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 2016, $12.0 million in 2015 and $32.0 million in 2014. The Company expects to contribute $22.0 million in cash to the pension plan in 2017.

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):



	2017		2018		2019		2020		2021		Total 2022-2026
Expected benefit payments	$	30,971	$	32,014	$	33,047	$	34,545	$	35,892	$	196,322

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):



	2017		2018		2019		2020		2021		Total 2022-2026
Expected benefit payments	$	6,991	$	7,302	$	7,580	$	6,479	$	6,675	$	34,704

The Company expects to contribute $7.0 million to other postretirement benefit plans in 2017, 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, 2016 and 2015 and the components of net periodic benefit costs for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):



	Pension Benefits						Other Post- retirement Benefits
	2016			2015			2016			2015
Change in benefit obligation:
Benefit obligation as of beginning of year	$	613,503		$	634,674		$	138,795		$	127,989
Service cost	18,302			19,791			3,205			2,925
Interest cost	27,544			26,117			6,110			5,158
Actuarial (gain)/loss	39,997			(35,790		)	(3,648		)	12,668
Plan change	—			(228		)	—			(1,000		)
Cumulative adjustment to reclassify liability	—			—			(1,042		)	(1,521		)
Benefits paid	(32,874		)	(31,061		)	(6,967		)	(7,424		)
Benefit obligation as of end of year	$	666,472		$	613,503		$	136,453		$	138,795
Change in plan assets:
Fair value of plan assets as of beginning of year	$	517,234		$	539,311		$	30,868		$	31,312
Actual return on plan assets	43,212			(4,305		)	2,497			(444		)
Employer contributions	12,000			12,000			—			—
Benefits paid	(31,532		)	(29,772		)	—			—
Fair value of plan assets as of end of year	$	540,914		$	517,234		$	33,365		$	30,868
Funded status	$	(125,558	)	$	(96,269	)	$	(103,088	)	$	(107,927	)
Unrecognized net actuarial loss	178,783			162,961			81,979			92,433
Unrecognized prior service cost	23			25			(8,981		)	(10,180		)
Prepaid (accrued) benefit cost	53,248			66,717			(30,090		)	(25,674		)
Additional liability	(178,806		)	(162,986		)	(72,998		)	(82,253		)
Accrued benefit liability	$	(125,558	)	$	(96,269	)	$	(103,088	)	$	(107,927	)
Accumulated pension benefit obligation	$	583,498		$	542,209		—			—
Accumulated postretirement benefit obligation:
For retirees							$	60,670		$	65,652
For fully eligible employees							$	34,429		$	34,498
For other participants							$	41,354		$	38,645



	Pension Benefits						Other Post- retirement Benefits
	2016			2015			2016			2015
Included in accumulated other comprehensive loss (income) (net of tax):
Unrecognized prior service cost	$	15		$	16		$	(5,854	)	$	(6,617	)
Unrecognized net actuarial loss	116,209			105,925			53,303			60,081
Total	116,224			105,941			47,449			53,464
Less regulatory asset	(108,903		)	(99,414		)	(47,202		)	(53,341		)
Accumulated other comprehensive loss for unfunded benefit obligation for pensions and other postretirement benefit plans	$	7,321		$	6,527		$	247		$	123



	Pension Benefits				Other Post- retirement Benefits
	2016		2015		2016		2015
Weighted-average assumptions as of December 31:
Discount rate for benefit obligation	4.26	%	4.57	%	4.23	%	4.57	%
Discount rate for annual expense	4.57	%	4.21	%	4.57	%	4.16	%
Expected long-term return on plan assets	5.40	%	5.30	%	6.03	%	6.36	%
Rate of compensation increase	4.78	%	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					2023		2022
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					2024		2023



	Pension Benefits									Other Post-retirement Benefits
	2016			2015			2014			2016			2015			2014
Components of net periodic benefit cost:
Service cost	$	18,302		$	19,791		$	15,757		$	3,205		$	2,925		$	1,844
Interest cost	27,544			26,117			26,224			6,110			5,158			5,226
Expected return on plan assets	(27,547		)	(28,299		)	(32,131		)	(1,861		)	(1,991		)	(1,903		)
Amortization of prior service cost	2			2			22			(1,208		)	(1,199		)	(1,116		)
Net loss recognition	8,511			9,451			4,731			5,728			5,095			4,289
Net periodic benefit cost	$	26,812		$	27,062		$	14,603		$	11,974		$	9,988		$	8,340

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:



	2016		2015
Equity securities	37	%	27	%
Debt securities	45	%	58	%
Real estate	8	%	6	%
Absolute return	10	%	9	%

The 2016 target investment allocation percentages were revised in the fourth quarter of 2016 and the pension plan assets were subsequently reinvested during the fourth quarter of 2016 and first quarter of 2017 to move toward the new target investment allocation percentages. The target asset allocation percentages were modified to better align the asset allocations with the funded status of the pension plan. Future contributions to the plan will also be increased to improve the funded status of the plan.

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, 2016 and 2015.

Pension plan other postretirement plan assets whose fair values are measured using net asset value (NAV) are excluded from the fair value hierarchy and are included as reconciling items in the tables below.

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, 2016 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	10,179	$	—	$	10,179
Fixed income securities:
U.S. government issues	—		30,919		—		30,919
Corporate issues	—		193,563		—		193,563
International issues	—		34,145		—		34,145
Municipal issues	—		18,888		—		18,888
Mutual funds:
U.S. equity securities	120,856		—		—		120,856
International equity securities	30,025		—		—		30,025
Absolute return (1)	6,622		—		—		6,622
Plan assets measured at NAV (not subject to hierarchy disclosure)
Common/collective trusts:
Real estate	—		—		—		19,779
International equity securities	—		—		—		29,140
Partnership/closely held investments:
Absolute return (1)	—		—		—		39,077
Private equity funds (2)	—		—		—		72
Real estate	—		—		—		7,649
Total	$	157,503	$	287,694	$	—	$	540,914



	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


(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 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 2016 and 2015.

The fair value of other postretirement plan assets was determined as of December 31, 2016 and 2015.

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, 2016 at fair value (dollars in thousands):



	Level 1		Level 2		Level 3		Total
Cash equivalents	$	—	$	6	$	—	$	6
Mutual funds:
Balanced index fund (1)	33,359		—		—		33,359
Total	$	33,359	$	6	$	—	$	33,365


(1)	The balanced index fund is a single mutual fund that includes a percentage of U.S. equity securities, fixed income securities and International securities.



	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

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, 2016 by $8.6 million and the service and interest cost by $1.0 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, 2016 by $6.7 million and the service and interest cost by $0.7 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):



	2016		2015		2014
Employer 401(k) matching contributions	$	8,710	$	8,011	$	6,862

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):



	2016		2015
Deferred compensation assets and liabilities	$	7,679	$	8,093