20230807Avista AR to Staff 1 Attachment B.pdf

AVISTA CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Avista Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Avista Corporation and subsidiaries (the “Company”) as of December 31, 2022 and
2021, the related consolidated statements of income, comprehensive income, equity, and cash flows, for each of the three years in the period ended
December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2023, expressed an unqualified opinion on
the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or
required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical
audit matters or on the accounts or disclosures to which they relate.
Regulatory Matters - Refer to Notes 1, 22, and 23 to the financial statements
Critical Audit Matter Description
The Company accounts for its regulated operations in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic
980, Regulated Operations (“ASC 980”). The provisions of this accounting guidance require, among other things, that financial statements of a rate-
regulated enterprise reflect the actions of regulators, where appropriate. These actions may result in the recognition of revenues and expenses in time
periods that are different than non-rate-regulated enterprises. When this occurs, costs are deferred as assets in the balance sheet (regulatory assets) and
recorded as expenses when those amounts are reflected in rates. Also, regulators can impose liabilities upon a regulated company for amounts previously
collected from customers and for recovery of costs that are expected to be incurred in the future (regulatory liabilities).
The Company is subject to regulation by the Washington Utilities and Transportation Commission, the Idaho Public Utilities Commission, the Public
Utility Commission of Oregon, the Public Service Commission of the State of Montana and the Regulatory Commission of Alaska (collectively, the
“Commissions”), which have jurisdiction with respect to, among other things, the rates of electric and natural gas distribution companies in Washington,
Idaho, Oregon, Montana, and Alaska, respectively. Accounting for the economics of rate regulation has an impact on multiple financial statement line items
and disclosures, such as property, plant, and equipment, regulatory assets and liabilities, operating revenues, operation and maintenance expense, and
depreciation expense.
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The Company’s rates are subject to the rate-setting processes of the Commissions and, in certain jurisdictions, annual earnings oversight. Rates are
determined and approved in regulatory proceedings based on analyses of the Company’s costs to provide utility service and are designed to recover the
Company’s prudently incurred investments in the utility business and provide a return thereon. Decisions to be made by the Commissions in the future will
impact the accounting for regulated operations under ASC 980 as described above. While the Company has indicated that it expects to recover costs from
customers through regulated rates, there is a risk that the Commissions will not approve (1) full recovery of the costs of providing utility service or (2) full
recovery of all amounts invested in the utility business and a reasonable return on that investment.
We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about
affected account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial
statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost
of recently completed plant or plant under construction and (3) refunds to customers. Given that management’s accounting judgments are based on
assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate
regulation and the rate setting process due to its inherent complexities.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the uncertainty of future decisions by the Commissions included the following procedures, among others:
•We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred
as property, plant, and equipment and deferred as regulatory assets and (2) a refund or a future reduction in rates that should be reported as
regulatory liabilities. We also tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant and
equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of
recovering costs in future rates or of a future reduction in rates.
•We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory
developments.
•We read relevant regulatory orders issued by the Commissions for the Company and other public utilities in the Company’s jurisdictions,
regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess
the likelihood of recovery in future rates or of a future reduction in rates based on the precedents of the Commissions’ treatment of similar
costs under similar circumstances. We evaluated the external information and compared it to management’s recorded regulatory asset and
liability balances for completeness.
•We inspected the Company’s filings with the Commissions and the filings with the Commissions by intervenors that may impact the
Company’s future rates, evaluating the evidence in relation to management’s assertions, as applicable.
•We inquired of management about property, plant, and equipment that may be abandoned. We inspected the capital-projects budget and
construction-work-in-process listings and inquired of management to identify projects that are designed to replace assets that may be retired
prior to the end of their useful life. We inspected minutes of the Board of Directors and regulatory orders and other filings with the
Commissions, evaluating the evidence in relation to management’s assertions, as applicable, regarding probability of an abandonment.
•We obtained an analysis from management regarding probability of recovery for regulatory assets or probability of either refund or future
reduction in rates for regulatory liabilities not yet addressed in a regulatory order in order to assess management’s assertion that amounts are
probable of recovery and/or that a future refund or reduction in rates is not probable.
Investments, at fair value - Level 3 Investment Valuations and Fair Value Measurements - Refer to Note 7, 18
Critical Audit Matter Description
The Company recorded a significant gain associated with the election of the fair value option for the measurement of certain investments in equity
securities without a readily determinable fair value. The fair value is based on significant unobservable inputs that reflect management's determination of
assumptions that market participants might reasonably use in valuing the investments. These investments are classified as Level 3 investments under
accounting principles generally accepted in the United States of America
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Such investments are valued based on specific pricing models, internal assumptions and the weighting of the best available pricing inputs for which a
market approach is generally used to determine the fair value of the equity instruments. The fair value of the Company's Level 3 investments was $54,284
million as of December 31, 2022.
How the Critical Audit Matter Was Addressed in the Audit
We identified the recording of the valuation of the Level 3 investments upon election of the fair value option as a critical audit matter due to the judgments
necessary for management to select appropriate valuation techniques and to use significant unobservable inputs to estimate the fair value of these
investments.
This required a high degree of auditor judgement and increased effort, including the need to involve fair value specialists who possess significant
quantitative and modeling expertise, to obtain and understating of the appropriateness of the model and to audit and evaluate the assumptions and the
weighting of the best available pricing inputs in determining the fair value of these investments.
Our audit procedures related to the valuation techniques and unobservable inputs used by management to estimate the fair value of Level 3 investments
included the following, among others:
•We tested the effectiveness of controls over management's valuation of Level 3 investments, including those related to the maintenance of the
Company’s investment accounting policy, valuation techniques and significant unobservable inputs.
•We evaluated the Company’s accounting for the investments in accordance with the fair value option under generally accepted accounting
principles.
•We obtained an understanding of the methods, valuation models, and assumptions for the unobservable inputs used to derive the pricing
information as part of the procedures to test the fair value estimates.
•We obtained an understanding of the valuation techniques used for Level 3 investments and tested the related significant unobservable inputs
by comparing these inputs to external sources. We evaluated the reasonableness of significant unobservable inputs.
•For selected Level 3 investments, we utilized fair value specialists to assist in validating the appropriateness of the valuation techniques and
valuation assumptions and to test the valuation by developing an independent expectation to compare to management’s estimate. We also
assessed the reasonableness of the business assumptions used in the valuation.
/s/ Deloitte & Touche LLP
Portland, Oregon
February 21, 2023
We have served as the Company's auditor since 1933.
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