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Fair Value
 6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value
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, but excluding capital leases), nonrecourse long-term debt 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 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, 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.
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 June 30, 2014 and December 31, 2013 (dollars in thousands):
 
June 30, 2014
 
December 31, 2013
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Long-term debt (Level 2)
$
951,000

 
$
1,103,475

 
$
951,000

 
$
1,054,512

Long-term debt (Level 3)
342,000

 
351,965

 
342,000

 
329,581

Nonrecourse long-term debt (Level 3)
9,812

 
10,058

 
17,838

 
18,636

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

 
38,145

 
51,547

 
37,114


These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available market information. Due to the unique nature of the long-term fixed rate electric capacity contract securing the long-term debt of Spokane Energy (nonrecourse long-term debt), the estimated fair value of nonrecourse long-term debt was determined based on a discounted cash flow model using available market information.
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 June 30, 2014 and December 31, 2013 at fair value on a recurring basis (dollars in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and Cash
Collateral
Netting (1)
 
Total
June 30, 2014
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
72,982

 
$
—

 
$
(61,838
)
 
$
11,144

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Power exchange agreement
—

 
—

 
2,408

 
(2,408
)
 
—

Foreign currency derivatives
—

 
136

 
—

 
(1
)
 
135

Interest rate swaps
—

 
15,637

 
—

 
(3,886
)
 
11,751

Funds held in trust account of Spokane Energy
1,600

 
—

 
—

 
—

 
1,600

Deferred compensation assets:
 
 
 
 
 
 
 
 
 
Fixed income securities (2)
1,879

 
—

 
—

 
—

 
1,879

Equity securities (2)
6,424

 
—

 
—

 
—

 
6,424

Total
$
9,903

 
$
88,755

 
$
2,408

 
$
(68,133
)
 
$
32,933

Liabilities:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
68,088

 
$
—

 
$
(64,889
)
 
$
3,199

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
2,183

 
—

 
2,183

Power exchange agreement
—

 
—

 
10,327

 
(2,408
)
 
7,919

Power option agreement
—

 
—

 
605

 
—

 
605

Foreign currency derivatives
—

 
1

 
—

 
(1
)
 
—

Interest rate swaps
—

 
24,577

 
—

 
(10,926
)
 
13,651

Total
$
—

 
$
92,666

 
$
13,115

 
$
(78,224
)
 
$
27,557

 
 
 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Counterparty
and Cash
Collateral
Netting (1)
 
Total
December 31, 2013
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
55,243

 
$
—

 
$
(51,367
)
 
$
3,876

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Power exchange agreement
—

 
—

 
339

 
(339
)
 
—

Foreign currency derivatives
—

 
7

 
—

 
(6
)
 
1

Interest rate swaps
—

 
33,543

 
—

 
—

 
33,543

Investments and funds held for clients:
 
 
 
 
 
 
 
 
 
Money market funds
11,180

 
—

 
—

 
—

 
11,180

Securities available for sale:
 
 
 
 
 
 
 
 
 
U.S. government agency
—

 
61,078

 
—

 
—

 
61,078

Municipal
—

 
3,518

 
—

 
—

 
3,518

Corporate fixed income – financial
—

 
3,000

 
—

 
—

 
3,000

Corporate fixed income – industrial
—

 
765

 
—

 
—

 
765

Certificate of deposits
—

 
1,000

 
—

 
—

 
1,000

Funds held in trust account of Spokane Energy
1,600

 
—

 
—

 
—

 
1,600

Deferred compensation assets:
 
 
 
 
 
 
 
 
 
Fixed income securities (2)
1,960

 
—

 
—

 
—

 
1,960

Equity securities (2)
6,470

 
—

 
—

 
—

 
6,470

Total
$
21,210

 
$
158,154

 
$
339

 
$
(51,712
)
 
$
127,991

Liabilities:
 
 
 
 
 
 
 
 
 
Energy commodity derivatives
$
—

 
$
72,895

 
$
—

 
$
(60,099
)
 
$
12,796

Level 3 energy commodity derivatives:
 
 
 
 
 
 
 
 
 
Natural gas exchange agreement
—

 
—

 
1,219

 
—

 
1,219

Power exchange agreement
—

 
—

 
14,780

 
(339
)
 
14,441

Power option agreement
—

 
—

 
775

 
—

 
775

Foreign currency derivatives
—

 
6

 
—

 
(6
)
 
—

Total
$
—

 
$
72,901

 
$
16,774

 
$
(60,444
)
 
$
29,231

(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 trading securities and are included in other property and investments-net on the Condensed Consolidated Balance Sheets.
Avista Corp. enters into forward contracts to purchase or sell a specified amount of energy at a specified time, or during a specified period, in the future. These contracts are entered into as part of Avista Corp.’s management of loads and resources and certain contracts are considered derivative instruments. The difference between the amount of derivative assets and liabilities disclosed in respective levels and the amount of derivative assets and liabilities disclosed on the Condensed Consolidated Balance Sheets is due to netting arrangements with certain counterparties. The Company uses quoted market prices and forward price curves to estimate the fair value of utility derivative commodity instruments included in Level 2. In particular, electric derivative valuations are performed using broker quotes, adjusted for periods in between quotable periods. Natural gas derivative valuations are estimated using New York Mercantile Exchange (NYMEX) pricing for similar instruments, adjusted for basin differences, using broker quotes. Where observable inputs are available for substantially the full term of the contract, the derivative asset or liability is included in Level 2.
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 $0.9 million as of June 30, 2014 and $0.7 million as of December 31, 2013.
Level 3 Fair Value
For the power exchange agreement, the Company compares the Level 2 brokered quotes and forward price curves described above to an internally developed forward price which is based on the average operating and maintenance (O&M) charges from four surrogate nuclear power plants around the country for the current year. Because the nuclear power plant O&M charges are only known for one year, all forward years are estimated assuming an annual escalation. In addition to the forward price being estimated using unobservable inputs, the Company also estimates the volumes of the transactions that will take place in the future based on historical average transaction volumes per delivery year (November to April). Significant increases or decreases in any of these inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the current year O&M charges for the surrogate plants is accompanied by a directionally similar change in O&M charges in future years. There is generally not a correlation between external market prices and the O&M charges used to develop the internal forward price.
For the power commodity option agreement, the Company uses the Black-Scholes-Merton valuation model to estimate the fair value, and this model includes significant inputs not observable or corroborated in the market. These inputs include 1) the strike price (which is an internally derived price based on a combination of generation plant heat rate factors, natural gas market pricing, delivery and other O&M charges, 2) estimated delivery volumes for years beyond 2013, and 3) volatility rates for periods beyond July 2017. Significant increases or decreases in any of these inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, changes in overall commodity market prices and volatility rates are accompanied by directionally similar changes in the strike price and volatility assumptions used in the calculation.
For the natural gas commodity exchange agreement, the Company uses the same Level 2 brokered quotes described above; however, the Company also estimates the purchase and sales volumes (within contractual limits) as well as the timing of those transactions. Changing the timing of volume estimates changes the timing of purchases and sales, impacting which brokered quote is used. Because the brokered quotes can vary significantly from period to period, the unobservable estimates of the timing and volume of transactions can have a significant impact on the calculated fair value. The Company currently estimates volumes and timing of transactions based on a most likely scenario using historical data. Historically, the timing and volume of transactions have not been highly correlated with market prices and market volatility.
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 June 30, 2014 (dollars in thousands):
 
 
Fair Value (Net) at
 
 
 
 
 
 
 
 
June 30, 2014
 
Valuation Technique
 
Unobservable
Input
 
Range
Power exchange agreement
 
$
(7,919
)
 
Surrogate facility
pricing
 
O&M charges
 
$30.18-$53.90/MWh (1)
 
 
 
 
Escalation factor
 
3% - 2014 to 2019
 
 
 
 
Transaction volumes
 
310,103 - 397,116 MWhs
Power option agreement

 
(605
)
 
Black-Scholes-
Merton
 
Strike price
 
$58.18/MWh - 2016
 
 
 
 
 
$71.88/MWh - 2019
 
 
 
 
Delivery volumes
 
110,854 - 287,147 MWhs
 
 
 
 
Volatility rates
 
0.20 (2)
Natural gas exchange
agreement
 
(2,183
)
 
Internally derived
weighted average
cost of gas
 
Forward purchase
prices
 
$3.57 - $3.86/mmBTU
 
 
 
 
 
 
 
 
 
Forward sales prices
 
$4.47 - $5.16/mmBTU
 
 
 
 
Purchase volumes
 
280,000 - 310,000 mmBTUs
 
 
 
 
Sales volumes
 
279,990 - 310,000 mmBTUs

(1) The average O&M charges for the delivery year beginning in November 2013 were $40.93 per MWh. For ratemaking purposes the average O&M charges to be included for recovery in retail rates vary slightly between regulatory jurisdictions. The average O&M charges for the delivery year beginning in 2013 were $42.44 for Washington and $40.93 for Idaho.
(2) The estimated volatility rate of 0.20 is compared to actual quoted volatility rates of 0.27 for 2014 to 0.20 in July 2017.

Avista Corp.'s Risk Management team and accounting team are responsible for developing the valuation methods described above and both groups report to the Chief Financial Officer. The valuation methods, significant inputs and resulting fair values described above are reviewed on at least a quarterly basis by the risk management team and the accounting team to ensure they provide a reasonable estimate of fair value each reporting period.
The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30 (dollars in thousands):
 
 
Natural Gas Exchange Agreement
 
Power Exchange Agreement
 
Power Option Agreement
 
Total
Three months ended June 30, 2014:
 
 
 
 
 
 
 
Balance as of April 1, 2014
$
(2,418
)
 
$
(13,624
)
 
$
(428
)
 
$
(16,470
)
Total gains or losses (realized/unrealized):
 
 
 
 
 
 
 
Included in net income
—

 
—

 
—

 
—

Included in other comprehensive income
—

 
—

 
—

 
—

Included in regulatory assets/liabilities (1)
235

 
5,029

 
(177
)
 
5,087

Purchases
—

 
—

 
—

 
—

Issuance
—

 
—

 
—

 
—

Settlements
—

 
676

 
—

 
676

Transfers to/from other categories
—

 
—

 
—

 
—

Ending balance as of June 30, 2014
$
(2,183
)
 
$
(7,919
)
 
$
(605
)
 
$
(10,707
)
Three months ended June 30, 2013:
 
 
 
 
 
 
 
Balance as of April 1, 2013
$
(1,991
)
 
$
(16,463
)
 
$
(1,200
)
 
$
(19,654
)
Total gains or losses (realized/unrealized):
 
 
 
 
 
 
 
Included in net income
—

 
—

 
—

 
—

Included in other comprehensive income
—

 
—

 
—

 
—

Included in regulatory assets/liabilities (1)
1,057

 
(6,272
)
 
604

 
(4,611
)
Purchases
—

 
—

 
—

 
—

Issuance
—

 
—

 
—

 
—

Settlements
(88
)
 
556

 
—

 
468

Transfers to/from other categories
—

 
—

 
—

 
—

Ending balance as of June 30, 2013
$
(1,022
)
 
$
(22,179
)
 
$
(596
)
 
$
(23,797
)
Six months ended June 30, 2014:
 
 
 
 
 
 
 
Balance as of January 1, 2014
$
(1,219
)
 
$
(14,441
)
 
$
(775
)
 
$
(16,435
)
Total gains or losses (realized/unrealized):
 
 
 
 
 
 
 
Included in net income
—

 
—

 
—

 
—

Included in other comprehensive income
—

 
—

 
—

 
—

Included in regulatory assets/liabilities (1)
2,084

 
7,055

 
170

 
9,309

Purchases
—

 
—

 
—

 
—

Issuance
—

 
—

 
—

 
—

Settlements
(3,048
)
 
(533
)
 
—

 
(3,581
)
Transfers to/from other categories
—

 
—

 
—

 
—

Ending balance as of June 30, 2014
$
(2,183
)
 
$
(7,919
)
 
$
(605
)
 
$
(10,707
)
 
 
 
 
 
 
 
 
 
Natural Gas Exchange Agreement
 
Power Exchange Agreement
 
Power Option Agreement
 
Total
Six months ended June 30, 2013:
 
 
 
 
 
 
 
Balance as of January 1, 2013
$
(2,379
)
 
$
(18,692
)
 
$
(1,480
)
 
$
(22,551
)
Total gains or losses (realized/unrealized):
 
 
 
 
 
 
 
Included in net income
—

 
—

 
—

 
—

Included in other comprehensive income
—

 
—

 
—

 
—

Included in regulatory assets/liabilities (1)
1,807

 
(6,248
)
 
884

 
(3,557
)
Purchases
—

 
—

 
—

 
—

Issuance
—

 
—

 
—

 
—

Settlements
(450
)
 
2,761

 
—

 
2,311

Transfers from other categories
—

 
—

 
—

 
—

Ending balance as of June 30, 2013
$
(1,022
)
 
$
(22,179
)
 
$
(596
)
 
$
(23,797
)
 
 
 
 
 
 
 
 

(1)
The UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment defers the recognition of mark-to-market gains and losses on energy commodity transactions until the period of delivery. The orders provide for Avista Corp. 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 ERM in Washington, the PCA mechanism in Idaho, and periodic general rates cases.