20150901AVU to Staff 5 Attachment A.pdf

Interoffice Memorandum
Corporate Accounting and Reporting

DATE: March 31, 2015
TO: Christy Burmeister-Smith, Vice President, Controller and Principal Accounting Officer
File
FROM: John Wilcox, Resource Accounting Manager

CC: Tracy Van Orden, Director of Accounting, Jeanne Pluth, Regulatory Accounting Manager
Accounting Policy Team

SUBJECT: Spokane Energy revenue from Portland General Electric for the first quarter of 2015
Background:

Spokane Energy, LLC is a special purpose limited liability company (LLC) and has 100% of its membership
owned by Avista Corporation. Spokane Energy was formed on December 30, 1998, to assume ownership
of a fixed rate electric capacity contract (the contract) between Avista and Portland General Electric
Company (PGE). Avista contributed member capital of $500,000 to Spokane Energy.
Under the terms of the Contract, Peaker, LLC (Peaker) purchases capacity from Avista and sells capacity
to Spokane Energy, who in turn, sells the related capacity to PGE. Peaker acts as an intermediary to fulfill
certain regulatory requirements between Spokane Energy and Avista. Peaker is obligated to pay
approximately $150,000 per month to Avista for its capacity purchase. Peaker was formed solely for the
purpose of assuming all rights and obligations from Enron Power Marketing, Inc. (EPMI), which assigned
the transactions to Peaker in November 2003 as part of its bankruptcy proceedings. Peaker is not
affiliated with EPMI.
To provide funding to acquire the contract from Avista, Spokane Energy borrowed $145.0 million from a
funding trust. Spokane Energy was required to maintain in trust $1.6 million for performance of certain
provisions under the borrowing agreement. The transaction was structured such that Spokane Energy
beared full recourse risk for the loan that was fully paid off in January 2015.
On December 30, 1998, Spokane Energy acquired the contract from Avista Corp. to supply capacity
electric energy to PGE on a monthly basis through December 31, 2016. The cost of acquiring the energy
contracts is being amortized and matched with sales revenue over the life of the contract using the
effective interest method (balance is $24.9 million at March 31, 2015).
Avista acts as the servicer under the contract and performs scheduling, billing, and collection functions.
In December 1998, Avista Corp. received $145 million of cash from Spokane Energy related to the
monetization of the contract. The amount was initially recorded as deferred revenue and was being
amortized into revenues over the 16-year period of the long-term sales contract. Pursuant to the WUTC
order in September 2001, Avista was directed to offset $53.8 million of the Washington share of the
deferred revenue against deferred power costs. The IPUC order in October 2001 directed Avista to
amortize the remaining Idaho share ($34.6 million) of the deferred revenue against deferred power
Avista Corp. – Confidential
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costs over the 15-month period between October 2001 and December 2002. The balance was fully
amortized as of December 31, 2002.
The debt of Spokane Energy was paid off in January 2015. The capacity contract with PGE runs through
December of 2016 and the contract is being amortized through that date. As such, there will be cash
flows of approximately $38 million in 2015 and 2016 without any debt service payments. Payments
during the first quarter of 2015 were $4,797,000 ($1,599,000 per month) and will continue at that level
for 2015.

Upon the retirement of the debt of Spokane Energy, it has been planned that the capacity contract will
be assigned back to Avista Corp. This revenue will be reflected as wholesale revenue and will flow
through the ERM and PCA calculations. Due to administrative processes, including obtaining consent
from the Spokane Energy debt holders and making the appropriate Section 203 filing with the Federal
Energy Regulatory Commission, this has not happened as of March 31, 2015. The Section 203 filing is
pending before the FERC.

Accounting Consideration:

How should the capacity payments (received by Spokane Energy) be accounted for during the first
quarter of 2015 (prior to assignment of the contract to Avista Corp.)?
Analysis:
Spokane Energy’s stand-alone financial statements reflect the full value of the capacity contract through
2016. On a monthly basis, Spokane Energy recognizes as this capacity payment as revenue and the $145
million cost of acquiring the capacity contract is being amortized and matched with sales revenue over
the life of the contract using the effective interest method. As such, Spokane Energy has net earnings
each period that will effectively total the amount of the capacity payments for 2015 and 2016 over the
term of the contract. The entity was essentially cash flow neutral until the debt was paid off in January
2015.
It has always been expected that any residual benefits (including the capacity payments for 2015 and
2016) will flow through regulatory accounting mechanisms (the ERM and the PCA). As such, retained
earnings and net income of Spokane Energy for each period have been deferred as a regulatory liability
in the Consolidated Financial Statements.

The capacity payments are being appropriately recorded as revenue at Spokane Energy as the contract
has not been assigned to Avista Corp. The offset at Spokane Energy has been an increase to the
regulatory liability.

We believe the capacity payments should be credited to the ERM and PCA, subject to the appropriate
sharing bands in Washington and 90/10 in Idaho.

Once the contract is assigned to Avista Corp., the capacity payments will flow through wholesale
revenue (account 447) and will be captured through the monthly ERM and PCA calculations as a
reduction to actual net power supply costs. The capacity payments are included in our authorized level
of net power supply costs as filed with the Washington Utilities and Transportation Commission.

Conclusion:
Avista Corp. – Confidential
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We have recorded the benefit of the capacity payments from PGE to the ERM and PCA, with appropriate
sharing between customers and Avista Corp. This has credited the ERM balance by $2,437K and the PCA
by $1,360K. Avista Corp.’s benefit is $397K in Washington and $151K in Idaho. The offsetting entry of
$4,345K has been recorded as a receivable from Spokane Energy and will be offset by the regulatory
liability (retained earnings) at Spokane Energy through the consolidation. These entries are NSJ 013 and
NSJ 018 in March 2015.

Avista Corp. – Confidential
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