SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avista Corporation (Avista Corp. or the Company) is an energy company engaged in the generation, transmission and distribution of electricity and the distribution of natural gas, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities provides electric distribution and transmission, as well as natural gas distribution, services in parts of eastern Washington and northern Idaho. Avista Utilities also provides natural gas distribution service in parts of northeastern and southwestern Oregon. Avista Utilities has generating facilities in Washington, Idaho, Oregon and Montana. The Company also supplies electricity to a small number of customers in Montana, most of whom are employees who operate one of the Montana generating facilities. Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). Avista Capital’s subsidiaries include Ecova, Inc. (Ecova), a 80.2 percent owned subsidiary as of December 31, 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 23 for business segment information.

Basis of Reporting

The 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 consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants (see Note 6).

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Significant estimates include:


•	determining the market value of energy commodity derivative assets and liabilities,


•	pension and other postretirement benefit plan obligations,


•	contingent liabilities,


•	goodwill impairment testing,


•	recoverability of regulatory assets, and


•	unbilled revenues.

Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein.

System of Accounts

The accounting records of the Company’s utility operations are maintained in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the state regulatory commissions in Washington, Idaho, Montana and Oregon.

Regulation

The Company is subject to state regulation in Washington, Idaho, Montana and Oregon. The Company is also subject to federal regulation primarily by the FERC, as well as various other federal agencies with regulatory oversight of particular aspects of its operations.

Utility Revenues

Utility revenues related to the sale of energy are recorded when service is rendered or energy is delivered to customers. 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 utility revenues. The determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, the amount of energy delivered to customers since the date of the last meter reading is estimated and the corresponding unbilled revenue is estimated and recorded.

Accounts receivable includes unbilled energy revenues of the following amounts as of December 31 (dollars in thousands):



	2013		2012
Unbilled accounts receivable	$	81,059	$	77,298

Ecova Revenues

Service revenues from Ecova are recognized over the period services are rendered, which is typically on a straight-line basis for fixed-fee or project-fee engagements or ratably for other types of services. New client account setup fees and implementation (onboarding) fees are deferred and recognized over the contractual life that approximates the expected customer relationship, which is typically the contract period. Investment earnings on funds held for clients and fees earned from third parties on payment processing are an integral part of Ecova’s product offerings and are recognized in revenues as earned. Revenue arrangements with multiple elements occur infrequently and generally represent a very small percentage of total Ecova revenues. When they occur, the separate deliverables are divided into separate units of accounting if certain criteria are met, and the total consideration received is allocated among the different deliverables using the relative selling price method. In most cases, management uses its best estimate of the selling price for each deliverable to determine the amount of consideration to allocate and revenue is recognized for each deliverable once all the applicable revenue recognition criteria are met.

Other Non-Utility Revenues

Revenues from the other businesses are primarily derived from the operations of Advanced Manufacturing and Development (doing business as METALfx) and are recognized when the risk of loss transfers to the customer, which occurs when products are shipped.

Advertising Expenses

The Company expenses advertising costs as incurred. Advertising expenses were not a material portion of the Company’s operating expenses in 2013, 2012 and 2011.

Depreciation

For utility operations, depreciation expense is estimated by a method of depreciation accounting utilizing composite rates for utility plant. Such rates are designed to provide for retirements of properties at the expiration of their service lives. For utility operations, the ratio of depreciation provisions to average depreciable property was as follows for the years ended December 31:



	2013		2012		2011
Ratio of depreciation to average depreciable property	2.90	%	2.92	%	2.92	%

The average service lives for the following broad categories of utility plant in service are:


•	electric thermal production - 41 years,


•	hydroelectric production - 79 years,


•	electric transmission - 56 years,


•	electric distribution - 36 years, and


•	natural gas distribution property - 48 years.

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 years ended December 31 (dollars in thousands):



	2013		2012		2011
Utility taxes	$	55,565	$	53,716	$	55,739

Allowance for Funds Used During Construction

The Allowance for Funds Used During Construction (AFUDC) represents the cost of both the debt and equity funds used to finance utility plant additions during the construction period. As prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost of utility plant and the debt related portion is credited against total interest expense in the Consolidated Statements of Income in the line item “capitalized interest.” The equity related portion of AFUDC is included in the Consolidated Statement of Income in the line item “other income-net.” The Company is permitted, under established regulatory rate practices, to recover the capitalized AFUDC, and a reasonable return thereon, through its inclusion in rate base and the provision for depreciation after the related utility plant is placed in service. Cash inflow related to AFUDC does not occur until the related utility plant is placed in service and included in rate base. The effective AFUDC rate was the following for the years ended December 31:



	2013		2012		2011
Effective AFUDC rate	7.64	%	7.62	%	7.91	%

Income Taxes

A deferred income tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s consolidated income tax returns. The deferred income tax expense for the period is equal to the net change in the deferred income tax asset and liability accounts from the beginning to the end of the period. The effect on deferred income taxes from a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax liabilities and regulatory assets are established for income tax benefits flowed through to customers as prescribed by the respective regulatory commissions.

Stock-Based Compensation

Compensation cost relating to share-based payment transactions is recognized in the Company’s financial statements based on the fair value of the equity or liability instruments issued and recorded over the requisite service period. See Note 19 for further information.

Other Income - Net

Other Income - net consisted of the following items for the years ended December 31 (dollars in thousands):



	2013			2012			2011
Interest income	$	(754	)	$	(944	)	$	(1,327	)
Interest on regulatory deferrals	(126		)	(68		)	(89		)
Equity-related AFUDC	(6,066		)	(4,055		)	(2,225		)
Net loss on investments	3,378			3,343			488
Other income	(3,109		)	(3,301		)	(280		)
Total	$	(6,677	)	$	(5,025	)	$	(3,433	)

Earnings per Common Share Attributable to Avista Corporation Shareholders

Basic earnings per common share attributable to Avista Corporation shareholders is computed by dividing net income attributable to Avista Corporation shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share attributable to Avista Corporation shareholders is calculated by dividing net income attributable to Avista Corporation shareholders (adjusted for the effect of potentially dilutive securities issued by subsidiaries) by diluted weighted average common shares outstanding during the period, including common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalent shares include shares issuable upon exercise of stock options and contingent stock awards. See Note 18 for earnings per common share calculations.

Cash and Cash Equivalents

For the purposes of the Consolidated Statements of Cash Flows, the Company considers all temporary investments with a maturity of three months or less when purchased to be cash equivalents.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts to provide for estimated and potential losses on accounts receivable. The Company determines the allowance for utility and other customer accounts receivable based on historical write-offs as compared to accounts receivable and operating revenues. Additionally, the Company establishes specific allowances for certain individual accounts. The following table presents the activity in the allowance for doubtful accounts during the years ended December 31 (dollars in thousands):



	2013			2012			2011
Allowance as of the beginning of the year	$	44,155		$	43,958		$	44,883
Additions expensed during the year	5,099			4,213			5,232
Net deductions	(4,945		)	(4,016		)	(6,157		)
Allowance as of the end of the year	$	44,309		$	44,155		$	43,958

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 December 31 (dollars in thousands):



	2013		2012
Materials and supplies	$	28,747	$	26,058
Fuel stock	3,170		4,121
Natural gas stored	13,029		17,276
Total	$	44,946	$	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 December 31, 2013 are as follows (dollars in thousands):



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

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

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



	Amortized Cost		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

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 December 31, 2013 and 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 December 31, 2013 and 2012.

Ecova management reviews its investments continuously for indicators of other-than-temporary impairment. To make this determination, management 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, management 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 the Company will be required to sell the security before recovery. Management 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 management’s analysis, securities available for sale do not meet the criteria for other-than-temporary impairment as of December 31, 2013.

The following is a summary of the disposition of available-for-sale securities during the years ended December 31 (dollars in thousands):



	2013		2012
Proceeds from sales, maturities and calls	$	22,960	$	137,999
Gross realized gains	19		461
Gross realized losses	—		—

Contractual maturities of securities available for sale as of December 31, 2013 and 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
December 31, 2013	$	5,382	$	12,745	$	48,310	$	2,924	$	69,361
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 3.0 years as of December 31, 2013 and 1.9 years as of December 31, 2012.

Utility Plant in Service

The cost of additions to utility plant in service, including an allowance for funds used during construction and replacements of units of property and improvements, is capitalized. The cost of depreciable units of property retired plus the cost of removal less salvage is charged to accumulated depreciation.

Asset Retirement Obligations

The Company recovers certain asset retirement costs through rates charged to customers as a portion of its depreciation expense for which the Company has not recorded asset retirement obligations (see Note 8). The Company has estimated retirement costs (that do not represent legal or contractual obligations) included as a regulatory liability on the Consolidated Balance Sheets of the following amounts as of December 31 (dollars in thousands):



	2013		2012
Regulatory liability for utility plant retirement costs	$	242,850	$	234,128

Goodwill

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

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



	Ecova		Other		Accumulated Impairment Losses			Total
Balance as of January 1, 2012	$	33,799	$	12,979	$	(7,733	)	$	39,045
Goodwill acquired during the year	33,484		—		—			33,484
Adjustments	3,430		—		—			3,430
Balance as of the December 31, 2012	70,713		12,979		(7,733		)	75,959
Adjustments	298		—		—			298
Balance as of the December 31, 2013	$	71,011	$	12,979	$	(7,733	)	$	76,257

The goodwill acquired in 2012 was related to Ecova's acquisition of LPB Energy Management (LPB) effective January 31, 2012. The adjustment to goodwill in 2012 represents purchase accounting adjustments for Ecova's acquisition of Prenova, Inc. in 2011 based upon final review of the fair market values of relevant assets and liabilities identified as of the acquisition date. The primary cause of the revisions was due to a net operating loss study and a change in the value of customer relationships. The adjustment to goodwill in 2013 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. The 2013 adjustment also includes a purchase accounting adjustment for Prenova, Inc. associated with the calculation of deferred tax assets.

Intangible Assets

Amortization expense related to Intangible Assets was as follows for the years ended December 31 (dollars in thousands):



	2013		2012		2011
Intangible asset amortization	$	11,828	$	10,435	$	4,682

The following table details the estimated amortization expense for the next five years related to Intangible Assets (dollars in thousands):



	2014		2015		2016		2017		2018
Estimated amortization expense	$	10,677	$	8,720	$	7,599	$	6,795	$	2,758

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



	Estimated Useful Lives	2013			2012
Client relationships	2 - 12 years	$	33,562		$	32,059
Software development costs	3 - 7 years	39,327			33,990
Other	1 - 10 years	3,321			6,237
Total intangible assets		76,210			72,286
Client relationships accumulated amortization		(12,336		)	(7,793		)
Software development costs accumulated amortization		(21,861		)	(16,557		)
Other accumulated amortization		(2,437		)	(1,680		)
Total accumulated amortization		(36,634		)	(26,030		)
Total intangible assets - net		$	39,576		$	46,256

As of December 31, 2013 and December 31, 2012, all of the intangible assets reported above are associated with Ecova.

Derivative Assets and Liabilities

Derivatives are recorded as either assets or liabilities on the 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 derivatives depends on the intended use of the derivatives 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 Consolidated Statements of Income. Realized gains or losses are recognized in the period of delivery, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory approval, result in adjustments to retail rates through purchased gas cost adjustments, the Energy Recovery Mechanism (ERM) in Washington, the Power Cost Adjustment (PCA) mechanism in Idaho, and periodic general rates cases. Regulatory assets are assessed regularly and are probable for recovery through future rates.

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

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap agreements and foreign currency exchange contracts, are reported at estimated fair value on the Consolidated Balance Sheets. See Note 16 for the Company’s fair value disclosures.

Regulatory Deferred Charges and Credits

The Company prepares its 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 Consolidated Balance Sheets. These costs and/or obligations are not reflected in the 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.

See Note 22 for further details of regulatory assets and liabilities.

Investment in Exchange Power-Net

The investment in exchange power represents the Company’s previous investment in Washington Public Power Supply System Project 3 (WNP-3), a nuclear project that was terminated prior to completion. Under a settlement agreement with the Bonneville Power Administration in 1985, Avista Utilities began receiving power in 1987, for a 32.5-year period, related to its investment in WNP-3. Through a settlement agreement with the UTC in the Washington jurisdiction, Avista Utilities is amortizing the recoverable portion of its investment in WNP-3 (recorded as investment in exchange power) over a 32.5-year period that began in 1987. For the Idaho jurisdiction, Avista Utilities fully amortized the recoverable portion of its investment in exchange power.

Unamortized Debt Expense

Unamortized debt expense includes debt issuance costs that are amortized over the life of the related debt.

Unamortized Debt Repurchase Costs

For the Company’s Washington regulatory jurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt are amortized over the remaining life of the original debt that was repurchased or, if new debt is issued in connection with the repurchase, these costs are amortized over the life of the new debt. In the Company’s other regulatory jurisdictions, premiums paid to repurchase debt prior to 2007 are being amortized over the average remaining maturity of outstanding debt when no new debt was issued in connection with the debt repurchase. These costs are recovered through retail rates as a component of interest expense.

Redeemable Noncontrolling Interests

Certain option holders of Ecova have the right to put their shares back to Ecova at their discretion during an annual put window. Stock options and other outstanding redeemable stock are valued at their maximum redemption amount which is equal to their intrinsic value (fair value less exercise price) (see Note 19 for further information).

Accumulated Other Comprehensive Loss

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



	2013			2012
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(2,280) and $(3,698), respectively	$	(4,233	)	$	(6,867	)
Unrealized gain (loss) on securities available for sale - net of taxes of $(936) and $97, respectively	(1,586		)	167
Total accumulated other comprehensive loss	$	(5,819	)	$	(6,700	)

The following table details the reclassifications out of accumulated other comprehensive loss by component for the year ended December 31, 2013 (dollars in thousands):



Details about Accumulated Other Comprehensive Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Loss			Affected Line Item in Statement of Income
Realized gains on investment securities	$	19		Other income-net
	19			Total before tax
	(7		)	Tax expense
	$	12		Net of tax
Amortization of defined benefit pension items
Amortization of net prior service cost	$	(10,681	)	(a)
Amortization of net loss	(142,794		)	(a)
Adjustment due to effects of regulation	149,423			(a)
	(4,052		)	Total before tax
	1,418			Tax benefit
	$	(2,634	)	Net of tax


(a)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 9 for additional details).

Appropriated Retained Earnings

In accordance with the hydroelectric licensing requirements of section 10(d) of the Federal Power Act (FPA), the Company maintains an appropriated retained earnings account for any earnings in excess of the specified rate of return on the Company's investment in the licenses for its various hydro projects. The rate of return on investment is specified in the various hydroelectric licensing agreements for the Clark Fork River and Spokane River. Per section 10(d) of the FPA, the Company must maintain these excess earnings in an appropriated retained earnings account until the termination of the licensing agreements or apply them to reduce the net investment in the licenses of the hydroelectric projects at the discretion of the FERC. The appropriated retained earnings amounts included in retained earnings were as follows as of December 31 (dollars in thousands):



	2013		2012
Appropriated retained earnings	$	9,714	$	1,548

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 December 31, 2013, there was no remaining liability accrued.