NOTE 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all regular full-time employees at Avista Utilities. 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. 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 $26 million in cash to the pension plan in 2011, $21 million in 2010 and $48 million in 2009. The Company expects to contribute $44 million in cash to the pension plan in 2012.

The Company also has a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to executive officers of the Company. The SERP is intended to provide benefits to executive officers whose benefits under the 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):


	2012		2013		2014		2015		2016		Total 2017-2021
Expected benefit payments	$	20,484	$	21,899	$	23,189	$	24,759	$	26,100	$	154,146

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 substantially all of its retired employees. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services. The Company elected to amortize the transition obligation of $34.5 million over a period of 20 years, beginning in 1993.

The Company has a Health Reimbursement Arrangement 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 this plan 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):


	2012		2013		2014		2015		2016		Total 2017-2021
Expected benefit payments	$	5,277	$	5,390	$	5,523	$	5,735	$	5,946	$	32,231

The Company expects to contribute $5.3 million to other postretirement benefit plans in 2012, representing expected benefit payments to be paid during the year. 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, 2011 and 2010 and the components of net periodic benefit costs for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):


	Pension Benefits						Other Post- retirement Benefits
	2011			2010			2011			2010
Change in benefit obligation:
Benefit obligation as of beginning of year	$	433,491		$	378,235		$	60,339		$	39,560
Service cost		12,936			11,609			1,805			684
Interest cost		24,134			23,231			4,126			2,624
Actuarial loss		44,148			38,547			42,476			21,657
Transfer of accrued vacation		—			—			450			367
Benefits paid		(20,517	)		(18,131	)		(4,466	)		(4,553	)

Benefit obligation as of end of year	$	494,192		$	433,491		$	104,730		$	60,339

Change in plan assets:
Fair value of plan assets as of beginning of year	$	306,712		$	272,732		$	22,875		$	20,394
Actual return on plan assets		14,705			29,846			(420	)		2,481
Employer contributions		26,000			21,000			—			—
Benefits paid		(19,267	)		(16,866	)		—			—

Fair value of plan assets as of end of year	$	328,150		$	306,712		$	22,455		$	22,875

Funded status	$	(166,042	)	$	(126,779	)	$	(82,275	)	$	(37,464	)
Unrecognized net actuarial loss		192,883			149,819			76,187			35,149
Unrecognized prior service cost		665			1,140			(1,005	)		(1,154	)
Unrecognized net transition obligation		—			—			505			1,011

Prepaid (accrued) benefit cost		27,506			24,180			(6,588	)		(2,458	)
Additional liability		(193,548	)		(150,959	)		(75,687	)		(35,006	)

Accrued benefit liability	$	(166,042	)	$	(126,779	)	$	(82,275	)	$	(37,464	)

Accumulated pension benefit obligation	$	429,135		$	377,606			—			—

Accumulated postretirement benefit obligation:
For retirees							$	39,470		$	27,921
For fully eligible employees							$	29,597		$	15,618
For other participants							$	35,663		$	16,800
Included in accumulated comprehensive loss (income) (net of tax):
Unrecognized net transition obligation	$	—		$	—		$	328		$	657
Unrecognized prior service cost		433			741			(653	)		(750	)
Unrecognized net actuarial loss		125,374			97,382			49,522			22,847

Total		125,807			98,123			49,197			22,754
Less regulatory asset		(119,360	)		(92,570	)		(49,873	)		(23,981	)

Accumulated other comprehensive loss (income)	$	6,447		$	5,553		$	(676	)	$	(1,227	)


	Pension Benefits						Other Post- retirement Benefits
	2011			2010			2011			2010
Weighted average assumptions as of December 31:
Discount rate for benefit obligation		5.04	%		5.69	%		4.98	%		5.50	%
Discount rate for annual expense		5.68	%		6.28	%		5.53	%		6.00	%
Expected long-term return on plan assets		7.40	%		7.75	%		7.00	%		7.75	%
Rate of compensation increase		4.87	%		4.72	%
Medical cost trend pre-age 65 – initial								7.50	%		8.00	%
Medical cost trend pre-age 65 – ultimate								5.00	%		5.00	%
Ultimate medical cost trend year pre-age 65								2017			2017
Medical cost trend post-age 65 – initial								8.00	%		8.00	%
Medical cost trend post-age 65 – ultimate								6.00	%		6.00	%
Ultimate medical cost trend year post-age 65								2018			2015


	2011			2010			2009			2011			2010			2009
Components of net periodic benefit cost:
Service cost	$	12,936		$	11,609		$	10,496		$	1,805		$	684		$	803
Interest cost		24,134			23,231			21,770			4,126			2,624			2,364
Expected return on plan assets		(23,115	)		(21,381	)		(17,612	)		(1,601	)		(1,581	)		(1,364	)
Transition obligation recognition		—			—			—			505			505			505
Amortization of prior service cost		475			650			654			(149	)		(149	)		(149	)
Net loss recognition		9,493			7,189			10,539			3,458			1,379			1,279

Net periodic benefit cost	$	23,923		$	21,298		$	25,847		$	8,144		$	3,462		$	3,438

Plan Assets

The Finance Committee of the Company's Board of Directors establishes 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 primarily in marketable debt and equity securities. Pension plan assets may also be invested in real estate, absolute return, venture capital/private equity 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 as indicated in the table below:


	2011			2010
Equity securities		51	%		51	%
Debt securities		31	%		31	%
Real estate		5	%		5	%
Absolute return		10	%		10	%
Other		3	%		3	%

The market-related 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 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). 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 fair value of the closely held investments and partnership interests is 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.

The market-related 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 market-related value of pension plan assets was determined as of December 31, 2011 and 2010.

The following table discloses by level within the fair value hierarchy (refer to Note 17 for a description of the fair value hierarchy) of the pension plan's assets measured and reported as of December 31, 2011 at fair value (dollars in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	7,550	$	—	$	7,550
Mutual funds:
Fixed income securities		76,486		—		—		76,486
U.S. equity securities		102,790		—		—		102,790
International equity securities		52,241		—		—		52,241
Absolute return (1)		16,121		—		—		16,121
Commodities (2)		6,526		—		—		6,526
Common/collective trusts:
Fixed income securities		—		27,774		—		27,774
U.S. equity securities		—		12,669		—		12,669
Real estate		—		—		8,598		8,598
Partnership/closely held investments:
Absolute return (1)		—		—		16,587		16,587
Private equity funds (3)		—		—		808		808

Total	$	254,164	$	47,993	$	25,993	$	328,150


	Level 1		Level 2		Level 3		Total
Cash equivalents	$	335	$	—	$	—	$	335
Mutual funds:
Fixed income securities		96,026		—		—		96,026
U.S. equity securities		104,232		—		—		104,232
International equity securities		53,964		—		—		53,964
Absolute return (1)		12,662		—		—		12,662
Commodities (2)		7,133		—		—		7,133
Common/collective trusts:
U.S. equity securities		—		13,653		—		13,653
Absolute return (1)		—		—		95		95
Real estate		—		—		423		423
Partnership/closely held investments:
Absolute return (1)		—		—		16,917		16,917
Private equity funds (3)		—		—		1,272		1,272

Total	$	274,352	$	13,653	$	18,707	$	306,712

(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)	The fund primarily invests in derivatives linked to commodity indices to gain exposure to the commodity markets. The fund manager fully collateralizes these positions with debt securities.

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

The table below discloses the summary of changes in the fair value of the pension plan's Level 3 assets for the year ended December 31, 2011 (dollars in thousands):


	Common/collective trusts					Partnership/closely held investments
	Absolute return			Real estate		Absolute return			Private equity funds
Balance, as of January 1, 2011	$	95		$	423	$	16,917		$	1,272
Realized gains (losses)		(748	)		22		—			373
Unrealized gains (losses)		746			1,098		(330	)		(218	)
Purchases (sales), net		(93	)		7,055		—			(619	)

Balance, as of December 31, 2011	$	—		$	8,598	$	16,587		$	808

The table below discloses the summary of changes in the fair value of the pension plan's Level 3 assets for the year ended December 31, 2010 (dollars in thousands):


	Common/collective trusts						Partnership/closely held investments
	Absolute return			Real estate			Absolute return		Private equity funds
Balance, as of January 1, 2010	$	844		$	6,029		$	15,794	$	1,561
Realized gains (losses)		(233	)		630			—		(148	)
Unrealized gains (losses)		(193	)		(160	)		1,123		(48	)
Purchases (sales), net		(323	)		(6,076	)		—		(93	)

Balance, as of December 31, 2010	$	95		$	423		$	16,917	$	1,272

The market-related value of other postretirement 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 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 62 percent equity securities and 38 percent debt securities in 2011 and 2010.

The market-related value of other postretirement plan assets was determined as of December 31, 2011 and 2010.

The following table discloses by level within the fair value hierarchy (refer to Note 17 for a description of the fair value hierarchy) of other postretirement plan assets measured and reported as of December 31, 2011 at fair value (dollars in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	86	$	—	$	86
Mutual funds:
Fixed income securities		8,683		—		—		8,683
U.S. equity securities		7,278		—		—		7,278
International equity securities		4,766		—		—		4,766
U.S. equity securities		1,569		—		—		1,569
Other		73		—		—		73

Total	$	22,369	$	86	$	—	$	22,455


	Level 1		Level 2		Level 3		Total
Cash equivalents	$	118	$	—	$	—	$	118
Mutual funds:
Fixed income securities		8,320		—		—		8,320
U.S. equity securities		6,986		—		—		6,986
International equity securities		5,572		—		—		5,572
U.S. equity securities		1,785		—		—		1,785
Other		94		—		—		94

Total	$	22,875	$	—	$	—	$	22,875

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, 2011 by $14.8 million and the service and interest cost by $0.8 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, 2011 by $12.3 million and the service and interest cost by $0.7 million.

The Company and its most significant subsidiaries 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):


	2011		2010		2009
Employer 401(k) matching contributions	$	7,027	$	5,405	$	4,667

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 intangibles, 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):


	2011		2010
Deferred compensation assets and liabilities	$	8,653	$	9,285