SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avista Corporation is an energy company engaged in the generation, transmission and distribution of energy, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities generates, transmits and distributes electricity in parts of eastern Washington, northern Idaho, and Montana. In addition, Avista Utilities has electric generating facilities in northern Oregon. Avista Utilities also provides natural gas distribution service in parts of eastern Washington and northern Idaho, as well as parts of northeastern and southwestern Oregon. Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). Avista Capital’s subsidiaries include Ecova, Inc. (Ecova), a 78.9 percent owned subsidiary as of September 30, 2013. Ecova is a provider of energy efficiency and other facility information and cost management programs and services for multi-site customers and utilities throughout North America. See Note 12 for business segment information.

Basis of Reporting

The condensed consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries, including Ecova and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants.

Taxes Other Than Income Taxes

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



	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Utility taxes	$	10,901	$	10,741	$	41,045	$	41,353

Other (Income)/Expense-Net

Other (Income)/Expense-net consisted of the following items for the three and nine months ended September 30 (dollars in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Interest income	$	(124	)	$	(166	)	$	(620	)	$	(804	)
Interest income on regulatory deferrals	(27		)	(19		)	(48		)	(43		)
Equity-related AFUDC	(1,595		)	(1,127		)	(4,341		)	(2,875		)
Net loss on investments	1,299			2,430			1,543			2,957
Other income	(537		)	(700		)	(2,099		)	(2,127		)
Total	$	(984	)	$	418		$	(5,565	)	$	(2,892	)

Materials and Supplies, Fuel Stock and Natural Gas Stored

Inventories of materials and supplies, fuel stock and natural gas stored are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	September 30,		December 31,
	2013		2012
Materials and supplies	$	29,334	$	26,058
Fuel stock	3,750		4,121
Natural gas stored	23,759		17,276
Total	$	56,843	$	47,455

Investments and Funds Held for Clients and Client Fund Obligations

In connection with the bill paying services, Ecova collects funds from its clients and remits the funds to the appropriate utility or other service provider. Some of the funds collected are invested by Ecova and classified as investments and funds held for clients, and a related liability for client fund obligations is recorded. Investments and funds held for clients include cash and cash equivalent investments, money market funds and investment securities classified as available for sale. Ecova does not invest the funds directly for the clients' benefit; therefore, Ecova bears the risk of loss associated with the investments. Investments and funds held for clients as of September 30, 2013 are as follows (dollars in thousands):



	Amortized Cost (1)		Unrealized Gain (Loss)			Fair Value
Cash and cash equivalents	$	14,155	$	—		$	14,155
Money market funds	3,238		—			3,238
Securities available for sale:
U.S. government agency	68,631		(2,466		)	66,165
Municipal	3,529		13			3,542
Corporate fixed income – financial	3,000		4			3,004
Corporate fixed income – industrial	1,753		13			1,766
Certificates of deposit	1,000		—			1,000
Total securities available for sale	77,913		(2,436		)	75,477
Total investments and funds held for clients	$	95,306	$	(2,436	)	$	92,870

Investments and funds held for clients as of December 31, 2012 are as follows (dollars in thousands):



	Amortized Cost (1)		Unrealized Gain (Loss)		Fair Value
Cash and cash equivalents	$	13,867	$	—	$	13,867
Money market funds	15,084		—		15,084
Securities available for sale:
U.S. government agency	48,340		156		48,496
Municipal	820		28		848
Corporate fixed income – financial	5,010		16		5,026
Corporate fixed income – industrial	3,887		49		3,936
Certificates of deposit	1,000		15		1,015
Total securities available for sale	59,057		264		59,321
Total investments and funds held for clients	$	88,008	$	264	$	88,272


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

Investments and funds held for clients are classified as a current asset since these funds are held for the purpose of satisfying the client fund obligations. As of September 30, 2013 and December 31, 2012 approximately 95 percent and 97 percent of the investment portfolio, respectively, was rated AA-, Aa3 and higher by nationally recognized statistical rating organizations. All fixed income securities were rated as investment grade as of September 30, 2013 and December 31, 2012.

Ecova reviews its investments continuously for indicators of other-than-temporary impairment. To make this determination, Ecova employs a methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Ecova evaluates, among other factors, general market conditions, credit quality of instrument issuers, the length of time and extent to which the fair value is less than cost, and whether it has plans to sell the security or it is more-likely-than not that Ecova will be required to sell the security before recovery. Ecova also considers specific adverse conditions related to the financial health of and specific prospects for the issuer as well as other cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the investment is established. Based on Ecova’s analysis, securities available for sale do not meet the criteria for other-than-temporary impairment as of September 30, 2013 or December 31, 2012.

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



	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Proceeds from sales, maturities and calls	$	1,825	$	32,053	$	16,955	$	103,545
Gross realized gains	2		111		20		252
Gross realized losses	—		—		—		—

Contractual maturities of securities available for sale as of September 30, 2013 and December 31, 2012 are as follows (dollars in thousands):



	Due within 1 year		After 1 but within 5 years		After 5 but within 10 years		After 10 years		Total
September 30, 2013	$	5,655	$	18,479	$	48,437	$	2,906	$	75,477
December 31, 2012	3,047		11,786		41,485		3,003		59,321

Actual maturities may differ due to call or prepayment rights and the effective maturity was 3.1 years as of September 30, 2013 and 1.9 years as of December 31, 2012.

Goodwill

Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. The Company evaluates goodwill for impairment using a discounted cash flow model on at least an annual basis or more frequently if impairment indicators arise. The Company completed its annual evaluation of goodwill for potential impairment as of December 31, 2012 for Ecova and as of November 30, 2012 for the other businesses and determined that goodwill was not impaired at that time.

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



	Ecova		Other		Accumulated Impairment Losses			Total
Balance as of December 31, 2012	$	70,713	$	12,979	$	(7,733	)	$	75,959
Adjustments	803		—		—			803
Balance as of September 30, 2013	$	71,516	$	12,979	$	(7,733	)	$	76,762

Accumulated impairment losses are attributable to the other businesses. The adjustment to goodwill recorded represents a purchase accounting adjustment for Ecova's acquisition of LPB based upon final review of the fair market value of the noncontrolling interests associated with a portion of the LPB business and based on review of the fair market value of the client relationship intangible asset.

Intangible Assets

Amortization expense related to Intangible Assets was as follows for the three and nine months ended September 30 (dollars in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Intangible asset amortization	$	2,765	$	2,436	$	8,442	$	7,091

The following table details the estimated amortization expense related to Intangible Assets for each of the five years ending December 31 (dollars in thousands):



	Remaining
	2013		2014		2015		2016		2017
Estimated amortization expense	$	2,292	$	10,460	$	8,484	$	7,359	$	6,516

The gross carrying amount and accumulated amortization of Intangible Assets as of September 30, 2013 and December 31, 2012 are as follows (dollars in thousands):



	Estimated	September 30,			December 31,
	Useful Lives	2013			2012
Client backlog and relationships	2 - 12 years	$	33,559		$	32,059
Software development costs	3 - 7 years	38,148			33,990
Other	1 - 10 years	3,332			6,237
Total intangible assets		75,039			72,286
Client relationships accumulated amortization		(11,255		)	(7,793		)
Software development costs accumulated amortization		(20,383		)	(16,557		)
Other accumulated amortization		(2,248		)	(1,680		)
Total accumulated amortization		(33,886		)	(26,030		)
Total intangible assets - net		$	41,153		$	46,256

Of the total net intangible assets above, intangible assets associated with Ecova represent approximately $40.4 million and $45.4 million at September 30, 2013 and December 31, 2012, respectively.

Derivative Assets and Liabilities

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

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

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

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap agreements and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 9 for the Company’s fair value disclosures.

Regulatory Deferred Charges and Credits

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


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


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


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

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


•	required to write off its regulatory assets, and


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

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, consisted of the following as of September 30, 2013 and December 31, 2012 (dollars in thousands):



	September 30,			December 31,
	2013			2012
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(3,401) and $(3,698), respectively	$	(6,316	)	$	(6,867	)
Unrealized gain (loss) on securities available for sale - net of taxes of $(904) and $97, respectively	(1,532		)	167
Total accumulated other comprehensive loss	$	(7,848	)	$	(6,700	)

The following table details the reclassifications out of accumulated other comprehensive loss by component for the three and nine months ended September 30, 2013 (dollars in thousands):



	Amounts Reclassified from Accumulated Other Comprehensive Loss
Details about Accumulated Other Comprehensive Loss Components	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Affected Line Item in Statement of Income
Realized gains on investment securities	$	2		$	20		Other income-net
	2			20			Total before tax
	(1		)	(8		)	Tax expense
	$	1		$	12		Net of tax
Amortization of defined benefit pension items
Amortization of net loss	$	(4,891	)	$	(14,673	)	(a)
Adjustment due to effects of regulation	4,608			13,825			(a)
	(283		)	(848		)	Total before tax
	99			297			Tax benefit
	$	(184	)	$	(551	)	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).

Contingencies

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

Voluntary Severance Incentive Program

At December 31, 2012, the Company accrued total severance costs of $7.3 million (pre-tax) related to the voluntary termination of 55 employees. The total severance costs were made up of the severance payments and the related payroll taxes and employee benefit costs. All terminations under the voluntary severance incentive program were completed by December 31, 2012. The cost of the program was recognized as expense during the fourth quarter of 2012 and severance pay was distributed in a single lump sum cash payment to each participant during January 2013. As of September 30, 2013, there was no remaining liability accrued.

Correction of an Immaterial Error

Subsequent to the issuance of the Company's condensed consolidated financial statements for the three and nine months ended September 30, 2012, the Company's management identified certain employee-related operating expenses, dues and donations, and other operating expenses totaling $3.4 million and $8.0 million for the three and nine months ended September 30, 2012, respectively, which had been erroneously included in “Other expense-net” in the previously issued financial statements rather than as a reduction to “Income from operations.” Accordingly, such classification has been corrected in the accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2012 by including $2.0 million and $5.4 million of other operating expenses within utility operating expense, $1.4 million and $2.5 million of other operating expenses within other non-utility operating expenses and $0.03 million and $0.1 million of taxes other than income taxes within utility operating expenses, respectively. Such items had no effect on net income or earnings per share.

Reclassifications

Certain prior year amounts on the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. In the current year Condensed Consolidated Statements of Income, Ecova operating revenues and operating expenses have been reclassified to separate line items. Previously, such amounts had been classified within the line items captioned "Other non-utility revenues" and “Other non-utility operating expenses,” respectively. Such items had no effect on net income or earnings per share. In the current year Condensed Consolidated Statements of Cash Flows, "Amortization of investment in exchange power," "Stock-based compensation expense," "Pension and other postretirement benefit expense" and "Amortization of Spokane Energy contract" have been added as their own line items. These were previously included in "Other" in the operating activities section.