Fair Value

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value

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 and material capital leases) and long-term debt to affiliated trusts are reported at carrying value on the Condensed Consolidated Balance Sheets.

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 fair values derived from 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, but 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 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 March 31, 2020 and December 31, 2019 (dollars in thousands):

	March 31, 2020				December 31, 2019
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Long-term debt (Level 2)	$	963,500	$	1,107,956	$	963,500	$	1,124,649
Long-term debt (Level 3)	947,000		949,144		947,000		1,048,440
Snettisham finance lease obligation (Level 3)	53,850		56,900		54,550		58,000
Long-term debt to affiliated trusts (Level 3)	51,547		33,506		51,547		41,238

These estimates of fair value of long-term debt and long-term debt to affiliated trusts were primarily based on available market information, which generally consists of estimated market prices from third party brokers for debt with similar risk and terms. The price ranges obtained from the third party brokers consisted of par values of 65.00 to 133.98, where a par value of 100.0 represents the carrying value recorded on the Condensed Consolidated Balance Sheets. Level 2 long-term debt represents publicly issued bonds with quoted market prices; however, due to their limited trading activity, they are classified as Level 2 because brokers must generate quotes and make estimates if there is no trading activity near a period end. Level 3 long-term debt consists of private placement bonds and debt to affiliated trusts, which typically have no secondary trading activity. Fair values in Level 3 are estimated based on market prices from third party brokers using secondary market quotes for debt with similar risk and terms to generate quotes for Avista Corp. bonds. Due to the unique nature of the Snettisham capital lease obligation, the estimated fair value of these items was determined based on a discounted cash flow model using available market information. The Snettisham capital lease obligation was discounted to present value using the Morgan Markets A Ex-Fin discount rate as published on March 31, 2020.

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 March 31, 2020 and December 31, 2019 at fair value on a recurring basis (dollars in thousands):

	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
March 31, 2020
Assets:
Energy commodity derivatives	$	—	$	35,061	$	—	$	(30,849	)	$	4,212
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		26		(26		)	—
Foreign currency exchange derivatives	—		36		—		(36		)	—
Deferred compensation assets:
Mutual Funds:
Fixed income securities (2)	2,642		—		—		—			2,642
Equity securities (2)	5,585		—		—		—			5,585
Total	$	8,227	$	35,097	$	26	$	(30,911	)	$	12,439
Liabilities:
Energy commodity derivatives	$	—	$	30,464	$	—	$	(30,154	)	$	310
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		2,279		(26		)	2,253
Foreign currency exchange derivatives	—		103		—		(36		)	67
Interest rate swap derivatives	—		112,238		—		(27,090		)	85,148
Total	$	—	$	142,805	$	2,279	$	(57,306	)	$	87,778

	Level 1		Level 2		Level 3		Counterparty and Cash Collateral Netting (1)			Total
December 31, 2019
Assets:
Energy commodity derivatives	$	—	$	41,546	$	—	$	(40,452	)	$	1,094
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		27		(27		)	—
Foreign currency exchange derivatives	—		97		—		—			97
Interest rate swap derivatives	—		1,552		—		(963		)	589
Deferred compensation assets:
Mutual Funds:
Fixed income securities (2)	2,232		—		—		—			2,232
Equity securities (2)	6,271		—		—		—			6,271
Total	$	8,503	$	43,195	$	27	$	(41,442	)	$	10,283
Liabilities:
Energy commodity derivatives	$	—	$	45,144	$	—	$	(43,830	)	$	1,314
Level 3 energy commodity derivatives:
Natural gas exchange agreement	—		—		3,003		(27		)	2,976
Interest rate swap derivatives	—		34,056		—		(7,733		)	26,323
Total	$	—	$	79,200	$	3,003	$	(51,590	)	$	30,613

(1) The Company is permitted to net derivative assets and derivative liabilities with the same counterparty when a legally enforceable master netting agreement exists. In addition, the Company nets derivative assets and derivative liabilities against any payables and receivables for cash collateral held or placed with these same counterparties.

(2) These assets are included in other property and investments-net and other non-current assets on the Condensed Consolidated Balance Sheets.

The difference between the amount of derivative assets and liabilities disclosed in respective levels in the table above and the amount of derivative assets and liabilities disclosed on the Condensed Consolidated Balance Sheets is due to netting arrangements with certain counterparties. See Note 5 for additional discussion of derivative netting.

To establish fair value for energy commodity derivatives, the Company uses quoted market prices and forward price curves to estimate the fair value of energy commodity derivative instruments included in Level 2. In particular, electric derivative valuations are performed using market quotes, adjusted for periods in between quotable periods. Natural gas derivative valuations are estimated using New York Mercantile Exchange pricing for similar instruments, adjusted for basin differences, using market quotes. Where observable inputs are available for substantially the full term of the contract, the derivative asset or liability is included in Level 2.

To establish fair values for interest rate swap derivatives, the Company uses forward market curves for interest rates for the term of the swaps and discounts the cash flows back to present value using an appropriate discount rate. The discount rate is calculated by third party brokers according to the terms of the swap derivatives and evaluated by the Company for reasonableness, with consideration given to the potential non-performance risk by the Company. Future cash flows of the interest rate swap derivatives are equal to the fixed interest rate in the swap compared to the floating market interest rate multiplied by the notional amount for each period.

To establish fair value for foreign currency derivatives, the Company uses forward market curves for Canadian dollars against the US dollar and multiplies the difference between the locked-in price and the market price by the notional amount of the derivative. Forward foreign currency market curves are provided by third party brokers. The Company's credit spread is factored into the locked-in price of the foreign exchange contracts.

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 $0.4 million as of March 31, 2020 and December 31, 2019.

Level 3 Fair Value

The following table presents the quantitative information which was used to estimate the fair values of the Level 3 assets and liabilities above as of March 31, 2020 (dollars in thousands):

	Fair Value (Net) at
	March 31, 2020			Valuation Technique	Unobservable Input	Range and Weighted Average Price
Natural gas exchange agreement	$	(2,253	)	Internally derived weighted average cost of gas	Forward purchase prices	$1.16 - $1.80/mmBTU $1.47 Weighted Average
					Forward sales prices	$1.33 - $3.79/mmBTU $2.96 Weighted Average
					Purchase volumes	155,000 - 310,000 mmBTUs
					Sales volumes	60,000 - 310,000 mmBTUs

The following table presents activity for energy commodity derivative assets (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31 (dollars in thousands):

	Natural Gas Exchange Agreement			Power Exchange Agreement			Total
Three months ended March 31, 2020:
Balance as of January 1, 2020	$	(2,976	)	$	—		$	(2,976	)
Total gains or (losses) (realized/unrealized):
Included in regulatory assets/liabilities (1)	485			—			485
Settlements	238			—			238
Ending balance as of March 31, 2020 (2)	$	(2,253	)	$	—		$	(2,253	)
Three months ended March 31, 2019:
Balance as of January 1, 2019	$	(2,774	)	$	(2,488	)	$	(5,262	)
Total gains or (losses) (realized/unrealized):
Included in regulatory assets/liabilities (1)	8,977			(1,018		)	7,959
Settlements	(8,307		)	2,894			(5,413		)
Ending balance as of March 31, 2019 (2)	$	(2,104	)	$	(612	)	$	(2,716	)

(1) All gains and losses are included in other regulatory assets and liabilities. There were no gains and losses included in either net income or other comprehensive income during any of the periods presented in the table above.

(2)

There were no purchases, issuances or transfers from other categories of any derivatives instruments during the periods presented in the table above.