Interest rate swap derivatives
 
 
 
Liabilities with credit-risk-related contingent features
112,238

 
34,056

Additional collateral to post
81,280

 
26,912


NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
Avista Utilities
Avista Utilities’ maintained the same pension and other postretirement plans during the three months ended March 31, 2020 as those described as of December 31, 2019. The Company’s funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum amounts that are currently deductible for income tax purposes. The Company contributed $7.3 million in cash to the pension plan for the three months ended March 31, 2020 and it expects to contribute a total of $22 million in 2020.
The Company uses a December 31 measurement date for its defined benefit pension and other postretirement benefit plans. The following table sets forth the components of net periodic benefit costs for the three months ended March 31 (dollars in thousands):
 
Pension Benefits
 
Other Postretirement Benefits
 
2020
 
2019
 
2020
 
2019
Service cost
$
5,546

 
$
4,874

 
$
979

 
$
772

Interest cost
6,971

 
7,138

 
1,515

 
1,372

Expected return on plan assets
(9,125
)
 
(7,815
)
 
(630
)
 
(718
)
Amortization of prior service cost
75

 
75

 
(275
)
 
(275
)
Net loss recognition
1,654

 
2,415

 
1,243

 
1,246

Net periodic benefit cost
$
5,121

 
$
6,687

 
$
2,832

 
$
2,397


Total service costs in the table above are recorded to the same accounts as labor expense. Labor and benefits expense is recorded to various projects based on whether the work is a capital project or an operating expense. Approximately 40 percent of all labor and benefits is capitalized to utility property and 60 percent is expensed to utility other operating expenses.
The non-service portion of costs in the table above are recorded to other expense below income from operations in the Condensed Consolidated Statements of Income or capitalized as a regulatory asset. Approximately 40 percent of the costs are capitalized to regulatory assets and 60 percent is expensed to the income statement.

22

AVISTA CORPORATION



NOTE 7. INCOME TAXES
The following table summarizes the significant factors impacting the difference between our effective tax rate and the federal statutory rate for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Federal income taxes at statutory rates
$
11,961

21.0
 %
 
$
30,639

21.0
 %
Increase (decrease) in tax resulting from:
 
 
 
 
 
Tax effect of regulatory treatment of utility plant differences
(2,402
)
(4.2
)
 
(2,080
)
(1.4
)
State income tax expense
1,227

2.1

 
1,659

1.1

Acquisition costs
—

—

 
(1,824
)
(1.2
)
Settlement of equity awards
165

0.3

 
612

0.4

Other
(2,419
)
(4.2
)
 
1,011

0.7

Total income tax expense
$
8,532

15.0
 %
 
$
30,017

20.6
 %

NOTE 8. COMMITTED LINES OF CREDIT
Avista Corp.
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. The Company expects to amend and extend the revolving line of credit agreement in the second quarter for a revised term of one additional year beyond the current maturity date of April 2021, with the option to extend for an additional one year period. The committed line of credit is secured by non-transferable first mortgage bonds of the Company issued to the agent bank that would only become due and payable in the event, and then only to the extent, that the Company defaults on its obligations under the committed line of credit.
Balances outstanding and interest rates of borrowings (excluding letters of credit) under the Company’s revolving committed line of credit were as follows as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Balance outstanding at end of period
$
185,000

 
$
182,300

Letters of credit outstanding at end of period
$
32,983

 
$
21,473

Average interest rate at end of period
1.66
%
 
2.64
%

As of March 31, 2020 and December 31, 2019, the borrowings outstanding under Avista Corp.'s committed line of credit were
classified as short-term borrowings on the Condensed Consolidated Balance Sheet.
AEL&P
AEL&P has a committed line of credit in the amount of $25.0 million that expires in November 2024. As of March 31, 2020 and December 31, 2019, there were borrowings of $0 and $3.5 million, respectively, and there were no letters of credit outstanding under this committed line of credit. The committed line of credit is secured by non-transferable first mortgage bonds of AEL&P issued to the agent bank that would only become due and payable in the event, and then only to the extent, that AEL&P defaults on its obligations under the committed line of credit.
NOTE 9. CREDIT AGREEMENT
Credit Agreement
On April 6, 2020, the Company entered into a Credit Agreement with U.S. Bank National Association, as Lender and Administrative Agent, and CoBank, ACB, as Lender in the amount of $100 million at an interest rate of 1-Month LIBOR plus 125 basis points with a maturity date of April 5, 2021. Loans under this agreement are unsecured and have a variable annual interest rate determined by either the Eurodollar rate or the Alternative Base Rate depending on the type of loan selected by Avista Corp.
The Credit Agreement contains customary covenants and default provisions, including a covenant not to permit the ratio of "consolidated total debt" to "consolidated total capitalization" of Avista Corp. to be greater than 65 percent at any time.
The Company has borrowed the entire $100 million available under this agreement, which is being used to provide additional liquidity. The amount can be repaid early; however, the amount repaid cannot be re-borrowed.

23

AVISTA CORPORATION



NOTE 10. LONG-TERM DEBT TO AFFILIATED TRUSTS
In 1997, the Company issued Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, with a principal amount of $51.5 million to Avista Capital II, an affiliated business trust formed by the Company. Avista Capital II issued $50.0 million of Preferred Trust Securities with a floating distribution rate of LIBOR plus 0.875 percent, calculated and reset quarterly.
The distribution rates paid were as follows during the three months ended March 31, 2020 and the year ended December 31, 2019:
 
March 31,
 
December 31,
 
2020
 
2019
Low distribution rate
2.46
%
 
2.79
%
High distribution rate
2.79
%
 
3.61
%
Distribution rate at the end of the period
2.46
%
 
2.79
%

Concurrent with the issuance of the Preferred Trust Securities, Avista Capital II issued $1.5 million of Common Trust Securities to the Company. The Preferred Trust Securities may be redeemed at the option of Avista Capital II at any time and mature on June 1, 2037. In December 2000, the Company purchased $10.0 million of these Preferred Trust Securities.
The Company owns 100 percent of Avista Capital II and has solely and unconditionally guaranteed the payment of distributions on, and redemption price and liquidation amount for, the Preferred Trust Securities to the extent that Avista Capital II has funds available for such payments from the respective debt securities. Upon maturity or prior redemption of such debt securities, the Preferred Trust Securities will be mandatorily redeemed. The Company does not include these capital trusts in its consolidated financial statements as Avista Corp. is not the primary beneficiary. As such, the sole assets of the capital trusts are $51.5 million of junior subordinated deferrable interest debentures of Avista Corp., which are reflected on the Condensed Consolidated Balance Sheets. Interest expense to affiliated trusts in the Condensed Consolidated Statements of Income represents interest expense on these debentures.
NOTE 11. FAIR VALUE
The carrying values of cash and cash equivalents, accounts and notes receivable, accounts payable, and short-term borrowings are reasonable estimates of their fair values. Long-term debt (including current portion and material capital leases) and long-term debt to affiliated trusts are reported at carrying value on the Condensed Consolidated Balance Sheets.
The fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to fair values derived from unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are defined as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, but which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Level 3 – Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values incorporates various factors that not only include the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits and letters of credit), but also the impact of Avista Corp.’s nonperformance risk on its liabilities.

24

AVISTA CORPORATION



The following table sets forth the carrying value and estimated fair value of the Company’s financial instruments not reported at estimated fair value on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Long-term debt (Level 2)
$
963,500

 
$
1,107,956

 
$
963,500

 
$
1,124,649

Long-term debt (Level 3)
947,000

 
949,144

 
947,000

 
1,048,440

Snettisham finance lease obligation (Level 3)
53,850

 
56,900

 
54,550

 
58,000

Long-term debt to affiliated trusts (Level 3)
51,547

 
33,506

 
51,547

 
41,238


These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available market information, which generally consists of estimated market prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers consisted of par values of 65.00 to 133.98, where a par value of 100.0 represents the carrying value recorded on the Condensed Consolidated Balance Sheets. Level 2 long-term debt represents publicly issued bonds with quoted market prices; however, due to their limited trading activity, they are classified as Level 2 because brokers must generate quotes and make estimates if there is no trading activity near a period end. Level 3 long-term debt consists of private placement bonds and debt to affiliated trusts, which typically have no secondary trading activity. Fair values in Level 3 are estimated based on market prices from third party brokers using secondary market quotes for debt with similar risk and terms to generate quotes for Avista Corp. bonds. Due to the unique nature of the Snettisham capital lease obligation, the estimated fair value of these items was determined based on a discounted cash flow model using available market information. The Snettisham capital lease obligation was discounted to present value using the Morgan Markets A Ex-Fin discount rate as published on March 31, 2020.
The following table discloses by level within the fair value hierarchy the Company’s assets and liabilities measured and reported on the Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 at fair value on a recurring basis (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and Cash
Collateral
Netting (1)
 
Total
March 31, 2020
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
35,061

 
$
—

 
$
(30,849
)
 
$
4,212

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
26

 
(26
)
 
—

Foreign currency exchange derivatives
—

 
36

 
—

 
(36
)
 
—

Deferred compensation assets:
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
Fixed income securities (2)
2,642

 
—

 
—

 
—

 
2,642

Equity securities (2)
5,585

 
—

 
—

 
—

 
5,585

Total
$
8,227

 
$
35,097

 
$
26

 
$
(30,911
)
 
$
12,439

Liabilities:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
30,464

 
$
—

 
$
(30,154
)
 
$
310

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
2,279

 
(26
)
 
2,253

Foreign currency exchange derivatives
—

 
103

 
—

 
(36
)
 
67

Interest rate swap derivatives
—

 
112,238

 
—

 
(27,090
)
 
85,148

Total
$
—

 
$
142,805

 
$
2,279

 
$
(57,306
)
 
$
87,778


25

AVISTA CORPORATION



 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and Cash
Collateral
Netting (1)
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
41,546

 
$
—

 
$
(40,452
)
 
$
1,094

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
27

 
(27
)
 
—

Foreign currency exchange derivatives
—

 
97

 
—

 
—

 
97

Interest rate swap derivatives
—

 
1,552

 
—

 
(963
)
 
589

Deferred compensation assets:
 
 
 
 
 
 
 
 
 
Mutual Funds:
 
 
 
 
 
 
 
 
 
Fixed income securities (2)
2,232

 
—

 
—

 
—

 
2,232

Equity securities (2)
6,271

 
—

 
—

 
—

 
6,271

Total
$
8,503

 
$
43,195

 
$
27

 
$
(41,442
)
 
$
10,283

Liabilities:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
45,144

 
$
—

 
$
(43,830
)
 
$
1,314

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
3,003

 
(27
)
 
2,976

Interest rate swap derivatives
—

 
34,056

 
—

 
(7,733
)
 
26,323

Total
$
—

 
$
79,200

 
$
3,003

 
$
(51,590
)
 
$
30,613

(1)
The Company is permitted to net derivative assets and derivative liabilities with the same counterparty when a legally enforceable master netting agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held or placed with these same counterparties.
(2)
These assets are included in other property and investments-net and other non-current assets on the Condensed Consolidated Balance Sheets.
The difference between the amount of derivative assets and liabilities disclosed in respective levels in the table above and the amount of derivative assets and liabilities disclosed on the Condensed Consolidated Balance Sheets is due to netting arrangements with certain counterparties. See Note 5 for additional discussion of derivative netting.
To establish fair value for energy commodity derivatives, the Company uses quoted market prices and forward price curves to estimate the fair value of energy commodity derivative instruments included in Level 2. In particular, electric derivative valuations are performed using market quotes, adjusted for periods in between quotable periods. Natural gas derivative valuations are estimated using New York Mercantile Exchange pricing for similar instruments, adjusted for basin differences, using market quotes. Where observable inputs are available for substantially the full term of the contract, the derivative asset or liability is included in Level 2.
To establish fair values for interest rate swap derivatives, the Company uses forward market curves for interest rates for the term of the swaps and discounts the cash flows back to present value using an appropriate discount rate. The discount rate is calculated by third party brokers according to the terms of the swap derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash flows of the interest rate swap derivatives are equal to the fixed interest rate in the swap compared to the floating market interest rate multiplied by the notional amount for each period.
To establish fair value for foreign currency derivatives, the Company uses forward market curves for Canadian dollars against the US dollar and multiplies the difference between the locked-in price and the market price by the notional amount of the derivative. Forward foreign currency market curves are provided by third party brokers. The Company's credit spread is factored into the locked-in price of the foreign exchange contracts.
Deferred compensation assets and liabilities represent funds held by the Company in a Rabbi Trust for an executive deferral plan. These funds consist of actively traded equity and bond funds with quoted prices in active markets. The balance disclosed in the table above excludes cash and cash equivalents of $0.4 million as of March 31, 2020 and December 31, 2019.

26

AVISTA CORPORATION



Level 3 Fair Value
The following table presents the quantitative information which was used to estimate the fair values of the Level 3 assets and liabilities above as of March 31, 2020 (dollars in thousands):
 
 
Fair Value (Net) at
 
 
 
 
 
 
 
 
March 31, 2020
 
Valuation Technique
 
Unobservable
Input
 
Range and
Weighted Average Price
Natural gas exchange
agreement
 
$
(2,253
)
 
Internally derived
weighted average
cost of gas
 
Forward purchase
prices
 
$1.16 - $1.80/mmBTU
$1.47 Weighted Average
 
 
 
 
 
 
 
 
 
Forward sales prices
 
$1.33 - $3.79/mmBTU
$2.96 Weighted Average
 
 
 
 
Purchase volumes
 
155,000 - 310,000 mmBTUs
 
 
 
 
Sales volumes
 
60,000 - 310,000 mmBTUs

The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31 (dollars in thousands):
 
Natural Gas Exchange Agreement
 
Power Exchange Agreement
 
Total
Three months ended March 31, 2020:
 
 
 
 
 
Balance as of January 1, 2020
$
(2,976
)
 
$
—

 
$
(2,976
)
Total gains or (losses) (realized/unrealized):
 
 
 
 
 
Included in regulatory assets/liabilities (1)
485

 
—

 
485

Settlements
238

 
—

 
238

Ending balance as of March 31, 2020 (2)
$
(2,253
)
 
$
—

 
$
(2,253
)
Three months ended March 31, 2019:
 
 
 
 
 
Balance as of January 1, 2019
$
(2,774
)
 
$
(2,488
)
 
$
(5,262
)
Total gains or (losses) (realized/unrealized):
 
 
 
 
 
Included in regulatory assets/liabilities (1)
8,977

 
(1,018
)
 
7,959

Settlements
(8,307
)
 
2,894

 
(5,413
)
Ending balance as of March 31, 2019 (2)
$
(2,104
)
 
$
(612
)
 
$
(2,716
)
 
 
 
 
 
 

(1)
All gains and losses are included in other regulatory assets and liabilities. There were no gains and losses included in either net income or other comprehensive income during any of the periods presented in the table above.
(2)
There were no purchases, issuances or transfers from other categories of any derivatives instruments during the periods presented in the table above.
NOTE 12. COMMON STOCK
The Company had entered into four separate sales agency agreements under which the sales agents offered and sold new shares of the Company’s common stock from time to time. During the three months ended March 31, 2020 the Company did not issue shares under the sales agency agreements. These sales agency agreements expired on February 29, 2020. The Company is currently working on entering into new sales agency agreements.
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss, net of tax, consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31,
 
December 31,
 
2020
 
2019
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $2,673 and $2,727, respectively
$
10,054

 
$
10,259


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AVISTA CORPORATION



The following table details the reclassifications out of accumulated other comprehensive loss to net income by component for the three months ended March 31 (dollars in thousands).
 
 
Amounts Reclassified from Accumulated Other Comprehensive Loss
 
 
Details about Accumulated Other Comprehensive Loss Components
 
2020
 
2019
 
Affected Line Item in Statement of Income
Amortization of defined benefit pension items
 
 
 
 
Amortization of net prior service cost
 
$
(200
)
 
$
(200
)
 
(a)
Amortization of net loss
 
3,100

 
3,661

 
(a)
Adjustment due to effects of regulation
 
(2,641
)
 
(3,258
)
 
(a)
 
 
259

 
203

 
Total before tax
 
 
(54
)
 
(43
)
 
Tax expense
 
 
$
205

 
$
160

 
Net of tax
(a)
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 6 for additional details).
NOTE 14. EARNINGS PER COMMON SHARE ATTRIBUTABLE TO AVISTA CORP. SHAREHOLDERS
The following table presents the computation of basic and diluted earnings per common share attributable to Avista Corp. shareholders for the three months ended March 31 (in thousands, except per share amounts):
 
2020
 
2019
Numerator:
 
 
 
Net income attributable to Avista Corp. shareholders
$
48,424

 
$
115,794

Denominator:
 
 
 
Weighted-average number of common shares outstanding-basic
67,239

 
65,733

Effect of dilutive securities:
 
 
 
Performance and restricted stock awards
142

 
208

Weighted-average number of common shares outstanding-diluted
67,381

 
65,941

Earnings per common share attributable to Avista Corp. shareholders:
 
 
 
Basic
$
0.72

 
$
1.76

Diluted
$
0.72

 
$
1.76

There were no shares excluded from the calculation because they were antidilutive.
NOTE 15. COMMITMENTS AND CONTINGENCIES
In the course of its business, the Company becomes involved in various claims, controversies, disputes and other contingent matters, including the items described in this Note. Some of these claims, controversies, disputes and other contingent matters involve litigation or other contested proceedings. For all such matters, the Company intends to vigorously protect and defend its interests and pursue its rights. However, no assurance can be given as to the ultimate outcome of any particular matter because litigation and other contested proceedings are inherently subject to numerous uncertainties. For matters that affect Avista Utilities’ or AEL&P's operations, the Company intends to seek, to the extent appropriate, recovery of incurred costs through the ratemaking process.
2015 Washington General Rate Cases
In January 2016, the Company received an order (Order 05) that concluded its 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.
PC Petition for Judicial Review
In March 2016, Public Counsel (PC) filed in Thurston County Superior Court a Petition for Judicial Review of the WUTC's Order 05 and Order 06. In April 2016, this matter was certified for review directly by the Court of Appeals, an intermediate appellate court in the State of Washington.

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AVISTA CORPORATION



On August 7, 2018, the Court of Appeals issued a "Published Opinion" (Opinion) which concluded that the WUTC's use of an attrition allowance to calculate Avista Corp.'s rate base violated Washington law. In the Opinion, the Court stated that because the projected additions to rate base in the future were not "used and useful" for service at the time the request for the rate increase was made, they may not lawfully be included in the Company's rate base to justify a rate increase. Accordingly, the Court concluded that the WUTC erred in including an attrition allowance in the calculation of Avista Corp.’s electric and natural gas rate base. The Court noted, however, that the law does not prohibit an attrition allowance in the calculation, for ratemaking purposes, of recoverable operating and maintenance expense. Since the WUTC order provided one lump sum attrition allowance without distinguishing what portion was for rate base and which was for operating and maintenance expenses or other considerations, 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.
On March 6, 2020, the Company received an order from the WUTC that will require it to refund $8.5 million to electric and natural gas customers. The Company will refund $4.9 million to electric customers and $3.6 million to natural gas customers. The Company previously recorded a customer refund liability of $3.6 million in 2019.
Boyds Fire (State of Washington Department of Natural Resources v. Avista)
On August 19, 2019, the Company was served with a complaint filed by the State of Washington Department of Natural Resources, seeking recovery of fire suppression costs and related expenses incurred in connection with a wildfire that occurred in Ferry County, Washington in August 2018. Specifically, the complaint alleges that the fire, which became known as the “Boyds Fire,” was caused by a dead ponderosa pine tree falling into an overhead distribution line, and that Avista Corp. was negligent in failing to identify and remove it before the tree came into contact with the line. Avista Corp. disputes that the tree in question was the cause of the fire and that it was negligent in failing to identify and remove it. The case is in the early stages of discovery and the plaintiff has not yet provided a statement specifying damages. Because the resolution of this claim remains uncertain, legal counsel cannot express an opinion on the extent, if any, of the Company’s liability, nor is it possible for the Company to estimate the impact of any outcome at this time. The Company intends to vigorously defend itself in the litigation.
Other Contingencies
In the normal course of business, the Company has various other legal claims and contingent matters outstanding. The Company believes that any ultimate liability arising from these actions will not have a material impact on its financial condition, results of operations or cash flows. It is possible that a change could occur in the Company’s estimates of the probability or amount of a liability being incurred. Such a change, should it occur, could be significant. See "Note 21 of the Notes to Consolidated Financial Statements" in the 2019 Form 10-K for additional discussion regarding other contingencies.
NOTE 16. INFORMATION BY BUSINESS SEGMENTS
The business segment presentation reflects the basis used by the Company's management to analyze performance and determine the allocation of resources. The Company's management evaluates performance based on income (loss) from operations before income taxes as well as net income (loss) attributable to Avista Corp. shareholders. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Avista Utilities' business is managed based on the total regulated utility operation; therefore, it is considered one segment. AEL&P is a separate reportable business segment, as it has separate financial reports that are reviewed in detail by the Chief Operating Decision Maker and its operations and risks are sufficiently different from Avista Utilities and the other businesses at AERC that it cannot be aggregated with any other operating segments. The Other category, which is not a reportable segment, includes other investments and operations of various subsidiaries, as well as certain other operations of Avista Capital.

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AVISTA CORPORATION



The following table presents information for each of the Company’s business segments (dollars in thousands):
 
Avista
Utilities
 
Alaska Electric Light and Power Company
 
Total Utility
 
Other
 
Intersegment
Eliminations
(1)
 
Total
For the three months ended March 31, 2020:
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
377,205

 
$
12,202

 
$
389,407

 
$
823

 
$
—

 
$
390,230

Resource costs
129,557

 
(10
)
 
129,547

 
—

 
—

 
129,547

Other operating expenses
91,279

 
3,217

 
94,496

 
1,360

 
—

 
95,856

Depreciation and amortization
48,974

 
2,447

 
51,421

 
235

 
—

 
51,656

Income (loss) from operations
76,534

 
6,246

 
82,780

 
(587
)
 
—

 
82,193

Interest expense (3)
24,983

 
1,589

 
26,572

 
131

 
(86
)
 
26,617

Income taxes
7,404

 
1,301

 
8,705

 
(173
)
 
—

 
8,532

Net income (loss) attributable to Avista Corp. shareholders
45,979

 
3,395

 
49,374

 
(950
)
 
—

 
48,424

Capital expenditures (4)
94,056

 
1,470

 
95,526

 
109

 
—

 
95,635

For the three months ended March 31, 2019:
 
 
 
 
 
 
 
 
 
 
Operating revenues
$
377,702

 
$
10,881

 
$
388,583

 
$
7,898

 
$
—

 
$
396,481

Resource costs
138,712

 
(1,365
)
 
137,347

 
—

 
—

 
137,347

Other operating expenses (2)
100,583

 
3,059

 
103,642

 
7,355

 
—

 
110,997

Depreciation and amortization
46,507

 
2,407

 
48,914

 
209

 
—

 
49,123

Income from operations
60,224

 
6,513

 
66,737

 
334

 
—

 
67,071

Interest expense (3)
24,264

 
1,596

 
25,860

 
588

 
(440
)
 
26,008

Income taxes
28,544

 
1,363

 
29,907

 
110

 
—

 
30,017

Net income attributable to Avista Corp. shareholders
111,901

 
3,552

 
115,453

 
341

 
—

 
115,794

Capital expenditures (4)
92,309

 
1,306

 
93,615

 
162

 
—

 
93,777

Total Assets:
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2020:
$
5,808,619

 
$
272,178

 
$
6,080,797

 
$
112,213

 
$
(19,011
)
 
$
6,173,999

As of December 31, 2019:
$
5,713,268

 
$
271,393

 
$
5,984,661

 
$
113,390

 
$
(15,595
)
 
$
6,082,456



(1)
Intersegment eliminations reported as interest expense represent intercompany interest.
(2)
Other operating expenses for Avista Utilities for the three months ended March 31, 2019 include merger transaction costs which are separately disclosed on the Condensed Consolidated Statements of Income.
(3)
Including interest expense to affiliated trusts.
(4)
The capital expenditures for the other businesses are included in other investing activities on the Condensed Consolidated Statements of Cash Flows.
NOTE 17. TERMINATION OF 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. Hydro One, based in Toronto, is Ontario’s largest electricity transmission and distribution provider.
Termination of the Merger Agreement
Due to the denial of the proposed merger by certain of the Company's regulatory commissions, on January 23, 2019, Avista Corp., Hydro One and certain subsidiaries thereof, entered into a Termination Agreement indicating their mutual agreement to terminate the Merger Agreement, effective immediately. Pursuant to the terms of the Termination Agreement, Hydro One paid Avista Corp. a $103 million termination fee on January 24, 2019. The termination fee was used for reimbursing the Company's transaction costs incurred from 2017 to 2019. The balance of the termination fee remaining after payment of 2019 transaction costs and applicable income taxes was used for general corporate purposes and reduced the Company's need for external financing. The 2019 costs totaled $19.7 million pre-tax and included financial advisers' fees, legal fees, consulting fees and employee time.


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AVISTA CORPORATION



NOTE 18. SALE OF METALfx
In April 2019, Bay Area Manufacturing, Inc., a non-regulated subsidiary of Avista Corp., entered into a definitive agreement to sell its interest in METALfx to an independent third party. The transaction was a stock sale for a total cash purchase price of $17.5 million plus cash on-hand, subject to customary closing adjustments. The transaction closed on April 18, 2019, and as of that date the Company has no further involvement with METALfx.
The purchase price of $17.5 million, as adjusted, was divided among the security holders of METALfx, including the minority shareholder, pro rata based on ownership (Avista Corp. owned 89.2 percent of the equity of METALfx). As required under the purchase agreement, $1.2 million (7 percent of the purchase price) will be held in escrow for 24 months from the closing of the transaction to satisfy certain indemnification obligations.
When all escrow amounts are released, the sale transaction will provide cash proceeds to Avista Corp., net of payments to the minority holder, contractually obligated compensation payments and other transaction expenses, of $16.5 million. The sale has resulted in a net gain after-tax of $3.3 million, with $2.4 million recognized in the three months ended March 31, 2019. 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. The gross gain is included in "Other income," the transaction expenses paid are included in "Non-utility Other operating expenses" and any taxes associated with the sale are included in "Income tax expense" on the Condensed Consolidated Statements of Income.
Prior to the completion of the sales transaction, METALfx was not a reportable business segment and was included in other in the business segment footnote at Note 16. This transaction does not meet the criteria for discontinued operations as it does not represent a strategic shift that will have a major effect on the Company's ongoing operations.

31

AVISTA CORPORATION




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Avista Corporation
Spokane, Washington
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of Avista Corporation and subsidiaries (the "Company") as of March 31, 2020, and the related condensed consolidated statements of income, comprehensive income, equity and cash flows, for the three-month periods ended March 31, 2020 and 2019, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP
Seattle, Washington
May 7, 2020

32

AVISTA CORPORATION



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations has been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q. The interim Management’s Discussion and Analysis of Financial Condition and Results of Operations does not contain the full detail or analysis which would be included in a full fiscal year Form 10-K; therefore, it should be read in conjunction with the Company's 2019 Form 10-K.
Business Segments
Our business segments have not changed during the three months ended March 31, 2020. See the 2019 Form 10-K as well as “Note 16 of the Notes to Condensed Consolidated Financial Statements” for further information regarding our business segments.
The following table presents net income attributable to Avista Corp. shareholders for each of our business segments (and the other businesses) for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Avista Utilities
$
45,979

 
$
111,901

AEL&P
3,395

 
3,552

Other
(950
)
 
341

Net income attributable to Avista Corp. shareholders
$
48,424

 
$
115,794

Executive Level Summary
Overall Results
Net income attributable to Avista Corp. shareholders was $48.4 million for the three months ended March 31, 2020, compared to $115.8 million for the three months ended March 31, 2019.
Avista Utilities' net income decreased due to the receipt, in the first quarter of 2019, of a $103 million termination fee from Hydro One (see "Note 17 of the Notes to Condensed Consolidated Financial Statements") which were partially offset by associated expenses of $19.7 million pre-tax. In addition, during the first quarter of 2020, we recorded an accrual for customer refunds related to the outcome of the 2015 Washington general rate cases outcome (see "Regulatory Matters"), an accrual for disallowed replacement power during an unplanned outage at Colstrip (see "Regulatory Matters"), and we had an increase in other operating expenses and depreciation and amortization, which were partially offset by a decrease in our income tax expense and resource costs.
AEL&P net income decreased slightly, primarily due to a net decrease in income from operations that was caused by an increase in resource costs that was larger than the increase in operating revenues.
The increase in net income at our other businesses for the year-to-date was primarily due to the sale of an equity investment and increased earnings from our other 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) that follow this section.
COVID-19 Global Pandemic
The COVID-19 global pandemic is currently impacting all aspects of our business, as well as the global, national and local economies. It is likely that the continued spread of COVID-19 and efforts to contain the virus, such as quarantines or closures or reduced operations of businesses, governmental agencies and other institutions, will continue to cause an economic slowdown and possibly a recession, resulting in significant disruptions in various public, commercial or industrial activities and causing employee absences which could interfere with operation and maintenance of the Company’s facilities. These circumstances have affected and will likely continue to adversely affect our operations, results of operations, financial condition and cash flows in the following ways:
Operations
We provide critical services to our customers. Accordingly, it is paramount that we keep our employees who operate our business safe so that we continue to provide reliable service. We implemented business continuity plans in the context of this global pandemic. We believe that we will continue to be able to conduct our utility operations effectively and provide safe and reliable service to our customers.

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AVISTA CORPORATION



We have taken precautions concerning employee and facility hygiene, imposed travel limitations on employees and directed our employees to work remotely whenever possible. Protocols have been established and implemented to protect employees and the public when work requires public interaction. We have informed retail customers and state regulators that disconnections and late fees for non-payment are temporarily suspended.
Although we have not experienced any significant issues to date, it is possible that COVID-19 could have a negative impact on the ability of suppliers, vendors or contractors to perform, which could increase operating costs and delay and/or increase the costs of capital projects.
Results of Operations
During the three months ended March 31, 2020, we did not experience a material reduction in overall customer loads or retail revenues as the economic restrictions and closures did not take effect in our service territory until mid-March. In the month of April, there was a decrease of approximately 5 percent on overall electric load, which consisted of approximately a 12 percent decrease in commercial and a 14 percent decrease in industrial, which was partially offset by approximately a 10 percent increase in residential. In contrast, natural gas loads appear to be within normal bounds for the time of year. We expect a gradual economic recovery and prolonged high unemployment that will depress load and customer growth into 2021. We have decoupling and other regulatory mechanisms in Washington, Idaho and Oregon, which mitigate the impact of lower loads and revenues for residential and certain commercial customer classes. There are limitations on increases in decoupling surcharges in a particular year and revenue recognition criteria established by GAAP. Although we expect to ultimately recognize all decoupling revenue, there can be a delay in revenue recognition. Over 90 percent of our utility revenue is covered by regulatory mechanisms.
We have suspended customer disconnections and late fees for non-payment. In combination with the economic downturn, we increased our bad debt expense by $1.6 million in the first quarter and expect bad debt expense to increase by $3.4 million for the remainder of 2020 as compared to our original forecast. We expect to offset at least some of the negative impacts of COVID-19 at Avista Utilities with cost savings, and we have filed petitions for an accounting order in each of our jurisdictions to defer the recognition of COVID-19 expenses as well as identified cost savings of other COVID-19 related benefits.
Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)
On March 27, 2020, the CARES Act, an economic stimulus package in response to COVID-19 was signed into law. The CARES Act contains corporate income tax provisions, including providing temporary changes regarding the prior and future utilization of net operating losses, temporary suspension of certain payment requirements for the employer portion of social security taxes, and the creation of certain refundable employee retention credits.

Financial Condition, Liquidity and Cash Flows
For 2020, we expect our net cash flows from operations to decrease primarily due to lower expected revenues from retail sales of electricity and natural gas and lower payments from customers.
We do not expect the impact of COVID-19 to change our estimate of utility capital expenditures for 2020. It is possible that a prolonged economic restrictions or business interruption could cause a decrease in our utility capital expenditures.
Disruptions and overall declines in the financial markets have decreased the fair value of pension plan assets and lower discount rates will increase the pension liability. This could ultimately increase future pension plan funding requirements and expenses. The impact on pension plan assets is mitigated as a significant portion of the assets are fixed-income securities with a target of 35 percent invested in equity securities.
As of March 31, 2020, we had $182.0 million of available liquidity under the Avista Corp. $400.0 million committed line of credit and $25.0 million under the AEL&P committed line of credit. As of April 30, 2020, we had $188.1 million of available liquidity under the Avista Corp. $400.0 million committed line of credit and $25.0 million under the AEL&P committed line of credit. In addition, in April 2020, we entered into a one-year credit agreement with two financial institutions in the amount of $100.0 million. We borrowed the entire $100.0 million available under this agreement, which was added to our cash reserves.
After considering the impacts of COVID-19, including the expectation of lower net operating cash flows, and the expected issuances of long-term debt and equity during 2020, we expect net cash flows from operations, together with cash available under our committed lines of credit and the $100.0 million borrowed under the new credit agreement, to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments.

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AVISTA CORPORATION



However, disruption, weakness and volatility in the financial markets could increase our costs, and delay our ability, to fund capital requirements from conventional sources. To the extent that access to the capital markets is adversely affected, we may need to consider alternative sources of funding for operations and for working capital, any of which could increase our cost of capital.
In addition to any of the issues identified above, we cannot predict the duration and severity of the COVID-19 global pandemic. The longer and more severe the economic restrictions and business disruption is, the greater the impact on our operations, results of operations, financial condition and cash flows will be.
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 expect to 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
2015 General Rate Cases
In January 2016, we received an order 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.
PC Petition for Judicial Review
In March 2016, PC filed in Thurston County Superior Court a Petition for Judicial Review of the WUTC's Orders. 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 a "Published Opinion" (Opinion) which concluded that the WUTC's use of an attrition allowance to calculate Avista Corp.'s rate base violated Washington law. In the Opinion, the Court stated that because the projected additions to rate base in the future were not "used and useful" for service at the time the request for the rate increase was made, they may not lawfully be included in our rate base to justify a rate increase. Accordingly, the Court concluded that the WUTC erred in including an attrition allowance in the calculation of our electric and natural gas rate base. The Court noted, however, that the law does not prohibit an attrition allowance in the calculation, for ratemaking purposes, of recoverable operating and maintenance expense. Since the WUTC order provided one lump sum attrition allowance without distinguishing what portion was for rate base and which was for operating and maintenance expenses or other considerations, the Court struck all portions of the attrition allowance attributable to our rate base and reversed and remanded the case for the WUTC to recalculate our rates without including an attrition allowance in the calculation of rate base.
On March 6, 2020, we received an order from the WUTC that will require us to refund $8.5 million to electric and natural gas customers. We will refund $4.9 million to electric customers and $3.6 million to natural gas customers. We previously recorded a customer refund liability of $3.6 million in 2019. The refund will be returned to customers over one year and began on April 1, 2020.
2019 General Rate Cases
On March 25, 2020, we received an order from the WUTC that approved the partial multi-party settlement agreement that was filed on November 21, 2019. The approved rates are designed to increase annual base electric revenues by $28.5 million, or 5.7 percent, and annual natural gas base revenues by $8.0 million, or 8.5 percent, effective April 1, 2020. The revenue increases are based on a 9.4 percent return on equity with a common equity ratio of 48.5 percent and a rate of return on rate base of 7.21 percent.
As part of the WUTC order, we will return approximately $40 million from the ERM rebate to customers over a two-year period. The ERM rebate includes approximately $3 million that was recently disallowed by the WUTC for the cost of

35

AVISTA CORPORATION



replacement power during an unplanned outage at the Colstrip generating facility in 2018. The WUTC directed us to return a larger portion of the ERM money during the first year to achieve a net-zero billed impact to electric customers.
Included in the WUTC order is the acceleration of depreciation of Colstrip Units 3 & 4 to reflect a remaining useful life through December 31, 2025. The order utilizes certain electric tax benefits associated with the 2018 tax reform to partially offset these increased costs. The order also sets aside $3 million for community transition efforts to mitigate the impacts of the eventual closure of Colstrip, half funded by customers and half funded by our shareholders. We recorded this liability and recognized the shareholder portion of the expense in the first quarter of 2020.
Lastly, the order includes the extension of electric and natural gas decoupling mechanisms through March 31, 2025.
2020 General Rate Cases
We expect to file electric and natural gas general rate cases with the WUTC in the fourth quarter of 2020.
Idaho General Rate Cases
2019 General Rate Cases
On October 11, 2019, Avista Corp. and all parties to our electric general rate case reached a settlement agreement that was approved by the IPUC. New rates went into effect on December 1, 2019.
The rates that went into effect are designed to decrease annual base electric revenues by $7.2 million (or 2.8 percent), effective December 1, 2019. The settlement revenue decreases are based on a 9.5 percent ROE with a common equity ratio of 50 percent and a rate of return ROR on rate base of 7.35 percent, which is a continuation of current levels. This outcome is in line with our expectations.
The primary element of the difference in the agreed upon base revenues in the settlement agreement from our original request is that the settlement includes the continued recovery of costs for our wind generation power purchase agreements, which will include Palouse Wind and Rattlesnake Flat, through the PCA mechanism rather than through base rates.
2020 General Rate Cases
We expect to file electric and natural gas general rate cases with the IPUC in the fourth quarter of 2020.
Oregon General Rate Cases
2019 General Rate Case
On October 9, 2019, the OPUC approved the all-party settlement agreements filed in the third quarter of 2019. New rates went into effect on January 15, 2020.
OPUC approved rates that are designed to increase annual natural gas billed revenues by $3.6 million, or 4.2 percent.
The OPUC’s decision reflects a ROR on rate base of 7.24 percent, with a common equity ratio of 50 percent and a 9.4 percent ROE, both of which represent a continuation of existing authorized levels.
In addition, the approved settlement agreements included agreement among the parties to a future independent review of our interest rate hedging practices, with any recommendations based on the results and findings in the final report to be applicable only on a prospective basis and do not apply to any prior interest rate hedging activity.

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AVISTA CORPORATION



2020 General Rate Case
On March 16, 2020, we filed a natural gas general rate case with the OPUC. We have requested an overall increase in base natural gas rates of 9.8 percent (designed to increase annual natural gas revenues by $6.8 million). Our request is based on a proposed ROR of 7.50 percent with a common equity ratio of 50 percent and a 9.9 percent ROE.
Petition for Judicial Review of the Deferral of Capital Projects
In February 2019 and October 2018, the OPUC issued orders which concluded that, contrary to the OPUC's past practice, Oregon statutes that authorize the deferral of expense for later recovery from customers do not authorize the OPUC to allow deferrals of any costs related to capital investments (utility plant). In April 2019, Avista Corp. and other petitioners filed a Petition for Judicial Review with the Oregon Court of Appeals seeking review of the above OPUC orders. The OPUC, on April 6, 2020, rescinded its prior orders that were the subject of the appeal, and issued a proposed order meant to replace the orders on appeal. The affected utilities, including Avista Corp., have advised the OPUC that they do not take exceptions to the proposed order, which reinstates the OPUC’s general authority to approve full revenue requirement deferrals, including a return of and on investment. If the proposed order becomes final, and no party seeks review of the revised order, the Court of Appeals will dismiss the appeal.
AMI Project
In March 2016, the WUTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value of our existing Washington electric meters for the opportunity for later recovery. This accounting treatment is related to our plans to replace our existing electric meters with new two-way digital meters and the related software and support services through our AMI project in Washington State. As of March 31, 2020, the estimated future undepreciated value for the existing electric meters was $22.6 million. In September 2017, the WUTC also approved our request to defer the undepreciated net book value of existing natural gas encoder receiver transmitters (ERT) (consistent with the accounting treatment we obtained on our existing electric meters) that will be retired as part of the AMI project. As of March 31, 2020, the estimated future undepreciated value for the existing natural gas ERTs was $3.3 million. Replacement of the electric meters and natural gas ERTs began during the second half of 2018 and is ongoing.
In September 2017, the WUTC approved a Petition to defer the depreciation expense associated with the AMI project, along with a carrying charge, and to seek recovery of the deferral and carrying charge in a future general rate case. Cost savings, such as reduced meter reading costs, will occur during the implementation period, and will offset a portion of the AMI costs not being deferred.
In May 2017, we filed Petitions with the IPUC and the OPUC requesting a depreciable life of 12.5 years for the meter data management system (MDM) related to the AMI project. Both the IPUC and the OPUC approved our request. In addition, in connection with the 2017 Idaho electric general rate case, the settling parties agreed to cost recovery of Idaho's share of the MDM system, effective January 1, 2019. In connection with the approval of the Oregon general rate case settlement, the OPUC approved cost recovery of Oregon's share of the MDM system, effective November 1, 2017.
Avista Utilities
Purchased Gas Adjustments
PGAs are designed to pass through changes in natural gas costs to Avista Utilities' customers with no change in utility margin (operating revenues less resource costs) or net income. In Oregon, we absorb (cost or benefit) 10 percent of the difference between actual and projected natural gas costs included in retail rates for supply that is not hedged. Total net deferred natural gas costs among all jurisdictions were a liability of $5.4 million as of March 31, 2020 and a net liability of $3.2 million as of December 31, 2019.
Power Cost Deferrals and Recovery Mechanisms
The ERM is an accounting method used to track certain differences between Avista Utilities' actual power supply costs, net of wholesale sales and sales of fuel, and the amount included in base retail rates for our Washington customers. Under the ERM, Avista Utilities makes an annual filing on or before April 1 of each year to provide the opportunity for the WUTC staff and other interested parties to review the prudence of and audit the ERM deferred power cost transactions for the prior calendar year. See the 2019 Form 10-K for a full discussion of the mechanics of the ERM and the various sharing bands. Total net deferred power costs under the ERM were a liability of $44.1 million as of March 31, 2020, compared to a liability of $37.0 million as of December 31, 2019. These deferred power cost balances represent amounts due to customers. Pursuant to WUTC requirements, should the cumulative deferral balance exceed $30 million in the rebate or surcharge direction, we must make a filing with the WUTC to adjust customer rates to either return the balance to customers or recover the balance from customers.

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The cumulative rebate balance exceeds $30 million and as a result, our 2019 filing contained a proposed rate refund. The ERM proceeding was considered with our 2019 general rate case proceeding and a refund was approved and will be returned to customers over a two-year period. See further discussion in the section "Washington General Rate Cases" above.
Avista Utilities has a PCA mechanism in Idaho that allows us to modify electric rates on October 1 of each year with IPUC approval. Under the PCA mechanism, we defer 90 percent of the difference between certain actual net power supply expenses and the amount included in base retail rates for our Idaho customers. The October 1 rate adjustments recover or rebate power supply costs deferred during the preceding July-June twelve-month period. Total net power supply costs deferred under the PCA mechanism were assets of $0.1 million as of March 31, 2020 and $0.3 million as of December 31, 2019. These deferred power cost balances represent amounts due from customers.
Decoupling and Earnings Sharing Mechanisms
Decoupling (also known as a FCA in Idaho) is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each of our 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" kilowatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. 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. Only residential and certain commercial customer classes are included in our decoupling mechanisms. See the 2019 Form 10-K for a discussion of the mechanisms in each jurisdiction.
Total net cumulative decoupling deferrals among all jurisdictions were regulatory assets of $20.1 million as of March 31, 2020 and $24.3 million as of December 31, 2019. These decoupling assets represent amounts due from customers. Total net earnings sharing balances among all jurisdictions were regulatory liabilities of $0.7 million as of March 31, 2020 and December 31, 2019. These earnings sharing liabilities represent amounts due to customers.
See "Results of Operations - Avista Utilities" for further discussion of the amounts recorded to operating revenues in 2020 and 2019 related to the decoupling and earnings sharing mechanisms.
COVID-19
In March 2020, we filed an application for authorization to defer certain incremental COVID-19 related costs with the OPUC. In April and May 2020, we made similar filings with the IPUC and the WUTC, respectively. In Alaska, a Senate Bill was signed into law that provides for deferral and recovery of incremental COVID-19 related costs subject to approval by the RCA. The recovery of any deferred costs would be determined in future rate making proceedings.
Results of Operations - Overall
The following provides an overview of changes in our Condensed Consolidated Statements of Income. More detailed explanations are provided, particularly for operating revenues and operating expenses, in the business segment discussions (Avista Utilities, AEL&P, and the other businesses) that follow this section.
The balances included below for utility operations reconcile to the Condensed Consolidated Statements of Income.

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Three months ended March 31, 2020 compared to the three months ended March 31, 2019
The following graph shows the total change in net income attributable to Avista Corp. shareholders for the first quarter of 2019 to the first quarter of 2020, as well as the various factors that caused such change (dollars in millions):

qtdnetincomechangeq12020a02.jpg
Utility revenues remained consistent at Avista Utilities when compared to the first quarter of 2019. The outcome from the 2015 Washington general rate cases decreased revenue by $4.9 million. In addition, residential and commercial load was lower than the first quarter of 2019. The above decreases were offset by an increase from electric and natural gas decoupling rates, higher PGA rates and customer growth. AEL&P's revenues increased from an increase in sales volumes due to weather that was cooler than the prior year.
Non-utility revenues decreased due to the sale of METALfx, which occurred in April 2019.
Utility resource costs decreased at Avista Utilities due to lower fuel for generation and other fuel costs, as well as lower natural gas purchases. The increase at AEL&P was due to an increase in deferred power supply expenses.
The increase in utility operating expenses was due to an increase at Avista Utilities primarily related to increases in generation and distribution operating and maintenance costs, an accrual for disallowed replacement power during an unplanned outage at Colstrip (see "Regulatory Matters"), and an increase in bad debt expense.
The merger transaction costs are related to the proposed (now terminated) acquisition by Hydro One. There were no additional costs in 2020 relating to this matter.
Utility depreciation and amortization increased due to additions to utility plant.
The merger termination fee was related to the termination of the proposed Hydro One acquisition.
The increase in other was primarily related to a decrease in non-utility other operating expenses due to the sale of METALfx during the second quarter of 2019 and also due to lower property taxes. In addition, there was a gain from the sale of an equity investment in the first quarter of 2020.
Income taxes decreased primarily due to a decrease in income before taxes. Our effective tax rate was 15.0 percent for the first quarter of 2020 compared to 20.6 percent for the first quarter of 2019. See "Note 7 of the Notes to Condensed Consolidated Financial Statements" for further details and a reconciliation of our effective tax rate.
Non-GAAP Financial Measures
The following discussion for Avista Utilities includes two financial measures that are considered “non-GAAP financial measures”: electric utility margin and natural gas utility margin. In the AEL&P section, we include a discussion of utility margin, which is also a non-GAAP financial measure.

39

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Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. Electric utility margin is electric operating revenues less electric resource costs, while natural gas utility margin is natural gas operating revenues less natural gas resource costs. The most directly comparable GAAP financial measure to electric and natural gas utility margin is utility operating revenues as presented in "Note 16 of the Notes to Condensed Consolidated Financial Statements."
The presentation of electric utility margin and natural gas utility margin is intended to enhance the understanding of operating performance. We use these measures internally and believe they provide useful information to investors in their analysis of how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our results of operations. Changes in loads, as well as power and natural gas supply costs, are generally deferred and recovered from customers through regulatory accounting mechanisms. Accordingly, the analysis of utility margin generally excludes most of the change in revenue resulting from these regulatory mechanisms. We present electric and natural gas utility margin separately below for Avista Utilities since each business has different cost sources, cost recovery mechanisms and jurisdictions, so we believe that separate analysis is beneficial. These measures are not intended to replace utility operating revenues as determined in accordance with GAAP as an indicator of operating performance. Reconciliations of operating revenues to utility margin are set forth below.
Results of Operations - Avista Utilities
Three months ended March 31, 2020 compared to the three months ended March 31, 2019
Utility Operating Revenues
The following graphs present Avista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the three months ended March 31 (dollars in millions and MWhs in thousands):
chart-4391ff24fdbf572b8d0.jpg
(1)
This balance includes public street and highway lighting, which is considered part of retail electric revenues, and deferrals/amortizations to customers related to federal income tax law changes.
Total electric operating revenues in the graph above include intracompany sales of $6.1 million and $19.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.


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AVISTA CORPORATION



chart-09ce99decbcc53c491e.jpg
The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility electric operating revenues for the three months ended March 31 (dollars in thousands):
 
Electric Decoupling
Revenues
 
2020
 
2019
Current year decoupling deferrals (a)
$
5,131

 
$
(2,681
)
Amortization of prior year decoupling deferrals (b)
(4,608
)
 
1,076

Total electric decoupling revenue
$
523

 
$
(1,605
)
(a)
Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.
(b)
Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.
Total electric revenues decreased $10.3 million for the first quarter of 2020 as compared to the first quarter of 2019 primarily due to the following:
•
an $8.5 million decrease in retail electric revenue due to a decrease in total MWhs sold (decreased revenues $10.6 million), partially offset by an increase in revenue per MWh (increased revenues $2.1 million).
◦
The decrease in total retail MWhs sold was primarily the result of a decrease in residential, commercial and industrial sales volumes due to weather that was warmer than normal and warmer than the prior year. These were partially offset by residential and commercial customer growth. Compared to the first quarter of 2019, residential electric use per customer decreased 9 percent and commercial use per customer decreased 2 percent. Heating degree days in Spokane were 7 percent below normal and 17 percent below the first quarter of 2019.
◦
The increase in revenue per MWh was primarily due to an increase in decoupling rates (as there was a decoupling surcharge in 2020 compared to a decoupling rebate in 2019). This was partially offset by a general rate decrease in Idaho, effective December 1, 2019.
•
a $6.4 million increase in wholesale electric revenues due to an increase in sales prices (increased revenues $5.5 million) and an increase in sales volumes (increased revenues $0.9 million). The fluctuation in volumes and prices was

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AVISTA CORPORATION



primarily the result of our optimization activities.
•
a $7.7 million decrease in sales of fuel due to a decrease in sales of natural gas fuel as part of thermal generation resource optimization activities.
•
a $2.1 million increase in electric decoupling revenue. Weather was warmer than normal in the first quarter of 2020, reducing the demand for electric heating, resulting in decoupling deferral surcharges related to the current year. There was also the amortization of decoupling surcharges from prior years.
•
the $2.8 million decrease in other electric revenues was primarily related to a $1.4 million accrual for customer refunds related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion. In addition, there was a $1.1 million decrease in tax reform amortization associated with the 2018 federal tax rate change.
The following graphs present Avista Utilities' natural gas operating revenues and therms delivered for the three months ended March 31 (dollars in millions and therms in thousands):
chart-4e6c4308cdf35f45a13.jpg
(1)
This balance includes interruptible and industrial revenues, which are considered part of retail natural gas revenues, and deferrals/amortizations to customers related to federal income tax law changes.
Total natural gas operating revenues in the graph above include intracompany sales of $12.8 million and $23.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.


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AVISTA CORPORATION



chart-bc56816dc0465025904.jpg
The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility natural gas operating revenues for the three months ended March 31 (dollars in thousands):
 
Natural Gas Decoupling
Revenues
 
2020
 
2019
Current year decoupling deferrals (a)
$
(3,556
)
 
$
(6,106
)
Amortization of prior year decoupling deferrals (b)
(1,380
)
 
3,053

Total natural gas decoupling revenue
$
(4,936
)
 
$
(3,053
)
(a)
Positive amounts are increases in decoupling revenue in the current year and will be surcharged to customers in future years. Negative amounts are decreases in decoupling revenue in the current year and will be rebated to customers in future years.
(b)
Positive amounts are increases in decoupling revenue in the current year and are related to the amortization of rebate balances that resulted in prior years and are being refunded to customers (causing a corresponding decrease in retail revenue from customers) in the current year. Negative amounts are decreases in decoupling revenue in the current year and are related to the amortization of surcharge balances that resulted in prior years and are being surcharged to customers (causing a corresponding increase in retail revenue from customers) in the current year.
Total natural gas revenues decreased $14.7 million for the first quarter of 2020 as compared to the first quarter of 2019 primarily due to the following:
•
a $10.2 million increase in natural gas retail revenues due to an increase in retail rates (increased revenues $22.1 million), partially offset by a decrease in volumes (decreased revenues $11.9 million).
◦
Retail rates increased from higher PGAs, decoupling rate increases and a general rate increase in Oregon, effective January 15, 2020.
◦
Retail natural gas sales decreased in the first quarter of 2020 as compared to the first quarter of 2019 primarily due to lower residential, commercial and industrial usage, partially offset by customer growth. Compared to first quarter of 2019, residential use per customer decreased 12 percent and commercial use per customer decreased 10 percent. Heating degree days in Spokane were 7 percent below normal, and 17 percent below the first quarter of 2019. Heating degree days in Medford were 4 percent above normal, and 3 percent below the first quarter of 2019.
•
a $20.0 million decrease in wholesale natural gas revenues due to a decrease in prices (decreased revenues $22.7 million), partially offset by an increase in volumes (increased revenues $2.7 million). Differences between revenues

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AVISTA CORPORATION



and costs from sales of resources in excess of retail load requirements and from resource optimization are accounted for through the PGA mechanisms.
•
the $2.5 million decrease in other natural gas revenues was primarily related to a $3.6 million accrual for customer refunds related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion. This was partially offset by a decrease of $1.4 million in the provision for tax rate refunds associated with the federal income tax law change in 2018.
The following table presents Avista Utilities' average number of electric and natural gas retail customers for the three months ended March 31:
 
Electric
Customers
 
Natural Gas
Customers
 
2020
 
2019
 
2020
 
2019
Residential
349,368

 
343,938

 
326,126

 
319,483

Commercial
43,300

 
42,874

 
36,194

 
35,707

Interruptible
—

 
—

 
43

 
42

Industrial
1,295

 
1,314

 
241

 
239

Public street and highway lighting
638

 
601

 
—

 
—

Total retail customers
394,601

 
388,727

 
362,604

 
355,471

Utility Resource Costs
The following graphs present Avista Utilities' resource costs for the three months ended March 31 (dollars in millions):
chart-bc9eec61457552bb946.jpg
Total electric resource costs in the graph above include intracompany resource costs of $12.8 million and $23.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Total electric resource costs decreased $18.3 million for the first quarter of 2020 as compared to the first quarter of 2019 primarily due to the following:
•
a $4.2 million decrease in power purchased due to a decrease in the volume of power purchases (decreased costs $5.7 million), partially offset by an increase in wholesale prices (increased costs $1.5 million). The fluctuation in volumes and prices was primarily the result of our optimization activities during the quarter.
•
an $8.8 million decrease in fuel for generation primarily related to a decrease in natural gas prices, a decrease in customer volumes sold and an increase in hydroelectric generation as compared to the first quarter of 2019.
•
a $6.3 million decrease in other fuel costs. This represents fuel and the related derivative instruments that were purchased for generation but were later sold when conditions indicated that it was more economical to sell the fuel as

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AVISTA CORPORATION



part of the resource optimization process. When the fuel or related derivative instruments are sold, that revenue is included in sales of fuel.

chart-2ace4bc56900566e8e1.jpg
Total natural gas resource costs in the graph above include intracompany resource costs of $6.1 million and $19.7 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
Total natural gas resource costs decreased $15.3 million for the first quarter of 2020 as compared to the first quarter of 2019 primarily due to the following:
•
a $59.4 million decrease in natural gas purchased due to a decrease in the price of natural gas (decreased costs $59.4 million).
•
a $44.6 million increase from net amortizations and deferrals of natural gas costs, primarily due to a spike in natural gas prices during the first quarter of 2019 from a natural gas supply disruption in Canada, which resulted in significant amount of PGA deferrals during that period.
Utility Margin
The following table reconciles Avista Utilities' operating revenues, as presented in "Note 16 of the Notes to Condensed Consolidated Financial Statements" to the Non-GAAP financial measure utility margin for the three months ended March 31 (dollars in thousands):
 
Electric
 
Natural Gas
 
Intracompany
 
Total
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
 
2020
 
2019
Operating revenues
$
246,208

 
$
256,467

 
$
149,950

 
$
164,677

 
$
(18,953
)
 
$
(43,442
)
 
$
377,205

 
$
377,702

Resource costs
75,531

 
93,881

 
72,979

 
88,273

 
(18,953
)
 
(43,442
)
 
129,557

 
138,712

Utility margin
$
170,677

 
$
162,586

 
$
76,971

 
$
76,404

 
$
—

 
$
—

 
$
247,648

 
$
238,990

Electric utility margin increased $8.1 million and natural gas utility margin increased $0.6 million.
Electric utility margin increased primarily due to a decrease in net power supply costs due to power purchase prices and thermal fuel costs that were lower than those recovered through our rates (authorized costs). For the first quarter of 2020, we had a $5.2 million pre-tax benefit under the ERM in Washington, compared to a $2.5 million pre-tax expense for the first quarter of 2019. For the full year of 2020, we expect to be in a benefit position under the ERM within the 90 percent customer/10 percent Company sharing band. In addition, electric utility margin was positively impacted by customer growth. The above increases were partially offset by an accrual for customer refunds of $1.4 million related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion.

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Natural gas utility margin increased primarily due to a general rate increase in Oregon, effective January 15, 2020 and customer growth. These increases were mostly offset by an accrual for customer refunds of $3.6 million related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion.
Intracompany revenues and resource costs represent purchases and sales of natural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation of total results for Avista Utilities and in the condensed consolidated financial statements but are included in the separate results for electric and natural gas presented above.
Results of Operations - Alaska Electric Light and Power Company
Three months ended March 31, 2020 compared to the three months ended March 31, 2019
Net income for AEL&P was $3.4 million for the three months ended March 31, 2020 compared to $3.6 million for the three months ended March 31, 2019.
The following table presents AEL&P's operating revenues, resource costs and resulting utility margin for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Operating revenues
$
12,202

 
$
10,881

Resource costs
(10
)
 
(1,365
)
Utility margin
$
12,212

 
$
12,246

Electric revenues increased for the first quarter of 2020 primarily due to higher sales volumes to residential and commercial customers for 2020 as compared to 2019. This resulted from weather that was cooler than the prior year, as well as more hydroelectric generation than the first quarter of 2019.
AEL&P had low hydroelectric generation during the first quarter of 2019, which limited energy provided to their interruptible customers. A portion of the sales to interruptible customers is used to reduce the overall cost of power to AEL&P's firm customers. When interruptible sales are below a certain threshold, AEL&P recognizes a regulatory asset and records a reduction to deferred power supply costs (resource costs) to reflect a future billable amount to its firm customers when the cost of power rates are reset. During the first quarter of 2020, hydroelectric generation returned to normal levels, which resulted in less resource costs compared to the first quarter of 2019.
Results of Operations - Other Businesses
Net loss for our other businesses was $1.0 million for the three months ended March 31, 2020 compared to net income of $0.3 million for the three months ended March 31, 2019.
During the first quarter of 2020, we had an impairment loss and an accrual for bad debt, which were partially offset by investment gains associated with our equity investments, primarily from a gain on the sale of one of our investments. This is compared to the first quarter of 2019 that resulted in net investment gains.
Due to market deterioration from a possible future recession, further losses could be incurred on our non-utility investments during the remainder of 2020.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on our consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2019 Form 10-K and have not changed materially.
Liquidity and Capital Resources
Overall Liquidity

We expect that COVID-19 will have a negative impact on our overall liquidity. For 2020, we expect our net cash flows from operations to decrease primarily due to lower expected revenues from retail sales of electricity and natural gas and lower payments from customers.

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In response to potential liquidity needs, in April 2020, we entered into a $100 million credit agreement, see "Note 9 of the Notes to Condensed Consolidated Financial Statements."
Other than COVID-19 impacts, our sources of overall liquidity and the requirements for liquidity have not materially changed in the three months ended March 31, 2020. See the 2019 Form 10-K for further discussion.
As of March 31, 2020, we had $182.0 million of available liquidity under the Avista Corp. committed line of credit and $25.0 million under the AEL&P committed line of credit. After considering the impacts of COVID-19, with our $400.0 million credit facility that expires in April 2021, AEL&P's $25.0 million credit facility that expires in November 2024 and the new $100.0 million credit agreement that expires in April 2021, we believe that we have adequate liquidity to meet our needs for the next 12 months.
Review of Cash Flow Statement
Operating Activities
Net cash provided by operating activities was $135.3 million for the three months ended March 31, 2020 compared to $196.9 million for the three months ended March 31, 2019. The decrease in net cash provided by operating activities primarily relates to a termination fee of $103.0 million received in 2019 upon the termination of the Hydro One transaction. The termination fee was used for reimbursing our transaction costs incurred from 2017 to 2019 which totaled approximately $51.0 million, including income taxes. The balance of the termination fee was used for general corporate purposes and reduced our need for external financing. Our total transaction costs were $19.7 million (pre-tax) for 2019 and we also incurred approximately $15.7 million in taxes in 2019.
The above decrease in net cash provided by operating activities was partially offset by power and natural gas deferrals which decreased during 2020 due to lower natural gas prices during the year (which increased cash flows by $6.4 million) as compared to an decrease to operating cash flows of $48.1 million in 2019. As compared to 2019, net current assets and liabilities decreased by $43.0 million.
Investing Activities
Net cash used in investing activities was $95.1 million for the three months ended March 31, 2020, compared to $97.7 million for the three months ended March 31, 2019. During the three months ended March 31, 2020, we paid $95.5 million for utility capital expenditures compared to $93.6 million for the three months ended March 31, 2019. Also, during the first quarter of 2020, we received proceeds from the sale of an equity investment (net of cash sold and amounts held in escrow) of $5.1 million.
Financing Activities
Net cash used by financing activities was $31.1 million for the three months ended March 31, 2020, compared to $98.0 million for the three months ended March 31, 2019. Due to the termination fee described above, we were able to reduce our short-term borrowings during the first quarter of 2019, as evidenced by the $71.0 million decrease in short-term borrowings during 2019. For 2020, we had a decrease in short-term borrowings of $0.8 million.
Capital Resources
Our consolidated capital structure, including the current portion of long-term debt and short-term borrowings, and excluding noncontrolling interests, consisted of the following as of March 31, 2020 and December 31, 2019 (dollars in thousands):
 
March 31, 2020
 
December 31, 2019
 
Amount
 
Percent
of total
 
Amount
 
Percent
of total
Current portion of long-term debt and leases
$
58,946

 
1.4
%
 
$
58,928

 
1.4
%
Short-term borrowings
185,000

 
4.4
%
 
185,800

 
4.5
%
Long-term debt to affiliated trusts
51,547

 
1.2
%
 
51,547

 
1.2
%
Long-term debt and leases
1,957,142

 
46.5
%
 
1,961,083

 
46.7
%
Total debt
2,252,635

 
53.5
%
 
2,257,358

 
53.8
%
Total Avista Corporation shareholders’ equity
1,959,095

 
46.5
%
 
1,939,284

 
46.2
%
Total
$
4,211,730

 
100.0
%
 
$
4,196,642

 
100.0
%
Our shareholders’ equity increased $19.8 million during the first three months of 2020 primarily due to net income, partially offset by dividends.

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We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our indebtedness, both short-term and long-term, reduce the amount of cash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividends and other requirements.
Committed Lines of Credit
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400.0 million. We expect to amend and extend the revolving line of credit agreement in the second quarter for a revised term of one additional year beyond the current maturity date of April 2021, with the option to extend for an additional one year period. As of March 31, 2020, there was $182.0 million of available liquidity under this line of credit.
The Avista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of “consolidated total debt” to “consolidated total capitalization” to be greater than 65 percent at any time. As of March 31, 2020, we were in compliance with this covenant with a ratio of 53.5 percent.
AEL&P has a $25.0 million committed line of credit that expires in November 2024. As of March 31, 2020, there were no borrowings or letters of credit outstanding under this committed line of credit.
The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of “consolidated total debt at AEL&P” to “consolidated total capitalization at AEL&P” (including the impact of the Snettisham obligation) to be greater than 67.5 percent at any time. As of March 31, 2020, AEL&P was in compliance with this covenant with a ratio of 53.0 percent.
Balances outstanding and interest rates of borrowings under Avista Corp.'s committed line of credit were as follows as of and for the three months ended March 31 (dollars in thousands):
 
2020
 
2019
Borrowings outstanding at end of period
$
185,000

 
$
119,000

Letters of credit outstanding at end of period
$
32,983

 
$
60,103

Maximum borrowings outstanding during the period
$
193,000

 
$
111,000

Average borrowings outstanding during the period
$
173,684

 
$
36,299

Average interest rate on borrowings during the period
2.33
%
 
2.43
%
Average interest rate on borrowings at end of period
1.66
%
 
3.31
%
As of March 31, 2020, Avista Corp. and its subsidiaries were in compliance with all of the covenants of their financing agreements, and none of Avista Corp.'s subsidiaries constituted a “significant subsidiary” as defined in Avista Corp.'s committed line of credit.
In April 2020, we entered into a $100.0 million credit agreement with a maturity date of April 2021. We borrowed the entire $100.0 million available under this agreement, which is being used to provide additional liquidity. See "Note 9 of the Notes to Condensed Consolidated Financial Statements."
Loans under this agreement are unsecured and will have a variable annual interest rate determined by either the Eurodollar rate or the Alternative Base Rate depending on the type of loan selected by Avista Corp. The credit agreement contains customary covenants and default provisions, including a covenant not to permit the ratio of “consolidated total debt” to “consolidated total capitalization” of Avista Corp. to be greater than 65 percent at any time.
Liquidity Expectations
During 2020, we expect to issue approximately $165.0 million of long-term debt and up to $70.0 million of equity in order to refinance maturing long-term debt, and fund planned capital expenditures.
After considering the impacts of COVID-19, including the expectation of lower net operating cash flows, and the expected issuances of long-term debt and equity during 2020, we expect net cash flows from operations, together with cash available under our committed lines of credit and the $100.0 million borrowed under the credit agreement entered in April, to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments.
Capital Expenditures
We are making capital investments to enhance service and system reliability for our customers and replace aging infrastructure. Our estimated capital expenditures for 2020 through 2022 have not materially changed during the three months ended March 31, 2020. It is possible that prolonged economic restrictions or business interruptions could cause a decrease in our utility capital expenditures. See the 2019 Form 10-K for further information on our expected capital expenditures.

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AVISTA CORPORATION



Off-Balance Sheet Arrangements
As of March 31, 2020, we had $33.0 million in letters of credit outstanding under our $400.0 million committed line of credit, compared to $21.5 million as of December 31, 2019. The increase in letters of credit outstanding was due to additional letters of credit being issued as collateral for energy commodity derivative instruments.
Pension Plan
Avista Utilities
In the three months ended March 31, 2020 we contributed $7.3 million to the pension plan and we expect to contribute $22.0 million in 2020. We expect to contribute a total of $110.0 million to the pension plan in the period 2020 through 2024, with annual contributions of $22.0 million over that period.
The final determination of pension plan contributions for future periods is subject to multiple variables, most of which are beyond our control, including changes to the fair value of pension plan assets, changes in actuarial assumptions (in particular the discount rate used in determining the benefit obligation), or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed above.
Disruptions and overall declines in the financial markets have decreased the fair value of pension plan assets and lower discount rates will increase the pension liability. This could ultimately increase future pension plan funding requirements and expenses. The impact on pension plan assets is mitigated as a significant portion of the assets are fixed-income securities with a target of 35 percent invested in equity securities. The impact on pension expense is also mitigated by pension accounting under GAAP, given that expense is based on the long-term rate of return which should be less affected by short-term market fluctuations.
See "Note 6 of the Notes to Condensed Consolidated Financial Statements" for additional information regarding the pension plan.
Contractual Obligations
Our future contractual obligations have not materially changed during the three months ended March 31, 2020, except for in April 2020, we entered into a $100.0 million credit agreement with a maturity date of April 2021. See "Note 9 of the Notes to Condensed Consolidated Financial Statements."
See the 2019 Form 10-K for our contractual obligations.
Environmental Issues and Contingencies
Our environmental issues and contingencies disclosures have not materially changed during the three months ended March 31, 2020 except for the following:
Coal Ash Management/Disposal
In 2015, the EPA issued a final rule regarding coal combustion residuals (CCRs), also termed coal combustion byproducts or coal ash. The CCR rule has been the subject of ongoing litigation. In August 2018, the D.C. Circuit struck down provisions of the rule. Colstrip, of which we are a 15 percent owner of Units 3 & 4, produces this byproduct. On December 2, 2019, a proposed revision to the rule was published in the Federal Register to address the D.C. Circuit's decision. The rule includes technical requirements for CCR landfills and surface impoundments under Subtitle D of the Resource Conservation and Recovery Act, the nation's primary law for regulating solid waste. The Colstrip owners developed a multi-year compliance plan to address the CCR requirements with existing state obligations expressed largely by the 2012 Administrative Order on Consent (AOC) with Montana Department of Environmental Quality (MDEQ). These requirements continue despite the 2018 federal court ruling.
The AOC requires MDEQ provide an ongoing public process which recently approved the Remedy and Closure plans for the three major areas of Colstrip. The AOC also requires the Colstrip owners to provide financial assurance primarily in the form of surety bonds, to secure each owner’s pro rata share of various anticipated closure and remediation obligations. Avista Corp. is responsible for its share of two major areas; the Plant Site Area and the Effluent Holding Pond (EHP) Area. Generally, the plans include the removal of Boron, Chloride, and Sulfate from the groundwater, closure of the existing ash storage ponds, and installation of a new water treatment system to convert the facility to a dry ash storage. Avista Corp. has posted three surety bonds totaling approximately $23 million. This amount will be updated annually, decreasing over time as remediation activities are completed.

49

AVISTA CORPORATION



Oregon Legislation and Regulatory Actions
GHG Reduction Targets
The State of Oregon has adopted non-binding targets to reduce GHG (Greenhouse Gas) emissions. The State enacted its targets with an expectation of reaching the targets through a combination of renewable energy standards, eventual carbon pricing mechanisms, such as cap and trade regulation or a carbon tax, and assorted “complementary policies.” However, no specific reductions are mandated as yet. The State’s targets have been evaluated by state institutions against the aims of the Paris Climate Accord of 2016, which include limiting the increase in global average temperatures to at least below 2 degrees Celsius above pre-industrial levels and pursuing efforts to restrict the temperature increase to 1.5 degrees Celsius above pre-industrial levels. On March 10, 2020, Oregon Governor Kate Brown issued Executive Order No. 20-04, “Directing State Agencies to Take Actions to Reduce and Regulate Greenhouse Gas Emissions.” The Executive Order launches rulemaking proceedings for every Oregon agency with jurisdiction over greenhouse gas-related matters, with the aim of reducing Oregon’s overall GHG emissions to 80% below 1990 levels by 2050. The Executive Order requires agencies to submit a preliminary report to the Governor by May 15, 2020 regarding potential regulatory program options. We cannot reasonably predict what regulatory proceedings will arise from the Executive Order, nor how the state legislature may undertake additional requirements or revise the State's targets in the future. We intend to seek recovery of any new costs associated with these reduction targets, or any new reduction targets, through the regulatory process.
Cabinet Gorge Total Dissolved Gas Abatement Plan
Dissolved atmospheric gas levels (referred to as "Total Dissolved Gas" or "TDG") in the Clark Fork River exceed state of Idaho and federal water quality numeric standards downstream of Cabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of the Clark Fork Settlement Agreement as incorporated in Avista Corp.’s FERC license for the Clark Fork Project, Avista Corp. works in consultation with agencies, tribes and other stakeholders to address this issue through structural modifications to the spillgates, monitoring and analysis. After extensive testing, Clark Fork Settlement Agreement stakeholders have agreed that no further spillway modifications are justified. For the remainder of the FERC License term, Avista Corp. will continue to mitigate remaining impacts of TDG while considering the potential for new approaches to further reduce TDG. The Company continues to work with stakeholders to determine the degree to which TDG abatement reduces future mitigation obligations. The Company has sought, and intends to continue to seek recovery, through the ratemaking process, of all operating and capitalized costs related to this issue.
See the 2019 Form 10-K for further discussion of environmental issues and contingencies.
Enterprise Risk Management
The material risks to our businesses, and our mitigation process and procedures to address these risks, were discussed in our 2019 Form 10-K and have not materially changed during the three months ended March 31, 2020, other than the changes noted due to COVID-19. See the 2019 Form 10-K.
Financial Risk
Our financial risks have not materially changed during the three months ended March 31, 2020, other than the changes noted due to COVID-19. Refer to the 2019 Form 10-K. The financial risks included below are required interim disclosures, even if they have not materially changed from December 31, 2019.
Interest Rate Risk
We use a variety of techniques to manage our interest rate risks. We have an interest rate risk policy and have established a policy to limit our 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 establishing fixed rate long-term debt with varying maturities. See "Note 5 of the Notes to Condensed Consolidated Financial Statements" for a summary of our interest rate swap derivatives outstanding as of March 31, 2020 and December 31, 2019 and the amount of additional collateral we would have to post in certain circumstances. In addition, see "Regulatory Matters" for a discussion of commitments we made in Oregon surrounding the independent review of our interest rate hedging practices.

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AVISTA CORPORATION



Credit Risk
Avista Utilities' contracts for the purchase and sale of energy commodities can require collateral in the form of cash or letters of credit. As of March 31, 2020, we had cash deposited as collateral in the amount of $1.8 million and letters of credit of $25.0 million outstanding related to our energy derivative contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount of collateral required. See “Credit Ratings” in the 2019 Form 10-K for further information. For example, in addition to limiting our ability to conduct transactions, if our credit ratings were lowered to below “investment grade” based on our positions outstanding at March 31, 2020 (including contracts that are considered derivatives and those that are considered non-derivatives), we would potentially be required to post the following additional collateral (in thousands):
 
March 31, 2020
Additional collateral taking into account contractual thresholds
$
2,897

Additional collateral without contractual thresholds
3,407

Under the terms of interest rate swap derivatives that we enter into periodically, we may be required to post cash or letters of credit as collateral depending on fluctuations in the fair value of the instrument. As of March 31, 2020, we had interest rate swap derivatives outstanding with a notional amount totaling $245.0 million and we had cash deposited as collateral in the amount of $27.1 million and letters of credit of $3.9 million outstanding for these interest rate swap derivatives. If our credit ratings were lowered to below “investment grade” based on our interest rate swap derivatives outstanding at March 31, 2020, we would potentially be required to post the following additional collateral (in thousands):
 
March 31, 2020
Additional collateral taking into account contractual thresholds
$
31,850

Additional collateral without contractual thresholds
81,280

Energy Commodity Risk
Our energy commodity risks have not materially changed during the three months ended March 31, 2020, except as discussed below and the COVID-19 related risks. See the 2019 Form 10-K. The following table presents energy commodity derivative fair values as a net asset or (liability) as of March 31, 2020 that are expected to settle in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2022.
 
Purchases
 
Sales
 
Electric Derivatives
 
Gas Derivatives
 
Electric Derivatives
 
Gas Derivatives
Year
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
Remainder 2020
$
(2
)
 
$
(794
)
 
$
(203
)
 
$
3,185

 
$
427

 
$
4,230

 
$
(881
)
 
$
(4,997
)
2021
—

 
50

 
39

 
3,309

 
—

 
966

 
(1,345
)
 
(2,065
)
2022
—

 
—

 
75

 
368

 
—

 
—

 
—

 
(19
)
The following table presents energy commodity derivative fair values as a net asset or (liability) as of December 31, 2019 that are expected to be delivered in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2022.
 
Purchases
 
Sales
 
Electric Derivatives
 
Gas Derivatives
 
Electric Derivatives
 
Gas Derivatives
Year
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
 
Physical (1)
 
Financial (1)
2020
$
19

 
$
2,063

 
$
(895
)
 
$
10,929

 
$
(422
)
 
$
(7,448
)
 
$
(1,634
)
 
$
(8,922
)
2021
—

 
—

 
15

 
2,666

 
—

 
(26
)
 
(1,187
)
 
(1,941
)
2022
—

 
—

 
35

 
180

 
—

 
—

 
—

 
(5
)
(1)
Physical transactions represent commodity transactions in which we will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of the benefit or cost but with no physical delivery of the commodity, such as futures, swap derivatives, options, or forward contracts.
The above electric and natural gas derivative contracts 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 deferral and recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually be collected through retail rates from customers.

51

AVISTA CORPORATION



Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth in the Enterprise Risk Management section of "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company has disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (Act) that are designed to ensure that information required to be disclosed in the reports it files or submits under the Act is recorded, processed, summarized and reported on a timely basis. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. With the participation of the Company’s principal executive officer and principal financial officer, the Company's management evaluated its disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective at a reasonable assurance level as of March 31, 2020.
There have been no changes in the Company's internal control over financial reporting that occurred during the first quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. Other Information

Item 1. Legal Proceedings
See “Note 15 of Notes to Condensed Consolidated Financial Statements” in “Part I. Financial Information Item 1. Condensed Consolidated Financial Statements.”
Item 1A. Risk Factors
Refer to the 2019 Form 10-K for disclosure of risk factors that could have a significant impact on our results of operations, financial condition or cash flows and could cause actual results or outcomes to differ materially from those discussed in our reports filed with the SEC (including this Quarterly Report on Form 10-Q), and elsewhere. These risk factors have not materially changed from the disclosures provided in the 2019 Form 10-K with the exception of the following:
The COVID 19 global pandemic is disrupting our business and could have a negative effect on our results of operations, financial condition and cash flows.
The COVID-19 global pandemic is currently impacting all aspects of our business, as well as the global, national and local economy. We cannot predict the full extent to which COVID-19 will impact on our operations, results of operations, cash flows, financial condition or capital resources. It is possible that the continued spread of COVID-19 and efforts to contain the virus, such as quarantines or closures or reduced operations of businesses, governmental agencies and other institutions, will continue to cause an economic slowdown and possibly a recession, resulting in significant disruptions in various public, commercial or industrial activities and causing employee absences which could interfere with operation and maintenance of the Company’s facilities. Any of these circumstances could adversely affect our operations, results of operations, financial condition and cash flows in the following ways, including, but not limited to:
•
A decrease in customer demand and revenues due to a reduction in economic activity and possibly a recession,
•
An increase in operating expenses, including bad debt expense due to our customers’ inability to pay amounts due to us,
•
A negative impact on the ability of suppliers, vendors or contractors to perform, which could increase costs and delay capital projects,
•
Regulatory commissions may not approve our requests to defer and recover increased expenses,
•
Delays in regulatory filings and the regulatory approval process, which could impact our ability to timely recover our operating expenses and costs associated with investments in utility assets,

52

AVISTA CORPORATION



•
An increase in cyber and technology risks, including the impact on internal controls, due to a significant number of employees working remotely,
•
A decrease in the fair value of pension plan assets or an increase in the pension liability, which could increase future pension plan funding requirements,
•
A decrease in the fair value of non-utility investments, which could result in losses or impairment,
•
A decrease in net operating cash inflows, which could negatively impact our liquidity and limit our ability to fund capital expenditures, dividends, and other contractual commitments,
•
Disruption, weakness and volatility in the financial markets, which could increase our costs to fund capital requirements,
•
To the extent that access to the capital markets is adversely affected, we may need to consider alternative sources of funding for operations and for working capital, any of which could increase our cost of capital.

We cannot predict the duration and severity of the COVID-19 global pandemic. The longer and more severe the economic restrictions and business disruption is, the greater the impact on our operations, results of operations, financial condition and cash flows will be.
In addition to these risk factors, see also “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.
Item 6. Exhibits




101.INS

XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH

XBRL Taxonomy Extension Schema Document
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB

XBRL Taxonomy Extension Label Linkbase Document
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF

XBRL Taxonomy Extension Definition Linkbase Document
104

Cover page formatted as Inline XBRL and contained in Exhibit 101.
 
 
(1
)
Filed herewith.
(2
)
Furnished herewith.

53

AVISTA CORPORATION



SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
AVISTA CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
May 7, 2020
 
/s/    Mark T. Thies        
 
 
 
Mark T. Thies
 
 
 
Executive Vice President,
Chief Financial Officer, and Treasurer
(Principal Financial Officer)

54