STOCK COMPENSATION PLANS

Avista Corp. (Excluding Ecova)

1998 Plan

In 1998, the Company adopted, and shareholders approved, the Long-Term Incentive Plan (1998 Plan). Under the 1998 Plan, certain key employees, officers and non-employee directors of the Company and its subsidiaries may be granted stock options, stock appreciation rights, stock awards (including restricted stock) and other stock-based awards and dividend equivalent rights. The Company has available a maximum of 4.5 million shares of its common stock for grant under the 1998 Plan. As of December 31, 2012, 0.7 million shares were remaining for grant under this plan.

2000 Plan

In 2000, the Company adopted a Non-Officer Employee Long-Term Incentive Plan (2000 Plan), which was not required to be approved by shareholders. The provisions of the 2000 Plan are essentially the same as those under the 1998 Plan, except for the exclusion of non-employee directors and executive officers of the Company. The Company has available a maximum of 2.5 million shares of its common stock for grant under the 2000 Plan. However, the Company currently does not plan to issue any further options or securities under the 2000 Plan. As of December 31, 2012, 1.9 million shares were remaining for grant under this plan.

Stock Compensation

The Company records compensation cost relating to share-based payment transactions in the financial statements based on the fair value of the equity or liability instruments issued. The Company recorded stock-based compensation expense (included in other operating expenses) and income tax benefits in the Consolidated Statements of Income of the following amounts for the years ended December 31 (dollars in thousands):



	2012		2011		2010
Stock-based compensation expense	$	5,792	$	5,756	$	4,916
Income tax benefits	2,027		2,014		1,720

Stock Options

The following summarizes stock options activity under the 1998 Plan and the 2000 Plan for the years ended December 31:



	2012			2011			2010
Number of shares under stock options:
Options outstanding at beginning of year	92,499			201,674			523,973
Options granted	—			—			—
Options exercised	(89,499		)	(107,575		)	(101,649		)
Options canceled	—			(1,600		)	(220,650		)
Options outstanding and exercisable at end of year	3,000			92,499			201,674
Weighted average exercise price:
Options exercised	$	10.63		$	12.25		$	11.51
Options canceled	$	—		$	11.80		$	22.60
Options outstanding and exercisable at end of year	$	12.41		$	10.69		$	11.53
Cash received from options exercised (in thousands)	$	951		$	1,318		$	2,179
Intrinsic value of options exercised (in thousands)	$	1,349		$	1,279		$	1,006
Intrinsic value of options outstanding (in thousands)	$	35		$	1,393		$	2,217

Information for options outstanding and exercisable as of December 31, 2012 is as follows:



Exercise Price	Number of Shares	Weighted Average Exercise Price	Weighted Average Remaining Life (in years)
$12.41	3,000	12.41	0.35

As of December 31, 2012 and 2011, the Company’s stock options were fully vested and expensed.

Restricted Shares

Restricted share awards vest in equal thirds each year over a three-year period and are payable in Avista Corp. common stock at the end of each year if the service condition is met. In addition to the service condition, the Company must meet a return on equity target in order for the CEO’s restricted shares to vest. During the vesting period, employees are entitled to dividend equivalents which are paid when dividends on the Company’s common stock are declared. Restricted stock is valued at the close of market of the Company’s common stock on the grant date. The weighted average remaining vesting period for the Company’s restricted shares outstanding as of December 31, 2012 was 0.7 years. The following table summarizes restricted stock activity for the years ended December 31:



	2012			2011			2010
Unvested shares at beginning of year	93,482			84,134			71,904
Shares granted	70,281			50,618			43,800
Shares canceled	(790		)	(431		)	—
Shares vested	(45,855		)	(40,839		)	(31,570		)
Unvested shares at end of year	117,118			93,482			84,134
Weighted average fair value at grant date	$	25.83		$	23.06		$	19.80
Unrecognized compensation expense at end of year (in thousands)	$	1,428		$	932		$	735
Intrinsic value, unvested shares at end of year (in thousands)	$	2,824		$	2,407		$	1,895
Intrinsic value, shares vested during the year (in thousands)	$	1,173		$	934		$	682

Performance Shares

Performance share awards vest after a period of three years and are payable in cash or Avista Corp. common stock at the end of the three-year period. Performance share awards entitle the recipients to dividend equivalent rights, are subject to forfeiture under certain circumstances, and are subject to meeting specific performance conditions. Based on the attainment of the performance condition, the amount of cash paid or common stock issued will range from 0 to 150 percent of the performance shares granted for grants prior to 2011 and 0 to 200 percent for grants in 2011 and after, depending on the change in the value of the Company’s common stock relative to an external benchmark. Dividend equivalent rights are accumulated and paid out only on shares that eventually vest.

Performance share awards entitle the grantee to shares of common stock or cash payable once the service condition is satisfied. Based on attainment of the performance condition, grantees may receive 0 to 150 percent of the original shares granted for grants prior to 2011 and 0 to 200 percent for shares granted in 2011 and after. The performance condition used is the Company’s Total Shareholder Return performance over a three-year period as compared against other utilities; this is considered a market-based condition. Performance shares may be settled in common stock or cash at the discretion of the Company. Historically, the Company has settled these awards through issuance of stock and intends to continue this practice. These awards vest at the end of the three-year period. Performance shares are equity awards with a market-based condition, which results in the compensation cost for these awards being recognized over the requisite service period, provided that the requisite service period is rendered, regardless of when, if ever, the market condition is satisfied.

The Company measures (at the grant date) the estimated fair value of performance shares awarded. The fair value of each performance share award was estimated on the date of grant using a statistical model that incorporates the probability of meeting performance targets based on historical returns relative to a peer group. Expected volatility was based on the historical volatility of Avista Corp. common stock over a three-year period. The expected term of the performance shares is three years based on the performance cycle. The risk-free interest rate was based on the U.S. Treasury yield at the time of grant. The compensation expense on these awards will only be adjusted for changes in forfeitures.

The following summarizes the weighted average assumptions used to determine the fair value of performance shares and related compensation expense as well as the resulting estimated fair value of performance shares granted:



	2012			2011			2010
Risk-free interest rate	0.3		%	1.2		%	1.4		%
Expected life, in years	3			3			3
Expected volatility	22.7		%	26.9		%	27.8		%
Dividend yield	4.5		%	4.7		%	4.6		%
Weighted average grant date fair value (per share)	$	26.06		$	20.79		$	15.30

The fair value includes both performance shares and dividend equivalent rights.

The following summarizes performance share activity:



	2012			2011			2010
Opening balance of unvested performance shares	351,345			325,700			300,601
Performance shares granted	181,000			184,600			168,700
Performance shares canceled	(4,544		)	(2,177		)	—
Performance shares vested	(168,101		)	(156,778		)	(143,601		)
Ending balance of unvested performance shares	359,700			351,345			325,700
Intrinsic value of unvested performance shares (in thousands)	$	8,672		$	9,047		$	7,335
Unrecognized compensation expense (in thousands)	$	3,800		$	2,991		$	2,330

The weighted average remaining vesting period for the Company’s performance shares outstanding as of December 31, 2012 was 1.5 years. Unrecognized compensation expense as of December 31, 2012 will be recognized during 2013. The following summarizes the impact of the market condition on the vested performance shares:



	2012			2011			2010
Performance shares vested	168,101			156,778			143,601
Impact of market condition on shares vested	(168,101		)	(15,678		)	21,540
Shares of common stock earned	—			141,100			165,141
Intrinsic value of common stock earned (in thousands)	$	—		$	3,633		$	3,719

Shares earned under this plan are distributed to participants in the quarter following vesting.

Outstanding performance share awards include a dividend component that is paid in cash. This component of the performance share grants is accounted for as a liability award. These liability awards are revalued on a quarterly basis taking into account the number of awards outstanding, historical dividend rate, and the change in the value of the Company’s common stock relative to an external benchmark. Over the life of these awards, the cumulative amount of compensation expense recognized will match the actual cash paid. As of December 31, 2012 and 2011, the Company had recognized compensation expense and a liability of $0.7 million and $1.0 million related to the dividend component of performance share grants.

Ecova

Ecova has an employee stock incentive plan under which certain employees of Ecova may be granted options to purchase shares of Ecova at prices no less than the estimated fair value on the date of grant. The fair value of each employee option grant is estimated on the date of grant using the Black-Scholes option-pricing model and certain assumptions deemed reasonable by management. Options outstanding under this plan generally vest over periods of four years from the date granted and terminate ten years from the date granted. Unrecognized compensation expense for stock based awards at Ecova was $3.1 million as of December 31, 2012, which will be expensed during 2013 through 2016.

In 2007, Ecova amended its employee stock incentive plan to provide an annual window at which time holders of common stock can put their shares back to Ecova providing the shares are held for a minimum of six months. In 2009, Ecova amended its employee stock incentive plan to make this put feature optional for future stock option grants. Stock is reacquired at fair market value less exercise price at the date of reacquisition. Additionally, there were redeemable noncontrolling interests related to the Cadence Network acquisition, as the previous owners can exercise a right to put their stock back to Ecova (see Note 5 for further information). The following amounts of common stock were repurchased from Ecova employees during the years ended December 31 (dollars in thousands):



	2012		2011		2010
Stock repurchased from Ecova employees	$	599	$	464	$	2,593