Derivatives and Risk Management

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedges, Assets [Abstract]

Derivatives and Risk Management

NOTE 6. DERIVATIVES AND RISK MANAGEMENT

Energy Commodity Derivatives

Avista Corp. is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in general, the risk of fluctuation in the market price of the commodity being traded and is influenced primarily by supply and demand. Market risk includes the fluctuation in the market price of associated derivative commodity instruments. Avista Corp. utilizes derivative instruments, such as forwards, futures, swap derivatives and options, to manage the various risks relating to these commodity price exposures. Avista Corp. has an energy resources risk policy and control procedures to manage these risks.

As part of Avista Corp.'s resource procurement and management operations in the electric business, Avista Corp. engages in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve Avista Corp.'s load obligations and the use of these resources to capture available economic value through wholesale market transactions. These include sales and purchases of electric capacity and energy, fuel for electric generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part of the process of matching resources with load obligations and hedging a portion of the related financial risks. These transactions range from terms of intra-hour up to multiple years.

As part of its resource procurement and management of its natural gas business, Avista Corp. makes continuing projections of its natural gas loads and assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low and average monthly requirements and delivery constraints from natural gas supply locations to Avista Corp.’s distribution system. However, daily variations in natural gas demand can be significantly different than monthly demand projections. Based on these projections, Avista Corp. plans and executes a series of transactions to hedge a portion of its projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend as much as three natural gas operating years (November through October) into the future. Avista Corp. also leaves a significant portion of its natural gas supply requirements unhedged for purchase in short-term and spot markets.

Avista Corp. plans for sufficient natural gas delivery capacity to serve its retail customers for a theoretical peak day event. Avista Corp. generally has more pipeline and storage capacity than what is needed during periods other than a peak-day. Avista Corp. optimizes its natural gas resources by using market opportunities to generate economic value that mitigates the fixed costs. Avista Corp. also optimizes its natural gas storage capacity by purchasing and storing natural gas when prices are traditionally lower, typically in the summer, and withdrawing during higher priced months, typically during the winter. However, if market conditions and prices indicate that Avista Corp. should buy or sell natural gas at other times during the year, Avista Corp. engages in optimization transactions to capture value in the marketplace. Natural gas optimization activities include, but are not limited to, wholesale market sales of surplus natural gas supplies, purchases and sales of natural gas to optimize use of pipeline and storage capacity, and participation in the transportation capacity release market.

The following table presents the underlying energy commodity derivative volumes as of September 30, 2023 expected to be delivered or mature in the respective years shown (in thousands of MWhs and mmBTUs):

	Purchases								Sales
	Electric Derivatives				Gas Derivatives				Electric Derivatives				Gas Derivatives
Year	Physical (1) MWh		Financial (1) MWh		Physical (1) mmBTUs		Financial (1) mmBTUs		Physical (1) MWh		Financial (1) MWh		Physical (1) mmBTUs		Financial (1) mmBTUs
Remainder 2023		5		—		12,377		33,810		74		267		735		5,295
2024		7		—		14,810		61,090		31		400		1,370		11,965
2025		—		—		6,363		14,130		—		96		1,115		1,125
2026		—		—		1,660		1,800		—		—		—		—

As of September 30, 2023, there were no expected deliveries of energy commodity derivatives after 2026.

The following table presents the underlying energy commodity derivative volumes as of December 31, 2022 expected to be delivered or mature in the respective years shown (in thousands of MWhs and mmBTUs):

	Purchases								Sales
	Electric Derivatives				Gas Derivatives				Electric Derivatives				Gas Derivatives
Year	Physical (1) MWh		Financial (1) MWh		Physical (1) mmBTUs		Financial (1) mmBTUs		Physical (1) MWh		Financial (1) MWh		Physical (1) mmBTUs		Financial (1) mmBTUs
2023		5		—		19,140		79,253		136		1,011		4,145		29,473
2024		—		—		533		30,658		—		—		1,370		9,668
2025		—		—		450		4,895		—		—		1,115		1,125

As of December 31, 2022, there were no expected deliveries of energy commodity derivatives after 2025.

(1)Physical transactions represent commodity transactions in which Avista Corp. will take or make delivery of either electricity or natural gas; financial transactions represent derivative instruments with delivery of cash in the amount of the benefit or cost but with no physical delivery of the commodity, such as futures, swap derivatives, options, or forward contracts.

The electric and natural gas derivative contracts above will be included in either power supply costs or natural gas supply costs during the period they are scheduled to be delivered and will be included in the various deferral and recovery mechanisms (ERM, PCA and PGAs), or in the general rate case process, and are expected to be recovered through retail rates from customers.

Foreign Currency Exchange Derivatives

A significant portion of Avista Corp.’s natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most of those transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion of Avista Corp.’s short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices. The short-term natural gas transactions are settled within 60 days with U.S. dollars. Avista Corp. hedges a portion of the foreign currency risk by purchasing Canadian currency exchange derivatives when such commodity transactions are initiated. The foreign currency exchange derivatives and the unhedged foreign currency risk have not had a material effect on Avista Corp.’s financial condition, results of operations or cash flows and these differences in cost related to currency fluctuations are included with natural gas supply costs for ratemaking.

The following table summarizes the foreign currency exchange derivatives outstanding as of September 30, 2023 and December 31, 2022 (dollars in thousands):

	September 30,		December 31,
	2023		2022
Number of contracts		20		19
Notional amount (in United States dollars)	$	5,292	$	8,563
Notional amount (in Canadian dollars)		7,159		11,659

Interest Rate Swap Derivatives

Avista Corp. is affected by fluctuating interest rates related to a portion of its existing debt, and future borrowing requirements. Avista Corp. hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swap derivatives. These interest rate swap derivatives are considered economic hedges against fluctuations in future cash flows associated with anticipated debt issuances.

The following table summarizes the unsettled interest rate swap derivatives outstanding as of September 30, 2023 and December 31, 2022 (dollars in thousands):

Balance Sheet Date	Number of Contracts		Notional Amount		Mandatory Cash Settlement Date
September 30, 2023		2	$	20,000	2024
		1	$	10,000	2025
December 31, 2022		4	$	40,000	2023
		1		10,000	2024

See Note 10 for discussion of the issuance of first mortgage bonds and the related settlement of interest rate swaps in connection with the pricing of the bonds in March 2023.

The fair value of outstanding interest rate swap derivatives can vary significantly from period to period depending on the total notional amount of swap derivatives outstanding and fluctuations in market interest rates compared to the interest rates fixed by the swaps. Avista Corp. is required to make cash payments to settle the interest rate swap derivatives when the fixed rates are higher than prevailing market rates at the date of settlement. Conversely, Avista Corp. receives cash to settle its interest rate swap derivatives when prevailing market rates at the time of settlement exceed the fixed swap rates.

Summary of Outstanding Derivative Instruments

The amounts recorded on the Condensed Consolidated Balance Sheet as of September 30, 2023 and December 31, 2022 reflect the offsetting of derivative assets and liabilities where a legal right of offset exists.

The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of September 30, 2023 (in thousands):

	Fair Value
Derivative and Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency exchange derivatives
Other current assets	$	23	$	—		$	—	$	23
Interest rate swap derivatives
Other property and investments-net and other non-current assets		6,379		—			—		6,379
Energy commodity derivatives
Other current assets		3,622		(1,664	)		—		1,958
Other property and investments-net and other non-current assets		534		(214	)		—		320
Other current liabilities		23,784		(70,886	)		27,418		(19,684	)
Other non-current liabilities and deferred credits		4,378		(18,413	)		—		(14,035	)
Total derivative instruments recorded on the balance sheet	$	38,720	$	(91,177	)	$	27,418	$	(25,039	)

The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of December 31, 2022 (in thousands):

	Fair Value
Derivative and Balance Sheet Location	Gross Asset		Gross Liability			Collateral Netted		Net Asset (Liability) on Balance Sheet
Foreign currency exchange derivatives
Other current assets	$	43	$	—		$	—	$	43
Other current liabilities		—		(3	)		—		(3	)
Interest rate swap derivatives
Other current assets		8,536		—			—		8,536
Other property and investments-net and other non-current assets		2,648		—			—		2,648
Other current liabilities		—		(52	)		—		(52	)
Energy commodity derivatives
Other current assets		32,257		(22,638	)		—		9,619
Other property and investments-net and other non-current assets		312		(16	)		—		296
Other current liabilities		107,902		(229,607	)		94,850		(26,855	)
Other non-current liabilities and deferred credits		6,049		(24,530	)		10,589		(7,892	)
Total derivative instruments recorded on the balance sheet	$	157,747	$	(276,846	)	$	105,439	$	(13,660	)

Exposure to Demands for Collateral

Avista Corp.'s derivative contracts often require collateral (in the form of cash or letters of credit) or other credit enhancements, or reductions or terminations of a portion of the contract through cash settlement. In the event of changes in market prices or a downgrade in Avista Corp.'s credit ratings or other established credit criteria, additional collateral may be required. In periods of price volatility, the level of exposure can change significantly. As a result, sudden and significant demands may be made against Avista Corp.'s credit facilities and cash. Avista Corp. actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements.

The following table presents Avista Corp.'s collateral outstanding related to its derivative instruments as of September 30, 2023 and December 31, 2022 (in thousands):

	September 30,		December 31,
	2023		2022
Energy commodity derivatives
Cash collateral posted	$	27,418	$	171,581
Letters of credit outstanding		9,000		49,425
Balance sheet offsetting		27,418		105,439

No letters of credit or cash collateral were outstanding related to interest rate swap derivatives as of September 30, 2023 and December 31, 2022.

Certain of Avista Corp.’s derivative instruments contain provisions that require Avista Corp. to maintain an "investment grade" credit rating from the major credit rating agencies. If Avista Corp.’s credit ratings were to fall below "investment grade," it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions.

The following table presents the aggregate fair value of all derivative instruments with credit-risk-related contingent features in a liability position and the amount of additional collateral Avista Corp. could be required to post as of September 30, 2023 (in thousands):

	September 30,
	2023
Interest rate swap derivatives
Liabilities with credit-risk-related contingent features	$	—
Additional collateral to post		—
Energy commodity derivatives
Liabilities with credit-risk-related contingent features		5,334
Additional collateral to post		3,996