NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Avista Corporation (Avista Corp. or the Company) is an energy company engaged in the generation, transmission and distribution of energy, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities generates, transmits and distributes electricity in parts of eastern Washington and northern Idaho. In addition, Avista Utilities has electric generating facilities in Montana and northern Oregon. Avista Utilities also provides natural gas distribution service in parts of eastern Washington and northern Idaho, as well as parts of northeast and southwest Oregon. Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). Avista Capital's subsidiaries include Ecova, Inc. (Ecova), formerly Advantage IQ, Inc. (Advantage IQ), a 79.2 percent owned subsidiary as of December 31, 2011. Ecova is a provider of energy efficiency and other facility information and cost management programs and services for multi-site customers and utilities throughout North America. See Note 24 for business segment information.

Basis of Reporting

The consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries, including Ecova and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying consolidated financial statements include the Company's proportionate share of utility plant and related operations resulting from its interests in jointly owned plants (see Note 7).

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Significant estimates include:

•

determining the market value of energy commodity derivative assets and liabilities,

•

pension and other postretirement benefit plan obligations,

•

contingent liabilities,

•

recoverability of regulatory assets,

•

stock-based compensation, and

•

unbilled revenues.

Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein.

System of Accounts

The accounting records of the Company's utility operations are maintained in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the state regulatory commissions in Washington, Idaho, Montana and Oregon.

Regulation

The Company is subject to state regulation in Washington, Idaho, Montana and Oregon. The Company is also subject to federal regulation primarily by the FERC, as well as various other federal agencies with regulatory oversight of particular aspects of its operations.

Utility Revenues

Utility revenues related to the sale of energy are recorded when service is rendered or energy is delivered to customers. Revenues and resource costs from Avista Utilities' settled energy contracts that are "booked out" (not physically delivered) are reported on a net basis as part of utility revenues. The determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each calendar month, the amount of energy delivered to customers since the date of the last meter reading is estimated and the corresponding unbilled revenue is estimated and recorded. Accounts receivable includes unbilled energy revenues of the following amounts as of December 31 (dollars in thousands):


	2011		2010
Unbilled accounts receivable	$	82,950	$	84,073

Non-Utility Revenues

Service revenues from Ecova are recognized over the period services are rendered. New client account setup fees are deferred and recognized over the contractual life of the related client contract. Investment earnings on funds held for clients and fees earned from third parties on payment processing are an integral part of Ecova's product offerings and are recognized in revenues as earned. Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Revenues earned on payment processing through other service providers are reported gross on the income statement. Revenues from the other businesses are primarily derived from the operations of Advanced Manufacturing and Development (doing business as METALfx) and are recognized when the risk of loss transfers to the customer, which occurs when products are shipped.

Advertising Expenses

The Company expenses advertising costs as incurred. Advertising expenses were not a material portion of the Company's operating expenses in 2011, 2010 and 2009.

Depreciation

For utility operations, depreciation expense is estimated by a method of depreciation accounting utilizing composite rates for utility plant. Such rates are designed to provide for retirements of properties at the expiration of their service lives. For utility operations, the ratio of depreciation provisions to average depreciable property was as follows for the years ended December 31:


	2011			2010			2009
Ratio of depreciation to average depreciable property		2.92	%		2.84	%		2.78	%

The average service lives for the following broad categories of utility plant in service are:

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electric thermal production - 33 years,

•

hydroelectric production - 74 years,

•

electric transmission - 51 years,

•

electric distribution - 38 years, and

•

natural gas distribution property - 49 years.

Taxes Other Than Income Taxes

Taxes other than income taxes include state excise taxes, city occupational and franchise taxes, real and personal property taxes and certain other taxes not based on net income. These taxes are generally based on revenues or the value of property. Utility related taxes collected from customers (primarily state excise taxes and city utility taxes) are recorded as operating revenue and expense and totaled the following amounts for the years ended December 31 (dollars in thousands):


	2011		2010		2009
Utility taxes	$	55,739	$	49,953	$	56,818

Allowance for Funds Used During Construction

The Allowance for Funds Used During Construction (AFUDC) represents the cost of both the debt and equity funds used to finance utility plant additions during the construction period. As prescribed by regulatory authorities, AFUDC is capitalized as a part of the cost of utility plant and the debt related portion is credited against total interest expense in the Consolidated Statements of Income in the line item "capitalized interest." The equity related portion of AFUDC is included in the Consolidated Statement of Income in the line item "other expense (income)-net." The Company is permitted, under established regulatory rate practices, to recover the capitalized AFUDC, and a reasonable return thereon, through its inclusion in rate base and the provision for depreciation after the related utility plant is placed in service. Cash inflow related to AFUDC does not occur until the related utility plant is placed in service and included in rate base. The effective AFUDC rate was the following for the years ended December 31:


	2011			2010			2009
Effective AFUDC rate		7.91	%		8.25	%(1)		8.22	%

(1)	Rate was effective from January 1, 2010 to November 30, 2010. Effective December 1, 2010, rate was changed to 7.91%.

Income Taxes

A deferred income tax asset or liability is determined based on the enacted tax rates that will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's consolidated income tax returns. The deferred income tax expense for the period is equal to the net change in the deferred income tax asset and liability accounts from the beginning to the end of the period. The effect on deferred income taxes from a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax liabilities and regulatory assets are established for income tax benefits flowed through to customers as prescribed by the respective regulatory commissions.

Stock-Based Compensation

Compensation cost relating to share-based payment transactions is recognized in the Company's financial statements based on the fair value of the equity or liability instruments issued and recorded over the requisite service period. See Note 20 for further information.

Other Expense (Income) - Net

Other expense (income) - net consisted of the following items for the years ended December 31 (dollars in thousands):


	2011			2010			2009
Interest income	$	(1,327	)	$	(1,159	)	$	(1,614	)
Interest on regulatory deferrals		(89	)		(248	)		(2,935	)
Equity-related AFUDC		(2,225	)		(3,353	)		(3,078	)
Net loss on investments		488			3,297			837
Dues and donations		2,143			4,164			1,405
Other expense		5,213			5,686			5,472
Other income		(18	)		(430	)		(889	)

Total	$	4,185		$	7,957		$	(802	)

Earnings per Common Share Attributable to Avista Corporation

Basic earnings per common share attributable to Avista Corporation is computed by dividing net income attributable to Avista Corporation by the weighted average number of common shares outstanding for the period. Diluted earnings per common share attributable to Avista Corporation is calculated by dividing net income attributable to Avista Corporation (adjusted for the effect of potentially dilutive securities issued by subsidiaries) by diluted weighted average common shares outstanding during the period, including common stock equivalent shares outstanding using the treasury stock method, unless such shares are anti-dilutive. Common stock equivalent shares include shares issuable upon exercise of stock options and contingent stock awards. See Note 19 for earnings per common share calculations.

Cash and Cash Equivalents

For the purposes of the Consolidated Statements of Cash Flows, the Company considers all temporary investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash deposits from counterparties.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts to provide for estimated and potential losses on accounts receivable. The Company determines the allowance for utility and other customer accounts receivable based on historical write-offs as compared to accounts receivable and operating revenues. Additionally, the Company establishes specific allowances for certain individual accounts. The following table presents the activity in the allowance for doubtful accounts during the years ended December 31 (dollars in thousands):


	2011			2010			2009
Allowance as of the beginning of the year	$	44,883		$	42,928		$	45,062
Additions expensed during the year		5,232			5,194			5,344
Net deductions		(6,157	)		(3,239	)		(7,478	)

Allowance as of the end of the year	$	43,958		$	44,883		$	42,928

Materials and Supplies, Fuel Stock and Natural Gas Stored

Inventories of materials and supplies, fuel stock and natural gas stored are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of December 31 (dollars in thousands):


	2011		2010
Materials and supplies	$	24,148	$	24,998
Fuel stock		4,248		6,289
Natural gas stored		23,610		17,243

Total	$	52,006	$	48,530

Investments and Funds Held for Clients and Client Fund Obligations

In connection with the bill paying services, Ecova collects funds from its clients and remits the funds to the appropriate utility or other service provider. The funds collected are invested and classified as investments and funds held for clients and a related liability for client fund obligations is recorded. Investments and funds held for clients include cash and cash equivalent investments and beginning in 2011, investment securities classified as available for sale. Investments and funds held for clients as of December 31, 2011 are as follows (dollars in thousands):


	Amortized Cost		Unrealized Gain (Loss)			Fair Value
Money market funds	$	21,957	$	—		$	21,957
Securities available for sale:
U.S. government agency		74,721		172			74,893
Municipal		425		—			425
Corporate fixed income – financial		11,139		15			11,154
Corporate fixed income – industrial		6,495		23			6,518
Corporate fixed income – utility		2,088		4			2,092
Certificates of deposit		1,500		(3	)		1,497

Total securities available for sale		96,368		211			96,579

Total investments and funds held for clients	$	118,325	$	211		$	118,536

All investments and funds held for clients at December 31, 2010 were in money market funds. The Company has classified investments and funds held for clients as a current asset since these funds are held solely for the purpose of satisfying the client fund obligations. Approximately 88 percent of the investment portfolio is rated AA or higher as of December 31, 2011 by Nationally Recognized Statistical Rating Organizations. All fixed income securities were rated as investment grade as of December 31, 2011. Based on the Company's analysis, securities available for sale do not meet the criteria for other-than-temporary impairment as of December 31, 2011. Contractual maturities of securities available for sale as of December 31, 2011 are as follows (dollars in thousands):


	Due within 1 year		After 1 but within 5 years		After 5 but within 10 years		Total
Maturity date	$	425	$	55,126	$	41,028	$	96,579

Utility Plant in Service

The cost of additions to utility plant in service, including an allowance for funds used during construction and replacements of units of property and improvements, is capitalized. The cost of depreciable units of property retired plus the cost of removal less salvage is charged to accumulated depreciation.

Asset Retirement Obligations

The Company recovers certain asset retirement costs through rates charged to customers as a portion of its depreciation expense for which the Company has not recorded asset retirement obligations (see Note 9). The Company had estimated retirement costs (that do not represent legal or contractual obligations) included as a regulatory liability on the Consolidated Balance Sheets of the following amounts as of December 31 (dollars in thousands):


	2011		2010
Regulatory liability for utility plant retirement costs	$	227,282	$	223,131

Goodwill

Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. The Company evaluates goodwill for impairment using a discounted cash flow model on at least an annual basis or more frequently if impairment indicators arise. The Company completed its annual evaluation of goodwill for potential impairment as of November 30, 2011 for the other businesses and as of December 31, 2011 for Ecova and determined that goodwill was not impaired at that time. The changes in the carrying amount of goodwill are as follows (dollars in thousands):


	Ecova		Other		Accumulated Impairment Losses			Total
Balance as of January 1, 2010	$	19,472	$	12,979	$	(7,733	)	$	24,718
Goodwill acquired during the year		1,113		—		—			1,113
Adjustments		104		—		—			104

Balance as of the December 31, 2010		20,689		12,979		(7,733	)		25,935
Goodwill acquired during the year		12,933		—		—			12,933
Adjustments		177		—		—			177

Balance as of the December 31, 2011	$	33,799	$	12,979	$	(7,733	)	$	39,045

Accumulated impairment losses are attributable to the other businesses. The goodwill acquired in 2010 was related to Ecova's acquisition of The Loyalton Group (Loyalton) on December 31, 2010. The goodwill acquired in 2011 was related to Ecova's acquisition of Prenova, Inc. (Prenova) on November 30, 2011.

Other Intangibles

Other Intangibles primarily represent the amounts assigned to client relationships related to the Ecova acquisition of Cadence Network in 2008 (estimated amortization period of 12 years), Ecos in 2009 (estimated amortization period of 3 years), Loyalton in 2010 (estimated amortization period of 6 years) and Prenova in 2011 (estimated amortization period of 9 years), software development costs (estimated amortization period of 5 to 7 years) and other. Other Intangibles are included in other intangibles, property and investments - net on the Consolidated Balance Sheets. Amortization expense related to Other Intangibles was as follows for the years ended December 31 (dollars in thousands):


	2011		2010		2009
Other intangible amortization	$	4,682	$	3,755	$	2,412

The following table details the future estimated amortization expense related to Other Intangibles (dollars in thousands):


	2012		2013		2014		2015		2016
Estimated amortization expense	$	7,809	$	7,374	$	6,324	$	3,396	$	2,761

The gross carrying amount and accumulated amortization of Other Intangibles as of December 31, 2011 and 2010 are as follows (dollars in thousands):


	2011			2010
Client relationships	$	18,859		$	11,459
Software development costs		29,327			19,139
Other		3,065			1,450

Total other intangibles		51,251			32,048

Client relationships accumulated amortization		(3,623	)		(2,156	)
Software development costs accumulated amortization		(12,016	)		(8,985	)
Other accumulated amortization		(990	)		(806	)

Total accumulated amortization		(16,629	)		(11,947	)

Total other intangibles - net	$	34,622		$	20,101

Derivative Assets and Liabilities

Derivatives are recorded as either assets or liabilities on the Consolidated Balance Sheets measured at estimated fair value. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for derivatives depends on the intended use of the derivatives and the resulting designation.

The Washington Utilities and Transportation Commission (WUTC) and the Idaho Public Utilities Commission (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 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 Energy Recovery Mechanism (ERM) in Washington, the Power Cost Adjustment (PCA) mechanism in Idaho, and periodic general rates cases. Regulatory assets are assessed regularly and are probable for recovery through future rates.

Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an offsetting regulatory asset or liability. Contracts that are not considered derivatives are accounted for on the accrual basis until they are settled or realized, unless there is a decline in the fair value of the contract that is determined to be other than temporary.

Fair Value Measurements

Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap agreements and foreign currency exchange contracts, are reported at estimated fair value on the Consolidated Balance Sheets. See Note 17 for the Company's fair value disclosures.

Regulatory Deferred Charges and Credits

The Company prepares its consolidated financial statements in accordance with regulatory accounting practices because:

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rates for regulated services are established by or subject to approval by independent third-party regulators,

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the regulated rates are designed to recover the cost of providing the regulated services, and

•

in view of demand for the regulated services and the level of competition, it is reasonable to assume that rates can be charged to and collected from customers at levels that will recover costs.

Regulatory accounting practices require that certain costs and/or obligations (such as incurred power and natural gas costs not currently included in rates, but expected to be recovered or refunded in the future) are reflected as deferred charges or credits on the Consolidated Balance Sheets. These costs and/or obligations are not reflected in the Consolidated Statements of Income until the period during which matching revenues are recognized. If at some point in the future the Company determines that it no longer meets the criteria for continued application of regulatory accounting practices for all or a portion of its regulated operations, the Company could be:

•

required to write off its regulatory assets, and

•

precluded from the future deferral of costs not recovered through rates at the time such costs are incurred, even if the Company expected to recover such costs in the future.

See Note 23 for further details of regulatory assets and liabilities.

Investment in Exchange Power-Net

The investment in exchange power represents the Company's previous investment in Washington Public Power Supply System Project 3 (WNP-3), a nuclear project that was terminated prior to completion. Under a settlement agreement with the Bonneville Power Administration in 1985, Avista Utilities began receiving power in 1987, for a 32.5-year period, related to its investment in WNP-3. Through a settlement agreement with the WUTC in the Washington jurisdiction, Avista Utilities is amortizing the recoverable portion of its investment in WNP-3 (recorded as investment in exchange power) over a 32.5-year period that began in 1987. For the Idaho jurisdiction, Avista Utilities fully amortized the recoverable portion of its investment in exchange power.

Unamortized Debt Expense

Unamortized debt expense includes debt issuance costs that are amortized over the life of the related debt.

Unamortized Debt Repurchase Costs

For the Company's Washington regulatory jurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt are amortized over the remaining life of the original debt that was repurchased or, if new debt is issued in connection with the repurchase, these costs are amortized over the life of the new debt. In the Company's other regulatory jurisdictions, premiums paid to repurchase debt prior to 2007 are being amortized over the average remaining maturity of outstanding debt when no new debt was issued in connection with the debt repurchase. These costs are recovered through retail rates as a component of interest expense.

Redeemable Noncontrolling Interests

This item represents the estimated fair value of redeemable stock and stock options of Ecova issued under its employee stock incentive plan and to the previous owners of Cadence Network. See Notes 5 and 20 for further information.

Accumulated other comprehensive loss, net of tax, consisted of the following as of December 31 (dollars in thousands):

Accumulated Other Comprehensive Loss


	2011			2010
Unfunded benefit obligation for pensions and other postretirement benefit plans	$	(5,771	)	$	(4,326	)
Unrealized gain on securities available for sale		134			—

Total accumulated other comprehensive loss	$	(5,637	)	$	(4,326	)

Contingencies

The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency if it is probable that a liability has been incurred and the amount of the loss or impairment can be reasonably estimated. The Company also discloses losses that do not meet these conditions for accrual, if there is a reasonable possibility that a loss may be incurred.