PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The pension and other postretirement benefit plans described below only relate to Avista Utilities. AEL&P (not discussed below) participates in a defined contribution multiemployer plan for its union workers and a defined contribution money purchase pension plan for its nonunion workers. METALfx (not discussed below) has a defined contribution 401(k) savings plan. None of the subsidiary retirement plans, individually or in the aggregate, are significant to Avista Corp.

Avista Utilities

The Company has a defined benefit pension plan covering the majority of all regular full-time employees at Avista Utilities that were hired prior to January 1, 2014. 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. Non-union employees hired on or after January 1, 2014 participate in a defined contribution 401(k) plan in lieu of a defined benefit pension 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 $12.0 million in cash to the pension plan in 2015, $32.0 million in 2014 and $44.3 million in 2013. The Company expects to contribute $12.0 million in cash to the pension plan in 2016.

The Company also has a SERP that provides additional pension benefits to executive officers and certain key employees of the Company. The SERP is intended to provide benefits to individuals whose benefits under the defined benefit 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):



	2016		2017		2018		2019		2020		Total 2021-2025
Expected benefit payments	$	29,182	$	30,260	$	31,332	$	32,804	$	34,430	$	189,919

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 eligible retired employees that were hired prior to January 1, 2014. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services. The liability and expense of this plan are included as other postretirement benefits. Non-union employees hired on or after January 1, 2014, will have access to the retiree medical plan upon retirement; however, Avista Corp. will no longer provide a contribution toward their medical premium.

The Company has a Health Reimbursement Arrangement (HRA) 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 the HRA 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):



	2016		2017		2018		2019		2020		Total 2021-2025
Expected benefit payments	$	7,345	$	7,522	$	7,713	$	7,933	$	6,907	$	36,560

The Company expects to contribute $7.3 million to other postretirement benefit plans in 2016, representing expected benefit payments to be paid during the year excluding the Medicare Part D subsidy. 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, 2015 and 2014 and the components of net periodic benefit costs for the years ended December 31, 2015, 2014 and 2013 (dollars in thousands):



	Pension Benefits						Other Post- retirement Benefits
	2015			2014			2015			2014
Change in benefit obligation:
Benefit obligation as of beginning of year	$	634,674		$	527,004		$	127,989		$	108,249
Service cost	19,791			15,757			2,925			1,844
Interest cost	26,117			26,224			5,158			5,226
Actuarial (gain)/loss	(35,790		)	97,128			12,668			18,714
Plan change	(228		)	—			(1,000		)	—
Transfer of accrued vacation	—			—			—			437
Cumulative adjustment to reclassify liability	—			—			(1,521		)	—
Benefits paid	(31,061		)	(31,439		)	(7,424		)	(6,481		)
Benefit obligation as of end of year	$	613,503		$	634,674		$	138,795		$	127,989
Change in plan assets:
Fair value of plan assets as of beginning of year	$	539,311		$	481,502		$	31,312		$	29,732
Actual return on plan assets	(4,305		)	55,974			(444		)	1,580
Employer contributions	12,000			32,000			—			—
Benefits paid	(29,772		)	(30,165		)	—			—
Fair value of plan assets as of end of year	$	517,234		$	539,311		$	30,868		$	31,312
Funded status	$	(96,269	)	$	(95,363	)	$	(107,927	)	$	(96,677	)
Unrecognized net actuarial loss	162,961			175,596			92,433			82,421
Unrecognized prior service cost	25			256			(10,180		)	(10,379		)
Prepaid (accrued) benefit cost	66,717			80,489			(25,674		)	(24,635		)
Additional liability	(162,986		)	(175,852		)	(82,253		)	(72,042		)
Accrued benefit liability	$	(96,269	)	$	(95,363	)	$	(107,927	)	$	(96,677	)
Accumulated pension benefit obligation	$	542,209		$	551,615		—			—



	Pension Benefits						Other Post- retirement Benefits
	2015			2014			2015			2014
Accumulated postretirement benefit obligation:
For retirees							$	65,652		$	58,276
For fully eligible employees							$	34,498		$	31,843
For other participants							$	38,645		$	37,870
Included in accumulated other comprehensive loss (income) (net of tax):
Unrecognized prior service cost	$	16		$	166		$	(6,617	)	$	(6,747	)
Unrecognized net actuarial loss	105,925			114,138			60,081			53,574
Total	105,941			114,304			53,464			46,827
Less regulatory asset	(99,414		)	(106,484		)	(53,341		)	(46,759		)
Accumulated other comprehensive loss (income) for unfunded benefit obligation for pensions and other postretirement benefit plans	$	6,527		$	7,820		$	123		$	68



	Pension Benefits				Other Post- retirement Benefits
	2015		2014		2015		2014
Weighted average assumptions as of December 31:
Discount rate for benefit obligation	4.57	%	4.21	%	4.57	%	4.16	%
Discount rate for annual expense	4.21	%	5.10	%	4.16	%	5.02	%
Expected long-term return on plan assets	5.30	%	6.60	%	6.36	%	6.40	%
Rate of compensation increase	4.87	%	4.87	%
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					2022		2021
Medical cost trend post-age 65 – initial					7.00	%	7.00	%
Medical cost trend post-age 65 – ultimate					5.00	%	5.00	%
Ultimate medical cost trend year post-age 65					2023		2022



	Pension Benefits									Other Post-retirement Benefits
	2015			2014			2013			2015			2014			2013
Components of net periodic benefit cost:
Service cost	$	19,791		$	15,757		$	19,045		$	2,925		$	1,844		$	4,144
Interest cost	26,117			26,224			23,896			5,158			5,226			5,216
Expected return on plan assets	(28,299		)	(32,131		)	(27,671		)	(1,991		)	(1,903		)	(1,606		)
Amortization of prior service cost	2			22			319			(1,199		)	(1,116		)	(149		)
Net loss recognition	9,451			4,731			13,199			5,095			4,289			5,674
Net periodic benefit cost	$	27,062		$	14,603		$	28,788		$	9,988		$	8,340		$	13,279

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:



	2015		2014
Equity securities	27	%	27	%
Debt securities	58	%	58	%
Real estate	6	%	6	%
Absolute return	9	%	9	%

The fair 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, the investment manager estimates fair value 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 Company's investments in common/collective trusts have redemption limitations that permit quarterly redemptions following notice requirements of 45 to 60 days. The fair values of the closely held investments and partnership interests are 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. Most of the Company's investments in closely held investments and partnership interests have redemption limitations that range from bi-monthly to semi-annually following redemption notice requirements of 60 to 90 days. One investment in a partnership has a lock-up for redemption currently expiring in 2022 and is subject to extension.

The fair 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 fair value of pension plan assets was determined as of December 31, 2015 and 2014.

Effective December 31, 2015, the Company adopted ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removed from the fair value hierarchy, investments for which the practical expedient is used to measure fair value at net asset value (NAV). In prior years, the Company held investments fair valued using NAV and these amounts were included as level 3 items. This ASU was adopted retrospectively; therefore, the 2014 amounts have been reclassified to conform to the 2015 presentation. Also, since these amounts are no longer included in the fair value hierarchy as level 3 items, the level 3 reconciliations are no longer applicable and have been excluded from this footnote.

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, 2015 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	86	$	10,641	$	—	$	10,727
Fixed income securities:
U.S. government issues	—		47,845		—		47,845
Corporate issues	—		187,308		—		187,308
International issues	—		34,458		—		34,458
Municipal issues	—		22,416		—		22,416
Mutual funds:
U.S. equity securities	87,678		—		—		87,678
International equity securities	40,343		—		—		40,343
Absolute return (1)	13,996		—		—		13,996
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate	—		—		—		24,147
Partnership/closely held investments:
Absolute return (1)	—		—		—		38,302
Private equity funds (2)	—		—		—		73
Real estate	—		—		—		9,941
Total	$	142,103	$	302,668	$	—	$	517,234



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	3,138	$	—	$	3,138
Fixed income securities:
U.S. government issues	19,681		—		—		19,681
Corporate issues	104,959		—		—		104,959
International issues	19,935		—		—		19,935
Municipal issues	2,762		7,788		—		10,550
Mutual funds:
Fixed income securities	157,415		8		—		157,423
U.S. equity securities	103,203		—		—		103,203
International equity securities	40,838		—		—		40,838
Absolute return (1)	15,334		—		—		15,334
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate	—		—		—		21,303
Partnership/closely held investments:
Absolute return (1)	—		—		—		36,114
Private equity funds (2)	—		—		—		73
Real estate	—		—		—		6,760
Total	$	464,127	$	10,934	$	—	$	539,311


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

The fair value of other postretirement plan assets invested in debt and equity securities was based primarily on 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 both 2015 and 2014.

The fair value of other postretirement plan assets was determined as of December 31, 2015 and 2014.

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, 2015 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	9	$	—	$	9
Mutual funds:
Fixed income securities	12,000		—		—		12,000
U.S. equity securities	13,224		—		—		13,224
International equity securities	5,635		—		—		5,635
Total	$	30,859	$	9	$	—	$	30,868



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	3	$	—	$	3
Mutual funds:
Fixed income securities	11,968		—		—		11,968
U.S. equity securities	13,210		—		—		13,210
International equity securities	6,131		—		—		6,131
Total	$	31,309	$	3	$	—	$	31,312

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, 2015 by $9.7 million and the service and interest cost by $0.5 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, 2015 by $7.5 million and the service and interest cost by $0.4 million.

401(k) Plans and Executive Deferral Plan

Avista Utilities and METALfx 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):



	2015		2014		2013
Employer 401(k) matching contributions	$	8,011	$	6,862	$	6,279

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):



	2015		2014
Deferred compensation assets and liabilities	$	8,093	$	8,677