STOCK COMPENSATION PLANS

Avista Corp.

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, 2014, 0.4 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, 2014, 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):



	2014		2013		2012
Stock-based compensation expense	$	6,007	$	5,037	$	4,549
Income tax benefits	2,102		1,763		1,592

Stock Options

There are no longer any stock options outstanding as of December 31, 2014 and the Company does not have any plans to issue additional stock options in the near future.

The following summarizes stock options activity under the 1998 Plan and the 2000 Plan for the years ended December 31, 2013 and 2012:



	2013			2012
Number of shares under stock options:
Options outstanding at beginning of year	3,000			92,499
Options granted	—			—
Options exercised	(3,000		)	(89,499		)
Options canceled	—			—
Options outstanding and exercisable at end of year	—			3,000
Weighted average exercise price:
Options exercised	$	12.41		$	10.63
Options canceled	$	—		$	—
Options outstanding and exercisable at end of year	$	—		$	12.41
Cash received from options exercised (in thousands)	$	37		$	951
Intrinsic value of options exercised (in thousands)	$	40		$	1,349
Intrinsic value of options outstanding (in thousands)	$	—		$	35

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, 2014 was 0.7 years.

The following table summarizes restricted stock activity for the years ended December 31:



	2014			2013			2012
Unvested shares at beginning of year	104,416			117,118			93,482
Shares granted	62,075			44,556			70,281
Shares canceled	(1,550		)	(1,802		)	(790		)
Shares vested	(52,899		)	(55,456		)	(45,855		)
Unvested shares at end of year	112,042			104,416			117,118
Weighted average fair value at grant date	$	28.37		$	26.04		$	25.83
Unrecognized compensation expense at end of year (in thousands)	$	1,349		$	1,199		$	1,428
Intrinsic value, unvested shares at end of year (in thousands)	$	3,961		$	2,943		$	2,824
Intrinsic value, shares vested during the year (in thousands)	$	1,473		$	1,363		$	1,173

Performance and Market-Based Awards

The Company has two types of awards that fall under this category, Total Shareholder Return (TSR) awards, which are market-based awards and Cumulative Earnings Per Share (CEPS) awards, which are performance awards. Both types of 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. The method of settlement is at the discretion of the Company and historically the Company has settled these awards through issuance of Avista Corp. common stock and intends to continue this practice. Both types of awards entitle the recipients to dividend equivalent rights, are subject to forfeiture under certain circumstances, and are subject to meeting specific market or performance conditions. Based on the level of attainment of the market or performance conditions, the amount of cash paid or common stock issued will range from 0 to 200 percent of the initial awards granted. Dividend equivalent rights are accumulated and paid out only on shares that eventually vest and have met the market and performance conditions.

Both types of awards entitle the grantee to shares of Avista Corp. common stock or cash payable once the service condition is satisfied and provided that the market or performance conditions are achieved. All TSR awards granted have two conditions, the service condition of three years and a market-based condition, which is the Company’s TSR performance over a three-year period as compared against other utilities. CEPS awards began in 2014 and they also have two conditions, the service condition of three years and a performance condition, which is the Company's CEPS performance over a three-year period. CEPS is a performance condition based solely on internal metrics and it is used to determine whether an award vests or not. The level of payout for both the TSR and CEPS awards is based on the level of attainment of the market and performance conditions, respectively.

TSR awards 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. CEPS awards are equity awards with a performance condition based solely on internal Company metrics; therefore, compensation cost for these awards is recognized over the requisite service period, provided that the requisite service period is rendered. However, if the CEPS performance metric is not met, all compensation cost for these awards is reversed as these awards are not considered vested.

The Company measures (at the grant date) the estimated fair value of the shares awarded. The fair value of each TSR award was estimated on the date of grant using a statistical model that incorporates the probability of meeting the market 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 TSR awards 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 estimated fair value of the equity component of CEPS awards was estimated on the date of grant as the share price of Avista Corp. common stock on the date of grant, less the net present value of the estimated dividends over the three-year period. The combined fair value of the equity and dividend components of CEPS awards is equal to the share price of Avista Corp. common stock on the date of grant.

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



	2014			2013			2012
TSR assumptions
Risk-free interest rate	0.7		%	0.4		%	0.3		%
Expected life, in years	3			3			3
Expected volatility	17.9		%	19.1		%	22.7		%
Dividend yield	4.5		%	4.6		%	4.5		%
Weighted average grant date fair value (per share)	$	24.64		$	23.30		$	26.06
CEPS assumptions
Weighted average share price on date of grant	$	28.09		$	—		$	—
Annual dividends per share	1.22			—			—
Risk-free interest rate	0.7		%	—		%	—		%
Weighted average grant date fair value of equity component (per share)	$	24.48		$	—		$	—

The weighted average grant date fair value above for TSR awards includes both the equity component and dividend equivalent rights.

The following summarizes TSR and CEPS share activity:



	2014			2013			2012
TSR Awards
Opening balance of unvested TSR shares	344,684			359,700			351,345
TSR shares granted	117,550			175,000			181,000
TSR shares canceled	(6,816		)	(13,298		)	(4,544		)
TSR shares vested	(167,584		)	(176,718		)	(168,101		)
Ending balance of unvested TSR shares	287,834			344,684			359,700
Intrinsic value of unvested performance shares (in thousands)	$	10,175		$	9,717		$	8,672
Unrecognized compensation expense (in thousands)	$	2,833		$	3,651		$	3,800
CEPS Awards
Opening balance of unvested CEPS shares	—			—			—
CEPS shares granted	59,025			—			—
CEPS shares canceled	(1,008		)	—			—
CEPS shares vested	—			—			—
Ending balance of unvested CEPS shares	58,017			—			—
Intrinsic value of unvested performance shares (in thousands)	$	2,051		$	—		$	—
Unrecognized compensation expense (in thousands)	$	1,577		$	—		$	—

The weighted average remaining vesting period for the Company’s TSR shares outstanding as of December 31, 2014 was 1.4 years. The weighted average remaining vesting period for the Company’s CEPS shares outstanding as of December 31, 2014 was 2 years. Unrecognized compensation expense as of December 31, 2014 includes only the amount attributable to the equity portion of the awards and will be recognized during 2015 and 2016.

The following summarizes the impact of the market condition on the TSR shares that met the service vesting condition (no CEPS awards vested in 2014):



	2014			2013			2012
TSR shares vested based on service condition	167,584			176,718			168,101
Impact of market condition on shares vested	(70,385		)	(176,718		)	(168,101		)
Shares of common stock earned	97,199			—			—
Intrinsic value of common stock earned (in thousands)	$	3,436		$	—		$	—

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

Outstanding TSR and CEPS share awards include a dividend component that is paid in cash. This component of the 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, the change in the value of the Company’s common stock relative to an external benchmark (TSR awards only) and the amount of CEPS earned to-date compared to estimated CEPS over the performance period (CEPS awards only). Over the life of these awards, the cumulative amount of compensation expense recognized will match the actual cash paid. As of December 31, 2014 and 2013, the Company had recognized cumulative compensation expense and a liability of $1.3 million and $0.9 million, respectively, related to the dividend component on the outstanding and unvested share grants.