Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value [Abstract]

Fair Value

NOTE 9. 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 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 September 30, 2011 and December 31, 2010 (dollars in thousands):

	September 30, 2011				December 31, 2010
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt	$	1,099,100	$	1,302,447	$	1,099,100	$	1,139,765
Nonrecourse long-term debt		49,676		55,725		58,934		64,795
Long-term debt to affiliated trusts		51,547		43,805		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 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 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 September 30, 2011 and December 31, 2010 at fair value on a recurring basis (dollars in thousands):

							Counterparty Netting (1)
	Level 1		Level 2		Level 3					Total
September 30, 2011
Assets:
Energy commodity derivatives	$	—	$	46,744	$	12,388	$	(53,048	)	$	6,084
Investments and funds held for customers:
Money market funds (2)		57,323		—		—		—			57,323
Securities available for sale:
U.S. government agency		—		34,817		—		—			34,817
Municipal		—		429		—		—			429
Corporate fixed income – financial		—		7,202		—		—			7,202
Corporate fixed income – industrial -		—		4,750		—		—			4,750
Funds held in trust account of Spokane Energy		1,600		—		—		—			1,600
Deferred compensation assets:
Fixed income securities (3)		2,299		—		—		—			2,299
Equity securities (3)		5,355		—		—		—			5,355
Total	$	66,577	$	93,942	$	12,388	$	(53,048	)	$	119,859
Liabilities:
Energy commodity derivatives	$	—	$	116,564	$	12,148	$	(53,048	)	$	75,664
Foreign currency derivatives		—		523		—		—			523
Interest rate swaps		—		14,225		—		—			14,225
Energy commodity derivatives	$	—	$	131,312	$	12,148	$	(53,048	)	$	90,412
December 31, 2010
Assets:
Energy commodity derivatives	$	—	$	15,124	$	19,739	$	(17,010	)	$	17,853
Interest rate swaps		—		127		—		—			127
Foreign currency derivatives		—		116		—		—			116
Investments and funds held for customers (2)		100,543		—		—		—			100,543
Funds held in trust account of Spokane Energy		1,600		—		—		—			1,600
Deferred compensation assets:
Fixed income securities (3)		1,854		—		—		—			1,854
Equity securities (3)		6,211		—		—		—			6,211
Total	$	110,208	$	15,367	$	19,739	$	(17,010	)	$	128,304
Liabilities:
Energy commodity derivatives	$	—	$	93,198	$	6,280	$	(17,010	)	$	82,468
Interest rate swaps		—		53		—		—			53
Total	$	—	$	93,251	$	6,280	$	(17,010	)	$	82,521

(1) The Company is permitted to net derivative assets and derivative liabilities with the same counterparty when a legally enforceable master netting agreement exists.

(2) Represents amounts held in money market funds.

(3) These assets are trading securities and are included in other intangibles, property and investments-net on the Condensed Consolidated Balance Sheets.

Avista Utilities 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 Utilities' 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.

For securities available for sale (held at Ecova) the Company uses a nationally recognized third party to obtain fair value and reviews these prices for accuracy using a variety of market tools and analysis. The Company's pricing vendor uses a generic model which uses standard inputs, including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. Further, the model uses Option Adjusted Spread and is a multidimensional relational model. All bonds valued using these techniques are classified as Level 2. All securities available for sale were deemed Level 2.

The Company also has certain contracts that, primarily due to the length of the respective contract, require the use of internally developed forward price estimates, which include significant inputs that may not be observable or corroborated in the market. These derivative contracts are included in Level 3. Refer to Note 5 for further discussion of the Company's energy commodity derivative assets and liabilities.

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 $1.4 million as of September 30, 2011 and $1.2 million as of December 31, 2010.

The following table presents activity for energy commodity derivative assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30 (dollars in thousands):

	Assets						Liabilities
	2011			2010			2011			2010
Three months ended September 30:
Balance as of July 1	$	17,032		$	33,851		$	(9,687	)	$	(4,381	)
Total gains or losses (realized/unrealized):
Included in net income		—			—			—			—
Included in other comprehensive income		—			—			—			—
Included in regulatory assets/liabilities (1)		(4,644	)		(22,105	)		(2,461	)		(2,788	)
Purchases		—			—			—			—
Issuances		—			—			—			—
Settlements		—			—			—			—
Transfers from other categories		—			—			—			—
Ending balance as of September 30	$	12,388		$	11,746		$	(12,148	)	$	(7,169	)
Nine months ended September 30:
Balance as of January 1	$	19,739		$	57,276		$	(6,280	)	$	(7,806	)
Total gains or losses (realized/unrealized):
Included in net income		—			—			—			—
Included in other comprehensive income		—			—			—			—
Included in regulatory assets/liabilities (1)		(7,351	)		(43,181	)		(3,409	)		556
Purchases		—			—			—			—
Issuances		—			—			—			—
Settlements		—			(2,349	)		1,945			81
Transfers from other categories (2)		—			—			(4,404	)		—
Ending balance as of September 30	$	12,388		$	11,746		$	(12,148	)	$	(7,169	)

(1) The WUTC and the 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 settlement. The orders provide for Avista Utilities 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 settlement, 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 rate cases.

(2) A derivative contract was reclassified from Level 2 to Level 3 during the nine months ended September 30, 2011 due to a particular unobservable input becoming more significant to the fair value measurement.