PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all regular full-time employees at Avista Utilities. Individual benefits under this plan are based upon the employee’s years of service, date of hire and average compensation as specified in the plan. 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 $44.3 million in cash to the pension plan in 2013, $44.0 million in 2012 and $26.0 million in 2011. The Company expects to contribute $32.0 million in cash to the pension plan in 2014.

In October 2013, the Company revised its defined benefit pension plan such that as of January 1, 2014 the plan is closed to all non-union employees hired or rehired by the Company on or after January 1, 2014. All actively employed non-union employees that were hired prior to January 1, 2014 and are currently covered under the defined benefit pension plan will continue accruing benefits as originally specified in the plan. A new and separate defined contribution 401(k) plan replaced the defined benefit pension plan for all non-union employees hired or rehired on or after January 1, 2014. Under the new defined contribution plan, the Company provides a non-elective contribution as a percentage of each employee's pay based on his or her age. This new defined contribution plan is in addition to the existing 401(k) plan in which the Company matches a portion of the pay deferred by each participant. In addition to the above changes, the Company has also revised its lump sum calculation from its previous lump sum calculation for non-union participants who retire under the defined benefit pension plan to provide non-union retirees on or after January 1, 2014 with a lump sum amount equivalent to the present value of the annuity based upon applicable discount rates.

The Company also has a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to executive officers of the Company. The SERP is intended to provide benefits to executive officers whose benefits under the pension plan are reduced due to the application of Section 415 of the Internal Revenue Code of 1986 and the deferral of salary under deferred compensation plans. The liability and expense for this plan are included as pension benefits in the tables included in this Note.

The Company expects that benefit payments under the pension plan and the SERP will total (dollars in thousands):



	2014		2015		2016		2017		2018		Total 2019-2023
Expected benefit payments	$	25,176	$	26,735	$	27,731	$	28,880	$	30,379	$	172,887

The expected long-term rate of return on plan assets is based on past performance and economic forecasts for the types of investments held by the plan. In selecting a discount rate, the Company considers yield rates for highly rated corporate bond portfolios with maturities similar to that of the expected term of pension benefits.

The Company provides certain health care and life insurance benefits for substantially all of its retired employees. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services. The Company elected to amortize the transition obligation of $34.5 million over a period of 20 years, beginning in 1993. In October 2013, the Company revised the health care benefit plan such that beginning on January 1, 2020, the method for calculating health insurance premiums for non-union retirees under age 65 and active Company employees was revised. The revisions resulted in separate health insurance premium calculations for each group. In addition, for non-union employees hired or rehired on or after January 1, 2014, upon retirement the Company no longer provides a contribution towards his or her medical premiums. The Company will provide access to its retiree medical plan, but the non-union employees hired or rehired on or after January 1, 2014 will pay the full cost of premiums upon retirement.

The Company has a Health Reimbursement Arrangement to provide employees with tax-advantaged funds to pay for allowable medical expenses upon retirement. The amount earned by the employee is fixed on the retirement date based on the employee’s years of service and the ending salary. The liability and expense of this plan are included as other postretirement benefits.

The Company provides death benefits to beneficiaries of executive officers who die during their term of office or after retirement. Under the plan, an executive officer’s designated beneficiary will receive a payment equal to twice the executive officer’s annual base salary at the time of death (or if death occurs after retirement, a payment equal to twice the executive officer’s total annual pension benefit). The liability and expense for this plan are included as other postretirement benefits.

The Company expects that benefit payments under other postretirement benefit plans will total (dollars in thousands):



	2014		2015		2016		2017		2018		Total 2019-2023
Expected benefit payments	$	6,969	$	6,707	$	7,056	$	7,120	$	7,247	$	35,121

The Company expects to contribute $7.0 million to other postretirement benefit plans in 2014, representing expected benefit payments to be paid during the year. The Company uses a December 31 measurement date for its pension and other postretirement benefit plans.

The following table sets forth the pension and other postretirement benefit plan disclosures as of December 31, 2013 and 2012 and the components of net periodic benefit costs for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):



	Pension Benefits						Other Post- retirement Benefits
	2013			2012			2013			2012
Change in benefit obligation:
Benefit obligation as of beginning of year	$	584,619		$	494,192		$	132,541		$	104,730
Service cost	19,045			15,551			4,144			2,804
Interest cost	23,896			24,349			5,216			5,056
Actuarial (gain)/loss	(78,234		)	72,170			(18,017		)	24,543
Plan change	277			—			(10,788		)	—
Transfer of accrued vacation	—			—			1,189			336
Benefits paid	(22,599		)	(21,643		)	(6,036		)	(4,928		)
Benefit obligation as of end of year	$	527,004		$	584,619		$	108,249		$	132,541
Change in plan assets:
Fair value of plan assets as of beginning of year	$	406,061		$	328,150		$	25,288		$	22,455
Actual return on plan assets	52,502			54,318			4,444			2,833
Employer contributions	44,263			44,000			—			—
Benefits paid	(21,324		)	(20,407		)	—			—
Fair value of plan assets as of end of year	$	481,502		$	406,061		$	29,732		$	25,288
Funded status	$	(45,502	)	$	(178,558	)	$	(78,517	)	$	(107,253	)
Unrecognized net actuarial loss	107,043			223,308			56,885			94,202
Unrecognized prior service cost	278			319			(707		)	(856		)
Prepaid (accrued) benefit cost	61,819			45,069			(22,339		)	(13,907		)
Additional liability	(107,321		)	(223,627		)	(56,178		)	(93,346		)
Accrued benefit liability	$	(45,502	)	$	(178,558	)	$	(78,517	)	$	(107,253	)
Accumulated pension benefit obligation	$	464,432		$	505,695		—			—
Accumulated postretirement benefit obligation:
For retirees							$	52,384		$	49,232
For fully eligible employees							$	24,320		$	35,570
For other participants							$	31,545		$	47,739
Included in accumulated other comprehensive loss (income) (net of tax):
Unrecognized prior service cost	$	180		$	207		$	(7,472	)	$	(556	)
Unrecognized net actuarial loss	69,578			145,150			43,988			61,231
Total	69,758			145,357			36,516			60,675
Less regulatory asset	(64,925		)	(138,184		)	(37,116		)	(60,981		)
Accumulated other comprehensive loss (income)	$	4,833		$	7,173		$	(600	)	$	(306	)



	Pension Benefits				Other Post- retirement Benefits
	2013		2012		2013		2012
Weighted average assumptions as of December 31:
Discount rate for benefit obligation	5.10	%	4.15	%	5.02	%	4.15	%
Discount rate for annual expense	4.15	%	5.04	%	4.15	%	4.98	%
Expected long-term return on plan assets	6.60	%	6.95	%	6.35	%	6.55	%
Rate of compensation increase	4.96	%	4.89	%
Medical cost trend pre-age 65 – initial					7.00	%	7.00	%
Medical cost trend pre-age 65 – ultimate					5.00	%	5.00	%
Ultimate medical cost trend year pre-age 65					2020		2019
Medical cost trend post-age 65 – initial					7.50	%	7.50	%
Medical cost trend post-age 65 – ultimate					5.00	%	5.00	%
Ultimate medical cost trend year post-age 65					2021		2021



	Pension Benefits									Other Post-retirement Benefits
	2013			2012			2011			2013			2012			2011
Components of net periodic benefit cost:
Service cost	$	19,045		$	15,551		$	12,936		$	4,144		$	2,804		$	1,805
Interest cost	23,896			24,349			24,134			5,216			5,056			4,126
Expected return on plan assets	(27,671		)	(23,810		)	(23,115		)	(1,606		)	(1,471		)	(1,601		)
Transition obligation recognition	—			—			—			—			505			505
Amortization of prior service cost	319			346			475			(149		)	(149		)	(149		)
Net loss recognition	13,199			11,637			9,493			5,674			5,020			3,458
Net periodic benefit cost	$	28,788		$	28,073		$	23,923		$	13,279		$	11,765		$	8,144

Plan Assets

The Finance Committee of the Company’s Board of Directors approves investment policies, objectives and strategies that seek an appropriate return for the pension plan and other postretirement benefit plans and reviews and approves changes to the investment and funding policies.

The Company has contracted with investment consultants who are responsible for managing/monitoring the individual investment managers. The investment managers’ performance and related individual fund performance is periodically reviewed by an internal benefits committee and by the Finance Committee to monitor compliance with investment policy objectives and strategies.

Pension plan assets are invested in mutual funds, trusts and partnerships that hold marketable debt and equity securities, real estate, absolute return and commodity funds. In seeking to obtain the desired return to fund the pension plan, the investment consultant recommends allocation percentages by asset classes. These recommendations are reviewed by the internal benefits committee, which then recommends their adoption by the Finance Committee. The Finance Committee has established target investment allocation percentages by asset classes and also investment ranges for each asset class. The target investment allocation percentages are typically the midpoint of the established range. The target investment allocation percentages by asset classes are indicated in the table below:



	2013		2012
Equity securities	47	%	51	%
Debt securities	31	%	31	%
Real estate	6	%	5	%
Absolute return	12	%	10	%
Other	4	%	3	%

The market-related value of pension plan assets invested in debt and equity securities was based primarily on fair value (market prices). The fair value of investment securities traded on a national securities exchange is determined based on the reported last sales price; securities traded in the over-the-counter market are valued at the last reported bid price. Investment securities for which market prices are not readily available or for which market prices do not represent the value at the time of pricing, are fair-valued by the investment manager based upon other inputs (including valuations of securities that are comparable in coupon, rating, maturity and industry). Investments in common/collective trust funds are presented at estimated fair value, which is determined based on the unit value of the fund. Unit value is determined by an independent trustee, which sponsors the fund, by dividing the fund’s net assets by its units outstanding at the valuation date. The fair value of the closely held investments and partnership interests is based upon the allocated share of the fair value of the underlying assets as well as the allocated share of the undistributed profits and losses, including realized and unrealized gains and losses.

The market-related value of pension plan assets invested in real estate was determined by the investment manager based on three basic approaches:


•	properties are externally appraised on an annual basis by independent appraisers, additional appraisals may be performed as warranted by specific asset or market conditions,


•	property valuations are reviewed quarterly and adjusted as necessary, and


•	loans are reflected at fair value.

The market-related value of pension plan assets was determined as of December 31, 2013 and 2012.

The following table discloses by level within the fair value hierarchy (see Note 16 for a description of the fair value hierarchy) of the pension plan’s assets measured and reported as of December 31, 2013 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Mutual funds:
Fixed income securities	$	86,481	$	310	$	—	$	86,791
U.S. equity securities	152,831		—		—		152,831
International equity securities	85,942		—		—		85,942
Absolute return (1)	23,599		—		—		23,599
Common/collective trusts:
Fixed income securities	—		55,872		—		55,872
Real estate	—		—		19,735		19,735
Partnership/closely held investments:
Absolute return (1)	—		—		34,151		34,151
Private equity funds (3)	—		—		377		377
Commodities (2)	—		18,331		—		18,331
Real estate	—		—		3,873		3,873
Total	$	348,853	$	74,513	$	58,136	$	481,502



	Level 1		Level 2		Level 3		Total
Mutual funds:
Fixed income securities	$	83,037	$	—	$	—	$	83,037
U.S. equity securities	135,436		—		—		135,436
International equity securities	79,448		—		—		79,448
Absolute return (1)	20,764		—		—		20,764
Commodities (2)	8,258		—		—		8,258
Common/collective trusts:
Fixed income securities	—		43,107		—		43,107
Real estate	—		—		17,596		17,596
Partnership/closely held investments:
Absolute return (1)	—		—		17,755		17,755
Private equity funds (3)	—		—		660		660
Total	$	326,943	$	43,107	$	36,011	$	406,061


(1)	This category invests in multiple strategies to diversify risk and reduce volatility. The strategies include: (a) event driven, relative value, convertible, and fixed income arbitrage, (b) distressed investments, (c) long/short equity and fixed income, and (d) market neutral strategies.


(2)	This investment is in derivatives linked to commodity indices to gain exposure to the commodity markets. These positions are fully collateralized with debt securities.


(3)	This category includes private equity funds that invest primarily in U.S. companies.

The table below discloses the summary of changes in the fair value of the pension plan’s Level 3 assets for the year ended December 31, 2013 (dollars in thousands):



	Common/collective trusts		Partnership/closely held investments
	Real estate		Absolute return		Private equity funds			Real estate
Balance, as of January 1, 2013	$	17,596	$	17,755	$	660		$	—
Realized gains	—		—		(323		)	—
Unrealized gains (losses)	2,139		2,396		345			113
Purchases (sales), net	—		14,000		(305		)	3,760
Balance, as of December 31, 2013	$	19,735	$	34,151	$	377		$	3,873

The table below discloses the summary of changes in the fair value of the pension plan’s Level 3 assets for the year ended December 31, 2012 (dollars in thousands):



	Common/collective trusts		Partnership/closely held investments
	Real estate		Absolute return		Private equity funds
Balance, as of January 1, 2012	$	8,598	$	16,587	$	808
Realized gains (losses)	411		—		108
Unrealized gains (losses)	1,087		1,168		80
Purchases (sales), net	7,500		—		(336		)
Balance, as of December 31, 2012	$	17,596	$	17,755	$	660

The market-related value of other postretirement plan assets invested in debt and equity securities was based primarily on fair value (market prices). The fair value of investment securities traded on a national securities exchange is determined based on the last reported sales price; securities traded in the over-the-counter market are valued at the last reported bid price. Investment securities for which market prices are not readily available or for which market prices do not represent the value at the time of pricing, are fair-valued by the investment manager based upon other inputs (including valuations of securities that are comparable in coupon, rating, maturity and industry). The target asset allocation was 60 percent equity securities and 40 percent debt securities in 2013 and 62 percent equity securities and 38 percent debt securities in 2012.

The market-related value of other postretirement plan assets was determined as of December 31, 2013 and 2012.

The following table discloses by level within the fair value hierarchy (see Note 16 for a description of the fair value hierarchy) of other postretirement plan assets measured and reported as of December 31, 2013 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	4	$	—	$	4
Mutual funds:
Fixed income securities	11,645		—		—		11,645
U.S. equity securities	11,831		—		—		11,831
International equity securities	6,252		—		—		6,252
Total	$	29,728	$	4	$	—	$	29,732



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	6	$	—	$	6
Mutual funds:
Fixed income securities	9,314		—		—		9,314
U.S. equity securities	10,266		—		—		10,266
International equity securities	5,702		—		—		5,702
Total	$	25,282	$	6	$	—	$	25,288

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 2013 by $3.8 million and the service and interest cost by $0.8 million. A one-percentage-point decrease in the assumed health care cost trend rate for each year would decrease the accumulated postretirement benefit obligation as of December 31, 2013 by $3.1 million and the service and interest cost by $0.6 million.

The Company and its most significant subsidiaries have salary deferral 401(k) plans that are defined contribution plans and cover substantially all employees. Employees can make contributions to their respective accounts in the plans on a pre-tax basis up to the maximum amount permitted by law. The respective company matches a portion of the salary deferred by each participant according to the schedule in the respective plan.

Employer matching contributions were as follows for the years ended December 31 (dollars in thousands):



	2013		2012		2011
Employer 401(k) matching contributions	$	8,579	$	8,168	$	7,027

The Company has an Executive Deferral Plan. This plan allows executive officers and other key employees the opportunity to defer until the earlier of their retirement, termination, disability or death, up to 75 percent of their base salary and/or up to 100 percent of their incentive payments. Deferred compensation funds are held by the Company in a Rabbi Trust. There were deferred compensation assets included in other property and investments-net and corresponding deferred compensation liabilities included in other non-current liabilities and deferred credits on the Consolidated Balance Sheets of the following amounts as of December 31 (dollars in thousands):



	2013		2012
Deferred compensation assets and liabilities	$	9,170	$	8,806